NXT Energy Solutions Inc. - Annual Report: 2002 (Form 10-K)

As filed with the Securities and Exchange Commission on March 31, 2003

Commission file number:  0-24027

Registrant's telephone number, including area code:  (403) 264-7020

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

Securities registered pursuant to Section 12(g) of the Act:  Common stock, par value $0.001 per share.

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   [X]  No   [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 26, 2003 was approximately $1,565,547 based upon the closing price per share of the registrant's common stock of $0.14 on that date.

The number of shares outstanding of the registrant's common stock as of March 26, 2003:  16,971,153 shares.

Unless specified otherwise as used herein, the terms "we," "NXT", "us" or "our" refers to Energy Exploration Technologies, its wholly owned subsidiaries and its interest in its joint ventures.

We conduct our transactions in the currency of both the United States and Canada, although we consider the United States dollar to be our functional and reporting currency. All references to "dollars" in this annual report refer to United States or U.S. dollars unless specific reference is made to Canadian or CDN dollars. The rate of exchange of Canadian dollars to United States dollars as of December 31, 2002, was CDN $1.5776 to U.S. $1. For information relative to the conversion of Canadian amounts into US dollars, see the section contained in explanatory Note 2 to our consolidated financial statements captioned "Foreign Currency Translation".

The observations, beliefs and opinions we express in this annual report relating to the scientific basis and principles of our SFD technology, and the ability of our SFD Technology to detect subsurface conditions, represent those of our company and our management alone, and should not be construed as representing those of any third party, except to the extent expressly stated in this annual report.

In this annual report we have made a number of statements, which we refer to as "forward-looking statements", which generally relate to our present expectations or predictions as to the possible occurrence of future events or the existence of trends and factors that may impact our future plans and operating results. These forward-looking statements are based upon assumptions and analyses made by us in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances.

You can generally identify any forward-looking statements contained in this annual report through words and phrases such as "seek", "anticipate", "believe", "estimate", "expect", "intend", "plan", "budget", "project", "will be", "will continue", "will likely result", and similar expressions. Forward-looking statements that may be contained in this annual report would, for example, include statements relating to the timing and likelihood of success of our drilling and production plans and the performance of our joint venture partners.

Whenever you read any forward-looking statements contained in this annual report you should remain mindful that actual results may vary from the anticipated or predicted results as expressed by the forward-looking statements for a number of reasons or factors including, but not limited to, changes in our business plan and corporate strategies or those of our joint venture partners, changes in political climate and fluctuations in forecasted oil and natural gas prices. Moreover, you must read each forward-looking statement in context with, and an understanding of, the various other disclosures concerning our company and our business made elsewhere in this annual report.

Additionally, the various uncertainties and risk factors described in this annual report are not exhaustive, and new risks and uncertainties may emerge from time to time. It is not possible for us to predict all risks and uncertainties, nor can we assess the impact of all risks and uncertainties on our 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 statement. Consequently, we can give you no assurance that the results or developments anticipated or predicted by us will be realized, or even if realized, that they will have the expected consequences or effects on us.

We use our SFD to survey large exploration areas from aircraft at speeds of approximately 200 mph to identify and prioritize leads for further evaluation and potential drilling. SFD has been successfully field tested for independent geologists and joint venture partners. Our SFD affords us the relatively inexpensive ability to obtain analysis and interpretation of potential hydrocarbon prospects in a matter of days or weeks, as compared to months or years, as in the case of the seismic methods currently employed in wide-area exploration activities. These advantages can dramatically reduce finding costs as well as the exploration time cycle. Finding costs include seismic acquisition, purchasing mineral rights and drilling and completing exploration wells. Once SFD prospects are identified, highly focused conventional geological and geophysical methods are employed to evaluate the potential commercial viability of the prospects.

We conduct our activities through two wholly-owned operating subsidiaries: NXT Energy USA, Inc., which focuses on United States-based exploration and NXT Energy Canada, Inc. which focuses on Canadian-based exploration. All survey flight activities are conducted through our subsidiaries, NXT Aero USA, Inc. and NXT Aero Canada, Inc. NXT concentrates on research and development efforts to improve our SFD survey system, and oversees the operations of and provides management, financial and administrative services to our subsidiaries.

We were initially incorporated in Nevada on September 27, 1994 under the name Auric Mining Corporation. In January 1996, we acquired all of the common stock of NXT Energy USA (then known as Pinnacle Oil Inc.) from its stockholders in exchange for our common stock. As a consequence of this reverse acquisition, NXT Energy USA became our wholly-owned subsidiary and its stockholders acquired a 92% controlling interest in our common stock.

Prior to this transaction, we were a corporate shell conducting no active business, and NXT Energy USA was a development stage research and development enterprise holding world-wide rights to use the SFD technology for hydrocarbon exploration purposes. Immediately after this transaction, we changed our name to Pinnacle Oil International, Inc, and subsequently, on June 13, 2000, we changed our name to Energy Exploration Technologies.

Our corporate objective is to become an industry leader in technology-driven oil and natural gas exploration. We believe our SFD technology has the potential to provide significant competitive advantages.

Our primary objective is to become profitable and self-sustaining:

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We believe that the majority of the value of hydrocarbon reserves is added early in the development cycle and we plan to sell the reserves as the value-adding curve begins to level off. We do not plan to be a long-term production based company, although we may hold properties after they begin production for periods of time while we wait for oil and natural gas prices to increase. Reserves will be treated as portfolio investments and will be sold off as product prices rise and held when prices drop. This strategy will require discipline and focus, as it tends to be contrary to the activities of many industry players. Also, we will need to build a financial reserve to enable us to sustain operations through the cyclical price downturns that regularly occur in this industry.

We believe that by successfully exploiting our SFD we will be able to achieve market acceptance, and access to the additional capital to fund the exploration, land acquisition and drilling efforts that will be necessary to fund our future growth and expansion.

Our SFD allows us to measure variations in energy fields, which we believe to be related to stressed subsurface structures and hydrocarbon accumulations. By analyzing these field patterns, we are able to determine the probability of locating commercially viable hydrocarbon deposits.

Subsurface mechanical stresses are caused by forces that disrupt the stress and pressure equilibrium in buried strata. Sedimentary basins consisting of relatively undisturbed flat-lying or gently dipping sediments or sedimentary rock generally maintain balanced pressure equilibrium and therefore exhibit low constant stress. Where the sedimentary package is compressed, folded, faulted, or fractured, a balanced mechanical equilibrium is not maintained. In other areas where the regional strata are characterized by non-uniform geologic layering, there appears to be exhibited higher residual stress than the surrounding regional strata.

Subsurface hydraulic stresses are caused by the presence of fluids (liquids and gases), such as water, oil and natural gas, within the strata and, more particularly, the inherent and directional pressures resulting from the relative buoyancy of the fluids. Oil and gas will percolate upwards through the strata by way of fractures or permeable strata until they either reach the surface or are stopped or trapped by a non-porous barrier, in which case they will continue to exert pressure against the trapping barrier.

