**United States**

**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

** **

**FORM 10-QSB**

 

**(Mark One)**

 

**ý****QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2005**

 

**o****TRANSITION REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from**            **to**          

 

**Commission file number 000-27783**

 

**NATHANIELENERGY CORPORATION**

(Name of Small Business Issuer in its Charter)

 
| **Delaware**                                                    | ** ** | **84-1572525**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**8001 South InterPort Blvd. Suite 260, Englewood, Colorado 80112**

(Address of principal executive offices) (Zip Code)

 

Issuer’s telephone number: (303) 690-8300

 

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

 

Applicable only to issuersinvolved in bankruptcy proceedings during the preceding five years

 

Check whether the registrantfiled all documents and reports required to be filed by Section 12, 13 or15(d) of the Exchange Act after the distribution of securities under aplan confirmed by a court. Yes o No o

 

Applicable only to corporateissuers

 

State the number of sharesoutstanding of each of the issuer’s class of common equity, as of the latestpracticable date: November 18, 2005, 90,698,263 shares of common stock,$.001 par value.

 

**TransitionalSmall Business Disclosure Format (Check One) Yes****o****No****ý******

 

 

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**NATHANIEL ENERGY CORPORATION**

 

TABLE OF CONTENTS

 
| PART I.  | FINANCIAL INFORMATION                                           |                                                                                                         |
|---------------|-----------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|          |                                                            |                                                                                                         |
| Item  1       | Financial  Statements (unaudited)                               |                                                                                                         |
|          |                                                            |                                                                                                         |
|          |                                                            | Consolidated Balance Sheets as of  September 30, 2005 and December 31,  2004                  |   |
|          |                                                            |                                                                                                         |   |
|          |                                                            | Consolidated Statements of  Operations for the Three And Nine Months ended September 30, 2005 and  2004 |   |
|          |                                                            |                                                                                                         |   |
|          |                                                            | Consolidated Statements of  Cash Flows for the Nine Months ended September 30, 2005 and 2004            |   |
|          |                                                            |                                                                                                         |   |
|          |                                                            | Notes to Consolidated  Financial Statements                                                                  |   |
|          |                                                            |                                                                                                         |
| Item 2.       | Management’s Discussion and  Analysis or Plan of Operation |                                                                                                         |
|          |                                                            |                                                                                                         |
| Item 3.       | Controls and Procedures                                         |                                                                                                         |
|          |                                                            |                                                                                                         |
|          |                                                            |                                                                                                         |
| PART II. | OTHER INFORMATION                                               |                                                                                                         |
|          |                                                            |                                                                                                         |
| Item 1.       | Legal Proceedings                                               |                                                                                                         |
|          |                                                            |                                                                                                         |
| Item 2.       | Unregistered Sales of Equity  Securities And Use of Proceeds    |                                                                                                         |
|          |                                                            |                                                                                                         |
| Item 3.       | Defaults Upon Senior  Securities                                |                                                                                                         |
|          |                                                            |                                                                                                         |
| Item 4.       | Submission of Matters to a  Vote of Security Holders            |                                                                                                         |
|          |                                                            |                                                                                                         |
| Item 5.       | Other Information                                               |                                                                                                         |
|          |                                                            |                                                                                                         |
| Item 6.       | Exhibits                                                        |                                                                                                         |
|          |                                                            |                                                                                                         |   |
|          | Signatures                                                      |                                                                                                         |

 

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**Nathaniel Energy Corporation**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                             | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                   |       | **(unaudited)**              |       |                        |       |
| Assets                                                                                                                                                                                 |       |                         |       |                        |       |
| Current  assets:                                                                                                                                                                       |       |                         |       |                        |       |
| Cash                                                                                                                                                                                   |       | $                            | 260,908    |                        | $          | 33,897 |   |
| Accounts receivable                                                                                                                                                                    |       | 57,064                       |       | 16,873                      |       |
| Inventory                                                                                                                                                                              |       | —                       |       | 681,123                     |       |
| Prepaid expenses                                                                                                                                                                       |       | 198,083                      |       | 70,293                      |       |
| Assets held for sale                                                                                                                                                                   |       | 2,024,973                    |       | 2,261,773                   |       |
| Total  current assets                                                                                                                                                                  |       | 2,541,028                    |       | 3,063,959                   |       |
| Property,  plant and equipment, net of accumulated depreciation                                                                                                                        |       | 1,334,571                    |       | 396,784                     |       |
| Intangible  assets, net                                                                                                                                                                |       | 360,998                      |       | 425,428                     |       |
| Restricted  cash                                                                                                                                                                       |       | —                       |       | 237,000                     |       |
| Deposits                                                                                                                                                                               |       | 89,222                       |       | 85,477                      |       |
| Assets held  for sale                                                                                                                                                                  |       | 9,755,772                    |       | 10,079,630                  |       |
| Total Assets                                                                                                                                                                           |       | $                            | 14,081,591 |                        | $          | 14,288,278 |   |
| Liabilities  and Stockholders’ Equity                                                                                                                                             |       |                         |       |                        |       |
| Current  liabilities:                                                                                                                                                                  |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                       |       | $                            | 532,713    |                        | $          | 835,809 |   |
| Accrued compensation and payroll  liabilities                                                                                                                                          |       | 31,667                       |       | 67,112                      |       |
| Accrued interest                                                                                                                                                                       |       | 14,122                       |       | 12,210                      |       |
| Other accrued expenses                                                                                                                                                                 |       | 5,387                        |       | 4,904                       |       |
| Notes payable, current portion                                                                                                                                                         |       | 1,062,266                    |       | 536,135                     |       |
| Notes payable - stockholder, current  portion                                                                                                                                          |       | 3,354,210                    |       | —                      |       |
| Liabilities held for sale                                                                                                                                                              |       | 3,182,208                    |       | 3,686,006                   |       |
| Total  current liabilities                                                                                                                                                             |       | 8,182,573                    |       | 5,142,176                   |       |
| Long-term  debt                                                                                                                                                                        |       | 290,104                      |       | 728,571                     |       |
| Liabilities  held for sale                                                                                                                                                             |       | 8,892,151                    |       | 7,812,151                   |       |
| Total  liabilities                                                                                                                                                                     |       | 17,364,828                   |       | 13,682,898                  |       |
| Stockholders’  Equity:                                                                                                                                                            |       |                         |       |                        |       |
| Preferred stock, 2,000,000 shares of $.001  par value authorized, none issued or outstanding                                                                                           |       | —                       |       | —                      |       |
| Common stock, 75,000,000 shares of $0.001  par value authorized, 70,698,263 shares and 70,198,263 shares issued and  outstanding at September 30, 2005 and December 31, 2004 |       | 70,698                       |       | 70,198                      |       |
| Common stock  to be issued                                                                                                                                                             |       | 20,318                       |       | 20,318                      |       |
| Additional  paid-in capital                                                                                                                                                            |       | 61,584,446                   |       | 64,851,656                  |       |
| Accumulated  deficit                                                                                                                                                                   |       | (64,958,699                  | )          | (64,336,792                 | )          |
| Total  Stockholders’ Equity                                                                                                                                                       |       | (3,283,237                   | )          | 605,380                     |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                       |       | $                            | 14,081,591 |                        | $          | 14,288,278 |   |

 

*The accompanying notes are an integral part of thefinancial statements.*

 

2

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**Nathaniel Energy Corporation Consolidated Statements ofOperations**

