NXT Energy Solutions Inc. - Quarter Report: 2006 March (Form 10-Q)

As filed with the Securities and Exchange Commission on May 15, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________

FORM 10–Q

_________________

Commission file number:  0-24027

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

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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  (as defined in Rule 12b-2 of the Exchange Act)

Large accelerated filer [   ]

Accelerated filer [   ]

Non-accelerated filer [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)  

Yes [   ]  No [ X ]

The number of shares outstanding of the registrant's common stock as of May 5, 2006: 22,263,423 shares.

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Advisement

Our reporting currency is the United States of America dollar.  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 March 31, 2006, was CDN $1.17 to U.S. $1.00.  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".

Special Note Regarding The Observations, Beliefs And Opinions Expressed In This Quarterly Report Relating To The Scientific Basis And Principles Of Our SFD Technology

The observations, beliefs and opinions we express in this quarterly 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 quarterly report.  

For additional information on Energy Exploration Technologies Inc. please consult our web page www.nxtenergy.com, or the SEDAR webpage www.sedar.ca or the EDGAR webpage www.edgar.com.

This document should be read in conjunction with the Form 10-K filed April 26, 2006 for fiscal year-end December 31, 2005.

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TABLE OF CONTENTS

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PART I

ITEM 1.  FINANCIAL STATEMENTS

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1. Organization and Ability to Continue Operations

Energy Exploration Technologies Inc. ("we", "our company" or "NXT") was incorporated under the laws of the State of Nevada on September 27, 1994. The reverse takeover by Pinnacle Oil Inc. of the original company on October 20, 1995 triggered the “continuing entity” for financial accounting purposes under the US GAAP.

In March 2003 we divested all our U.S. properties. For reporting purposes, the results of operations and the cash flows of the U.S. properties have been presented as discontinued operations.  For details, refer to note 12.

NXT was continued from the State of Nevada to the Province of Alberta, Canada on October 24, 2003. The shareholders voted on and approved this change, which moved the jurisdiction of incorporation from the U.S. to Canada.

We are a technology-based reconnaissance exploration company which utilizes our proprietary stress field detection (SFD) remote-sensing airborne survey technology to quickly and inexpensively identify and high-grade oil and natural gas prospects.  

For the three months ended March 31, 2006, we incurred a loss of $727,547 and had $34,602,183 accumulated deficit at March 31, 2006.  Our working capital deficit at March 31, 2006 was $2,130,810.  The net cash used in operating activities was $447,821 for the three months ended March 31, 2006.

Our ability to continue as a going concern is dependent upon our ability to generate profitable operations in the future and obtain the necessary financing to meet our obligations and repay liabilities arising from normal business operations when they come due.  The outcome of these matters cannot be predicted with any certainty at this time. These consolidated financial statements do not include any adjustments to amounts and classifications of assets and liabilities that may be necessary should we be unable to continue as a going concern.

We are executing a business plan to allow us to continue as a going concern.  We plan to raise new capital as well as complete survey contracts for a fee in 2006 and the future.  We can give no assurance that we will be successful in executing this plan.  Should we fail to raise more capital or earn revenue we would be forced to suspend our operations, liquidate our assets, wind-up and dissolve our company.  See Subsequent Events Note 14.

These consolidated financial statements are prepared using generally accepted accounting principles that are applicable to a going concern, which assumes the realization of assets and the settlement of liabilities in the normal course of operations. Should this assumption not be appropriate, adjustments in the carrying amounts of the assets and liabilities to their realizable amounts and the classification thereof will be required and these adjustments and reclassifications may be material.

2. Significant Accounting Policies

Basis of Presentation

We have prepared these consolidated financial statements as at March 31, 2006 and for the three month interim periods ended March 31, 2006 and 2005 in accordance with accounting principles generally accepted in the United States of America for interim financial reporting.  While the financial statements for these interim periods reflect all normal recurring adjustments, which, in the opinion of our management, are necessary for fair presentation of the results of the interim period, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.  The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.  Refer to our consolidated financial statements included in our annual report on Form 10-K for our fiscal year ended December 31, 2005.

Consolidation

We have consolidated the accounts of our wholly-owned subsidiaries with those of NXT in the course of preparing these consolidated financial statements.  All inter-company balances and transactions amongst NXT and its subsidiaries have

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been eliminated as a consequence of the consolidation process, and are therefore not reflected in these consolidated financial statements.

