NXT ENERGY SOLUTIONS INC
As at and for three and nine months ended September 30, 2010
NXT ENERGY SOLUTIONS INC | ||
Consolidated Balance Sheets | ||
(Unaudited) (Expressed in Canadian dollars except share data) | ||
September 30, 2010 | December 31, 2009 | |
Assets | ||
Current assets: | ||
Cash and cash equivalents | $ 345,289 | $ 4,174,145 |
Short term investments | 1,803,884 | - |
Accounts receivable | 72,408 | 1,142,380 |
Prepaid expenses and other | 35,414 | 53,288 |
2,256,995 | 5,369,813 | |
Restricted cash [note 5] | 43,971 | - |
Oil and natural gas properties | 5,000 | 5,000 |
Other property and equipment | 563,928 | 630,827 |
$ 2,869,894 | $ 6,005,640 | |
Liabilities and Shareholders' Equity | ||
Current liabilities: | ||
Trade payables | $ 327,577 | $ 413,997 |
Other accrued liabilities [note 3] | 197,915 | 295,739 |
Current portion of capital lease obligation | 10,684 | 10,684 |
Current portion of asset retirement obligation | 19,357 | 19,357 |
555,533 | 739,777 | |
Long term liabilities: | ||
Capital lease obligation | 10,393 | 16,834 |
Asset retirement obligation | 34,290 | 31,897 |
Derivative liability [note 4] | 6,589 | 183,815 |
606,805 | 972,323 | |
Future operations [note 1] | ||
Shareholders' equity: | ||
Preferred shares: - authorized unlimited | ||
Issued: 10,000,000 | 3,489,000 | 3,489,000 |
Common shares: - authorized unlimited [note 6] | ||
Issued: 30,801,796 shares as of September 30, 2010 (December 31, 2009 - 30,701,796) | 52,031,435 | 51,934,360 |
Contributed capital | 4,248,385 | 3,939,953 |
Deficit | (58,216,666) | (55,040,931) |
Accumulated other comprehensive income | 710,935 | 710,935 |
2,263,089 | 5,033,317 | |
$ 2,869,894 | $ 6,005,640 |
Signed "George Liszicasz" Director | Signed "Brian Kohlhammer" Director |
The accompanying notes to these consolidated financial statements are an integral part of these consolidated balance sheets. |
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NXT ENERGY SOLUTIONS INC Consolidated Statements of Loss and Comprehensive Loss (Unaudited) (Expressed in Canadian dollars except share data)
| ||||
For the three months ended September 30, | For the nine months ended September 30, | |||
2010 | 2009 | 2010 | 2009 | |
Revenue | ||||
Survey revenue | $ - | $ - | $ 443,011 | $ 2,638,560 |
Oil and natural gas revenue | 820 | 447 | 4,162 | 874 |
820 | 447 | 447,173 | 2,639,434 | |
Expense | ||||
Survey cost | 5,275 | (26,888) | 466,290 | 1,078,812 |
Oil and natural gas operating expenses | 5,471 | - | 4,195 | 6,818 |
Administrative | 908,417 | 1,064,739 | 3,030,428 | 3,096,660 |
Amortization and depreciation | 38,880 | 44,871 | 124,402 | 130,547 |
958,043 | 1,082,722 | 3,625,315 | 4,312,837 | |
(957,223) | (1,082,275) | (3,178,142) | (1,673,403) | |
Other expense (income) | ||||
Interest income | (3,982) | (8,953) | (7,476) | (78,177) |
Loss on foreign exchange | 8,434 | 158,588 | 1,286 | 132,817 |
Loss (gain) on sale of property | - | (21) | 1,074 | (1,037) |
Asset retirement costs | 915 | 1,558 | 2,709 | 6,661 |
5,367 | 151,172 | (2,407) | 60,264 | |
Net loss before income tax | (962,590) | (1,233,447) | (3,175,735) | (1,733,667) |
Income tax recovery | - | 263,856 | - | - |
Net loss and comprehensive loss | $ (962,590) | $ (969,591) | $ (3,175,735) | $ (1,733,667) |
Net loss per share unit [note 6] | ||||
Basic | $ (0.03) | $ (0.03) | $ (0.10) | $ (0.06) |
Diluted | $ (0.03) | $ (0.03) | $ (0.10) | $ (0.06) |
The accompanying notes to these consolidated financial statementsare an integral part of these consolidated statements of Loss and Comprehensive Loss.