(Unaudited)

 
| ** **                                                    | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                    | ** ** | **September 30,  2005**   | ** ** | **September 30, 2004**   | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| Revenue                                                       |       | $                              | 102,125    |                          | $          | 169,692 |   | $ | 424,455 |   | $ | 466,809 |   |
| Cost of  revenue                                              |       | 202,607                        |       | 176,014                       |       | 615,140 |   | 643,555 |   |
| Gross loss                                                    |       | (100,482                       | )          | (6,322                        | )          | (190,685 | ) | (176,746 | ) |
| Selling,  general and administrative expenses                 |       | 418,205                        |       | 510,025                       |       | 1,316,825 |   | 1,625,643 |   |
| Write-down  of inventory                                      |       | —                         |       | —                        |       | — |   | 274,000 |   |
| Impairment  of assets                                         |       | —                         |       | —                        |       | — |   | 1,403,046 |   |
| Total  operating expenses                                     |       | 418,205                        |       | 510,025                       |       | 1,316,825 |   | 3,302,689 |   |
| Loss from  operations                                         |       | (518,687                       | )          | (516,347                      | )          | (1,507,510 | ) | (3,479,435 | ) |
| Other income  (expense)                                       |       |                           |       |                          |       |   |   |   |   |
| Gain (loss) on disposal of equipment                          |       | 19,957                         |       | —                        |       | 19,957 |   | (18,912 | ) |
| Interest expense                                              |       | (46,462                        | )          | (63,110                       | )          | (177,942 | ) | (159,691 | ) |
| Write-off of related party receivable                         |       | —                         |       | —                        |       | — |   | (264,587 | ) |
| Other income                                                  |       | 133,047                        |       | —                        |       | 140,889 |   | 71,800 |   |
| Loss from  continuing operations                              |       | (412,145                       | )          | (579,457                      | )          | (1,524,606 | ) | (3,850,825 | ) |
| Income from  discontinued operations, net of tax              |       | 225,752                        |       | 116,046                       |       | 700,121 |   | 310,783 |   |
| Net loss                                                      |       | $                              | (186,393   | )                             | $          | (463,411 | ) | $ | (824,485 | ) | $ | (3,540,042 | ) |
| Loss per share from continuing operations,  basic and diluted |       | $                              | (0.01      | )                             | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.05 | ) |
| Income from  discontinued operations, basic and diluted       |       | (0.00                          | )          | (0.00                         | )          | 0.01 |   | 0.00 |   |
| Net loss per  share, basic and diluted                        |       | $                              | (0.01      | )                             | $          | (0.01 | ) | $ | (0.01 | ) | $ | (0.05 | ) |
| Weighted  average common shares outstanding                   |       | 70,698,263                     |       | 70,198,263                    |       | 70,690,937 |   | 69,866,008 |   |

 

*The accompanying notes are an integral part of thefinancial statements.*

 

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** **

**Nathaniel Energy Corporation**

**Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                                 | ** ** | **For the Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,  2005**  | ** ** | **September 30,  2004** | ** ** |
| Cash flows  from operating activities:                                                     |       |                          |       |   |   |
| Net loss from continuing operations                                                        |       | $                             | (1,524,606 | ) | $ | (3,850,825 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                          |       |   |   |
| Depreciation and amortization                                                              |       | 159,427                       |       | 265,907 |   |
| Loss on related party receivables                                                          |       | —                        |       | 264,587 |   |
| Write down of inventory                                                                    |       | —                        |       | 274,000 |   |
| Impairment of assets                                                                       |       | —                        |       | 1,403,046 |   |
| Loss on equipment                                                                          |       | —                        |       | 18,912 |   |
| Non-cash settlement of debt                                                                |       | (151,087                      | )          | (65,800 | ) |
| Changes in  operating assets and liabilities: (Increase) decrease in:                      |       |                          |       |   |   |
| Accounts receivable                                                                        |       | (40,191                       | )          | (5,130 | ) |
| Inventory                                                                                  |       | 536,423                       |       | (2,387,462 | ) |
| Prepaid expenses                                                                           |       | (127,790                      | )          | (2,606 | ) |
| Other receivables                                                                          |       | 529                           |       | 24,238 |   |
| Restricted cash                                                                            |       | 237,000                       |       | 644,868 |   |
| Related party receivable                                                                   |       | —                        |       | 19,450 |   |
| Other assets                                                                               |       | (4,274                        | )          | (34,366 | ) |
| Accounts payable and accrued expenses                                                      |       | 169,584                       |       | 307,121 |   |
| Net effect on cash from discontinued  operations                                           |       | 1,309,933                     |       | 1,553,001 |   |
| Net cash  provided by (used in) operating activities                                       |       | 564,948                       |       | (1,571,059 | ) |
| Cash flows  from investing activities:                                                     |       |                          |       |   |   |
| Equipment and intangible asset purchases                                                   |       | (910,426                      | )          | (39,679 | ) |
| Cash flows from discontinued operations                                                    |       | (200,516                      | )          | (753,705 | ) |
| Net cash  used in investing activities                                                     |       | (1,110,942                    | )          | (793,384 | ) |
| Cash flows  from financing activities:                                                     |       |                          |       |   |   |
| Payments on debt                                                                           |       | (843,280                      | )          | (63,897 | ) |
| Proceeds from issuance of notes and loans                                                  |       | 1,082,031                     |       | 2,000,000 |   |
| Net cash  provided by financing activities                                                 |       | 238,751                       |       | 1,936,103 |   |
| Net increase  in cash                                                                      |       | (307,243                      | )          | (428,340 | ) |
| Cash and  cash equivalents, beginning of year                                              |       | 568,151                       |       | 504,782 |   |
| Cash and  cash equivalents, end of period                                                  |       | $                             | 260,908    |   | $ | 76,442 |   |
| Cash paid  for interest                                                                    |       | $                             | 34,328     |   | $ | 31,168 |   |
| Cash paid  for income taxes                                                                |       | $                             | —     |   | $ | — |   |
| Non cash  financing activity:                                                              |       |                          |       |   |   |
| Issuance of stock to settle accrued  expenses, accounts and notes payable                  |       | $                             | 87,500     |   | $ | 230,800 |   |
| Cancellation of shares of common stock in  settlement of a receivable from an officer      |       | $                             | —     |   | $ | 50,484 |   |
| Notes payable related to construction in  progress                                         |       | $                             | —     |   | $ | 325,780 |   |
| Debt issued to purchase minority interest                                                  |       | $                             | 3,354,210  |   | $ | — |   |

 

*Theaccompanying notes are an integral part of the financial statements.*

 

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** **

**Nathaniel Energy Corporation**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

SEPTEMBER 30, 2005 and 2004

(Unaudited)

 

1. Significant AccountingPolicies and Nature of Operations:

 

***Condensed footnotes***

 

As contemplated by theSecurities and Exchange Commission instructions to Form 10-QSB, thefollowing footnotes have been condensed and therefore do not contain alldisclosures required in connection with annual financial statements. Referenceshould be made to the notes to Nathaniel Energy Corporation’s annual financialstatements set forth in Form 10-KSB for the year ended December 31,2004.

 

***Unaudited Interim Financial Statements***

 

The accompanying unauditedinterim financial statements, which include the Company’s wholly ownedsubsidiary, have been prepared by the Company in accordance with generallyaccepted accounting principles pursuant to Regulation S-B of the Securities andExchange Commission. The financial information has not been audited and shouldnot be relied on to the same extent as audited financial statements. Certaininformation and footnote disclosures normally included in audited financialstatements prepared in accordance with generally accepted accounting principleshave been condensed or omitted. Accordingly, these interim financial statementsshould be read in conjunction with the Company’s financial statements andrelated notes as contained in Form 10-KSB for the year ended December 31,2004. In the opinion of management, the interim financial statements reflectall adjustments, including normal recurring adjustments, necessary for fairpresentation of the interim periods presented. The results of operations forthe three and nine months ended September 30, 2005 are not necessarilyindicative of results of operations to be expected for the full year.

 

***Description of Business***

 

Nathaniel Energy Corporationis a renewable hydrocarbon-based waste-to-energy company that providesmunicipalities and industries with solutions that divert waste from landfillswhile providing a clean alternative energy comparable to that of fossil fuels.Our proprietary patented technology, the Thermal GasifierTM, is a 2-stagegasification system designed to convert waste, biomass, tires and any othersolid, hydrocarbon-based materials into economical clean electrical and thermalenergy, while exceeding the most stringent EPA and European Union regulations.

 

We have been in thealternative fuel processing business, including used tire recycling andcollection services, since 1997. We have operated a 27 acre tire fuelprocessing facility in Hutchins, Texas since 1999. During the three and ninemonths ended September 30, 2005, our tire fuel processing business hasgenerated 100% and 81% of our total revenue.

 

We plan to focus ourpatented technology, the Thermal GasifierTM in three main areas: licensing;creating energy infrastructures; and building, owning and operating smallhydrocarbon-based waste-to-energy plants. The Company’s mission is to become anenvironmental partner with municipalities and commercial and industrialbusinesses for the diversion of solid waste from landfills, while providing aneconomically cost effective, clean energy alternative to fossil fuelsworldwide.

 

We plan to license theThermal GasifierTM technology to qualified companies, joint venture partners,and distributorships. We plan to build hydrocarbon-based waste-to-energyinfrastructures for certain industries that have a need to dispose ofhydrocarbon-based materials and seek an independent source of energy in theform of heat, steam or electricity. These energy infrastructures would be builton the businesses’ premises (“inside the fence”) and can reduce the dependencea business has on fossil fuels and power from the local utility. In some cases,the hydrocarbon-based waste-to-energy infrastructures can become a business’self sustaining utility. We plan to identify new and existing sites where wecan build, own and operate small hydrocarbon-based waste-to-energy plantsthrough our own resources or in conjunction with joint venture partners.