While the response of our SFD to known structurally trapped accumulations is more readily demonstrated, responses to stratigraphically trapped accumulations has led us to infer that a hydraulic component of stress exists in certain trapping conditions. As a consequence, our SFD technology has practical applications as an oil and natural gas finding tool.

The exact nature of the energy fields the SFD reacts to and measures are unknown. The two known energy sources to which the SFD may respond are electromagnetic fields (i.e., of an electric, magnetic or electromagnetic character) and gravitational fields. For the reasons explained below, we believe that the energy fields we are measuring are both non-electromagnetic and non-gravitational in character.

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We hypothesize that the principal component of our SFD technology, which we refer to as the SFD sensor, is a passive transducer that creates and maintains a stress-related non-electromagnetic and non-gravitational energy field that interacts with stress-related non-electromagnetic and non-gravitational energy fields associated with subsurface conditions.

Our testing and development of the SFD technology to date has been almost entirely focused on an applied basis toward the identification of hydrocarbon related subsurface conditions. We have not scientifically proven our hypothesis and at this time, we do not plan to conduct more comprehensive scientific evaluations.

Our SFD technology is comprised of the following components, which we collectively refer to as our SFD survey system, used for the following functions:

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Once SFD datasets are returned to our offices, our geological and geophysical interpretive staff process the data, plot the flight lines, and produce computer-generated base maps. We then commence the following screening and interpretation process:

As a consequence, we are able to record and interpret approximately 600 linear miles of SFD data acquired in one SFD survey flight over a period of only a few days. By way of comparison, traditional land-based seismic crews record up to five linear miles of 2D seismic per day. Two or more weeks are then required to process the data, followed by several weeks for interpretation. As a result, it can take a minimum of six months to record and interpret 1,000 linear miles of new 2D seismic data. Greatly adding to these direct seismic expenses are the obvious opportunity costs of allowing aggressive competitors with similar seismic capabilities an equal chance to image oil and natural gas accumulations during the same six-month interpretation period.

We identify approximately twenty SFD leads on average for each three-hour survey, and ultimately on average, two or 10% of these leads are considered for further evaluation. The SFD prospects which we tender can be pool to field-sized targets that could require two to ten wells or more to exploit depending upon the accumulation. The actual number of these recommended SFD prospects that are accepted and ultimately drilled would, however, be dependent upon any number of competitive, geological and environmental variables.

We currently operate in only one business segment, oil and natural gas exploration, insofar as we intend to develop all oil and natural gas exploration prospects identified using our SFD technology either directly for our account or indirectly for our account through working interest or overriding royalty interests. We do not currently sell or market our SFD data or surveying services as a separate product to third parties but we are currently investigating opportunities to provide this service. For geographical segment information, see explanatory Note 16 to our consolidated financial statements included with this annual report.

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Our United States exploration activities to date have been conducted principally with CamWest Exploration LLC, a privately held oil and natural gas exploration company located in Denver, Colorado. These activities were conducted through an Exploration and Joint Venture Agreement which expired in February 2003.

Our Canadian exploration activities in the past have been conducted principally through Calpine Canada Resources Limited, located in Calgary, Alberta, Canada. These activities were governed by the terms of an Exploration and Joint Venture Agreement, which expired during 2002.

We expect to form joint ventures in the future but they will be on a prospect-by-prospect basis and will be with a variety of industry partners.

The results of our drilling efforts to date have been mixed. These limited results appear to validate the effectiveness of our SFD technology insofar as most of the wells drilled have encountered hydrocarbon bearing formations, although the utility of these results in empirically validating the SFD are hindered by a number of factors. The following factors have impacted our drilling results:

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We have interests in three exploration blocks in the Green River basin: the Poblano/Antelope Tail block, the Gold Coast prospect, and the Horsethief Canyon prospect. We also hold prospective rights to acquire working interests in a number of other prospects in the Green River basin including Alkali Creek South and Stage Coach Draw North.

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As a result of the low success rates achieved in those joint ventures, which have now expired, we believe that we must:

By taking control in certain circumstances, we will attempt to ensure that the following objectives are appropriately addressed:

Our future activities will be aggressively directed towards creating value from our existing lands through an active program of soliciting farm-ins, participating in the most attractive drilling prospects as well as dispositions of those prospects and reserves which we feel have limited upside potential or are not core to our plans.

Management will be seeking to monetize assets on a continuous basis to fund development efforts and working interest obligations. A number of properties have been identified as disposition candidates and are being marketed. Creating a consistent revenue stream to fund on-going operations is critical at this point and will be a prime focus for much of 2003. At the same time, we will be seeking opportunities that do not require large outlays of capital but which will enable us to earn interests in mineral rights through the application of SFD.

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Since we use our SFD technology for wide-area oil and natural gas reconnaissance exploration, our competition would generally be described as other companies using other technologies for wide-area oil and natural gas reconnaissance exploration. The principal competitive technology in this regard is seismic, which is well accepted in the industry and has been used for over 70 years. While there are numerous seismic service companies, none use their technology for their own exploration but rather they sell the service to the oil and gas industry. The largest seismic providers to our knowledge are Compagnie Generale de Geophysique, S.A, Seitel, Inc., Veritas DGC Inc. and Petroleum Geo-Services A.S.A.

There are also a number of other technologies used in the industry for passive wide-area oil and natural gas reconnaissance exploration, including aeromagnetic, gravity surveys, ground or surface radar, satellite surveys, telemetrics and spectrum analyzers. However, we do not believe that any of these technologies have been accepted in the industry as a highly predictive general exploration tool.

To our knowledge, there are no other companies in the oil and natural gas exploration industry who commercially employ any technology similar to our SFD technology.

We have not offered SFD services to third parties in the past but we are currently considering opportunities in this aspect of the business. As our technology is unique, we feel that this may be a market which has not been tapped.

We require specialized skill and knowledge in the identification and evaluation of prospects and in the research, development and improvement of the SFD technology. We have obtained the necessary skill and knowledge through our current employees. As of December 31, 2002, we had 7 full-time employees and 6 consultants including 3 financial staff, 2 operations staff, 1 landman, 1 geologist, 1 pilot, 1 electronics engineer, a research scientist holding a Ph.D. in micro-electronics and 3 administrative staff.

Our research and development activities have focused on developing, improving and testing our SFD survey system and related components. We are expending a small amount of resources annually to continuously improve the technology as our major effort now is on practical applications. Research and development expenses in 2002 were $152,862, $418,422 IN 2001 AND $368,249 IN 2000.

We are not dependent upon any third party contract manufacturers or suppliers to satisfy our technology requirements. Our SFD sensors and the SFD unit in which they are incorporated are custom designed, fabricated and assembled in-house. The customized software used in our data acquisition system are written and modified by outside consulting programmers with whom we have long-standing relationships. The computer 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.

