**United States**

**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

**FORM10-QSB**

(Mark One)

**x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES**

**EXCHANGEACT OF 1934**

**For thequarterly period ended September 30, 2006**

**o TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES**

**EXCHANGEACT OF 1934**

**For thetransition period from           to             **

**Commission file number 000-27783**

**NATHANIELENERGY CORPORATION**

(Name of SmallBusiness Issuer in its Charter)

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

**8001 South InterPort Blvd. Suite260, Englewood, Colorado 80112**

(Address ofprincipal executive offices) (Zip Code)

Issuer’s telephonenumber: **(303) 690-8300**

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x No o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o No x

APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS

Checkwhether the registrant filed all documents and reports required to be filed bySection 12, 13 or 15(d) of the Exchange Act after the distribution ofsecurities under a plan confirmed by a court. Yes oNo o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of theissuer’s class of common equity, as of the latest practicable date: November 6,2006, 90,731,596 shares of common stock, $.001 par value.

**Transitional Small Business DisclosureFormat (Check One) Yes**o**No**x

 

 

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**NATHANIELENERGY CORPORATION**
|           |   | TABLE OF  CONTENTS                                                                                     |   |
|-----------|--------|--------------------------------------------------------------------------------------------------------|--------|
|      |   |                                                                                                   |   |
| PART I.   |   | FINANCIAL INFORMATION                                                                                  |   |
|      |   |                                                                                                   |   |
| Item 1    |   | Financial Statements (unaudited)                                                                       |   |
|      |   |                                                                                                   |   |
|      |   | Consolidated  Balance Sheets as of September 30, 2006 and December 31, 2005                            |   |
|      |   |                                                                                                   |   |
|      |   | Consolidated Statements of Operations for the Three  And Nine Months ended September 30, 2006 and 2005 |   |
|      |   |                                                                                                   |   |
|      |   | Consolidated Statements of Cash Flows for the Nine  Months ended September 30, 2006 and 2005           |   |
|      |   |                                                                                                   |   |
|      |   | 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                                                                                             |   |

 

i

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**NathanielEnergy Corporation**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                                                   | ** ** | **September 30,  2006  (unaudited)** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                         |       |                                      |       |                        |       |
| Assets                                                                                                                                                                                       |       |                                      |       |                        |       |
| Current assets:                                                                                                                                                                              |       |                                      |       |                        |       |
| Cash                                                                                                                                                                                         |       | $                                         | 801,164    |                        | $          | 260,032 |   |
| Accounts  receivable                                                                                                                                                                         |       | 99,028                                    |       | 85,418                      |       |
| Prepaid expenses                                                                                                                                                                             |       | 73,611                                    |       | 88,698                      |       |
| Deferred tax  asset                                                                                                                                                                          |       | —                                    |       | 759,000                     |       |
| Assets held for  sale                                                                                                                                                                        |       | —                                    |       | 2,036,783                   |       |
| Total current assets                                                                                                                                                                         |       | 973,803                                   |       | 3,229,931                   |       |
| Property, plant and  equipment, net of accumulated depreciation                                                                                                                              |       | 1,095,989                                 |       | 1,256,708                   |       |
| Intangible assets, net                                                                                                                                                                       |       | 219,437                                   |       | 322,482                     |       |
| Deposits                                                                                                                                                                                     |       | 97,197                                    |       | 88,322                      |       |
| Assets held for sale                                                                                                                                                                         |       | —                                    |       | 9,768,510                   |       |
| Total Assets                                                                                                                                                                                 |       | $                                         | 2,386,426  |                        | $          | 14,665,953 |   |
| Liabilities and  Stockholders’ Equity                                                                                                                                                   |       |                                      |       |                        |       |
| Current liabilities:                                                                                                                                                                         |       |                                      |       |                        |       |
| Accounts payable                                                                                                                                                                             |       | $                                         | 724,254    |                        | $          | 628,784 |   |
| Accrued  compensation and payroll liabilities                                                                                                                                                |       | 31,667                                    |       | 75,757                      |       |
| Accrued interest                                                                                                                                                                             |       | 12,035                                    |       | 14,760                      |       |
| Other accrued  expenses                                                                                                                                                                      |       | 65,023                                    |       | 5,399                       |       |
| Notes payable,  current portion                                                                                                                                                              |       | 243,343                                   |       | 1,014,235                   |       |
| Notes payable -  stockholder, current portion                                                                                                                                                |       | —                                    |       | 3,354,210                   |       |
| Liabilities held  for sale                                                                                                                                                                   |       | —                                    |       | 7,307,128                   |       |
| Total current liabilities                                                                                                                                                                    |       | 1,076,322                                 |       | 12,400,273                  |       |
| Long-term debt                                                                                                                                                                               |       | 194,374                                   |       | 277,589                     |       |
| Liabilities held for  sale                                                                                                                                                                   |       | —                                    |       | 4,892,151                   |       |
| Total liabilities                                                                                                                                                                            |       | 1,270,696                                 |       | 17,570,013                  |       |
| Stockholders’ Equity  (Deficit):                                                                                                                                                        |       |                                      |       |                        |       |
| Preferred stock,  10,000,000 shares of $.001 par value authorized, none issued or outstanding                                                                                                |       | —                                    |       | —                      |       |
| Common stock,  200,000,000 shares of $0.001 par value authorized, 90,731,596 shares and  90,698,263 shares issued and outstanding at September 30, 2006 and December  31, 2005, respectively |       | 90,731                                    |       | 90,698                      |       |
| Common stock to be  issued                                                                                                                                                                   |       | 285                                       |       | 318                         |       |
| Additional paid-in  capital                                                                                                                                                                  |       | 60,702,446                                |       | 61,584,446                  |       |
| Accumulated deficit                                                                                                                                                                          |       | (59,677,732                               | )          | (64,579,522                 | )          |
| Total Stockholders’  Equity (Deficit)                                                                                                                                                   |       | 1,115,730                                 |       | (2,904,060                  | )          |
| Total Liabilities and Stockholders’ Equity (Deficit)                                                                                                                                    |       | $                                         | 2,386,426  |                        | $          | 14,665,953 |   |