 

5

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Our short term objective isto complete the start up and testing of our two Thermal GasifiersTM recentlyconstructed in Cologna Veneta, Italy. We plan to utilize the operating ThermalGasifierTM units in Italy in our sales, marketing and research efforts during2005. Upon completion and acceptance of the second of two Thermal GasifiersTMand payment by our customer in Italy, we will recognize revenue on those units.We have recognized no revenue from the sale or delivery of our ThermalGasifierTM through the period ended September 30, 2005. During the firstquarter of 2005, we formed a Delaware corporation as a wholly owned subsidiaryfor purposes of advancing our business for the commercialization of our ThermalGasifierTM technology through hydrocarbon-based waste-to-energy projects. Thesubsidiary is named Cleanergy, Inc. Cleanergy, Inc. had no financialactivity through the period ended September 30, 2005.  The Company has employed the services of anexperienced executive to advance the business plan and secure a sales pipelineof hydrocarbon-based waste-to-energy projects and business developmentactivities.

 

During September 2005,we entered into an Asset Purchase Agreement with Midstream Energy Services, LLCpursuant to which we will sell the assets which comprise our helium and gasprocessing facility and operations. The results of operations of our helium andgas processing facility and operations are shown as income from discontinuedoperations in our statement of operations. See Note 7. – “Disposition of aBusiness Segment”.

 

**Critical Accounting Policies**

 

The financial statementsinclude the accounts of Nathaniel Energy Corporation and its subsidiaries. Allmaterial inter-company accounts and transactions have been eliminated inconsolidation. Certain prior period amounts have been reclassified to conformto the current period presentation with no effect on the net loss.

 

***Inventory***

 

Tire shred inventory isvalued at its cost to produce a salable product using the first-in first-outmethod, but in an amount not to exceed realizable value, determined withrespect to existing contractual sales prices, less costs to complete the tireprocessing. The tire shred inventory value at September 30, 2005 is zero.

 

We are also completing thestart-up and testing of two Thermal GasifiersTM in Italy, which have beeninstalled, under a contract for resale to a customer. Both units have beenoperated in start up phase. The Thermal GasifiersTM are valued at that portionof the contract price we reasonably expect to receive upon completion andacceptance by our customer, reduced by our contractual exposure to penaltiescontained in the contract which could be incurred if our Thermal GasifiersTM donot produce the volume of steam specified in the contract and payments already received.Our customer continues to have difficulty securing fuel for the ThermalGasifiersTM that meets the specifications agreed to in our contract to meet ouroutput performance guarantee. In addition, our customer is in the process ofretrofitting downstream equipment provided them by a third party subcontractor.The retrofit is required to bring the downstream equipment into specificationto accept the synthesis gas our units produce. Although both the fuel supplyand downstream equipment capability concerns are being addressed by ourcustomer, we continue to advise our customer and pursue payment of amounts dueus on our contract with our customer. During the three months ended September 30,2005, management determined that the timing of receipt and amount of payment wecould expect to receive is uncertain and therefore,  we reduced the carrying value of theconstruction in progress inventory by $144,700 to zero. The write down ofinventory has been primarily offset by the reversal of $143,204 of accrued expenses,which have been negotiated with certain third party subcontractors andeliminated. The costs of the accrued expenses had been included in the carryingcost of inventory. The net write down of $1,496 has been included in cost ofrevenue for the three and nine months ended September 30, 2005. We arereimbursed for our out of pocket expenses, with shipping expenses to be paid oncompletion of the performance test incurred during the start up phase and werecord those expenses and the reimbursement of those expenses in cost ofrevenue and revenue, respectively.

 

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Components of inventory at September 30,2005 are as follows:

 

| Helium  inventory, valued by first-in, first-out method         | ** ** | $        | 400,452 | ** ** |
|-----------------------------------------------------------------|------------|----------|---------|------------|
| Construction  in progress, valued by first-in, first-out method |       | —   |    |
| Less  inventory included in assets held for sale                |       | (400,452 | )       |
|                                                            |       | $        | —  |       |

 

***Research and Development***

 

Researchand development expenditures, all of which relate directly to the design anddevelopment of our Thermal GasifierTM technology, are expensed as incurred. Forthe three and nine months ended September 30, 2005 and 2004, we incurredcosts for outside resources and expensed $-0- and $15,323, and $117,125 and$306,319 respectively, as selling, general and administrative expense.

 

***Property, Plant and Equipment and Related Depreciation***

 

Property, plant andequipment purchased or constructed is recorded at cost. Direct costs, such aslabor and materials, and indirect costs, such as overhead used during constructionare capitalized. Major units of property replacements or improvements arecapitalized and minor items are expensed. Gain or loss is recorded in incomefor the difference between the net book value relative to proceeds received, ifany, when the asset is sold or retired. Depreciation is provided for usingstraight-line and accelerated methods. Estimated useful lives of the assetsused in the computation of depreciation are as follows:

 

| Machinery and equipment |   | 5 - 20 years |   |
|-------------------------|--------|--------------|--------|
| Buildings               |   | 25 years     |   |
| Vehicles                |   | 5 years      |   |
| Gathering  pipeline     |   | 20 years     |   |

 

***Long-Lived Assets***

 

In accordance with theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, the Company reviews its long-lived assets,including intangible assets, for impairment whenever events or changes incircumstances indicate that the related carrying amount may not be recoverable.Recovery of assets to be held and used is measured by a comparison of thecarrying amount of the assets to the future net cash flows expected to begenerated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carrying amountof the assets exceeds the fair value of the assets. Assets to be disposed ofare reported at the lower of the carrying amount or fair value less the cost tosell.  For the quarter ended September 30,2005, we entered into an agreement to dispose of our helium and gas processingfacility and operations and have reflected those assets on our balance sheet asassets held for sale at their carrying value. See Note 7. – “Disposition of aBusiness Segment.”  The impairment reviewperformed for fiscal year 2004 indicated an impairment of long-lived assets atthe Hutchins, TX tire processing facility. At the time of the impairmentreview, net realizable value for these assets was determined to be $300,000,resulting in a net impairment adjustment of $1,403,046. Management usessignificant judgments, assumptions and estimates to calculate future cash flowsexpected to be generated by the assets under impairment review.

 

***Revenue Recognition***

 

Ourtire fuel processing facility recognizes revenue in two ways. First when wastetires are accepted at the facility (“tipping fees”) and secondly from the saleof processed tire shreds. The revenues from tipping fees are fully earned whenthe waste tires are accepted at the facility and the processed tire shredrevenues are recognized when the

 

7

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shredsare delivered to the end user. Internal quality controls are in place to ensurethat shreds meet the standards required in contracts for the delivery ofshreds. This quality control reduces the risk of significant returns andallowances of tire shreds sold. Sales returns are reprocessed and added back tothe existing tire shreds. Sales returns are booked based on the Company’shistorical experience.

 

Werecognize revenue from the sale of our Thermal GasifiersTM upon completion,delivery and customer acceptance, using the completed contract method ofaccounting.

 

****Net Income (Loss) Per Common Share****

 

SFASNo. 128, “Earnings Per Share” requires presentation of basic (loss) orearnings per share (“Basic EPS”) and diluted (loss) or earnings per share (“DilutedEPS”).

 

Thecomputation of basic loss per share is computed by dividing loss available tocommon stockholders by the weighted average number of outstanding common sharesduring the period. Diluted loss per share gives effect to all dilutivepotential common shares outstanding during the period. The computation ofdiluted EPS does not assume conversion, exercise or contingent exercise ofsecurities that would have an anti-dilutive effect on earnings. During theperiods presented, we had no potentially dilutive securities outstanding.

 

****Use of Estimates****

 

Thepreparation of our financial statements in conformity with generally acceptedaccounting principles requires our management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from those estimates.

 

****2. Notes Payable****

 

DuringAugust 2005, we signed a mutual release and settlement agreement andexecuted a promissory note for $728,637 with a vendor that provided engineeringand consulting services to us for the design and installation of two ThermalGasifiersTM we built in Cologna Veneta, Italy. The promissory note has a twoyear term commencing July 15, 2005, bears interest at 8% per annum andreplaces and cancels two previous notes dated December 21, 2005 in theoriginal principal amounts of $461,135 and $325,780, respectively, outstandingaccrued expenses of $89,219 included as research and development expense in thefirst quarter of 2005, and accrued and unpaid interest of approximately$18,000. During September 2005, we executed a first amendment to themutual release and settlement agreement, made a one time lump sum payment of$430,000 to our vendor, and cancelled our August 2005 promissory note. Theterms of the first amendment require us to pay our vendor an additional$70,000, in total, to be paid in the amount of 20% of each and every payment wereceive from our customer for our Thermal GasifierTM project in Cologna Veneta,Italy, until the $70,000 is paid in full. We have reflected the $70,000 as acurrent note payable on our balance sheet. The difference between our August 2005note payable of $728,637, less our principal cash payments and our lump sumpayment through September 2005 of $520,590 and the $70,000 note payablebalance is $138,047, which we have reflected as other income, net of estimatedlegal expense incurred in the settlement of $5,000, in our statement ofoperations for the three and nine month period ended September 30, 2005.