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We have four wholly-owned operating subsidiaries:  NXT Energy USA, Inc. and NXT Aero USA, Inc., Nevada corporations formed on October 20, 1995 and August 28, 2000, respectively; and NXT Energy Canada, Inc. and NXT Aero Canada, Inc., federal Canadian corporations formed on April 1, 1997 and October 30, 2000, respectively. NXT Energy USA focuses on United States-based exploration and NXT Energy Canada focuses on Canadian-based exploration. All survey flight activities are conducted through NXT Aero USA and NXT Aero Canada.

The operation of our business, namely, conducting aerial SFD surveys and interpreting SFD data, is not subject to material governmental or environmental regulation with the exception of flight rules issued by the Federal Aviation Administration (for activities in the United States) and Transport Canada (for activities in Canada) governing the use of private aircraft, including rules relating to low altitude flights.

The oil and natural gas industry in general is subject to extensive controls and regulations imposed by various levels of the federal and state governments in the United States and federal and provincial governments in Canada. In particular, oil and natural gas exploration and production is subject to laws and regulations governing environmental quality and pollution control, limits on allowable rates of production by well or proration unit, and other similar regulations. Laws and regulations are generally intended to prevent the waste of oil and natural gas, to protect rights to produce oil and natural gas between owners in a common reservoir, to control the amount of oil and natural gas produced by assigning allowable rates of production, and to reduce contamination of the environment. Environmental regulations affect our operations on a daily basis. Drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. We believe that the trend to stricter environmental legislation and regulations will continue.

We do not expect that any of these government controls or regulations will affect projects in which we participate in a manner materially different than they would affect other projects of similar size or scope of operations. All current legislation is a matter of public record and we are not able to accurately predict what additional legislation or amendments may be enacted. Governmental regulations may be changed from time to time in response to economic or political conditions. Any laws enacted or other governmental action taken which prohibit or restrict onshore and offshore drilling or impose environmental protection requirements that result in increased costs to the oil and natural gas industry in general would have a material adverse effect on our business, financial condition and results of operations.

The operations of SFD survey flights are subject to the usual hazards incident to general and low-level flight operations. These hazards can cause personal injury and loss of life, as well as severe damage to and destruction of property. While we maintain general business insurance coverage, we do not carry insurance specific to the operation of a third party aircraft although we are currently investigating this type of insurance. If we were unable to procure insurance for our flight operations at an acceptable cost, the occurrence of a significant adverse aircraft accident not fully insured or indemnified against could have a material, adverse effect on our business, financial condition and results of operations.

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The oil and natural gas exploration and development projects in which we participate will be subject to the usual hazards incident to the drilling of oil and natural gas wells, including the risk of fire, explosion, blow-out, pipe failure, casing collapse, abnormally pressured formations and environmental hazards such as oil spills, gas leaks, ruptures and discharges of toxic gases. These hazards can cause personal injuries or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations.

The project operator will, in accordance with prevailing industry practice, maintain insurance against some, but not all, of these risks. The insurance maintained by the project operator generally would not cover claims relating to failure of title to oil and natural gas leases, trespass during survey acquisition or surface damage attributable to seismic operations, or business interruption, nor would it protect against loss of revenues due to well failure. There can be no assurance that any insurance obtained by the project operator covering claims related to worker's compensation, comprehensive general liability for bodily injury and property damage, comprehensive automobile liability and pollution, cleanup, underground blowout and evacuation will be adequate to cover any losses or liabilities which may be incurred within projects in which we participate. We also cannot predict the continued availability of insurance coverage or the availability of insurance at premium levels that justify its purchase.

In cases where we have direct liability as a result of our participation on a working interest basis, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have a direct material, adverse effect on our business, financial condition and results of operations. In these cases, our exposure will be commensurate with our participation percentage.

While we would have no direct liability in cases where our participation is limited to an overriding royalty interest, the failure or inability of the project operator to procure insurance at an acceptable cost or the occurrence of a significant adverse event not fully insured or indemnified against could have an indirect material, adverse effect on our business, financial condition and results of operations to the extent it adversely affects our joint venture partner's ability to complete current projects or explore for and develop additional projects.

Our rights to use our SFD technology arises from an SFD technology license granted to us by Momentum Resources

Corporation, known throughout this report as Momentum Resources, the owner of the SFD, pursuant to which we hold the exclusive worldwide right to use, possess and control the SFD for hydrocarbon identification and exploration purposes and any SFD data derived from that use for the same purpose. We control all of the data acquisition, processing and interpretation systems used with the SFD for hydrocarbon identification and exploration purposes.

The terms of our license are set forth in an SFD License Agreement dated December 31, 2000 among us, Momentum Resources, and Messrs. George Liszicasz and R. Dirk Stinson, which supercedes prior licenses granted on August 1, 1996 and April 3, 1998. Momentum Resources is a Bahamas corporation that is indirectly owned and controlled by Messrs. Liszicasz and Stinson. Mr. Liszicasz, who is the inventor of the SFD technology, is also our largest shareholder and the Chief Executive Officer and a director of our company. Mr. Stinson is our second largest shareholder, a past director and officer and has commenced litigation against us as further described below in "Legal Proceedings".

The material terms of the SFD License Agreement, as most recently amended, are summarized as follows:

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Our principal executive office and research and development facilities are located at 700-840-7 Avenue SW, Calgary, Alberta, T2P 3G2. Our lease on these premises expired on January 31, 2003. Virtus Energy Ltd. assumed the main lease and we agreed to sub-lease our space from them. As of the date of this report, terms of the sub-lease have been finalized but no contract has been entered into. Our facilities, consisting of approximately 5,500 square feet, are sub-leased for an eighteen-month term extending through July 31, 2004. Our combined obligations for base lease payments and building operating cost and other pass-through items under this lease is approximately CDN $10,000 per month. We also maintain executive office facilities in Las Vegas, Nevada, for United States operational requirements, which we rent for a nominal amount. We believe that all of our current facilities are adequate for our needs for the foreseeable future.

Due to the sale of both of our aircraft during 2002, we terminated our hangar lease.

As we have recently developed a universal platform for our SFD equipment that can be readily installed into most types of aircraft, we no longer require custom fitted airplanes and have sold both our planes. On May 1, 2002, we completed the sale of our Piaggio Avanti P180 aircraft to a third party for approximately $2,600,000, and net proceeds of approximately $1,000,000 after settlement of principal and interest due on the related asset based loan. On December 24, 2002, we completed the sale of our Commander aircraft to a third party for approximately $150,000. We intend to lease airplanes as needed to conduct surveys.

For a description of our petroleum properties, see the sections of this annual report captioned "Business--Summarized Exploration Information" and "Business--Description Of Exploration Properties And Programs" and explanatory Notes 5, 16 and 17 of our consolidated financial statements included at the end of this annual report.

