UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





þ
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
the Quarterly Period Ended June 30, 2010





o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


Commission
file number: 0-053150





NACEL
ENERGY CORPORATION





9375
E. Shea Blvd., Suite 100


Scottsdale,
Arizona  85260


Telephone
(602) 235-0355





Incorporated
      in Wyoming
            
            IRS
      ID# 20-4315791





Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to the filing requirements for the past
90 days.     Yes þ  
No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  The registrant has not been
phased into the Interactive Data reporting system.


Yes o No þ





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o (Do not
      check if a smaller reporting company)
            Smaller
      reporting
              company
      þ





Check
whether the issuer is a shell Company (as defined in Rule 12b-2 of the
Exchange Act).


Yes o No þ





Shares of
common stock outstanding on August 18, 2009: 25,645,724









NACEL
ENERGY CORPORATION





INDEX





FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2010





PART
      I. FINANCIAL INFORMATION
                
                
                3Item
      1.  Financial Statements
                
                
                3Consolidated
      Balance Sheets
                
                
                3Consolidated
      Statements of Expenses
                
                
                4Consolidated
      Statements of Cash Flows
                
                
                5Notes
      to Consolidated Financial Statements
                
                
                6Item
      2.  Management’s Discussion and Analysis or Plan of
      Operation
                
                
                10Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk
                
                
                14Item
      4.  Controls and Procedures
                
                
                14PART
      II. OTHER INFORMATION
                
                
                15Item
      1.  Legal Proceedings
                
                
                15Item
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds
                
                
                15Item
      3.  Defaults Upon Senior Securities
                
                
                16Item
      4.  Submission of Matters to a Vote of Security
      Holders
                
                
                16Item
      5.  Other Information
                
                
                16Item
      6.  Exhibits
                
                
                16





2




PART I. FINANCIAL
INFORMATION




Item
1.  Financial Statements





Nacel Energy
      Corporation(A Development Stage
      Company)Consolidated Balance
      Sheets(Unaudited)
  June 30,
              
              
              March 31,2010
              
              
              2010ASSETSCurrent
    AssetsCash
              
              $
              200,578
              
              
              $
              57,763Deposits
              
              
              -
              
              
              
              183,220Prepaid
      expenses
              
              
              4,041
              
              
              
              4,041Deferred
      financing costs
              
              
              -
              
              
              
              86,539Total current
      assets
              
              
              204,619
              
              
              
              331,563Property, plant and equipment, net
      of accumulated depreciation of $17,995 and14,886 at June 30, 2010 and March
      31, 2010, respectively.
              
              
              172,792
              
              
              
              175,901TOTAL
ASSETS
              
              $
              377,411
              
              
              $
              507,464LIABILITIES AND STOCKHOLDERS'
      EQUITY (DEFICIT)Accounts
      payable
              
              $
              101,054
              
              
              $
              307,301Accounts
      payable - related party
              
              
              19,500
              
              
              
              19,500Accrued
      interest - related party
              
              
              3,129
              
              
              
              3,333Notes
      payable
              
              
              450,000
              
              
              
              300,000Shareholder
      line of credit
              
              
              460,753
              
              
              
              460,753Convertilbe
      note, net of discount of $576,686, and $558,389 atJune
      30, 2010 and March 31, 2010, respectively
              
              
              150,990
              
              
              
              341,611Derivative
      liabilities
              
              
              1,026,564
              
              
              
              1,098,227Total current
      liabilities
              
              
              2,211,990
              
              
              
              2,530,725Stockholders'
      equityCommon
      stock of $.001 par value.  Authorized 50,000,000
      shares;issued24,017,846and 22,181,000 at June
      30, 2010 and March 31,
                2010,
      respectively
              
              
              24,018
              
              
              
              22,181Additional paid-in capital
              
              
              4,376,726
              
              
              
              3,992,691Deficit
      accumulated during the development stage
              
              
              (6,235,323
              )
              
              
              (6,038,133
              )Total stockholders' equity(deficit)
              
              
              (1,834,579
              )
              
              
              (2,023,261
              )TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY (DEFICIT)
              
              $
              377,411
              
              
              $
              507,464








3


Nacel Energy
      Corporation( A Development Stage
      Company)Consolidated Statements of
      Expenses(Unaudited)Three months ended June 30, 2010
      and 2009 and the periodfrom February 7, 2006 (Inception)
      through June 30, 2010
  InceptionThree Months Ended June
      30,
              
              
              through2010
              
              
              2009
              
              
              June 30,
    2010General and administrative
      expenses
              
              $
              115,776
              
              
              $
              198,372
              
              
              $
              2,946,380Wind projects donated by related
      party
              
              
              -
              
              
              
              -
              
              
              
              490,000Wind project development
      costs
              
              
              30,994
              
              
              
              287,661
              
              
              
              1,921,931Depreciation
              
              
              3,109
              
              
              
              4,082
              
              
              
              17,995Net loss from
      operations
              
              
              149,879
              
              
              
              490,115
              
              
              
              5,376,306Other (income)
      expenseInterest
      expense
              
              
              554,296
              
              
              
              3,535
              
              
              
              1,070,634Interest
    income
              
              
              -
              
              
              
              -
              
              
              
              (3,848
              )Other
income
              
              
              -
              
              
              