Estimates and Assumptions

The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions.  These estimates and assumptions affect the reported amounts of assets and liabilities including the disclosure of contingent assets and liabilities at the date of these consolidated financial statements as well they affect revenues and expenses recorded during the reporting periods.  Estimates include allowances for doubtful accounts, valuation of the note receivable, estimated useful lives of assets, provisions for contingent liabilities, measurement of stock based compensation, valuation of future tax assets, determination of proved reserves and reflect management's best estimate.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined necessary.  Actual results may differ from those estimates.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS 123-R (revised 2004), "Share Based Payment." SFAS 123-R is a revision of FASB 123 and supersedes APB No. 25.  SFAS 123-R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair market value of the entity's equity instruments.  Prior to the adoption of SFAS 123-R, we accounted for share-based payments to employees using APB Opinion No. 25, Accounting for Stock Issued to Employees, intrinsic value method and, as such, we generally recognized no compensation cost for employee stock options.

SFAS 123-R requires an entity to value employee services received in exchange for an award of equity instruments by determining the fair market value of the instrument on the day the instrument is granted.  This value is then recorded as a compensation expense over the period during which an employee is required to provide service for the award.  For options, the compensation expense is recognized as the options vest.  The grant-date fair market value of options issued is estimated using an option-pricing model.

In addition, SFAS 123-R requires a public entity to measure the cost of employee services received in exchange for an award of a liability instrument based on its current fair market value and that the fair market value of that award will be revalued at each subsequent reporting date until the liability is settled.  

The effective date for us to implement SFAS 123-R is January 1, 2006.  Accordingly this standard is reflected initially in our first quarterly interim report of 2006.  We adopted this standard using the “modified prospective” transition method.  Using the modified prospective method there is no compensation expense recorded for any outstanding option that was vested as of the effective date of this standard.  A compensation expense is recorded progressively as unvested options outstanding as of the effective date become vested and for options issued subsequent to the effective date.  Under the modified prospective application method, prior periods are not restated for the effect of SFAS 123-R, however, a pro forma note disclosure is required to report what would have been the impact on the prior year if we had elected to follow the fair market value accounting method.

3. Oil and Natural Gas Properties

Summarized below are the oil and natural gas property costs we capitalized for the three months ended March 31, 2006 and 2005, and as of March 31, 2006 and December 31, 2005.

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We assess our unproved properties for any impairment in value (see note 2).  We determine the average price recently paid per acre for similar properties in the open market and then discount these prices to adjust for the reduced life remaining on our leases.

4. Other Property and Equipment

Summarized below are our capitalized costs for other property and equipment as of March 31, 2006 and December 31, 2005:

5. Other Accrued Liabilities

As of March 31, 2006 the Company has $132,052 of other accrued liabilities.  Other accrued liabilities includes $8,602 accrued audit fees, $35,973 payable for tax return preparation, $29,260 accrued legal fees, $568 crown royalty payable, $23,787 in consulting fees and $33,862 accrued oil and gas property costs.  

6. Note Payable

As of March 31, 2006 the Company has a loan outstanding in the amount of $208,604. This amount is comprised of $250,000 CDN borrowed from our CEO and largest shareholder, Mr. George Liszicasz on November 3, 2004. These agreements provide that the loans accrue interest at the rate of 0.58% per month (7.0% per annum). The maturity date for this loan is April 15, 2007.

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7. Common Stock

The loss per share is presented in accordance with the provision of SFAS No. 128, Earnings Per Share (“EPS”).  Basic EPS is calculated by dividing the income or loss available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.  Basic and diluted EPS were the same for the three months ended March 31, 2006 and 2005 because the company had losses from operations and therefore, the effect of all potential common stock was anti-dilutive.

In calculating diluted earnings per common share for the three month period ended March 31, 2006 and 2005, we excluded all options and warrants, either because the exercise price was greater than the annual average market price of our common shares in those years or the exercise of the options and warrants would have been anti-dilutive.  During these periods, outstanding stock options and warrants were the only potentially dilutive instrument.

During the quarter ended March 31, 2006, we issued 582,788 common shares to settle liabilities of $838,182.  During the similar period in the prior year we issued 125,000 common shares to settle liabilities of $218,750.