 

Inconnection with our purchase of a 49% interest in our 51% owned subsidiary,Nathaniel Energy Oklahoma Holdings, Corporation., owned by Mr. Richard C.Strain, our majority stockholder and major debt holder, we issued a $3,354,210promissory note to Richard Strain, which is payable on demand by Richard Strainat any time after December 31, 2005, or earlier on the date of thecommencement of any bankruptcy or insolvency proceedings against us, if any. Wehave the right to pre-pay the promissory note at any time without penalty.  The promissory note bears interest at theprime rate plus 1.5% annually. We recorded the $3,354,210 promissory note as acurrent note payable due stockholder with a corresponding reduction in ouradditional paid-in capital on our balance sheet as

 

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ofSeptember 30, 2005. The promissory note is secured by a first prioritysecurity interest in all of our assets and a pledge of the Nathaniel EnergyOklahoma Holdings, Corporation (NEOHC) shares that we purchased. See Note 3. – “RelatedParty Transactions”. As of September 30, 2005 and December 31, 2004,our total indebtedness to Richard Strain was $12,246,361 and $8,892,151,respectively.

 

OnMarch 17, 2004 we borrowed $2,000,000 from Richard Strain. Our PromissoryNote II to Richard Strain relating to the $2,000,000 loan provides a fixedeffective interest rate of 3.49% and is payable in equal installments of$540,000 due on October 1, 2005, January 1, 2006, April 1, 2006and July 1, 2006. Richard Strain has the right, at any time, to convertall or any portion of the outstanding indebtedness of $8,892,151, plusinterest, into shares of our common stock. The conversion price is equal to103% of the average closing price of our common stock for the five trading daysprior to March 17, 2004, which was $0.78 per share. The conversion priceexceeded the market value of the stock on March 17, 2004.

 

OnApril 14, 2005, Richard Strain agreed to restructure payment terms on theoutstanding debt and accrued interest due from us so that no payments will berequired during our fiscal year ending 2005 and that we would revise the debtrepayment schedule to allow us to satisfy those payments from eitheroperating cash flows or other financing activities. We expect to pay off ourindebtedness to Richard Strain from the proceeds we expect to receive from thesale of our helium and gas processing facility and operations to MidstreamEnergy Services, LLC. See Note 7. – “Disposition of a Business Segment.”  The $8,892,151, plus interest, due RichardStrain is presented as liabilities held for sale on our balance sheet as thedebt is expected to be paid off when we close the sale of our helium and gasprocessing facility and operations to Midstream out of the proceeds from thatsale.

 

****3. Related Party Transactions****

 

DuringJuly 2005, we obtained a one year bank line of credit for $500,000,interest payable at the prime lending rate, for additional funding ofimprovements at our tire fuel processing operations. The line of credit issupported by a standby letter of credit, issued in our bank’s favor, andprovided by Richard Strain, our major shareholder and debt holder.  During September 2005, we obtained a$500,000 increase in that bank line of credit which was supported by acorresponding increase in the standby letter of credit provided by RichardStrain. We have borrowed $740,000 against the line of credit as of September 30,2005.

 

OnSeptember 29, 2005, we entered into and closed a Stock Purchase Agreementwith Richard Strain pursuant to which we purchased 4,900 shares of common stockof Nathaniel Energy Oklahoma Holdings Corporation (“NEOHC”), our 51% ownedsubsidiary, for $3,354,210. The purchase price is to be increased if we sellsubstantially all of NEOHC’s assets within 12 months following the date of thestock purchase agreement, by 49% of the price we receive for those assets inexcess of $16,200,000. The NEOHC shares purchased represent 49% of NEOHC. As aresult of this acquisition, NEOHC became a wholly-owned subsidiary ofNathaniel. See Note 2 – “Notes Payable” which discussed a promissory noteissued to Richard Strain related to the Stock Purchase Agreement.

 

OnOctober 1, 2004, we entered into a consulting agreement with CJM Group, Inc.,a company affiliated with Corey Morrison, to provide senior management andconsulting services, contract negotiation, deal structure services, andbusiness and planning services. The agreement has a term of 24 months, unless terminatedby either party, and provides that the consultant receive a consulting fee of$12,500 monthly for services provided. During the nine months ended September 30,2005, the Company paid CJM Group, Inc. $37,500.

 

Asof and for the year ended December 31, 2004, an additional $250,000 inmarketing and communication related expenses was accrued to Strong Wilken, Inc.,an entity affiliated with Corey Morrison, for corporate marketing andcommunication services, which was paid during January 2005.

 

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OnApril 12, 2005 we terminated our October 1, 2004 Consulting Agreementwith CJM Group, Inc. and our relationship with Strong Wilken, Inc.

 

SeeNote 2 - “Notes Payable” relating to a $2,000,000 loan and issuance of a$3,354,210 promissory note from Richard Strain to the Company.

 

On June 25, 2004, StanAbrams retired and resigned his employment with Nathaniel Energy as theChairman of the Board and Chief Executive Officer. Under the terms of StanAbrams’ resignation, his employment agreement terminated. Mr. Abramsagreed not to compete with Nathaniel Energy in the gasification, helium andnatural gas, renewable energy and/or tire recycling businesses for twoyears.  Mr. Abrams waived any rightsto the return of our patents pursuant to the Amended and Restated PatentReassignment -Agreement between him, Brett Abrams and Nathaniel Energy. Thatagreement, by its terms terminated.

 

On June 25, 2004, BrettAbrams resigned as Vice President, Fuel Processing of Nathaniel Energy on termssimilar to Stan Abrams’ retirement and resignation.

 

Mr. Abrams agreed tolimit the public resale of Nathaniel Energy common stock which he and his sonBrett Abrams own to a total of 50,000, 75,000 and 100,000 shares for threeconsecutive 90 day periods respectively. Stan Abrams also agreed to limitpublic resale of the remaining shares he owns in amounts equal to SecuritiesAct Rule 144 volume limitations for two years after that.

 

During the June 2004quarter we wrote off a $264,587 related party receivable from RipetouchGreenhouse LLC, an entity controlled by our former Chief Executive Officer,Stan Abrams since debt collection has been determined to be uncertain. In prioryears, we paid certain expenses related to site clean-up on behalf of RipetouchGreenhouse LLC.

 

****4. Subsequent Events****

 

OnOctober 12, 2005, we filed an amendment to our certificate ofincorporation with the Delaware Secretary of State. The amendment increases ourauthorized shares of common stock from 75,000,000 to 200,000,000 shares andpreferred stock from 2,000,000 to 10,000,000 shares.

 

OnOctober 31, 2005, 20,000,000 shares of common stock were issued to RichardStrain, a related party, to satisfy an outstanding obligation arising from adebt conversion agreement with Richard Strain dated October 3, 2003.Pursuant to that conversion agreement, $10,000,000 of our indebtedness toRichard Strain was converted into an aggregate of 50,000,000 shares of ourcommon stock. We had 75,000,000 shares of common stock authorized for issuanceprior to filing an amendment to our certificate of incorporation and 70,698,263shares issued as of September 30, 2005. At the time we entered into theconversion agreement, we had 75,000,000 shares authorized and 38,262,664 sharesissued and outstanding. We issued 30,000,000 shares of common stock pursuant tothe conversion agreement. Accordingly, we did not have a sufficient number ofshares of common stock authorized for issuance to issue all of the shares ofcommon stock in the conversion. The conversion agreement provided that to theextent that we did not have sufficient shares of common stock authorized toissue all of the shares in the conversion, Richard Strain had the irrevocableright to the shares that could not be issued.

 

Theamendment to our Certificate of Incorporation also clarified our board ofdirectors’ authority to provide for the issuance of and terms of the preferredstock. No shares of preferred stock have been issued and no terms have beenprovided as of the time of this filing.

 

**5. AssetImpairment**

 

During the nine months endedSeptember 30, 2004, management changes prompted a review and update of the

 

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expected cash flows on longlived assets. Based on this review, operating costs were higher than previouslyestimated, and an impairment of $1,403,046 was recognized during June 2004on the assets at the fuel processing facility in Hutchins, Texas. The Companydiscounted the cash flows expected from the impaired long lived assets todetermine their current value and the impairment amount.

