NXT ENERGY SOLUTIONS INC.
As at and for the three and nine month periods ended September 30, 2011
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NXT ENERGY SOLUTIONS INC.
Consolidated Balance Sheets
(Unaudited) (Expressed in Canadian dollars)
September 30 | December 31 | |||||||
2011 | 2010 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 714,524 | $ | 464,583 | ||||
Short term investments | - | 905,651 | ||||||
Accounts receivable | 35,839 | 3,071 | ||||||
Work-in-progress | 49,550 | - | ||||||
Prepaid expenses and other | 52,631 | 45,941 | ||||||
852,544 | 1,419,246 | |||||||
Restricted cash [note 4] | 45,461 | 101,856 | ||||||
Property and equipment | 436,912 | 525,804 | ||||||
$ | 1,334,917 | $ | 2,046,906 | |||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities [note 3] | $ | 586,577 | $ | 576,588 | ||||
Current portion of capital lease obligation | 9,294 | 10,684 | ||||||
595,871 | 587,272 | |||||||
Long term liabilities: | ||||||||
Capital lease obligation | 1,762 | 8,153 | ||||||
Asset retirement obligation | 57,076 | 54,444 | ||||||
654,709 | 649,869 | |||||||
Future operations [note 1] | ||||||||
Commitments and contingencies [note 10] | ||||||||
Subsequent event [note 8] | ||||||||
Shareholders’ equity: | ||||||||
Preferred shares: - authorized unlimited | ||||||||
Issued: 10,000,000 | 3,489,000 | 3,489,000 | ||||||
Common shares: - authorized unlimited | ||||||||
Issued: 34,022,396 shares as of September 30, 2011 (2010 - 30,801,796) [note 5] | 53,202,476 | 52,031,435 | ||||||
Contributed capital | 5,283,197 | 4,659,026 | ||||||
Deficit | (62,005,400 | ) | (59,493,359 | ) | ||||
Accumulated other comprehensive income | 710,935 | 710,935 | ||||||
680,208 | 1,397,037 | |||||||
$ | 1,334,917 | $ | 2,046,906 |
Signed “George Liszicasz” | Signed “Brian Kohlhammer” | |
Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
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NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Loss and Comprehensive Loss
(Unaudited) (Expressed in Canadian dollars)
For the three months | For the nine months | |||||||||||||||
ended September 30 | ended September 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue | ||||||||||||||||
Survey revenue | $ | - | $ | - | $ | 144,650 | $ | 443,011 | ||||||||
Oil and natural gas revenues | 1,398 | 820 | 4,570 | 4,162 | ||||||||||||
1,398 | 820 | 149,220 | 447,173 | |||||||||||||
Expense | ||||||||||||||||
Survey cost | 1,846 | 5,275 | 45,836 | 466,290 | ||||||||||||
General and administrative | 1,032,914 | 908,417 | 2,529,065 | 3,030,428 | ||||||||||||
Amortization and depreciation | 38,978 | 38,880 | 114,596 | 124,402 | ||||||||||||
1,073,738 | 952,572 | 2,689,497 | 3,621,120 | |||||||||||||
(1,072,340 | ) | (951,752 | ) | (2,540,277 | ) | (3,173,947 | ) | |||||||||
Other expense (income) | ||||||||||||||||
Interest income, net | (2,817 | ) | (3,982 | ) | (8,345 | ) | (7,476 | ) | ||||||||
Loss (gain) on foreign exchange | (44,146 | ) | 8,434 | (23,217 | ) | 1,286 | ||||||||||
Oil & natural gas operations and other | - | 5,471 | - | 4,195 | ||||||||||||
Loss on sale of property | - | - | - | 1,074 | ||||||||||||