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NXT ENERGY SOLUTIONS INC | |||
Consolidated Statements of Cash Flow | |||
(Unaudited) (Expressed in Canadian dollars) | |||
For the nine months ended September 30, | |||
2010 | 2009 | ||
Operating activities | |||
Net loss | $ (3,175,735) | $ (1,733,667) | |
Amortization and depreciation | 124,402 | 130,547 | |
Abandonment of oil and natural gas properties | 2,709 | 6,661 | |
Stock-based compensation expense | 173,763 | 484,717 | |
Loss (gain) on sale of property | 1,074 | (1,037) | |
Changes in non-cash working capital | |||
Accounts receivable | 1,069,972 | (57,358) | |
Prepaid expenses and other | 17,874 | 18,982 | |
Trade payables | (86,420) | (8,185) | |
Other accrued liabilities | (97,824) | 47,325 | |
Asset retirement obligations paid | (316) | (4,486) | |
Net cash generated (used) by operating activities | (1,970,501) | (1,116,501) | |
Financing activities | |||
Repayment of capital lease | (6,441) | (5,919) | |
Issue of common shares, net of issuance costs | 54,518 | 50,239 | |
Net cash generated (used) by financing activities | 48,077 | 44,320 | |
Investing activities | |||
Invested in other property and equipment | (58,978) | (154,079) | |
Proceeds on sale of property | 401 | 2,055 | |
Increase in restricted cash | (43,971) | - | |
Decrease (increase) in short term investments | (1,803,884) | 6,748,105 | |
Net cash generated (used) by investing activities | (1,906,432) | 6,596,081 | |
Net cash inflow (outflow) | (3,828,856) | 5,523,900 | |
Cash and cash equivalents, beginning of period | 4,174,145 | 146,065 | |
Cash and cash equivalents, end of period | $ 345,289 | $ 5,669,965 | |
Cash interest paid | $ 1,572 | $ 2,094 |
The accompanying notes to these consolidated financial statementsare an integral part of these consolidated statements of cash flows. |
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NXT ENERGY SOLUTIONS INC Consolidated Statements of Shareholders' Equity (Unaudited) (Expressed in Canadian dollars except share data) | ||||
For the nine months ended September 30, | ||||
2010 | 2009 | |||
Common Shares | ||||
Balance at beginning of the period | $ 51,934,360 | $ 51,884,121 | ||
Issued upon exercise of stock options and warrants | 97,075 | - | ||
Issued through private placement; net of issue costs | - | 50,239 | ||
Balance at end of the period | 52,031,435 | 51,934,360 | ||
Preferred Shares | ||||
Balance at beginning and end of the period | 3,489,000 | 3,489,000 | ||
Contributed Capital | ||||
Balance at beginning of the period | 3,939,953 | 3,519,072 | ||
Opening balance adjustment upon adoption of change in accounting policy | - | (108,779) | ||
Option and warrant compesation costs | 350,989 | 371,049 | ||
Contributed capital transferred to common shares pursuant to exercise of options and warrants | (42,557) | - | ||
Balance at end of the period | 4,248,385 | 3,781,342 | ||
Deficit | ||||
Balance at beginning of the period | (55,040,931) | (52,703,170) | ||
Opening balance adjustment upon adoption of change in accounting policy | - | 67,364 | ||
Net loss for the period | (3,175,735) | (1,733,667) | ||
Balance at end of the period | (58,216,666) | (54,369,473) | ||
Accumulated Other Comprehensive Income | ||||
Balance at beginning and end of the period | 710,935 | 710,935 | ||
Total Shareholders' Equity end of period | $ 2,263,089 | $ 5,546,164 |
The accompanying notes to the consolidated financial statementsare an integral part of the condensed consolidated statements of Shareholders' Equity.
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NXT ENERGY SOLUTIONS INC Notes to the Consolidated Financial Statements
As at and for the three and nine month period ended September 30, 2010 (Unaudited) (Expressed in Canadian dollars)
1. Organization and Ability to Continue Operations
NXT Energy Solutions Inc ("we", "company" or "NXT") was incorporated under the laws of the State of Nevada on September 27, 1994. NXT was continued from the State of Nevada to the Province of Alberta, Canada on October 24, 2003.
We own a proprietary technology called Stress Field Detection ("SFD®"). SFD® is a remote sensing airborne survey system that is designed to identify areas with oil and natural gas reserve potential. This technology was acquired from NXT's current CEO and President on December 31, 2005 following a ten year period wherein the company controlled the technology through a series of licensing agreements.