First Quarter Fiscal 2006

On January 6, 2006 we issued 182,788 common shares to discharge in full a $274,182 liability related to corporate strategy and planning services provided by a consultant to NXT in 2005.  The liability was recorded as “Other Accrued Liabilities” at December 31, 2005.

On January 23, 2006 we issued 400,000 common shares to discharge in full a $564,000 liability related to corporate strategy and planning services provided by a consultant to NXT in 2005.  The liability was recorded as “Other Accrued Liabilities” at December 31, 2005.

On March 20, 2006 we issued 35,833 common shares, which resulted from the conversion of a Secured Convertible Debenture and accrued but unpaid interest.

On March 23, 2006 we issued 41,058 common shares, which resulted from the conversion of a Secured Convertible Debenture and accrued but unpaid interest.

During the first quarter of 2006 we issued 92,500 common shares as a result of options exercised at prices between $0.38 and 0.65 per share.

Year Ended December 31, 2005

On January 13, 2005 we issued 125,000 common shares to discharge in full a $218,750 liability related to corporate strategy and planning services provided by a consultant to NXT in 2005.

On March 17, 2005 we issued 10,000 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004.

On March 30, 2005 we issued 23,600 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004.

On July 31, 2005 we issued 6,000 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004.

On December 31, 2005 we issued 147,500 common shares in conjunction with the $2.00 ($2.60 Cdn) private placement, for which we had already received the money in the prior year and was shown as subscriptions payable at the end of 2004.  We also had a refund on $12,320 finder’s fees that we had outstanding, which was waived by the finder.

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8. Preferred Shares

On December 31, 2005 the Amended and Restated Technical Service Agreement was signed between the Company and George Liszicasz, its Chief Executive Officer. According to the terms of the agreement Mr. Liszicasz received 10,000,000 preferred shares.  Of these preferred shares 2,000,000 were immediately convertible into common shares on a one-to-one basis but have not yet been converted.  The remaining 8,000,000 preferred shares are conditionally convertible into common shares if specified annual revenue objectives are met.  Preferred shares carry liquidation preferences over common shares.

The Preferred shares were issued in consideration for Mr. Liszicasz granting the Company an intangible asset.  The asset consists of an exclusive, world-wide license to use, develop, copy and modify the Operating SFD Detectors and to the extent reasonably necessary, the SFD Theories for use in the exploration of hydrocarbon resources.

The preferred shares are progressively convertible on a one-to-one basis into common shares, at the option of the holder once annual revenue objectives are met.  The following schedule outlines the number of preferred shares that become convertible at various revenue stages of the Company.

All ten million (10,000,000) preferred shares became issued and outstanding upon execution of the agreement on December 31, 2005.  A maximum of five million (5,000,000) of the preferred shares can be converted without ratification by shareholders of the Corporation.  The remaining five million (5,000,000) require ratification by the shareholders of the Corporation, but will be subject to cancellation in the event that they are not authorized at a meeting of the shareholders.  Gross revenue of the Corporation is determined on a consolidated basis in accordance with generally accepted accounting principles and will also include the proceeds of sale of assets by the Corporation or its subsidiaries.

The preferred shares issued were valued using a Black Scholes option-pricing model with the following assumptions and valuations:

The value for the Preferred Shares is substantially assigned to the first two million (2,000,000) preferred shares that are immediately convertible into Common Shares.  The remaining eight million (8,000,000) preferred shares have been assigned a nominal value reflecting the uncertainty that the required revenue objectives will be achieved to allow the Preferred Shares to be convertible into Common Shares.

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As per FAS 2 “Accounting for Research and Development Costs” intangibles that are purchased from others for a particular research and development project and that have no alternative uses and therefore no separate economic value, such as the SFD intellectual property, are to be accounted for as research and development expense at the time the cost is incurred.  Accordingly we expensed in the fourth quarter of 2005 the full value of this intangible asset as a research and development expense.