On November 27, 2002, we were served a Statement of Claim which had been filed on November 25, 2002, in the Court of Queen's Bench of Alberta, Judicial District of Calgary (Action No. 0201-19820), naming Energy Exploration Technologies Inc. and George Liszicasz as defendants. Mr. Dirk Stinson, the plaintiff, alleges that NXT failed to pay him compensation under a consulting agreement and further alleges that NXT, without lawful justification, obstructed Mr. Stinson from trading his shares of NXT. Mr. Stinson is seeking, among other things, damages in the amount of $1,614,750 and an injunction directing NXT to instruct our transfer agent to immediately remove the legend from Mr. Stinson's shares. On December 10, 2002, we filed our Statement of Defence and are awaiting on the Plaintiff to take further action on this matter. At the time of the filing of this suit, Mr. Stinson was a major shareholder of our common stock. He is a past President and director of NXT and is currently a director and shareholder of Momentum Resources.

We believe the claim against us is without merit and intend to vigorously defend ourselves against the claim and will seek an expeditious dismissal of the claim.

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On March 18, 2003, we were served a Statement of Claim which had been filed on March 14, 2003, in the Court of Queen's Bench of Alberta, Judicial District of Calgary (Action No. 0301-04309), naming Glen Coffey, Murray's Aviation Repairs (1980) Ltd., Energy Exploration Technologies, its wholly-owned subsidiary, NXT Energy Canada, Inc., Dennis Wolsky, as Administrator of the Estate of Jerry Wolsky, deceased and Embassy Aero Group Ltd. as defendants. Tops Aviation Ltd., Spartan Aviation Inc. and John Haskakis (the "Plaintiffs") allege that the defendants were negligent and in breach of a Ferry Flight Contract between one or some of the defendants and one or some of the Plaintiffs under which Mr. Jerry Wolsky was to deliver a Piper Twin Comanche aircraft to Athens, Greece. The aircraft crashed in Newfoundland enroute to Athens killing Mr. Wolsky. The Plaintiff is seeking, among other things, damages in the amount of $450,000 Cdn for loss and damages to the aircraft and cargo; and damages in respect to search and rescue expenses, salvage, storage, transportation expenses and pollution and contamination expenses.

Neither we nor our subsidiary, NXT Energy Canada, Inc., were parties to the Ferry Flight Contract. We believe the claim against us and our subsidiary is without merit and intend to vigorously defend ourselves against the claim and will seek an expeditious dismissal of the claim.

The Annual Meeting of Shareholders was held on September 20, 2002, at which the following items were voted upon:

1.The following directors were elected to the board of directors to hold such position until the next annual meeting of the shareholders or until their successor is duly elected and qualified:

 2. The 2000 Pinnacle Oil International, Inc. Directors' Stock Option Plan was approved and adopted. Under this plan, the Compensation Committee, acting as the plan administrator, is authorized to issue up to 400,000 shares of our common stock. The plan does not mandate a formula for the pricing of options, however, the Compensation Committee has recently adopted a standard for the granting of options. Generally, all options vest over a three-year period in thirds with each third vesting on the first through third anniversary of the grant. All unexercised options expire on the fifth anniversary of the grant. The exercise price of the option is generally priced at the closing price of our common stock on the date of grant.

3. The shareholders ratified the appointment of Deloitte & Touche LLP as our auditors, who have been our auditors since July 9, 2002.

There were no broker non-votes with respect to any matter presented for vote at our annual meeting.

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Our common shares currently trade over-the-counter on the OTC Bulletin Board under the trading symbol "ENXT". The following table lists, by calendar quarter, the volume of trading and the high and low sales prices of our common shares for each of the periods indicated.

A shareholders' list provided by our transfer agent showed 130 registered shareholders and 16,971,153 common shares outstanding as of March 26, 2003. We estimate that there are approximately 1,350 beneficial holders of our common shares, based upon information provided by our stock transfer agent in anticipation of our upcoming annual meeting of shareholders to be held on June 20, 2003. There were also outstanding as of that date 800,000 series 'A' preferred shares, held by one shareholder, for which no trading market presently exists. These series 'A' preferred shares are convertible into approximately 2,368,762 common shares as of the date of this annual report.

We have 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 and development 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 may deem relevant at that time.

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The following tables present selected historical consolidated financial data for each of our five most recent annual fiscal periods ended December 31, derived from our consolidated financial statements prepared in accordance with United States generally accepted accounting principles.

The selected statement of loss and comprehensive loss data set forth below for our fiscal period ended December 31, 2002 and the selected balance sheet data set forth below as of December 31, 2002, have been derived from our consolidated financial statements audited by Deloitte & Touche LLP, independent auditors, as indicated in their report contained in the consolidated financial statements included as part of this annual report.

The selected statement of loss and comprehensive loss data set forth below for our fiscal periods ended December 31 2001 and 2000 and the selected balance sheet data set forth below as of December 31, 2001 and 2000, have been derived from our consolidated financial statements audited by Arthur Andersen LLP, independent chartered accountants, as indicated in their report contained in the consolidated financial statements included as part of this annual report.

The selected statement of loss and comprehensive loss data set forth below for our fiscal periods ended December 31, 1999 and December 31, 1998 and the selected balance sheet data set forth below as of December 31, 1999 and December 31, 1998 are derived from our audited consolidated financial statements not included in this annual report.

The following selected financial data should be read in conjunction with our consolidated financial statements and the explanatory notes to those statements included as part of this annual report, as well as the section of this annual report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations".

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We are a technology-based reconnaissance exploration company that utilizes our SFD technology to identify and prioritize oil and natural gas prospects. We conduct our activities through our two wholly-owned operating subsidiaries, NXT Energy USA, Inc. which focuses on United States-based exploration, and NXT Energy Canada, Inc. which focuses on Canada-based exploration. NXT concentrates on research and development efforts as needed to improve the capability of our SFD survey system, and oversees the operations of and provides management, financial and administrative services to our subsidiaries.

Our exploration efforts have been conducted under two broad area joint venture agreements pursuant to which we conducted SFD surveys in exploration areas selected by joint venture partners. We then had the right to participate in the prospects on a combination working interest/overriding royalty interest basis, typically up to a 22.5% working interest and a 4% overriding royalty. Those joint venture agreements have now expired and we have commenced direct exploration activities.

Our rights to use our SFD technology arise from an SFD technology license, which we acquired from the owner and licensor of that technology, Momentum Resources, and we received the exclusive world-wide right to use the SFD technology for hydrocarbon exploration purposes. We are obligated under the terms of that license to pay Momentum Resources a fee equal to 5% of any Prospect Profits (as that term is defined in the license) which we may receive after December 31, 2000.

Prior to December 31, 2001, we had not generated any operating income and were considered a development stage enterprise. We now have a proved reserve base, and commenced production in the first quarter of 2002.