Accretion and abandonment of | ||||||||||||||||
asset retirement obligation | 1,437 | 915 | 3,326 | 2,709 | ||||||||||||
(45,526 | ) | 10,838 | (28,236 | ) | 1,788 | |||||||||||
Net loss and comprehensive loss | $ | (1,026,814 | ) | $ | (962,590 | ) | $ | (2,512,041 | ) | $ | (3,175,735 | ) | ||||
Net loss per share - basic and diluted [note 6] | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.10 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
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NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Cash Flows
(Unaudited) (Expressed in Canadian dollars)
For the three months | For the nine months | |||||||||||||||
ended September 30 | ended September 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Operating activities | ||||||||||||||||
Net loss for the period | $ | (1,026,814 | ) | $ | (962,590 | ) | $ | (2,512,041 | ) | $ | (3,175,735 | ) | ||||
Items not affecting cash | ||||||||||||||||
Amortization and depreciation | 38,978 | 38,880 | 114,596 | 124,402 | ||||||||||||
Accretion of asset retirement obligation | 877 | 798 | 2,632 | 2,393 | ||||||||||||
Stock-based compensation expense | 246,000 | 72,899 | 294,785 | 173,763 | ||||||||||||
Loss (gain) on sale of property | - | - | - | 1,074 | ||||||||||||
(740,959 | ) | (850,013 | ) | (2,100,028 | ) | (2,874,103 | ) | |||||||||
Changes in non-cash working capital balances (note 9) | 185,680 | 20,682 | (79,019 | ) | 903,602 | |||||||||||
Net cash generated by (used in) operating activities | (555,279 | ) | (829,331 | ) | (2,179,047 | ) | (1,970,501 | ) | ||||||||
Financing activities | ||||||||||||||||
Repayment of capital lease obligation | (2,390 | ) | (2,192 | ) | (7,781 | ) | (6,441 | ) | ||||||||
Issue of common shares and warrants, net of issuance costs | - | - | 1,487,827 | 54,518 | ||||||||||||
Exercise of stock options and warrants | 12,600 | - | 12,600 | - | ||||||||||||
Net cash generated by (used in) financing activities | 10,210 | (2,192 | ) | 1,492,646 | 48,077 | |||||||||||
Investing activities | ||||||||||||||||
Purchase of property and equipment | (5,022 | ) | (9,856 | ) | (25,704 | ) | (58,978 | ) | ||||||||
Proceeds from sale of property and equipment | - | - | - | 401 | ||||||||||||
Decrease (increase) in restricted cash | 254,183 | 45,967 | 56,395 | (43,971 | ) | |||||||||||
Decrease (increase) in short term investments | - | 197,429 | 905,651 | (1,803,884 | ) | |||||||||||
Net cash generated by (used in) investing activities | 249,161 | 233,540 | 936,342 | (1,906,432 | ) | |||||||||||
Net cash inflow (outflow) | (295,908 | ) | (597,983 | ) | 249,941 | (3,828,856 | ) | |||||||||
Cash and cash equivalents, beginning of period | 1,010,432 | 943,272 | 464,583 | 4,174,145 | ||||||||||||
Cash and cash equivalents, end of period | $ | 714,524 | $ | 345,289 | $ | 714,524 | $ | 345,289 | ||||||||
Supplemental information: | ||||||||||||||||
Cash interest paid | $ | 347 | $ | 479 | $ | 1,187 | $ | 1,572 |
The accompanying notes are an integral part of these consolidated financial statements.
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NXT ENERGY SOLUTIONS INC.