9. Convertible Debentures

In the fourth quarter of 2005 we closed private placement bridge-financing contracts.  Pursuant to these contracts the Company issued security that converts automatically into $1,955,342 of debentures and 1,989,265 warrants in exchange for cash proceeds of $1,649,764 (net of commission paid of $24,928) and the conversion of Note Payable and accrued interest of $280,650 for an aggregate net value proceed of $1,930,414.  The debentures are convertible into common share.  (See consolidated financial statements as at December 31, 2005 for further details on conversion features)

The proceeds received on issuance of the convertible debt during 2005 were first allocated to the fair value of the bifurcated embedded derivative instruments included in the convertible notes and the warrants, with the remaining proceeds allocated to the convertible debentures, resulting in the debentures being recorded at a significant discount from their face amounts as show in the table below.  This discount is being accreted, together with the stated interest on the debenture, using an effective interest method over the term of the debenture.  

The embedded derivative instrument is the conversion option.  This conversion feature is revalued at the end of each reporting period to reflect its period ended fair market value.  Any change in the value of the conversion feature is expensed in the period.

Immediately prior to the conversion of any convertible debenture to common shares we amortize any remaining debt discount for that debenture and revalue its conversion feature to fair market value.  The resulting changes in carrying value of the debenture and conversion feature are recorded as debit or credit, as applicable, to income for the period.  Common shares issued through the conversion of a debenture are then valued as the sum of the fair market value at the date of conversion of the fully accreted value of the debenture and value of the conversion feature.

In accordance with this accounting procedure the value of the convertible debenture and the conversion feature as at the beginning and ending of the three month period ended March 31, 2006 and the changes in the period are as follows:

10. Employee and Director Options

We have summarized below all outstanding options under the Plans as of March 31, 2006:

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Consultant and executive options outstanding as of March 31, 2006 vest over the next three years, from the date of grant based upon the continued provision of services.  The options vest one-third each on the first through third anniversaries of the grant date.

The director options granted after January 1, 2000 that are outstanding as of March 31, 2006 vest one-third each on the first through third anniversaries of the grant date, respectively, based upon the continued provision of services as a director.  Both the employee and director options generally lapse, if unexercised, five years from the date of vesting.

We received $50,371 and $28,500 cash from the exercise of stock options during the 3-month periods ended March 31, 2006 and March 31, 2005, respectively.  The actual tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $nil in both periods.

Compensation Expense Associated With Grant of Options

In the first quarter of 2006, the adoption of FAS 123-R resulted in incremental stock-based compensation expense of $95,555.  The incremental stock-based compensation expense caused net loss to increase by $95,555, however, basic and diluted earnings per share is unchanged.  Net cash flow is not affected by the adoption of this standard.

The incremental stock-based compensation expense in the first quarter of 2006 was derived from stock options issued to employees under share-based compensation plans.  Stock options were issued at the current market price on the date of grant, subject to a 3-year vesting period with a contractual term of 5 years.  The grant date fair value is calculated using the Black-Scholes option valuation model.

Table.

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The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The expected life (estimated period of time outstanding) of options granted was estimated using the historical exercise behavior of employees.

The expected volatility was based on historical volatility for a period equal to the stock option’s expected life

As of March 31, 2006, there was $517,487 of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the stock option plans.  This cost will be recognized over the 3 year vesting period.

In the first quarter of 2005 there was no incremental stock-based compensation expense recognized as a result of the adoption of FAS 123-R as we adopted this standard using the modified prospective transition method.  Prior to the adoption of FAS 123-R, the Company applied APB 25 to account for its stock-based awards.  Under this standard no stock-based compensation expense was recorded by the Company.  Had we elected to follow the modified retrospective method, an alternative transition method provided for under FAS 123-R, to transition from APB 25, we would have recorded additional compensation expense of approximately $127,412, for the three month period ended March 31, 2005.  The following table details the effect on net income and earnings per share had compensation expense for the Employee Stock-Based Awards been recorded in the first quarter of 2005 based on the modified retrospective method.

11. Commitments and Contingencies

On December 1, 2005 we entered into a sublease agreement for our new office space for a term of eleven months.   The monthly minimum lease payments are CDN $ 10,719 per month.

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 of $74,750, plus interest, under a consulting agreement and further alleges that NXT, without lawful justification, obstructed Mr. Stinson from trading his shares of NXT.  On December 10, 2002, we filed our Statement of Defense.  Mr. Stinson is a past President and director of NXT.  We believe the claim against us is contentious because of the ambiguity of the arrangements and we are vigorously defending ourselves against the claim.

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

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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 Plaintiffs are seeking, among other things, damages in the amount of $450,000 CDN or 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.