During 2002, the following events occurred:

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We commenced production in late March from the Beiseker property in Alberta, Canada. Our share of production from the three wells was approximately 200 thousand cubic feet per day and it generated $75,628 in revenue for the period from commencement of production until the property was sold on July 1, 2002 for a gain of $42,046.

Our U.S. production commenced in late April and our share of on-going production was approximately 500 thousand cubic feet per day and it generated revenue of $453,947.

We had no oil and natural gas working interest or royalty revenues for our years ended December 31, 2001 and December 31, 2000.

The operating loss was $5,653,343 for 2002, compared to a loss of $4,344,835 for 2001, representing a $1,308,508 (30%) overall increase. This was attributable to the following:

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partially offset by:

partially offset by a $6,301(1.8%) decrease in amortization and depreciation from $343,225 to $336,924 for 2001 from 2000 was primarily attributable to an increase in the estimated useful remaining life of the survey aircraft, and the consequential reduction in annual amortization as the overall remaining unamortized costs of these aircraft are spread over a longer amortization period.

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Our cash flow requirements for 2002 were funded principally from a private placement which closed in September 2001 of 3,803,684 common shares for total gross proceeds of $4,374,237 and the sale of both our aircraft for $2,737,434 in 2002.

There are no guarantees, commitments, lease and debt agreements or other agreements which could be triggered by an adverse change in our credit rating, earnings, cash flows or stock price, including requirements to perform under standby agreements.

Our cash position as of December 31, 2002 was $585,070, as compared to $2,994,608 as of December 31, 2001.

The $2,409,538 decrease in our cash position for 2002 was attributable to:

The $1,284,671 decrease in our cash position for 2001 was attributable to:

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Our operating activities required cash in the amount of $2,123,426 for 2002, as compared to cash requirements of $1,922,089 for 2001.

Financing activities in 2002 used cash of $1,512,331 compared to the cash of $4,296,289 generated from financing activities in 2001.

Investing activities generated cash of $1,187,008 in 2002 compared to a  $3,499,919 use of cash 2001.

We have taken steps to significantly cut-back our administration, exploration and research and development costs through a number of cost-saving measures until such time as we attain substantial revenues. We are also reducing geological, aerial survey and research and development functions. We have terminated our hangar lease and are in the process of actively soliciting offers for some of our properties.

Assuming our success in a number of these activities, we believe we can maintain this minimal level of operations for approximately twelve to 16 months. At this time, we have no other capital commitments, however, if we ramp-up operations, we will be required to raise additional capital to support increased operations.

We can give no assurance that any or all projects in our pending programs will be commercial, or if commercial will generate sufficient revenues to cover our operating or other 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.

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We recorded a $39,211 foreign currency translation gain for 2002 (2001 - loss of $158,952) as a comprehensive income(loss) item on our statements of loss and comprehensive 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 cannot give you any assurance that our future operating results will not be adversely affected by currency exchange rate fluctuations.

We do not believe that our operating results were unduly affected by inflation during our three years ended December 31, 2002.

We follow the full cost method of accounting for oil and natural gas properties and equipment whereby we capitalize all costs relating to our acquisition of, exploration for and development of oil and natural gas reserves. Our consolidated financial condition and results of operations are sensitive to, and may be adversely affected by, a number of subjective or complex judgments relating to methods, assumptions or estimates required under the full cost method of accounting concerning the effect of matters that are inherently uncertain. For example:

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In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. We are required to adopt the provisions of SFAS No. 143 on January 1, 2003. We are currently evaluating the impact that the adoption of SFAS No. 143 will have on our consolidated financial condition and results of operations. As we are in the process of divesting many of our properties and the associated liabilities, we expect that there may be a modest increase in our liabilities to recognize the fair value of restoration costs with respect to our oil and natural gas properties, with a commensurate increase in the capitalized cost of those assets and a resultant increase in amortization and depreciation expense associated with those increased capitalized costs.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and provides a single accounting model for long-lived assets to be disposed of. We adopted the provisions of SFAS No. 144 on January 1, 2002. The impact was not material to the consolidated financial statements included at the end of this annual report.

Our primary market risks will be related to market changes in oil and natural gas prices. Since our prospective revenues will be tied to the price at which NXT sells oil and natural gas products or properties, any fluctuations in these prices will directly impact our income base. Similarly, our ability to acquire drilling rights is also directly affected by fluctuations in oil and natural gas prices, since competition for and the cost to acquire drilling rights is generally a function of oil and natural gas prices. Specifically, increases in oil and natural gas prices are generally accompanied by increases in industry competition and costs to acquire drilling rights, while decreases in oil and natural gas prices are generally accompanied by a similar decline in competition and costs to acquire drilling rights.

An additional significant market risk relates to foreign currency fluctuations between United States and Canadian dollars. Since any revenues generated by our Canadian-based operations will be denominated in Canadian currency, our consolidated financial condition and results of operations 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 significant 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 mitigating efforts would effectively limit any adverse effects of foreign currency fluctuations on our consolidated financial condition and results of operations.

We currently maintain the bulk of our available cash in Canadian dollars and our interest income from these short-term investments could be adversely affected by any material changes in interest rates within Canada.

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We have described below a number of uncertainties and risk factors which, in addition to uncertainties and risks presented elsewhere in this annual report, may materially adversely affect our business, operating results and financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this annual report should be considered carefully in evaluating our company and our business and the value of our securities.

Exploration and development of oil and natural gas is extremely risky, particularly given our present stage of development. An investment in our company should be considered highly speculative due to the nature of our involvement in the exploration, development and production of oil and natural gas. Oil and gas exploration involves a high degree of risk, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. There is no assurance that expenditures we make on future exploration will result in new discoveries of oil or gas. Exploratory drilling is subject to numerous risks, including the risk that no commercially productive oil and natural gas reservoirs will be encountered. The cost to drill, complete and operate wells is often uncertain, and drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors including unexpected drilling conditions, abnormal pressures, equipment failures, premature declines of reservoirs, blow-outs, cratering, sour gas releases, fires, spills or other accidents, as well as weather conditions, compliance with governmental requirements, delays in receiving governmental approvals or permits, unexpected environmental issues and shortages or delays in the delivery of equipment. Our inability to drill wells that produce commercial quantities of oil and natural gas would have a material adverse effect on our business, consolidated financial condition and results of operations.

Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after exploration, drilling, operating and other costs. Completion of wells does not ensure a profit on the investment or recovery of exploration, drilling, completion and operating costs. Drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect production. Adverse conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions.

We anticipate that we will continue to incur operating losses well into 2003 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 profits in the near future or at all.