              -
              
              
              
              (419
              )Loss on debt
      extinguishment
              
              
              1,815,327
              
              
              
              -
              
              
              
              1,815,327Gain on derivative financial
      instruments
              
              
              (2,322,312
              )
              
              
              -
              
              
              
              (2,022,677
              )Total other (income)
      expense
              
              
              47,311
              
              
              
              3,535
              
              
              
              859,017Net loss
              
              $
              (197,190
              )
              
              $
              (493,650
              )
              
              $
              (6,235,323
              )Basic and diluted net loss per
      share
              
              $
              (0.01
              )
              
              $
              (0.02
              )
              
              
              N/ABasic and diluted weighted average
      common shares outstanding
              
              
              22,555,058
              
              
              
              21,793,747
              
              
              
              N/A


See accompanying notes to
consolidated financial statements




4




Nacel Energy
      Corporation(A Development Stage
      Company)Consolidated Statements of Cash
      Flows(Unaudited)Three months ended June 30, 2010
      and 2009 and the periodfrom February 7, 2006 (Inception)
      through June 30, 2010
  InceptionThree Months Ended June
      30,
              
              
              through2010
              
              
              2009
              
              
              June 30,
    2010CASH FLOWS FROM OPERATING
      ACTIVITIESNet
      loss
              
              $
              (197,190
              )
              
              $
              (493,650
              )
              
              $
              (6,235,323
              )Adjustments to reconcile net loss
      to net cash used inoperating
      activities:Depreciation
              
              
              3,109
              
              
              
              4,082
              
              
              
              17,995Amortization of debt discount and
      deferred financing costs
              
              
              538,564
              
              
              
              -
              
              
              
              982,228Stock for
      services
              
              
              -
              
              
              
              18,300
              
              
              
              349,390Wind projects donated by related
      party
              
              
              -
              
              
              
              -
              
              
              
              490,000Imputed
      interest
              
              
              -
              
              
              
              -
              
              
              
              15,725Stock issued for executive
      compensation
              
              
              -
              
              
              
              -
              
              
              
              1,007,500Loss on extinguishment of
      debt
              
              
              1,815,327
              
              
              
              -
              
              
              
              1,815,327Gain on
      derivatives
              
              
              (2,322,312
              )
              
              
              -
              
              
              
              (2,022,677
              )Changes
      in:Prepaids and other current assets
              
              
              -
              
              
              
              (64,943
              )
              
              
              (4,041
              )Deposits
              
              
              183,220
              
              
              
              -
              
              
              
              -Accounts payable
              
              
              (27,700
              )
              
              
              14,646
              
              
              
              279,601Accounts
      payable - related party
              
              
              -
              
              
              
              -
              
              
              
              19,500Accrued
      interest
              
              
              (203
              )
              
              
              (3,894
              )
              
              
              3,130Net
      Cash Used in Operating Activities
              
              
              (7,185
              )
              
              
              (525,459
              )
              
              
              (3,281,645
              )CASH FLOWS FROM INVESTING
      ACTIVITIESPurchase of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              (190,787
              )Net Cash
      Used in Investing Activities
              
              
              -
              
              
              
              -
              
              
              
              (190,787
              )CASH FLOWS FROM FINANCING
      ACTIVITIESCash paid for financing
      costs
              
              
              -
              
              
              
              -
              
              
              
              (120,000
              )Proceeds from shareholder line of credit
              
              
              -
              
              
              
              -
              
              
              
              458,010Borrowings
      on debt
              
              
              150,000
              
              
              
              150,000
              
              
              
              1,180,000Proceeds from sale of common stock
              
              
              -
              
              
              
              -
              
              
              
              955,000Proceeds from exercise of warrant
              
              
              -
              
              
              
              -
              
              
              
              1,200,000Net cash Provided by Financing Activities
              
              
              150,000
              
              
              
              150,000
              
              
              
              3,673,010NET CHANGE IN CASH
              
              
              142,815
              
              
              
              (375,459
              )
              
              
              200,578CASH AT BEGINNING OF PERIOD
              
              
              57,763
              
              
              
              564,677
              
              
              
              -CASH AT END OF PERIOD
              
              $
              200,578
              
              
              $
              189,218
              
              
              $
              200,578SUPPLEMENTAL DISCLOSURES OF CASH
      FLOW INFORMATIONInterest
              
              $
              15,935
              
              
              $
              7,429
              
              
              $
              62,122Income taxes
              
              
              -
              
              
              
              -
              
              
              
              -NON-CASH INVESTING AND FINANCING
      TRANSACTIONSDebt
      discount from derivative liabilities
              
              
              935,000
              
              
              
              -
              
              
              
              1,665,000Warrants
      issued for deferred financing costs
              
              
              -
              
              
              
              -
              
              
              
              68,592Shares
      issued accounts payable
              
              
              178,548
              
              
              
              -
              
              
              
              178,548Shares
      issued for notes payable
              
              
              207,324
              
              
              
              -
              
              
              
              207,324









5




NACEL
ENERGY CORPORATION


(A
Development Stage Company)


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


UNAUDITED





NOTE
1 - BASIS OF PRESENTATION





The
unaudited interim financial statements included herein have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange
Commission. We suggest that these interim financial statements be read in
conjunction with the audited financial statements and notes thereto included in
our Form 10-K for the year ended March 31, 2010, as filed with the SEC. We
believe that all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of financial position and the results of
operations for the interim periods presented have been reflected herein and that
the disclosures made are adequate to make the information not
misleading.  The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full
year.  Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited financial statements for the
most recent fiscal year as reported in Form 10-K have been omitted.