NXT was not party to the Ferry Flight Contract.  We believe the claim against us is without merit and we intend to vigorously defend ourselves against the claim and will seek an expeditious dismissal of the claim.

In March 2005 a contract was signed with Pangaea Investments under which Pangaea will provide investor relations and public relations services for a monthly fee of $5,000 CDN ($4,160 US) plus reimbursement of certain expenses, 100,000 common shares and a grant of an option to buy 100,000 additional common shares. The 100,000 common shares have been issued as of the date of this report. The contract may be terminated by either party upon 30 days notice.

12.  Discontinued Operations

In January 2003, we adopted a formal plan to divest our U.S. oil and gas properties. On May 9, 2003 we closed a sale transaction with our U.S. joint venture partner to sell the properties for total consideration of $1,450,000 with proceeds of $720,000 in cash and the return to treasury of all the outstanding preferred shares.  The effective date of the transaction was March 1, 2003 and was recorded at fair market value.  The price for these properties was set by arm’s length negotiations between the parties.

In June 2004 we sold airplane parts in exchange for 30 hours of rental time on an airplane from Avia Aviation.  The airplane parts had been written off in previous years and had no recorded value at the time.  We used the rental rate for the airplane of $1,747 US per hour based on previous invoices from Avia Aviation for the valuation of the transaction.  We recognized a gain of $45,725 on the sale. We also incurred $12,231 of administrative expenses in relation to discontinued operation.  The net loss from discontinued operations was Nil and $4,303 for the three months ended March 31, 2006 and 2005 respectively.

For reporting purposes, the results of operations and the financial position of the properties have been presented as discontinued operations, accordingly, prior period financial statements have been reclassified.

13. Segment Information

We operate in only one business segment, oil and natural gas exploration, insofar as we develop oil and natural gas exploration prospects identified using our proprietary SFD airborne survey technology.  Summarized below with respect to our periods ended March 31, 2006, and 2005 and is geographic information relating to:

Of our total revenue, $12,173 came from a single external customer and was earned in the geographical segment of Canada.

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In preparing the above tables, we have eliminated all inter-segment revenues, expenses and assets. The accounting policies of each segment are the same as those described in note 2.

14. Subsequent Events

Subsequent to the end of the quarter NXT closed two Private Placements for aggregate net and gross proceeds of US$2,124,000.  On April 19, 2006 the NXT closed a Private Placement for US$1,685,000 wherein NXT issued 1,685,000 Units.  On May 12, 2006 the Company closed a second Private Placement for US$439,000 wherein NXT issued a further 439,000 Units.  For both Private Placements a Unit was sold at a price of US$1.00 and each Unit consisted of one (1) common share and one (1) warrant.  Each warrant shall entitle the holder to purchase one additional Common Share at $2.00 US per share.  The warrant expires two (2) years from the date of issue.  

The issuance of the shares is exempt from registration pursuant to section 4(2) of the Securities Act of 1933.  Shares are restricted and must be resold pursuant to Rule 144 promulgated by the SEC under the Securities Act of 1933 and pursuant to Multilateral Instrument 45-102 Resale of Securities in Canada.

In connection with the financing, NXT will pay a commission of an additional 159,520 Units.

On April 6, 2006 the maturity date of the note payable was extended to April 15, 2007.

On April 30, 2006 NXT entered into agreement with two companies to provide financial consulting and investment banking services.  We agreed to grant these two companies an aggregate of 350,000 warrants exercisable at $1.60 per share into 350,000 common shares until April 30, 2008.

15. Comparative Figures

Certain amounts in the consolidated financial statements have been reclassified in the current period to conform to the current year’s presentation.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Operating revenues

Our well at Entice, Alberta, in which we have a 22.5% working interest, had production averaging 18 thousand cubic feet (mcf) per day during the quarter ended March 31, 2006 (“Q1 2006”) as compared with production of 18 thousand cubic feet (mcf) per day during the quarter ended March 31, 2005 (“Q1 2005”).  Revenues, net of royalty expense, for the period were $12,173 (Q1 2005 - $11,121).  In Q1 2006 the average price received net of royalties was $7.51 per mcf (Q1 2005- $6.86 per mcf) and the operating cost was $0.61 per mcf. (Q1 2005- $0.75 per mcf.)