If we do not raise sufficient additional capital to fully fund our further drilling and operational requirements, we will be forced to reduce or even suspend our operations, and may even be forced to liquidate our assets and wind-up and dissolve our company

We hope to activate our assets through farm-ins, drilling or dispositions to raise additional capital to fund drilling programs and operational requirements. We cannot give you any assurance that we will be able to secure the additional capital we require to fully or partially fund our plans in a manner which will not be objectionable to our company or our shareholders, including substantial dilution. 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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Our future success is dependent upon our ability to successfully identify commercially viable hydrocarbon accumulations for development. Based on our business plan, we will be dependent on:

We cannot give you any assurance that we will be able to consistently discover commercial quantities of oil and natural gas or that we will successfully acquire and drill properties at low finding costs.

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 in the form of an overriding royalty or a working interest or other participation right. Exploratory drilling is subject to numerous risks, including the risk that no commercially productive oil and natural gas reservoirs will be encountered. The cost to drill, complete and operate wells is often uncertain, and drilling operations may be curtailed, delayed or cancelled 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 future operating results may fluctuate significantly depending upon a number of factors including industry conditions, prices of oil and natural 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, consolidated 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.

Oil and natural gas are commodities whose prices are determined based on world demand, supply and other factors, all of which are beyond our control. 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:

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

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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 natural gas prices than other industry participants that do engage in such activities. A sustained material decline in prices from historical average prices could add additional limitation factors to our borrowing base, reducing credit available to our company. Our business, consolidated financial condition and results of operations would be materially and adversely affected by adverse changes in prevailing oil and natural gas prices.

If we pursue development without a partner, we will have to establish markets for any oil and natural gas we do produce and we will also have to market our oil and natural gas to prospective buyers. The marketability and price of oil and natural gas, which may be acquired or discovered by us, will be affected by numerous factors beyond our control. We will be affected by the differential between the price paid by refiners for light quality oil and the grades of oil produced by us. Our ability to market our natural gas may depend upon our ability to acquire space on pipelines which deliver natural gas to commercial markets. We will also likely be affected by deliverability uncertainties related to the proximity of our reserves to pipelines and processing facilities and relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and many other aspects of the oil and natural gas business. We have limited direct experience in the marketing of oil and natural gas.

We cannot give any assurance that our competitors will not develop exploration services that are superior to 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, consolidated financial condition and results of operations.

The oil and natural gas industry is highly competitive. Many companies and individuals are engaged in the business of acquiring interests in and developing oil and natural gas properties, and the industry is not dominated by any single competitor or a small number of competitors. We 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. These competitive disadvantages could adversely affect our ability to participate in projects with favorable rates of return.

Our success depends to a significant extent on the continued efforts of our executive officer, 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. The loss of Mr. Liszicasz could have a material adverse effect on our business, consolidated financial condition and results of operations. While we have entered into employment and non-competition agreements with Mr. Liszicasz, he would nevertheless not be prevented from working for other companies in the oil and natural gas industry so long as they did not employ SFD technology should he elect to terminate his employment with us. We also do not carry key person life insurance policies on our executive officer.

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Our success also depends on the continued efforts of our SFD research and development team, which is composed of a small number of individuals. While there are professionals who could replace these individuals, none of these professionals would 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 SFD research and development team, the loss of any members of this team could adversely affect the pace at which we interpret SFD data or affect improvements to our SFD technology, which could adversely impact our business, consolidated financial condition and results of operations.

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. We cannot give you any assurance that we will be able to retain our key managerial, professional and technical employees, or that we will be able to attract and retain additional highly qualified managerial, professional and technical personnel in the future. Our inability to attract and retain the necessary personnel could impede our growth.

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 a newly developed technology, hiring and training personnel, acquiring reliable facilities and equipment, and implementing operational controls. In general, development stage 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 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 results of operations.

Our success will depend upon the 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:

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, consolidated financial condition and results of operations.

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:

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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 consolidated financial condition and results of operations.

In December of 2002, the Canadian government ratified the Kyoto Accord. Under the Kyoto Accord, industrialized countries and countries in transition to a market economy agreed to bring their emissions of greenhouse gases to 5% less than 1990 levels. They also agreed to foster energy efficiency in their economies, promote the development of cleaner energy sources, and employ agricultural practices that have a sustainable environmental impact. By ratifying the Kyoto Accord, the Canadian government agreed to reduce greenhouse gas emissions to 6% below 1990 levels by 2012. This would represent a 26% reduction from projected 2012 levels. It is expected that the Canadian government will enact new environmental regulations in order to meet the goals set out in the Kyoto Accord. We believe that these new regulations will have negative repercussions on our Canadian operations but cannot determine the full impact of these at this time.

Mr. George Liszicasz beneficially owns approximately 31% of the common shares outstanding as of the date of this annual report, and therefore has a substantial voice in all shareholder matters.

Our series 'A' preferred shareholder does not have voting rights except as outlined below, however, these preferred shares are convertible at any time into common shares at a prescribed rate. As of the date of this annual report, the 800,000 outstanding series 'A' preferred shares, if all converted, would be convertible into 2,368,762 common shares. While our series 'A' preferred shareholder holds the preferred shares, we cannot carry out any of the following transactions or actions without that shareholder's consent and approval:

An investment in the common shares will entail entrusting these and similar decisions to our present management subject to their fiduciary duties.

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Mr. George Liszicasz indirectly controls our company and is a major shareholder and director of Momentum Resources, which has granted us an exclusive license to identify oil and natural gas prospects using the SFD while reserving the exclusive right to use the SFD technology for purposes other than oil and natural gas exploration. As a result of the foregoing relationships, certain conflicts of interests between our company, Momentum Resources and Mr. Liszicasz may directly or indirectly arise, including the proper exercise by Mr. Liszicasz of his fiduciary duties on our behalf as a controlling stockholder and, to the extent applicable, as a director of our company in connection with any matters concerning Momentum Resources such as, by way of example and not limitation:

While Mr. Liszicasz and our company have each executed certain disclosures and consents relating to these conflicts, these disclosures and consents will not remedy these conflicts, but will merely release Mr. Liszicasz from liability as a result of the conflicts so long as he uses 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 licensor of our SFD technology, Momentum Resources, claims common law ownership of that technology, but has not obtained patent or copyright protection for those rights. Momentum Resources and our company each believe that the disclosure risks inherent in patent or copyright registration of our SFD technology outweigh the legal protections which might be afforded by that registration. In the absence of significant patent or copyright protection, we may be vulnerable to competitors who attempt to imitate the SFDs, or to develop functionally similar technologies.

Although we believe that we have all rights necessary to market our services without infringing upon any patents or copyrights held by others, we cannot give any assurance that conflicting patents or copyrights do not exist. We rely upon trade secret protection and confidentiality and non-disclosure agreements with our employees, consultants, joint venture partners and others to protect our proprietary rights. Furthermore, we do not believe, were Momentum Resources to apply for and receive patent protection, that the patent would necessarily protect Momentum Resources or our company from competition. Momentum Resources and our company therefore anticipate continued reliance upon contractual rights and on common law to protect our trade secrets. The steps taken by our company and Momentum Resources to protect our respective rights may not be adequate to deter misappropriation, or to preclude an independent third party from developing functionally similar technology.