Consolidated Statements of Shareholders’ Equity
(Unaudited) (Expressed in Canadian dollars)
for the nine months | ||||||||
ended September 30 | ||||||||
2011 | 2010 | |||||||
Common Shares | ||||||||
Balance at beginning of the period | $ | 52,031,435 | $ | 51,934,360 | ||||
Issued upon exercise of stock options and warrants | 12,600 | 54,518 | ||||||
Issued through private placement, net of issue costs | 1,158,441 | - | ||||||
Transfer from contributed capital upon exercise of options and warrants | - | 42,557 | ||||||
Balance at end of the period | 53,202,476 | 52,031,435 | ||||||
Preferred Shares | ||||||||
Balance at beginning and end of the period | 3,489,000 | 3,489,000 | ||||||
Contributed Capital | ||||||||
Balance at beginning of the period | 4,659,026 | 3,939,953 | ||||||
Recognition of stock based compensation expense | 294,785 | 350,989 | ||||||
Contributed capital transferred to common shares pursuant to exercise of options and warrants | - | (42,557 | ) | |||||
Value attributed to warrants issued through private placement | 329,386 | - | ||||||
Balance at end of the period | 5,283,197 | 4,248,385 | ||||||
Deficit | ||||||||
Balance at beginning of the period | (59,493,359 | ) | (55,040,931 | ) | ||||
Net loss for the period | (2,512,041 | ) | (3,175,735 | ) | ||||
Balance at end of the period | (62,005,400 | ) | (58,216,666 | ) | ||||
Accumulated Other Comprehensive Income | ||||||||
Balance at beginning and end of the period | 710,935 | 710,935 | ||||||
Total Shareholders’ Equity at end of the period | $ | 680,208 | $ | 2,263,089 |
The accompanying notes are an integral part of these consolidated financial statements.
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NXT ENERGY SOLUTIONS INC.
Notes to the Consolidated Financial Statements
For the nine month period ended and as at September 30, 2011
(Unaudited) (Expressed in Canadian dollars unless otherwise stated)
1. Organization and Future Operations
NXT Energy Solutions Inc. (the “Company” or “NXT”) was incorporated under the laws of the State of Nevada on September 27, 1994, and was later continued from the State of Nevada to the Province of Alberta, Canada on October 24, 2003.
NXT owns a proprietary technology called Stress Field Detection (“SFD®”), an airborne survey system that is designed to identify areas with oil and natural gas reservoir 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 to develop, validate and obtain industry acceptance of SFD®, including 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 a deficit of approximately $47.6 million in conducting these activities.
This early period was effective in developing the technology to a stage where SFD® was both technically ready and had the required industry validation to embark on the commercial phase of the company. In 2006 the Company began the “commercialization” phase by offering SFD® survey services to clients engaged in oil and gas exploration activities with a focus on potential clients operating in the western Canadian sedimentary basin.
The global financial crisis of late 2008 affected a number of markets and resulted in a dramatic decline in NXT’s Canadian market opportunities. This caused NXT to re-focus its sales activities towards international markets, and in 2009 NXT commenced active operations in Colombia.
Despite having provided services to clients since 2006, NXT is still in the early stage of commercializing its SFD® technology. The generation of positive cash flow from operations in the future will depend largely on its ability to demonstrate the value of the NXT survey system to a much wider client base. NXT recognizes that this early commercialization phase can last for several years and that its’ financial position is dependent upon a limited number of client projects, on obtaining additional financing and attracting future clients.
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 traditionally had minimal working capital. NXT recognizes that current working capital is not sufficient to support the operations for the next twelve months without generating additional revenues and / or capital.
NXT anticipates it will be able to expand operations in order to generate both net income and cash from operations in future years with its existing 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 NXT be unable to raise additional capital or generate sufficient net income and cash from operations as required in future years in order to continue as a going concern.
2. Significant Accounting Policies
Basis of presentation
These interim unaudited 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, 2010. These interim statements should be read in conjunction with the 2010 annual audited consolidated financial statements as they contain disclosure which is supplemental to NXT’s annual consolidated financial statements and accordingly certain disclosure normally required for annual financial statements has been condensed or omitted.
Consolidation
These consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiaries (two inactive United States subsidiary companies). All significant inter-company balances and transactions among NXT and its subsidiaries have been eliminated and are therefore not reflected in these consolidated financial statements.
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3. Accounts payable and accrued liabilities
September 30 | December 31, | |||||||
2011 | 2010 | |||||||
Accrued liabilities related to | ||||||||
Professional fees | $ | 108,250 | $ | 118,065 | ||||
Consultant fees | 33,750 | 15,100 | ||||||
Board of Directors’ fees | 53,750 | - | ||||||
Vacation pay | 73,042 | 60,748 | ||||||
268,792 | 193,913 | |||||||
Trade payables, payroll withholdings and other | 317,785 | 382,675 | ||||||
$ | 586,577 | $ | 576,588 |
4. Restricted cash
Restricted cash consists of U.S. dollar money market securities (plus accrued interest) which has been deposited by NXT with financial institutions as security in order for these institutions to issue bank letters of credit for the benefit of third party clients. A Barbados bank holds on deposit U.S. $42,408 (encumbered until 2012) to satisfy a contractual requirement related to ongoing SFD® survey services in Colombia.
