NXT Energy Solutions Inc. - Quarter Report: 2001 March (Form 10-Q)

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in Part I, Item 1, of this report. The information set forth below in this report is current as of the date of this report, May 11, 2001, unless an earlier or later date is indicated.

All references to "dollars" in this report refer to United States or U.S. dollars unless specific reference is made to Canadian or Cdn. dollars. For information relative to currency conversion, see note 2(m) to our consolidated financial statements. The rate of exchange of Canadian dollars to United States dollars as of March 31, 2001, was Cdn. $1.5763 to U.S. $1.

NXT is a technology-based reconnaissance exploration company which utilizes our proprietary, quantum physics-based, stress field detection or "SFD" remote-sensing airborne survey technology, which we refer to as our "SFD survey system," to quickly and inexpensively identify and high-grade oil and natural gas prospects. We conduct our reconnaissance exploration activities, as well as land acquisition, drilling, completion and production activities to exploit prospects identified using our SFD technology, through our wholly-owned subsidiaries-NXT Energy USA and NXT Energy Canada, our two exploration subsidiaries which focus on exploration acquisition and development efforts in the United States and Canada, respectively; and NXT Aero USA and NXT Aero Canada, our two aircraft operation subsidiaries which operate our aircraft on survey missions for NXT Energy USA and NXT Energy Canada, respectively. NXT, in turn, focuses on research and development efforts to improve the efficacy of our SFD survey system.

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We had no oil and gas working interest or royalty revenues for our three-month interim fiscal periods ended March 31, 2001 and March 31, 2000.

We incurred an operating loss of $630,658 for our three-month interim period ended March 31, 2001, as compared to $603,728 for the corresponding interim period in fiscal 2000, representing a $26,930 or 4.5% overall increase. The nominal increase in our operating loss for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was primarily attributable to the following changes in expense:

• a $65,474, or 101.3%, increase in research and development expense from $64,641 to $130,115;

• a $20,775 charge to reflect impairment in our oil and natural gas properties; and

• a $2,558, or 3.5%, increase in amortization and depreciation from $74,021 to $76,579; and

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partially offset by

• a $32,967, or 39.2%, decrease in survey support expense from $84,049 to $51,082;

• a $15,376, or 28.8%, decrease in survey operations and data analysis expense from $53,333 to $37,957; and

• a $13,534, or 4.1%, decrease in administrative expense from $327,684 to $314,150;

Relative Changes In Research and Development Expense

The $65,474 or 101.3% increase in research and development expense for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was principally attributable to salaries associated with additional research and development staffing as well as a greater allocation of existing personnel toward research and development activities as we focused increased efforts to improve the operation and efficacy of our SFD survey system.

Impairment Of Oil And Natural Gas Properties

The $20,775 impairment of oil and natural gas properties for our three-month interim period ended March 31, 2001 relates to our write-down of the cost of drilling and completing one well in Canada which was non-commercial. Since we do not have proved reserves to date with respect to the prospect that contained this well, these costs are fully expensed notwithstanding our continuing active exploration and development activities with respect to other wells in this prospect.

The $2,558 or 3.5% increase in amortization and depreciation for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was primarily attributable to additional depreciation and amortization arising as the result of the acquisition of our second survey aircraft in mid-2000.

Survey support expense generally relates to costs-including allocable salaries-to:

• equip, maintain and hangar our survey aircraft;

• conduct field evaluations designed by our joint venture partners to evaluate our SFD technology (after netting any costs which our joint venture partners are required to reimburse us for); and

• develop, organize, staff and train our survey and interpretation operational functions.

Excluded from survey support expense are costs capitalized as property and equipment (including costs relating to our survey aircraft) and costs capitalized as exploration costs related to oil and gas prospects identified through our commercial SFD survey activities.

The $32,967 or 39.2% decrease in survey support expense for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was primarily attributable to lower costs to maintain our survey aircraft for the period, partially offset by increased hangarage costs.

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Relative Changes In Survey Operations And Data Analysis Expense

Survey and data analysis expenditures consist primarily of any costs we incur conducting commercial SFD survey activities. These costs can generally be broken down into the following two components:

• aircraft operating costs, travel expenses and allocable salaries of our personnel while on survey assignment (after netting any costs our joint venture partners are required to reimburse us for); and

• allocable salaries incurred by our personnel interpreting SFD data.

Excluded from survey and data analysis expense are costs capitalized as property and equipment (including costs relating to our survey aircraft) and costs capitalized as exploration costs related to oil and gas prospects identified through our commercial SFD survey activities.

Our survey and data analysis expense for our three-month interim period ended March 31, 2001 was $37,957 as compared to $73,611 over the corresponding interim period in fiscal 2000, before taking joint venture partner reimbursements into consideration. Our survey and data analysis expense for our three-month interim period ended March 31, 2001 was $37,957 as compared to $53,333 over the corresponding interim period in fiscal 2000, after taking joint venture partner reimbursements into consideration. Our joint venture partner reimbursement for our three-month interim period ended March 31, 2001 was $0 as compared to $20,278 for the corresponding interim period in fiscal 2000.

The decrease in survey and data analysis expense for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was primarily attributable to the increased capitalization of costs associated with exploration prospects as well as a reduction in non-SFD survey and interpretation activities for our joint venture partners in that period, partially offset by an increase in SFD survey and interpretation activities in that period for our own account.