Fair
Value Measurements





In
September 2006, the FASB issued ASC 820 (previously SFAS 157) which defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. The provisions of ASC 820 were effective
January 1, 2008.





As
defined in ASC 820, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). The Company utilizes market
data or assumptions that market participants would use in pricing the asset or
liability, including assumptions about risk and the risks inherent in the inputs
to the valuation technique. These inputs can be readily observable, market
corroborated, or generally unobservable. The Company classifies fair value
balances based on the observations of those inputs. ASC 820 establishes a fair
value hierarchy that prioritizes the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurement) and the lowest
priority to unobservable inputs (level 3 measurement).





The three
levels of the fair value hierarchy defined by ASC 820 are as
follows:





Level 1 –
Quoted prices are available in active markets for identical assets or
liabilities as of the reporting date. Active markets are those in which
transactions for the asset or liability occur in sufficient frequency and volume
to provide pricing information on an ongoing basis. Level 1 primarily consists
of financial instruments such as exchange-traded derivatives, marketable
securities and listed equities.





Level 2 –
Pricing inputs are other than quoted prices in active markets included in level
1, which are either directly or indirectly observable as of the reported date.
Level 2 includes those financial instruments that are valued using models or
other valuation methodologies. These models are primarily industry-standard
models that consider various assumptions, including quoted forward prices for
commodities, time value, volatility factors, and current market and contractual
prices for the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in the
marketplace throughout the full term of the instrument, can be derived from
observable data or are supported by observable levels at which transactions are
executed in the marketplace. Instruments in this category generally include
non-exchange-traded derivatives such as commodity swaps, interest rate swaps,
options and collars.





Level 3 –
Pricing inputs include significant inputs that are generally less observable
from objective sources. These inputs may be used with internally developed
methodologies that result in management’s best estimate of fair
value.




6




The
following table sets forth by level within the fair value hierarchy the
Company’s financial assets and liabilities that were accounted for at fair value
as of June 30, 2010. As required by ASC 820, financial assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. The Company’s assessment of the
significance of a particular input to the fair value measurement requires
judgment, and may affect the valuation of fair value assets and liabilities and
their placement within the fair value hierarchy levels.





June 30, 2010Level 1
                                
                                
                                Level 2
                                
                                
                                Level 3
                                
                                
                                TotalEmbedded
      derivatives
                                
                                
                                —
                                
                                
                                $
                                1,026,564
                                
                                
                                
                                —
                                
                                
                                $
                                1,026,564




The
derivatives listed above are carried at fair value. The fair value amounts in
current period earnings associated with the Company’s derivatives resulted from
Level 2 fair value methodologies; that is, the Company is able to value the
assets and liabilities based on observable market data for similar instruments.
This observable data includes the quoted market prices and estimated volatility
factors.





Reclassifications.




Certain
prior year amounts have been reclassified to conform to the current year
presentation.





NOTE
2 - GOING CONCERN




The
accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Nacel Energy has incurred material
recurring losses from operations.  Since inception, Nacel Energy has
incurred losses of approximately $6.24 million.  In addition, Nacel
Energy is experiencing a continuing operating cash flow deficiency. These
factors, among others, raise substantial doubt about Nacel Energy’s ability to
continue as a going concern for a reasonable period of time.





Nacel
Energy is pursuing, and will  continue to pursue, additional equity
financing and/or debt financing while managing cash flow in an effort to provide
funds and cash flow to meet its obligations on a timely basis and to support
wind project development activities.





The
consolidated financial statements do not contain any adjustments to reflect the
possible future effects on the classification of assets or the amounts and
classification of liability that may result should Nacel Energy be unable to
continue as a going concern.





NOTE
3 – CONVERTIBLE NOTE PAYABLE





On
November 24, 2009, Nacel entered into a definitive Securities Purchase Agreement
for the issuance of a Senior Secured Convertible Note (the “Note”) and 3,500,000
Warrants in a private placement with a single institutional investor (the
“Investor”).  Proceeds from the Note were $730,000 with repayment
amount of $900,000.  The Note has an original issue discount of
$150,000.  $20,000 of the initial proceeds was used to pay legal costs
for the investor.  In addition, Nacel paid an additional $25,000 in
separate legal fees associated with the offering.  The legal fees were
deferred and will be amortized until maturity to interest expense.




7




On April
23, 2010, Nacel entered into an Exchange Agreement whereby the Note was
exchanged for a new Senior Secured Convertible Note (the “2010 Convertible
Note”) and original Warrants were exchanged for New Warrants containing various
changes and modifications. The principal amount of the 2010 Convertible Note is
$935,000 consisting of the $900,000 original principal plus an additional
$35,000 of costs and expenses which Nacel is obligated to reimburse the
Investor. The 2010 Convertible Note  is payable in  seven
equal  monthly installments of $133,571 beginning on June 23, 2010 and
matures on December 23, 2010.  No
interest  accrues  unless an event of default occurs, in
which case the interest rate shall be 18% per annum.  Nacel may pay
each monthly installment in cash or, at its option, subject to the satisfaction
of customary equity conditions, in shares of common stock.  The Note
is convertible into shares of Nacel’s common stock at
current  conversion price of $0.30 per share, reduced from the initial
conversion price of $0.90 per share.