Operating loss from continuing operations

We incurred an operating loss of $643,961 in Q1 2006 (Q1 2005 -$1,617,136), representing a $973,175 (60.18%) overall decrease.  This decrease was attributable to the following changes:  

Interest income

Interest expense for Q1- 2006 was $83,586 (Q1 2005 - $2,548) and consisted of $80,425 (Q1 2005 - Nil) interest on convertible debentures, $3,694 (Q1 2005 - $4,102) interest on shareholder loan, and $141 interest on outstanding accounts payable (Q1 2005 – Nil), which was partially offset by interest revenue of $674 (Q1 2005 - $1,554).

Loss from discontinued operations

The expense related to discontinued operations for Q1- 2006 was nil (Q1 2005 - $4,303).  The expense in 2005 relates to professional fees to prepare and file tax returns for NXT’s two inactive subsidiaries.

Other comprehensive income

Other comprehensive income and loss is caused by changes in the relative exchange values of the U.S. and Canadian dollars.  For example when the U.S. dollar trades higher relative to the Canadian dollar net monetary assets held in Canadian dollars will decline in value as recorded in the U.S. dollar equivalent and this decline will be reflected as a foreign exchange loss in a period.  The equivalent U.S. dollars for each Canadian dollar was unchanged from $1.16 at December 31, 2005 to March 31, 2006 and changed from $1.20 at December 31, 2004 to $1.21 at March 31, 2005.  Both periods also experienced fluctuation in currency exchange rates throughout the period.  These fluctuations in currency exchange rates resulted in a comprehensive loss in Q1 2006 of $72,127 compared with a loss in Q1 2005 of $28,909.

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Relationships and Transactions on Terms That Would Not Be Available From Clearly Independent Third Parties

There was no new transaction in the first quarter of 2006 that were on terms that would not be available from independent third parties.  On April 6, 2006 the maturity date of a note payable to an officer of the Company was extended from April 15, 2006 to April 15, 2007.

Liquidity And Capital Resources

Sources of Cash

In the quarter ended March 31, 2006 we had a net cash outflow of $434,608 compared to the first quarter of 2005 when we had a net cash outflow of $199,178.  The Q1 2006 results were due to the operating activities use of cash of $447,821, cash flow of $50,371 expended in financing activities, $29,216 cash inflow in investing activities, nil used by discontinued operations and the effects of the fluctuations in foreign exchange of $66,374.  The Q1 2005 results were due to the operating activities use of cash of $94,704, cash flow of $19,534 expended in financing activities, $51,728 cash used in investing activities, $4,303 used by discontinued operations and the effects of the fluctuations in foreign exchange of $28,909.

Net cash used by our operating activities during the three month period ended March 31, 2006 of $447,821 was an increase of $353,117 over the same period in 2005 (net cash used in operating activities in the period ended March 31, 2005 was $94,704).  The increased use of cash in Q1 2006 as compared with Q1 2005 was significantly affected by a $756,594 reduction in working capital (including consulting costs settled by the issuance of common stock).  These non-cash changes reduced cash flow used by operating activities in Q1 2006 by $235,875 as compared with $992,469 Q1 2005.

Current Cash Position and Changes in Cash Position

Our cash position as of March 31, 2006 was $624,669 as compared to $1,059,277 as of December 31, 2005.  This decrease in our cash position was attributable to the cash used in operating activities of $447,821, cash inflow of $50,371 received through financing activities, $29,216 cash inflow in investing activities, and the effects of the fluctuations in foreign exchange of $66,374.  Our cash position as of March 31, 2006 was $624,669 as compared to $88,253 as of March 31, 2005 and $1,059,277 at December 31, 2005.

We had a working capital deficiency of $2,130,810 as of March 31, 2006 as compared with $2,393,872 as at December 31, 2005.  This deficiency is mainly caused by the fair value of the convertible debenture and its bifurcated conversion feature.  In aggregate these liabilities are valued at $2,410,884 as of March 31, 2006 ($2,403,370 at December 31, 2005).  These convertible debentures are more likely than not to be converted into common shares.  If converted to common shares the aggregate liability will be discharged without a cash outlay.  The deficiency was also caused by the continuing operational losses of $727,547 for Q1 2006.  Our losses from operations will likely continue in the second quarter.

Cash used in operating activities in the quarter ended March 31, 2006 increased by $353,117 (372%) to $447,821 for 2006 as compared to $94,704 for the same period in 2005. The increased cash utilization is attributable mainly to changes in working capital including $838,182 consulting costs settled by issuance of common stock and $95,555 of compensation settled with options.