 

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

2

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**NathanielEnergy Corporation**

**ConsolidatedStatements of Operations**

(Unaudited)

 
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                        | ** ** | **September 30,  2006**                       | ** ** | **September 30,  2005**                      | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Revenue                                                           |       | $                                                  | 350,716    |                                              | $          | 102,125 |   | $ | 900,975 |   | $ | 424,455 |   |
| Cost of revenue                                                   |       | 362,671                                            |       | 202,607                                           |       | 804,999 |   | 615,140 |   |
| Gross income (loss)                                               |       | (11,955                                            | )          | (100,482                                          | )          | 95,976 |   | (190,685 | ) |
| Selling, general and  administrative expenses                     |       | 391,338                                            |       | 418,205                                           |       | 1,363,581 |   | 1,199,700 |   |
| Research and  development expense                                 |       | 4,151                                              |       | —                                            |       | 43,393 |   | 117,125 |   |
| Total operating  expenses                                         |       | 395,489                                            |       | 418,205                                           |       | 1,406,974 |   | 1,316,825 |   |
| Loss from operations                                              |       | (407,444                                           | )          | (518,687                                          | )          | (1,310,998 | ) | (1,507,510 | ) |
| Other income (expense)                                            |       |                                               |       |                                              |       |   |   |   |   |
| Gain on disposal  of equipment                                    |       | —                                             |       | 19,957                                            |       | — |   | 19,957 |   |
| Interest income  (expense), net                                   |       | 4,353                                              |       | (46,462                                           | )          | (100,313 | ) | (177,942 | ) |
| Other income                                                      |       | —                                             |       | 133,047                                           |       | — |   | 140,889 |   |
| Loss from continuing  operations                                  |       | (403,091                                           | )          | (412,145                                          | )          | (1,411,311 | ) | (1,524,606 | ) |
| Income from  discontinued operations, net of tax                  |       | —                                             |       | 225,752                                           |       | 193,428 |   | 700,121 |   |
| Gain on sale of assets,  net of tax                               |       | 78,528                                             |       | —                                            |       | 6,119,673 |   | — |   |
| Net income (loss)                                                 |       | $                                                  | (324,563   | )                                                 | $          | (186,393 | ) | $ | 4,901,790 |   | $ | (824,485 | ) |
| Loss per share from  continuing operations, basic and diluted     |       | $                                                  | (0.00      | )                                                 | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.02 | ) |
| Income per share from  discontinued operations, basic and diluted |       | —                                             |       | (0.00                                             | )          | 0.00 |   | 0.01 |   |
| Income per share from  gain on sale of assets, basic and diluted  |       | 0.00                                               |       | —                                            |       | 0.07 |   | — |   |
| Net income (loss) per  share, basic and diluted                   |       | $                                                  | 0.00       |                                              | $          | (0.01 | ) | $ | 0.05 |   | $ | (0.01 | ) |
| Weighted average common shares outstanding                        |       | 90,731,596                                         |       | 70,698,263                                        |       | 90,715,781 |   | 70,690,937 |   |