Nacel
also modified the outstanding warrants issued with the original
note.  Nacel increased the original warrant amount from 3,500,000 to
7,500,000 and reduced the exercise price from $0.90 to $0.30 per
share.  In addition, Nacel issued an additional 3,000,000 warrants
with an exercise price of $0.30 that are exercisable for one year from the
modification date.





Nacel
evaluated the extension event under ASC 470-60. Because the investors did not
grant a concession on this outstanding loan, the transaction was not accounted
for as troubled debt restructuring. Consequently, Nacel evaluated these
transactions under ASC 470-50 “Debtor’s Accounting for a
Modification or Exchange of Debt Instruments”to determine if the
modification was substantial. Because the change in fair value of the conversion
option was greater than 10% of the carrying value of the debt,  the
debt modification was determined to be substantial and accordingly the debt was
extinguished.  The difference in the carrying value of the original
debt and its corresponding derivatives and the new debt and its corresponding
derivatives was $1,815,327 which is recorded as a loss on debt extinguishment in
the consolidated statement of operations for the three months ended June 30,
2010.





The
embedded conversion option contains a reset provision that can cause an
adjustment to the conversion price if Nacel sells or issues an equity instrument
at a price lower than the initial conversion price.  Due to this
provision, the embedded conversion option qualifies for derivative accounting
under ASC 815-15 (See Note 6 below).  This fair value in conjunction
with the fair value of the warrants issued with the new note resulted in a full
discount to the note payable at the modification date.  As of June 30,
2010, $385,314 of the discount had been amortized to interest
expense.





During
the three months ended June 30, 2010, Nacel made principal payments in shares of
common stock in accordance with the terms of the agreement.  A total
of 1,241,688 shares of common stock were issued for payment of $207,324 of
principal.





NOTE
4 - EQUITY TRANSACTIONS





During
the quarter ending June 30, 2010, 595,158 shares were issued for services
performed in the prior period (included in accounts payable as of March 31,
2010) valued at $178,548.





Additionally,
during the quarter ending June 30, 2010,  1,241,688 shares were issued
for debt payments valued $207,324.  (see Note 3)





NOTE
5 – WARRANTS





During
the quarter, in conjunction with the note modification above (see Note 3), Nacel
issued new warrants to an investor, which are exercisable for a period of 5
years for up to 7,500,000 shares of Nacel’s commons stock, with a modified
exercise price of $0.30, reduced from the initial exercise price of
$0.90.  Nacel also issued additional warrants to purchase 3,000,000
shares of common stock with an exercise price of $0.30 until the 1 year
anniversary of the effective date of the registration statement filed by
Nacel.





The
warrants all contain reset provisions that can cause an adjustment to the
exercise price if Nacel sells or issues an equity instrument at a price lower
than the initial conversion price.  Due to this provision, the
warrants qualify for derivative accounting under ASC 815-15 (See Note 6
below).




8




A summary
of the warrants for the three months ended June 30, 2010 is as
follows:





Warrants
                              
                              
                              Weighted-AverageExercise Price
                              
                              
                              Weighted-AverageRemainingContracted Life(Years)
                              
                              
                              AggregateIntrinsic ValueOutstanding
      on March 31, 2010
                              
                              
                              3,583,333
                              
                              
                              $
                              0.90
                              
                              
                              
                              4.92
                              
                              
                              $
                              -Granted
                              
                              
                              10,500,000
                              
                              
                              
                              0.30
                              
                              
                              
                              3.86
                              
                              
                              
                              -Exercised
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Exchanged
                              
                              
                              (3,500,000
                              )
                              
                              
                              0.90
                              
                              
                              
                              -
                              
                              
                              
                              -Expired
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Outstanding
      on June 30, 2010
                              
                              
                              10,583,333
                              
                              
                              $
                              0.30
                              
                              
                              
                              3.68
                              
                              
                              $
                              -





NOTE
6 - DERIVATIVE LIABILITY





Embedded
feature of equity-linked financial instrument:


ASC
815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to
an Entity's Own Stock" lays out a procedure to determine if an equity linked
financial instrument (or embedded feature) is indexed to its own common
stock.




Senior
Secured Note - The embedded conversion option in Nacel’s $935,000 note described
in Note 3 and the related warrants described in Note 5 contain a reset provision
that can cause an adjustment to the conversion price if Nacel sells or issues an
equity instrument at a price lower than the initial conversion
price.  Nacel replaced 3,500,000 warrants by issuing 10,500,000 new
warrants as a result of debt restructuring.  The fair value of these
liabilities will be re-measured at the end of every reporting period and the
change in fair value will be reported in our consolidated statement of
operations as a gain or loss on derivative financial instruments.