5. Common shares
The Company has an unlimited number of shares authorized.
The following is a continuity of issued and outstanding common shares:
Common Shares | ||||||||
# of Shares | Amount | |||||||
As at December 31, 2010 | 30,801,796 | $ | 52,031,435 | |||||
Transactions during the 9 month period ended September 30, 2011 | ||||||||
Issued through private placement; net of issue costs and value attributed to warrants | 3,200,600 | 1,158,441 | ||||||
Issued on exercise of stock options | 20,000 | 12,600 | ||||||
As at September 30, 2011 | 34,022,396 | $ | 53,202,476 |
On February 16, 2011 NXT closed a non-brokered private placement (the “Placement”) for aggregate proceeds of $1,600,300 (net $1,487,827) including $40,000 from two officers of the Company. NXT issued 3,200,600 units at a price of $0.50 per unit where each unit consisted of one common share and one warrant, with each warrant entitling the holder to acquire an additional common share at a price of $0.60 per share on or before the expiry date of February 16, 2012. The expiry date may become accelerated at the discretion of NXT if the shares trade at a price greater than $0.90 for 10 consecutive trading days. In connection with closing of the Placement, NXT paid a finder’s fee of $72,600 and issued 145,320 warrants with the same terms as above.
The common shares were recorded at a value equal to the net proceeds received less $329,386 which was the estimated fair value attributed to the 3,345,920 warrants that were issued on the Placement.
6. Earnings (loss) per share
For the three months | For the nine months | |||||||||||||||
ended September 30 | ended September 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) for the period | $ | (1,026,814 | ) | $ | (962,590 | ) | $ | (2,512,041 | ) | $ | (3,175,735 | ) | ||||
Weighted average number of shares | ||||||||||||||||
outstanding - basic and diluted | 34,007,613 | 30,801,796 | 33,453,135 | 30,765,935 | ||||||||||||
Net (loss) per share | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.10 | ) |
All outstanding stock options, common share purchase warrants and preferred shares were excluded from the diluted earnings per share calculation for the periods ended September 30, 2011 and 2010 as they were anti-dilutive.
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7. Stock Options issued to Employees, Directors and Contractors
The following is a summary of stock options outstanding as at September 30, 2011:
average | |||||||||||
remaining | |||||||||||
# of options | # of options | contractual | |||||||||
exercise price | outstanding | exercisable | life (years) | ||||||||
$ 0.45 | 166,600 | 166,600 | 4.0 | ||||||||
$ 0.53 | 150,000 | 50,000 | 2.4 | ||||||||
$ 0.63 | 1,466,741 | 1,190,075 | 1.0 | ||||||||
$ 1.16 | 504,800 | 214,800 | 4.8 | ||||||||
2,288,141 | 1,621,475 | 2.4 |
For the nine months ended | For the year ended | |||||||||||||||
September 30, 2011 | December 31, 2010 | |||||||||||||||
# of options | weighted average | # of | weighted average | |||||||||||||
exercise price | exercise price | |||||||||||||||
Outstanding at beginning of period | 2,134,804 | $0.61 | 2,757,204 | $1.76 | ||||||||||||
Granted | 654,800 | $1.02 | 248,900 | $0.45 | ||||||||||||
Granted on re-pricing in 2010 | - | - | 2,113,204 | $0.63 | ||||||||||||
Cancelled for re-pricing | - | - | (2,113,204 | ) | $1.92 | |||||||||||
Forfeited | (270,000 | ) | $0.63 | (431,300 | ) | $1.48 | ||||||||||
Expired | (211,463 | ) | $0.63 | (340,000 | ) | $0.66 | ||||||||||
Exercised | (20,000 | ) | $0.63 | (100,000 | ) | $0.55 | ||||||||||
Options outstanding as at end of period | 2,288,141 | $0.73 | 2,134,804 | $0.61 | ||||||||||||
Options exercisable as at end of the period | 1,621,475 | $0.68 | 1,737,637 | $0.61 |
Stock options granted generally vest at a rate of one-third at the end of each of the first three years following the date of grant, except as noted below. Options lapse, if unexercised, generally five years from the date granted.