 

**6.Inventory**

 

During the nine months endedSeptember 30, 2004, management changes prompted a review and update of thenet realizable value of the tire shred inventory at the tire fuel processingfacility. Based on this review, the costs to process the tire shred inventorywere higher than previously estimated and the operating condition of ourequipment would not allow us to process that inventory to salable form duringthe fiscal period while continuing to process waste tires we were accepting inour day to day operation. During June 2004, we wrote down the inventory by$274,000 to a net realizable value of zero. The net realizable value wascalculated using estimated selling prices less estimated costs to process theinventory into a salable form.

 

**7.Disposition of a Business Segment**

 

OnSeptember 30, 2005, we and our wholly-owned subsidiary Nathaniel EnergyOklahoma Holdings Corporation (NEOHC) and NEOHC’s wholly-owned subsidiary,MCNIC Rodeo Gathering, Inc. entered into an Asset Purchase Agreement withMidstream Energy Services, LLC pursuant to which NEOHC will sell the assetswhich comprise our helium and gas processing facility and operations toMidstream Energy Services, LLC. The purchase is $16,200,000 payable in cash atthe closing, subject to adjustment as follows:

 

•                                  upward for any capital expenditures we makerelating to the helium and gas operations from August 1, 2005.

•                                  upward for expenses we incur from August 1,2005 to operate the gas and helium assets.

•                                  upward for all amounts owed to us or ouraffiliates as of the closing under the contracts which are included in theassets to be sold.

•                                  upward by up to $1,800,000 if Midstream andColorado Interstate Gas Company enter into an agreement for nitrogen and/or airservices which commences on or near January 1, 2007. This agreement, ifentered into, is expected to replace our agreement with Colorado Interstate GasCompany, which expires in December 2006, that is included in the assetsbeing transferred.

•                                  downward for any expenses relating to theoperation of the gas assets which are attributed to the period before closingthat are unpaid at the closing, and the liability for which is transferred tothe buyer.

•                                  downward for amounts due under the contractswhich are included in the gas assets to be sold that are unpaid as of theclosing, and the liability for which is transferred to the buyer.

•                                  downward for all funds, receivables and thelike, that are attributable to the gas assets being sold, for all periods from August 1,2005 to the extent we retain those assets.

 

Midstreamwill assume all the liabilities under the contracts included in the gas assetsbeing sold that arise after the closing date.

 

Theclosing is subject to the approval of the majority of shareholders as of recordof date, among other customary closing conditions.

 

TheAsset Purchase Agreement also provides that we will not negotiate with anythird party for the sale of the assets covered by the Asset Purchase Agreementfrom the date of the agreement until March 31, 2006 if the transaction hasnot closed by then.

 

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TheAsset Purchase Agreement provides that if either party wrongfully terminatesthe Asset Purchase Agreement, the breaching party will pay the other party atermination fee of $2,000,000. Additionally if we are the breaching party that wrongfully terminatesthe agreement, we will reimburse Midstream for the expenses Midstream incurs inperforming under the proposed agreement between Midstream and ColoradoInterstate Gas Company that is described above, up to $3,000,000.

 

Weexpect to use the proceeds from the sale of the assets as follows:

 

•                                  approximately $3,354,210 to satisfy thepromissory note to Richard Strain that was issued in payment for the 49%interest in NEOHC.

•                                  approximately $9,900,000 to repay theoutstanding indebtedness to Richard Strain. There is currently no formalagreement between Nathaniel and Richard Strain relating to the repayment ofthis debt, however Nathaniel has the right to prepay it without penalty.

•                                  the remainder of the sale proceeds forworking capital, primarily to advance our Thermal GasifierTM business, foroverhead administration and for closing costs.

 

In the event the purchaseprice is adjusted upward so that the net purchase price is greater than$16,200,000, 49% of the adjustment will be payable to Richard Strain pursuantto our Stock Purchase Agreement with Richard Strain described above.

 

We have reflected the assetsto be sold and liabilities to be assumed pursuant to the Asset PurchaseAgreement as assets held for sale and liabilities held for sale on our balancesheet as of September 30, 2005.

 

**8. IncomeTax Expense**

 

We include in ourconsolidated statements of operations the results of operations of our whollyowned subsidiary, NEOHC. For periods prior to September 30, 2005, we couldnot file a consolidated income tax return for federal income tax purposes andtherefore we could not use our tax loss against NEOHC’s taxable income forfederal income tax purposes. Since the companies filed separate federal incometax returns, the financial statements reflect federal income tax expense andaccrued income tax liabilities computed at statutory rates on a separate companybasis.

 

On September 29, 2005,we acquired a 49% interest in NEOHC from Richard Strain. See Note 3-”RelatedParty Transactions”. As a result of that acquisition, we own 100% of NEOHC asof September 30, 2005 and we are now able to include taxable income orloss of NEOHC with our taxable income or loss for federal income tax purposes.For the quarter ended September 30, 2005, we have computed our federalincome tax expense combining our taxable income or loss with taxable income orloss of NEOHC, subject to limitations provided by the federal income taxregulations on the use of our losses during the period.

 

**BusinessSegments**

 

TheCompany conducts business in two separate facilities presently managed as twoenergy operating business segments, tire fuel processing and alternativeenergy. The location and use of our facilities are shown as follows:

 

• the tire fuel processing operation inHutchins, Texas, and

• the alternative energy engineering andcorporate offices in Englewood, Colorado.

 

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** **

**Item 2. Management’s Discussion and Analysis of Results ofOperations.**

 

**FORWARD LOOKING STATEMENTS**

 

Certain informationcontained in this report may include “forward-looking statements” within themeaning of the Private Securities Litigation Reform Act of 1995, and is subjectto the safe harbor created by that act. The safe harbor created by theSecurities Litigation Reform Act will not apply to certain “forward lookingstatements” because we issued “penny stock” (as defined in Section 3(a)(51)of the Securities Exchange Act of 1934 and Rule 3a51-1 under the ExchangeAct) during the three year period preceding the date(s) on which those forwardlooking statements were first made, except to the extent otherwise specificallyprovided by rule, regulation or order of the Securities and ExchangeCommission. We caution readers that certain important factors may affect ouractual results and could cause such results to differ materially from anyforward-looking statements which may be deemed to have been made in this Reportor which are otherwise made by or on behalf of us. For this purpose, anystatements contained in this report that are not statements of historical factmay be deemed to be forward-looking statements. Without limiting the generalityof the foregoing, words such as “may”, “will”, “expect”, “believe”, “explore”, “consider”,“anticipate”, “intend”, “could”, “estimate”, “plan”, or “continue” or thenegative variations of those words or comparable terminology are intended toidentify forward-looking statements. Factors that may affect our resultsinclude, but are not limited to, the risks and uncertainties associated with:

 

•             Our ability to raise capital necessary toimplement our business plan.

•             Our ability to finance and complete plannedprojects and facilities upgrades.

•             Risks relating to the closing of the sale ofour helium and gas operations and facilities to Midstream Energy Services, LLC.

•             Our ability to execute our business plan andcommercialize the Thermal GasifierTM technology, including building ThermalGasifiersTM that meet customers’ specifications and that meet local regulatoryenvironmental and permit requirements.

•             Risks related to dependency on a small numberof customers.

•             Our ability to satisfy our customers’expectations.

•             Our ability to employ and retain qualifiedmanagement and employees.

•             Changes in government regulations which areapplicable to our business.

•             The availability of a consistent,economically viable, and sustainable waste stream supply to fuel the ThermalGasifierTM operations.

•             Changes in the demand for our products andservices, including the impact from changes in governmental regulation andfunding for alternative energy.

•             The degree and nature of our competition,including the reliability and pricing of traditional energy sources, economicviability of other alternative energy sources such as wind and solar power.

•             Our ability to pay debt service on loans asthey come due.

•             Our ability to generate sufficient cash topay our creditors.

•             Disruption in the economic and financialconditions primarily from the impact of terrorist attacks in the United Statesand overseas, threats of future attacks, police and military activities andother disruptive worldwide political events.

 

We are also subject to otherrisks detailed from time to time in other Securities and Exchange Commissionfilings and elsewhere in this report. Any one or more of these uncertainties,risks and other influences could materially affect our results of operations andwhether forward-looking statements made by us ultimately prove to be accurate.Our actual results, performance and achievements could differ materially fromthose expressed or implied in these forward-looking statements. We undertake noobligation to publicly update or revise any forward-looking statements, whetherfrom new information, future events or otherwise.