The
following table summarizes the change in derivative liabilities for the three
months ended June 30, 2010:





Derivative
      liabilities at March 31, 2010
                
                $
                1,098,227Change
      in fair value of embedded conversion option and warrants prior to
      modification
                
                
                206,516Extinguishment
      of derivative liabilities due to note modification
                
                
                (1,246,700
                )Addition
      of new derivative liabilities after note modification
                
                
                3,497,349Change
      in fair value of embedded conversion option and warrants after
      modification
                
                
                (2,653,470
                )Change
      in fair value of unmodified derivative liabilities existing at March 31,
      2010
                
                
                124,642Derivative
      liabilities at June 30, 2010
                
                $
                1,026,564





The
following table summarizes the derivative gain for the three months June 30,
2010:





Change
      in fair value of embedded conversion option and warrants prior to
      modification
                
                $
                206,516Change
      in fair value of embedded conversion option and warrants after
      modification
                
                
                (2,653,470
                )Change
      in fair value of unmodified derivative liabilities existing at March 31,
      2010
                
                
                124,642Gain
      on derivative liabilities
                
                $
                (2,322,312
                )





Nacel
used the Black-Scholes option pricing model to value the embedded conversion
feature and warrants above using the following assumptions: number of options as
set forth in the convertible note and warrant agreements; no expected dividend
yield; expected volatility ranging from 102% - 306%; risk-free interest rates
ranging from 0.32% - 1.79% and expected terms based on the contractual
term.




9




NOTE
7 – SUBSEQUENT EVENTS





Subsequent
to June 30, 2010, Nacel issued 1,627,878 shares of common stock for payment of
notes payable described in Note 3.





On July
27, 2010, Nacel modified the note described in Note 3.  Under the
terms of the Second Exchange Agreement, the 2010 Convertible Note was exchanged
for a new Senior Secured Convertible Note (the “New Note”) whereby the only
change was to increase to 9.9% the beneficial ownership limitation of Company
shares which can be owned by the investor





Item
2.  Management’s Discussion and Analysis or Plan of
Operation





At the
directive of the Securities and Exchange Commission to use “plain English” in
its public filings, the Company will use such terms as “we”, “our” and “us” in
place of Nacel Energy Corporation or “the Company.” When such terms are used in
this manner throughout this document they are in reference only to the
corporation, Nacel Energy Corporation and its subsidiary, and are not used in
reference to the board of directors, corporate officers, management, or any
individual employee or group of employees.





Forward-Looking
Statements




This Form
10-Q includes “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this Form 10-Q, including, without
limitation, the statements under both “Notes to Consolidated Financial
Statements” and “Item 2. Management’s Discussion and Analysis or Plan of
Operation” located elsewhere herein regarding the Company’s financial position
and liquidity, the amount of and its ability to make debt service payments, its
strategies, financial instruments, and other matters, are forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from our expectations are disclosed in this
Form 10-Q.




History




Nacel
Energy Corporation is a Wyoming corporation incorporated on February 7, 2006,
with our principal executive office located at 9375 E. Shea Blvd., Suite 100,
Scottsdale, Arizona 85260. We are a development stage wind power generation
company engaged in the business of developing wind power generation facilities
from “green field” (or blank state) up to and including operation. Our domestic
development efforts are primarily focused upon wind power generation facilities
in the 10 MW to 40 MW range. We have not ruled out the possibility of larger
projects including internationally.


.


Current
Operations





As of
June 30, 2010, we had six (6) separate wind energy projects having 185 MW, or
more, of total potential generating capacity located on acreage in the Panhandle
area of Texas and in Arizona. The status of each of our development stage wind
energy projects was described in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2010, as filed with the Commission. We are also actively
engaged in efforts to locate and evaluate other “green field” sites for
development of additional wind power generation facilities. We do not have any
wind energy projects in operation currently and it is estimated that it will not
be until at least late December 2012, perhaps longer, before any of our projects
may become operational, and will require that we obtain substantial additional
financing and/or equity, obtaining of construction and project debt financing
and establishing turbine supply relationships. There are no assurances that we
will be able to obtain any additional financing and/or equity and, even if
obtained, that any of our wind power generation facilities will ultimately
become operational or generate sufficient revenues to be profitable. Similarly,
there are no assurances that we will be able to establish and maintain
satisfactory relationships with a turbine supply company in order to able to
develop any of our wind energy projects.




10




During
the three month period ending June 30, 2010, the following activities have
occurred with respect to our six (6) wind power generations
projects:





·           In
April, 2010, we submitted a comprehensive bid with the assistance of a tier-one
wind turbine manufacturer to Arizona Public Service Co. (APS) for the supply of
19.5 megawatts of clean, renewable energy to be sourced from our Snowflake wind
project. For further information, see our Current Report on Form 8-K dated April
14, 2010, as amended by Form 8-K/A, each filed with the Commission.





·           In
late May, 2010, we received notification from APS that our Snowflake Project was
not shortlisted amount the projects which would be considered in APS’s detailed
evaluation process of wind projects which might thereafter result in selection
for final negotiation and possible contract execution and regulatory
approval.  For further information, see our Current Report on Form 8-K
dated May 26, 2010, filed with the Commission.