The $13,534 or 4.1% decrease in our administrative expense for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was primarily attributable to the stabilization of our general and administrative staffing and space requirements over the past year.

We earned $42,988 in interest income for our three-month interim period ended March 31, 2001, as compared to $112,830 for the corresponding interim period in fiscal 2000. The decrease in interest income for our three-month interim period ended March 31, 2001 was attributable to lower cash balances in our accounts as a result of our application of available cash for operational and capital requirements.

• Interest Expense

We incurred $38,839 in interest expense for our three-month interim period ended March 31, 2001, as compared to $0 for the for the corresponding interim period in fiscal 2000. Our interest expense for our three-month interim period ended March 31, 2001 related to interest due on a $1.6 million asset-based loan collateralized by our Piaggio P180 Avanti aircraft.

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Our cash flow requirements from our inception as NXT Energy USA (October 20, 1995) through March 31, 2001 were funded principally from:

• a private placement in May 1996 of 975,000 shares of our common stock for total gross proceeds of $975,000,

• a private placement in May 1996 of 975,000 shares of our common stock for total gross proceeds of $975,000,

• loans to our company in the amount of $1,000,000 in January 1997, and the subsequent conversion of the outstanding balance of principal and accrued interest of these loans in the amount of $1,120,000 into 411,764 shares of our common stock in February 1998;

• a private placement in April 1998 of 800,000 shares of our convertible series "A" preferred stock and 200,000 common stock purchase warrants for total gross proceeds of $6,000,000;

• a private placement in May 1999 of 400,000 shares of our common stock for total gross proceeds of $6,000,000;

• the exercise on March 31, 2000 of warrants to purchase 200,000 shares of our common stock at an exercise price of $7.50 per share, resulting in gross proceeds of $1,500,000; and

• the exercise of employee stock options during fiscal 2000 and fiscal 1999 resulting in aggregate gross proceeds of $953,854.

We also borrowed $1.6 million for working capital purposes on November 6, 2000 pursuant to an asset-based loan collateralized by our Piaggio P180 aircraft. The principal and interest on this loan, which accrues at the rate of 9.65% per annum, are repayable in 156 equal installments of $18,037 each, commencing January 1, 2001 with the last payment due on December 1, 2013. The loan contains no restrictive or financial ratio covenants, although it does allow the lender to accelerate the loan in the event of our insolvency or bankruptcy or any adverse change in our financial condition, or in the event the estimated retail value of the secured collateral falls anytime to less than 50% of the outstanding balance of the loan.

Our cash position as of March 31, 2001 was $3,219,806, as compared to $4,279,279 as of December 31, 2000. Our cash position as of March 31, 2000 was $9,375,858, as compared to $9,068,723 as of December 31, 1999. We maintain the bulk of our cash in a United States government and government-backed securities money-market account.

The $1,059,473 decrease in our cash position for our three-month period ended March 31, 2001 was attributable to $390,430 in cash used in operating activities, $521,383 in cash used in investing activities, $15,160 in cash used through financing activities and a $132,500 comprehensive loss due to the effect of exchange rate changes. The $307,135 increase in our cash position for our three-month period ended March 31, 2000 was attributable to $1,632,140 in cash raised through financing activities, partially offset by $686,574 in cash used in operating activities, $629,729 in cash used in investing activities, and a $8,702 comprehensive loss due to the effect of exchange rate changes.

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Our operating activities required cash in the amount of $390,430 for our three-month period ended March 31, 2001, as compared to cash requirements of $686,574 for our three-month period ended March 31, 2000. The $390,430 in cash used in operating activities for our three-month period ended March 31, 2001 reflected our net loss of $624,957 for that period, as decreased for non-cash deductions and a net increase in non-cash working capital balances. The $686,574 in cash used in operating activities for our three-month period ended March 31, 2000 reflected our net loss of $490,898 for that period, as decreased for non-cash deductions and a net increase in non-cash working capital balances.

We used $15,160 in cash from financing activities for our three-month period ended March 31, 2001, as compared to raising $1,621,140 in cash from financing activities for our three-month period ended March 31, 2000. The $15,160 in cash used through financing activities for our three-month period ended March 31, 2001 was due to principal repayments of loan proceeds from an asset-based loan collateralized by our Piaggio P180 Avanti aircraft. The $1,632,140 in cash raised through financing activities for our three-month period ended March 31, 2000 was principally comprised of $1,500,0000 in gross proceeds from the exercise of warrants and $132,140 in gross proceeds from the exercise of employee stock options.

We used cash in the amount of $521,383 for investing activities for our three-month period ended March 31, 2001, as compared to $629,729 in cash used for investing activities for our three-month period ended March 31, 2000. The principal use of cash for our three-month period ended March 31, 2001 was to acquire drilling rights and seismic data in exploratory blocks pursuant to working interest elections ($538,531), while the principal use of cash for our three-month period ended March 31, 2000 was to acquire drilling rights in exploratory blocks pursuant to working interest elections ($331,528) and to acquire property, equipment and software ($105,496).