 

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** **

**CompanyOverview**

 

Ourmission is to become an environmental partner with municipalities andcommercial and industrial businesses for the diversion of solid waste fromlandfills, while providing an economically cost effective, clean energyalternative to fossil fuels worldwide. Our operational plan focuses on threemajor business models in the commercialization of our Thermal GasifierTMtechnology: licensing; creating energy infrastructures; and building, owningand operating small hydrocarbon-based waste-to-energy plants. On September 30,2005, we signed a Purchase and Sale Agreement with Midstream Energy Services,LLCpursuant to which oursubsidiaries Nathanial Energy Oklahoma Holdings Corporation (NEOHC) and MCNIC RodeoGathering, Inc. will sell substantially all of the assets that compriseour helium and gas processing facilities and operations to Midstream.  Midstream is a privately owned full serviceenergy company engaged in the gathering, processing, treating, compression,dehydration, transportation and marketing of natural gas and natural gas liquids,based in Tulsa, Oklahoma.  Midstream isnot affiliated with Nathaniel.  Revenue generated from our discontinuedoperations, the helium and gas processing business, has provided operating andcapital funds for improving our current tire fuel processing operations andfurther advancing it toward a full service fuel procurement operation, inaddition to, furthering the commercialization of our Thermal GasifiersTM. Webelieve that it is in our best interest to exit the gas and helium processingbusiness and focus our resources in the emerging alternative energy industrythrough the commercialization of our proprietary patented Thermal GasifierTMtechnology.  By improving and advancing our fuelprocessing division and furthering the commercialization of our patentedtechnology, we plan to secure hydrocarbon-based waste-to-energy projectsthrough our newly formed subsidiary; Cleanergy, Inc. Cleanergy, Inc.has had no activity to date.

 

Webegan to implement our planned improvements to the tire fuel processingoperations at our facility located in Hutchins, Texas during June 2005that included; purchasing new processing equipment, improving our handlingsystems, expanding of our operations facility and site offices and regulatorycompliance upgrades. The tire fuel processing facility improvements and expansionprovide the foundation for its diversification toward alternative fuelprocurement. The facility is strategically located less than a mile from thethird largest train intermodal station in the nation and is currently the onlywaste tire storage and processing facility licensed by the State of Texas tooperate in the Dallas metro area. We expect that upon completion of theequipment installation and site improvements, this facility will increase itsproduction and will be able to increase the volume of waste tires it processes.We believe that the increased production will result in increased tipping feerevenue, and increased revenue from the sale of tire shreds. We believe that theaddition of new equipment combined with existing equipment in conjunction withfacility improvements has enabled us to enter into a three (3) year takeor pay contract for the sale of tire shreds, and will provide the resources andinfrastructure to enable us to sign new contracts for the acceptance of wastetires.  The new equipment has alsoimproved the quality of the tire shreds thereby enabling us to increase ourprices approximately 60% for the higher quality tire shreds.  The improvements should enable us to obtainincreased revenue and cash flow from this operation. We completed the primaryplanned improvements during September 2005 and continue to improve ourtire handling and tire shred delivery capabilities to increase the efficiencyof the facility. We had expected to complete the planned improvements beforethe end of September 2005; however, we experienced unexpected delays inequipment delivery, resulting in a completion delay of approximately 30 days.

 

Duringthe nine months ended September 30, 2005, we generated $344,455 of ourrevenue, or 81%, from our tire fuel processing division.  We have recognized no revenue from ourThermal GasifierTM business segment to date; however, we have recognized $80,000of revenue (or 19% of our revenue) during the nine months ended September 30,2005 for consulting services provided our customer related to the start-up ofthe Thermal GasifiersTM built in Cologna Veneta, Italy.

 

Ourlong term goal is to produce the majority of our revenue and cash flow from thecommercialization of our Thermal GasifierTM technology through hydrocarbon-basedwaste-to-energy projects. During the first quarter 2005, we formed Cleanergy, Inc.,a Delaware corporation, as a wholly owned subsidiary of the Company for thepurpose of advancing our business plan to commercialize our Thermal GasifierTMtechnology. We plan to focus the majority of our resources on this businessoperation, which will be supported through the advancement of our tire fuelprocessing division’s expansion for fuel procurement for the hydrocarbon-basedwaste-to-energy projects.

 

Historically,we have not had difficulty finding potential project opportunities and we haveemployed the services of an experienced senior executive to develop a salespipeline of hydrocarbon-based waste-to-energy projects and

 

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businessdevelopment activities. Worldwide, industries and municipalities seek solutionsfor diverting solid waste from landfills and lower cost and clean energy alternativesto fossil fuels. Demand for these solutions is expected to grow. A key to oursuccess will be wisely choosing among project opportunities and focusing ourresources on projects with the greatest chance of success and returns forstockholders.

 

Oncewe have obtained final acceptance for the two Thermal GasifierTM units inCologna Veneta, Italy, we will have access to an operating commercial facilityto use in marketing, testing and additional research and development efforts.Our mission in the fourth quarter of 2005 and the first quarter of 2006 is to developa sales pipeline of qualified hydrocarbon-based waste-to-energy projects,contract for one or more of those projects and initiate implementation as apartner or joint venture member in at least one commercial operation utilizingour Thermal GasifierTM technology, which activity will be supported through thewholly owned subsidiary, Cleanergy, Inc. and the senior executive chargedwith project development responsibilities. We have identified a number ofopportunities that we are currently pursuing, however we can not assure thatany of these opportunities will result in a project that generates revenuewithin the next twelve months.

 

Atthe same time, we are developing the infrastructure and business developmentactivities to support our energy infrastructure and small hydrocarbon-basedwaste-to-energy plant opportunities utilizing our Thermal GasifierTM technology.Additionally, we plan to seek project funding that will be based on the size,configuration and business structure of the project. We anticipate that thetimeframe from identification of a project to completion will be 12 to 24months, provided we obtain the requisite project financing.

 

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** **

**Results ofOperations**

 

The following tables setforth certain unaudited quarterly results of operations of Nathaniel Energy forthe first three quarters of 2005. The quarterly operating results are notnecessarily indicative of future results of operations.

 
| ** **                                           | ** ** | ** **              | ** ** | ** **             | ** ** | ** **                  | ** ** | **Three Months Ended (unaudited)** | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|-----------------------------|------------|------------------------------------|------------|
| ** **                                           | ** ** | **March 31  2005** | ** ** | **June 30  2005** | ** ** | **September 30  2005** | ** ** | **September 30  2004**        | ** ** | **September 2005  increase** | ** ** | **vs. 2004  (decrease)** | ** ** |
| ** **                                           | ** ** | ** **              | ** ** | ** **             | ** ** | ** **                  | ** ** | ** **                         | ** ** | **$** | ** ** | **%** | ** ** |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Revenue                                              |       | $                       | 210,364    |                   | $          | 111,966                     |       | $                                  | 102,125    |   | $ | 169,692 |   | $ | (67,567 | ) | (40 | )% |
| Cost of  revenue                                     |       | 226,128                 |       | 186,405                |       | 202,607                     |       | 176,014                            |       | 26,593 |   | 15 |   |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Gross profit                                         |       | (15,764                 | )          | (74,439                | )          | (100,482                    | )          | (6,322                             | )          | (94,160 | ) | (1,489 | )% |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Selling general and administrative expense           |       | 500,414                 |       | 398,206                |       | 418,205                     |       | 510,025                            |       | (91,818 | ) | (18 | ) |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Operating  income(loss)                              |       | (516,178                | )          | (472,645               | )          | (518,687                    | )          | (516,347                           | )          |   |   |   |   |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Interest expense                                     |       | (64,160                 | )          | (67,320                | )          | (46,462                     | )          | (63,110                            | )          |   |   |   |   |
| Other non-operating income (expense)                 |       | —                  |       | 7,842                  |       | 133,047                     |       | —                             |       |   |   |   |   |
| Gain (loss)  on sale of equipment                    |       | —                  |       | —                 |       | 19,957                      |       | —                             |       |   |   |   |   |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Loss from continuing operations before  income taxes |       | (580,338                | )          | (532,123               | )          | (412,145                    | )          | (579,457                           | )          |   |   |   |   |
| Income from discontinued operations, net of  tax     |       | 255,047                 |       | 219,322                |       | 225,752                     |       | 116,046                            |       |   |   |   |   |
| Net loss                                             |       | $                       | (325,291   | )                      | $          | (312,801                    | )          | $                                  | (186,393   | ) | $ | (463,411 | ) |   |   |   |   |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
|                                                 |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Significant non cash charges and expenses:           |       |                    |       |                   |       |                        |       |                               |       |   |   |   |   |
| Depreciation  and amortization                       |       | $                       | 39,333     |                   | $          | 39,333                      |       | $                                  | 80,761     |   | $ | 66,271 |   |   |   |   |   |
|                                                      |            |                         |            |                        |            |                             |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

Forthe three months ended September 30, 2005, our revenue decreased by$67,567, or 40% to $102,125 from $169,692 during the same period in 2004. Thedecrease is due primarily to the shut down of the tire fuel processing facilityduring most of the third quarter to install new equipment and upgrade thefacility. The tire fuel processing division generated all of our revenue duringthe third quarter. During the shutdown, we were able to accept a limited numberof waste tires and generate tipping fees (a fee we receive for each waste tirewe accept), however we were unable to shred those tires into tire derived fuel,which we sell to a major customer. The equipment installation and the facilityimprovements have been primarily completed by the end of the third quarter 2005.  We expect the tire fuel processing operationto begin to generate an increase in revenue in the fourth quarter of 2005 withthe new equipment placed in service and operating improvements, which wecontinue to make at the facility, allowing us to accept and shred more wastetires. These improvements increase our tipping fee revenue, produce a greatervolume and improve the quality and value of tire shreds, thereby increasing ourtire fuel revenue.