Financing activities in the first quarter of 2006 generated $50,371 from the exercise of options.  Financing activities in 2005 generated $28,500 from the exercise of options and $1,966 from the increase in notes payable and used $50,000 due to a cancellation of a subscription agreement.

Investing activities generated cash of $29,216 for the quarter ended March 31, 2006 as compared to $51,728 used in the quarter ended March 31, 2005.  The increase was attributable to the redemption of short term investments and offset by an investment in other property and equipment.  

Discontinued operations used cash of nil in the quarter ended March 31, 2006.  The quarter ended March 31, 2005 used

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$4,303 of cash from discontinued operations.

Other comprehensive income, specifically currency exchange, was a loss of $66,374 in the quarter ended March 31, 2006 as compared to the loss of $28,909 in the quarter ended March 31, 2005. The reasons for the change are explained above.

Plan of Operation and Prospective Capital Requirements

We had $2,197,315 in cash on hand as of May 10, 2006.  

At the March 31, 2006 we required additional funds to ensure that we could continue operations.  We needed to raise a minimum of $1,500,000 to ensure that we had adequate working capital for us to operate for at least one more year.  Consequently we actively pursued new equity investment for the company and on April 19, 2006 we closed a $1,685,000 Private Placement that we believe will ensure that we can meet our financial obligations for a minimum of one additional year.  See Subsequent Event Note 14 of our consolidated financial statements.    

Our ability to continue as a going concern beyond one year is dependent upon our ability to generate profitable operations and/or obtain the necessary financing to meet our obligations and repay liabilities arising from normal business operations when they come due.  The outcome of these matters cannot be predicted with any certainty at this time.

Our consolidated financial statements included within the Form 10-Q are prepared using U.S. Generally Accepted Accounting Principles that is applicable to a going concern.  The going concern principle assumes a company can realize on its assets and settle its liabilities in the normal course of operations.  Our consolidated financial statements do not include any adjustments to amounts and classifications of assets and liabilities that may be necessary should we be unable to continue as a going concern.

In the three months ended March 31, 2006, we incurred a comprehensive loss of $799,674 and used $447,821 of cash in operating activities.  We have an accumulated deficit of $34,602,183, and have a working capital deficiency of $2,130,810 as at the end of the period.

We expect to continue incurring net losses from operations and have negative operating cash flows until we can secure revenue-generating activities.  These circumstances raise substantial doubt about our ability to continue as a going concern.  

We can give no assurance that our business will continue as a going concern.  If we cannot generate sufficient cash from operations or if we fail to find additional sources of financing, we would cease to be a going concern.  Should we cease being a going concern we would be required to suspend our operations, liquidate our assets, wind-up and dissolve our company.

Summarized below are our contractual commitments:

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Other Matters

Foreign Exchange

Foreign currency translation gains or losses are included 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 assurance that our future operating results will not be adversely affected by currency exchange rate fluctuations.  

Effect of Inflation

We do not believe that our operating results were unduly affected during the first quarter of 2006 or 2005 by inflation or changing prices.

Critical Accounting Policies

In December 2004, the FASB issued SFAS 123R (revised 2004), "Share Based Payment." SFAS 123R is a revision of FASB 123 and supersedes APB No. 25.  SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services or incurs liabilities in exchange for goods or services that are based on the fair market value of the entity's equity instruments.  Prior to the adoption of SFAS 123R, we accounted for share-based payments to employees using APB Opinion No. 25.  Accounting for Stock Issued to Employees, intrinsic value method and, as such, we generally recognized no compensation cost for employee stock options.

SFAS 123R requires an entity to value employee services received in exchange for an award of equity instruments by determining the fair market value of the instrument on the day the instrument is granted.  This value is then recorded as a compensation expense over the period during which an employee is required to provide service for the award.  For options the compensation expense is recognized as the options vest.  The grant-date fair market value of options issued is estimated using the Black Scholes option-pricing model.

In addition, SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of a liability instrument based on its current fair market value and that the fair market value of that award will be revalued at each subsequent reporting date until the liability is settled.  