·           In
late June, 2010, we submitted a comprehensive bid with the assistance of a
tier-one wind turbine manufacturer to APS for the supply of 15 megawatts of
clean, renewable energy to be sourced from our Snowflake wind project with a
commercial operation date of December 31, 2012. A preliminary decision is
expected to be announced by APS in late August, 2010 regarding whether a bidder
would be included on a short list of projects to thereafter be considered in
APS’s detailed evaluation process of wind projects which might thereafter result
in selection for final negotiation and possible contract execution. For further
information, see our Current Report on Form 8-K dated June 24, 2010, filed with
the Commission





·           We
are engaged in completing necessary procedures to allow the filing of additional
applications for interconnection with other public utilities with respect to a
couple of our other wind power projects.





·           We
are continuing to monitor wind data being generated at all wind power project
sites and to develop wind energy studies which may be necessary for our respect
wind power projects.





In
addition to the foregoing, we also assess our wind power project development
business regularly with regard to the need for capital equipment. During the
first three months of the period ending June 30, 2010, we acquired no additional
capital equipment.





Plan
of Operation





Since our
inception, we have been a development stage company and, accordingly, have
incurred losses from our operations. For the three months ended June 30, 2010,
we incurred net losses of $197,190 and have an accumulated deficit since
inception of $6,235,323. We currently have no revenues. The potential future
revenues from our wind power generation projects, if any, will not be generated
until at least December, 2012, perhaps longer, and will require the expenditure
of substantial additional capital, obtaining construction and project debt
financing and establishing turbine supply relationships.





For the
foreseeable future, our operating plan is dependent upon both the ability to
conserve existing cash resources and the ability to obtain additional capital
through equity financing and/or debt financing in an effort to provide funds and
cash flow to meet our obligations on a timely basis and to support wind project
development activities. In the event that we are unable to conserve existing
cash resources and/or obtain the additional and necessary capital to pursue our
wind power generation development projects, we may have to cease or
significantly curtail our operations. This could materially impact our ability
to continue operations.




11




Liquidity
and Capital Resources





The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business.  Since our inception, we have been a
development stage company and, accordingly, have incurred losses from our
operations. For the three months ended June 30, 2010, we incurred net losses of
$197,190 and have an accumulated deficit since inception of $6,235,323. We
currently have no revenues. The potential future revenues from our wind power
generation projects, if any, will not be generated until at least December 2010,
perhaps longer, and will require the expenditure of substantial additional
capital obtaining construction and project debt financing and establishing
turbine supply relationships.  In addition, our shareholder line of
credit in the amount of $460,753 is due and payable on April 1, 2011, unless we
are able to obtain a further extension. These factors, among others, indicate
that we may be unable to continue as a going concern for a reasonable period of
time.




As of
June 30, 2010, we had cash of $200,578 and working capital deficit of
$(2,007,371). This compares to cash of $57,763 and working capital deficit
of  $(2,199,162) at March 31, 2010. Based on commitments arising from
our consulting agreements and other general and administrative expenses, we
anticipate that that operating expenses during each succeeding quarter will be,
at a minimum, approximately $40,000. This amount does not include any capital
requirements for our wind energy projects. Based on the foregoing, we will not
have sufficient cash resources to finance our operations except for several
months unless we are able to raise additional equity financing and/or debt
financing in the immediate future. We have commenced, and will continue to
pursue, efforts to raise additional equity financing and/or debt financing from
a variety of sources and means. There are no assurances that we will be able to
obtain any additional financing and/or equity and, even if obtained, that such
financing will be in a sufficient amount to be able to continue operations for a
sufficient period until one or more of our wind power generation facilities
become operational or until we can generate sufficient revenues to be
profitable.





As of
June 30, 2010, we had borrowed the entire $460,753 under an original $250,000
shareholder line of credit, which was amended in late June, 2009 to, among other
things, increase the amount which could be borrowed from $250,000 up to
$400,000. The credit line was further amended in late June, 2009 to increase the
amount which could be borrowed up to $442,143, and was amended again in late
September, 2009 when the credit line was increased up to $460,753 The first
payment under the amended credit line is due on October 1. 2009. The unpaid
principal amount and all accrued interest are due and payable in full on April
1, 2011. . As of June 30, 2010, we had borrowed the entire $460,753 under this
credit facility, which again leaves no additional amounts available for future
borrowing. There are no assurances that the shareholder will agree to further
extend the due date for repayment of the line of credit balance or otherwise
change any of the repayment terms. Accordingly, if the repayment date of the
line of credit remains unchanged, this could have a material impact on the
future liquidity of the Company and its future operations.





In July
2009, Nacel executed a new loan with a lender in the amount of $250,000, which
provides for simple interest of 10% to be paid in consecutive monthly
installments of interest only commencing on July 1, 2009 and continuing on the
first of each following month until the lender has provided the borrower with
written notice of demand and the balance owing under this agreement will be paid
within 15 days of any such notice of demand.  The loan is unsecured.
This loan is included in notes payable in the consolidated balance sheets as of
June 30, 2010 and March 31, 2010.





Recent
Financings





As of the
fiscal year ended at March 31, 2010, we completed various financings. For
further description and details of these financings, see our Annual Report on
Form 10-K dated March 31, 2010, as filed on July 14, 2010 with the
SEC.





During
the quarter ending June 30, 2010, we did not enter into any additional
financings. However, we did modify and amend an existing, principal financing as
further described below.