We cannot give any assurance that others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to Momentum Resources' or our trade secrets, or otherwise disclose aspects of the SFD device, or that we will be able to meaningfully protect our trade secrets. We also cannot give you any assurance that Momentum Resources or our company will not be required to defend against litigation or to enforce or defend intellectual property rights relating to SFD devices. Legal and accounting costs relating to prosecuting or defending intellectual property rights may be substantial.

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There is only a limited public market for our common shares on the OTC Electronic Bulletin Board, and we cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.

The market price for the common shares on the OTC Bulletin Board 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, drilling results, advances in technology or other business developments.

Because we are a development stage enterprise with a limited operating history and no profits 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 prospects. 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.

Sales of substantial amounts of the common shares on the public market, or the perception that substantial sales could occur, could adversely affect the prevailing market prices for those shares and also, to the extent the prevailing market price for the common shares is reduced, adversely impact our ability to raise additional capital in the equity markets. In addition, our employees, directors and consultants currently hold vested options entitling them to acquire 1,063,842 common shares. Should these persons exercise these options, it is likely they would sell some or all of the underlying common shares on the public markets in order to procure liquidity to pay taxes as well as other reasons they may deem pertinent. The 800,000 series 'A' preferred shares outstanding are also each convertible into approximately 2.96 common shares as of the date of this annual report.

Since the common shares are not listed on a national stock exchange or quoted on the Nasdaq Market within the United States, trading in the common shares on the OTC Electronic Bulletin Board 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 require a broker-dealer to deliver a standardized risk disclosure document prepared by 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 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.

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We have 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 consolidated financial condition, results of operations, capital requirements and other factors as our board of directors may deem relevant at that time.

If we were to wind-up or dissolve our company and liquidate and distribute our assets, our common shareholders 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 shareholder 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 shareholder to enable you to receive any liquidation distribution with respect to any common shares you may hold.

We are authorized under our Articles of Incorporation to issue up to 50,000,000 common shares. 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 board of directors may, in their discretion, determine to be necessary and appropriate. The sale of common shares under certain prices may also result in the issuance of additional common shares to the holder of our series 'A' preferred shares should it elect to convert those shares into common shares pursuant to certain anti-dilution rights they hold. Your proportionate ownership and voting rights as a common shareholder could be adversely affected by the issuance of additional common shares, including a substantial dilution in your net tangible book value per share.

Our consolidated financial statements and the report of our independent auditors are filed with this annual report in a separate section at the end of this annual report.

On July 9, 2002, our board of directors accepted the resignation of Arthur Andersen LLP Canada, otherwise referred to as Andersen, as our independent auditors. The resignation was tendered as Andersen was no longer able to fulfill its responsibilities to NXT due to Andersen ceasing operations. Andersen audited our consolidated financial statements for our two most recent years ended December 31, 2001.

The report of Andersen accompanying the audited financial statements for our two most recent years ended December 31, 2001 was not qualified or modified as to audit scope or accounting principles and did not contain an adverse opinion or disclaimer of opinion.

During our two most recent years ended December 31, 2001, and also during the subsequent interim period through the date of resignation, there were (1) no disagreements between us and Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure; (2) no reportable events as such term is defined by paragraph (a)(1)(v) of Item 304 of Regulation S-K promulgated by the Securities and Exchange Commission; and (3) no matters identified by Andersen involving our internal control structure or operations which was considered to be material weakness.

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On July 9, 2002, our board of directors appointed D & T as our new independent accountants.

During our two most recent years ended December 31, 2001, and also during the subsequent interim period prior to the appointment of D & T, we did not consult with D & T regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of opinion that might be rendered regarding our financial statements, nor did we consult with D & T with respect to any accounting disagreement or any reportable event as such term is defined by paragraph (a)(1)(v) of Item 304 of Regulation S-K.

Prior to the appointment of Andersen as our independent auditor, D & T acted as our independent auditor for the two years ended December 31, 1999, and also during the subsequent interim period through the date of their resignation in June 2000. The resignation was tendered in anticipation of a conflict of interest that would arise under the rules of the Securities and Exchange Commission governing the independence of auditors as a consequence of a pending marriage between a sibling of NXT's controller and a partner in D & T's Calgary office. Prior to the transaction between Andersen and D & T, both auditing firms reviewed the potential conflict of interest outlined above and concluded that under the recently amended Securities and Exchange Commission's rules governing independence of independent auditors, a conflict of interest no longer existed.

The report of D & T accompanying the audited financial statements for our two years ended December 31, 1999 was not qualified or modified as to audit scope or accounting principles and did not contain an adverse opinion or disclaimer of opinion.

During our two years ended December 31, 1999, and also during the subsequent interim period through the date of resignation, there were (1) no disagreements between us and D & T on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure; (2) no reportable events as such term is defined by paragraph (a)(1)(v) of Item 304 of Regulation S-K; and (3) no matters identified by D & T involving our internal control structure or operations which was considered to be material weakness.

Specifically, our articles of incorporation were amended to provide that our common shareholders would retain the exclusive right to elect all members of our board of directors, unless there are 400,000 or more shares of our series 'A' preferred stock outstanding, in which case our series 'A' preferred shareholder would have the right to appoint one or more additional directors. The number of directors which our series 'A' preferred shareholder may elect under such circumstances would, when aggregated with the number of common directors, equal one-sixth of such aggregated number of directors (or such minimum whole number in excess of one-sixth in the event such number of aggregated directors is not a multiple of six). The series 'A' preferred shareholder has not exercised their right to appoint a director but may do so at any time.

Our articles of incorporation specifically provide that our common shareholders shall have no right to vote for the series 'A' directors, and our series 'A' preferred shareholder shall have no right to vote for the common directors. The removal of any series 'A' directors shall require only the affirmative vote of holders of a majority of the then outstanding shares of our series 'A' preferred stock. The vacancy of any series 'A' director position, from whatever cause, shall require only the affirmative vote of holders of a majority of the then outstanding shares of our series 'A' preferred stock.

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Our common directors are appointed by our common stock shareholders at our annual meeting of shareholders and holds the position either until the next annual shareholders meeting or until a successor is appointed. The following table sets forth information, as of March 26, 2003, regarding our directors, executive officers and key employees:

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None of our executive officers or directors have been involved in any bankruptcy proceedings within the last five years, been convicted in or has 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.

The following represents each person who did not file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent year:

Due to changes in our board and management in 2002, our Compensation Committee consisted of only Mr. Hunter until July 9, 2002, when our board of directors appointed Messrs. Foulkes and Rowe to assist Mr. Hunter. Our Compensation Committee reviews and makes recommendations with respect to the compensation of our executive officers, and also administers our various stock plans.