For the ten year period prior to 2006 the company had engaged in extensive activities that were effective in developing the technology to a stage wherein SFD® was both technically ready and had the required industry validation to embark on the commercial phase of the company. These early activities included conducting SFD® surveys for oil and gas industry partners on a cost recovery basis and participating as a joint venture partner in SFD® identified exploration wells. By December 31, 2005 the company had accumulated approximately $47.6 million of deficits in conducting these activities.
In 2006 the company began its commercialization phase by offering SFD® survey services to the oil and gas industry. The company has earned $13.9 million of survey revenue, accumulated an additional $10.6 million in deficits, used a net $3.6 million in operating activities and invested $1.1 million in property and equipment since the beginning of 2006. However, since the beginning of 2009 the company has used $4.6 million of cash in operations.
The company is in the early stage of commercializing its SFD® technology. Its ability to generate cash flow from operations will depend largely on its ability to generate revenues as contemplated by the business plan that commenced in 2009. Management recognizes that this early commercialization phase can last for several years. While the company is in this early stage of commercialization, the company’s financial position is materially impacted by the loss or gain of any one client. The company's ability to continue operations is dependent on attracting future customers through demonstrating the value that the company can bring to their exploration activities.
These consolidated financial statements have been prepared on a going concern basis in accordance with United States generally accepted accounting principles. The going concern basis of presentation assumes that the company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. There is significant doubt about the appropriateness of the use of the going concern assumption because the company has experienced losses and negative cash flow from operations over the past several years and has working capital as at September 30, 2010 of $1.7 million that management believes is not sufficient to support the company's operations for the next twelve months without additional revenue or capital.
The company anticipates generating both net income and cash from operations in future years with its business model; however, the occurrence and timing of this outcome cannot be predicted with certainty.
These consolidated financial statements do not include any adjustments to amounts and classifications of assets and liabilities or reported expenses that would be necessary should we be unable to generate sufficient net income and cash from operations as required in future years to continue as a going concern.
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2. Significant Accounting Policies Basis of Presentation |
These interim consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles of the United States of America in accordance with the same accounting policies and methods used in preparing the consolidated financial statements for the fiscal year ended December 31, 2009. These interim statements should be read in conjunction with the 2009 annual consolidated financial statements as they contain disclosure which is supplemental to our annual consolidated financial statements and accordingly certain disclosure normally required for annual financial statements has been condensed or omitted.
Consolidation
We have consolidated the accounts of our wholly owned subsidiaries in the course of preparing these consolidated financial statements. All significant inter-company balances and transactions amongst NXT and its subsidiaries have been eliminated and are therefore not reflected in these consolidated financial statements. As of December 31, 2009 the company consisted of NXT Energy Solutions Inc. and two inactive subsidiaries in the United States.
In January 2010 the company opened a branch office in Colombia. | |||
3. Accrued Liabilities | |||
As at | |||
September 30, 2010 | December 31, 2009 | ||
Legal and accounting | $ 107,915 | $ 162,752 | |
Commission on sales | - | 30,958 | |
Consultant fees | 18,750 | 25,000 | |
Survey Costs | - | 77,029 | |
Directors' fees | 71,250 | - | |
$ 197,915 | $ 295,739 | ||
4. Derivative Liability |
Under the FASB's fair value measurement standards, financial instruments that are recorded at fair value on a recurring basis are required to be classified into one of three categories based upon a fair value hierarchy. The company's only financial instrument recorded at fair value on a recurring basis are the vested contractor stock options. We have classified these derivative financial instruments as level II where the fair value is determined by using valuation techniques that refer to observable market data. During the nine months ended September 30, 2010 we recorded a credit of $177,226 in regards to the change in fair market value of vested contractor options. This reduction is due primarily to the expiration in the period of 234,000 options. Changes in fair value of the liability are included in the line item ‘Administrative’ on the company's consolidated statement of loss.
For the nine months ended | For the year ended | |
The following table outlines the change in the derivative liability value in the year: | September 30, 2010 | December 31, 2009 |
Balance as at December 31, 2009 | $ 183,815 | $ - |
Adjustment to opening balance upon adoption of change in accounting policy | - | 41,415 |
Increase (decrease) in fair value | (177,226) | 142,400 |
Balance as at September 30, 2010 | $ 6,589 | $ 183,815 |
5. Restricted Cash |
The company has $43,971 held in a Barbados bank letter of credit account to satisfy contractual requirements related to ongoing SFD® survey services in Colombia. These funds are encumbered until 2012.