In the first quarter of 2011 an officer of the Company was granted 150,000 options at an excise price of $0.53 per share with one third of the options vesting at the date of grant and one-third vesting at the end of each of the following two years. These options will expire three years from the date of grant.
A total of 214,800 of the 504,800 stock options which were granted in July 2011 at an exercise price of $1.16 per share had immediate vesting.
Compensation expense associated with grants of stock options
The fair value attributed to grants of stock options is calculated using the Black-Scholes option valuation model utilizing the following weighted average assumptions:
For the nine months ended September 30 | ||||||||
2011 | 2010 | |||||||
Expected dividends paid per common share | Nil | Nil | ||||||
Expected life (years) | 3.7 | 3 | ||||||
Expected volatility in the price of common shares (%) | 115% | 95% | ||||||
Risk free interest rate (%) | 2.2% | 1.5% | ||||||
Weighted average grant date fair market value per share | $0.83 | $0.57 |
The intrinsic (or “in-the-money”) value of options exercised in 2011 was $0.36 per share (2010 - $0.53 per share).
As of September 30, 2011 there was $334,636 (2010 - US $434,132) of unrecognized stock based compensation expense related to non-vested stock options. This amount will be recognized in expense over the remaining vesting periods of the underlying stock options.
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8. Warrants
The following is a summary of outstanding common share purchase warrants:
# of warrants | weighted average | |||||||
exercise price | ||||||||
Outstanding as at January 1, 2011 | $- | |||||||
Issued on February, 2011 private placement | 3,345,920 | $0.60 | ||||||
Outstanding as at September 30, 2011 (expire February 16, 2012) | 3,345,920 | $0.60 |
In November 2011, a total of 700,000 of the warrants were exercised, resulting in net proceeds to the Company of $420,000. There were no warrants outstanding in 2010.
The value attributed to warrants that were issued pursuant to the private placement on February 16, 2011 was calculated using the Black-Scholes warrant valuation model utilizing the following weighted average assumptions:
Expected dividends paid per common share | Nil | |||
Expected life in years | 0.8 | |||
Expected volatility in the price of common shares | 94% | |||
Risk free interest rate | 1.5% | |||
Weighted average grant date fair market value per share | $0.14 |
9. Changes in non-cash operating working capital
The change in non-cash working capital is comprised of:
3 months ended Sept. 30 | 9 months ended Sept. 30 | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Accounts receivable | 67,823 | 13,421 | (32,768 | ) | 1,069,972 | |||||||||||
Work-in-progress | - | - | (49,550 | ) | - | |||||||||||
Prepaid expenses and other | 8,710 | 24,327 | (6,690 | ) | 17,874 | |||||||||||
Unearned revenue | - | - | - | - | ||||||||||||
Accounts payable and accrued liabilities | 109,147 | (17,066 | ) | 9,989 | (184,244 | ) | ||||||||||
185,680 | 20,682 | (79,019 | ) | 903,602 | ||||||||||||
Portion attributable to: | ||||||||||||||||
Operating activities | 185,680 | 20,682 | (79,019 | ) | 903,602 | |||||||||||
Financing activities | - | - | - | - | ||||||||||||
Investing activities | - | - | - | - | ||||||||||||
185,680 | 20,682 | (79,019 | ) | 903,602 |
10. Commitments and contingencies
The Company has an operating lease commitment on office space through October 31, 2012 which requires minimum monthly lease payments of $32,212.
In addition, the Company has in place an agreement to utilize a minimum annual volume of aircraft charter hours, the terms of which it expects to meet for 2011.
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