Senior Secured Convertible Note and
Warrants.  On April 23, 2010, we entered into an Exchange
Agreement which effectively amended and modified the terms of the Senior Secured
Convertible Note in the original principal amount of $900,000 (the “Note”)
issued to a single institutional investor (the “Investor”) and common stock
warrants (the “Warrants”) issued to the Investor. Under the terms of the
Exchange Agreement, the Note was exchanged for a new Note and the Warrants were
exchanged for New Warrants containing various changes and modifications in their
respective terms and provisions.




12




The
principal amount of the New Note is $935,000 (the “2010 Convertible Note”)
consisting to the original principal amount of $900,000 plus an additional
$35,000 in costs and expenses (including attorney’s fees) which we were
obligated to reimburse under the original transaction documents and the
negotiation and preparation of the Exchange Agreement and Exchange Documents (as
defined in the Exchange Agreement).  The 2010 Convertible Note
provides for payment in seven equal installments of $133,571 beginning 21
trading days after the earlier of (a) May 24, 2010, or (b) the date a
registration statement covering the shares of our common stock issuable upon
conversion or exercise (as the case may be) of the 2010 Convertible Note and New
Warrants is declared effective by the SEC. Accordingly, the maturity date of the
2010 Convertible Note will be no later than December 23, 2010.  No
interest accrues on the principal amount outstanding unless an event of default
occurs in which event interest shall thereafter accrue at the rate of eighteen
percent per annum. We may pay installments of principal in cash or, at our
option, in shares of common stock.  If we elect to pay the principal
in shares of our common stock, the value of each share of common stock will be
equal to the lower of (a) the new conversion price of $0.30 per share, or (b)
90% of the average of the volume weighted average prices of our common stock on
each of the twenty (20) consecutive trading days immediately preceding the
applicable payment date. In addition, at the option of the holder of the 2010
Convertible Note, all or any part of the principal amount outstanding under the
2010 Convertible Note is convertible at any time and from time to time into
shares of our common stock at the new conversion price of $0.30 per share.
However, the conversion price may be reduced if we issue securities at a price
per share less than the conversion price of the 2010 Convertible Note then in
effect.





The 2010
Convertible Note and the New Warrants have conversion features which result in
them being recorded as derivative liabilities as described further in Note 6 to
the consolidated financial statements for the year ended at March 31, 2010. As
derivative liabilities, the existing uncertainties as to the ultimate amount of
shares which could be required to issue are not known and may increase
significantly. Accordingly, these uncertainties are reflected as obligations
until they are resolved through conversion, exercise or expiration





For
further description of the Exchange Agreement, the documents executed and
delivered and other pertinent terms and provisions, see our Form 8-K dated April
23, 2010, as filed with the SEC on April 27, 2010.





Subsequent
to June 30, 2010, on July 27, 2010, we entered into a definitive Exchange
Agreement (the “Second Exchange Agreement”) with the Investor pursuant to which
the 2010 Convertible Note was exchanged for a new Senior Secured Convertible
Note (the “New Note”) whereby the only changes were to increase to 9.9% the
beneficial ownership limitation of our shares which can be owned by the investor
and further acknowledged and agreed that the current unpaid principal balance
due on the New Note is $667,857, that the dates on which Installment Amounts are
due are August 23, 2010, September 23, 2010, October 23, 2010 and November 23,
2010 and that the Maturity Date of the New Note is December 23,
2010.





Except as
noted above, all of the other terms and provisions of the New Note remain the
same as set forth in the 2010 Convertible Note. In addition, there were no
changes or modifications made to any of the provisions of the Registration
Rights Agreement or the Warrants.





For
further description of the Second Exchange Agreement, the documents executed and
delivered and other pertinent terms and provisions , see our Form 8-K dated July
27, 2010, as filed with the SEC on July 30, 2010.




13




Results of
Operations





Three
Months Ended June 30, 2010 compared to the Three Months Ended June 30,
2009





Overview.We have yet to generate any revenues from our operations. The net loss
for the three months ended June 30, 2010 (“2010 Period”) was $197,190 compared
to a net loss of $493,650 for the three months ended June 30, 2009 (“2009
Period”), a decrease of $296,460.





Revenues.
We generated no revenues from our operations for the three months ended June 30,
2010 or for the three months ended June 30, 2009. Our operations have focused
upon various business planning and wind power project development activities
since inception, and have not generated any revenues.  .





Expenses.  Our
operating expenses were $149,879 for the 2010 Period compared to operating
expenses of $490,115  for the 2009 Period, a decrease of $340,236.
This decrease in operating expenses is primarily attributable to an $82,596
decrease in general and administrative expense, a $256,667 decrease in wind
project development costs, and a decrease in depreciation of $973  for
the 2010 Period as compared to the 2009 Period.





Our net
other expenses/income for the 2010 Period were $47,311 as compared to $3,535 for
the 2009 Period. Our other expenses included a gain on derivative financial
instruments of $2,322,312 as compared to $0 in the 2009 Period, a loss on debt
extinguishment of $1,815,327 for the 2010 Period as compared to $0 in the 2009
Period and interest expense of $554,296 for the 2010 Period as compared to
$3,535 for the 2009 Period.





Off
Balance Sheet Transactions, Arrangements, or Obligations.





We have
no material off balance sheet transactions, arrangements or
obligations.




Item
3. Quantitative and Qualitative Disclosures About Market Risk.