Due to the nature and early stage of development of our SFD technology and also due to the practices of the oil and gas industry and their experience and attitudes toward new and unproven technologies, the only practical way for NXT to prove-out the efficacy of our SFD technology, achieve industry acceptance and to generate revenues and profits is to participate in drilling projects either through our joint-venture partners or on our own account. We believe that we would need to participate in a minimum of 30 prospects in order to statistically prove-out the efficacy of our SFD technology. Since costs to acquire or conduct ancillary seismic, to acquire drilling rights, and to drill, case and complete wells and to tie-them into sales or gathering systems are very expensive and can easily exceed $1 million per well, the overall cost to prove-out our SFD technology over at least 30 prospects will be fairly high and will require significant capital resources, particularly if NXT as opposed to our joint venture or other drilling partners is required to bear a significant portion or all of these costs.

We have approximately $3.22 million in cash on hand to fund our administration, operational and research and development requirements and to contribute toward our proposed fiscal 2001 drilling program. Of this amount, approximately $500,000 is dedicated toward the completion of pending projects.

NXT estimates that it will need to raise additional capital in the range of between $3 million and $5 million to facilitate our proposed fiscal 2001 drilling program, whether through our participation in exploration projects under our joint venture agreements or on our own account. The exact cost of our fiscal 2001 drilling program, which includes a number of recently identified new projects, will vary based upon a variety of factors, including our ability to acquire drilling rights. We would reduce our fiscal 2001 drilling program to a number of core prospects, principally those in Wyoming, to the extent sufficient funds are not available to facilitate the entire program. If a sufficient number of prospects are successfully drilled in our fiscal 2001 drilling program, we should be able to finance further levels of exploration, acquisition and drilling activities through available cash flow or financings funded, in part, through our anticipated base of proven reserves. If we do not invest in any proposed drilling prospects, we would likely reduce the level of our staff and operations, cut-back or eliminate our participation in drilling projects, and liquidate a portion of our assets. At that point we would likely focus our efforts on further improving and validating our SFD technology and our interpretive functions, including conducting additional SFD survey in order to further develop statistical data bases to validate these interpretive functions, until such time as we can use these efforts to raise sufficient additional capital to reestablish commercial participations in exploratory projects and to otherwise ramp-up operations. Based upon our current cash position, we believe that this minimal level of operations could be maintained for approximately 24 months from the date of this report. Our inability to raise sufficient additional working capital in the longer-term would likely force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

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We are currently evaluating a proposed working interest investment together with CamWest in two SFD prospects which CamWest is currently negotiating to acquire-one in the Green River basin and the other in the Williston basin. Our decision to participate will ultimately be based upon CamWest's ability to acquire drilling rights and our evaluation of the correlation of our SFD data with available geological and geophysical data. While an investment in the prospects would be in the range of $1.2 million to $2 million and would consume the bulk of our available capital, we also believe these prospects have the potential to generate sufficient revenues to cover all of our current operating costs going forward, and that an investment in these prospects may be warranted notwithstanding their risk. If successful, we could also raise additional capital through levering these prospects, which we could apply toward additional exploration efforts. Depending in part upon our decisions with respect to, or the outcome of, these two opportunities, we will likely also have opportunities to invest in other prospects under our other joint ventures that may have similar investment profiles, although these opportunities are not as advanced as the two opportunities under current consideration. We can give you no assurance, in any event, that any of these prospects if acquired and drilled will be commercial, or if commercial will generate sufficient revenues to cover our operating or other exploration costs. Should this be the case, we would be forced, unless we can raise sufficient additional working capital, to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

Since we have insufficient capital resources as of the date of this report to fully fund all or a significant portion of our proposed fiscal 2001 drilling program, and since we also do not expect meaningful revenues from existing wells to come on-line, if at all, in the near future, we will seek to raise the necessary funds to facilitate this program in one or more increments through project or drilling fund financing, public or private sales of debt or equity securities, debt financing or short-term loans, or a combination of the foregoing. We cannot give you any assurance that we will be able to secure the additional capital we require to fully or partially fund our proposed fiscal 2001 drilling program, or on terms which will not be objectionable to our company or our shareholders, including substantial dilution.

We recorded a $132,500 foreign currency translation loss for the first three months of fiscal 2000 as a comprehensive loss item on our statements of loss and shareholders' equity (deficit) in consolidating our accounting records for financial reporting purposes as a result of the fluctuation in United States-Canadian currency exchange rates during that period. We anticipate that our exposure to significant foreign currency gains or losses on our accounting records will increase as we invest a greater portion of our United States-dollar denominated cash reserves into our Canadian operations and properties through intercompany advancements. We cannot give you any assurance that our future operating results will not be similarly adversely affected by currency exchange rate fluctuations. See Part I, Item 3, of this report captioned "Quantitative and Qualitative Disclosure About Market Risk," for a description of other aspects of our company that may be potentially affected by foreign exchange fluctuations.

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We do not believe that our operating results were adversely affected during the first three months of fiscal 2001 or fiscal 2000 by inflation or changing prices.

Our future results of operations or financial condition may be affected by the uncertainties and other risk factors enumerated below as well as those presented elsewhere in this report and in other reports we periodically file with the Securities and Exchange Commission, including our annual report on Form 10-K for the fiscal year ended December 31, 2000, and should be considered in context with the various disclosures concerning our company presented elsewhere herein and therein.

