2. Significant Accounting Policies

Basis of Presentation

These consolidated financial statements for the year ended December 31, 2025, have been prepared by management in accordance with generally accepted accounting principles of US GAAP.

Consolidation 

These consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiaries (all of which are inactive).  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.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and short-term Guaranteed Investment Certificates (“GIC’s”) with an original maturity less than 90 days from the date of acquisition.

Short Term Investments

Short term investments consist of short term GICs, with original maturity dates greater than 90 days and up to one year.

Fair Value Measures

For any balance sheet items recorded at fair value on a recurring basis or non-recurring basis, the Company is required to classify the fair value measure into one of three categories based on the fair value hierarchy noted below.

In Level I, the fair value of assets and liabilities is determined by reference to quoted prices in active markets for identical assets and liabilities that the Company has the ability to assess at the measurement date. 

At December 31, 2025 the fair values of restricted stock units (“RSU”) liability was based on share price that was determined using Level I inputs. 

In Level II, determination of the fair value of assets and liabilities is based on the extrapolation of inputs, other than quoted prices included within Level I, for which all significant inputs are observable directly or indirectly. Such inputs include published exchange rates, interest rates, yield curves and stock quotes from external data service providers. Transfers between Level I and Level II would occur when there is a change in market circumstances.  There are no Level II fair value measures.

In Level III, the fair value of assets and liabilities measured on a recurring basis is determined using a market approach based on inputs that are unobservable and significant to the overall fair value measurement. Assets and liabilities measured at fair value can fluctuate between Level II and Level III depending on the proportion of the value of the contract that extends beyond the time frame for which inputs are considered to be observable.  As contracts near maturity and observable market data becomes available, the contracts are transferred out of Level III and into Level II. 

The determination of the fair value of the acquisition of the Intellectual property (Note 8) was determined using Level III inputs, as well as the convertible debentures (Note 11).

Measurement of credit losses on financial instruments

The impairment model of financial instruments is based on expected losses rather than incurred losses.  In making the assessment of expected losses, the Company considers the following factors: historically realized bad debts; a counterparty’s present financial condition and whether a counterparty has breached certain contracts; the probability that a counterparty will enter bankruptcy; changes in economic conditions that correlate to increased levels of default and term to maturity of the specific receivable. These expected credit losses are recognized as an allowance rather than as a direct write-down of the amortized cost basis.

Deposits

Deposits consist of security payments made to lessors for the Company’s office and aircraft lease.  They are classified as long-term if the lease end date is greater than one year.

Property and Equipment

Property and equipment is recorded at cost, less accumulated amortization, which is recorded over the estimated service lives of the assets using the following annual rates and methods:

Intellectual Property

Intellectual property acquired is recorded at cost, less accumulated amortization, which is recorded over the estimated minimum useful life of the assets. The Company incurs periodic costs that are expensed when incurred to file patents and to maintain them.

 Impairment of Long-Lived Assets

The Company reviews long-lived assets, which includes property, equipment and intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company considers both internal and external factors when assessing for potential indicators of impairment, and with respect to intellectual property, the Company’s assessment includes consideration of historical and forecasted SFD^® related revenues, market capitalization, control premiums, and the SFD^® related revenue multiples compared to industry peers.

When indicators of impairment exist, the Company first compares the total of the estimated undiscounted future cash flows or the estimated sale price to the carrying value of an asset.  If the carrying value exceeds these amounts, an impairment loss is recognized for the excess of the carrying value over the estimated fair value of the asset.

Convertible Debentures

The Company’s convertible debentures are denominated in U.S. dollars while the Company’s functional currency is the Canadian dollar. As a result, the conversion feature does not meet the “fixed‑for‑fixed” equity classification criteria under ASC 815. Accordingly, the convertible debentures are classified as financial liabilities and measured at fair value through profit or loss, with changes in fair value recognized in earnings.  If the convertible debentures are converted to common shares, the common shares will be classified as equity.  Interest on the convertible debenture is accrued as earned. 

Foreign Currency Translation

The Company’s functional currency is the Canadian dollar.  Revenues and expenses denominated in foreign currencies are translated into Canadian dollars at the average exchange rate for the applicable period.  Monetary assets and liabilities are translated into Canadian dollars at the exchange rate in effect at the end of the applicable period.  Non-monetary assets and liabilities are recorded at the relevant exchange rates for the period in which the balances arose.  Any related foreign exchange gains and losses resulting from these translations are included in the determination of net income (loss) for the period.

Income Taxes

NXT follows the asset and liability method of accounting for income taxes. This method recognizes deferred income tax assets and liabilities based on temporary differences in reported amounts for financial statement and income tax purposes, at the income tax rates expected to apply in the future periods when the temporary differences are expected to be reversed or realized.  The effect of a change in income tax rates on deferred income tax assets and deferred income tax liabilities is recognized in income in the period when the tax rate change is enacted.  Valuation allowances are provided when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized.

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (ASU 2023-09), which improves income tax disclosures by requiring: (1) consistent categories and greater disaggregation of information in the rate reconciliation, and (2) income taxes paid disaggregated by jurisdiction. It also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024.

Stock-based Compensation

NXT follows the fair value method of accounting for stock options, restricted stock units, deferred stock units, and the employee share purchase plan (the “Share Compensation Plans”) that are granted to acquire common shares under NXT’s Share Compensation Plans.  For equity-settled stock-based compensation awards, fair values are determined at the grant date and the expense, net of estimated forfeitures, is recognized over the requisite service period with a corresponding increase recorded in contributed capital. An adjustment is made to compensation for any differences between the estimated forfeitures and the actual forfeitures. For cash-settled stock-based compensation awards, fair values, based on observable prices, are determined at each reporting date and periodic changes are recognized as compensation costs, with a corresponding change to liabilities.  Stock-based awards with performance conditions are recognized as compensation costs only when the performance condition is probable of being met.

Upon exercise or realization of the equity-settled Share Compensation Plans, the consideration received by NXT, and the related amount which previously recorded in contributed capital, is recognized as an increase in the recorded value of the common shares of the Company.

Net Income (Loss) Per Share

Basic income (loss) per share amounts is calculated by dividing net income (loss) by the weighted average number of common shares that are outstanding for the fiscal period.  Shares issued during the period are weighted for the portion of the period that the shares were outstanding.  Diluted income per share, in periods when NXT has net income, is computed using the treasury stock method, whereby the weighted average number of shares outstanding is increased to include any additional shares that would be issued from the assumed exercise of stock options and restricted stock units.  The incremental number of shares added under the treasury stock method assumes that outstanding stock options and restricted stock units that are exercisable at exercise prices below the Company’s average market price (i.e. they were “in-the-money”) for the applicable fiscal period are exercised and then that number of incremental shares is reduced by the number of shares that could have been repurchased by the Company from the issuance proceeds, using the average market price of the Company’s shares for the applicable fiscal period.

No addition to the basic number of shares is made when calculating the diluted number of shares if the diluted per share amounts become anti-dilutive (such as occurs in the case where there is a net loss for the period).

Revenue

SFD^® Surveys

The performance obligation for NXT in SFD^® surveys is the acquisition, processing, interpretation and integration of Stress Field Detection (SFD^®) data.  Revenue from SFD^® survey contracts is recognized over time using an input method based on direct survey costs incurred relative to total estimated survey costs. The determination of total estimated survey costs requires management judgment and is based on expected aircraft utilization, personnel costs, data processing costs, and other project‑specific inputs.

Changes in estimated total costs or project scope may result in adjustments to revenue recognized in the period of change. All funds received or invoiced in advance of recognition of revenue are reflected as contract obligations and classified as a current liability on our balance sheet. 

The Company uses direct survey costs as the input measure to recognize revenue in any fiscal period.  The percentage of direct survey costs incurred to date over the total expected survey costs to be incurred, provides an appropriate measure of the stage of the performance obligation being satisfied over time.

SFD^® Data Sales

The performance obligation for NXT in SFD^® data sales is the delivery of the promised specific services as itemized in the contract with the customer.   Revenue from the sale of SFD^® data (excluding any related foreign value added taxes) is recognized once the services are completed and the data is transferred to the customer.

Leases 

The Company determines if an arrangement is an operating or finance lease, as defined under US GAAP, at inception.  A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.  These leases are included in right-of-use (“ROU”) assets and lease obligations in the Consolidated Balance Sheet.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the obligation to make lease payments arising from such leases.  Lease obligations are recognized at the lease commencement date based on the present value of remaining lease payments over the lease term, taking into consideration conditions such as incentives and termination penalties, as appropriate.  A corresponding ROU asset is recognized at the amount of the lease obligation, adjusted for payments made prior to lease commencement or initial direct costs, if any.

When calculating the present value, the Company uses the rate implicit in the lease, or uses its incremental borrowing rate for a similar term and risk profile based on the information available at the commencement date. The Company’s lease terms may have options to extend or terminate the lease which are included in the calculation of lease obligations when it is reasonably certain that it will exercise those options. Lease expense for operating leases is recognized on a straight-line basis over the lease term.  Office and equipment lease expenses are included within General and administrative expenses.

The aircraft lease cost is treated as a finance lease and is recorded in ROU assets.  The ROU asset amortization included within amortization costs and lease payments are recorded as interest expense and as a reduction in the lease liability.  The aircraft ROU is amortized at a 10% declining balance.

Lease agreements can contain both lease and non-lease components, which are accounted for separately.  The office lease contains non-lease components which are detailed in Note 15.

Government grants

Government grants are recognized when there is reasonable assurance that the grant will be received, and all attached conditions will be complied with.  When the grant relates to an expense item, it is recognized as an expense reduction in the period in which the costs are incurred.  Where the grant relates to an asset, it is recognized as a reduction to the net book value of the related asset and then subsequently in net loss over the expected useful life of the related asset through lower charges to amortization and impairment.