As a
“smaller reporting company” (as defined by §229.10(f)(1)), we are not required
to provide the information required by this item.




Item
4.  Controls and Procedures





Evaluation of Disclosure
Controls and Procedures





We
maintain a system of disclosure controls and procedures that are designed for
the purpose of insuring that information required to be disclosed in our SEC
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including the Chief Executive
Officer and Principal Accounting Officer, as appropriate, to allow timely
decisions regarding required disclosures.





As of the
end of the period covered by this report on Form 10-Q, our Chief Executive
Officer and our Chief Financial Officer performed an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rule
13a-15(e) or Rule 15d-15(e) under the Exchange Act. Based on that evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that, as
of the end of the period covered by this report on Form 10-Q, our disclosure
controls and procedures were not effective for the purposes stated above due to
material errors in the recording of a debt extinguishment transaction. The
consolidated financial statements in this report have been adjusted to include
these changes. Management is working on plans to improve the processes that
govern the recording of these transactions. We believe these plans when
finalized will enable us to avoid these types of errors in the
future.





Changes in Internal Control
Over Financial Reporting





We
continue to monitor and evaluate the effectiveness of our internal controls and
procedures and our internal controls over financing reporting on an ongoing
basis. We are committed to taking further action and implementing additional
enhancements or improvements, as necessary, and as funds allow.




14




There
have been no changes in our internal control over financial reporting that
occurred during the quarter ended June 30, 2010 that have materially affected,
or were reasonably likely to materially affect, our internal control over
financial reporting.





PART
II. OTHER INFORMATION




Item
1.  Legal Proceedings




We know
of no material, active or pending legal proceedings against our company, nor are
we involved as a plaintiff in any material proceeding or pending litigation.
There are no proceedings in which any of our directors, officers or affiliates,
or any registered or beneficial shareholder, is an adverse party or has a
material interest adverse to our interest.





Item
1A.  Risk Factors





As
a “smaller reporting company” (as defined by §229.10(f)(1)), we are not required
to provide the information required by this item.




Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





(a)    Unregistered
Sales of Equity Securities.





On April
25, 2010, we issued 250,000 shares and 45,000 shares to former executive
officers as payment of accrued and deferred compensation of $75,000 and $13,500,
respectively. The sale of such shares was exempt from registration under the
Securities Act in reliance upon Section 4(2) thereof. We believe that each
former executive officer is an “accredited investor” as that term is defined in
Rule 501(a) of Regulation D under the Securities Act. The certificates issued
for the subject shares of common stock included a restrictive legend that there
are restricted.





On April
25, 2010, we issued a total of 300,158 shares to the two principals of Renergix
Wind LLC, our former project development consultant, as payment for accrued and
deferred compensation of $90,047.25.  In connection with such
issuance, a total of 25,079 shares were issued to a former executive officer,
being one of the principals of Renergix Wind LLC. The sale of such shares was
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof. We believe that each of the principals of Renergix Wind LLC is an
“accredited investor” as that term is defined in Rule 501(a) of Regulation D
under the Securities Act. The certificate issued for the subject shares of
common stock included a restrictive legend that there are
restricted.





On May
23, 2010, we exercised our right to pay the first Installment Amount due on June
23, 2010 under the 2010 Convertible Note with the issuance to the Investor of
shares of our common stock. Accordingly, we issued an aggregate of 462,569
shares to the Investor in connection with the pre-installment payment obligation
under the 2010 Convertible Note. These shares are deemed to have been held by
the Investor for a period of more than 6 months pursuant to Rule 144 and these
shares can be sold by the Investor, subject to compliance with Rule
144.





On June
23, 2010, we issued 158,275 shares, which coupled with the earlier 462,569
shares issued on May 23, 2010, satisfied the first Installment Amount due on
June 23, 2010. These shares are deemed to have been held by the Investor for a
period of more than 6 months pursuant to Rule 144 and these shares can be sold
by the Investor, subject to compliance with Rule 144.





On June
23, 2010, we also exercised our right to pay the second Installment Amount due
on July 23, 2010 under the 2010 Convertible Note with the issuance to the
Investor of shares of our common stock. Accordingly, we issued an aggregate of
620,844 shares of our common stock to the Investor in satisfaction of the
pre-installment payment obligation under the 2010 Convertible Note. These shares
are deemed to have been held by the Investor for a period of more than 6 months
pursuant to Rule 144 and these shares can be sold by the Investor, subject to
compliance with Rule 144.




15




Item
3.  Defaults Upon Senior Securities





None





Item
4.  Submission of Matters to a Vote of Security Holders




The
Registrant did not submit any matters to a vote of its security holders during
the three-months ended June 30, 2009.




Item
5.  Other Information




None




Item
6.  Exhibits




a)
Exhibits.





Exhibit No.
                  
                  Document31.1
                  
                  Certification
      Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (Mark
      Schaftlein, President, Principal Executive Officer and Principal
      Accounting Officer)32.1
                  
                  Certification
      Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (Mark Schaftlein, President, Principal
      Executive Officer and Principal Accounting
  Officer)




SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





NACEL
      ENERGY CORPORATIONBy:
                  /s/  Mark
      SchaftleinMark
      SchaftleinChief
      Executive Officer and Principal Accounting OfficerDate:
                  August 19, 2010




16