 

Duringthe nine months ended September 30, 2005, revenue decreased $42,354, or9%, to $424,455 from $466,809 for the same period in 2004. The decrease isprimarily due to our tire fuel processing division revenue which generatedrevenue of $344,455, a decrease of $122,354, or 26% from $466,809 during thenine months ended

 

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September 30,2004 this was due to the facility shut down in the third quarter, theproduction down time for equipment repair we experienced during the first halfof 2005 and disruption to the operation in June 2005 while we reorganizedthe processing line to accept delivery and began to install new tire fuelprocessing equipment. We also we recognized $80,000 of revenue for start-up consulting servicesprovided to our customer for the Thermal GasifierTM built in Cologna Veneta,Italy during the nine months ended September 30, 2005 with no such revenuerecognized during the comparable period in the prior year.

 

Grossloss for the three months ended September 30, 2005 was $100,482, anincrease of $94,160 compared to gross loss of $6,322 for the three months endedSeptember 30, 2004. In addition to our decrease in revenue, whichcontributed $67,567 to our increase in gross loss, we incurred additionalequipment rental expense of $57,902 for trailers to store and collect wastetires at our facility until we were able to shred and deliver the tire derivedfuel to our customer offset by a $29,909 decrease in payroll and relatedemployee costs resulting from a reduction in our work force during the shutdownof the facility.  We recognized a writedown in our inventory included in our gross loss of $1,496 related to the twoThermal GasifiersTM we built for our customer in Cologna Veneta, Italy.

 

Grossloss for the nine months ended September 30, 2005 was $190,685, anincrease of $13,939, or 8% compared to gross loss of $176,746 for the ninemonths ended September 30, 2004. Gross loss from our tire fuel processingoperation increased by $140,186, or 163% from $86,137 during the nine monthsended September 30, 2004 to $226,323 in the current year. In addition to aloss in revenue of $42,354, our increase in gross loss is due primarily to anincrease in transportation expense of $39,406, increase in storage equipmentrental, primarily trailers, of $58,057, offset by a reduction in depreciationexpense of $113,775 as a result of an asset impairment during the secondquarter 2004, which reduced the carrying value of those assets and the relateddepreciation expense for all periods subsequent to that impairment and adecrease in equipment repairs and maintenance expense of $9,648,. Gross profitfrom consulting services for the start-up of the Thermal GasifiersTM built inCologna Veneta, Italy was $35,641 for the nine months ended September 30,2005. We recognized no gross profit from our Thermal GasifierTM business duringthe same period in 2004.

 

Totalselling, general and administrative expenses decreased by $91,820 or 22% from$510,025 for the three months ended September 30, 2004 to $418,205 for thethree months ended September 30, 2005. The decrease in selling, generaland administrative expenses is due primarily to a decrease in legal andconsulting expenses of approximately $65,000 and a reduction in advertisingexpense of approximately $28,000.  Forthe nine months ended September 30, 2005, selling, general andadministrative expenses decreased by $308,818, a 19% decrease, to $1,316,825from $1,625,643 during the same period in 2004. The decrease is primarily dueto a decrease in research and development expense of $117,125, a decrease inpayroll and related employee expenses of approximately $64,000 resulting from areduction in headcount, a decrease in professional and consulting fees ofapproximately $27,000, and a reduction in advertising expense of approximately$37,000.

 

Interestexpense decreased by $16,648 from $63,110 for the three months ended September 30,2004 to $46,462 for the three months ended September 30, 2005 dueprimarily to the reversal of accrued interest of approximately $18,000 onpromissory notes which were renegotiated and paid to a third party vendorduring the quarter. Interest expense increased by $18,251 from $159,691 for thenine months ended September 30, 2004 to $177,942 for the nine months endedSeptember 30, 2005 due primarily to an increase in our notes payablebalance over the same period in the prior year.

 

Other income includes$133,047 income from the settlement of a note payable. We entered into a$728,637 note payable with a vendor on August 2005. During September 2005,we made an advance payment on, and extinguished, the note. The value of thenote of $728,637 less our principal cash payments and our lump sum paymentthrough September 2005 of $520,590 and an unsecured non-interest bearingnote we exchanged in the settlement of $70,000 is $138,047, which we havereflected as other income, net of estimated legal expense incurred in thesettlement of $5,000, in our statement of operations for the three and ninemonth period ended September 30, 2005.

 

**Liquidityand Capital Resources**

 

As of September 30,2005 we owed $525,370 to financial institutions under installment notes with anaverage

 

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interest rate of 4.5%, ofwhich, $414,689 is secured by land or equipment.

 

The remaining indebtednessconsists of miscellaneous notes to unaffiliated third parties of $17,000.

 

Inaddition, we have $8,892,151 in secured loans from Richard Strain with anaverage interest rate of 6.0%. During March 2004, we borrowed $2,000,000of this total with principal and interest payable in four quarterly payments of$540,000 each on October 1, 2005, and January 1, April 1, and July 1,2006 with an effective interest rate of 3.49%. The remaining amount due RichardStrain of $6,892,151 is due in quarterly principal and interest payments of$572,876 from March 2007 through December 31, 2009. All loan amountsfrom Richard Strain may be converted, at Richard Strain’s option, into sharesof our common stock at a conversion rate equal to 103% of the average closingprice on the five trading days prior to March 17, 2004. On April 14,2005, Richard Strain agreed to restructure payment terms on the outstandingdebt and accrued interest due from us so that no payments will be requiredduring our fiscal year ending 2005.

 

Inconnection with our purchase of a 49% interest in our 51% owned subsidiary,Nathaniel Energy Oklahoma Holdings, Corporation (NEOHC), owned by Mr. RichardC. Strain, our majority stockholder and major debt holder, we issued a$3,354,210 promissory note to Richard Strain, which is payable on demand byRichard Strain at any time after December 31, 2005, or earlier on the dateof the commencement of any bankruptcy or insolvency proceedings against us, ifany. We have the right to pre-pay the promissory note at any time withoutpenalty.  The promissory note bearsinterest at the prime rate plus 1.5% annually. We recorded the $3,354,210promissory note as a current note payable due stockholder with a correspondingreduction in our additional paid-in capital on our balance sheet as of September 30,2005. The promissory note is secured by a first priority security interest inall of our assets and a pledge of the NEOHC shares that we purchased.

 

During August 2005, wesigned a mutual release and settlement agreement and executed a promissory notefor $728,637 with a vendor that provided engineering and consulting services tous for the design and installation of two Thermal GasifiersTM we built inCologna Veneta, Italy. The promissory note has a two year term commencing July 15,2005, bears interest at 8% per annum and replaces and cancels two previousnotes dated December 21, 2005 in the original principal amounts of$461,135 and $325,780, respectively, outstanding accrued expenses of $89,219included as research and development expense in the first quarter of 2005, andaccrued and unpaid interest of approximately $18,000. During September 2005,we executed a first amendment to the mutual release and settlement agreement,made a one time lump sum payment of $430,000 to our vendor, and cancelled our August 2005promissory note. The terms of the first amendment require us to pay our vendoran additional $70,000, in total, to be paid in the amount of 20% of each andevery payment we receive from our customer for our Thermal GasifierTM project inCologna Veneta, Italy, until the $70,000 is paid in full. We have reflected the$70,000, which does not bear interest, as a current note payable on our balancesheet.