We are a developmental stage enterprise since we have not generated any oil or gas revenues from prospects we have drilled to date. Our failure to generate revenues and ultimately profits would:

• in the shorter-term, adversely affect our ability to:

• complete pending drilling and development projects and fund our current operational requirements and our proposed fiscal 2001 drilling program;

• raise additional working capital; and

• force us to reduce our level of operations; and

• in the longer-term, force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

Decisions relating to whether any of the wells we have completed in Wyoming or Alberta will be tied-into gathering systems will not be made until the second or third quarters of fiscal 2001 at the earliest, and the earliest we would receive revenues from these wells-assuming any of these wells were indeed tied-into gathering systems-would be the second half of fiscal 2001. Given that decisions relating to tying-in these wells and otherwise funding the development of the underlying fields resides with our joint-venture partners, and also given the issues and complexities inherent to our partners in tying-in these wells and otherwise funding the development of the underlying fields, we can give you no assurance as to when or whether any of these wells will be tied-into gathering systems or the underlying fields developed. We have, as a result of our lack of revenues, incurred cumulative net losses (after taking comprehensive gains and losses into consideration) in the amount of $7,574,216 from our inception in October 1995 through March 31, 2001, and we anticipate that we will continue to incur substantial operating losses for the foreseeable future unless and until we are able to bring satisfactory producing wells and fields on-line. We cannot give you any assurance that we will generate revenues or profits in the near future or at all.

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As previously discussed in detail in that part of this section captioned "-Liquidity And Capital Resources-Capital Requirements Going Forward," NXT will need to raise, after taking our administration, operational and research and development requirements into consideration, a significant amount of additional capital in order to facilitate our proposed fiscal 2001 drilling program. As also discussed in that section, we cannot give you any assurance that we will be able to secure the additional capital we require to fully or partially fund our proposed fiscal 2001 drilling program, or on terms which will not be objectionable to our company or our shareholders, including substantial dilution. If we are not able to finance all or a meaningful portion of our fiscal 2001 drilling program, we would likely cut-back or eliminate our participation in drilling projects, liquidate a portion of our assets, and significantly reduce the level of our staff and operations. Our inability to raise sufficient additional working capital in the longer-term would likely force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

Our future success is dependent upon our ability, through utilization of our SFD technology, to successfully identify commercially viable hydrocarbon accumulations for development by our joint venture partners or for our own account. Based on our business plan, we will be dependent on:

• the efficacy of our SFD technology in identifying SFD prospects; and

• the cooperation of, and capital investment by, our joint venture partners in exploiting these prospects, or our ability to independently raise the funds necessary to exploit these prospects.

Although we believe that our SFD technology has proven its prospective ability as a geologic structural identification tool, we nevertheless cannot give you any assurances that our SFD technology will be able to consistently locate hydrocarbons or oil and gas prospects, or that these prospects will be commercially exploitable. We also cannot give you any assurances that we will be able to consistently discover commercial quantities of oil and gas, or that our joint venture partners will successfully acquire and drill properties at low finding costs.

We will be reliant, at least in the near-term, upon our joint venture partners for opportunities to participate in exploration prospects, through overriding royalties or equity participation on a working interest basis from producing SFD prospects. We exclusively focus on exploration and the review and identification of viable prospects through our SFD technology, and rely upon our joint venture partners to provide and complete all other project operations and responsibilities, including land acquisition, seismic, drilling, marketing and project administration. As a result, we have only a limited ability to exercise control over the selection of prospects for development, drilling or production operations, or the associated costs of such operations, and the timeliness of our partners in pursuing or carrying-out those activities. The success of each project will be dependent upon a number of factors which are outside our control, or controlled by our joint venture partners as the project operator, in accordance with the applicable agreements between our company and the joint venture partners. These factors include:

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• the selection and approval of prospects for lease/acquisition and exploratory drilling;

• obtaining favorable leases and required permitting for projects;

• the availability of capital resources of the joint venture partner for land acquisition and drilling expenditures;

• the timing of drilling activity, and the economic conditions at such time, including then prevailing prices for oil and gas; and

• the timing and amount of distributions from the production.

Our reliance on our joint venture partners, and our limited ability to directly control project operations, costs and distributions could have a material adverse effect on the realization of return from our interest in projects, and on our overall financial condition.

Pursuant to our business plan, our revenues and cash flow will, at least in the near-term, be principally dependent upon the success of drilling and production from prospects in which we participate through agreements with our joint venture partners in the form of an overriding royalty or a working interest or other participation right. The success of these prospects will be determined by the location, development and production of commercial quantities of hydrocarbons. Exploratory drilling is subject to numerous risks, including the risk that no commercially productive oil and gas reservoirs will be encountered. The cost to our joint venture partners to drill, complete and operate wells is often uncertain, and drilling operations may be curtailed, delayed or canceled as a result of a variety of factors including unexpected formation and drilling conditions, pressure or other irregularities in formations, equipment failures or accidents, as well as weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment. Our partners' inability to successfully locate and drill wells that produce commercial quantities of oil and gas would have a material adverse effect on our business, financial position and results of operations.