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6. Common Shares
The company has an unlimited number of shares authorized.
The following table provides common shares and their value:
Common Shares | ||
Shares | Amount | |
As at December 31, 2009 | 30,701,796 | $ 51,934,360 |
Transactions during the three months ended March 31, 2010 | ||
| 50,000 | 34,914 |
Transactions during the three months ended June 30, 2010 | ||
| 50,000 | 62,161 |
As at September 30, 2010 | 30,801,796 | $ 52,031,435 |
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Reconciliation of Earnings per Share Calculations
For the three months ended September 30, 2010 | |||
Net loss | Weighted average shares outstanding | Per Share | |
| $ (962,590) | 30,801,796 | $ (0.03) |
For the nine months ended September 30, 2010 | |||
Net loss | Weighted average shares outstanding | Per Share | |
| $ (3,175,735) | 30,765,935 | $ (0.10) |
For the three months ended September 30, 2009 | |||
Net loss | Weighted average shares outstanding | Per Share | |
| $ (969,591) | 30,701,796 | $ (0.03) |
For the nine months ended September 30, 2009 | |||
Net loss | Weighted average shares outstanding | Per Share | |
| $ (1,733,667) | 30,686,595 | $ (0.06) |
All options, warrants and preferred shares were excluded from the diluted earnings per share calculation as they were antidilutive.
7. Employee, Directors and Contractor Options | ||||
We have summarized below all outstanding options under the Plans as of September 30, 2010: | ||||
Weighted average | Weighted average | |||
exercise price of | exercise price of | |||
Range of exercise prices in U.S. dollars | Outstanding options | outstanding options | Options exercisable | exercisable options |
$0.50 - $0.99 | 226,741 | $ 0.87 | 130,074 | $ 0.88 |
$1.00 - $1.99 | 1,604,463 | $ 1.39 | 1,092,963 | $ 1.42 |
$2.00 - $3.99 | 57,000 | $ 2.28 | 45,333 | $ 2.03 |
$4.00 - $4.90 | 300,000 | $ 4.90 | 200,000 | $ 4.90 |
2,188,204 | $ 1.84 | 1,468,370 | $ 1.86 | |
Weighted average remaining | ||||
Range of exercise prices in U.S. dollars | contractual life (years) | |||
$0.50 - $0.99 | 2.6 | |||
$1.00 - $1.99 | 2.1 | |||
$2.00 - $3.99 | 1.3 | |||
$4.00 - $4.90 | 2.2 | |||
2.1 |
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For the nine months ended September 30, 2010 | For the nine months ended September 30, 2009 | |||
Weighted average | Weighted average | |||
Exercise prices in U.S. dollars | # of options | exercise price | # of options | exercise price |
Outstanding at beginning of year | 2,757,204 | $ 1.68 | 2,270,204 | $ 1.90 |
Granted | 30,000 | $ 0.96 | 250,000 | $ 0.56 |
Forfeited | (499,000) | $ 1.17 | (100,000) | $ 2.12 |
Exercised | (100,000) | $ 0.53 | - | $ - |
Options outstanding as at end of period | 2,188,204 | $ 1.84 | 2,420,204 | $ 1.76 |
Exercisable as at end of period | 1,468,370 | $ 1.86 | 1,633,704 | $ 1.55 |
Unvested options outstanding as of September 30, 2010 and December 31, 2009 generally vest over the three year period starting from the date of grant dependant on the continued provision of services. The options vest one-third at the end of each of the first three years following the grant date. Options generally lapse, if unexercised, five years from the date of issue.
Compensation Expense Associated with Grant of Options
The grant date fair value is calculated in U.S. dollars using the Black Scholes option valuation model utilizing the following weighted average assumptions:
For nine months ended | ||
September 30, 2010 | September 30, 2009 | |
Expected dividends paid per common share | Nil | Nil |
Expected life (years) | 3 | 3 |
Expected volatility in the price of common shares (%) | 95% | 104% |
Risk free interest rate (%) | 1.5% | 1.5% |
Weighted average grant date fair market value per share | $ 0.57 | $ 0.36 |
Intrinsic value of options exercised | - | $ - |
As of September 30, 2010 and 2009 there were U.S. $434,132 and U.S. $562,107 respectively of total unrecognized compensation cost related to non-vested share-based compensation awards granted under the stock option plans. This cost will be recognized over the remaining vesting period.
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