The effective date for us to implement SFAS 123R is January 1, 2006.  Accordingly this standard is reflected initially in our first quarterly interim report of 2006.  We adopted this standard using the “modified prospective” transition method.  Using the modified prospective method there is no compensation expense recorded for any outstanding option that was vested as of the effective date of this standard.  A compensation expense is recorded for unvested options outstanding as of the effective date and for options issued subsequent to the effective date.  Under the modified prospective application method, prior periods are not restated for the effect of SFAS 123R, however, a pro forma note disclosure is required to report what would have been the impact on the prior year if we had elected to follow the fair market value accounting method.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Oil And Gas Price Fluctuations

Our primary market risk is market changes in oil and natural gas prices.  Prospective revenues from the sale of products or properties will be impacted by oil and natural gas prices.  A $1.00 per mcf change in the market price of natural gas will result in approximately an $8,000 change in our gross oil and gas production revenue.  The impact on any potential sale of property cannot be readily determined.  

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Currency Fluctuations

We currently hold our cash in Canadian and US currency. This does expose us to exchange rate fluctuations between the Canadian and United States currencies; however, we are planning to expand our operations in the international markets and the U.S. dollar is the standard currency for international transactions in the oil and gas industry. Therefore, we intend to continue using the U.S. dollar as our reporting currency for the foreseeable future. As we become more active in international markets we will transfer cash into U.S. currency based upon expected needs at that time.  We have not previously engaged in activities to mitigate the effects of foreign currency.  Based on the Q1 2006 revenue and cash flows a one percent change in the Canadian dollar rate relative to the US dollar is estimated to affect quarterly revenues and expenses by $122 and $523 respectively.

Interest Rate Fluctuations

We currently maintain some of our available cash and redeemable short term investments in US dollars and our reported interest income from these short term investments could be adversely affected by any material changes in US dollar interest rates.  A 1% change in the interest rate would have approximately a $6,000 impact if all of our cash was invested in interest bearing notes.

ITEM 4.  CONTROLS AND PROCEDURES

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 U.S. 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.

Disclosure controls and other procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of March 31, 2006, 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 /Chief Financial Officer concluded that our disclosure controls and procedures are effective in the timely alerting of management to material information relating to us which is required to be included in our periodic SEC filings.

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

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PART II
OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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 of $74,750, plus interest, under a consulting agreement and further alleges that NXT, without lawful justification, obstructed Mr. Stinson from trading his shares of NXT.   On December 10, 2002, we filed our Statement of Defense.  Mr. Stinson is a past President and director of NXT.

We believe the claim against us is contentious because of the ambiguity of the arrangements and we are vigorously defending ourselves against the claim.

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 Plaintiffs are seeking, among other things, damages in the amount of $450,000 CDN or 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.

NXT was not a party to the Ferry Flight Contract.  We believe the claim against us is without merit and intend to vigorously defend ourselves against the claim and will seek dismissal of the claim.

ITEM 1A.  RISK FACTORS

There have been no material change in the risk factors as previously disclosed in our Form 10-K.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NXT had two investors of the convertible debenture offering who exercised their options to convert their Convertible Debenture into Common Shares on March 20 and March 23, 2006.  In aggregate 76,891 Common Shares were issued in exchange for Convertible Debentures and  accrued interest.  These conversions were non-cash transactions and did not involve an underwriter.  The Convertible Debentures had a face value of $52,500 and accrued interest of $2,022.  The Convertible Debentures were converted at $0.70 of the face value and the accrued interest was issued in Common Shares equal to the weighted average market price per Common Share for the 10 days preceding the date when the interest is payable.

The 76,891 Common Shares were issued exempt from registration pursuant to Rule 506 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933.  Neither we nor any person acting on our behalf offered or sold these securities by any form of general solicitation or general advertising.  The shares issued are restricted securities and the certificates representing these shares have been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption there from.  Each investor represented to us that the securities were purchased for his own account and not for the account of any other persons. Each investor was provided with written disclosure that the securities have not been registered under the Securities Act of 1933 and therefore cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.

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ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

There has been no default upon senior securities.

ITEM 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

There have been no matters submitted during the first quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

ITEM 5.  OTHER INFORMATION

There is no information required to be disclosed in a report on Form 8-K during this period covered by this Form 10-Q that has not been reported on a Form 8-K.  Furthermore there has been no material change to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6.  EXHIBITS

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SIGNATURE

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, this 15th day of May 2006.

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