Due to changes in our board and management in 2002, our Audit Committee had no members from May 9, 2002 to July 9, 2002, when the board of directors appointed Messrs. Foulkes and Van Caneghan to the committee. The Audit Committee's duties, as outlined in its charter, include recommending to our board of directors the engagement of our independent auditors, reviewing the results of the auditor's examination of our periodic financial statements, and determining the independence of those accountants. The Audit Committee held two meetings after the appointment of Messrs. Foulkes and Van Caneghan. The board of directors is in the process of locating a financial expert to sit on the Audit Committee.

Messrs. Foulkes and Van Caneghan are considered "independent" within the meaning of the rules of Nasdaq, the New York and American Stock Exchanges and the Securities and Exchange Commission.

The Compensation Committee of the board of directors reviews and recommends to the board of directors the compensation and benefits of all our executive officers and establishes and reviews general policies relating to compensation and benefits of our employees. None of our executive officers served as a director, executive officer or member of a compensation committee of another entity of which one of its executive officers served on our Compensation Committee. Except as described in "Certain Relationships and Related Transactions", no interlocking relationships exist between our board of directors or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.

In the past, our board of directors has negotiated all executive salaries of our employees, including our Chief Executive Officer. Directors do not participate in approving or authorizing their own salaries as executive officers. Compensation for our Chief Executive Officer was determined by the Compensation Committee after considering his efforts in assisting in the development of our business strategy, the salaries of executives in similar positions and our general financial condition. The use of stock options and other awards is intended to strengthen the alignment of interests of executive officers and other key employees with those of our stockholders.

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Our board of directors was comprised of five directors for the majority of 2002, and they held six meetings during 2002. No director attended less than 80% of the total number of those meetings. Our board of directors also approved three additional corporate matters during 2002 through unanimous written consents.

The Compensation Committee held two meetings during 2002. Messrs. Foulkes and Rowe attended both meetings and Mr. Hunter attended neither.

The Audit Committee held two meetings during 2002 and all members were in attendance at both meetings.

The following table shows the compensation paid over the past three years with respect to the following persons:

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The following table sets forth information regarding stock option grants to our officers and directors as of March 26, 2003:

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The potential realizable value is calculated based on the assumption that the common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiry of the term of the option. These numbers are calculated based on SEC requirements and do not reflect our projection or estimate of future stock price growth. Potential realizable values are computed by:

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the company, we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable.

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Our By-laws provide that, to the fullest extent permitted by law, we may indemnify our directors, officers and others who were or are a party to, or are threatened to be made a party to, any threatened, pending or completed action, suit or proceeding.

We do not maintain directors and officers indemnity insurance.

Mr. Liszicasz is employed as our Chief Executive Officer under a five-year employment agreement entered into on December 1, 2002, which contains the following principal compensatory provisions:

At the conclusion of his initial term, Mr. Liszicasz's employment agreement renews automatically each year for a successive one-year term, unless we or Mr. Liszicasz elects by a written, 60-day notice not to renew; or the agreement is terminated earlier in accordance with its terms.

Mr. Liszicasz's employment agreement provides for early termination in the case of any of the following events as defined in the employment agreement:

Under the employment agreement a "change in control" means any of the following:

In general, where a termination is for death, disability, "cause" or by Mr. Liszicasz without "good reason", Mr. Liszicasz's compensation allowances and benefits will accrue only through the effective date of the termination. However, where a termination is due to a "change in control", without "cause", or Mr. Liszicasz for "good reason", the employment agreement provides that we will pay compensation and certain allowances and benefits to Mr. Liszicasz through the end of the then applicable term.

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The following table sets forth certain selected information, computed as of March 26, 2003, about the amount and nature of our securities "beneficially owned" by the following persons as of that date:

The information contained in the following tables was given to us by the individuals, our transfer agent or entities named. We believe that each of these individuals or entities has sole or shared investment and voting power with respect to the securities indicated as beneficially owned by them, subject to community property laws, where applicable, except where otherwise noted.

a) On May 15,1999, we sold 190,066 and 66,667 common shares to Mr. Dennis R. Hunter and SFD Investment II, LLC, respectively, for gross proceeds of $2,850,990 and $1,000,005, respectively. These sales were effectuated as part of a $6,000,000 private placement of 400,000 common shares at a price of $15 per share. Mr. Hunter has been one of our directors since September 1998, while SFD Investment II, LLC, is an affiliate, through Stephens Group, of SFD Investment LLC, which holds all series 'A' preferred shares outstanding.

b) On February 9, 2000, we loaned the sum of CDN $250,000 to Mr. George Liszicasz, our Chief Executive Officer and a director and principal shareholder of our company. The principal amount of this loan, which was extended pursuant to an unsecured promissory note providing for interest at the rate of 51/2% per annum, was repaid by Mr. Liszicasz in full on April 14, 2000.

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c) On December 31, 2000, we amended our license agreement with Momentum Resources relating to the use, possession and control of our Stress Field Detector or SFD technology. Momentum Resources is a Bahamas corporation which is indirectly owned and controlled by Messrs. George Liszicasz and R. Dirk Stinson, who are also parties to the license. Mr. Liszicasz, who is the inventor of the SFD technology, is also our largest shareholder and the Chief Executive Officer, Chairman of the Board and a director of our company. Mr. Stinson is a past director and officer.

Previously, Momentum Resources retained legal possession and control of the Stress Field Detector units while SFD data was collected and remitted to us for our exclusive worldwide use for hydrocarbon identification and exploration purposes. Under the new agreement, we acquired the full and exclusive right to use, possess and control all existing Stress Field Detector units for hydrocarbon identification and exploration purposes, as well as the right to exclusively conduct and control all SFD data collection activities, thereby eliminating the control and participation of Momentum Resources with respect to any of these activities.

The amendment also formally documented our research and development practice with Momentum Resources. Under this practice, we would continue research and development activities to design, fabricate and assemble improved Stress Field Detector units while acquiring the exclusive right to use, possess and control these units, and would continue to charge Momentum Resources for these costs in the form of an offset against any royalties payable to Momentum Resources under the license agreement.

The new license agreement also contained several revisions relating to termination and amendment, including the deletion of a provision which would terminate the license should there be a change of control of NXT, and the addition of provisions requiring the approval of a majority of non-Momentum Resources related directors and, in certain cases, non-Momentum Resources related shareholders, to amend or terminate the license. All other terms of the license, including compensation payable to Momentum Resources, remained unchanged.

d) Mr. Lorne W. Carson, who resigned as a director in May 2002, is a partner of Bennett Jones LLP, a law firm located in Calgary, Alberta, Canada, which received compensation for the provision of legal services in the amount of $46,958, $22,652, $8,061 and $50,896 during our 2002, 2001, 2000 and 1999 years, respectively.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the United States Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective in connection with the filing of this Annual Report on Form 10-K for the year ended December 31, 2002.

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any significant deficiencies or material weaknesses of internal controls that would require corrective action.

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(a)   Financial Statements: