NXT Energy Solutions Inc. (Form: 20-F, Received: 04/12/2017 06:02:58)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

(Mark One)

[ ] Registration Statement Pursuant To Section 12(b) or (g) of the Securities Exchange Act of 1934

[ X ] Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016.

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

[ ] Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 000-24027

NXT Energy Solutions Inc.

(Exact Name of Registrant as Specified in its Charter)

Alberta, Canada
(Jurisdiction of incorporation or organization)

Suite 302, 3320 - 17 ^th Avenue SW
Calgary, Alberta, Canada, T3E 0B4
(Address of principal executive offices)

Bev Stewart

Phone: 403-206-0807

Facsimile: 403-264-6442

Suite 302, 3320 - 17 ^th Avenue SW
Calgary, Alberta, Canada, T3E 0B4
(Name, Telephone, E-mail and/or Facsimile number and address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act: None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Common Shares

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

53,856,509 common shares outstanding as of December 31, 2016 (53,856,509 common shares outstanding as of April 6 ^th , 2017).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Yes

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

U.S. GAAP

International Financial Reporting Standards as issued by the International Accounting Standards Board

Other

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17

Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes

20-F for the year ended December 31, 2015

TABLE OF CONTENTS

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	5
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE	5
ITEM 3. KEY INFORMATION	5
ITEM 4. INFORMATION ON THE COMPANY	14
ITEM 4A. UNRESOLVED STAFF COMMENTS	23
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	23
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	35
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	45
ITEM 8. FINANCIAL INFORMATION	47
ITEM 9. THE OFFER AND LISTING	47
ITEM 10. ADDITIONAL INFORMATION	49
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	59
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	59
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	60
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	60
ITEM 15. CONTROLS AND PROCEDURES	60
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	61
ITEM 16B. CODE OF ETHICS	61
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	61
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	62
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	62
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	62
ITEM 16G. CORPORATE GOVERNANCE	62
ITEM 16H. MINE SAFETY DISCLOSURE	62
PART III
ITEM 17. FINANCIAL STATEMENTS	62
ITEM 18. FINANCIAL STATEMENTS	62
ITEM 19. EXHIBITS	63

FORWARD-LOOKING STATEMENTS

Except for any historical information contained herein, the matters discussed in this Annual Report on Form 20-F contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations and business. These statements relate to analyses and other information which are based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies. These forward-looking statements are identified by their use of terms and phrases such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “will” and similar terms and phrases, including references to assumptions. These forward-looking statements involve risks and uncertainties, including current trend information, projections for deliveries and other trend projections, that may cause our actual future activities and results of operations to be materially different from those suggested or described in this Annual Report on Form 20-F.

These risks include:

our ability to generate sufficient ongoing cash flow from operations or to raise adequate capital to allow us to grow the business and continue operations;

conducting operations in international markets;

the availability of suitable aircraft used in conducting our operations;

the emergence of alternative competitive technologies;

protection of our intellectual property and rights to our SFD® technology;

the loss of key personnel;

our dependence on a limited number of clients;

foreign currency and interest rate fluctuations may affect our financial position;

recent low commodity prices for oil and gas have impacted demand for our services and ongoing volatility in oil and natural gas commodity prices may reduce demand for our services in the future; and

other factors described herein under “Risk Factors” (see Item 3. D.)

If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those expected, estimated or projected. Given these uncertainties, users of the information included in this Annual Report on Form 20-F, including investors and prospective investors, are cautioned not to place undue reliance on such forward-looking statements. We do not intend to update the forward-looking statements included in this Annual Report on Form 20-F.

In this Annual Report on Form 20-F, except as specified otherwise or unless the context requires otherwise, “we”, “our”, “us”, the “company”, and “NXT” refer to NXT Energy Solutions Inc. and its subsidiaries. All references to “fiscal” in connection with a year shall mean the year ended December 31.

All financial information contained herein is expressed in Canadian dollars (“Cdn$”) unless otherwise stated.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected financial data.

The following historical financial information should be read in conjunction with the section entitled “Operating and Financial Review and Prospects” (see Item 5 herein) and our audited consolidated financial statements and related notes, which are included elsewhere in this document. The consolidated statements of income (loss) data for the years ended December 31, 2016, 2015 and 2014 and selected consolidated balance sheet data as of December 31, 2016 and 2015 are derived from, and qualified by reference to, our audited consolidated financial statements that are included elsewhere in this Form 20-F. The selected consolidated balance sheet data as of December 31, 2014, 2013 and 2012, and the consolidated statements of income (loss) data for the years ended December 31, 2013 and 2012 is derived from our previously filed audited consolidated financial statements (which are not included in this Form 20-F).

INCOME (LOSS) & COMPREHENSIVE INCOME (LOSS)

	(expressed in Canadian Dollars)	2016	2015	2014	2013	2012
Survey revenues		$1,447,269	$ 17,422,151	$ 3,913,367	$ 2,684,095	$ 10,937,575
Operating expenses
	Survey costs	1,157,185	5,095,691	431,518	1,632,159	3,633,645
	General and administrative	5,645,459	5,049,690	4,132,108	4,112,787	4,508,506
	Stock based compensation expense	790,500	1,081,000	658,000	492,000	265,000
	Amortization expense	2,104,864	704,943	67,162	85,484	125,015
		9,698,008	11,931,324	5,288,788	6,322,430	8,532,166
Other expense (income)
	Interest expense (income), net	(17,254)	(13,910)	(50,824)	(25,455)	2,744
	Foreign exchange (gain) loss	272,713	(712,480)	(158,817)	(150,350)	14,686
	Other expense (income)	218,853	529,081	354,781	107,985	66,973
	Increase (decrease) in fair value of US$ Warrants	-	-	42,800	1,371,500	(168,143)
		474,312	(197,309)	187,940	1,303,680	(83,740)
Income (loss) before income taxes		(8,725,051)	5,688,136	(1,563,361)	(4,942,015)	2,489,149
Income tax expense (recovery)		374,511	(4,852,092)	-	399,546	426,421
Net income (loss) and comprehensive income (loss) for the year		(9,099,562)	10,540,228	(1,563,361)	(5,341,561)	2,062,728
Net income (loss) per share - Basic		(0.17)	0.22	($ 0.04)	($0.13)	$ 0.05
Diluted ⁽¹⁾		(0.17)	0.21	($ 0.04)	($0.13)	$ 0.04
Weighted average # of common shares outstanding
Basic		53,526,155	47,782,647	44,375,540	41,660,190	40,453,392
Diluted ⁽¹⁾		53,526,155	49,041,383	44,375,540	41,660,190	48,790,462

# of common shares outstanding		53,856,509	53,306,109	44,958,843	42,418,326	39,554,959

⁽¹⁾ in periods with a loss, the Diluted total excludes the 8,000,000 convertible preferred shares which were outstanding until converted
on August 31, 2015, as their effect is anti-dilutive.

Balance Sheet Data

(expressed in Canadian Dollars)

	2016	2015	2014	2013	2012
Working capital (deficiency)	$1,703,510	$ 7,534,128	$ 5,029,013	$ 1,618,719	$ 4,948,556

Current assets	2,316,341	10,691,918	5,811,639	6,577,175	7,130,383
Restricted cash	-	-	-		-
Property and equipment, net	3,348,557	3,678,985	237,464	262,818	327,839
Intellectual property, net	23,024,268	24,709,000	-		-
Total assets	28,689,166	39,079,903	6,049,103	6,839,993	7,458,222

Current liabilities	612,831	3,157,790	782,626	4,958,456	2,181,827

Long-term liabilities	264,775	300,462	50,000	64,560	61,813
Total liabilities	877,606	3,458,252	832,626	5,023,016	2,243,640

Shareholders’ equity:
Common shares	85,966,393	85,051,553	65,792,307	61,340,321	56,623,686
Preferred shares	-	-	232,600	232,600	3,489,000
Contributed capital	7,613,719	7,239,089	6,400,789	5,889,914	5,406,193
Deficit	(66,479,487)	(57,379,926)	(67,920,154)	(66,356,793)	(61,015,232)
Accumulated other comprehensive income	710,935	710,935	710,935	710,935	710,935
	28,689,166	35,621,651	5,216,477	1,816,977	5,214,582

Throughout the history of the company there have been no dividends declared.

The following table sets forth certain exchange rates between our financial reporting currency, the Canadian dollar, and the United States dollar (“US $”) based on the noon rate of exchange for the US $, expressed in Canadian dollars, as reported by the Bank of Canada (i.e. multiply by these rates to convert Cdn$ to US $).

Date	US $ per Cdn$ Exchange Rates

Last 6 months ended	High	Low

March 31, 2017	0.7531	0.7405
February 28, 2017	0.7690	0.7548
January 31, 2017	0.7675	0.7497
December 31, 2016	0.7622	0.7377
November 30, 2016 October 31, 2016	0.7498 0.7631	0.7363 0.7461


Last Quarter & Last 5 Years	Average
Quarter ended March 31, 2017	0.7555
Year ended December 31, 2016	0.7555
Year ended December 31, 2015	0.7820
Year ended December 31, 2014	0.9054
Year ended December 31, 2013	0.9710
Year ended December 31, 2012	1.0004

	Ending
March 31, 2017	0.7506

B. Capitalization and indebtedness.

Not applicable.

C. Reasons for the offer and use of proceeds.

Not applicable.

D. Risk factors.

Investing in our common shares involves a high degree of risk. In addition to the other information included in this document, you should carefully consider the risks described below before purchasing our common shares. If any of the following risks actually occur, our business, financial condition and results of operations could materially suffer. As a result, the trading price of our common shares could decline and you might lose all or part of your investment.

Our ability to continue operating is not certain.

We are in the early stages of realizing the goal of industry acceptance of our SFD ® technology, during which we may have a significant economic dependency on a limited number of clients. As such, there is uncertainty about the timing and magnitude of future revenues. We recognize that there is limited ability to support operations indefinitely without generating sufficient new revenue sources or securing additional financing if such should become required.

Volatility in oil and natural gas commodity prices may affect demand for our services.

We incur a risk of market changes in oil and natural gas prices. Prospective revenues from the sale of our services can be impacted by oil and natural gas price changes. The impact of price changes on our ability to enter into SFD ® survey contracts cannot be readily determined; however, in general, if commodity prices decline significantly, our opportunity to obtain and execute SFD ® survey contracts may also likely decline.

The financial statements rely upon estimates and assumptions that could be incorrect.

The preparation of financial statements requires our management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities including the disclosure of contingent assets and liabilities as well as revenues and expenses recorded in our financial statements. Estimates made relate primarily to the measurement of accrued liabilities, stock-based compensation expense, valuation of future income tax assets, estimates for asset retirement obligations, and the useful lives of capital assets and intellectual property.

The estimates and assumptions are reviewed periodically and are based upon the best information available to management; however, we cannot provide assurance that future events will not prove that these estimates and assumptions are inaccurate. Any revisions to our estimates and assumptions may have a material impact on our future reported net income or loss and assets and liabilities.

Our financial position is affected by foreign currency fluctuations.

We currently conduct cash transactions and have holdings in Canadian dollars, US $ and periodically have holdings of local currency in countries such as Bolivia. We generally contract to earn revenues in U.S. dollars and potentially may earn revenues in Canadian dollars and other foreign currencies

Our reporting currency is in Canadian dollars. We currently do not engage in currency hedging activities, and are reviewing opportunities to do so. Our cash positions and potential foreign currency revenue streams in currencies other than Canadian dollars exposes us to exchange rate fluctuations between the Canadian dollar and foreign currencies (see also Item 11).

Our financial position will be affected by exchange rate fluctuations. We may earn revenue and incur expenses denominated in foreign currencies, yet report our financial results in Canadian dollars. Furthermore, we intend to enter into contracts to provide services in foreign countries and may periodically conduct business in other currencies such as the Euro. Changes in currency exchange rates could have an adverse effect on the company's business, financial condition and results of operations.

Our net income or loss is impacted by interest rate fluctuations.

We periodically invest available cash in short term investments that generate interest income that will be affected by any change in interest rates (See Item 11).

We rely upon the availability of aircraft to conduct our survey operations.

In December 2015, NXT acquired (from its third party owner), a 1997 Cessna Citation Ultra 560 jet aircraft, the primary aircraft which had previously been charter hired to NXT by its operator, Air Partners. The purchase price was US $2 million, and Air Partners continue to maintain and operate (including providing pilots, aircraft maintenance engineers, insurance, hangars, etc.) the aircraft now owned by NXT, in accordance with Transport Canada and other regulatory standards. When the aircraft is not needed for use by NXT, Air Partners seek to earn charter hire revenues from the aircraft on behalf and for the account of NXT.

In the event that NXT’s aircraft is not available (due to damage, a need for extensive repairs, or other unforeseen events) to conduct survey projects, there is a risk that suitable alternative aircraft may not be available on a timely basis from other charter operators when needed. This inability to conduct survey operations could have a material adverse effect on the company's business, financial condition and results of operations. This risk is mitigated somewhat as Air Partners also has access to an alternate, similar model aircraft (certified for the use of our survey equipment) which could be charter hired for use by NXT if required and if available.

In March 2017, NXT entered into a binding sale and leaseback agreement with a Calgary based international aircraft services organization. The terms of the agreement involve NXT selling its’ Cessna Citation aircraft that was purchased in 2015 for US$2,000,000 for the sum of US$2,300,000. NXT will lease the aircraft back for a minimum period of 60 months and retain all existing operating rights and obligations.

We are a small business with limited personnel and our inability to segregate duties between administrative staff is an internal control weakness.

Certain duties that are most appropriately segregated between different employees are, due to our current limited staff, assigned to one individual.

Standard internal control methodology involves the separation of incompatible functions by assigning these functions to separate individuals, and in larger organizations, to separate departments. We often cannot allocate these functions to separate individuals because our administrative staff is limited.

Although we have adopted alternative control methods designed to compensate for the reduced ability to separate incompatible functions, these alternative controls are not effective and there is more than a remote likelihood that our internal control over financial reporting will not prevent or detect material misstatements if they should exist in our financial statements. This lack of separation of duties exposes us to potential misappropriation of funds, embezzlement and other forms of fraud and could have a material adverse effect on our business, financial condition and results of operations (see also Item 15).

We may periodically engage in transactions with related parties.

We may periodically enter into related party transactions with our officers and directors (see also Item 7.B). The most significant transaction was a “Technology Transfer Agreement” (the “TTA”) that was executed on December 31, 2006 between NXT and Mr. George Liszicasz, our Chief Executive Officer (“CEO”), president and director, wherein we issued 10,000,000 convertible preferred shares to him in exchange for the rights to the SFD ® technology for use in hydrocarbon exploration. In 2013, a total of 2,000,000 of these preferred shares were converted (on a one-to-one basis) into common shares, and the remaining 8,000,000 preferred shares were converted in August 2015.

For a full history of the TTA see also Item 4. part A, “Information on the Company - History and development of the company”, and Item 4. part B. “Information on the Company - Business Overview – Technology Transfer Agreement”.

Although we manage this potential conflict of interest risk through maintenance of a strong independent board of directors (the “Board”), all related party transactions have the potential for conflicts of interest that may compromise the ability of Board members to exercise their fiduciary responsibility to NXT shareholders.

A single major shareholder who is also a Board member and an officer of the company retains the ability to influence or control the company, and this influence or control may result in a conflict of interest.

Mr. George Liszicasz, our CEO, is our largest shareholder, and as of March 31, 2017 owns approximately 28% of our outstanding common shares and therefore has a substantial influence in all shareholder matters.

In January 2014, Mr. Liszicasz granted to various individuals “Rights” to acquire from him a total of 1,000,000 of the 8,000,000 common shares which were subsequently issued to him effective August 31, 2015 upon the conversion of the 8,000,000 preferred shares which he held. These Rights are exercisable at a price of $1.77 per common share, and had an expiry date of December 31, 2016. See also the Notes to NXT’s Consolidated Financial Statements or Item 4. part B. “Information on the Company – Technology Transfer Agreement”, for additional information relating to these Rights. These “Rights” expired, unexercised on December 31 ^st , 2016 and were not renewed.

Controls do exist to mitigate any potential risks associated with this conflict of interest. Mr. Liszicasz adheres to a code of conduct which includes a fiduciary responsibility to the company and its shareholders and this conduct is governed by the independent Board of directors who collectively represent a majority of the Board. Furthermore all material related party transactions are disclosed publicly.

However, should these conflict of interest controls not be effective, decisions could be made by the company that may advantage Mr. Liszicasz and negatively impact other shareholders.

Our rights to SFD ® technology may be challenged and we may need to defend our rights to the technology in the courts.

Our rights to ownership and use of SFD ® technology depended on Mr. Liszicasz having the lawful right to sell to NXT the exclusive rights to exploit the SFD ® technology for the exploration of hydrocarbons as agreed to in the TTA.

A risk exists that an unknown party may claim some legal entitlement to our intellectual property, our rights to commercialize this intellectual property or our right to create SFD ® devices and processes. However, we believe that such a claim would be without merit.

The SFD ® technology is an essential component of our business plan. If a third party challenged our lawful entitlement to this technology, the legal defense of our right to the technology may be expensive and could cause a loss of our right to the SFD ® technology, or a protracted legal process to assert our right to the technology would have a material adverse effect on the company's business, financial condition and results of operations.

We rely on specialized equipment, including a limited number of SFD ® sensors, and this limitation may affect our ability to conduct business.

We rely on specialized data acquisition equipment, including a limited number of SFD ® sensor devices, to conduct our aerial SFD ® survey operations. We would be at risk if these survey sensors were to become damaged, destroyed, worn out, stolen or in any way became unavailable for use in operations prior to us creating and testing additional sensors. Should the sensors become unavailable for any reason, our ability to conduct surveys could be delayed for several months as we built new sensors. During this period we may become unable to satisfy contractual obligations, which may jeopardize future revenue opportunities and may potentially result in a client drawing on a contract performance bond posted by the company or otherwise making claims against the company for breach of contract. In addition, an inability to satisfy contractual obligations may have an adverse effect on our developing reputation within the oil and gas community.

NXT seeks to mitigate this risk by researching new designs and constructing additional SFD ® sensor devices.

As the company is in the early commercialization phase, SFD ® surveys have not been tested over all potential geological conditions. Some geological conditions may subsequently be proven to be unsuited for SFD ® surveys thereby creating unforeseen limitations to the application of SFD ® surveys.

Any limitation to the application of SFD ® surveys has the potential of restricting future revenue opportunities and if not properly disclosed to industry clients, such limitations may impact the reputation of the company with these clients.

Unless we pursue ongoing technological improvement and development, we may be unable to respond to changes in customer requirements or new competitive technologies.

We must continue to refine and develop our SFD ® survey system to make it scalable for growth and to respond to potential future competitive pressures. These improvements require substantial time and resources. Furthermore, even if resources are available, there can be no assurance that the company will be commercially or technically successful in enhancing the technology. Our inability to keep pace with new technologies and evolving industry standards and demands could have a material adverse effect on our business, financial condition and results of operations.

We rely on a limited number of key personnel who collectively possess the knowledge and skills to conduct SFD ® surveys and interpret SFD ® data as required to meet contract obligations. Additional or replacement personnel cannot be found and trained quickly. The loss of any of these key persons or increased demand for our services from clients could impair our ability to meet contract obligations, thereby adversely impacting our reputation and our ability to earn future revenue from clients.

The company's future success depends to a significant extent on the continued service of its key technical and management personnel and on our ability to continue to attract and retain qualified employees. The loss of the services of our employees or a failure to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and results of operations. We do not have “key man” insurance on any of our personnel.

The company puts in place employment agreements with all of its executive officers, including George Liszicasz, its President and CEO.

We have a dependence on Mr. Liszicasz and two other staff members to be involved in the SFD ® data interpretation process and to continue to enhance our technology. We are working to minimize dependency on key personnel. Mr. Liszicasz has trained and continues to train a team of signal interpreters to minimize our reliance on him to perform these functions. Currently, a total of seven persons, three of which are highly experienced, (with two additional persons currently in process of training) are trained to interpret SFD ® signals.

Although we have engaged employees with suitable credentials to work with Mr. Liszicasz to enhance our interpretation process and further develop the SFD ® technology, if we are unable to reduce dependence on Mr. Liszicasz and he becomes incapable of performing or unwilling to perform these functions, then there may be an adverse effect on our ability to interpret the data from SFD ® surveys or to enhance our technology.

Within the province of Alberta, the skilled personnel that we require may periodically be in short supply and there is specialized training required that can take several months in order for a new employee to become effective. If we cannot hire these key personnel, we have inadequate time to train them or should we lose current personnel, then our ability to accept contracts or meet contract commitments may be adversely affected, thereby restricting our ability to earn revenue.

There is no certainty that an investor can trade our common shares on public markets at a stable market price.

The Company has historically had a limited public market for our common shares on the TSX Venture Exchange (the “TSX-V”), and the United States (“U.S.”) OTC Markets Group’s Venture Stage Marketplace (the “OTCQB”) and there is a risk that a broader or more active public trading market for our common shares will not develop or be sustained, or that current trading levels will not be sustained. Effective March 22, 2016, the Company’s application to graduate from the TSX-V to the broader Toronto Stock Exchange (“TSX”), Canada’s premier stock exchange listing, was approved.

The market price for the common shares on the exchanges where our stock is listed has been, and we anticipate will continue to be, extremely volatile and subject to significant price and volume fluctuations in response to a variety of external and internal factors. This is especially true with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in oil and natural gas prices, oil and natural gas inventory levels, regulatory and environment rules, and announcements of technology innovations or new products by other companies. Examples of internal factors, which can generally be described as factors that are directly related to our consolidated financial condition or results of operations, would include release of reports by securities analysts and announcements we may make from time to time relative to our operating performance, clients exploration results, financing, advances in technology or other business developments.

Because we have a limited operating history and a limited history of profitability to date, the market price for the common shares is more volatile than that of a seasoned issuer. Changes in the market price of the common shares, for example, may have no connection with our operating results or the quality of services provided to clients. No predictions or projections can be made as to what the prevailing market price for the common shares will be at any time, or as to what effect, if any, that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price. Given the relatively low historic trading volumes, small trades of NXT’s common shares can adversely and potentially dramatically affect the market prices for those shares.

Accordingly, investors in our common stock should anticipate both volatile stock price and poor liquidity unless these conditions change.

You will be subject to the penny stock rules to the extent our stock price on the OTCQB is less than $5.00.

Since the common shares are not listed on a national stock exchange within the United States, trading in the common shares on the OTCQB is subject, to the extent the market price for the common shares is less than $5.00 per share, to a number of regulations known as the "penny stock rules". The penny stock rules, subject to certain exemptions, require a broker-dealer to deliver a standardized risk disclosure document prepared by the U.S. Securities and Exchange Commission (the “SEC”) to provide the customer with additional information, including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and to receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable, they will reduce the level of trading activity in the secondary market for the common shares and may severely and adversely affect the ability of broker-dealers to sell the common shares.

You should not expect to receive dividends in the foreseeable future.

We have never paid any cash dividends on our common shares and we do not anticipate that we will pay any dividends in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Board of directors and will be dependent upon our consolidated financial condition, results of operations, capital requirements and other factors as our Board of directors may deem relevant at that time.

Our right to issue additional capital stock at any time could have an adverse effect on your proportionate ownership and voting rights.

We are authorized under our Articles of Incorporation to issue an unlimited number of common shares and an unlimited number of preferred shares. We may issue these shares under such circumstances and in such manner and at such times, prices, amounts and purposes as our Board of Directors may, in its discretion, determine to be necessary and appropriate, subject to compliance with all applicable exchange regulations and corporate and securities laws. Proportionate ownership and voting rights of common shareholders could be adversely affected by the issuance of additional common shares which may result in common share value dilution.

We may not be able to protect our trade secrets and intellectual property from competitors who would use this knowledge to eliminate or reduce our technological advantage.

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property (“IP”). We have implemented an IP strategy to obtain patents related to the SFD ® technology, while also utilizing “trade secrets” protection of the proprietary nature of our technology as applicable. In early 2017 we were granted a patent by Russia and continue to pursue the grant of numerous other international patents.

The formal patent protection application process, which commenced in 2012, will require disclosure of at least some aspects of our SFD ® technology to third parties and ultimately public disclosure. This disclosure could significantly increase the risk of unlawful use of our technology by third parties. Furthermore, we have no assurance that, even if we seek patent protection, a patent could be registered to protect our IP in all or any jurisdictions within North America or other countries throughout the world. If registered, there can be no assurance that it would be sufficiently broad to protect our technology or that any potential patent would not be challenged, invalidated or circumvented or that any right granted thereunder would provide meaningful protection or a competitive advantage to us. Finally, protection afforded by patents is limited by the financial resources available to legally defend IP rights. We currently do not possess the required financial resources to fund a lengthy defense of our rights if challenged by a much larger competitor or an oil and gas company.

We do enjoy common and contract law protection of our technology and trade secrets. Employees and contractors are governed by confidentiality agreements as well as a fiduciary responsibility to protect our technology, supporting documentation and other proprietary information.

Our strongest protection of the SFD ® technology comes from restricting access to knowledge concerning the technology. Only a very limited number of NXT personnel have access to or knowledge of the underlying SFD ® technology and no one employee and only one officer has access or knowledge of all aspects of the SFD ® system. Currently, no third party has any significant knowledge of the technology. As further protection, SFD ® equipment does not leave the direct control of NXT employees, thereby preventing unauthorized replication of the equipment.

The company reassesses the appropriateness of its IP protection strategy on an ongoing basis and seeks advice from IP advisors as necessary.

It is possible that a third party will copy or otherwise obtain and use the company's technology without authorization, develop a similar technology independently or design around the company's secrets. Accordingly there can be no assurance that the steps taken by the company to prevent misappropriation or infringement of our IP will be successful.

An inability to protect our IP would make it possible for competitors to offer similar products and services that could have a material adverse effect on our business, financial condition and results of operations.

We experience operational hazards in our flight operations that may subject us to potential claims in the event that an incident or accident occurs.

The flight operations of SFD ® surveys are subject to the hazards associated with general flight operations. An aircraft accident may cause personal injury and loss of life, as well as severe damage to and destruction of property or the SFD ® sensors and related equipment.

Independent third parties provide all the services required to maintain and operate the aircraft; they bear the primary risks of flight operations. These services are provided by an organization accredited by Transport Canada to operate aircraft in accordance with Transport Canada approved and audited operating procedures. The aircraft operator employs the required pilots, aircraft maintenance engineers and support personnel and ensures that they operate within their Transport Canada operating certificate. Our employees do not perform any airworthiness or flight safety operations.

We require the flight contractor to maintain appropriate insurance coverage for the risks associated with aircraft operations, and we obtain insurance coverage to provide us with additional risk protection. In addition, we maintain general business insurance coverage, and believe that this insurance and the policy limits are appropriate for the operational risks that we incur.

Despite our policy to not operate the aircraft directly and our insurance coverage, we cannot avoid or alternatively be insured for all risks of flight operations. In the event of an incident or accident we may be sued by injured parties in excess of our policy limits or for damages that are not covered by our insurance policy. The magnitude of a lawsuit of this nature is not determinable. Furthermore, to the extent that our SFD ® equipment is damaged, we may be unable to conduct SFD ® surveys for several months following an accident.

We are a Canadian company and our nationality may impair the enforceability of a judgment for any person resident outside Canada.

Since we are a Canadian company and most of our assets and key personnel are located in Canada, you may not be able to enforce a U.S. judgment for claims you may bring against us, our assets, our key personnel or many of the experts named in this document. This may prevent you from receiving compensation to which you may otherwise have a claim.

We are organized under the laws of Alberta, Canada and substantially all of our assets are normally located in Canada. In addition, all but two of our current members of our Board of directors and all of our officers are residents of Canada . As a result, it may be impossible for you to affect service of process upon us or these individuals within the U.S. or to enforce any judgments in civil and commercial matters, including judgments under U.S. federal securities laws. In addition, a Canadian court may not permit you to bring an original action in Canada or to enforce in Canada a judgment of a U.S. court based upon civil liability provisions of the U.S. federal securities laws.

We conduct operations in foreign countries, which exposes us to several risks that may have a material adverse effect on the company.

Criminal Activity and Social Instability –we have operated in the past in foreign countries such as Colombia, which over the past two decades experienced significant social upheaval and criminal activity relating to drug trafficking, kidnapping and terrorist acts. While the situation has improved dramatically in recent years, there can be no guarantee that the situation will not deteriorate again, nor are these risks eliminated as yet. Furthermore, other potential international survey locations may have similar or other indeterminate criminal or social instability risks.

Systemic criminal activity in a country or isolated criminal acts may disrupt operations, impact our ability to earn revenue, dramatically add to our cost of operations or potentially prevent us from earning any survey revenue in a country.

In addition, foreign markets may be susceptible to a higher risk of corruption and bribery. All of NXT’s employees, contractors, and independent sales agents are required to adhere to the company’s code of conduct and business ethics, which prohibits illegal activities, including any acts of bribery or corruption.

Political Instability - Any changes in regulations or shifts in political attitudes are beyond the control of the company and may adversely affect our business. Exploration may be affected in varying degrees by government regulations which have the effect of restricting exploration and production activities. These changes may adversely impact the laws and policies governing price controls, export controls, foreign exchange controls, income taxes, expropriation of property, environmental legislation, site safety or other areas.

Currently, there are no restrictions (other than the payment of local with-holding taxes) on the repatriation back to Canada of our earnings in foreign countries in which we have operated, such as Colombia and Bolivia; however, there can be no assurance that significant restrictions on repatriation to Canada of earnings will not be imposed in the future.

Our operations may also be adversely affected by changes in laws and policies in Canada impacting foreign travel and immigration, foreign trade, taxation and investment.

Commercial Disputes – While operating in a foreign country, we are subjected to local commercial laws which often involve executing contracts in a foreign language. Although every effort is made to ensure we have access to an accurate English translation, misunderstanding and potential disputes between parties may arise.

In the event of a dispute arising in connection with our foreign operations for any reason, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of the courts of Canada or enforcing Canadian judgments in such other jurisdictions. We may also be hindered or prevented from enforcing our rights with respect to a government instrumentality because of the doctrine of sovereign immunity.

Accordingly, these risk factors have the potential of adversely reducing the level of survey revenue from our clients, our ability to operate effectively or our ability to be paid for our services and may have a material adverse effect on our financial position.

Where possible, NXT utilizes risk mitigation products offered by entities such as Export Development Canada (“EDC”). EDC financial products include insurance coverage of contract accounts receivable, guarantee support for contract performance bonds, and wrongful call insurance for such bonds.

We rely upon the right to conduct airborne surveys in foreign countries. These foreign operations expose us to the risks that we will be prevented from conducting surveys when requested by clients.

The operation of our business, namely conducting aerial SFD ® surveys and interpreting SFD ® data, is not subject to material governmental or environmental regulation in Canada and the United States with the exception of flight rules issued by Transport Canada and the U.S. Federal Aviation Administration (“FAA”) governing the use of commercial aircraft, including rules relating to low altitude flights. The requirements in other countries vary greatly and may require permits and/or provide other restrictions to conducting flight operations in the country that may restrict our ability to perform SFD ® surveys.

For example, in South American countries in which we have operated, such as Colombia and Bolivia, SFD ® surveys must comply with additional requirements not encountered in Canada and the United States, including customs obligations and bonds related to the importation and exportation of the aircraft into the country, obtaining permits from the local aviation authority, and obtaining permits from the local Air Force. We have successfully operated in South America and other global regions in accordance with these typical requirements.

With our North America and International experience to date, we do not anticipate any government controls or regulations that will prevent timely completion of SFD ® surveys. However, we may encounter government restrictions in other countries that may impact or restrict our ability to conduct surveys.

If we encounter government regulation and restrictions that impact or prevent us from conducting surveys in any country, then we will not be able to earn revenue in the country and we may be exposed to forfeiting any performance bonds which may have been issued.

We caution that the factors referred to above and those referred to as part of particular forward-looking statements may not be exhaustive and that new risk factors emerge from time to time in our rapidly changing business environment.

ITEM 4. INFORMATION ON THE COMPANY

A. History and development of the company.

We are a technology company focused on providing a service to oil and natural gas exploration clients using our proprietary Stress Field Detection (“SFD ®”) remote sensing airborne survey system. SFD ® and NXT ® are both registered trademarks of NXT Energy Solutions Inc.

NXT’s corporate history is summarized as follows:

NXT was incorporated under the laws of the State of Nevada on September 27, 1994 as Auric Mining Corporation.

In January 1996, NXT acquired all of the common stock of NXT Energy USA, Inc. (which was then known as Pinnacle Oil Inc.) from its shareholders in exchange for common shares. As a consequence of this reverse acquisition, NXT Energy USA Inc. became a wholly owned subsidiary and its shareholders acquired a 92% controlling interest in NXT’s common shares.

Prior to this reverse acquisition transaction, NXT was a corporate shell conducting no active business, and NXT Energy USA Inc. was a development stage research and development enterprise holding the worldwide rights to use what is now our SFD ® technology for hydrocarbon exploration purposes.

Shortly thereafter, on February 23, 1996 we changed our name to Pinnacle Oil International, Inc. and on June 13, 2000, subsequently changed our name to Energy Exploration Technologies.

On October 24, 2003, our shareholders approved the continuance of the company from the State of Nevada to the Province of Alberta, Canada under the Business Corporations Act (Alberta) (the “ABCA”). Also, our name was modified to Energy Exploration Technologies Inc. (“EETI”).

On September 22, 2008 EETI changed its name to NXT Energy Solutions Inc. by way of Articles of Amendment filed pursuant to the ABCA.

Our registered office is located at 3700, 400 – 3 ^rd Street SW, Calgary, Alberta, Canada and our telephone number is (403) 264-7020. In the United States our authorized agent is Parasec at: 318 North Carson Street, Suite 208, Carson City, NV and their telephone number is (888) 972-7273.

We are a reporting issuer in Alberta and British Columbia and are principally governed by the Alberta Securities Commission in accordance with the Securities Act (Alberta) and the Business Corporations Act (Alberta). We are a foreign private issuer under United States securities laws and are subject to the regulation of the US Securities in accordance with the Securities Exchange Act of 1934 , as amended (the “Exchange Act”).

The underlying technology employed by our SFD ® survey system was invented by George Liszicasz, our President and CEO, chairman and largest shareholder. The technology was initially licensed to the company by Mr. Liszicasz until December 31, 2006 through a series of consecutive license agreements. On December 31, 2006 we obtained the rights to the technology from Mr. Liszicasz pursuant to the terms of the TTA.

Upon execution of the TTA, Mr. Liszicasz transferred to us all his rights and entitlements to the SFD ® technology for use in the field of hydrocarbon exploration.

For further details of the TTA, see the “Summary information on dependence on patents, licenses and contracts” section below.

SFD ® technology for the purposes of the TTA is defined as the theories of quantum physics and engineering which are utilized in the operation of stress field detectors used by NXT for the reception, collection and recording of subsurface geological stresses for hydrocarbon exploration. See also Item 4. Part B “Summary information on dependence on patents, licenses and contracts” for more information on this TTA agreement.

Our business does not normally rely on significant capital expenditures. For the last three fiscal years, the company made capital expenditures for property and equipment of $89,702 (2016), $3,380,717 (2015), and $41,808 (2014), .These annual expenditures normally relate largely to upgrades to office computer equipment and SFD ® survey equipment. In 2015, capital expenditures included the purchase of a survey aircraft (which had previously been charter-hired as needed from the owner / operator of the aircraft), as well as leasehold improvement costs incurred in a move to a new office location in Calgary.

The company does not currently have any significant capital expenditures in progress, or planned for the short term, for Canada or other international operations.

B. Business overview.

Description of the nature of the company’s operations and principal activities

We utilize our proprietary, airborne SFD ® survey system to provide a service for the oil and gas exploration industry. NXT provides a rapid and cost-effective method for our clients to evaluate large land areas for their exploration potential.

SFD ® sensors remotely respond to gravity perturbations and changes in subsurface stress regimes that are meaningful for oil and gas exploration. These responses are captured as raw data that, when interpreted, can provide an indirect method to detect the presence of geological features such as structures, faults, fractures and reefs that are often associated with traps and reservoir accumulations. SFD ® is highly effective in frontier and under-explored areas, in offshore or onshore environments, and over any terrain. The SFD ® survey system has been demonstrated to quickly focus exploration resources, offering the benefit of reducing the risk, time and expense associated with frontier exploration.

Following completion of the aerial surveys, we deliver to our clients a detailed report and maps of the surveyed area that identifies, ranks and recommends areas with SFD ® indications of reservoir potential.

In 2006, we commenced our current business model and began providing SFD ® survey services to clients on a fee-for-service basis. In accordance with this model, we have not invested either directly or indirectly in exploration or development wells or engaged in other exploration or production activities. Our current business model minimizes our capital requirements, thereby conserving cash, and minimizes any perceived or real conflicts between the interests of NXT and its survey clients.

NXT’s primary business model is to earn revenues by conducting SFD ® surveys for clients on a fee-for-service basis. Secondly, we may be able to negotiate to earn revenue from gross overriding royalty income and/or other incentive fees from clients should they generate production on areas recommended by SFD ® surveys. Finally, in the future, we may earn a fee by providing other related geological and geophysical integration services to clients.

Our objective is to obtain broad industry acceptance and appreciation of the value of our SFD ® survey system. The main obstacle in achieving this objective is the oil and gas industry’s skepticism related to the adoption of any early-stage technology. Accordingly, industry professionals are seldom prepared to devote resources or stake their professional reputation on an early stage technology. This reluctance is particularly acute when the fundamental science related to the technology is complex and not easily understood, as is the case with SFD ® .

Our strategy to overcome skepticism in order to gain industry acceptance of SFD ® includes maximizing client endorsement opportunities (such as through joint case studies) and targeting the most appropriate markets (i.e. where SFD ® provides the maximum benefits). Our specific tactics include:

Focus the majority of sales resources on high profile primary markets which offer the maximum opportunity for success (such as Bolivia, Mexico, Colombia);

Build upon success in this initial market, and step out to other markets (such as Argentina, Peru, Brazil) in Latin America, and in South Asia (Pakistan, Malaysia, Sri Lanka);

Pursue requests of interest from qualified potential client "bluebirds" from all other locations in the world. The bluebird model is defined as an opportunity that arises, not from deliberate targeted sales initiatives, but in response to unsolicited client enquiries;

Continue to conduct pilot surveys to expand our knowledge base and provide documentation to support the use of SFD ® in new applications. Each new application opens more market opportunities and provides valuable case studies to support our sales initiatives; and

Respond to opportunities to present at technical conferences, publish papers in periodicals and generally maximize our opportunities to educate the industry on SFD ® capabilities and document case study successes.

Description of the principal markets in which the company competes

Overview of markets

We have an opportunity to provide our services to any region in the world that conducts oil and gas exploration activities. However, we choose to be strategic and focus our limited sales resources in the early stages of commercialization on a limited number of markets.

A summary of revenues derived in our primary geographic market segments for the last 3 fiscal years, and highlights of global survey operations, follows:

Year ended December 31	2016	2015	2014
South and Central America (Bolivia, Belize)	1,447,269	$ 17,422,151	-
North America (United States)	-	-	3,913,367
	1,447,269	17,422,151	3,913,367

North America Market

We began marketing the SFD ® survey system in 2006 largely in Canada and continued with this market focus until the end of 2008. Solely in Canada we earned survey revenue of $1.2 million, $5.6 million, and $2.9 million respectively in the prior fiscal years 2006, 2007 and 2008.

In 2011, we completed a US $150,000 contract to conduct a pilot SFD ® survey in Montana, USA for a Calgary-based client.

In 2014, we completed two survey projects in Texas and Florida, USA, for a new client, with a total value of $3.9 million.

Latin America and Central America Markets

In 2008, exploration activity seriously diminished in Canada as a result of the world-wide credit crisis and falling natural gas commodity prices. In response, in late 2008 we looked to international markets for new revenue opportunities, especially where there were emerging, frontier-type exploration markets. Latin and Central America became a target market for us, with Colombia viewed as an attractive initial proving ground due to its many characteristics desirable for achieving market success for our SFD ® survey system.

Colombia’s business-friendly approach and practical resource policies allowed it to attract a large number of exploration and production companies from around the world. In Colombia, there are obstacles to acquire geological and geophysical data as required to properly evaluate unexplored land. Obstacles include rain forests, environmental and community restrictions, security concerns and the high cost and time required to shoot seismic programs, particularly on-shore. SFD ® can be a very effective tool to help overcome these obstacles.

Colombia was a primary international market focus in recent years, with NXT gaining valuable experience there. The company earned survey revenue in Colombia of $2.9 million in 2012, $0.4 million in 2010, and $3.7 million in 2009.

Building on our initial Colombia success, we have been pursuing many other South America countries as attractive potential markets. Many of the exploration companies active in Colombia are also active in other areas of South America, such as Peru, Bolivia, Argentina and Brazil. These countries often share a number of the same community, remote access and environmental issues that make SFD ® an attractive solution.

In 2012, SFD ® surveys were conducted in several new markets, including Argentina, Guatemala, Belize and most importantly Mexico. Our first contract with the Petroleos Mexicanos ((“PEMEX”), the National Oil Company of Mexico) was for US $4.7 million, which was subsequently expanded before its completion to a total of US $5.8 million.

This was a significant milestone for NXT, as it was our single largest contract to date, and it was able to be delivered in roughly 4 months. Mexico continues to be a primary target market to pursue for new SFD® survey opportunities.

In 2014, we invested significant marketing efforts in seeking to expand into the emerging Bolivia market. We were able to leverage our past experience in Colombia and Mexico, and in 2015, we successfully secured our largest single survey project to date. The contract with Yacimientos Petrolíferos Fiscales Bolivianos (“YPFB”), the National Oil Company of Bolivia, was based on the local Bolivianos currency (which has an ongoing fixed rate to the US $), and had an equivalent value of US$13 million (net of local sales taxes included in the contract price).

Our SFD ® data acquisition operations commenced in Bolivia in early June 2015, and the data acquisition phase was completed in August, with NXT’s related recommendations reports delivered to YPFB in late October 2015. During the data acquisition phase, YPFB chose to undertake an additional survey “expansion” project valued at approximately US $1.0 million. The decision for YPFB’s expansion was based on the rapid delivery of preliminary SFD ® results, which had excellent correlations noted between anomalies identified by SFD ® and the clients’ existing ones identified using seismic methods. A contract amendment was finalized in October, 2015 for this project, the final results for which were delivered by NXT in January 2016.

NXT also had ongoing discussions concerning potential SFD ® survey project opportunities with several of YPFB’s affiliated, subsidiary companies which have exploration acreage in Bolivia. Two entities expressed interest in obtaining SFD ® data for certain of their exploration lands in Bolivia: YPFB Chaco and YPFB Andina (which is a partnership with Repsol, a major Spanish oil company). A contract with YPFB Chaco to purchase initial SFD ® data (which was acquired in summer 2015) in the amount of US $0.2 million was completed and delivered by NXT in Q4-15.

While conducting operations in Bolivia in summer 2015, NXT acquired additional proprietary SFD ® data flight lines requested by YPFB Andina and minor additional SFD ® data for YPFB Chaco. These parties indicated in 2015 that they intend to execute formal contracts to purchase this data, which has a sales value of approximately US $0.5 million (net).. While this process has advanced in 2016, there is, however, some risk that this process may not result in formal contracts to purchase the SFD ® data from NXT.

Description of seasonality of the company’s main business

There is no seasonality to our business. NXT does however, have a very cyclical business, as revenue activity is dependent upon the size and timing of a limited number of survey contracts each year.

Description of the sources and availability of raw materials

We do not foresee any constraints upon materials or equipment that will impede our ability to execute our business plan or affect our ability to conduct and/or expand our business. Our main direct project input costs are aircraft operating costs and data interpretation staff. None of these expenses have been subject to significant price volatility.

In order to conduct our survey operations we require the following:

Survey aircraft – Historically, we have both owned aircraft and chartered aircraft from independent charter aircraft companies. From 2009 to December 2015, we utilized an aircraft charter agreement with Air Partners, a Calgary-based air-charter operator, to provide aircraft, crew and maintenance services for our survey operations worldwide (see also Item 4. part B – “Business Overview - Summary information on dependence on patents, licenses and contracts” below). In December 2015, we acquired from Air Partners a jet aircraft which was previously charter hired to NXT. We currently rely on Air Partners as the manager / operator of the aircraft which we use in SFD ® survey operations.

SFD ® sensors - All of the survey sensors are manufactured in-house. Certain machining is required by third party machine shops, with final assembly performed by our technical staff. The sensors, once assembled, require flight testing prior to being considered acceptable for operational use. Not all sensors meet the performance criteria for operational use; however, we have demonstrated our ability to manufacture new functional SFD ® sensors.
SFD ® assembly - The units in which the sensors are incorporated are custom designed, fabricated and assembled in-house or through subcontracted vendors. We utilize the services of Transport Canada approved Design Approval Representatives to prepare subsequent type certificates (“STC”) for the installation of our SFD ® units in each aircraft that we utilize for surveys. The time to obtain an STC approval for the installation of our SFD ® units into any proposed aircraft type may require several months.
Computer hardware and software - ( Data Acquisition System, SFD ® Signal Conditioning Unit , and data Interpretation software). During the course of 2016, a new data acquisition system completed final testing. The software was developed by in-house personnel and will be utilized on future surveys. The hardware we use in our SFD ® survey systems (other than the SFD ® unit), and the balance of the computer software we use, are all readily available from retail or wholesale sources.

We are not dependent upon any other third party contract manufacturers or suppliers to satisfy our technology requirements.

Description of marketing channels

We largely use direct sales methods with some use of independent commissioned sales representatives in international markets.

Summary information on dependence on patents, licenses and contracts

Patents

In early 2017 we were granted the first international patent by the Russian authorities on our SFD ® technology and we understand that we may be able to obtain worldwide patents in the future. In May 2012, we commenced a “provisional” patent application process in the U.S. and formally filed a patent on May 22, 2013, which was subsequently published on November 28, 2013. We intend to continue expanding the process with additional formal patent applications in the future. We understand that our right to patent the SFD ® technology is not compromised by our ongoing commercial use of the technology, as the components of the SFD ® technology have never been disclosed to third parties (except under very limited and confidential terms) or released in any manner into the public domain. See also Item 3. part D “Key Information – Risk factors”.

Initiatives to protect our Intellectual Property ("IP" - patenting and new research & development (“R&D”) initiatives) continue, which should also serve to allow us to expand on our technology disclosures in order to build further industry awareness, understanding, and acceptance of SFD ® . Squire Patton Boggs LLP, a U.S.-based leader in IP protection, is advising on our IP strategy, including the prior filing of an initial U.S. provisional patent application in May 2013. In November 2014, NXT filed a related patent amendment submission in the U.S. and commenced to undertake new patent applications in select strategic international markets.

Technology Transfer Agreement (TTA)

Upon execution of the TTA on December 31, 2006, Mr. Liszicasz transferred all his rights and entitlements to the SFD ® technology for use in the field of hydrocarbon exploration to NXT in exchange for receiving 10,000,000 non-voting, convertible preferred shares.

2,000,000 of these preferred shares became immediately convertible on a one-to-one basis into common shares of the company at the discretion of the holder. Effective May 22, 2013, Mr. Liszicasz formally converted these 2,000,000 preferred shares into 2,000,000 common shares.

The remaining 8,000,000 preferred shares were convertible on a one-to-one basis into common shares if NXT achieved the following cumulative revenue thresholds prior to the expiration of the TTA on December 31, 2015 (the “Maturity Date”):

2,000,000 shares, should cumulative gross revenue reach US $50 million,

an additional 2,000,000 shares, should cumulative gross revenue reach US $100 million,

an additional 2,000,000 shares, should cumulative gross revenue reach US $250 million, and

an additional 2,000,000 shares, should cumulative gross revenue reach US $500 million.

An additional 1,000,000 common shares were issuable to Mr. Liszicasz if cumulative gross revenues would have exceeded US $500 million.

NXT also had an option to choose to retain the SFD ® technology by immediately converting all of the then outstanding preferred shares prior to the Maturity Date, and the independent members of the Board elected to do so effective August 31, 2015.

In the event that the conversion option had not been exercised by the Maturity Date, the preferred shares would have been redeemed for $0.001 per share and NXT's rights to the SFD ® technology would have reverted to the holder of the preferred shares.

Following the conversion, Mr. Liszicasz has continued to retain the rights to utilize the SFD ® technology in all other potential field-of-use applications.

Separately, in January 2014, NXT’s CEO (the “Grantor”) personally granted (to a total of 17 persons, including NXT employees, directors, officers, advisors and others) “Rights” to acquire a total of 1,000,000 of the common shares which were expected to become issued to him in 2015 upon future conversion of the preferred shares by their Maturity Date. Each of the Rights were subject to certain vesting provisions and entitled the holder to acquire from the Grantor one common share of NXT at a fixed exercise price of $1.77. The Rights originally had an expiry date of December 31, 2015, which, effective that date, was extended by the Grantor to December 31, 2016.

A total of 365,000 of these Rights were granted in 2014 to certain directors and officers of NXT, and a total of 430,000 Rights were granted to NXT’s employees and advisors. These Rights were supplemental to existing incentives which had been granted under NXT’s stock option plan.

The Rights expired, unexercised on December 31 ^st , 2016. They were not renewed.

Second Amended and Restated Technical Services Agreement (the “TSA”)

In conjunction with the TTA, the TSA was executed on December 31, 2006, covering the terms of Mr. Liszicasz employment with the company. The TSA also had a term ending December 31, 2015, and will be replaced in 2017 by an industry standard Executive Employment Agreement for Mr. Liszicasz, which is in process of being finalized by the NXT Board.

Basis for statements made regarding competitive position

Our SFD ® airborne survey service is based upon a proprietary technology, which is capable of remotely identifying, from a survey aircraft, subsurface anomalies associated with potential hydrocarbon traps with a resolution that we believe is technically superior to other airborne survey systems. To our knowledge there is no other company employing technology comparable to our SFD ® survey system for oil and natural gas exploration.

Seismic is the standard technology used by the oil & gas industry to image subsurface structures. It is our view that the SFD ® survey system is highly complementary to seismic analysis. Our system may reduce the need for seismic in wide-area reconnaissance but will not replace the role of seismic in verifying structure, closure and selecting drilling locations. The seismic industry is very competitive with many international and regional service providers.

The SFD ® system can be used as a focusing tool for seismic. With an SFD ® survey a large tract (i.e. over 5,000 square kilometers) of land can be evaluated quickly to identify locations with indications of reservoir potential. Seismic surveys, although effective in identifying these locations, are much more expensive, require significantly more time and impose a much greater negative impact on local communities and the environment. An SFD ® survey deployed first can provide necessary information to target a seismic program over a limited area of locations selected by SFD ® . This approach can result in a more effective seismic program and reduce the overall cost, time, community resistance and environmental impact required to locate and qualify a prospect.

The industry uses other technologies for wide area oil and natural gas reconnaissance exploration, such as aeromagnetic and gravity surveys. These systems can provide regional geological information, such as basement depth, sedimentary thickness and major faulting and structural development; however, these other airborne techniques are not as suitable for identifying areas with reservoir potential as the SFD ® system.

Description of material effects of governmental & environmental regulation

SFD ® Survey Flight Operations

The operation of our business, namely conducting aerial SFD ® surveys and interpreting SFD ® data, is not subject to material governmental or environmental regulation in Canada and the United States with the exception of flight rules issued by Transport Canada and the FAA governing the use of commercial aircraft, including rules relating to low altitude flights. The requirements in other countries vary greatly and may require permits and/or provide other restrictions to conducting flight operations in the country that may restrict our ability to perform SFD ® surveys as freely as in Canada and the United States.

For example, in Colombia, SFD ® surveys must comply with three requirements not encountered in Canada and the United States. These requirements are: customs obligations and bonds related to the importation and exportation of the aircraft into Colombia; obtaining permits from the local aviation authority; and obtaining permits from the Colombian Air Force. NXT has successfully operated in the past in Colombia in accordance with these requirements.

With our past experience in Canada, the United States, Bolivia, Mexico, Colombia and other countries, we do not anticipate any unusual government controls or regulations that might significantly prevent timely completion of SFD ® surveys. However, we may encounter unforeseen government regulations or restrictions in other countries that may impair or restrict our ability to conduct surveys, which could limit our ability to earn revenue or potentially expose us to forfeiture of performance bonds

C. Organizational structure.

The following table provides a list of all subsidiaries and other companies controlled by NXT:

Subsidiaries	Date and Manner of Incorporation	Authorized Share Capital	Issued and Outstanding Shares	Nature of the Business	% of each Class of Shares owned by NXT
NXT Energy USA, Inc.	October 20, 1995 by Articles of Incorporation – State of Nevada	20,000,000 common	5,000,000 common	Inactive	100%
NXT Aero USA, Inc.	August 28, 2000 by Articles of Incorporation – State of Nevada	1,000 common 4,000 preferred	100 common	Inactive	100%
Cascade Petroleum Inc. (Formerly Survey Services International Inc.)¹	September 6, 2011 by Articles of Incorporation – Province of Alberta	Unlimited number of common shares	100 common	Inactive	100%
NXT Energy Services (SFD) Inc.	December 2008 by Federal Articles of Incorporation – Canada	Unlimited number of common shares	100 common	Inactive	100%

PetroCaza
Exploration Inc.

May 2015 by Articles of Incorporation –
Province of Alberta

Unlimited
number of common and preferred shares

100 common

Inactive

100%

¹On January 16 ^th , 2017 the name of Survey Services International Inc. was changed to “Cascade Petroleum Inc.”

In February, 2010, NXT registered a wholly owned “Branch” entity with the tax administration and Chamber of Commerce authorities in Colombia, (NXT Energy Solutions Inc. Sucursal Colombia). The formation of this branch became a Colombian legal requirement following the company commencing permanent activity in Colombia in 2010 while conducting commercial survey operations. The process to close this branch commenced in 2016 and it is expected that this exercise will be formally completed in early April 2017.

In addition, in March, 2015, NXT registered NXT Energy Solutions Inc. (Sucursal Bolivia) as a wholly owned “Branch” entity under the laws of the Plurinational State of Bolivia, in order to contract and conduct survey operations in Bolivia.

D. Property, plant and equipment.

Oil and Gas Properties

We have minor historical interests in a limited number of acreage holdings of undeveloped lands in western Canada. These assets are not a material asset and have been written off in our financial statements. Additionally, we may in the future become entitled to receive gross over-riding royalty (“GORR”) interests on production from portions of certain lands where we conducted past surveys for clients in Canada, such as in the Horn River shale gas basin in British Columbia, Canada. There is no certainty that wells on these lands will become placed on production, or that future royalty revenues will be earned from these entitlements prior to the expiry of the landowners’ related mineral leases. No asset value has been recorded in the financial statements for these GORRs.

Facilities / office premises

In August 2015, NXT moved to a new, larger office premises (11,298 square feet) at 3320 – 17 ^th Avenue SW in Calgary under a 10-year lease at an initial estimated minimum monthly lease payment of $42,368 (including building operating costs) commencing in October 2015. See also Item 5.F “Contractual Obligations”.

Aircraft

In order to perform our survey services, NXT requires to fly the survey area in a jet aircraft. In December 2015, NXT purchased a Cessna Citation aircraft for US$2,000,000 and in March 2017, entered into a binding sale and leaseback agreement with a Calgary based international aircraft services organization. The terms of the agreement involve NXT selling the aircraft for the sum of US$2,300,000. NXT will lease the aircraft back for a minimum period of 60 months and retain all existing operating rights and obligations. Net proceeds to NXT from the sale will be approximately CAD $2,700,000, after payment of all commissions and fees and are expected to be received in April 2017. The monthly repayment is approximately US $40,000

Equipment

Our SFD ® technology is comprised of three main components, detailed below, which we collectively refer to as our SFD ® survey system. This system is generally stored at our Calgary office facility unless deployed during survey operations when this equipment would travel with the aircraft or be stored in a locked facility at the survey location when not in use. In addition, there is extensive interpretation equipment located in Calgary. The main categories of equipment we use are:

·	Stress Field Detector - the stress field detector, or SFD ® system, including a unit which houses the SFD ® sensors, is the principal component of our technology. SFD ® sensors respond to changes in subsurface stress. These responses are transformed through a passive transducer into electronic digital signals. Airborne surveys are normally conducted utilizing an array of 22 SFD ® sensors, consisting of 6 primary, 8 secondary and 8 development sensors, allowing the acquisition of multiple independent SFD ® signals responses at all points of a survey.
·	Data Acquisition System - used in conjunction with the SFD ® sensor array on surveys, our data acquisition system is a compact, portable computer system which concurrently acquires the electronic digital signals from the SFD ® sensor array and other pertinent client data, including the GPS location information of the data.
·	SFD ® Signal Conditioning Unit - this self-contained unit contains electronic circuits for stabilizing and conditioning electronic signals. All sensor output is directly connected to this unit and after signal conditioning is completed, all output is forwarded to the computer system.
·	Interpretation Theatre - once returned to our home base, the SFD ® data collected is processed and converted into a format that can be used by our interpretation staff using systems consisting of generally off-the-shelf computer equipment, high definition monitors, projectors and screens. This equipment is generally permanently set up at our Calgary office facility. A remote SFD ® data interpretation theater is available and may be deployed during survey operations and would be set up in a facility at the survey client’s city.

We are not affected by any significant environmental concerns, nor is there any planned significant capital additions contemplated.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and the accompanying Consolidated Financial Statements and the notes to those statements incorporated by reference elsewhere in this Form 20-F. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this annual report, particularly under the caption “Risk Factors”.

A. Operating results.

Overall Operational Performance

Selected Annual Information	For the year ended December 31
	2016	2015	2014

Survey revenue	$ 1,447,269	$ 17,422,151	$ 3,913,367
Net comprehensive income (loss)	(9,099,562)	10,540,228	(1,563,361)
Net income (loss) per common share basic	(0.17)	$ 0.22	($ 0.04)
Net income (loss) per common share diluted	(0.17)	$ 0.21	($ 0.04)
Net cash generated by (used in) operating activities	(7,587,614)	6,984,922	(3,581,186)
Cash and short term investments	1,943,587	9,141,281	5,224,065
Total assets	28,689,166	39,079,903	6,049,103
Long term liabilities	264,775	300,462	50,000

Summary financial highlights for the last three fiscal years are as follows:

Financial Highlights for 2016

While conducting operations in Bolivia during the summer of 2015, NXT acquired additional proprietary SFD ^® data flight lines requested by YPFB Andina and minor additional SFD ^® data for YPFB Chaco. Additional YPFB Chaco data resulted in a total revenue amount of $1.45m CAD recognized in 2016. At present, we are uncertain as to the timing of the YPFB Andina data sale and receipt of the associated funds.

Survey costs were $1,157,185, we experienced a net loss of $9,099,562 for 2016, compared to net income of $10,540,228 in 2015.

We had cash and short-term investments of $1,943,587 at the end of 2016.

Cash flow from operating activities was $(7,587,614) for 2016, compared to $6,984,922 for 2015.

Capital expenditures in 2016 resulted in net cash use of $89,702 which is primarily associated with the purchase of computer hardware and software.

Financial Highlights for 2015

In the Q4-15 period, we completed US $13.2 million of survey projects for two new clients in Bolivia, primarily for YPFB, the National Oil Company of Bolivia. A separate project expansion for YPFB, valued at US $1 million, was started in mid-2015 and delivered to the client in January 2016 (to be recognized in revenue in Q1-16).

Survey costs were $5,095,691, and with completion of this large survey project, we generated overall net income of $10,540,228 for 2015, compared to net loss of $1,563,361 for 2014.

We had cash and short-term investments of $9,141,281 at the end of 2015.

Cash flow from operating activities generated net cash of $6,984,922 in 2015, compared to a $3,581,186 net use of cash in 2014.

We undertook significant capital expenditures in 2015, with the net cash use of $3,380,717 including $2,734,611 for the purchase of a survey aircraft in December 2015, and most of the remainder for net costs of leasehold improvements at a new office premises.

Financial Highlights for 2014

In Q1-14, we completed US $3.7 million of survey projects with a new client, Kerogen Exploration LLC (“Kerogen”), which included surveys in both Texas and Florida. Based on initial results delivered to Kerogen, the initial project was expanded in a short period of time from US $1.1 million to an overall total of US $3.7 million.

We incurred a net loss of $1,563,361 for 2014, compared to net loss of $5,341,561 in 2013.

We received proceeds of $2,735,995 from the exercise of a total of 2,057,852 common share purchase warrants (exercise price of US $1.20 per share - the “US$ Warrants”) which were issued in the 2012 private placement equity financing.

We had cash and short-term investments of $5,224,165 at the end of 2014.

Operating activities used net cash of $3,581,186 in 2014, compared to a $774,958 net use of cash in 2013.

Net Income (Loss)

	2016	2015	2014
Survey revenue	$1,447,269	$ 17,422,151	$ 3,913,367

Expenses
Survey costs	1,157,185	5,095,691	431,518
General and administrative	5,645,459	5,049,690	4,132,108
Stock based compensation expense	790,500	1,081,000	658,000
Amortization expense	2,104,864	704,943	67,162
	9,698,008	11,931,324	5,288,788

Other expense (income), net	474,312	(197,309)	187,940
Income (loss) before income taxes	(8,725,051)	5,688,136	(1,563,361)
Income tax expense (recovery)
Current	374,511	1,970,908
Deferred		(6,823,000)	-
	374,511	(4,852,092)	-
Net income (loss) for the year	(9,099,562)	10,540,228	(1,563,361)

Expenses for the years ended December 31, 2016, 2015 and 2014

Survey costs – these costs depend on the number of survey projects conducted and completed in each fiscal year. We apply the completed contract basis of revenue recognition, with survey revenue and expenses recognized in the quarterly period in which our overall survey recommendations report is delivered to our client. Survey costs may also periodically include expenses related to some R&D and equipment test flights (as was the case in 2016 and 2014) as well as aircraft maintenance charges, which are not necessarily directly related to projects undertaken.

2015 survey costs related to the projects which commenced in May 2015 and were completed in Q4-15 for two new clients in Bolivia. These survey costs include a minor level of expenses incurred for a new local office which was opened in Bolivia in 2015 for administration and servicing of the projects.

2014 reflects completion of US $3.7 million of survey projects in the U.S.,

General and administrative (“G&A”) expense - G&A is a major component of NXT's total expenses. All salaries and overhead costs related to SFD ® data interpretation staff (other than out of country per diem allowances) are included in G&A, and not included with direct survey expenses. The categories included in G&A expense are as follows:

For the year ended December 31	2016	2015	2014
Salaries, benefits and consulting charges	$ 3,192,304	$ 2,563,445	$2,383,388
Board, professional fees, and public company costs	908,086	881,299	612,847
Premises and administrative overhead	886,795	862,052	599,230
Business development	589,300	369,087	433,441
Colombia office	68,973	20,807	103,202
	5,645,459	4,696,690	4,132,108
Bonus expense	-	353,000	-
Total G&A	5,645,459	5,049,690	4,132,108

Total G&A for 2016 was $5.6 million, which was $0.6 million higher than the 2015 total, and the overall net changes in G&A within the five individual expense categories noted above reflect several factors:

2016 salaries, benefits and consulting charges are higher than 2015 levels as NXT incurred termination fees of $280k in Q2-16.

Business development expenses increased in 2016 as a result of an extensive marketing campaign carried out by senior members of NXT.

Premises and administrative overhead has decreased in 2016 YTD as the moving costs incurred in 2015 were not repeated. Spending on office supplies, printing, international calls and computer equipment were reduced by more than half in comparison to 2015.

Board, professional and legal fees, were higher in 2016 primarily due to investor relations activities and additional legal and regulatory charges arising from moving onto the TSX from the TSX-V.

2016 noted an increase in Columbia office costs resulting from an income tax expense of $39k, as well as consulting fees totaling $24k for the year.

No bonus pools were expensed during year.

Total G&A for 2015 of $5.0 million was $0.9 million higher than the 2014 total, and the overall net changes in G&A within the five individual expense categories noted above reflect several factors:

staff levels were higher in 2015, leading to an increase salaries and related benefits.

in the Q4-14 period, public company costs were much lower than the normal rate for each quarter based on the timing of discretionary investor relations activities.

Board, professional fees, & public company costs were higher in 2015 primarily due to a higher level of spending on investor relations activities, and in 2014, a higher percentage of the total fees for NXT Board members were settled in the form of stock options granted, rather than paid in cash.

premises and overhead costs rose in Q4-15, and for 2015 YTD, following the move to new, larger office premises in August, 2015. The increase included an overlap of office rent on two locations for one month in Q3-15, and the effect of amortizing the initial “rent-free” period at the new location to G&A expense over the 10 year term of the new lease (which resulted in a “deferred charge” being recorded in long-term liabilities).

business development costs were slightly lower for 2015 YTD, although they are somewhat discretionary each quarter, as they are a function of the timing of activity in developing new client opportunities. Costs incurred in 2015 related to opportunities being pursued in the Latin America, Africa and south Asia regions.

a decrease in costs in 2015 for the Colombia office following the lay off in summer 2014 of the office administrator.

a corporate bonus pool of $353,000 was expensed in Q4-15 based on financial results of the Bolivia survey project.

While total G&A for 2014 of $4.1 million was comparable to 2013 period, the overall net changes in G&A expense within the five individual categories noted above reflect several factors:

staff levels were slightly higher in 2014 as compared to 2013.

Board, professional fees, & public company costs decreased in 2014 primarily due to lower expenses for discretionary investor relations activities.

business development costs are affected by the timing of discretionary international trips, and for 2013 there was a higher number of international tradeshows and conferences attended.

NXT previously maintained a one-person administrative office in Colombia, and this person was laid off in Q3-14 due to an ongoing lack of survey activity in the region.

Stock-Based Compensation Expense (“SBCE”) - this expense varies in any given quarter or year, as it is a function of several factors, such as the number of stock options issued in the period, and the period of amortization (based on the term of the contract and / or number of years for full vesting of the options, which is normally 3 years) of the resultant expense. Also, SBCE is a function of periodic changes in the inputs used in the Black-Scholes option valuation model, such as volatility in NXT's trailing share price.

There was a higher average number of stock options outstanding in 2015 (total of 3,462,835 as at the end of 2015 as compared to 2,541,435 as at the end of 2014).

Total SBCE also includes additional expense recognized related to the “Rights” which were personally issued by NXT’s CEO in January 2014 (see prior discussion in “Item 4.B – Technology Transfer Agreement” related to the convertible preferred shares), and for which the term to expiry was extended by one year to December 31, 2016 in 2015, as follows:

	2016	2015	2014
SBCE recognized related to:
Rights – grant in 2014	-	$ 244,000	$226,000
Rights – extension of term in 2015	-	210,000	-
		454,000	226,000

Stock options	790,500	627,000	432,000
	790,500	1,081,000	658,000

SBCE in 2017 may increase as a result of the change in compensation practice discussed in “B. Liquidity and capital resources” below.

Amortization expense – consists of the following amounts:

	2016	2015	2014
Amortization of:
Property and equipment	$ 420,131	$ 142,943	$67,162
Intellectual property	1,684,733	562,000	-
	2,104,864	704,943	67,162

Most of our capital investment in property and equipment is in computer hardware, which is amortized on a 30% declining balance basis, such that amortization is high in the initial year of capital investment. Prior to 2015, annual capital spending has been minimal, resulting in declining levels of amortization expense.

Capital expenditure in 2016 was $89,702, and this related mainly to a new data acquisition system and other IT upgrades. Although significant capital expenditures were incurred in 2015 for the purchase of a survey aircraft (in December, 2015) and for leasehold improvements (completed in August 2015), amortization on such applied for only a portion of 2015, whereas in 2016 a full year of amortization was charged.

Amortization expense for 2016 also relates to intellectual property, which was acquired by NXT upon the August 31, 2015 conversion (the “Conversion”) of the final 8 million NXT preferred shares.

The Conversion gave rise to the application of “fair-value” accounting in Q3-15, whereby the 8 million common shares issued were assigned an estimated fair-value of $18.5 million. An intellectual property (“IP”) asset related to the technology acquired was recognized at approximately $25.3 million, which included a tax effect gross-up of $6.8 million (as the IP acquired has no corresponding deferred tax pool deduction for ongoing Canadian current income tax purposes).

The IP assets December 31, 2016 net book value of $23.0 million is amortized on a straight line basis over a 15-year period and will also be subject to ongoing tests of potential impairment of the recorded net book value.

Other Expense (Income)

	2016	2015	2014
Interest expense (income), net	$ (17,254)	$ (13,910)	$ (50,824)
Foreign exchange (gain) loss	272,713	(712,480)	(158,817)
Feasibility study and other expenses	218,853	529,081	354,781
Increase (decrease) in fair value of US$ Warrants	-	-	42,800
	474,312	(197,309)	187,940

Interest income - Interest income, generated by short term investments, is offset by interest expense incurred on such items as capital lease obligations for leasehold improvements, and varies by year based on the level of cash available for investment.

Foreign exchange (gain) loss – gains and losses on foreign exchange are caused by changes in the relative exchange values of the US $ and Canadian dollar. For example, when the Canadian dollar trades higher relative to the US $, cash held in US $ will decline in value and this decline will be reflected as a foreign exchange loss in the period. We normally hold cash and short-term investments in Canadian dollars to reduce the effect of market volatility; however, we occasionally are contractually obligated to hold certain restricted cash funds in US $ instruments to support performance bond commitments issued for projects in certain foreign countries.

Feasibility study and other expenses – this total includes costs incurred for the following:

	2016	2015	2014
Feasibility study	$ -	$ 400,104	$ 213,241
Intellectual property and R&D	60,143	121,348	148,975
TSX Listing	147,099	-	-
Other, net	11,611	7,629	(7,435)
	218,853	529,081	354,781

In March 2016, NXT graduated from the TSX Venture Exchange to the main TSX Exchange. There were certain costs incurred associated with this move which totaled $147,099.

In the Q4-14 period, NXT commenced a feasibility study undertaken with the aim of monetizing the value of specific portions of our proprietary SFD ® data library, and started to incur significant geotechnical and consulting costs related to this project, which continued through mid-2015.

Other expenses includes primarily discretionary costs related to intellectual property / patent filings and R&D activity related to the SFD ® technology. Also, minor net expenses are incurred related to pre-2009 minority interests in oil & gas activities.

NXT has certain asset abandonment and reclamation obligations (“ARO”) related to our historical minority working interests in various oil and gas wells in which NXT had participation prior to 2005. At December 31, 2016, the ARO is estimated to be $55,240, based on obligations which are estimated to be settled in the next three years. The net present value of the ARO is estimated based on inflation of 3.4% and discounted using a credit-adjusted risk-free interest rate of 10%.

Change in fair value of US$ Warrants – until May 2014, we previously had outstanding US$ Warrants (which had a US $1.20 exercise price and a term of two years to expiry in March and May, 2014) that were issued in a $3.2 million private placement equity financing in early 2012. As these US$ Warrants were denominated in a currency other than the company's Canadian $ functional currency, they were classified as "derivative instruments" under U.S. Generally Accepted Accounting Principles (“GAAP”), and were recorded on a fair value basis at each period end (a total of $1,238,000 as at December 31, 2013 and $241,000 at December 31, 2012). This balance was adjusted to its estimated fair value at each period end (until expiry of the US$ Warrants in early 2014), based on the number of US$ Warrants outstanding. These derivative instruments were classified as a liability balance but did not require any ongoing outlay of cash.

We currently have no other outstanding derivative financial instruments, such as foreign currency hedges.

Income tax expense - NXT periodically earns revenues while operating outside of Canada in foreign jurisdictions. Payments made to NXT for services rendered to clients and subsidiary companies in certain countries may be subject to foreign income tax with-holdings. Such taxes incurred are only recoverable in certain limited circumstances, including potential utilization in Canada as a foreign tax credit against future taxable earnings from the foreign jurisdictions.

In 2016, NXT expensed foreign withholding tax of $159,990 (2015 – $1,755,678) which was incurred in connection with the Bolivia survey project. Total current income tax expense for 2016 also includes income taxes payable in Bolivia for NXT’s local operating entity.

A total net income tax recovery was recognized in 2016 as follows:

	2016	2015	2014
Foreign with-holding taxes incurred	$159,990	$ 1,755,678	$ -
	159,990	1,755,
Foreign corporate taxes incurred	446,925	215,230
Less portion accrued at Dec 2015	(232,404)
Corporate income tax expense – foreign	214,521	215,230	-
	374,511	1,970,908	-
Deferred tax recovery	-	(6,823,000)	-
Net tax expense (recovery)	374,511	(4,852,092)	-

At the end of 2016, NXT has available for future Canadian income tax deduction purposes significant unrecorded deferred income tax assets, the benefit of which has only been partially recorded in the Company’s financial statements due to uncertainty regarding the amount and timing of their potential future utilization. These deferred income tax assets include non-capital losses carried-forward (expiring in 2017 to 2036) and other resource deductions totaling approximately $35.7 million.

Summary of Quarterly Results (Unaudited)

A summary of operating results for each of the trailing 8 quarters (including a comparison to each respective prior quarter) follows. The extent of the profit or loss each quarter is mainly due to the timing and the number of survey contracts that are underway, and variances in such non-cash items as SBCE, which can occasionally be a significant expense in any given quarter. In addition, in Q3-12, we commenced to recognize significant adjustments to the fair value of "derivative instruments", which include US$ Warrants to purchase NXT common shares.

	Q4-16	Q3-16	Q2-16	Q1-16
	Dec 31, 2016	Sep 30, 2016	Jun 30, 2016	Mar 31, 2016
Survey revenue	$ -	$ -	$ -	$ 1,447,269
Net income (loss)	(2,356,848)	(2,142,834)	(2,643,938)	(1,955,942)
Income (loss) per share - basic	(0.04)	(0.04)	(0.05)	(0.04)
Income (loss) per share - diluted	(0.04)	(0.04)	(0.05)	(0.04)

	Q4-15	Q3-15	Q2-15	Q1-15
	Dec 31, 2015	Sep 30, 2015	Jun 30, 2015	Mar 31, 2015
Survey revenue	$ 17,422,151	$ -	$ -	$ -

Net income (loss)	15,523,601	(1,878,210)	(1,586,991)	(1,518,172)
Income (loss) per share - basic	0.29	(0.04)	(0.04)	(0.03)
Income (loss) per share - diluted	0.29	(0.04)	(0.04)	(0.03)

Q4-16 to Q3-16 comparison – NXT had survey revenue of $nil ($nil in Q3-16), survey costs (related to overseas branch costs, equipment test flights and aircraft maintenance costs) of $9,998, ($200,443 in Q3-16), and SBCE of $287,500 ($218,000 in Q3-16).

Q3-16 to Q2-16 comparison – NXT had survey revenue of $nil ($nil in Q2-16), survey costs of $200,443 ($157,365 in Q2-16), SBCE of $218,000 ($135,000 in Q2-16), and total amortization expense of $521,945 ($520,493 in Q2-16).

Q2-16 to Q1-16 comparison – NXT had survey revenue of $nil ($1,447,269 in Q1-16), survey costs of $157,365 ($789,379 in Q1-16), SBCE of $135,000 ($150,000 in Q1-16), and total amortization expense of $520,493 ($514,258 in Q1-16).

Q1-16 to Q4-15 comparison – NXT had survey revenue of $1,447,269 ($17,422,151 in Q4-15), survey costs of $789,379 ($5,070,023 in Q4-15), SBCE of $150,000 ($490,000 in Q4-15), and total amortization expense of $514,258 ($523,760 in Q4-15).

Q4-15 to Q3-15 comparison – NXT had survey revenue of $17,422,151 ($nil in Q3-15), survey costs of $5,070,023 ($nil in Q3-15), SBCE of $490,000 ($169,000 in Q3-15), total amortization expense of $523,760 ($146,828 in Q3-15) and a total net income tax recovery of $5,415,933 (income tax expense of $485,788 Q3-15).

Q3-15 to Q2-15 comparison – NXT had survey revenue of $nil ($nil in Q2-15), survey costs of $nil ($228 in Q2-15), SBCE of $169,000 ($228,000 in Q2-15), and total amortization expense of $146,828 ($18,830 in Q2-15).

Q2-15 to Q1-15 comparison – NXT had survey revenue of $nil ($nil in Q1-15), survey costs of $228 ($25,440 in Q1-15), and SBCE of $228,000 ($194,000 in Q1-15).

Q1-15 to Q4-14 comparison – NXT had survey revenue of $nil ($nil in Q4-14), survey costs (related to equipment test flights and aircraft maintenance costs) of $25,440 ($33,221 in Q4-14), and SBCE of $194,000 ($186,000 in Q4-14).

B. Liquidity and capital resources.

These consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. In preparing these consolidated financial statements, the Company’s initial assessment of its liquidity position raised substantial doubt about its ability to continue as a going concern. This initial assessment was based on the extended duration between revenue contracts and the significant decline that this had on NXT’s working capital ($7.8 million at December 31, 2015 to $1.7 million at December 31, 2016). Given the Company’s annual expenses were initially estimated to be significantly in excess of the remaining working capital and there is uncertainty with respect to the timing of future revenue, the Company believed these conditions were significant to the going concern assumption.

However, the Company has taken important steps subsequent to year end to address its ability to meet its obligations such that the concern over substantial doubt has been alleviated in the preparation of these financial statements. The most significant step taken is the securing of a $2.7 million sale and leaseback arrangement of its airplane (see note 19). In addition, the Board of Director’s (the “Board”) have approved and communicated to certain of the Company’s employees that a portion of their cash compensation and all of the Board and Advisory Board members cash compensation will be deferred until the Company achieves revenue thresholds that, in the opinion of the Board, allows the Company to commence incurring such costs again. The Company expects that issuing some form of incremental share based compensation will be a part of the strategy to compensate those individuals who are impacted by these changes.

In reaching the conclusions that it is probable that there will be sufficient resources to meet its obligations over the 12 month period beyond the date that these financial statements have been issued, the Company has assumed a minimum revenue inflow of approximately $600,000. While the Company continues to work towards the signing of several other contracts, the time to complete this process cannot be predicted with a high degree of certainty and therefore the benefit of any additional contracts has not been included in the projected cash flow analysis.

Should the timing of new contracts continue to extend beyond management’s current expectation, the Company has also received a binding promissory note from it’s Chief Executive Officer that would provide the Company with up to an additional $500,000. These funds will only be drawn to the extent necessary to help the Company meet its obligations over this period.

We do not presently have any legal or economic restrictions that would affect the ability of any subsidiaries to transfer funds to us. As of the last fiscal year end, and the present date, we do not have any material outstanding commitments for capital expenditures that require funding.

NXT's cash and cash equivalents plus short-term investments at the end of Q4-16 was $1.9 million.

NXT's longer term success remains dependent upon our ability to continue to attract new client projects and expand the revenue base to a level sufficient to far exceed G&A expenses, and generate excess net cash flow from operations. Equity financings have been used on a limited basis in recent years to supplement working capital as required.

Private placement financings totaling $3.2 million ($2.9 million net of finders fees and share issue costs incurred) were conducted in early 2012 to enhance NXT's financial strength and fund its expansion plans. This financing also included the US$ Warrants (which had a term of two years, expiring in March and May 2014), for which exercise proceeds of US $1.0 million were received in Q4-13 and US $2.5 million in 2014.

Risks related to having sufficient ongoing working capital to execute survey project contracts are mitigated through our normal practice of obtaining progress payments from clients throughout the course of the projects, which often span 3 to 4 months. In addition, where possible, risk of default on client billings is mitigated through the use of export insurance programs offered via Export Development Canada (“EDC”).

EDC can also be utilized by NXT for financial support in the form of guarantees of specific bank letters of credit required to be issued by NXT as performance guarantees on international projects, such as was utilized on our project for YPFB in Bolivia. This aids in reducing restrictions on working capital that is needed to initiate and undertake projects.

NXT has minimal secured debt and had total “net working capital” of $1.7 million as at Q4-16 as follows:

	December 31,	December 31,	net change
	2016	2015	in 2015
Current assets (current liabilities):
Cash and cash equivalents	$ 490,496	$ 7,085,803	$(6,595,307)
Short-term investments	1,453,091	2,055,478	(602,387)
	1,943,587	9,141,281	(7,197,694)
Restricted cash	-	75,000	(75,000)
Accounts receivable	205,952	810,400	(604,448)
Prepaid expenses and deposits	166,802	260,397	(93,595)
Accounts payable and accrued liabilities	(575,964)	(1,163,783)	587,819
Income taxes payable	(98)	(1,253,126)	1,253,028
Current portion of capital lease obligation	(36,769)	(34,159)	(2,610)
Net working capital before the undernoted items	1,703,510	7,836,010	(6,132,500)
Additional asset (liability) amounts:
Work-in-progress	-	404,840	(404,840)
Deferred revenue	-	(706,722)	706,722
	-	(301,882)	301,882
Net working capital	1,703,510	7,534,128	(5,830,618)

The $5.8 million year to date decrease in net working capital is primarily due to the net outflow of cash and the reduction in payables, work in progress and deferred revenue.

NXT applies the "completed contract" method of revenue recognition - revenues and related project costs are deferred until the period in which the survey contract is completed. At each period end, if applicable, deferred revenue (a current liability) represents progress billing amounts that are to be recognized in revenue in future periods. Similarly, WIP relates to deferred survey costs which will be expensed in future periods upon completion of the related contracts. As these amounts will not result in additional future cash inflows or outflows to the Company, they are excluded (in periods in which applicable) from NXT’s above noted table / analysis of net working capital.

This discussion includes references to terms such as “net working capital” and “net working capital before the undernoted items”, which do not have a standardized meaning prescribed by U.S. GAAP and may not be comparable to similar measures presented by other entities. NXT management uses this non-GAAP measure to improve our ability to assess liquidity at a point in time. Net working capital is defined as total current assets less total current liabilities, excluding amounts accumulated in work in progress and deferred revenue. Management excludes these amounts from the calculation as they do not represent future cash inflows or outflows to the Company.

NXT utilizes the above noted sub-total line “net working capital before the undernoted items” to assess a more relevant measure of financial liquidity (excluding items classified as liabilities such as deferred revenue balances) as at the period end date.

Sources and uses of cash

The following table, and the narrative below, summarizes NXT’s net cash flows, and the total cash plus short-term investments held at the end of the periods, for the last three fiscal years:

For the year ended December 31	2016	2015	2014
Cash provided by (used in):
Operating activities	$ (7,587,614)	$ 6,984,922	$ (3,581,186)
Financing activities	464,811	327,824	3,024,061
Investing activities	527,496	(277,578)	(2,711,867)
Net cash inflow (outflow)	(6,595,307)	7,035,168	(3,268,992)
Cash & cash equivalents, start of the year	7,085,803	50,635	3,319,627
Cash & cash equivalents, end of the year	490,496	7,085,803	50,635

Cash & cash equivalents	490,496	7,085,803	50,635
Short-term investments	1,453,091	2,055,478	5,173,430
Total	1,943,587	9,141,281	5,224,065

Operating Activities

Net cash flow from operating activities listed above is a function of net income (loss) for the year, an add back of the net non-cash revenue and expense items (such as SBCE, amortization expense, deferred tax expense / (recovery), and the net change in year-end working capital items (for example, a net decrease in working capital in the year gives rise to a source of cash), with these components each year as follows:

For the year ended December 31	2016	2015	2014
Comprehensive income (loss) for the year	$ (9,099,562)	$ 10,540,228	$ (1,563,361)
Add back net non-cash expense and income items	2,896,447	(4,948,061)	753,402
	(6,196,585)	5,592,167	(809,959)
Change in non-cash working capital balances	(1,384,499)	1,392,755	(2,771,227)
Total cash provided by (used in) in operations	(7,587,614)	6,984,922	(3,581,186)

Financing Activities

2016 - The only financing activity was related to proceeds from exercise of NXT stock options. Q4-16 reflects a $34,159 cash use for repayments of the capital lease obligation and $498,970 proceeds from the exercise of NXT stock options.

2015 – the overall net cash from financing activities of $327,824 reflects:

$335,946 of proceeds from exercise of a total of 347,266 NXT stock options.

$8,122 used for repayment of the new capital lease obligation which was entered into in 2015.

2014 - no equity financings occurred in 2014 or 2013. In 2014, NXT received a total of $2,735,995 proceeds from exercise of US$ Warrants (which had an exercise price of US $1.20 per common share and which had been issued in a private placement equity financing in 2012) and $288,066 proceeds from exercise of a total of 482,665 stock options.

Investing Activities

2016 – The overall net cash source in investing activities of $527,496 for 2016 reflects these components:

A use of $89,702 for net capital additions, which relate primarily to $45,725 for computer equipment, $16,178 for SFD Equipment – non computer, $15,141 for computer software, $8,102 for SFD computer hardware and, $4,555 for leaseholds.

A source of $602,387 from a net decrease in cash invested in short-term investments.

A source of $75,000 related to a decrease in restricted cash balance.

A use of $60,187 arising from a decrease in non – cash working capital balances related to investing activities.

2015 – the overall net cash used in investing activities of $277,578 for 2015 reflects these components:

a use of $3,380,717 for net capital additions, which relate primarily to $2.7 million for a survey aircraft acquired in December 2015 and $0.6 million net cash paid for leasehold improvement costs incurred ($0.8 million costs net of a tenant leasehold improvement allowance received, and less $0.2 million of capital lease financing) for construction of the new office facility, which NXT moved to in August, 2015.

a source of $3,117,952 from a net decrease in cash invested in short-term investments.

a use of $75,000 related to an increase in restricted cash balances (issued for bank security purposes).

a source of $60,187 arising from an increase in non-cash working capital balances related to investing activities.

2014 - the overall net cash used in investing activities of $2,711,867 reflects three components:

a $2,723,980 use relating to a movement from cash into short-term, interest bearing investments.

A $53,921 source from a decrease in restricted cash balances. Restricted cash balances relate primarily to balances used as security for bank letters of credit, which are often required to be issued to foreign clients as performance guarantees for survey contracts.

and $41,808 used in purchases of property and equipment.

C. Research and development, patents and licenses, etc.

There was no separate R&D expense reported in the financial statements in the years 2016, 2015 and 2014. In these three years, expenditures related to R&D were included within general and administrative expense (related to a portion of staff salaries and overhead) and in other expense (for patent filings and related costs).

D. Trend information.

We have historically conducted a limited number of service contracts each year, the dollar value and timing of securing and ultimate delivery of which are subject to numerous external factors. As at April 6th, 2017 we do not have a significant committed “backlog” or order book of contracts to be performed.

We are not aware of any current external trends (such as in commodity prices, etc.) which could affect our operations for the next fiscal year. As noted previously, the amount and timing of our annual revenues can vary widely year to year, as we derive our revenues from a limited number of service contracts each year, and each individual contract may have a large effect on the aggregate annual revenues and profits. For example, in 2012, we conducted our first contract with PEMEX, the National Oil Company of Mexico. This project was completed in 2012 and was our largest to that time, at US $5.8 million. In 2015, projects totaling US $13 million were completed in Bolivia for YPFB.

We continue to seek future business projects with large exploration clients such as PEMEX and YPFB, with the aim of having each new client become an ongoing repeat customer.

E. Off-balance sheet arrangements.

We do not have any off-balance sheet arrangements.

F. Tabular disclosure of contractual obligations.

The following table sets forth our outstanding contractual obligations as at December 31, 2016:

		less than	2 to 3	4 to 5	more than
	total	1 year	years	years	5 years
Long-term debt	$ -	$ -	$ -	$ -	$ -
Capital (finance) lease obligations	-	-	-	-	-
Operating lease obligations:
Premises rent / operating lease	4,744,980	535,485	1,070,970	1,085,842	2,052,683
Purchase obligations	-	-	-	-	-
Other long term liabilities:
Asset retirement obligation	55,240	-	55,240	-	-

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and senior management.

Our articles of incorporation provide for a minimum of one director and a maximum of 15 directors comprising our Board of directors. At present, our Board of directors consists of six members.

Our directors are elected by our shareholders at our annual meeting of shareholders and hold the position either until the next annual shareholders’ meeting, the date of their resignation or until a successor is appointed.

The following sets forth information, including directorships in other reporting issuers, as of April 6th, 2017 , for our directors, executive officers and key employees:

Mickey Abougoush

Age 70
Director since
November 2007

Mr. Abougoush is a retired professional engineer with over 40 years of experience in the petroleum industry, largely in technical and executive positions. He previously (to August 2015) was the chairman of Teknica Overseas Ltd., an international consulting company. He previously was chairman of SQFive Intelligent Oilfield Solutions Ltd., an international consulting and software development company and also served as president of Teknica Petroleum Services Ltd., an international consulting and software development company. He was formerly a director of both CCR Technologies Ltd. and WellPoint Systems Inc., both of which were public companies listed on the TSX Venture Exchange.

Mr. Abougoush is the Chair of NXT’s Audit Committee and a member of the Governance Committee.

George Liszicasz

Age 63

Director, Chairman and Chief

Executive Officer since January

1996; President since July 2002

Mr. Liszicasz is the inventor of the company’s SFD ® technology and has been our Chairman and CEO since the company’s inception in 1996. Mr. Liszicasz' primary responsibilities, as the President and CEO, are to oversee all operations and to further develop the SFD ® technology.

Mr. Liszicasz studied electronics and general sciences at the University of British Columbia and obtained a High Voltage Controls and Station Operations degree in Electronics from the Landler Jeno Technitken in Hungary in 1973.

Charles Selby

Age 60

Director since
January 2006

Mr. Selby holds a B. Sc. (Hons) in Chemical Engineering, a J.D. degree and is a registered Professional Engineer in the Province of Alberta. He previously practiced law for two large Canadian law firms, specializing in securities and corporate finance matters. Since leaving the practice of law, he has served on the management of a number of reporting issuers including serving as Vice President and Corporate Secretary of Pengrowth Corporation with operations in Canada and as an officer of Arakis Energy, which formerly had operations in the Sudan. He has served on the board and management of other issuers in the oil and natural gas industry with operations in Canada and internationally.

Mr. Selby is currently the Chairman and CEO of Montana Exploration Corp. (formerly AltaCanada Energy Corp.), an oil and gas company with operations in the State of Montana that is listed on the TSX-V and is the president of Caledonian Royalty Corporation and Caledonian Global Corporation, both private entities which are involved in oil & gas production.

Mr. Selby is the Lead Independent Director of NXT. He is also Chair of NXT’s Compensation Committee and a member of the Audit, Disclosure, and Strategic Planning Committees.

John Tilson

Age 73

Director since
February 2015

Mr. Tilson is retired, and after obtaining MBA and CFA designations, had a distinguished career as an analyst, portfolio manager, and advisor in the US investment and financial industry with such firms as Sutro & Company and EF Hutton & Company. Mr. Tilson joined Roger Engemann and Associates in 1983 when assets under management were roughly US $160 million. During his tenure there, the Pasadena Group of Mutual Funds was started, with Pasadena Capital Corporation formed as the holding company for the mutual funds and investment management business. After working as an analyst and portfolio manager, John later became Executive Vice President & Managing Director of Pasadena Capital Corporation. Pasadena Capital Corporation was sold to Phoenix Insurance in 1997 when assets under management were around US$5 billion. Mr Tilson subsequently retired in 2005.

Mr. Tilson is the Chair of the Strategic Planning Committee, and a member of the Compensation Committee.

Thomas E. Valentine

Age 55
Director since
November 2007

Corporate Secretary since
April 2014

Mr. Valentine is a Partner with Norton Rose Fulbright Canada LLP, where he has practiced law, both as a Barrister and a Solicitor, since his call to the Bar in 1987. He is a member of the firm’s Energy and Infrastructure Practice Group and is involved in energy and energy related matters throughout the Middle East, North Africa, the CIS, Asia and South America.

Mr. Valentine is a member of the Board of Directors of Touchstone Exploration Inc., and formerly was a director of two other Canadian public companies, Calvalley Petroleum Inc. (to May 2015) and Veraz Petroleum Ltd.

Mr. Valentine holds a BA from the University of British Columbia, a LLB from Dalhousie University, and a LL.M. from the London School of Economics.

Mr. Valentine is the Chair of the Governance Committee and a member of the Compensation Committee.

Bruce G. Wilcox
Age 62
Director since
June 2015

Mr. Wilcox is the CEO of E Street Management, LLC, the investment manager for the E Street Fund, LLC, a fund of funds focused on high-performing smaller managers. He has had a long career as an investment company CEO, analyst and portfolio manager. He spent most of his career with Cumberland Associates, LLC, a New York long/short equity fund, from 1986 through retirement in 2010, progressing from analyst / portfolio manager to partner, and Chairman of the Managing Committee. Mr. Wilcox specialized in Cumberland’s investment positions in energy industry (E&P and service) companies, with an emphasis on value and long-term holdings. During his tenure, the fund’s assets under management ranged from US $0.7 billion to $1.5 billion.

From 1984 to 1986, Mr. Wilcox was with Central National-Gottesman, Inc. as an analyst and portfolio manager on a team responsible for a $500 million listed equity portfolio.

Mr. Wilcox is presently one of the managing members of Xiling Fund III, LLC, part of a series of private equity funds (US $100+ million) which specialize in investing in museum quality Chinese art and collectibles.

Mr. Wilcox obtained a BA (Honors), in Modern Chinese from the University of California, Santa Barbara (1977), and a Master of International Management from the American Graduate School of International Management in Phoenix (1980).

Mr. Wilcox is a member of several Boards, including the Teachers College of Colombia University (2003 to date, including acting as the Chair of the Investment Committee), the University of California Santa Barbara Foundation (2003 to date, including as former Chair of the Board, and chair of the Investment and Finance Committees), and is a Trustee (2001 to date) of the Manhattan Institute For Policy Research, a leading urban, state, and national policy institution, which works on matters such as energy policy

Mr. Wilcox is a member of NXT’s Audit, Disclosure, and Strategic Planning Committees.

Bev Stewart

Age 48

V-P Finance and CFO
since May 2016

Mrs. Stewart joined NXT in May 2016 as Vice-President of Finance and Chief Financial Officer. Mrs. Stewart obtained a Chartered Accountant designation in 1995, and has over 20 years’ experience in financial reporting, treasury, taxation, regulatory and risk management.

Mrs. Stewarts’ experience has included senior financial roles within the oil and gas and energy service sectors. Mrs. Stewart was Chief Financial Officer of TransCanada Turbines Ltd. (a joint venture company owned by TransCanada Corporation and John Wood Group Ltd) from 2005 until December 2014.

None of our executive officers or directors have been involved in any bankruptcy proceedings within the last five years, been convicted of or have pending any criminal proceeding, been subject to any order, judgment or decree enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity or been found to have violated any federal, state or provincial securities or commodities laws.

Charles Selby was previously a member of the board of directors of Wellpoint Systems Inc. (“Wellpoint”, a reporting issuer on the TSX-V), which in January 2011 had a Receiver appointed by the Court of Queen’s Bench of the Province of Alberta on behalf of the holders of secured debts. Wellpoint was subsequently wound up following a restructuring and sale of its operating assets. Mickey Abougoush also had previously served as a director of Wellpoint, and resigned in July, 2010, prior to it entering Receivership in 2011.

Messrs. Abougoush, Selby, Tilson, Valentine, and Wilcox are considered "independent" within the meaning of Canadian National Instrument 58-101.

B. Compensation

Executive Compensation

The following table sets out certain information regarding the annual and long-term compensation of the Chief Executive Officer, the Chief Financial Officer at December 31, 2016, as well as any additional individuals for whom disclosure would have been provided pursuant to the above criteria except that the individual was not serving as an officer of the company at the end of 2016. All officers of the company are based in the Calgary, Canada head office and are paid in Canadian dollars.

Summary compensation table for the year ended December 31, 2016:

Name & Principal Position	salary	Termination ⁽¹⁾	vacation ⁽²⁾	other ⁽³⁾	total

George Liszicasz, President & CEO ⁽⁴⁾	$ 274,800	-	$ 36,708	$ 12,931	$ 324,439
Andrew Steedman, V-P Operations	208,000	-	41,319	3,610	252,929
Greg Leavens, Chief Financial Officer	82,500	245,696	-	1,412	329,608
Beverly Stewart, Chief Financial Officer	109,833	-	-	2,321	112,154

(1) Compensation was paid to Mr. Leavens upon the termination of his employment in May 2016.

(2) “vacation” represents a cash payout in the year of a portion of unused vacation entitlements carried forward.

(3) “other” consists of any vehicle allowance paid ($9,000 for Mr. Liszicasz) plus the taxable portion of company paid amounts for group health benefits and parking.

(4) salary and other totals exclude the cash portion of fees earned as Chairman of the Board, for which $35,000 was received in 2016.

(See Item 6.E “Share Ownership” for details regarding stock options granted to officers).

No amount is set aside or accrued by the company or its subsidiaries to provide pension, retirement or similar benefits to officers or directors.

Director Compensation

NXT compensates directors for serving on our Board by paying a combination of an annual cash retainer as well granting stock options to purchase NXT common shares. New members who join the Board receive a separate grant of stock options (with entitlement to exercise vesting over a 3 year period) in the year of joining the Board.

In 2016 and 2015, the directors group each individually elected to receive a mix of cash and / or stock option grants as payment of Board fees earned for the year. The annual cash retainer was based on $30,000 ($35,000 in the case of each of the Chairman of the Board and the Audit Committee). Compensation payable (including pro-rated amounts for periods of partial service in the year) for 2016 and 2015 is summarized as follows:

	2016	2015
Payable in cash	$ 145,000	$ 173,209

# of stock options granted:
as part of annual Board fee compensation	75,000	42,600
to new Board members joining the Board	-	300,000
	75,000	342,600

The amount and terms of any stock options granted as compensation for Board member services is determined by the Board. We do not provide additional compensation for committee participation (other than as noted previously re the minor additional amount for service as the Chairman of the Board and of the Audit Committee) or for special assignments of the Board. (See Item 6.E “Share ownership” for details regarding stock options granted to directors.)

An additional amount of $30,000 was paid in the year to Mr. Charles Selby in respect of his joining the NXT Advisory Board.

The company reimburses directors for out-of-pocket expenses for attending Board and committee meetings. We do not provide termination benefits for directors.

C. Board practices.

Expiration Dates

No director or member of our administrative, or supervisory bodies has an expiration date for their current term of office. Directors are elected by shareholders at the annual meeting of shareholders and hold the position either until the next annual shareholders’ meeting or until a successor is appointed. The period during which each individual has served as a director is set out in the table under Item 6.A – “Directors and senior management”. The Chief Financial Officer is on a term contract as at 31 ^st December 2016. The term contract expires on 31 ^st January 2016 and may or may not be renewed depending upon performance.

Service Contracts

No directors (other than an employment contract for the CEO, Mr. Liszicasz) have service contracts with the company or any of its subsidiaries that provide benefits upon termination of employment.

Board of Directors Mandate

The principal role of the Board is stewardship of the company through the creation of shareholder value, including the protection and enhancement of the value of its assets, as the fundamental objective. The stewardship responsibility means that the Board oversees the general operation of the business and management, which is responsible for the day-to-day conduct of the business. The Board must assess and ensure systems are in place to manage the risks of the company’s business with the objective of preserving the company’s assets. The Board, through the CEO, sets the attitude and disposition of the company towards compliance with applicable laws, environmental, safety and health policies, financial practices and reporting. In addition to its primary accountability to shareholders, the Board is also accountable to employees, government authorities, other stakeholders and the public. The Mandate of the Board of directors is posted on the company website and may viewed at www.nxtenergy.com or you may request a copy be mailed to you by writing to our offices at Suite 302, 3320 - 17th Avenue SW Calgary, Alberta, Canada, T3E 0B4.

Board Committees

Corporate Governance Committee

The company and the Board recognize the importance of corporate governance to the effective management of the company and to its shareholders. The company’s approach to significant issues of corporate governance is designed with a view to ensuring that the business and affairs of the company are effectively managed so as to enhance shareholder value. The Mandate of the Corporate Governance Committee is posted on the company website and may be viewed at www.nxtenergy.com or you may request a copy be mailed to you by writing to our offices at Suite 302, 3320 - 17th Avenue SW Calgary, Alberta, Canada, T3E 0B4.

The Board and management endorse the need to establish forward-looking governance policies and to continuously evaluate and modify them to ensure their effectiveness.

Composition of the Corporate Governance Committee

Messrs. Valentine (Chair) and Abougoush are members of the Corporate Governance Committee, and are both independent within the meaning of Canadian National Instrument 58-101.

Responsibilities of the Corporate Governance Committee

The Corporate Governance Committee’s duties, as outlined in its charter, are to deal with the company’s approach to corporate governance and the promotion of compliance with industry and regulatory standards. The committee is responsible for overseeing and assessing the functioning of the Board and the committees of the Board and for the development, recommendation to the Board, implementation and assessment of effective corporate governance principles and guidelines. The Committee’s responsibilities also include identifying new candidates for director and recommending that the Board select qualified director candidates for election at the next annual meeting of shareholders.

Disclosure Committee

Composition of the Disclosure Committee

The Disclosure Committee currently consists of Messrs. Selby and Wilcox (who are independent) and Mrs. Stewart (Chair).

Responsibilities of the Disclosure Committee

The Disclosure Committee’s duties are to ensure that the company provides timely, accurate and balanced disclosure of all material information about the company and to provide fair and equal access to such information. All news releases, including but not limited to releases of material information, are managed by the Disclosure Committee. If the information has been determined by the Disclosure Committee to be material, news releases will be prepared, reviewed and then disseminated through a news-wire service that provides simultaneous service to widespread news services and financial media. Additionally, the Disclosure Committee is responsible for ensuring public disclosure through filing these news releases on SEDAR, EDGAR, and our website.

AUDIT COMMITTEE

Composition of the Audit Committee

The Audit Committee consists of Messrs. Abougoush (Chair), Selby and Wilcox. All members of the Audit Committee are independent and each member is financially literate. The company’s Audit Committee Charter is posted on our website and may be viewed at www.nxtenergy.com or you may request a copy be mailed to you by writing to our offices at Suite 302, 3320 – 17 ^th Avenue SW, Calgary, Alberta, Canada, T3E 0B4.

M. S. (Mickey) Abougoush

Mr. Abougoush holds a B.Sc. Chemical Engineering degree from the University of Alberta and has completed the director’s education program sponsored by the Canadian Institute of Corporate Directors. He has previously served as audit committee chair of a publicly traded company.

Charles Selby

Mr. Selby is both a lawyer and Professional Engineer, with past legal experience specializing in securities and corporate finance matters. He has served on the board or in senior management roles with a number of private firms as well as reporting issuers in the oil and natural gas industry.

Mr. Selby has previously served on the audit committees of AltaCanada Energy Corp. and served as the audit committee chairman for Idaho Natural Resources Corp. (formerly Bridge Resources Corp.)

Bruce Wilcox

Mr. Wilcox holds a Master of International Management from the American Graduate School of International Management in Phoenix. His career as an investment company CEO, analyst and portfolio manager was spent primarily with Cumberland Associates, LLC, a New York equity fund, where he was a partner, and served as Chairman of the Managing Committee.

All members of the Audit Committee have the educational background and experience that provides them with the knowledge and ability to understand accounting policies and related financial reporting and disclosure issues, in order to fulfill their duties and responsibilities as an Audit Committee member.

Audit Committee Oversight - The company’s Board has adopted all recommendations by the Audit Committee with respect to the nomination and compensation of the external auditor.

Pre-Approval Policies and Procedures - The Audit Committee has adopted a formal policy requiring the pre-approval of all audit and non-audit related services to be provided by the company’s principal auditor prior to the commencement of the engagement, subject to the following:

the Audit Committee will review annually a list of audit, audit related, recurring tax and other non-audit services and recommend pre-approval of those services for the upcoming year. Any additional requests will be addressed on a case-by-case specific engagement basis;

for engagements not on the pre-approved list, the Audit Committee has delegated to the Chair of the Committee the authority to pre-approve individual non-audit service engagements with expected costs of up to $50,000 (annual aggregate total) subject to reporting to the Audit Committee, at its next scheduled meeting; and

for engagements not on the pre-approved list and with expected costs greater than $350,000 (annual aggregate total), the entire Audit Committee must approve this service, generally at its next scheduled meeting.

COMPENSATION COMMITTEE

Composition of the Compensation Committee

Messrs. Selby (Chair), Tilson and Valentine are members of the Compensation Committee, and are all independent. The charter or mandate of the Compensation Committee is posted on the company website and may viewed at www.nxtenergy.com or you may request a copy be mailed to you by writing to our offices at 302, 3320 – 17 ^th Avenue SW, Calgary, Alberta, Canada, T3E 0B4.

Responsibilities of the Compensation Committee

The Compensation Committee's duties, as outlined in its charter, are to deal with the assessment of management and succession to key positions and compensation within the company. The Compensation Committee shall assist the Board in discharging the Board’s oversight responsibilities relating to the compensation and retention of key senior management employees, and in particular the CEO, with the skills and expertise needed to enable the company to achieve its goals and strategies at fair and competitive compensation and appropriate performance incentives. In discharging its responsibilities, the Compensation Committee will report and, where appropriate, make recommendations to the Board in respect of the matters identified in the charter.

STRATEGIC PLANNING COMMITTEE

Composition of the Strategic Planning Committee

Messrs. Tilson (Chair), Selby and Wilcox are members of the Strategic Planning Committee, and are all independent. The Committee was formed in 2015 to assist the company with addressing long range planning considerations, including plans for growth and management succession.

D. Employees

Fiscal year ended December 31, 2016

As of the fiscal year ended December 31, 2016 we had a total of 23 employees and nil full-time independent contractors. NXT has no employees that are members of a labor union. The following summarizes the number of employees and independent contractors by main job function as at December 31, 2016 :

Function	employees	contractors	total
Senior management team	4	-	4
Finance, administration and sales	6	1	7
Operations and technical development	13	-	13
Total	23	1	24

All of the above noted staff are based in Calgary, Canada except for 2 based in the Santa Cruz, Bolivia office which was opened in 2015. The 13 operations and technical development staff includes one research scientist holding a Ph.D. and 5 geoscientists. We periodically engage other technical and administrative contract personnel as required on a project basis.

Fiscal year ended December 31, 2015

As at December 31, 2014, we had a staff of 16, all based in Calgary, as follows:

Function	employees	contractors	total
Senior management team	4	-	4
Finance, administration and sales	5	-	5
Operations and technical development	12	-	12
Total	21	-	21

All of the above noted staff are based in Calgary, Canada except for 2 based in the Santa Cruz, Bolivia office which was opened in 2015. The 12 operations and technical development staff includes one research scientist holding a Ph.D. and 4 geoscientists.

E. Share ownership.

Information on the ownership of our common shares is given under Item 7, Major Shareholders and Related Party Transactions.

Summary of Stock Options and Stock Appreciation Rights Granted To Executive Officers and Directors

All stock options have been granted pursuant to the Stock Option Plan (the “Plan”) of the company or predecessor plans with substantially the same terms. The Plan is approved and ratified by shareholders annually at the company’s annual general meeting (“AGM”). The Plan, as was re-approved and ratified at the company’s last AGM held on June 4, 2016. Pursuant to this Plan, all stock option grants must be approved by the Board of directors of the company. Stock options may be granted to the directors, officers and employees of NXT and to consultants retained by the company. The aggregate number of common shares reserved for issuance under this Plan, and any other plan of the Corporation, shall not, at the time of the stock option grant, exceed ten percent of the total number of issued and outstanding shares (calculated on a non-diluted basis) unless the company receives the permission of the stock exchange or exchanges on which the shares are then listed to exceed such threshold. No stock option shall be exercisable for a period exceeding five (5) years from the date the stock option is granted unless the company receives the permission of the stock exchange or exchanges on which the shares are then listed and as specifically provided by the Board and as permitted under the rules of any stock exchange or exchanges on which the shares are then listed, and in any event, no stock option shall be exercisable for a period exceeding ten (10) years from the date the option is granted.

Stock options are generally issued with a three year vesting period wherein entitlement to exercise one third of the options granted shall vest at the end of each of the first three years following the grant date. The exercise price for an option grant is set at the last trade price on the date preceding the grant or some higher price at the discretion of the Board.

The following stock options were granted to NXT’s executive officers and directors in the three prior fiscal years ended December 31, 2016, 2015, and 2014 and to date to April 6 ^th , 2017:

In 2016 and to date in 2017:

a total of 150,000 stock options with an exercise price of $1.49 per common share were granted in May 2016 to the new Chief Financial Officer..

a total of 37,500 stock options with an exercise price of $1.48 per common share were granted in July 2016 to three directors as part of their elected form of payment of the Board of director fees earned for 2016. All of these options had immediate vesting at the grant date.

a total of 50,000 stock options with an exercise price of $1.50 per common share were granted in July 2016 to a directors as part of their Advisory Board of director fees earned for 2016.

a total of 37,500 stock options with an exercise price of $1.45 per common share were granted in December 2016 to three directors as part of their elected form of payment of the Board of director fees earned for 2016. All of these options had immediate vesting at the grant date.

In 2015:

A total of 300,000 stock options with an exercise price of $2.10 per common share were granted in September 2015 to two persons who joined the NXT Board of Directors in 2015.

A total of 42,600 stock options with an exercise price of $1.73 were granted in December 2015 to two directors as part of their elected form of payment of their Board of director fees earned for 2015. All of these options had immediate vesting at the grant date

In 2014:

260,000 stock options with an exercise price of $1.35 per share were granted to an officer of NXT in December 2014.

a total of 55,000 stock options with an exercise price of $1.35 per share were granted in January 2015 to directors as part of their Board of director fees earned for the period July to December 2014. All of these options had immediate vesting at the grant date.

a total of 55,000 stock options with an exercise price of $1.39 per share were granted in July 2014 to directors as part of their Board of director fees earned for the period January to June 2014. All of these options had immediate vesting at the grant date.

The following table sets forth information regarding outstanding stock options which have been granted to our directors and officers as of April 6 ^th , 2017. All options are issued at an exercise price set at the closing trade price on the trading date prior to the grant. Each option entitles the option holder to acquire one common share of the company.

Issued and outstanding stock options held by directors and officers of the company (as of April 6 ^th , 2017)

Name and Position	Exercise Price	Option Grant Date	Option Expiry Date	# of options held	% of total outstanding options

George Liszicasz	$ 0.86	23-Jul-2012	23-Jul-2017	100,000
CEO & Director	$ 0.76	24-Dec-2012	24-Dec-2017	15,000
	$ 0.86	5-Jul-2013	5-Jul-2018	7,500
	$ 1.83	18-Dec-2013	18-Dec-1018	7,500
	$ 1.39	9-Jul-2014	9-Jul-2019	7,500
	$ 1.35	9-Jan-2015	9-Jan-2020	7,500
				145,000	4.5 %

Bev Stewart	$ 1.49	26-May-2016	26-May-2021	150,000	4.7%
V-P Finance & CFO

Mickey Abougoush	$ 0.86	23-Jul-2012	23-Jul-2017	70,000
Director	$ 0.76	24-Dec-2012	24-Dec-2017	15,000
	$ 0.86	5-Jul-2013	5-Jul-2018	7,500
	$ 1.83	18-Dec-2013	18-Dec-2018	7,500
	$ 1.39	9-Jul-2014	9-Jul-2019	7,500
	$ 1.35	9-Jan-2015	9-Jan-2020	7,500
				115,000	3.6 %

Charles Selby	$ 0.86	23-Jul-2012	23-Jul-2017	120,000
Director	$ 0.76	24-Dec-2012	24-Dec-2017	15,000
	$ 0.86	5-Jul-2013	5-Jul-2018	7,500
	$ 1.83	18-Dec-2013	18-Dec-2018	7,500
	$ 1.39	9-Jul-2014	9-Jul-2019	7,500
	$ 1.35	9-Jan-2015	9-Jan-2020	7,500
	$ 1.50	22-Jul-2016	22-Jul-2021	50,000
				215,000	6.7 %

John Tilson	$ 2.10	16-Sep-2015	16-Sep-2020	150,000
Director	$ 1.73	10-Dec-2015	10-Dec-2020	25,600
	$ 1.48	14-Jul-2016	14-Jul-2021	15,000
	$ 1.45	22-Dec-2016	22-Dec-2021	15,000
				205,600	6.4 %

Thomas Valentine	$ 0.86	23-Jul-2012	23-Jul-2017	70,000
Director	$ 0.76	24-Dec-2012	24-Dec-2017	15,000
	$ 0.86	5-Jul-2013	5-Jul-2018	7,500
	$ 1.83	18-Dec-2013	18-Dec-2018	7,500
	$ 1.39	9-Jul-2014	9-Jul-2019	7,500
	$ 1.35	9-Jan-2015	9-Jan-2020	7,500
	$ 1.48	14-Jul-2016	14-Jul-2021	7,500
	$ 1.45	22-Dec-2016	22-Dec-2021	7,500
				130,000	4.0 %

Bruce Wilcox	$ 2.10	16-Sep-2015	16-Sep-2020	150,000
Director	$ 1.73	10-Dec-2015	10-Dec-2020	17,000
	$ 1.48	14-Jul-2016	14-Jul-2021	15,000
	$ 1.45	22-Dec-2016	22-Dec-2021	15,000
				197,000	6.1 %

Total number of stock options held by officers and directors				1,157,600	35.9 %

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major shareholders.

The following table sets forth information concerning the beneficial ownership of our common shares as of
April 6 ^th , 2017 by persons who beneficially own 5% or more of the outstanding common shares of NXT, each person who is a director of NXT, each executive officer named in this Form 20-F, each individual referenced in Item 6.E above and all directors and executive officers as a group. For the purposes of this Form 20-F, a person is considered to be a “beneficial owner” of common shares in the company if that person has, or shares with another person, the power to direct the vote or disposition of the common shares or to receive the economic benefit of ownership of the common shares.

A person is also deemed to be a beneficial owner of a common share if that person has the right to acquire the share within 60 days by option or other agreement (whether or not, in the case of a stock option, the current market price of the underlying common share is below the stock option exercise price). Therefore, the table below also reflects, for each such beneficial owner, the number of options exercisable into common shares within 60 days of April 6 ^th , 2017 that are owned by each beneficial owner, but, in determining the percentage ownership and general voting power of such person, does not assume the exercise of options or the conversion of securities owned by any other person.

We believe that the beneficial owners of common shares listed below, based on information they furnished, have sole voting and investment power over the number of shares listed opposite their names. The percentage of beneficial ownership is based on 53,856,509 common shares issued and outstanding as of April 6 ^th , 2017. This total of 53,856,509 excludes all outstanding options and warrants that are exercisable within 60 days of April 6th, 2017 (which is adjusted for each individuals’ % purposes as noted in footnote 5 below).

Beneficial Ownership of Directors and Officers (“D&O”)	Beneficially Owned as at April 6th, 2017	Percent of Common Shares ⁵
Directors and Officers:
George Liszicasz ^{1 & 2}	15,347,490	26.9 %
Mickey S. Abougoush ¹	195,000	* .3
Charles Selby ¹	623,161	1.1 %
John Tilson ¹	2,939,348	5.1 %
Thomas E. Valentine ¹	130,000	* .3
Bruce Wilcox ¹	281,350	* .3
Beverly Stewart ²	61,000	* .3
Total D & O Common Shares	19,577,349	34.3 %

Major Shareholders (> 5%):
Mork Capital Management, LLC., and Michael Mork ⁴	3,760,610	7.0 %

¹ Director of NXT
² Officer of NXT
³ Beneficially owns less than one percent of the total outstanding common shares. ⁴ based on information provided to the company as at April 6th, 2017 by Mork Capital Management, LLC. and its principal, Mr. Michael Mork. ⁵ For each beneficial owner’s percentage of common shares calculation, it is assumed that any stock options that they hold which are or will become exercisable within 60 days of April 6th, 2017 have been exercised (while also assuming that no one else similarly exercises), and such options are thus included in both the numerator and denominator for purposes of each of their own individual calculations as follows:

	common	vested &
	shares	exerciseable	Pro forma
	held	options	total

Liszicasz	15,202,490	145,000	15,347,490
Abougoush	80,000	115,000	195,000
Selby	408,161	215,000	623,161
Tilson	2,833,748	105,600	2,939,348
Valentine	-	130,000	130,000
Wilcox	184,400	96,950	281,350
Stewart	11,000	50,000	61,000

	18,719,799	857,550	19,577,349

Major changes in the last 3 years in the percentage ownership of persons who beneficially own (as at the respective December 31, year-end dates) 5% or more of the outstanding common shares of NXT were:

in May 2013, George Liszicasz acquired 2,000,000 common shares upon conversion of an initial total of 2,000,000 of the 10,000,000 preferred shares which he held.

In August 2015, the remaining 8,000,000 preferred shares were converted into 8,000,000 common shares issued to George Liszicasz pursuant to completion of the acquisition of the SFD ® technology under the terms of the TTA.

In 2014, John Tilson exercised 200,000 US$ Warrants to acquire 200,000 NXT common shares at an exercise price of US $1.20 per common share. The US$ Warrants had been acquired in 2012 through participation in a $3.2 million private placement equity financing by NXT, under which Mr. Tilson acquired 200,000 “Units” (which consisted of one common share and one US$ Warrant, expiring in 2014, to acquire a common share at a price of US $1.20) at a price of US $0.75 per Unit.

The following information is taken from the records of Computershare Trust Company of Canada, located in Calgary, Alberta, Canada, the company's transfer agent for its common shares. As of April 6 ^th , 2017 there were 134 registered holders of record of the company's common shares, including 878 in the United States who collectively held 20,964,517 common shares, representing 38.93% of NXT’s 53,856,509 total issued and outstanding common shares.

NXT is a foreign private issuer for its current fiscal year. As of the last business day of the company’s second fiscal quarter, the majority of the company’s executive officers and directors are Canadian citizens who reside in Canada, the majority of the company’s assets are in Canada, and the company is administered principally in Canada. The company’s major shareholders in common shares have the same voting rights as other holders of common shares. The company is not directly or indirectly owned or controlled by another corporation, a foreign government or any other natural or legal persons severally or jointly. There are no arrangements known to the company which may result in a change of control of the company.

Related party transactions.

Summarized below are certain other transactions and business relationships between NXT and persons who are related parties, for the current fiscal year ended December 31, 2016 through the current date, April 6 ^th , 2017:

Details of stock options which have been granted to related parties during the above noted period are included with Item 6.E above. Details of stock options which have been exercised by related parties are noted below.

One of the members of NXT’s Board of directors is a partner in a law firm which provides legal advice to NXT. In 2016, NXT incurred legal expenses of $62,645 with this firm, for which a total of $10,443 is included in accounts payable as at December 31, 2016.

Accounts payable and accrued liabilities at December 31, 2016 includes a total of $46 related to re-imbursement of expenses owing to persons who are directors and officers of NXT.

There were no stock options to acquire common shares of the company exercised in 2016 by persons who were directors or officers of NXT as at the date of their exercise. Mr. Krishna Vathyam exercised a total of 157,500 stock options subsequent to his resignation from the Board, which was effective November 28, 2016.

Interests of experts and counsel.

Not applicable.

ITEM 8. FINANCIAL INFORMATION

Consolidated statements and other financial information.

The company’s consolidated financial statements are stated in Canadian dollars and are prepared in accordance with U.S. generally accepted accounting principles.

The financial statements and notes thereto as required under Item 8 are attached as Exhibit 15.1 to this annual report and are incorporated by reference herein. The audit report of KPMG LLP is included therein immediately preceding the consolidated financial statements and is also incorporated by reference herein.

No significant events or changes have occurred subsequent to the date of the December 31, 2016 consolidated financial statements, except as otherwise disclosed therein.

Legal Proceedings

To the best of the company's knowledge, there are no legal or arbitration proceedings existing or pending which have had or may have, significant effects on the company's financial position or profitability and no such proceedings are pending or known to be contemplated by governmental authorities.

Dividend Policy

The company does not pay dividends.

Consolidated statements and other financial information.

As of April 6 ^th , 2017, 2017, there have not been any significant subsequent events which have occurred subsequent to the date of consolidated financial statements for the year ended December 31, 2016. NXT’s interim, unaudited consolidated financial statements for the 3-month period ended March 31, 2017 will be released in mid-May, 2017.

ITEM 9. THE OFFER AND LISTING

A. Offer and listing details.

The following tables set forth the price history of the company’s common shares listed on the OTC in the United States and on the TSX-V and the TSX in Canada. ¹

OTC QB

TSX-V & TSX

Period		High	Low	High	Low
		(in US$)	(in US$)	(in Cdn$)	(in Cdn$)
5 prior fiscal years
Year ended	December 31, 2016	$1.41	$0.90	$1.92	$1.21
Year ended	December 31, 2015	$ 2.17	$ 0.99	$ 2.73	$ 1.18
Year ended	December 31, 2014	$ 1.80	$ 0.84	$ 1.93	$ 0.90
Year ended	December 31, 2013	$ 1.99	$ 0.56	$ 2.04	$ 0.56
Year ended	December 31, 2012	$ 1.16	$ 1.60	$ 1.13	$ 0.59

Prior Quarters
Quarter ended	Q1 - March 31, 2017	$1.17	$0.90	$1.52	$1.08
Quarter ended	Q4 - December 31, 2016	$1.22	$0.96	$1.59	$1.32
Quarter ended	Q3 - September 30, 2016	$1.25	$1.02	$1.65	$1.34
Quarter ended	Q2 - June 30, 2016	$1.21	$0.95	$1.55	$1.35
Quarter ended	Q1 - March 31, 2016	$ 1.41	$ 0.90	$ 1.92	$ 1.21
Quarter ended	Q4 - December 31, 2015	$ 1.53	$ 1.13	$ 2.09	$ 1.51
Quarter ended	Q3 - September 30, 2015	$ 2.00	$ 1.20	$ 2.59	$ 1.55
Quarter ended	Q2 - June 30, 2015	$ 2.17	$ 1.37	$ 2.73	$ 1.73
Quarter ended	Q1 - March 31, 2015	$ 1.48	$ 1.01	$1.83	$ 1.18

For each of the last 6 months
Month ended	March 31, 2017	$1.11	$0.90	$1.52	$1.08
Month ended	February 28, 2017	$1.17	$1.04	$1.52	$1.36
Month ended	January 31, 2017	$1.10	$0.92	$1.45	$1.22
Month ended	December 31, 2016	$1.15	$1.03	$1.50	$1.40
Month ended	November 30, 2016	$1.13	$0.96	$1.51	$1.32
Month ended	October 31, 2016	$1.22	$1.06	$1.59	$1.40
(1) See section C. “Markets” below for further information on share trading history.

B. Plan of distribution.

Not applicable.

C. Markets.

Our common shares are currently quoted in the United States on the OTC Markets QB Exchange under the symbol “NSFDF”, in Canada on the TSX-V under the symbol “SFD.V” (to March 21, 2016) and on the TSX under the symbol “SFD” effective from March 22, 2016, and in Europe on the Frankfurt and Berlin Exchanges (both of these listings are inactive) under the symbol “EFW”.

The company’s common shares commenced trading on the US Over-The-Counter Bulletin Board pursuant to a reverse takeover transaction in 1996, and were approved for listing on the Frankfurt and Berlin Exchanges in January 2004, and on the TSX-V in December 2007. Effective March 22, 2016, NXT upgraded its Canadian listing from the TSX-V to the TSX.

D. Selling shareholders.

Not applicable.

E. Dilution.

Not applicable.

F. Expenses of the issue.

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share capital.

Not applicable.

B. Memorandum and articles of association.

NXT was incorporated in the State of Nevada. With respect to the foregoing items, the law applicable to NXT in the Province of Alberta is not significantly different from that in the State of Nevada. NXT was established in Alberta pursuant to a Certificate of Continuance issued October 24, 2003 by the Registrar of Corporations of the Province of Alberta. NXT’s Alberta Corporate Access Number is 2010730915. The Articles of Continuance of NXT were amended to create the Series 1 Preferred Shares on December 28, 2006, and provide that there are no restrictions on the nature of the business that may be carried on by NXT. On September 19, 2008, pursuant to Articles of Amendment, the name of the company was changed from Energy Exploration Technologies Inc. to NXT Energy Solutions Inc.

Quorum

The Board of directors of NXT may fix the quorum for meetings of the Board or of a committee of the Board, but unless so fixed, a majority of the directors or of a committee of directors holding office at the time of the meeting constitutes a quorum provided that no business may be transacted unless at least half of the directors present are resident Canadians. Business cannot be transacted without a quorum. A quorum of directors may vote on any matter of business properly brought before the meeting provided that where a director is a party to a material contract or proposed material contract or is a director or an officer of or has a material interest in any person who is a party to a material contract or proposed material contract with NXT, such director must disclose his or her interest at the earliest possible date, request the conflict be noted in the minutes of the meeting and, with few exceptions, refrain from voting on the matter in which the director has a conflict of interest. There is no limitation on the Board of directors to vote on matters of their remuneration as a director, officer, employee or agent of NXT or of an affiliate of NXT.

Borrowing Powers

The Board of directors may, without authorization of the shareholders of NXT:

(a)

borrow money on the credit of NXT;

(b)

issue, reissue, sell or pledge debt obligations of NXT;

(c)

subject to restrictions respecting financial assistance prescribed in the ABCA, guarantee, on behalf of NXT, the performance of an obligation of any person; and

(d)

mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of NXT, owned or subsequently acquired, to secure any obligation of NXT.

The Board of directors of NXT may, by resolution, delegate to a director, a committee of directors or an officer all or any of the foregoing borrowing powers.

Directors

A person is qualified to be or stand for election as a director provided such person is at least 18 years of age, is not bankrupt and is not mentally incapacitated pursuant to applicable mental health legislation of the Province of Alberta or pursuant to an order of the courts of the Province of Alberta. There is no provision in NXT’s Articles or By-Laws relating to the retirement or non-retirement of directors under an age limit requirement. There is also no requirement in NXT’s Articles or By-Laws for a director to hold securities of NXT.

Pursuant to the ABCA, a director or officer shall not be disqualified by his office, or be required to vacate his office, by reason only that he is a party to, or is a director or officer or has a material interest in any person who is a party to, a material contract or proposed material contract with NXT or subsidiary thereof. Such a director or officer shall, however, disclose the nature and extent of his interest in the contract at the time and in the manner provided by the ABCA. Any such contract or proposed contract shall be referred to the Board of directors of NXT or shareholders for approval even if such contract is one that in the ordinary course of NXT's business would not require approval by the Board or shareholders. Subject to the provisions of the ABCA, a director shall not by reason only of his office be accountable to NXT or to its shareholders for any profit or gain realized from such a contract or transaction, and such contract or transaction shall not be void or voidable by reason only of the director's interest therein, provided that the required declaration and disclosure of interest is properly made, the contract or transaction is approved by the directors or shareholders, and it is fair and reasonable to NXT at the time it was approved and, if required by the ABCA, the director refrains from voting as a director on the contract or transaction and absents himself from the director's meeting at which the contract is authorized or approved by the directors, except attendance for the purpose of being counted in the quorum

Rights Attached to Common Shares

The holders of the common shares are entitled to dividends as and when declared by the directors of NXT, to one vote per share at meetings of shareholders of NXT, and upon liquidation, subject to the rights of the holders of preferred shares, are entitled to share rateably with the holders of the common shares in all distributions of assets of NXT.

Rights Attached to Preferred Shares

Preferred shares may be issued from time to time in one or more series. The Board of directors of NXT is expressly authorized to provide by resolution duly adopted prior to issuance, for the creation of each such series and to fix the designation, rights, privileges, restrictions and conditions attached to the shares of each such series, including the rate or amount of dividends or the method of calculating dividends, the dates of payment of dividends, the redemption, purchase and/or conversion prices and terms and conditions of redemption, purchase and/or conversion, and any sinking fund or other provisions.

The preferred shares of each series shall, with respect to the payment of dividends and the distribution of assets or return of capital in the event of liquidation, dissolution or winding-up of NXT, whether voluntary or involuntary, or any other return of capital or distribution of the assets of NXT among its shareholders for the purpose of winding up its affairs, rank on a parity with the preferred shares of every other series and be entitled to preference over the common shares and over any other shares of NXT, if any, ranking junior to the preferred shares. The preferred shares of any series may also be given other preferences, not inconsistent with the articles of continuance of NXT (the "Articles"), over the common shares and any other shares of NXT ranking junior to the preferred shares of a series as may be fixed by the Board of directors of NXT.

If any cumulative dividends or amounts payable on the return of capital in respect of a series of preferred shares are not paid in full, all series of preferred shares shall participate rateably in respect of accumulated dividends and return of capital.

Unless the Board of directors of NXT otherwise determine in the articles of amendment designating a series of preferred shares, the holder of each share of a series of preferred shares shall not, as such, be entitled to receive notice of or vote at any meeting of shareholders, except as otherwise specifically provided in the ABCA.

Rights Attached to Preferred Shares - Series 1

NXT is authorized to issue up to 10,000,000 preferred shares - Series 1. In 2006, NXT issued 10,000,000 non-voting, convertible preferred shares - Series 1 (the “Series 1 Shares”), of which none remained outstanding as at December 31, 2016 following their conversion on a 1 for 1 basis into NXT common shares on August 31, 2015 pursuant to the terms of the TTA (see prior discussion in Item 4.B.) which had a maturity date of December 31, 2015.

Alteration of the Rights of Shareholders

Under the ABCA, any substantive change to the Articles (including, but not limited to, change of any maximum number of shares that NXT is authorized to issue, creation of new classes of shares, add, change or remove any rights, privileges, restrictions and conditions in respect of all or any of its shares, whether issued or unissued, change the shares of any class or series, whether issued or unissued, into a different number of shares of the same class or series or into the same or a different number of shares of other classes or series) or other fundamental changes to the capital structure of NXT, including a proposed amalgamation or continuance of NXT out of the jurisdiction, requires shareholder approval by not less than 2/3 of the votes cast by shareholders voting in person or by proxy at a shareholders’ meeting called for that purpose. In certain prescribed circumstances, holders of shares of a class or of a series are entitled to vote separately as a class or series on a proposal to amend the Articles whether or not shares of a class or series otherwise carry the right to vote. The holders of a series of shares of a class are entitled to vote separately as a series only if the series is affected by an amendment in a manner different from other shares of the same class.

Meetings of Shareholders

NXT’s By-Laws provide that the Board of directors shall call an annual meeting of shareholders to be held not later than fifteen months after holding the last preceding annual meeting. NXT’s By-Laws provide that the Board of directors may at any time call a special meeting of shareholders. Only the registered holders of shares are entitled to receive notice of and vote at annual and special meetings of shareholders, except to the extent that:

(a)

if a record date is fixed, the person transfers ownership of any of the person’s shares after the record date; or

(b)

if no record date is fixed, the person transfers ownership of any of the person’s shares after the date on which the list of shareholders is prepared; and

(c)

the transferee of those shares;

produces properly endorsed share certificates; or

otherwise establishes ownership of the shares; and

demands, not later than ten (10) days before the meeting, that the transferee’s name be included in the list before the meeting;

in which case the transferee is entitled to vote the shares.

The ABCA also permits the holders of not less than 5% of the issued voting securities of NXT to give notice to the Board of directors requiring them to call and hold a meeting of NXT.

The only persons entitled to be present at a meeting of shareholders are:

(a)

the shareholders entitled to vote at the meeting;

(b)

the Board of directors of NXT;

(c)

the external auditor of NXT; and

(d)

any others who, although not entitled or required under the provisions of the ABCA, any unanimous shareholder agreement, or the Articles or the By-Laws, are allowed to be present at the meeting.

Any other person may be admitted only on the invitation of the Chairperson of the meeting or with the consent of the meeting.

There are no restrictions in NXT’s Articles or By-Laws as to the number of shares that may be held by non-residents other than restrictions set out in the Investment Canada Act (the “ICA”) (Canada), as further described under Item 10.D – “Exchange Controls” below.

Change of Control

There are no specific provisions in the Articles or By-Laws of NXT that have the effect of delaying, deferring or preventing a change of control of NXT and that would operate only with respect to a merger, acquisition or corporate restructuring involving NXT (or any of its subsidiaries). Notwithstanding this, the Board of directors, under the general powers conferred to it under NXT’s By-Laws, have the authority to approve and invoke a shareholders rights plan that will protect shareholders from unfair, abusive or coercive take-over strategies, including the acquisition or control of NXT by a bidder in a transaction or series of transactions that does not treat all shareholders equally or fairly or that does not afford all shareholders an equal opportunity to share in any premium paid upon an acquisition of control. NXT has not adopted such a plan.

Shareholder Ownership Disclosure

There are no provisions in NXT’s By-Laws regarding public disclosure of individual shareholdings.

C. Material contracts.

Each material contract, other than contracts entered into in the ordinary course of business, to which the company has been a party, for the two years immediately preceding publication of this annual report, is summarized elsewhere herein.

D. Exchange controls.

There are no governmental laws, decrees or regulations in Canada relating to restrictions on the export or import of capital, or affecting the remittance of interest, dividends or other payments to non-residents. Dividends paid to U.S. residents, however, are subject to a 15% withholding tax or a 5% withholding tax for dividends if the shareholder is a corporation owning at least 10% of the outstanding voting shares of NXT pursuant to Article X of the reciprocal tax treaty between Canada and the U.S.

Except as provided in the ICA, which has provisions that restrict the holding of voting shares by non-Canadians, there are no limitations specific to the rights of non-Canadians to hold or vote the common shares under the laws of Canada or the Province of Alberta, or in the charter documents of NXT or its subsidiaries.

Management of NXT believes that the following summary fairly describes those provisions of the ICA pertinent to an investment in NXT by a person who is not a Canadian resident (a “non-Canadian”).

The ICA requires a non-Canadian making an investment which would result in the acquisition of control of a Canadian business (i.e. the gross value of the assets of which exceed a certain monetary threshold) to identify, notify, or file an application for review with the Investment Review Division of Industry Canada (“IRD”).

The notification procedure involves a brief statement of information about the investment on a prescribed form which is required to be filed with the IRD by the investor at any time up to 30 days following implementation of the investment. It is intended that investments requiring only notification will proceed without government intervention unless the investment is in a specific type of business activity related to Canada’s cultural heritage and national identity.

If an investment is reviewable under the ICA, an application for review in the form prescribed is normally required to be filed with the IRD prior to the investment taking place and the investment may not be implemented until the review has been completed and the Minister of Industry Canada (the “Minister”) (the Minister responsible for Investment Canada) is satisfied that the investment is likely to be of net benefit to Canada. The Minister has up to 75 days to make this determination. If the Minister is not satisfied that the investment is likely to be of net benefit to Canada, the non-Canadian must not implement the investment or, if the investment has been implemented, may be required to divest himself of control of the business that is the subject of the investment.

The following investments by non-Canadians are subject to notification under the ICA:

An investment to establish a new Canadian business; and

An investment to acquire control of a Canadian business that is not reviewable pursuant to the Act.

The following investments by a non-Canadian are subject to review under the ICA:

An investment is reviewable if there is an acquisition of a Canadian business and the asset value of the Canadian business being acquired equals or exceeds the following thresholds:

(a)

For non-World Trade Organization (“WTO”) investors, the threshold is $5 million for a direct acquisition and $50 million for an indirect acquisition; the $5 million threshold will apply however for an indirect acquisition if the asset value of the Canadian business being acquired exceeds 50% of the asset value of the global transaction;

(b)

Except as specified in paragraph (c) below, a threshold is calculated annually for reviewable direct acquisitions by or from WTO investors. The threshold for 2012 was $330 million. Pursuant to Canada’s international commitments, indirect acquisitions by or from WTO investors are not reviewable;

(c)

The limits set out in paragraph (a) apply to all investors for acquisitions of a Canadian business that:

(i) engages in the production of uranium and owns an interest in a producing uranium property in Canada;

(ii) provides any financial service;

(iii) provides any transportation services; or

(iv) is a cultural business.

Notwithstanding the above, any investment which is usually only notifiable, including the establishment of a new Canadian business, and which falls within a specific business activity, including the publication and distribution of books, magazines, newspapers, film or video recordings, audio or video music recordings, or music in print or machine-readable form may be reviewed if an Order-in-Council directing a review is made and a notice is sent to the investor within 21 days following the receipt of a certified complete notification.

Generally speaking, an acquisition is direct if it involves the acquisition of control of the Canadian business or of its direct or indirect Canadian parent and an acquisition is indirect if it involves the acquisition of control of a non-Canadian direct or indirect parent of an entity carrying on the Canadian business. No change of voting control will be deemed to have occurred if less than one-third of the voting control of a Canadian corporation is acquired by an investor.

A WTO investor, as defined in the ICA, includes an individual who is a national of a member country of the WTO or who has the right of permanent residence in relation to that WTO member, a government or government agency of a WTO investor-controlled corporation, a limited partnership, trust or joint venture that is neither WTO-investor controlled or Canadian controlled of which two-thirds of its Board of directors, general partners or trustees, as the case may be, are any combination of Canadians and WTO investors.

The ICA exempts certain transactions from the notification and review provisions of ICA, including, among others, (a) an acquisition of voting shares if the acquisition were made in the ordinary course of that person’s business as a trader or dealer in securities; (b) an acquisition of control of the company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the ICA; (c) the acquisition of voting interests by any person in the ordinary course of a business carried on by that person that consists of providing, in Canada, venture capital on terms and conditions not inconsistent with such terms and conditions as may be fixed by the Minister; and (d) acquisition of control of the company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of the company, through the ownership of voting interests, remains unchanged.

E. Taxation.

Certain United States Federal Income Tax Considerations

The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of common shares of the company.

This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including specific tax consequences to a U.S. Holder under an applicable tax treaty. Except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. This summary is not intended to be relied upon, and cannot be relied upon by you, for the purposes of avoiding penalties that may be imposed on you under the Internal Revenue Code of 1986, as amended (the “Code”). Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences relating to the acquisition, ownership and disposition of common shares.

No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the positions taken in this summary.

Scope of this Summary

Authorities

This summary is based on the Code, Treasury Regulations (whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, U.S. court decisions, the Convention Between Canada and the United States of America with Respect to Taxes on Income and Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective basis which could affect the U.S. federal income tax considerations described in this summary. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.

U.S. Holders

For purposes of this summary, the term "U.S. Holder" means a beneficial owner of common shares that is for U.S. federal income tax purposes:

an individual who is a citizen or resident of the U.S.;

a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any state thereof or the District of Columbia;

an estate whose income is subject to U.S. federal income taxation regardless of its source; or

a trust that (a) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (b) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

Non-U.S. Holders

For purposes of this summary, a “non-U.S. Holder” is a beneficial owner of common shares that is not a U.S. Holder. This summary does not address the U.S. federal income tax consequences to non-U.S. Holders arising from and relating to the acquisition, ownership, and disposition of common shares. Accordingly, a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any income tax treaties) relating to the acquisition, ownership, and disposition of common shares.

U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed

This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) are dealers in securities or currencies or U.S. Holders that are traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) have a “functional currency” other than the U.S. dollar; (e) own common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (f) acquired common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) hold common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) are partnerships and other pass-through entities (and investors in such partnerships and entities); or (i) own or have owned (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the outstanding shares of the company.

This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former long-term residents of the U.S.; (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the Income Tax Act (Canada) (the “Tax Act”); (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold common shares in connection with carrying on a business in Canada; (d) persons whose common shares constitute “taxable Canadian property” under the Tax Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention. U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders described immediately above, should consult their own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences relating to the acquisition, ownership and disposition of common shares.

If an entity or arrangement that is classified as a partnership (or other “pass-through” entity) for U.S. federal income tax purposes holds common shares, the U.S. federal income tax consequences to such entity and the partners (or other owners) of such entity generally will depend on the activities of the entity and the status of such partners (or owners). This summary does not discuss the U.S. federal tax consequences to partners (or owners) of entities or arrangements that are classified as partnerships. Partners (or other owners) of entities or arrangements that are classified as partnerships or as “pass-through” entities for U.S. federal income tax purposes should consult their own tax advisor regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of common shares.

Tax Consequences Not Addressed

This summary does not address the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of common shares. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of common shares.

U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Our Common Shares

The following discussion is subject in its entirety to the rules described below under the heading “Passive Foreign Investment Company Rules.”

Distributions on Common Shares

A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of the current or accumulated “earnings and profits” of the company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of the company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder’s tax basis in the common shares and thereafter as gain from the sale or exchange of such common shares (see “Sale or Other Taxable Disposition of Common Shares” below). However, the company does not intend to maintain calculations of its earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should therefore assume that any distribution by the company with respect to the common shares will constitute ordinary dividend income. Dividends received on common shares generally will not be eligible for the “dividends received deduction.”

Subject to applicable limitations and provided that the company is eligible for the benefits of the Canada-U.S. Tax Convention or the common shares are readily tradable on a United States securities market, dividends paid by the company to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that the company not be classified as a PFIC (as defined below) in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.

Sale or Other Taxable Disposition of Common Shares

A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of common shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in such common shares sold or otherwise disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if, at the time of the sale or other disposition, such common shares are held for more than one year.

Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of common shares generally will be treated as “U.S. source” for purposes of applying the U.S. foreign tax credit rules unless the gain is subject to tax in Canada, is sourced as “foreign source” under the Canada-U.S. Tax Convention and such U.S. Holder elects to treat such gain or loss as “foreign source.”

Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.

Additional Tax on Passive Income

Certain individuals, estates and trusts whose income exceeds certain thresholds will be required to pay a 3.8% Medicare surtax on "net investment income" including, among other things, dividends and net gain from dispositions of property (other than property held in certain trades or businesses). Special rules apply to PFICs. U.S. Holders should consult with their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of common shares.

Receipt of Foreign Currency

The amount of any distribution paid in foreign currency to a U.S. Holder in connection with the ownership of common shares, or on the sale, exchange or other taxable disposition of common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder that receives foreign currency and converts such foreign currency into U.S. dollars at a conversion rate other than the rate in effect on the date of receipt may have a foreign currency exchange gain or loss, which generally would be treated as U.S. source ordinary income or loss. If the foreign currency received is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who receives payment in foreign currency and engages in a subsequent conversion or other disposition of the foreign currency may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method of tax accounting. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.

Foreign Tax Credit

A U.S. Holder who pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.

Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source”. Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and if an election is properly made under the Code. However, the amount of a distribution with respect to the common shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. Dividends paid by the company generally will constitute “foreign source” income and generally will be categorized as “passive income.”

The foreign tax credit rules are complex, and each U.S. Holder should consult its own tax advisor regarding the foreign tax credit rules.

Information Reporting; Backup Withholding Tax for Certain Payments

Under U.S. federal income tax law and regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on individuals who are U.S. Holders that hold certain specified foreign financial assets in excess of certain threshold amounts. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U. S. Holders may be subject to these reporting requirements unless their common shares are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders of common shares should consult with their own tax advisors regarding the requirements of filing information returns, including the requirements to file IRS Form 8938.

Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, common shares generally will be subject to information reporting and backup withholding tax, at the current rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on IRS Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons, such as corporations, generally are excluded from these information reporting and backup withholding tax rules. Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner.

The discussion of reporting requirements set forth above is not intended to constitute a complete description of all reporting requirements that may apply to a U.S. Holder. A failure to satisfy certain reporting requirements may result in an extension of the time during which the IRS can assess a tax, and under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting requirement. Each U.S. Holder should consult its own tax advisor regarding the information reporting and backup withholding rules.

Passive Foreign Investment Company Rules

If the company were to constitute a PFIC (as defined below) for any year during a U.S. Holder’s holding period, then certain different and potentially adverse rules will affect the U.S. federal income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of common shares. In addition, in any year in which the company is classified as a PFIC, such holder would be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidelines may require.

The company generally will be a “passive foreign investment company” (“PFIC”) under Section 1297 of the Code if, for a tax year, (a) 75% or more of the gross income of the company for such tax year is passive income (the “income test”) or (b) 50% or more of the value of the assets held by the company either produce passive income or are held for the production of passive income, based on the quarterly average of the fair market value of such assets (the “asset test”). “Gross income” generally includes sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and “passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all (85% or more) of a foreign corporation’s commodities are stock in trade or inventory, depreciable property used in a trade or business or supplies regularly used or consumed in the ordinary course of its trade or business, and certain other requirements are satisfied.

In addition, for purposes of the PFIC income test and asset test described above, if the company owns, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, the company will be treated as if it (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by the company from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.

Under certain attribution rules, if the company is a PFIC, U.S. Holders will be deemed to own their proportionate share of any subsidiary of the company which is also a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income tax on (i) a distribution on the shares of a Subsidiary PFIC or (ii) a disposition of shares of a Subsidiary PFIC, both as if the holder directly held the shares of such Subsidiary PFIC.

The company believes that it was not a PFIC during the tax year ending December 31, 2016. No opinion of legal counsel or ruling from the IRS concerning the status of the company as a PFIC has been obtained or is currently planned to be requested. The determination of whether any corporation was, or will be, a PFIC for a tax year depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. In addition, whether any corporation will be a PFIC for any tax year depends on the assets and income of such corporation over the course of each such tax year and, as a result, cannot be predicted with certainty as of the date of this document. Accordingly, there can be no assurance that the IRS will not challenge any determination made by the company (or a Subsidiary PFIC) concerning its PFIC status or that the company (and each Subsidiary PFIC) was not, or will not be, a PFIC for any tax year. Each U.S. Holder should consult its own tax advisor regarding the PFIC status of the company and each Subsidiary PFIC.

If the company were a PFIC in any tax year that a U.S. Holder held common shares, such holder generally would be subject to special rules with respect to “excess distributions” made by the company on the common shares and with respect to gain from the disposition of common shares. An “excess distribution” generally is defined as the excess of distributions with respect to the common shares received by a U.S Holder in any tax year over 125% of the average annual distributions such U.S. Holder has received from the company during the shorter of the three preceding tax years, or such U.S. Holder’s holding period for the common shares. Generally, a U.S. Holder would be required to allocate any excess distribution or gain from the disposition of the common shares ratably over its holding period for the common shares. Such amounts allocated to the year of the disposition or excess distribution would be taxed as ordinary income, and amounts allocated to prior tax years would be taxed as ordinary income at the highest tax rate in effect for each such year and an interest charge at a rate applicable to underpayments of tax would apply.

While there are U.S. federal income tax elections that sometimes can be made to mitigate these adverse tax consequences (including, without limitation, the “QEF Election” and the “Mark-to-Market Election”), such elections are available in limited circumstances and must be made in a timely manner. U.S. Holders should be aware that, for each tax year, if any, that the company is a PFIC, the company can provide no assurances that it will satisfy the record keeping requirements of a PFIC, or that it will make available to U.S. Holders the information such U.S. Holders require to make a QEF Election under Section 1295 of the Code with respect of the company or any Subsidiary PFIC. U.S. Holders should consult their own tax advisers regarding the potential application of the PFIC rules to the ownership and disposition of common shares, and the availability of certain U.S. tax elections under the PFIC rules.

F. Dividends and paying agents.

Not applicable – The company is filing this Form 20-F as an annual report.

G. Statement by experts.

Not applicable – The company is filing this form 20-F as an annual report.

H. Documents on display.

We will furnish our shareholders with annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP. We intend, although we are not obligated to do so, to furnish when requested by our shareholders quarterly reports by mail with the assistance of a corporate services provider, which will include unaudited interim financial information prepared in conformity with U.S. GAAP for each of the three quarters of each fiscal year following the end of each such quarter. We may discontinue providing quarterly reports at any time without prior notice to our shareholders. For additional information on the company, please consult our website at www.nxtenergy.com, or the SEDAR website at http://sedar.com.

Our reports and other information, including this annual report and the exhibits hereto, as filed with the SEC in accordance with the Exchange Act, may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, Washington, D.C. 20549. In addition, copies of such reports and other information filed with the SEC can be obtained from www.sec.gov.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As at December 31, 2016 and to date in 2017, we do not have any interest bearing debt facilities or any forward / futures hedging contracts in place to manage risks related to foreign currency or interest rate fluctuations.

Currency Fluctuations

We currently hold our cash in both Canadian, U.S. and Bolivia currency, as we generally bill revenues in U.S. currency and local currency such as Bolivianos, and periodically hold certain short-term monetary assets and liabilities in other foreign currencies. Any transaction in a currency other than the Canadian dollar exposes us to the impact of exchange rate fluctuations between the Canadian and the foreign currencies. We do not currently engage in hedging activities to mitigate the effects of foreign currency fluctuation, and are reviewing opportunities to do so.

At December 31, 2016 we held U.S $ cash and short term investments totaling US $10,034. Accordingly, a hypothetical 10% change in the value of one U.S. $ expressed in Canadian dollars as at December 31, 2016 would have had a $1,003 effect on the unrealized foreign exchange gain or loss for the year.

Interest Fluctuations

At December 31, 2016 we held a total of $1,693,292 in cash, cash equivalents and short term investments. If all this cash was held in an interest bearing account for a full year, an actual 1% change in interest rates during the year ended December 31, 2016 would have resulted in approximately a $16,933 change in interest income for the year.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

There have not been any defaults, dividend arrears or delinquencies.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

There have been no material modifications to the rights of security holders except as outlined in Item 4.B “Summary information on dependence on patents, licenses and contracts” within this Form 20-F.

ITEM 15. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures (“DCP”) designed to ensure that information required to be disclosed by the company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports is accumulated and communicated to management, to allow timely decisions regarding required disclosure.

The company's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”, together the "Responsible Officers") are responsible for establishing and maintaining DCP, or causing them to be designed under their supervision, for NXT to provide reasonable assurance that material information relating to the company is made known to the Responsible Officers by others within the organization, particularly during the period in which the company's quarterly and year-end financial statements, Form 20-F and Canadian MD&A are being prepared.

As of December 31, 2016 we carried out an evaluation, under the supervision and with the participation of our management, including our Responsible Officers, of the effectiveness of the design and operation of the Company’s DCP as defined under the rules adopted by the Canadian securities regulatory authorities and in Rule 13a-15(e) of the Exchange Act. The evaluation concluded that there are material weaknesses in the Company’s ICFR that have a direct impact on the Company’s DCP as discussed in more detail below.

Our management, under the supervision of the Responsible Officers, is also responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) as defined in Rule 13a-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our Responsible Officers assessed the effectiveness of our ICFR as of December 31, 2016. In making this assessment, they used the criteria established in Internal Control – Integrated Framework 2013, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Our ICFR were not required to be independently audited. Accordingly, no independent audit was performed over the effectiveness of internal controls as at December 31, 2016 and this annual report does not include an attestation report of the company’s registered public accounting firm regarding ICFR. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to rules of the SEC that permit the company to provide only management’s report in this annual report.

During this process, we identified the following material weaknesses in the company’s ICFR that have a direct impact on the Company’s DCP:

Due to our limited number of staff, it is currently not feasible to achieve adequate segregation of incompatible duties. We mitigate this deficiency by adding management and Audit Committee review procedures over the areas where inadequate segregation of duties are of the greatest concern; and
We do not have a sufficient level of staff with specialized expertise to adequately conduct separate preparation and a subsequent independent review of certain complex or highly judgmental accounting issues. These complex areas include accounting for income taxes, stock based compensation expense, and prior to 2016, the valuation of US$ Warrants. We mitigate this deficiency by preparing financial statements with their best judgments and estimates of the complex accounting matters and relies on reviews by management, external consultants and the Audit Committee for quality assurance.

As we continue to expand our operations, we seek to reduce these risks by adding additional staff resources and the use of out-sourced consultants as financial resources permit.

Notwithstanding our efforts to mitigate the risks associated with the above noted deficiencies, based upon this review the CEO and the CFO concluded that due to the foregoing material weakness, the company’s internal controls over financial reporting are not effective as at December 31, 2016 and as a result its disclosure controls and procedures are not effective as at December 31, 2016. We reached this conclusion based upon their assessment that there is more than a remote likelihood that its ICFR will not prevent or detect material misstatements if they should exist in our financial statements.

Changes in Internal Controls

During the period ended December 31, 2016, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that we have at least one audit committee “financial expert” (as defined under Item 16.A of Form 20-F) serving on our Audit Committee. The Audit Committee consists of Messrs. Abougoush (Chair), Selby and Wilcox. Each member of the NXT Audit Committee has relevant experience in understanding and evaluating financial information, generally accepted accounting principles, control systems, and audit committee functions. Each member of NXT’s Audit Committee is considered a financial expert, and each is an “independent” director, as that term is defined under the listing standards of NASDAQ.

ITEM 16B. CODE OF ETHICS

NXT has in place a Code of Conduct & Business Ethics (the “Code of Conduct”) that applies to all of our directors, officers, employees, and consultants. This Code of Conduct is incorporated in our Employee Handbook, is an integral part of our employee contracts and our Employee Handbook, and contains company policies on Business Ethics, Employee Practices and Conflicts of Interest.

During 2016, the company did not significantly amend its Code of Conduct or grant any waiver, including any implicit waiver, from any provision of the Code of Conduct to any of its directors, officers or employees. Copies of NXT’s Code of Conduct are available without charge to any person upon request from NXT’s Chief Financial Officer at nxt_info@nxtenergy.com or at NXT’s headquarters at Suite 302, 3320 – 17 ^th Avenue SW, Calgary Alberta, Canada, T3E 0B4, and on the company website.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate audit fees, audit-related fees, tax fees of our principal accountants and all other fees billed for products and services provided by our principal accountants for each of the fiscal years ended December 31, 2016 and 2015.

	2016	2015
Audit fees	$125,250	$ 126,000
Audit related fees – Colombia branch	8,910	9,288
Audit related fees – Bolivian branch	9,509	-
	143,669	135,288
Tax fees	28,847	30,390
Other Audit Related Fees	17,500	-
Total fees	190,016	165,678

Audit Committee’s Pre-approval Policies and Procedures

Our Audit Committee nominates and engages our independent auditors to audit our financial statements. Our Audit Committee also requires management to obtain the Audit Committee’s approval on a case-by-case basis before engaging our independent auditors to provide any audit or permitted non-audit services to the company or any of our subsidiaries. All fees shown have been pre-approved by the Audit Committee.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

The company did not directly, or through an affiliate purchaser, purchase shares or other units of any class of the issuer’s equity securities that is registered by the issuer pursuant to section 12 of the Exchange Act (15 U.S.C. 781).

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

Not applicable.

ITEM 16H. MINE SAFETY DISCLOSURE

Not applicable.

PART III

ITEM 17. FINANCIAL STATEMENTS

The company’s consolidated financial statements and related notes are prepared in accordance with U.S. generally accepted accounting principles and included in Item 8 to this annual report.

ITEM 18. FINANCIAL STATEMENTS

Not applicable as the company has filed its consolidated financial statements and related notes in accordance with U.S. generally accepted accounting principles.

ITEM 19. EXHIBITS

EXHIBIT INDEX

Exhibit No.	Description
1.1	Articles of Incorporation of Auric Mining Corporation as filed with the Nevada Secretary of State on September 27, 1994 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 filed on June 29, 1998)
1.2	Amendment to Articles of Incorporation of Auric Mining Corporation as filed with the Nevada Secretary of State on February 23, 1996 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 filed on June 29, 1998)
1.3	Certificate of Amendment to Articles of Incorporation of Pinnacle Oil International, Inc. as filed with the Nevada Secretary of State on April 1, 1998 (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form 10 filed on June 29, 1998)
1.4	Certificate of Amendment to Articles of Incorporation of Pinnacle Oil International, Inc. as filed with the Nevada Secretary of State on June 13, 2000 (incorporated by reference to Exhibit 3.4 to our Amendment No. 1 to the Annual Report on Form 10-K for the year ended December 31, 1999 as filed on July 28, 2000)
1.5	Articles of Amendment of Energy Exploration Technologies Inc. as filed with the province of Alberta, Canada on September 22, 2008 (incorporated by reference to Exhibit 1.8 to our Annual Report on Form 20-F for the year ended December 31, 2008 as filed on June 29, 2009)
1.6	Amendment to the Articles of NXT Energy Solutions Inc. (incorporated by reference to Item V of Exhibit 99.1 to Form 6-K as filed on September 20, 2013)
1.7	NXT Energy Solutions Inc. By-Law No. 1 (incorporated by reference to Schedule “D” to Exhibit 99.2 to Form 6-K as filed on September 20, 2013)
4.1	Form of Indemnification Agreement between NXT Energy Solutions Inc. and each of its Directors and Executive Officers (incorporated by reference to Exhibit 4.6 to our Annual Report on Form 20-F for the year ended December 31, 2013 as filed on April 30, 2014)
4.2	SFD ® Technology Ownership Agreement dated December 31, 2006 (incorporated by reference to Exhibit 99.4 to Form 6-K as filed on January 12, 2007)
4.3	Technology Transfer Agreement dated December 31, 2006 (incorporated by reference to Exhibit 99.6 to Form 6-K as filed on January 12, 2007)
8.1	List of Subsidiaries (incorporated by reference to Exhibit 8.1 to our Annual Report on Form 20-F for the year ended December 31, 2013 as filed on April 30, 2014)
11.1	Code of Conduct and Business Ethics (incorporated by reference to Exhibit 11.1 to our Annual Report on Form 20-F for the year ended December 31, 2013 as filed on April 30, 2014)
12.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer and President
12.2	Rule 13a-14(a)/15d-14(a) Certification of VP Finance and Chief Financial Officer
13.1	Section 1350 Certification of Chief Executive Officer and President

13.2	Section 1350 Certification of VP Finance and Chief Financial Officer
15.1	Consolidated Financial Statements and Audit report of KPMG LLP for the year ended December 31, 2016
15.2	Consent of KPMG LLP
15.3	Management’s Discussion and Analysis for the year ended December 31, 2016

NXT ENERGY SOLUTIONS INC.

Consolidated Financial Statements

For the year ended

December 31, 2016

NXT ENERGY SOLUTIONS INC.

Consolidated Balance Sheets

(Expressed in Canadian dollars)

		December 31,	December 31,
		2016	2015

Assets
Current assets
	Cash and cash equivalents	$ 490,496	$ 7,085,803
	Short-term investments	1,453,091	2,055,478
	Restricted cash (Note 3)	-	75,000
	Accounts receivable	205,952	810,400
	Work-in-progress	-	404,840
	Prepaid expenses and deposits	166,802	260,397
		2,316,341	10,691,918
Long term assets
	Property and equipment (Note 4)	3,348,557	3,678,985
	Intellectual property (Note 5)	23,024,268	24,709,000
		$ 28,689,166	$ 39,079,903

Liabilities and Shareholders' Equity
Current liabilities
	Accounts payable and accrued liabilities (Note 6)	$ 575,964	$ 1,163,783
	Income taxes payable	98	1,253,126
	Deferred revenue (Note 16)	-	706,722
	Current portion of capital lease obligation (Note 7)	36,769	34,159
		612,831	3,157,790
Long-term liabilities
	Capital lease obligation (Note 7)	124,697	161,466
	Asset retirement obligation (Note 8)	55,240	51,240
	Deferred charges (Note 15)	84,838	87,756
		264,775	300,462
		877,606	3,458,252



	Common shares (Note 9): - authorized unlimited
	Issued: 53,856,509 (2015 - 53,306,109) common shares	85,966,393	85,051,553
	Contributed capital	7,613,719	7,239,089
	Deficit	(66,479,488)	(57,379,926)
	Accumulated other comprehensive income	710,935	710,935
		27,811,560	35,621,651

	*Subsequent Event - Note 19*	$ 28,689,166	$ 39,079,903

	Signed "George Liszicasz"		Signed "Mickey Abougoush"
	Director		Director

The accompanying notes are an integral part of these consolidated financial Statements

NXT ENERGY SOLUTIONS INC.

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

(Expressed in Canadian dollars)

		Year ended December 31
		2016	2015	2014

Revenue

	Survey revenue (Note 16)	$ 1,447,269	$ 17,422,151	$ 3,913,367

Expenses

	Survey costs, net (Note 17)	1,157,185	5,095,691	431,518
	General and administrative	5,645,459	5,049,690	4,132,108
	Stock based compensation expense (Note 11)	790,500	1,081,000	658,000
	Amortization expense	2,104,864	704,943	67,162

		9,698,008	11,931,324	5,288,788

Other expenses (income)
	Interest income, net	(17,254)	(13,910)	(50,824)
	Foreign exchange (gain) loss	272,713	(712,480)	(158,817)
	Intellectual Property and other expenses	218,853	529,081	354,781
	Increase in fair value of US$ Warrants (Note 9)	-	-	42,800
		474,312	(197,309)	187,940

Income (Loss) before income taxes		(8,725,051)	5,688,136	(1,563,361)

Income tax (recovery) expense (Note 13)
	Current	374,511	1,970,908	-
	Deferred	-	(6,823,000)	-
		374,511	(4,852,092)	-

Net Income (loss) and comprehensive income (loss)		$ (9,099,562)	$ 10,540,228	$ (1,563,361)


Net Income (Loss) per share (Note 10)
	Basic	$ (0.17)	$ 0.22	$ (0.04)
	Diluted	$ (0.17)	$ 0.21	$ (0.04)

The accompanying notes are an integral part of these consolidated financial Statements

NXT ENERGY SOLUTIONS INC.

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

		Year ended December 31
		2016	2015	2014

Cash provided by (used in):

Operating activities

Comprehensive Income (loss) for the year		$ (9,099,562)	$ 10,540,228	$ (1,563,361)
Items not affecting cash:
	Deferred income tax recovery	-	(6,823,000)	-
	Stock based compensation expense	790,500	1,081,000	658,000
	Amortization expense	2,104,864	704,943	67,162
	Increase in fair value of US$ Warrants	-	-	42,800
	Non-cash changes to asset retiremet obligation	4,000	1,800	(12,449)
	Asset retirement obligations paid	-	(560)	(2,111)
	Other	(2,917)	87,756	-

		2,896,447	(4,948,061)	753,402

Change in non-cash working capital balances (Note 14)		(1,384,499)	1,392,755	(2,771,227)

Net cash from (used in) operating activities		(7,587,614)	6,984,922	(3,581,186)


Financing activities

Proceeds from exercise of stock options		498,970	335,946	288,066
Proceeds from exercise of US$ Warrants		-	-	2,735,995
Repayment of capital lease obligation		(34,159)	(8,122)	-

Net cash from financing activities		464,811	327,824	3,024,061


Investing activities

Purchase of property and equipment		(89,702)	(3,380,717)	(41,808)
Decrease (increase) in short-term investments		602,385	3,117,952	(2,723,980)
Decrease (increase) in restricted cash		75,000	(75,000)	53,921
Change in non-cash working capital balances (Note 14)		(60,187)	60,187	-

Net cash from (used in) investing activities		527,496	(277,578)	(2,711,867)

Net increase (decrease) in cash and cash equivalents		(6,595,307)	7,035,168	(3,268,992)
Cash and cash equivalents, beginning of the year		7,085,803	50,635	3,319,627

Cash and cash equivalents, end of the year		$ 490,496	$ 7,085,803	$ 50,635


Supplemental information

	Cash interest (received)	16,057	(15,134)	(56,401)
	Cash taxes paid	$ 1,634,360	$ 717,782	$ -

The accompanying notes are an integral part of these consolidated financial Statements

NXT ENERGY SOLUTIONS INC.

Consolidated Statements of Shareholders' Equity

(Expressed in Canadian dollars)

		Year ended December 31
		2016	2015	2014

Common Shares

Balance at beginning of the year (Note 9)		$ 85,051,553	$ 65,792,307	$ 61,340,321
Conversion of preferred shares and
	acquisition of intellectual property	-	18,680,600	-
Issued upon exercise of stock options (Note 9)		498,970	335,946	288,066
Transfer from contributed capital upon exercise of stock options (Note 9)		415,870	242,700	147,125
Issued upon exercise of common share purchase warrants		-	-	-
Issued upon exercise of US$ Warrants (Note 9)		-	-	2,735,995
Transfer from fair value of US$ Warrants upon exercise of US$ Warrants		-	-	1,280,800

Balance at end of the year (Note 9)		85,966,393	85,051,553	65,792,307

Preferred Shares (note 5)

Balance at beginning and end of the year		-	232,600	232,600
Conversion of preferred shares to common shares		-	(232,600)	-

Balance at the end of the year		-	-	232,600

Contributed Capital

Balance at beginning of the year		7,239,089	6,400,789	5,889,914
Recognition of stock based compensation expense		790,500	1,081,000	658,000
Contributed capital transferred to common shares
	upon exercise of stock options	(415,870)	(242,700)	(147,125)

Balance at end of the year		7,613,719	7,239,089	6,400,789

Deficit

Balance at beginning of the year		(57,379,926)	(67,920,154)	(66,356,793)
Net loss and comprehensive loss for the year		(9,099,562)	10,540,228	(1,563,361)


Balance at end of the year		(66,479,488)	(57,379,926)	(67,920,154)

Accumulated Other Comprehensive Income

Balance at beginning and end of the year		710,935	710,935	710,935


Total Shareholders' Equity at end of the year		$ 27,811,560	$ 35,621,651	$ 5,216,477

The accompanying notes are an integral part of these consolidated financial Statements

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

1. The Company and future operations

NXT Energy Solutions Inc. (the "Company" or "NXT") is a publicly traded company based in Calgary, Canada.

NXT's proprietary Stress Field Detection ("SFD®") technology is an airborne survey system that is used in the oil and natural gas exploration industry to identify areas with hydrocarbon reservoir potential.

However, the Company has taken important steps subsequent to year end to address its ability to meet its obligations such that the concern over substantial doubt has been alleviated in the preparation of these financial statements. The most significant step taken is the securing of a $2.7 million sale and leaseback arrangement of its airplane (see note 19). In addition, the Board of Director’s (the “Board”) have approved and communicated to the Company’s employees that a portion of their cash compensation and all of the Board and Advisory Board members cash compensation will be deferred until the Company achieves revenue thresholds that, in the opinion of the Board, allows the Company to commence incurring such costs again. The Company expects that issuing some form of incremental share based compensation will be a part of the strategy to compensate those individuals who are impacted by these changes.

NXT continues to develop its pipeline of opportunities to secure new revenue contracts. However, the Company’s longer term success remains dependent upon its ability convert these opportunities into successful contracts and to continue to attract new client projects and expand the revenue base to a level sufficient to exceed fixed operating costs and generate positive cash flow from operations. The occurrence and timing of these events cannot be predicted with certainty. The Company will be closely monitoring its going concern assessment in future periods to determine whether its current conclusions remain appropriate.

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

The consolidated financial statements do not reflect adjustments that would be necessary if the going concern basis was not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then significant adjustments would be necessary in the classification and carrying value of assets and liabilities and the reported revenues and expenses.

2. Significant Accounting Policies

Basis of presentation

These consolidated financial statements for the year ended December 31, 2016 have been prepared by management in accordance with generally accepted accounting principles of the United States of America ("US GAAP") and by applying the same accounting policies and methods as used in preparing the consolidated financial statements for the fiscal year ended December 31, 2015.

Consolidation

These consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiaries (all of which are inactive, other than its operation in Bolivia). 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.

Estimates and Assumptions

Estimates made relate primarily to the estimated useful lives of intellectual property and property and equipment, the measurement of stock-based compensation expense, valuation of deferred income tax assets, and estimates for asset retirement obligations. The estimates and assumptions used are based upon management's best estimate. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period when determined. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and short term GICs 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 but less than one year.

Revenue Recognition

Revenues from SFD® survey contracts performed by NXT (net of any related foreign sales tax) are recognized using the completed contract method of revenue recognition. Substantial completion of the contract culminates with NXT’s delivery to its clients of a final interpretation and recommendations report for the survey project. This method is viewed as appropriate as prior to that point, the raw SFD® survey data obtained by NXT cannot be interpreted or utilized in an independent, meaningful way by the client.

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

Amounts received or invoiced in advance of completion of the contract are reflected as deferred revenue and classified as a current liability. At the end of each applicable quarterly fiscal period, all related survey expenditures and obligations (including sales commissions incurred) related to uncompleted contracts are reflected as work-in-progress and classified as current assets.

Upon completion of the contract deliverables, unearned revenue and the related work-in-progress are reflected in the statement of income (loss) as either revenue or survey cost. Survey costs do not include staff and related overhead costs (which are included in general and administrative expense) or any amortization of property and equipment.

Fair Value of Derivative Instruments

Derivative Instruments

Derivative instruments are recognized on the balance sheet at fair value with any changes in fair value between periods recognized in the determination of net income (loss) for the period. NXT does not apply hedge accounting to any of its derivatives. As at December 31, 2016 and 2015, NXT had no outstanding derivative instruments.

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.

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.

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.

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

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:

Computer hardware (including survey equipment)	30% declining balance
Computer software	100% declining balance
Aircraft	10% declining balance
Furniture and other equipment	20% declining balance
Leasehold improvements	over the remaining term of the lease

Impairment of long-lived assets

The Company reviews long-lived assets, which includes property and equipment and intellectual property for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. When indictors 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.

Intellectual Property Expenditure

Intellectual property acquired is recorded at cost, less accumulated amortization, which is recorded over the estimated minimum useful life of the assets. Intellectual property is also subject to ongoing tests of potential impairment of the recorded net book value.

Research and Development Expenditure

Research and development ("R&D") expenditures incurred to develop, improve and test the SFD® survey system and related components are expensed as incurred. Any intellectual property that is acquired for the purpose of enhancing research and development projects, if there is no alternative use for the intellectual property, is expensed in the period acquired. No significant external R&D was incurred in the years ended 2014, 2015 and 2016.

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. Shareholders' equity accounts are translated into Canadian dollars using the exchange rates in effect at the time of the transaction. 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 (including work-in-progress and deferred revenue balances) 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.

Prior to 2010, NXT had active US subsidiaries which had the US dollar as their functional currency. Historic foreign currency translation adjustments related to the consolidation of these now inactive

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

subsidiaries is the only component of accumulated other comprehensive income, which is a component of shareholders' equity.

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.

Stock based compensation expense

NXT follows the fair value method of accounting for stock options that are granted to acquire common shares under NXT's stock option plan. Under this method, an estimate of the fair value of the cost of stock options that are granted to employees, directors and consultants is calculated using the Black-Scholes option pricing model and charged to income over the future vesting period of the stock options, with a corresponding increase recorded in contributed capital. Upon exercise of the stock options, the consideration received by NXT, and the related amount which was previously recorded in contributed capital, is recognized as an increase in the recorded value of the common shares of the Company.

Stock based compensation expense related to stock options granted to non-employees is periodically re-measured until the earlier of the completion of their service period or when the vesting period is completed. Changes to the re-measured compensation are recognized in the period of change and amortized over the remaining life of the vesting period in the same manner as the original stock option.

Income (loss) per share

Basic income (loss) per share amounts are 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 (loss) per share are 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 common share purchase warrants. The incremental number of shares added under the treasury stock method assumes that outstanding stock options and warrants 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).

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

Future Accounting Policy Changes

Revenue recognition :

This new guidance will be effective from January 1, 2018, and early application is not permitted. There will be two methods in which the amendment can be applied: (1) retrospectively to each prior reporting period (which will include NXT’s fiscal years 2015 and 2016) presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application. NXT is evaluating the impact of the adoption of this new guidance and although the review is not yet complete, indications are that there will be no material impact on the financial statements.

Leases:

In February 2016, the FASB issued new guidance on leases. The new guidance requires lessees to recognize most leases, including operating leases, on the balance sheet as lease assets and lease liabilities. In addition, lessees may be required to reassess assumptions associated with existing leases as well as to provide expanded qualitative and quantitative disclosures. The new guidance is effective January 1, 2019. NXT is evaluating the impact of the adoption of this new guidance and has not yet determined the effect on its consolidated financial statements.

3. Restricted cash

Restricted cash consists of funds which are deposited by NXT as security with financial institutions, including for the issuance of credit cards. Also, bank letters of credit are periodically issued for the benefit of NXT’s clients related to contractual performance requirements on certain SFD® survey contracts. There were no restricted cash balances at the end of 2016. The restricted cash balance as at 31 December 2015 of $75,000 related to security on the Corporate Credit Card program and this restriction was removed during Q3-2016 by the financial institution.

4. Property and equipment

	Cost	Accumulated	Net book
Year ended December 31, 2016	Base	amortization	value
Survey equipment	$ 680,518	$593,228	$87,290
Aircraft	2,734,611	287,277	2,447,334
Computers and software	1,241,740	1,140,956	100,784
Furniture and other equipment	528,420	490,775	37,645
Leasehold improvements	1,165,108	489,604	675,504
	6,350,397	3,001,840	3,348,557

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

	Cost	Accumulated	Net book
Year ended December 31, 2015	Base	amortization	value
Survey equipment	$ 656,237	$ 571,595	$ 84,642
Aircraft	2,734,611	15,351	2,719,260
Computers and software	1,180,873	1,098,876	81,997
Furniture and other equipment	528,420	481,297	47,123
Leasehold improvements	1,160,553	414,590	745,963
	6,260,694	2,581,709	3,678,985

5. Intellectual property

During 2015, NXT acquired the permanent rights to the SFD® technology for use in the exploration of hydrocarbons from its CEO and recorded the acquisition as an intellectual property asset on the balance sheet. Prior to acquiring the SFD® technology, the Company had rights to use the technology under a 10 year technology transfer agreement (“TTA”) with the CEO. As a result of not achieving pre-defined revenue milestones under the TTA, the Company was required to convert on a one-to-one basis the 8,000,000 preferred shares that had been issued to the CEO, at the commencement of the licensing agreement, to common shares. The asset was recorded at the fair value of the consideration transferred, including the related tax affect, of approximately $25.3 million. The historic carrying value of the preferred shares of $0.2 million was transferred to common share capital upon conversion in 2015.

The asset is being amortized on a straight line basis over its estimated useful life of 15 years. The annual amortization expense expected to be recognized in each of the next five years is approximately $1.7 million per year for a 5 year aggregate total of $8.5 million.

	2016	2015
Intellectual property acquired	$ 25,271,000	$ 25,271,000
Accumulated amortization	(2,246,732)	(562,000)
	23,024,268	24,709,000

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

6. Accounts payable and accrued liabilities

		2016	2015
Accrued liabilities related to:
	Consultants and professional fees	$ 107,387	$ 100,000
	Board of Directors' fees	-	30,000
	Survey and other projects	-	10,394
	Payroll (vacation pay and wages payable)	156,498	210,816
		263,885	351,210
Trade payables and other		312,079	812,571
		575,964	1,163,781

7. Capital lease obligation

	2016	2015
Capital lease obligation	$ 161,466	$ 195,625
Less current portion	(36,769)	(34,159)
	124,697	161,466

The capital lease obligation is secured by specific leasehold improvements included in property and equipment, bears interest at a rate of 7.4%, and is repayable as follows:

Year ended December 31:
2017	36,769
2018	39,579
2019	42,603
2020	42,515
	161,466

8. Asset retirement obligation

Asset retirement obligations ("ARO") relate to minor interests in oil and natural gas wells in which NXT has outstanding abandonment and reclamation obligations in accordance with government regulations. The Company's obligation relates to its interests in 6 gross (1.2 net) wells. ARO have an estimated future liability of approximately $59,000 which is based on estimates of the future timing and costs to abandon, remediate and reclaim the well sites within the next five years. The net present value of the ARO is as noted below, and has been calculated using an inflation rate of 3.4% and discounted using a credit-adjusted risk-free interest rate of 10%.

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

	2016	2015	2014
ARO balance, beginning of the year	$ 51,240	$ 50,000	$ 64,560
Accretion expense	4,000	1,800	800
Costs incurred	-	(560)	(2,111)
Change in ARO estimates	-	-	(13,249)
ARO balance, end of the year	55,240	51,240	50,000

9. Common shares

The Company is authorized to issue an unlimited number of common shares, of which the following are issued and outstanding:

		As at the Year Ended
		December 31, 2016		December 31, 2015
		# of shares	$ amount	# of shares	$ amount
As at the beginning of the year		53,306,109	$85,051,553	44,958,843	$ 65,792,307
Shares issued during the year:		-	-	-	-
	Exercise of stock options	565,722	498,970	347,266	335,946
	Conversion of preferred shares (note 5)	-	-	8,000,000	232,600
	Stock options proceeds receivable	-	(30,285)	-	-
Value assigned to acquisition of		-	-	-
	Intellectual property	-	-	-	18,448,000
		-	-	-
	Transfer from contributed capital on the exercise of stock options (see (i))	-	415,870	-	242,700
Return to Treasury of		-	-	-	-
exercised stock options-		(15,322)	-	-	-
As at the end of the year		53,856,509	85,966,393	53,306,109	85,051,553

		As at the Year Ended
		December 31, 2014
		# of shares	$ amount
As at the beginning of the year		42,418,326	$61,340,321
Shares issued during the year:
	Exercise of stock options	482,665	288,066
	Issued on exercise of US$ Warrants (note 9)	2,057,852	2,735,995

	Transfer from contributed capital on the
	exercise of stock options	-	147,125
	Transfer from fair value of US$ Warrants
	Upon exercise	-	1,280,800
As at the end of the year		44,958,843	65,792,307

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

At December 31, 2016 a reduction of $16,200 in the common share capital balance was made in respect of shares that had been repurchased by the Company and held in trust pending transfer to a Consultant in lieu of fees that would be incurred in 2017.

(i)

As part of a 2012 financing, the Company issued warrants that expired in 2014. During 2014, the company received proceeds of $2.7 million on the exercise of 2,057,852 warrants. Also during 2014, a remaining 1,598,269 warrants expired unexercised. The warrants were accounted for as derivative instruments with changes in fair value recorded in the Consolidated Statement of income (Loss) and Comprehensive income (Loss). During 2014, the Company recognized a non-cash charge related to the charge in fair value of the warrants of $42,800.

10. Net Income (loss) per share

		2016	2015	2014
Comprehensive Income/(loss) for the year		$(9,099,562)	$10,540,228	$(1,563,361)

Weighted average number of shares
	outstanding for the year:
	Basic	53,562,155	47,782,647	44,375,540
	Additional shares related to assumed
	Exercise of Stock options under the
	Treasury stock method (see (i))	-	1,258,736	-

	Diluted	53,562,155	49,041,383	44,375,540

Net Income (loss) per share – Basic		$ (0.17)	$ 0.22	$ (0.04)
Net Income (loss) per share – Diluted		$ (0.17)	$ 0.21	$ (0.04)

(i)

In periods in which a loss results, all outstanding stock options and the Preferred Shares are excluded from the fully diluted loss per share calculations as their effect is anti-dilutive.

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

11. Stock options

The following is a summary of stock options which are outstanding as at December 31, 2016:

			Average remaining
Exercise price	# of options	# of options	contractual
per share	outstanding	exercisable	life (in years)
$ 0.75	345,000	345,000	0.5
$ 0.76	104,001	104,001	1.1
$ 0.86	530,000	530,000	0.6
$ 1.20	300,000	300,000	0.6
$ 1.35	554,400	238,132	3.0
$ 1.39	30,000	30,000	2.5
$ 1.45	37,500	37,500	4.9
$ 1.48	37,500	37,500	4.5
$ 1.49	150,000	-	4.4
$ 1.50	100,000	-	4.6
$ 1.51	150,000	-	4.7
$ 1.55	40,000	26,667	2.2
$ 1.57	30,000	10,000	3.1
$ 1.61	25,000	16,667	2.1
$ 1.67	150,000	100,000	2.9
$ 1.73	92,600	59,267	3.9
$ 1.82	215,000	71,667	3.8
$ 1.83	30,000	30,000	2.0
$ 2.10	300,000	100,000	3.7
$ 1.33	3,221,001	2,036,401	2.38

A continuity of the number of stock options which are outstanding at the end of the current period and as at the prior fiscal year ended December 31, 2016 is as follows:

	For the year ended		For the year ended
	December 31, 2016		December 31, 2015
		weighted		weighted
	# of stock	average	# of stock	average
	options	exercise price	options	exercise price
Options outstanding, start of the period	3,462,835	$ 1.26	2,541,435	$ 1.02
Granted	475,000	$ 1.50	1,268,666	$ 1.66
Exercised	(565,722)	-	(347,266)	$ 0.97
Forfeited	(151,112)	$ 1.50	-	-
Options outstanding, end of the period	3,221,001	$ 1.33	3,462,835	$ 1.26
Options exercisable, end of the period	2,036,401	$ 1.17	2,004,268	$ 1.01

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

Stock options granted generally expire, if unexercised, five years from the date granted and entitlement to exercise them generally vests at a rate of one-third at the end of each of the first three years following the date of grant.

Stock based compensation expense (“SBCE”) is calculated based on the fair value attributed to grants of stock options using the Black-Scholes valuation model and utilizing the following weighted average assumptions:

Year ended December 31	2016	2015	2014
Expected dividends paid per common share	Nil	Nil	Nil
Expected life in years	5.0	4.9	5.0
Expected volatility in the price of common shares	85 %	105 %	113 %
Risk free interest rate	0.75%	1.0 %	1.5 %
Weighted average fair market value per share at grant date	$ 0.99	$ 1.28	$ 1.24
Intrinsic (or "in-the-money") value per share of options exercised	$ 0.45	$ 1.40	$ 0.85

The unamortized portion of SBCE related to the non-vested portion of stock options, all of which will be recognized in future expense over the related remaining (2017 to 2018) vesting periods, is approximately $884,000.

12. Financial instruments

1) Non-derivative financial instruments:

The Company's non-derivative financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, and accounts payables and accrued liabilities. The carrying value of these financial instruments approximates their fair values due to their short terms to maturity. NXT is not exposed to significant interest or credit risks arising from these financial instruments. NXT is exposed to foreign exchange risk as a result of periodically holding foreign denominated financial instruments. Any unrealized foreign exchange gains and losses arising on such holdings are reflected in earnings at the end of each period.

2) Derivative financial instruments

As at December 31, 2016, 2015 and 2014 the Company held no derivative financial instruments

13. Income tax expense

NXT periodically earns revenues while operating outside of Canada in foreign jurisdictions. Payments made to NXT for services rendered to clients and branch offices in certain countries may be subject to foreign income and withholding taxes. Such taxes incurred are only recoverable in certain limited circumstances, including potential utilization in Canada as a foreign tax credit, or against future taxable earnings from the foreign jurisdictions.

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

For the year ended December 31, 2016, NXT recorded foreign income and withholding taxes of $159,990 (2015 - $1,755,678 and 2014 - $nil) on a portion of its revenues generated on the Bolivian project, including withholding taxes incurred on certain charges to the Bolivian branch office.

Income tax expense is different from the expected amount that would be computed by applying the statutory Canadian federal and provincial income tax rates to NXT's income (loss) before income taxes as follows:

		2016	2015	2014
Net income (loss) before income taxes		$(8,725,051)	$5,688,136	$(1,563,361)
Canadian statutory income tax rate		27.0 %	26.0 %	25.0 %
Income tax (recovery) at statutory income tax rate		(2,355,764)	1,478,915	(390,840)
Effect of non- deductible expenses and other items:
	Stock-based compensation and other expenses	223,463	407,593	176,719
	Change in statutory tax rates	-	(511,508)	-
	Foreign exchange adjustments	112,581	(489,665)	(185,093)
	Foreign tax credit benefit	(256,500)	(1,755,678)	-
	Other	(271,676)	(318,664)	12,474
		(2,547,896)	(1,189,007)	(387,040)
Change in valuation allowance		2,547,896	(5,633,993)	387,040
		-	(6,823,000)	-
Income taxes in foreign jurisdictions		374,511	1,970,908	-
Income tax expense (recovery)		374,511	(4,852,092)	-

As at December 31, 2016 the Company has available for future Canadian income tax deduction purposes the following unrecognized tax pools:

Non-capital / operating loses carried forward
	(expiration dates 2030 to 2035)	$ 24,992,119
Canadian resource pool deductions		5,567,443
Capital cost allowance and financing costs deductible		4,246,726
Unclaimed SRED expenditures		509,130
		35,315,418

There are also tax credits as follows:

SRED	$ 106,627
Unclaimed Foreign Tax Credit	371,133
	477,760

A valuation allowance has been provided for the potential financial statement value of these assets and the Company’s other deferred income tax assets, due to uncertainty regarding the amount and timing of their potential future utilization, as follows:

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

		2016	2015	2014
Net operating losses carried forward:
	Canada (expiration dates 2030 to 2035)	$ 6,747,506	$ 5,100,905	$ 4,236,318
	USA (expiration dates 2020 to 2026)	2,575,389	2,654,605	2,225,150
Timing differences on property & equipment
	and financing costs	1,789,311	1,850,228	2,106,780
SRED Expenditures		215,303	-	-
Foreign Tax Credit		371,133	-	-
		11,059,946	9,605,738	8,568,248
Intellectual property		(6,216,552)	(6,671,544)	-
		5,482,090	2,934,194	8,568,248
Less valuation allowance		(5,482,090)	(2,934,194)	(8,568,248)
		-	-	-

14. Change in non-cash working capital

The changes in non-cash working capital balances are comprised of:

		For the year ended December 31
		2016	2015	2014
Accounts receivable		$ 604,448	$ (561,470)	$ 46,949
Work-in-progress		404,840	(404,840)	299,842
Prepaid expenses and deposits		93,595	78,247	(180,188)
Accounts payable and accrued liabilities		(587,819)	381,157	(156,729)
Income Taxes Payable		(1,253,028)	1,253,126	-
Deferred revenue		(706,722)	706,722	(2,781,101)
		(1,444,686)	1,452,942	2,771,227

Portion attributable to:
	Operating activities	(1,384,499)	1,392,755	2,771,227
	Financing activities	-	-	-
	Investing activities	(60,187)	60,187	-
		(1,444,686)	1,452,942	2,771,227

15. Commitments and contingencies

Office premises lease

NXT has an operating lease commitment on its Calgary office space for a 10 year term at an initial estimated minimum monthly lease payment of $44,624 (including operating costs). The estimated future minimum annual commitment is as follows as at December 31, 2016:

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

Fiscal year ending December 31
2017		535,485
2018		535,485
2019		535,485
2020		538,460
2021		547,382
		2,692,297
Thereafter, 2021 through 2025		2,052,683
		4,744,980

Deferred charges of $84,838 as at December 31, 2016 relates to the valuation of an initial free-rent period received on this lease in 2015. This balance will be amortized as a reduction of general and administrative expense over the 10 year term of the lease commitment.

16. Geographic information

NXT conducts all of its survey operations from its head office in Canada, and occasionally maintains administrative offices in foreign locations such as Bolivia. NXT has no long term assets outside of Canada.

In May 2015, NXT executed a contract to conduct a US $13.4 million (US $12.9 million net of applicable local sales taxes owing) survey project with a new client in Bolivia. This contract was completed and recognized in revenue in NXT’s Q4-2015 period.

A contract amendment for an additional survey project valued at US $1.0 million (net of taxes) was finalized in October, 2015. The results for this project were delivered to the client in January, 2016, and it is recognized as revenue in NXT’s Q1-2016 period. Accordingly, deferred revenue as at December 31, 2015 included US $0.5 million (net of taxes) which had been invoiced as a progress billing for this project.

Revenues by geographic area were generated solely in Bolivia in 2015 and 2016, and were derived almost entirely from a single client in each of the periods. Revenue in 2014 was generated from one customer in the United States

Revenues were derived by geographic area as follows:

	2016	2015	2014
South and Central America (Bolivia, Belize)	$1,447,269	$ 17,422,151	$ -
North America (United States)	-	-	3,913,367
	1,447,269	17,422,151	3,913,367

NXT ENERGY SOLUTIONS INC.

Notes to the Consolidated Financial Statements

As at and for the year ended December 31, 2016

(Expressed in Canadian dollars unless otherwise stated)

17. Survey Expenses

		2016	2015	2014
Aircraft Operations
	Charter Hire Revenue Earned	(564,505)	-	-
	Operating Expenses	1,185,359	-	-
		620,854	-	-
Survey Projects		36,331	5,065,691	431,501
		1,157,185	5,065,691	431,501

18. Other related party transactions

One of the members of NXT’s Board of Directors is a partner in a law firm which provides legal advice to NXT. Legal fees (including costs related to share issuance) incurred with this firm were as follows:

For the three months		For the twelve months
ended December 31		ended December 31
2016	2015	2016	2015
$ 13,890	$ 59,694	$ 62,645	$ 100,598

Accounts payable and accrued liabilities includes a total of $10,443 ($62,048 as at December 31, 2015) payable to this law firm.

In addition, accounts payable and accrued liabilities includes $46 ($34,881 as at December 31, 2015) related to re-imbursement of expenses owing to persons who are Officers of NXT.

19. Subsequent Event – Aircraft Financing

On March 17 ^th , 2017, NXT entered into a binding sale and leaseback agreement with a Calgary based international aircraft services organization (“the lessor”). The terms of the agreement involve NXT selling its’ Cessna Citation aircraft that was purchased in 2015 for US$2,000,000 for the sum of US$2,300,000. NXT will lease the aircraft over an initial term of 60 months and retain all existing operating rights and obligations. Net proceeds to NXT from the sale will be approximately CAD $2,700,000, after payment of all commissions and fees, and are expected to be received in April 2017. The monthly repayment is approximately US $40,000.

ANNUAL REPORT

As at and for the year ended

December 31, 2016

Message from the President & CEO

March 30, 2017

As always, I wish to say a heart-felt thanks to our clients, employees, advisors, Board of Directors and service providers for their ongoing effort and support of NXT. Fiscal 2016 did not continue the record momentum of 2015, nevertheless significant progress was made in many areas which I wish to highlight below:

we continued to expand our global presence, and secured another significant new client, SHINE Quest FZC, with whom we will partner in Sri Lanka to build a multi-client data set of the Mannar Basin, subject to government approval.

an extensive marketing campaign in Q-2 2016 resulted in the formation of much stronger relationships with National Oil Companies (“NOCs”) in Africa, Asia Pacific, and the Middle East.

we were proud to announce in March 2016 that we had successfully graduated from the TSX-V exchange to the TSX.

we continued to strengthen our management team with the addition of an internationally experienced CFO and a new Director of Operations who has extensive experience in the seismic industry.

the development, manufacture and testing of a new generation of SFD ^® sensors were completed during the year that will provide enhanced detection ability, thus increasing the efficiency and accuracy of the interpretation process.

Significant progress in the development of algorithms to model the SFD ^® signal was achieved during the year. Our end goal for this project is to develop the algorithms to the level where the client is able to independently interpret the SFD ^® data.

Our efforts to secure multiple international patents continued successfully in 2016 to the extent that we were awarded our first patent by the Russian Patent examiner in early 2017. We believe we are close to award of additional patents in 2017 and await the results of other international patent examiners.

Outlook for 2016 and beyond

The oil & natural gas exploration and production industry continues to deal with the ongoing challenge of excess global supply and the related soft commodity prices. Capital spending for many E&Ps was somewhat curtailed in 2016, however we are seeing signs of recovery in early 2017. NXT continues to target a strategic mix of global client prospects, primarily National Oil Companies (“NOCs”) who take a long-term view of the commodity price and exploration cycles. These parties generally recognize the need to continue to search for and secure new exploration prospects which can yield them strategic new oil and gas reserves to meet future needs.

We also continue to focus on independent E & P companies and independent oil and gas companies (“IOCs”) as we believe our proprietary SFD ^® technology can bring great value and efficiency to the exploration process. Integration into each and every E & P and IOCs exploration process is our goal.

In closing, I note that I am extremely proud of our 2016 accomplishments, and the momentum we are building in 2017. As I noted last year, the true exploration potential of our SFD ^® technology continues to be recognized by a wider global client base. Our pipeline of potential project opportunities is now larger and more diverse than ever, and includes several very large potential projects, at least one of which we aim to commence in 2017.

Thank you all again for your ongoing support of the NXT technology and team.

Best regards,

George Liszicasz

President & CEO

NXT Energy Solutions Inc.

NXT ENERGY SOLUTIONS INC.

Management’s Discussion and Analysis (“MD&A”)

Q4 – 2016

As at and for the year
ended December 31, 2016

Management's Discussion and Analysis

The following management's discussion and analysis ("MD&A") was prepared by management based on information available as at March 29th, 2017 and should be reviewed in conjunction with the audited Consolidated Financial Statements for the year ended December 31, 2016. This MD&A covers the unaudited 3 month ("Q4-16") and 12 month year-to-date (“2016 YTD”) periods ended December 31, 2016, with comparative totals for the 3 month (“Q4-15”) and 12 month year-to-date (“2015 YTD”) periods ended December 31, 2015.

As used in this MD&A, the terms "we", "us", "our", "NXT" and the "Company" mean NXT Energy Solutions Inc.

Our functional and reporting currency is the Canadian dollar. All references to "dollars" in this MD&A refer to Canadian or Cdn. dollars (“Cdn $”) unless specific reference is made to United States or US dollars ("US$").

SFD ^® and NXT in Canada and the United States are the registered trademarks of NXT Energy Solutions Inc.

Forward-looking statements

This MD&A contains forward-looking statements, which include words such as “intends”, “plans”, “anticipates”, “expects”, “scheduled”, and relate primarily to:

Estimates of the amount and expected timing of revenue and costs related to new SFD ^® survey contracts that may be obtained, conducted and completed in future periods.

The timing and extent of potential future growth opportunities in new international markets, including new business ventures.

Estimates related to NXT’s future financial position and liquidity.

The material factors and assumptions which affect this forward-looking information include assumptions that NXT will continue to have available the necessary personnel, equipment and required local permits to conduct survey projects as intended.

These forward-looking statements are based on current expectations and are subject to a wide range of known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Except as required by law, NXT assumes no obligation to update forward-looking statements should circumstances or the Company's estimates or opinions change.

Non GAAP measures

NXT's accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This MD&A includes references to terms such as net working capital and net working capital before the undernoted items, terms which do not have a standardized meaning prescribed by US GAAP and may not be comparable to similar measures presented by other entities. Management of NXT uses this non-GAAP measure to improve its ability to assess liquidity at a point in time. Net working capital before the undernoted items is defined as total current assets less total current liabilities, excluding amounts accumulated in work in progress and deferred revenue. Management excludes these amounts from the calculation as they do not represent future cash inflows or outflows to the Company.

Description of the Business

NXT provides an airborne, gravity-based geophysical survey to leading oil and gas Exploration and Production (“E&P”) companies globally.

NXT's proprietary patented Stress Field Detection ("SFD ^® ") survey method is used to identify subsurface trapped fluid accumulations by confirming “trap integrity”: the simultaneous existence of trap, reservoir and seal. Subtle changes in the earth's gravitational field caused by variations in sub-surface geological density/stress are used to identify potential hydrocarbon accumulations. This is a critical piece of information within the exploration process, only identified by the use of SFD® technology and is crucial to the commercial success of exploration projects. This is what makes the SFD ^® technology so valuable to the industry. The SFD® method is used as an executive decision making tool designed to minimize risk and finding costs and maximize exploration program efficiencies in terms of time and success rates.

SFD ^® surveys are non-invasive, environmentally friendly, unaffected by ground security concerns and effective in both offshore and onshore environments. The results of the survey enable the customer to focus their exploration efforts towards areas with a high success potential, thus minimizing the huge expense of drilling non-commercial prospects.

SFD ^® is an established exploration tool with a number of clients globally and a growing list of recommended prospects drilled with significant discoveries. This tool is particularly useful as an early stage exploration tool in frontier and under-developed areas. SFD ^® is also used prior to drilling in areas that have significant seismic coverage to confirm traps identified by seismic surveys and assess reservoir potential, thus reducing exploration risk.

Business Overview and Strategy

NXT recognizes that its past revenue base has been sporadic in nature, as it is derived from a limited number of clients, conducting survey projects that are relatively short term in nature and that it has been influenced by the global downturn in commodity prices.

Our primary goal has been to expand our revenue base, by increasing the pipeline of opportunities with new and existing customers and we seek to achieve this goal by focusing on several key areas.

Firstly, NXT increased its investment in business development when senior members of management undertook an extensive marketing initiative in Q2-2016, which resulted in building stronger relationships with global NOC’s in Africa, Asia Pacific, and the Middle East. Many of the potential clients in these regions are currently in various stages of discussions with NXT. The proposed project with Shine Quest FZC in Sri Lanka is an example of the success of this marketing initiative.

Following the success of selling the SFD ^® concept to the National Oil Companies (“NOCs”) for limited areas, we are now expanding our scope to cover entire regions and countries. This strategy focuses on working with heads of government and senior executives who are not only interested in the science but also in the economic benefits of developing their hydrocarbon resources in a strategic manner that delivers success much faster.

While we continue to grow the major project pipeline, our strategy will also continue to focus on independent E&P companies, and independent oil and gas companies (“IOCs”). The purpose of this strategy has been to integrate our SFD® technology into the standard exploration process of such organizations and we are gaining traction in this area, particularly in the provision of Multi-Client datasets. We believe this approach will help us build a steady backlog of projects that will enable us to enhance and smooth our revenue flow.

Following the successful completion of the Bolivia Survey Project s in 2015 NXT has been effective in positioning the SFD ^® method as an established geophysical tool backed by technical papers, past project case studies, a strong list of references and letters of recommendations. Please see the NXT Energy website for more information. (www.nxtenergy.com)

As NXT pursues various international markets, one of our strategies is to utilize high quality local sales representatives with key knowledge of their area, potential clients and the exploration sector of the oil and gas industry. This allows us to cover larger areas and more clients with minimum fixed cost.

NXT continues to have sales representatives who pursue SFD ^® opportunities in such markets as Latin America, Southeast Asia (Malaysia and Pakistan), and the Middle-East. All independent international sales representatives are required to certify that they adhere to NXT's code of conduct and business ethics.

It should be noted, however, that the process of expanding the client base has ongoing challenges, due to such factors as:

The exploration cycle is long in nature, and generating results from SFD ^® recommendations made in past surveys takes time and patience to realize.

Large NOCs tend to have a long decision making and approval process.

The current, ongoing downturn in commodity prices in the oil and gas industry.

The discussion in the MD&A focuses on the highlights of NXT’s ongoing business development activities, and any significant changes arising prior to the filing of our MD&A for the fiscal year ended December 31, 2016.

The consolidated financial statements have been prepared on a going concern basis. The going concern basis of presentation assumes that NXT will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business. In preparing the consolidated financial statements, the Company’s initial assessment of its liquidity position raised substantial doubt about its ability to continue as a going concern. This initial assessment was based on the extended duration between revenue contracts and the significant decline that this had on NXT’s working capital ($7.8 million at December 31, 2015 to $1.7 million at December 31, 2016). Given the Company’s annual expenses were initially estimated to be significantly in excess of the remaining working capital and there is uncertainty with respect to the timing of future revenue, the Company believed these conditions were significant to the going concern assumption.

However, the Company has taken important steps subsequent to year end to address its ability to meet its obligations, such that the concern over substantial doubt has been alleviated in the preparation of the financial statements. The most significant step taken is the securing of a $2.7 million sale and leaseback arrangement of its airplane (see note 19 in the financial statements). In addition, the Board of Director’s (the “Board”) have approved and communicated to the Company’s employees that a portion of their cash compensation and all of the Board and Advisory Board members cash compensation will be deferred until the Company achieves revenue thresholds that, in the opinion of the Board, allows the Company to commence incurring such costs again. The Company expects that issuing some form of incremental share based compensation will be a part of the strategy to compensate those individuals who are impacted by these changes.

In reaching the conclusions that it is probable that there will be sufficient resources to meet its obligations over the 12 month period beyond the date that the financial statements have been issued, the Company has assumed a minimum revenue inflow of approximately $600,000. While the Company continues to work towards the signing of several other contracts, the time to complete this process cannot be predicted with a high degree of certainty and therefore the benefit of any additional contracts has not been included in the projected cash flow analysis.

Should the timing of new contracts continue to extend beyond management’s current expectation, the Company has also received a binding promissory note from its’ Chief Executive Officer that would provide the Company with up to an additional $500,000. These funds will only be drawn to the extent necessary to help the Company meet its obligations over this period.

Estimates of the timing and securing of future contract opportunities are forward-looking expectations which are dependent upon regional political and other factors that are beyond NXT’s control.

Near-term Outlook for 2017

There are a number of short term and longer term prospects that are being pursued in South and Central America, the frontier areas of Africa, Asia, the Arctic and offshore Atlantic regions (particularly where Canadian and American E&P companies are operating).

NXT has been working with a number of clients towards finalizing survey contract s . However the process within the NOC’s and related Government departments in these regions are complex and time consuming .

As announced on September 19 ^th , 2016 NXT are pleased to partner with SHINE Quests FZC in a project where the SFD® survey method is the lead technology in the proposed “Project SHINE”, currently under consideration by the Sri Lankan government. The SFD® survey data is intended to provide information on trap integrity (the simultaneous presence of trap, reservoir and seal). The purpose of the project is to build a new multi-client data set for Sri Lanka. This will involve the integration of the SFD® survey data with all existing Geological & Geophysical data, (which includes regional seismic data), that is available for the Mannar Basin.

The revenue from the “Project SHINE” to NXT is estimated to be approximately US$29 million, of which US$21 million relates to SFD® services. Work is anticipated to start within the next 3 – 6 months, once final government approvals have been received by SHINE Quests FZC.

NXT also anticipates performing work in Malaysia, Mexico, Ghana, Senegal & Bolivia within the next 6 – 18 months.

NXT has also been working diligently on making gains with several other prospects globally and are in discussions with their respective NOC’s. Further, NXT has also been working with E&P companies who have assets in Africa and have indicated their interest in using the SFD ^® method to help evaluate their prospects. We believe these organizations view SFD ^® as an essential tool to achieve cost and time efficiencies.

Intellectual Property (“IP”) and Research & Development (“R&D”)

We have made significant progress in the development of algorithms to model the SFD® signal. We believe that this will enable NXT to create software to enhance and accelerate SFD® data interpretation as well as assisting clients in the understanding of SFD® recommendations. The end goal will be for the client to independently interpret SFD data.

We have completed the testing of the upgraded SFD® Data Acquisition System. This system will be used on all future SFD® survey projects. The new system is more reliable, compact, and expandable to acquire larger SFD® datasets. It also eliminates the dependency on custom operating systems. The new system was completed in 2016 and the additions to Property and Equipment include approximately $30,000 of computer software and hardware that was purchased for this new system.

Initiatives to expand and protect our IP (including patenting and new R&D initiatives) continued in 2016. Squire Patton Boggs LLP, a United States (“US”) based leader in IP protection, has been advising on our IP strategy, including the prior filing of an initial US provisional patent application in May 2012. In November 2014, NXT filed a related patent amendment submission in the US and since that time has undertaken new patent applications in select strategic international markets. In January 2017 NXT was awarded the first international patent from Russia and we believe we have successfully defended all questions raised to date by other international patent examiners and now await the outcome of their deliberations.

Selected Annual Financial Information

		2016	2015	2014
Survey revenue		$ 1,447,269	$ 17,422,151	$ 3,913,367
Net income (loss)		(9,099,562)	10,540,228	(1,563,361)
Net income (loss) per share ⁽¹⁾
	Basic	(0.17)	0.22	(0.04)
	Diluted	(0.17)	0.21	(0.04)

Net cash flow from (used in) operating activities		(7,587,614)	6,984,922	(3,581,186)

Cash and short-term investments		1,943,587	9,141,281	5,224,065
Total assets		28,689,166	39,079,903	6,049,103
Long term liabilities		264,775	300,462	50,000

⁽¹⁾ in periods with a loss, the Diluted total excluded the 8,000,000 outstanding convertible preferred shares, as their effect is anti-dilutive.

Summary of Quarterly Results

A summary of operating results for each of the trailing 8 quarters (including a comparison of certain key categories to each respective prior quarter) follows. The extent of the profit or loss each quarter is mainly due to the timing and the number of SFD ^® survey contracts that have been completed or are underway, and variances in such non-cash items as stock based compensation expense ("SBCE"), which can occasionally be a significant expense in any given quarter Also in Q3-15, upon conversion of the outstanding preferred shares, NXT permanently acquired the hydrocarbon rights to the SFD technology and recorded a significant intellectual property asset, which is being amortized (a non-cash expense) over a 15 year period.

	Q4-2016	Q3-2016	Q2-2016	Q1-2016
	Dec 31, 2016	Sept 30, 2016	June 30, 2016	Mar 31, 2016
Survey revenue	$ -	$ -	$-	$ 1,447,269
Net income (loss)	(2,356,848)	(2,142,834)	(2,643,938)	(1,955,942)
Income (loss) per share – basic	(0.04)	(0.04)	(0.05)	(0.04)
Income (loss) per share – diluted	(0.04)	(0.04)	(0.05)	(0.04)

	Q4-2015	Q3-2015	Q2-2015	Q1-2015
	Dec 31, 2015	Sept 30, 2015	June 30, 2015	Mar 31, 2015
Survey revenue	$ 17,422,151	$ -	$ -	$ -
Net income (loss)	15,523,601	(1,878,210)	(1,586,991)	(1,518,172)
Income (loss) per share – basic	0.29	(0.04)	(0.04)	(0.03)
Income (loss) per share – diluted	0.29	(0.04)	(0.04)	(0.03)

Q4-16 to Q3-16 comparison – NXT had survey revenue of $nil ($nil in Q3-16), survey costs (related to overseas branch costs, equipment test flights and aircraft maintenance costs) of $9,998 ($200,443 in Q3-16), and SBCE of $287,500 ($218,000 in Q3-16).