Our future operating results may fluctuate significantly depending upon a number of factors including industry conditions, prices of oil and gas, rate of drilling success, rates of production from completed wells and the timing of capital expenditures. This variability could have a material adverse effect on our business, financial condition and results of operations. In addition, any failure or delay in the realization of expected cash flows from initial operating activities could limit our future ability to continue exploration and to participate in economically attractive projects.

• Volatility of oil and natural gas prices could have a material adverse effect on our business

It is impossible to predict future oil and natural gas price movements with any certainty, as they have historically been subject to wide fluctuations in response to a variety of market conditions, including:

• relatively minor changes in the supply and demand for oil and natural gas,

• economic, political and regulatory developments, and

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• competition from other sources of energy.

Any extended or substantial decline in oil and gas prices would have a material adverse effect on:

• our ability to negotiate favorable joint ventures with viable industry participants;

• our ability to acquire drilling rights;

• the volume of oil and gas that could be economically produced by the joint ventures in which we participate;

• our cash flow; and

• our access to capital.

We do not currently intend to engage in hedging activities (although we reserve the right to do so in the future), and may be more adversely affected by fluctuations in oil and gas prices than other industry participants that do engage in such activities. Our business, results of operations and financial condition would be materially and adversely affected by adverse changes in prevailing oil and gas prices. See Part I, Item 3, of this report captioned "Quantitative And Qualitative Disclosures About Market Risk," for additional discussion of market risks relating to oil and gas price fluctuations.

• The intense competition that is prevalent in the oil and gas industry could have a material adverse effect on our business

We compete directly with independent, technology-driven exploration and service companies, and indirectly (through our joint venture partnerships) with major and independent oil and gas companies in our exploration for and development of commercial oil and gas properties. We will experience competition from numerous oil and gas exploration competitors offering a wide variety of geological and geophysical services. Many of these competitors have substantially greater financial, technical, sales, marketing and other resources than we do, and may be able to devote greater resources to the development, promotion and sales of their services than our company. We cannot give you any assurance that our competitors will not develop exploration services that are superior to our SFD technology, or that these technologies will not achieve greater market acceptance than our SFD technology. Increased competition could impair our ability to attract viable industry participants, and to negotiate favorable participations and joint ventures with such parties, which could materially and adversely affect our business, operating results and financial condition.

The oil and gas industry is highly competitive. Many companies and individuals are engaged in the business of acquiring interests in and developing oil and gas properties in the United States and Canada, and the industry is not dominated by any single competitor or a small number of competitors. Our joint venture partners will compete with numerous industry participants for the acquisition of land and rights to prospects, and for the equipment and labor required to drill and develop those prospects. Many of these competitors have financial, technical and other resources substantially in excess of those available to us or our joint venture partners. These competitive disadvantages could adversely affect our or our joint venture partners' ability to participate in projects with favorable rates of return.

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• There is limited market acceptance for our SFD technology, and it must compete with established geological and geophysical technologies which have already achieved market acceptance

There is limited market acceptance for our SFD technology, and it must compete with established geological and geophysical technologies which have already achieved market acceptance. As is typical in the case of any new technology, demand and market acceptance for our SFD technology is subject to a high level of uncertainty and risk. Because the market for our SFD technology is new and evolving, it is difficult to predict the future growth rate, and the size of the potential market. We cannot give you any assurance that a market for our exploration technology will develop, or be sustainable. If the market fails to develop, or if our exploration technology does not achieve or sustain market acceptance, our business, results of operations and financial condition would be materially and adversely affected.

• Our inability to retain our key managerial, geological and geophysical, and research and development personnel could have a material adverse effect on our business

Our success depends to a significant extent on the continued efforts of our senior management team, which currently is composed of a small number of individuals, including Mr. George Liszicasz, the inventor of our SFD technology who is our Chief Executive Officer and who is responsible for the continuing development of our SFD technology; Mr. Daniel C. Topolinsky, our President, who handles strategic decision making and our joint venture partners; and Mr. James R. Ehrets, our Executive Vice President of Operations, who handles operations and supervises SFD interpretation activities. The loss of any of these individuals would likely have a material adverse effect on our business, results of operations and financial condition. While we have entered into employment agreements Messrs. Liszicasz, Topolinsky and Ehrets, these executive officers would nevertheless not be prevented from working for other companies in the oil and gas industry so long as they did not employ SFD technology should they elect to terminate their employment with NXT. We also do not carry key person life insurance policies any of our executive officers.

Our success also depends, to a lesser extent, on the continued efforts of our geological and geophysical interpretive and SFD research and development teams, which are composed of a small number of individuals. While there are professionals who could replace these individuals, none of these professionals have any theoretical or working knowledge of how to interpret SFD data or how our SFD technology operates, and it would take a significant period of time to train any replacement personnel. Until such time as we have a fully trained complement of geological and geophysical interpretive and SFD research and development teams, the loss of any members of these teams could adversely affect the pace at which we interpret SFD data or effect improvements to our SFD technology, which could adversely impact our business and results of operations and financial condition.

• We may be unable to attract the qualified managerial, geological and geophysical, and research and development personnel required to implement our longer-term growth strategies

Our ability to implement our longer-term growth strategies depends upon our continuing ability to attract and retain highly qualified geological, technical, scientific, information management and administrative personnel. Competition for these types of personnel is intense and we cannot give you any assurance that we will be able to retain our key managerial, professional and/or technical employees, or that we will be able to attract and retain additional highly qualified managerial, professional and/or technical personnel in the future. Our inability to attract and retain the necessary personnel could impede our growth.