 

During July 2005, weobtained a one year bank line of credit for $500,000, interest payable at theprime lending rate, for additional funding of improvements at our tire fuelprocessing operations. The line of credit is supported by a standby letter ofcredit, issued in our bank’s favor, and provided by Richard Strain, our majorshareholder and debt holder.  During September 2005,we obtained a $500,000 increase in that bank line of credit which was supportedby a corresponding increase in the standby letter of credit provided by RichardStrain. We have borrowed $740,000 against the line of credit as of September 30,2005.

 

The following is a summaryof Nathaniel Energy’s cash flows sources (uses) from operating, investing, andfinancing activities during the periods indicated:

 
| ** **            | ** ** | **Period ended September 30,** | ** ** |
|-----------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                  |       |                                |       |   |   |
| Operating  activities |       | $                                   | 564,948    |   | $ | (1,571,059 | ) |
| Investing  activities |       | (1,110,942                          | )          | (793,384 | ) |
| Financing  activities |       | 238,751                             |       | 1,936,103 |   |
|                  |       |                                |       |   |   |
| Net effect on cash    |       | $                                   | (307,243   | ) | $ | (428,340 | ) |

 

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For the period ended September 30,2005, the net cash provided by operating activities of $564,948 is dueprimarily to a net loss of $1,237,909, non-cash settlement of debt of $151,087,and an increase in prepaid expenses of $127,790 offset by non-cash operatingexpenses for depreciation and amortization of $159,427 and changes in operatingassets and liabilities which increased net cash as a result of a reduction ininventory of $536,423, reduction in restricted cash of $237,000, an increase inaccounts payable and accrued expenses of $169,584 and the positive net effecton cash from discontinued operations of $1,023,235.

 

The change in net cash usedin investing activities of $1,110,942 is due to the purchase of equipment andfacility improvements, primarily at our tire fuel processing operations duringthe nine months ended September 30, 2005.

 

The change in net cashprovided from financing activities of $238,751 is due to principal repaymentsof debt of $843,280 offset by issuance of notes and borrowing on our line ofcredit of $1,082,031 during the nine months ended September 30, 2005.

 

For the period ended September 30,2004, the net cash used in operating activities of $1,517,059 is due to a netloss for the quarter of $3,850,825, an increase in inventory of $2,387,462primarily for the construction two Thermal GasifiersTM in Cologna Venetta,Italy, offset by non-cash operating expenses including depreciation andamortization of $265,907, loss on related party receivables of $264,587,write-down of inventory of $274,000, impairment of assets of $1,403,046, anincrease in accounts payable and accrued expenses of $307,121, and the positivenet effect on cash from discontinued operations of $1,553,001.

 

The change in net cash usedin investing activities of $793,384 is due primarily to cash used bydiscontinued operations of $753,705 during the nine months ended September 30,2004.

 

The change in net cashprovided by financing activities of $1,936,103 is due to a $2,000,000 debtissuance, offset by debt repayments of $63,679 during the nine months ended September 30,2004.

 

Nathaniel Energy had cash of$260,908 at September 30, 2005 which will be used to fund the Company’soperations, pay current debts, partially fund the execution of our ThermalGasifierTM business plan and make improvements at our tire fuel processingoperations in Hutchins, Texas.  We alsohave a $1,000,000 line of credit, as discussed above.  We used approximately $310,000 of the line ofcredit to complete improvements at our tire fuel processing operation inHutchins, Texas and $430,000 to pay off a promissory note due a vendor.

 

We expect that as a resultof the improvements made at our tire fuel processing division during the thirdquarter 2005, that the tire fuel processing operations will generate futurepositive net cash flows from operating activities, which will be sufficient torepay our outstanding balance on our line of credit and provide additionalfunding for our corporate overhead expenses and implementation of our ThermalGasifierTM business plan.

 

On September 30, 2005,we entered into a Purchase and Sale Agreement with Midstream Energy Services,LLC pursuant to which we will sell the assets which comprise our helium and gasprocessing facility and operations to Midstream for $16,200,000, payable incash at the closing. We expect to use the proceeds from the sale of the assetsas follows:

 
| Cash to be received from Midstream at  closing |                                                         | $      | 16,200,000  |   |
|------------------------------------------------|--------------------------------------------------------------|--------|-------------|--------|
| Less:                                          | Repayment of  stockholder notes payable                      |   | (12,246,361 | )      |
|                                           | Payment of  accrued interest through September 30, 2005 |   | (1,023,713  | )      |
|                                           | Estimated  expenses of sale                                  |   | (358,500    | )      |
| Expected net  proceeds                         |                                                         | $      | 2,571,426   |   |

 

The Purchase and SaleAgreement provides that in the event that we or Midstream sign a new OperatingAgreement with Colorado Interstate Gas Company to replace our current agreementwith them expiring in December 2006, which represents a positiveadjustment to the purchase price of $1,800,000, of which there can be noassurance, we would receive additional cash proceeds of $918,000. Under theterms of a Stock Purchase Agreement with Richard Strain, our major shareholderand debt holder, whereby we purchased his 49% ownership interest in NEOHC,Richard Strain is entitled to 49% or $882,000 of this positive adjustment.

 

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Our working capital deficitas of September 30, 2005 was $5,641,545. We plan to reduce this deficitfrom the net proceeds we expect from the sale of our helium and gas processingfacility by $4,377,923, included in current liabilities, which is comprised of$1,023,713 of accrued interest and $3,354,210 of notes payable due RichardStrain. The remaining expected gross proceeds of $2,571,426 will be used asworking capital for overhead and to advance our tire fuel processing operationand the commercialization and marketing of our Thermal GasifierTM technology.

 

**Item 3. Controls and Procedures**

 

As of the end of the periodcovered by this report, the company conducted an evaluation, under thesupervision and with the participation of the Chief Executive Officer and ChiefFinancial Officer, of the company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934). Based on this evaluation, the Chief Executive Officerand Chief Financial Officer concluded that the company’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed by the company in reports that it files or submits under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms.

 

The company’s disclosurecontrols and procedures include, among other things, controls and proceduresdesigned to ensure that information required to be disclosed by the company inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the company’s management, including its Chief Executive Officerand Chief Financial Officer, to allow timely decisions regarding requireddisclosure.

 

There was no change in thecompany’s internal control over financial reporting during the company’s mostrecently completed fiscal quarter that has materially affected, or isreasonably likely to materially affect, the company’s internal control overfinancial reporting.

 

**PART 2: OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

Nathaniel Energy is involvedin litigation in the normal course of its business, none of which isanticipated to have a material adverse effect on its financial condition,operations or prospects.

 

**Item 2. Unregistered Sales of Equity Securities and Use ofProceeds.**

 

None.

 

**Item 3. Defaults Upon Senior Securities.**

 

Not Applicable

 

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

 

Not Applicable

 

**Item 5.Other Information.**

 

**Item 6.Exhibits.**

 

(a) Exhibits.

 

3.1           Certificate of Incorporation

3.2           Articles of Amendment to Articles ofIncorporation, filed on August 6, 1999

3.3           Certificate of Amendment of Certificate ofIncorporation, filed on April 24, 2002

3.4           Certificate of Amendment to Certificate ofIncorporation, filed on October 12, 2005

3.5           Amended and Restated By-Laws*****

10.1         Stock Purchase Agreement dated September 29, 2005 betweenNathaniel Energy Oklahoma Holdings, Corporation (“NEHOC”) and Richard Strain

 

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10.2         $3,354,210 Promissory Note dated September 29,2005 from NEOHC to Richard Strain

10.3         Purchase and Sale Agreement dated September 30, 2005 betweenNathaniel Energy Corporation, NEOHC, MCNIC Rodeo Gathering, Inc. andMidstream Energy Services

10.4         Nathaniel Energy Corporation 2005 Equity Participation Plan

10.5         Mutual Release and Settlement Agreement datedAugust 3, 2005 (the “Settlement Agreement”) between Nathaniel EnergyCorporation and Merrick & Company

10.6         First Amendment to the Settlement Agreementdated September 14, 2005

31.1         Certification of the Principal ExecutiveOfficer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2         Certification of the Principal FinancialOfficer pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1         Certification of the Principal ExecutiveOfficer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002

32.2         Certification of the Principal FinancialOfficer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

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*Denotes document filed asan exhibit to our Current Report on Form 8-K dated June 6, 2005 andincorporated herein by reference.

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the Registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

**NATHANIEL ENERGY CORPORATION**

(Registrant)

 

Date: November 21, 2005

 

* *
|   | By:    | */s/ George A. Cretecos*      | * * |
|--------|--------|-------------------------------|----------|
|   |   | George  A. Cretecos           |
|   |   | Chief  Executive Officer      |
|   |   | Nathaniel  Energy Corporation |

 

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