Q3-16 to Q2-16 comparison – NXT had survey revenue of $nil ($nil in Q2-16), survey costs (related to overseas branch costs, equipment test flights and aircraft maintenance costs) of $200,443 ($157,365 in Q2-16), and SBCE of $218,000 ($135,000 in Q2-16).

Q2-16 to Q1-16 comparison – NXT had survey revenue of $nil ($1,447,269 in Q1-16), survey costs (related to overseas branch costs, equipment test flights and aircraft maintenance costs) of $157,365 ($789,379 in Q1-16), and SBCE of $135,000 ($150,000 in Q1-16).

Q1-16 to Q4-15 comparison – NXT had survey revenue of $1,447,269 ($17,422,151 in Q4-15), survey costs, net of $789,379 ($5,070,023 in Q4-15), and SBCE of $150,000 ($490,000 in Q4-15), amortization expense of $514,258 ($523,760 in Q4-15), and a total net income tax expense of $275,997 (a net income tax recovery of $5,415,933 in Q4-15).

Q4-15 to Q3-15 comparison – NXT had survey revenue of $17,422,151 ($nil in Q3-15), survey costs of $5,070,023 ($nil in Q3-15), SBCE of $490,000 ($169,000 in Q3-15), amortization expense of $523,760 ($146,828 in Q3-15), and a total net income tax recovery of $5,415,933 (income tax expense of $485,788 in Q3-15).

Q2-15 to Q1-15 comparison – NXT had survey revenue of $nil ($nil in Q1-15), survey costs of $228 ($25,440 in Q1-15), and SBCE of $228,000 ($194,000 in Q1-15).

Q4-14 to Q3-14 comparison – NXT had survey revenue of $nil ($nil in Q3-14), survey costs (related to equipment test flights and aircraft maintenance costs) of $33,221 ($54,472 in Q3-14), and SBCE of $186,000 ($191,000 in Q3-14).

Summary of Operating Results

NXT had a net loss of $2,356,848 for Q4-16 (net loss of $9,099,562 for 2016 YTD) as compared to a net income of $15,523,601 for the Q4-15 period (and net income of $10,540,228 for 2015 YTD).

In 2015 NXT delivered results on two separate survey projects flown in Bolivia, for which the final findings and recommendations reports were delivered in October, 2015 and January, 2016, resulting in completion of the projects.

		Q4-16	Q4-15	2016 YTD	2015 YTD	2014 YTD
Survey revenue		$ -	$ 17,422,151	$ 1,447,269	$ 17,422,151	$ 3,913,367

Expenses:
	Survey costs	9,998	5,070,023	1,157,185	5,095,691	431,518
	General and administrative	1,427,677	1,667,241	5,645,459	5,049,690	4,132,108
	Stock based compensation expense	287,500	490,000	790,500	1,081,000	658,000
	Amortization expense	548,168	523,760	2,104,864	704,943	67162
		2,273,343	7,751,024	9,698,008	11,931,324	5,288,788

Other expense (income):
	Interest expense (income), net	(2,411)	606	(17,254)	(13,910)	(50,824)
	Foreign exchange (gain) loss	(351)	(449,826)	272,713	(712,480)	(158,817)
	Intellectual property and other expenses	23,058	12,679	218,853	529,081	354,781
	Decrease in fair value
	of US$ Warrants	-	-	-		42,800
		20,296	(436,541)	474,312	(197,309)	187,940
Income (loss) before income taxes		(2,293,639)	10,107,668	(8,725,051)	5,688,136	(1,563,361)

Income tax expense (recovery)
	Current	63,209	1,407,067	374,511	1,970,908	-
	Deferred	-	(6,823,000)	-	(6,823,000)	-
		63,209	(5,415,933)	374,511	(4,852,092)	-

Net income (loss) for the period		(2,356,848)	15,523,601	(9,099,562)	10,540,228	(1,563,361)

SFD ^® survey operations - NXT applies the completed contract basis of revenue recognition, with survey revenue and expenses recognized in the quarterly period in which the overall survey recommendations report is delivered to our client and the obligation under the contract is fulfilled. In 2015, NXT completed Bolivia survey projects totaling US $13.2 million. An additional expansion project that was flown for Yacimientos Petroliferos Fiscales Bolivianos (YPFB) the National Oil Company of Bolivia, was delivered and completed in January, 2016, which resulted in US $1 million (for which one half had been billed and received to December 31, 2015) of revenue recognition in the Q1-16 period. The second half of the contract billing for this expansion project was issued and received in Q1-16.

Survey expenses in 2016 include the net costs related to maintaining our survey aircraft, which was acquired in December 2015. The aircraft is available for charter to third parties through our aircraft manager when it is not being used by NXT.

	Q4-16	Q4-15	2016 YTD	2015 YTD
Aircraft operations	213,694	-	620,854	-
Survey projects	(203,696)	2,573,877	536,331	5,095,691
Survey costs	9,998	2,573,877	1,157,185	5,095,691

General and administrative expense (“G&A”) - All salaries and overhead costs related to SFD ^® data interpretation staff are included in G&A, and not included with direct survey expenses. The categories of costs included in G&A are as follows:

	Q4-16	Q4-15	net change	% change
Salaries, benefits and consulting charges	$851,892	$ 719,371	$132,521	18.42%
Board, professional fees, & public company costs	218,584	257,573	(38,989)	-15.14%
Premises and administrative overhead	276,283	214,128	62,155	29.03%
Business development	63,228	118,744	(55,516)	-46.75%
Other	17,690	4,425	13,265	299.77%
Bonus Expense	-	353,000	(353,000)	100.00%
Total G&A	1,427,677	1,667,241	(239,564)	-14.37%

	2016 YTD	2015 YTD	net change	% change
Salaries, benefits and consulting charges	$3,192,304	$ 2,563,445	$628,859	24.53 %
Board, professional fees, & public company costs	908,086	881,299	26,787	3.04 %
Premises and administrative overhead	886,795	862,052	24,743	2.87%
Business development	589,300	369,087	220,213	59.66%
Other	68,973	20,807	48,166	231.49%
Bonus Expense	-	353,000	(353,000)	100.00%
Total G&A	5,645,459	5,049,690	595,769	11.80%

The overall net changes in G&A within the six individual expense categories noted above reflect several factors:

2016 salaries, benefits and consulting charges are higher than 2015 levels as NXT incurred termination fees of $280k in Q2-16. In Q4-16 a SR&ED tax credit in the amount of $44,859 was received following a claim relating to 2014 wages for NXT staff undertaking qualifying development work and therefore was netted against salaries and wages.

2015 YTD- 2016 YTD business development expenses increased resulting from an extensive marketing campaign initiated and carried out by senior members of NXT. A decrease is noted in Q4-16 compared to Q4-15 due to a lower number of customer visits, however activity is expected to increase again in 2017.

Premises and administrative overhead has shown a slight increase in spending from 2015 YTD to 2016 YTD due to the full year of rent on the new premises.

Board, professional and legal fees, were higher in 2016 primarily due to investor relations activities and additional legal and regulatory charges arising from moving onto the TSX from the TSX-V. A decrease is noted in Q4-16 compared to Q4-15 due to a decrease in director fee costs as certain directors received their compensation in the form of stock options that are expensed through the Stock Based Compensation Expense as well as decreased costs incurred relating to the NXT website.

Other costs increased in 2016 as a result of income tax expense of $39k, as well as consulting fees totaling $24k for the year. These costs relate to the closure of the Columbian branch at the end of 2016.

No bonus pools were accrued during the year.

Stock Based Compensation Expense (“SBCE”) - this expense varies in any given quarter or year, as it is a function of several factors, such as the number of stock options issued in the period, and the period of amortization (based on the term of the contract and / or number of years for full vesting of the options, which is normally 3 years) of the resultant expense. Also, SBCE is a function of periodic changes in the inputs used in the Black-Scholes option valuation model, such as volatility in NXT's trailing share price.

There was a lower average number of options outstanding in the 2016 YTD period (total of 3,321,001 as at the end of Q4-16 as compared to 3,462,835 at the end of Q4-15).

SBCE also includes expense related to the “Rights” which were issued in January 2014 (see discussion which follows in the “convertible preferred shares” section herein) as follows:

		Q4-16	Q4-15	2016 YTD	2015 YTD
SBCE recognized related to:
	Rights – grant in 2014	$-	$ 62,000		$244,000
	Rights – extension of term in 2015	-	210,000	-	210,000
		-	272,000	-	454,000
	Stock options	287,500	218,000	790,500	627,000
		287,500	490,000	790,500	1,081,000

In January 2014, NXT’s CEO (the “Grantor”) personally granted to various individuals “Rights” to acquire (at a fixed price of $1.77 per common share) a total of 1,000,000 of the common shares which were expected to become issued to him in 2015 upon the future conversion by NXT of the 8,000,000 convertible preferred shares he held.

A total of 795,000 of these Rights were granted in 2014 to certain NXT directors, officers, employees and consultants. In 2015, the initial 2-year term of all of the Rights was extended by one additional year, such that the Rights expired on December 31, 2016 and were not extended.

Even though these Rights are not an obligation of NXT, but solely of the Grantor, under US GAAP they are viewed as an additional form of “incentive” issued to certain of the holders, supplemental to NXT’s existing stock option plan. This resulted in NXT recognizing additional SBCE over the term of the “vesting” of the Rights, which was completed in 2015.

Interest income, net – includes interest income earned on short-term investments. The total amount on deposit was similar to 2015 levels.

Loss (gain) on foreign exchange - this total is caused by changes in the relative exchange values of the US$ and Cdn$. For example, when the Cdn$ trades higher relative to the US$, cash held in US$ will decline in value, and this decline will be reflected as a foreign exchange loss in the period. NXT normally holds its cash and short-term investments in Cdn$ to reduce the effect of market volatility; however, we periodically are contractually obligated to hold certain restricted cash funds in US$ instruments to support performance bond commitments in certain foreign countries.

The value of net US$ monetary assets can vary widely each period, based on such factors as the extent of US$ revenue contracts in process, and the level of US$ cash and short-term investments on hand.

The valuation is also affected by the relative strength of the US$ at each period end (which fell in 2016 as compared to the end of 2015 (1.343 Cdn$ / US$ at the end of Q4-16 as compared to 1.384 Cdn$ / US$ as at Q4-15), resulting in both realized and unrealized net exchange movements on the net holdings of US$ cash and other working capital items. The foreign exchange loss for the year was primarily caused by the translation of assets and liabilities in both the Bolivian branch and the Canadian corporation which were held in in US$.

Intellectual Property and other expenses - this category includes primarily costs related to intellectual property filings and R&D activity related to the SFD ^® technology, and costs for certain non-recurring, “project” activities.

Other expense related to	Q4-16	Q4-15	2016 YTD	2015 YTD
Intellectual property and R&D	$20,694	$ 16,585	$60,143	$ 121,348
TSX Listing Project and Other net	2,364	1,077	158,710	7,629
Vertical model feasibility study	-	(4,983)	-	400,104
	23,058	12,679	218,853	529,081

In Q1-16, other expense included exchange listing fees and related professional fees incurred to allow NXT to apply to upgrade its stock exchange listing from the TSX-Venture Exchange, to the TSX. NXT’s new listing on the TSX, Canada’s premier exchange, was approved effective March 22, 2016.

In late 2014, NXT undertook a “Vertical” business model feasibility study that continued into 2015. The costs incurred in 2015 totaled $400,104 which included certain estimates of costs required to complete the study. These estimates were slightly overstated and hence a small credit was recognized in Q1-2016.

Intellectual property and related amortization expense - NXT finalized its acquisition of specific rights to utilize the proprietary SFD® technology from its inventor, NXT’s President & CEO, on August 31, 2015 with the conversion of his 8,000,000 preferred shares, on a 1 for 1 basis, into NXT common shares. NXT now has the exclusive ownership of and rights to utilize the SFD® intellectual property in global hydrocarbon exploration applications. After the conversion, NXT’s CEO continues to retain the rights to utilize SFD® in other potential field-of-use applications.

NXT’s intellectual property (“IP”) assets acquired in 2015 had a cost base of $25.3 million. The IP assets are being amortized on a straight line basis over a 15-year period (future amortization expense of $1,685,000 per year), and will also be subject to ongoing tests of potential impairment of the recorded net book value.

Amortization expense includes the following:

		Q4-16	Q4-15	2016 YTD	2015 YTD
Amortization of:
	Property and equipment	$126,799	$ 64,260	$420,131	$ 142,943
	Intellectual property	421,369	459,500	1,684,733	562,000
	548,168	523,760	2,104,864	704,943

Income tax expense - NXT periodically earns revenues while operating outside of Canada as a non-resident within certain foreign jurisdictions, and services rendered to clients in such countries may be subject to foreign withholding taxes, which are only recoverable in certain limited circumstances. Income tax expense for 2016 reflects such withholding taxes which were incurred on charges related to the Bolivia survey project.

	Q4-16	Q4-15	2016 YTD	2015 YTD
Foreign withholding taxes incurred	66,083	1,191,837	159,990	1,755,678
Corporate income tax expense – foreign	(2,874)	215,230	214,521	215,230
	63,209	1,407,067	374,511	1,970,908
Deferred tax recovery	-	(6,823,000)	-	(6,823,000)
Net tax expense (recovery)	63,209	(5,415,933)	374,511	(4,852,092)

Liquidity and Capital Resources

NXT's cash and cash equivalents plus short-term investments at the end of Q4-16 was $1.9 million.

Significant progress has been made in the recent past in developing our pipeline of opportunities to secure new revenue contracts. NXT's longer term success remains dependent upon our ability to continue to attract new client projects and expand the revenue base to a level sufficient to far exceed G&A expenses, and generate excess net cash flow from operations. Equity financings have been used on a limited basis in recent years to supplement working capital as required.

Risks related to having sufficient ongoing working capital to execute survey project contracts are mitigated through our normal practice of obtaining progress payments from prospective clients throughout the course of the projects, which often span 3 to 4 months. In addition, where possible, risk of default on client billings is mitigated through the use of export insurance programs offered via Export Development Canada (“EDC”).

EDC can also be utilized by NXT for financial support in the form of guarantees of specific bank letters of credit required to be issued by NXT as performance guarantees on international projects such as on the Bolivia project. This aids in reducing restrictions on working capital that is needed to initiate and undertake projects.

In order to enhance the short term cash flow of the business, NXT entered into a binding sale and leaseback agreement with a Calgary based international aircraft services organization on March 17 ^th , 2017. The terms of the agreement involve NXT selling its’ Cessna Citation aircraft that was purchased in 2015 for US$2,000,000 for the sum of US$2,300,000. NXT will lease the aircraft back for a minimum period of 60 months and retain all existing operating rights and obligations. Net proceeds to NXT from the sale will be approximately CAD $2,700,000, after payment of all commissions and fees. Net proceeds to NXT from the sale will be approximately CAD $2,700,000, after payment of all commissions and fees, and are expected to be received in April 2017. The monthly repayment is approximately US $40,000.

NXT had no secured debt, and total “net working capital” of $1.7 million as at Q4-16 as follows:

		December 31,	December 31,	net change
		2016	2015	as at Q4-16
Current assets (current liabilities):
	Cash and cash equivalents	$1,943,587	$ 9,141,281	$(7,197,694)
	Restricted cash	-	75,000	(75,000)
	Accounts receivable	205,952	810,400	(604,448)
	Prepaid expenses and deposits	166,802	260,397	(93,595)
	Accounts payable and accrued liabilities	(575,964)	(1,163,783)	587,819
	Income Taxes payable	(98)	(1,253,126)	1,253,028
	Current portion of capital lease obligation	(36,769)	(34,159)	(2,610)
Networking capital before the undernoted items		1,703,510	7,836,010	(6,132,500)
Additional asset (liability) amounts
	Work-in-progress	-	404,840	(404,840)
	Deferred revenue	-	(706,722)	706,722
		-	(301,882)	301,882
Networking capital		1,703,510	7,534,128	(5,830,618)

The $5.8 million year to date decrease in net working capital is primarily due to the net outflow of cash and the reduction in payables, work in progress and deferred revenue.

NXT applies the "completed contract" method of revenue recognition - revenues and related project costs are deferred until the period in which the survey contract is completed. At each period end, if applicable, deferred revenue (a current liability) represents progress billing amounts that are to be recognized in revenue in future periods. Similarly, work-in-progress ("WIP", a current asset) relates to deferred survey costs which will be expensed in future periods upon completion of the related contracts. As these amounts do not represent future cash inflows or outflows to the Company, they are excluded (in periods in which applicable) from NXT’s analysis of net working capital. There were no amounts recorded in WIP and deferred revenue at December 31, 2016, while the totals at December 31, 2015 relate to the Bolivia survey project which was underway.

The following summarizes NXT's net cash flows, and the total cash plus short-term investments held at the end of the period:

Cash flows from (used in):	Q4-16	Q4-15	2016 YTD	2015 YTD

Operating activities	$(1,442,066)	$ 4,637,938	$(7,587,614)	$ 6,984,922
Financing activities	79,018	(8,122)	464,811	327,824
Investing activities	1,388,822	(2,788,747)	527,496	(277,578)
Net source (use) of cash	25,774	1,841,069	(6,595,307)	7,035,168
Cash and cash equivalents, start of period	464,722	5,244,734	7,085,803	50,635
Cash and cash equivalents, end of period	490,496	7,085,803	490,496	7,085,803

Cash and cash equivalents	490,496	7,085,803	490,498	7,085,803
Short-term investments	1,453,091	2,055,478	1,453,091	2,055,478
Total	1,943,587	9,141,281	1,943,587	9,141,281

The overall net changes in cash balances in each of the periods noted above is a function of several factors including any inflows (outflows) due to changes in net working capital balances, and net of any cash transferred into / out of short-term investments. Further information on the net changes in cash, by each of the Operating, Financing, and Investing activities, is as follows:

Operating Activities

	Q4-16	Q4-15	2016 YTD	2015 YTD

Net income (loss) for the period	$(2,356,848)	$ 15,523,601	$(9,099,562)	$10,540,228
Total non-cash expense items	835,710	(5,809,830)	2,896,447	(4,948,061)

Change in non-cash working
capital balances	79,072	(5,075,833)	(1,384,499)	1,392,755
Cash used in operating activities	(1,442,066)	4,637,938	(7,587,614)	6,984,922

Financing Activities

In 2016, the only financing activity was related to proceeds from exercise of NXT stock options. Q4-16 reflects a $34,159 cash use for repayments of the capital lease obligation and $498,970 proceeds from the exercise of NXT stock options.

Investing Activities

The overall net cash source (use) noted above for 2016 and 2015 are as follows, and include the movement from cash out of and into short-term interest bearing investment balances, as follows:

		Q4-16	Q4-15	2016 YTD	2015 YTD

Purchase of property and equipment		$(3,139)	$ (2,803,884)	$(89,702)	$ (3,380,717)
Decrease (increase) in
	short-term investments	1,391,961	(510,558)	602,387	3,117,952
Decrease (Increase) in restricted cash -		26,000	75,000	(75,000)
Change in non-cash working
Capital balances		-	499,695	(60,187)	60,187
Cash from (used in) investing activities		1,388,822	(2,788,747)	527,498	(277,578)

The purchases of property and equipment in 2016 relate to IT equipment $30,381 of which was purchased for the new Data Acquisition System.

Restricted cash balances relate to bank security required for periodic project performance guarantees issued and corporate credit cards used. The restriction of $75,000 related to the corporate credit card program and it was removed in Q3-2016.

2015 – The overall net cash used in investing activities of $277,578 for 2015 reflects these components:

a source of $3,117,952 from a net decrease in cash invested in short-term investments.

a use of $75,000 related to an increase in restricted cash balances (issued for bank security purposes).

a source of $60,187 arising from an increase in non-cash working capital balances related to investing activities.

Contractual Commitments

Office premises lease

Fiscal year ending December 31
2017			535,485
2018			535,485
2019			535,485
2020			538,460
2021			547,382
			2,692,297
Thereafter, 2022 through 2025			2,052,683
			4,744,980

Additional Disclosures - Outstanding Securities

		as at	as at	as at
		March 29,	December 31,	December 31,
		2017	2016	2015

Shares issued and outstanding:
	Common shares	53,856,809	53,856,509	3,306,109
Common shares reserved for issue re:
	Stock options	3,321,001	3,321,001	3,462,835
		57,177,510	57,177,510	56,768,944

Other Transactions With Related Parties

For the three months		For the twelve months
ended December 31		ended December 31
2016	2015	2016	2015
$ 13,890	$ 59,694	$ 62,645	$ 100,598

Accounts payable and accrued liabilities includes a total of $10,443 ($62,048 as at December 31, 2015) payable to this law firm.

Critical Accounting Estimates

The key elements and assumptions are substantially unchanged from those described in NXT's annual audited consolidated financial statements as at and for the year ended December 31, 2015. The following is also important to note:

Revenue Recognition

Revenue earned on SFD ^® survey contracts (net of any related foreign sales taxes) is recognized on a completed contract basis. This method of revenue recognition is currently deemed appropriate given the complex nature of the end product that is delivered to the client - while the quantity of data acquisition can be measured based on actual line kilometers flown, the acquired SFD ^® data does not realize its full value until it is processed, interpreted in detail, and a recommendations report is generated and reviewed with the client's geological and geophysical staff.

All funds received or invoiced in advance of completion of the contract are reflected as unearned revenue and classified as a current liability on our balance sheet. All survey expenditures and obligations related to uncompleted SFD ^® survey contracts (including directly related sales commissions) are reflected as work-in-progress and classified as a current asset on our balance sheet. Upon completion of the related contract, unearned revenue and the work-in-progress is moved as appropriate to the statement of earnings (loss) as either revenue or survey cost. Survey costs do not include any salaries and overhead related to SFD ^® data interpretation staff (which is included in G&A expense) or amortization of property and equipment expense.

Changes in Accounting Policies Including Initial Adoption

No new accounting policies were adopted in 2016.

Future Accounting Policy Changes – Revenue recognition + Leases

In May 2014, the US Financial Accounting Standards Board (“FASB”) issued new guidance on accounting for “Revenue from Contracts with Customers”, which supersedes the current revenue recognition requirements and most industry-specific guidance. This new guidance will require that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. This new guidance will be effective from January 1, 2018, and early application is not permitted. There will be two methods in which the amendment can be applied: (1) retrospectively to each prior reporting period (which will include NXT’s fiscal years 2015 and 2016) presented, or (2) retrospectively with the cumulative effect recognized at the date of initial application. NXT is evaluating the effect of the future adoption of this new guidance, and although the review is not yet complete, indications are that there will be no material impact on the financial statements.

Risk Factors

NXT is exposed to numerous business related risks, some of which are unique to the nature of its operations. Many of these risks cannot be readily controlled.

Future Operations

NXT is still in the early stages of realizing wide-spread commercialization of its SFD ^® technology. Its ability to generate cash flow from operations will depend on its ability to service its existing clients and develop new clients for its SFD ^® services. Management recognizes that the commercialization phase can last for several years, and that it can have significant economic dependence on a small number of clients, which can have a material effect on the Company's operating results and financial position.

NXT anticipates that it will be able to generate both net income and cash from operations in future years based on its current business model; however this outcome cannot be predicted with certainty. The Company has a history of generating net losses and periodic shortages of working capital. The Company's consolidated financial statements do not include any adjustments to amounts and classifications of assets and liabilities that might be necessary should NXT be unable to generate sufficient revenues, net income and cash flow from operations in future years in order to continue as a going concern.

Steps to mitigate the risk of insufficient cash flow have been taken, please see the “Liquidity and Capital Resources” section above.

International operations

NXT conducts the majority of its operations in foreign countries, some of which it has not operated in before. This exposes NXT to various risks related to stability of political regimes, knowledge of the local customs, duties and other taxes, foreign currency and funds repatriation, the ability to access the relevant local services, and potential delays in commencing the projects.

Management and staff

NXT's success is currently largely dependent on the performance of a limited group of senior management and staff. The loss of the services of any of these persons could have an adverse effect on our business and prospects. There is no assurance that NXT can maintain the services of our complement of management, Directors, staff and other qualified personnel that are required to operate and expand our business.

Reliance on specialized equipment, and the protection of intellectual property

NXT currently has a limited number of SFD ^® survey sensors which are used in survey data acquisition operations. In addition, there is potential risk that the equipment could become damaged or destroyed during operations, become obsolete, or that a third party might claim an interest in our proprietary intellectual property. The costs of legal defense of our rights to the SFD ^® technology could be very significant.

Related party transactions

NXT may periodically enter into related party transactions with its Officers and Directors.

All related party transactions have the potential to create conflicts of interest that may undermine the Board of Director's fiduciary responsibility to NXT shareholders. NXT manages this risk of conflict of interest through maintenance of a strong independent Board of Directors. Six of the seven current Directors are independent. All significant transactions between Officers and or Directors of the Company are negotiated on behalf of NXT and voted upon by the disinterested Directors to protect the best interests of all shareholders.

Volatility in oil and natural gas commodity prices may affect demand for our services

NXT's customer base is in the oil and natural gas exploration industry, which is exposed to risks of volatility in oil and natural gas commodity prices. As such, demand for our services, and prospective revenues, may become adversely impacted by ongoing declines in oil and natural gas prices. The impact of price changes on our ability to enter into SFD ^® survey contracts cannot be readily determined. However, in general, if commodity prices decline significantly, our opportunity to obtain and execute SFD ^® survey contracts will also likely decline, at least in the short term.

Foreign currency fluctuations

NXT currently bills its revenues in US$ and occasionally local currencies (such as in Bolivia). We frequently hold cash in Cdn$ as well as in US$ and other foreign currencies (such as in Bolivia and Colombia) and are thus exposed to foreign exchange risk due to foreign currency fluctuations. Additionally, most of our operating expenses are incurred in Cdn$. We do not currently engage in currency hedging activities which can be used to mitigate this risk.

As NXT continues to expand into foreign markets, it may become exposed to additional foreign currency fluctuation risks, and currency hedging strategies will be utilized where appropriate.

Interest rate fluctuations

NXT periodically invests excess cash in short-term investments which generally yield fixed interest rates. Accordingly, NXT faces some risk related to volatility in interest rates, as interest income may be adversely affected by any material changes in interest rates.

Disclosure Controls and Procedures ("DCP") and
Internal Controls over Financial Reporting ("ICFR")

NXT's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") (together, the "Responsible Officers") are responsible for establishing and maintaining DCP, or causing them to be designed under their supervision, for NXT to provide reasonable assurance that material information relating to the Company is made known to the Responsible Officers by others within the organization, particularly during the period in which the Company's quarterly and year-end consolidated financial statements and MD&A are being prepared.

DCP and other procedures are designed to ensure that information required to be disclosed in reports that are filed is recorded, summarized and reported within the time periods specified by the relevant security authority in either Canada or the United States of America. DCP include controls and procedures designed to ensure that information required to be disclosed in our reports is communicated to management, including our Responsible Officers, to allow timely decisions regarding required disclosure.

The Company has established and maintains ICFR using the criteria that were set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). The control framework was designed or caused to be designed under the supervision of the Company’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP. During the year ended December 31, 2016, there was no change in the Company's ICFR that has materially affected or is reasonably likely to materially affect our ICFR.

However, in an evaluation of the effectiveness of the Company's DCP as defined under the rules adopted by the Canadian securities regulatory authorities and by the US SEC, the Company’s Responsible Officers concluded that there are material weaknesses in the Company’s ICFR that have a direct impact on the Company’s DCP:

due to the limited number of staff, it is not feasible to achieve adequate segregation of incompatible duties. NXT mitigates this deficiency by adding management and Audit Committee review procedures over the areas where inadequate segregation of duties are of the greatest concern, and

NXT does not have a sufficient level of staff with specialized expertise to adequately conduct separate preparation and a subsequent independent review of certain complex or highly judgmental accounting issues. These complex areas have included accounting for income taxes and equity related transactions. NXT mitigates this deficiency by preparing financial statements with their best judgments and estimates of the complex accounting matters and relies on reviews by management, external consultants and the Audit Committee for quality assurance.

As NXT continues to expand operations, we seek to reduce these risks by adding additional staff resources and the use of out-sourced consultants as financial resources permit.

Notwithstanding NXT’s efforts to mitigate the risks associated with the above mentioned deficiencies, the CEO and CFO concluded that the Company's ICFR are not effective and as a result its DCP are not effective as at December 31 2016. NXT reached this conclusion based upon their assessment that there is more than a remote likelihood that its ICFR will not prevent or detect material misstatements if they should exist in our consolidated financial statements.

There are inherent limitations on the ability of the Responsible Officers to design and implement DCP and ICFR on a cost effective basis, which may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.

It should be noted that a control system, including the Company’s DCP and ICFR procedures, no matter how well conceived, can provide only reasonable, but not absolute assurance that the objectives of the control system will be met and it should not be expected that the DCP and ICFR will prevent all errors or fraud.

Additional Information

For additional information on NXT Energy Solutions Inc. please consult our website at www.nxtenergy.com, or the SEDAR website at http://www.sedar.com.