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• Our limited operating history could adversely affect our business

We are a recently organized development stage enterprise with an unproven technology and a limited operating history. Our activities through the date of this report have encompassed:

• developing our business plan;

• obtaining license rights to our SFD technologies;

• establishing administrative offices and laboratory facilities, and engaging executive, administrative, scientific, geological, geophysical, scientific, information technology and aviation personnel;

• developing our SFD technology to a commercial stage;

• acquiring joint venture partners;

• conducting commercial SFD surveys on behalf of our joint venture partners; and

• successfully drilling oil and gas wells identified through our SFD technology.

We are subject to all the risks and issues inherent in the establishment and expansion of a new business enterprise including, among others, problems of using new and unproven technologies, hiring and training personnel, acquiring reliable facilities and equipment, and implementing operational controls. In general, startup businesses are subject to levels of risk that are often greater than those encountered by companies with established operations and relationships. Startups often require significant capital from sources other than operations. The management and employees of a startup business shoulder the burdens of the business operations and a workload associated with company growth and capitalization that is disproportionately greater than that for an established business. Our limited operating history makes it difficult, if not impossible, to predict future operating results. We cannot give you any assurance that we will successfully address these risks. Our failure to successfully address these risks could have a material, adverse effect on our business, financial condition and operating results.

• We may be unable to effectively manage our expected growth

Our success will depend upon the rapid expansion of our business. Expansion will place a significant strain on our financial, management and other resources, and will require us, among other things, to:

• change, expand and improve our operating, managerial and financial systems and controls; and

• improve coordination between our various corporate functions.

We cannot give you any assurance that we will be able to manage the expansion of our business effectively. Our inability to effectively manage our growth, including the failure of any new personnel we hire to achieve anticipated performance levels, would have a material adverse effect on our business, results of operations and financial position.

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• Our business may be adversely affected by currency fluctuation, regulatory, political and other risks associated with international transactions

We currently operate within the United States and Canada and anticipate we will also operate outside of these countries in the foreseeable future. These operations will subject us to several potential risks, including risks associated with:

• fluctuating exchange rates,

• the regulation by the governments of the United States and Canada as well as foreign governments of fund transfers and export and import duties and tariffs; and

• political instability.

We cannot give you any assurance that any of these risks will not have a material adverse effect upon our business. We do not currently engage in activities to mitigate the effects of foreign currency fluctuations. If earnings from international operations increase, our exposure to fluctuations in foreign currencies may increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate foreign currency risks. We can give you no assurance as to the effectiveness of these efforts in limiting any adverse effects of foreign currency fluctuations on our international operations and our overall results of operations.

There is only a limited public market for our common stock on the NASD OTC Electronic Bulletin Board, and we cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained. We are under no obligation to take any action to improve the public market for our securities including, without limitation, filing an application to list our common stock on any stock exchange or any over the counter market other than the OTC Bulletin Board.

The market price for our common stock on the OTC Bulleting Board is 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 gas prices, oil and 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 operating performance or financial condition, would include release of reports by securities analysts and announcements we may make from time-to-time relative to our operating performance, drilling results, advances in technology or other business developments.

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Moreover, because we are a development stage enterprise with a limited operating history and no revenues or profits, the market price for our common stock will be more volatile than that of a seasoned issuer. Changes in the market price of our common stock, for example, may have no connection with our operating results or prospects. No predictions or projections can be made as to what the prevailing market price for our common stock will be at any time, or as to what effect, if any, that the sale of shares or the availability of shares for sale at any time will have on the prevailing market price. Sales of substantial amounts of our common stock on the public market, or the perception that substantial sales could occur, could adversely affect the prevailing market prices for our common stock and also, to the extent the prevailing market price for our common stock is reduced, adversely impact our ability to raise additional capital in the equity markets.

• You will be subject to the penny stock rules to the extent our stock price on the OTC Bulletin Board is less than $5

Since our common stock is not listed on a national stock exchange or quoted on the Nasdaq Market, trading in our common stock on the OTC Electronic Bulletin Board is subject, to the extent the market price for our common stock is less than $5 per share, to a number of regulations known as the "penny stock rules." The penny stock rules require a broker-dealer to deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission, 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 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 our common stock and may severely and adversely affect the ability of broker-dealers to sell our common stock.

• Our common shareholders should not expect to receive dividends

NXT has never paid any cash dividends on shares of our capital stock, 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 financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time.

• Our common shareholders should not expect to receive a liquidation distribution

If we were to wind-up or dissolve our company and liquidate and distribute our assets, the holders of our common stock would share ratably in our assets only after we satisfy any amounts we would owe to our creditors and any amounts we would owe to our series "A" preferred shareholders as a liquidation preference ($7.50 per share, or $6,000,000 in the aggregate). If our liquidation or dissolution were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. Accordingly, we cannot give you any assurance that sufficient assets will remain available after the payment of our creditors and preferred shareholders to enable you to receive any liquidation distribution with respect to any shares of our common stock you may hold.

• Our right to issue additional capital stock at any time could have an adverse effect the proportionate ownership and voting rights of our common shareholders

NXT is authorized under our Articles of Incorporation to issue up to 50,000,000 shares of our common stock. Subject to compliance with applicable corporate and securities laws, we may issue these shares under such circumstances and in such manner and at such times, prices, amounts and purposes as our management may, in their discretion, determine to be necessary and appropriate. The proportionate ownership and voting rights of our common shareholders could be adversely effected by the issuance of these additional shares, including a substantial dilution in their net tangible book value per share.

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• Two of our principal shareholders control our company

Messrs. George Liszicasz and R. Dirk Stinson, our two principal shareholders, beneficially own approximately two-thirds of our common stock, and therefore have the power, as a group, to elect a majority of our board of directors. Our board of directors, in turn, has the power to appoint our officers and to determine, in accordance with their fiduciary duties and the business judgment rule, our direction, objectives and policies, such as:

• our business expansion or acquisition policies;

• whether we should raise additional capital through financing or equity sources, and in what amounts;

• whether we should retain cash reserves for future product development, or distribute them as a dividend, and in what amounts;

• whether we should sell all or a substantial portion of our assets, or should merge or consolidate with another corporation; and

• transactions which may cause or prevent a change in control or the winding up and dissolution of our company.

An investment in our common stock will entail entrusting these and similar decisions to our present management subject, of course, to their fiduciary duties and the business judgment rule.

• There is an inherent conflict in interest arising as a result of the relationship between our two principal shareholders and the licensor of our SFD technology

Messrs. George Liszicasz and R. Dirk Stinson indirectly own and control both our company and Momentum Resources, which has granted us an exclusive license to identify oil and natural gas prospects using the SFD data while reserving the exclusive right to use the SFD technology for purposes other than oil and natural gas exploration. Although we control the possession, development and use of our SFD technology under our license agreement with Momentum Resources, and have also made provision to prevent the termination or adverse amendment conflicts of that agreement without the independent approval of our disinterested directors and, in some cases, shareholders, various conflicts of interests between our company and one or more of Momentum Resources and Messrs. Liszicasz and Stinson may nevertheless directly or indirectly arise as a result of the foregoing relationships, including disputes regarding the validity, scope or duration of our SFD technology license and the rights to proprietary property and information. While Messrs. Liszicasz and Stinson and our company have each executed certain disclosures and consents relating to these conflicts, these disclosures and consents will not remediate these conflicts, but will merely release Messrs. Liszicasz and Stinson from liability as a result of the conflicts so long as they use reasonable efforts to minimize the conflicts. In the event any of these conflicts prove to be irreconcilable, Mr. Liszicasz, who is currently an officer and director of NXT, may be forced to resign his positions with our company.

The observations, beliefs and opinions we express in this report relating to the scientific basis and principles of our SFD technology, and the ability of our SFD Technology to detect subsurface mechanical and hydraulic stress, represent those of our company and our management alone, and should not be construed as representing those of any third party, including our joint venture partners and any professional geologists and engineers we may engage, except to the extent expressly stated in this report. We maintain the scientific and operating principles and mechanics of our SFD technology in strict confidence. While our joint venture partners and any professional geologists and engineers we may engage from time-to-time have observed the operations of our SFD technology while on survey assignments, and have also observed the SFD interpretive process, they have not been given any proprietary information relating to the scientific and operating principles and mechanics of our SFD technology other than general information consistent with the general observations, beliefs and opinions we express in this report. Our joint venture partners and any professional geologists and engineers we may engage do not hold themselves out as being experts in or otherwise having specific knowledge as to our SFD technology and its scientific basis and principles.

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Contained in this uncertainties and risk factors section as well as in other sections of this report are so-called "forward-looking statements" which generally relate to our expectations or speculations as to potential future events and our observations as to trends and factors that may impact our future operating results. These forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. You can generally identify forward-looking statements through words such as "believe," "anticipate," "expect," "project," "estimate," "budget," "will be," "will continue," "will likely result," or words or phrases with similar meanings. Forward-looking statements that may be contained in this report would, for example, include statements relating to:

• the timing of our SFD survey activities and the amount of SFD data we may acquire including, by way of example and not limitation, those statements contained in that section in Item 1 of this report captioned "Business-Operational Practices In Conducting SFD Surveys-How Fast Can We Acquire And Interpret SFD Data?"

• the timing and likelihood of success of our SFD data interpretation activities including, by way of example and not limitation, those statements contained in that section in Item 1 of this report captioned "Business-Operational Practices In Conducting SFD Surveys-How We Interpret SFD Data?"

• the timing and likelihood of success of our drilling and production plans including, by way of example and not limitation, those statements contained in that section in Item 1 of this report captioned "Business-Status Of Our Exploration Efforts" and Item 2 of this report captioned "Properties-Petroleum Properties?"

• the amount and character of future oil and gas revenues we may receive, the timing of receipt of revenues, and the timing of break-even, including, by way of example and not limitation, those statements contained in that section in Item 1 of this report captioned "Business-Status Of Our Exploration Efforts," Item 2 of this report captioned "Properties-Petroleum Properties?" Item 7 of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of O perations-Overview" and Item 7 of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations-Capital Requirements"

• the amount and character of expenses we may incur, and the timing of these expenditures including, by way of example and not limitation, those statements contained in those sections in Item 7 of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations-Capital Requirements" and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations-Results Of Consolidated Operations-Expectations Relative To Future Expense Levels"

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• the amount and composition of our capital expense budget, and the timing of these capital outlays including, by way of example and not limitation, those statements contained in those sections in Item 7 of this report captione d "Management's Discussion And Analysis Of Financial Condition And Results Of Operations-Capital Requirements" and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations-Results Of Consolidated Opera tions-Expectations Relative To Future Expense Levels" and

• our corporate objectives and growth strategies including, by way of example and not limitation, those statements contained in that section in Item 1 of this report captioned "Business-Corporate Objective."

Whenever you read any forward looking statement contained in this report, you should be aware of and take into consideration that:

• the forward-looking statement merely reflects the current expectations and speculation of our management as to anticipated events or observations relating to future trends based, in part, upon currently available information and our current business plan,

• actual results from these future events may differ materially from the results expected or speculated or trends observed as expressed in, or implied by, the forward-looking statement, as a result of changes in circumstances and events and other uncertainties and risks, including:

• changes in our business plan and corporate strategies or that of our joint venture partners;

• delays in our ability to conduct and complete SFD surveys or interpret SFD data,

• delays on the part of our joint venture partners in planning SFD survey activities, in conducting geologic and geophysical evaluations of recommended anomalies, in acquiring drilling rights, in conducting exploratory drilling activities and completing wells, and in connecting producing wells to pipelines and other production infrastructure; or

• the occurrence of the various types of uncertainties and risk factors described above in this section as well as those described in Item 7A of this report captioned "Quantitative And Qualitative Disclosure About Market Risk;"

• the forward-looking statement must, in any event, be considered in context with the various disclosures made by our company in this report about our business; and

• the uncertainties and risks presented in this section and elsewhere in this report are not exhaustive, and new uncertainties and risk factors may emerge from time to time. It is not possible for management to predict all such uncertainties and risk factors, nor can it assess the impact of all such uncertainties and risk factors on NXT's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from, those contained in any forward-looking statements.

Given these risks and uncertainties, holders of our securities should not place undue reliance on forward-looking statements as a prediction of actual results.

We are not obligated to update or revise any forward looking statement contained in this report to reflect new events or circumstances. You are also cautioned that we intend for all forward-looking statements contained in this report to be construed as "forward-looking statements" within the meaning Section 21E of the United States Securities Exchange Act of 1934 and, to the extent it may be applicable by way of the incorporation of statements contained in this report by reference or otherwise, Section 27A of the United States Securities Act of 1933, each of which establishes a safe-harbor from private actions for forward-looking statements as defined in those statutes.

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Our primary market risks will be related to market changes in oil and gas prices (See Part I, Item 2, of this report captioned "Management's Discussion And Analysis Of Financial Condition And Results Of Operations-Uncertainties And Other Factors That May Affect Our Future Results And Financial Condition-Uncertainties And Risk Factors Generally Relating To Our Company And Our Business-Volatility Of Oil And Natural Gas Prices Could Have A Material Adverse Effect On Our Business"). Since our prospective revenues will be tied to the price at which either NXT or our joint venture partners sell oil and gas on the world market, any fluctuations in these prices will directly and proportionately impact our income base. Similarly, our ability to acquire drilling rights is also directly affected by fluctuations in oil and gas prices, since competition for and the cost to acquire drilling rights is generally a function of oil and gas prices. Specifically, increases in oil and gas prices are generally accompanied by increases in costs to acquire drilling rights, while decreases in oil and gas prices are generally accompanied by a similar decline in costs to acquire drilling rights. The affect of changes in oil and gas prices will also affect joint-venture partner decision-making relative to the scope and budget for exploration, land acquisition, drilling, completion and tie-in activities, which will then impact NXT.

An additional significant market risk relates to foreign currency fluctuations between United States and Canadian dollars. Since our royalty or working interest revenues generated by our Canadian-based joint venture partners will be denominated in Canadian currency, our financial position could be adversely affected by United States-Canadian currency fluctuations. We have not previously engaged in activities to mitigate the effects of foreign currency fluctuations due to the absence of Canadian revenues to date, and we anticipate that the exchange rate between the United States and Canadian dollar will remain fairly stable. If earnings from our Canadian operations increase, our exposure to fluctuations in the United States-Canadian exchange rate will increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate these foreign currency risks. We cannot give you any assurance that the use of exchange rate contracts or other mitigation efforts would effectively limit any adverse effects of foreign currency fluctuations on our Company's international operations and our overall results of operations.

We currently maintain the bulk of our available cash in money-market accounts maintained in United States dollars. Our interest income from these short-term investments could be adversely affected by any material changes in interest rates within the United States.

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As of the date of this report, there are:

• no material pending legal or governmental proceedings relating to our company or properties to which we are a party, or to our knowledge any proceeding of this nature which are being contemplated or threatened; and

• to our knowledge, no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

Not Applicable

Not Applicable

Not Applicable

Not Applicable

None

None

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Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated at Calgary, Alberta, Canada, this 11th day of May, 2001.