 

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

 

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**Nathaniel EnergyCorporationConsolidated Statements of Cash Flows**(Unaudited)
| ** **                                                                                           | ** ** | **For the Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **September 30,  2006**                      | ** ** | **September 30,  2005** | ** ** |
| Cash flows from  operating activities:                                                               |       |                                              |       |   |   |
| Net income  (loss)                                                                                   |       | $                                                 | 4,901,790  |   | $ | (824,485 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                              |       |   |   |
| Depreciation and  amortization                                                                       |       | 306,720                                           |       | 159,427 |   |
| Gain on sale of  assets                                                                              |       | (6,119,673                                        | )          | — |   |
| Income tax  expense                                                                                  |       | 759,000                                           |       | — |   |
| Disposition of  equipment                                                                            |       | 2,629                                             |       | — |   |
| Non-cash  settlement of debt                                                                         |       | —                                            |       | (151,087 | ) |
| Changes in operating  assets and liabilities:                                                        |       |                                              |       |   |   |
| (Increase)  decrease in:                                                                             |       |                                              |       |   |   |
| Accounts  receivable                                                                                 |       | (13,610                                           | )          | (40,191 | ) |
| Inventory                                                                                            |       | —                                            |       | 536,423 |   |
| Prepaid expenses                                                                                     |       | 15,087                                            |       | (127,790 | ) |
| Other  receivables                                                                                   |       | —                                            |       | 529 |   |
| Restricted cash                                                                                      |       | —                                            |       | 237,000 |   |
| Other assets                                                                                         |       | (8,875                                            | )          | (4,274 | ) |
| Accounts payable  and accrued expenses                                                               |       | 108,279                                           |       | 169,584 |   |
| Net effect on  cash from discontinued operations                                                     |       | (1,277,956                                        | )          | 609,812 |   |
| Net cash provided by  (used in) operating activities                                                 |       | (1,326,609                                        | )          | 564,948 |   |
| Cash flows from  investing activities:                                                               |       |                                              |       |   |   |
| Acquisition of  minority interest                                                                    |       | (882,000                                          | )          | — |   |
| Equipment and  intangible asset purchases                                                            |       | (38,974                                           | )          | (910,426 | ) |
| Cash provided by  (used in) discontinued operations                                                  |       | 15,888,183                                        |       | (200,516 | ) |
| Net cash provided by  (used in) investing activities                                                 |       | 14,967,209                                        |       | (1,110,942 | ) |
| Cash flows from  financing activities:                                                               |       |                                              |       |   |   |
| Payments on debt                                                                                     |       | (4,330,557                                        | )          | (843,280 | ) |
| Proceeds from  issuance of notes and loans                                                           |       | 123,240                                           |       | 1,082,031 |   |
| Cash used in  discontinued operations                                                                |       | (8,892,151                                        | )          | — |   |
| Net cash provided by  (used in) financing activities                                                 |       | (13,099,468                                       | )          | 238,751 |   |
| Net increase (decrease)  in cash                                                                     |       | 541,132                                           |       | (307,243 | ) |
| Cash and cash  equivalents, beginning of period                                                      |       | 260,032                                           |       | 568,151 |   |
| Cash and cash  equivalents, end of period                                                            |       | $                                                 | 801,164    |   | $ | 260,908 |   |
| Cash paid for interest                                                                               |       | $                                                 | 1,394,464  |   | $ | 34,328 |   |
| Cash paid for income  taxes                                                                          |       | $                                                 | 121,493    |   | $ | — |   |
| Non cash financing  activity:                                                                        |       |                                              |       |   |   |
| Issuance of stock to  settle accrued expenses, accounts and notes payable                            |       | $                                                 | 33         |   | $ | 87,500 |   |
| Debt issued to purchase minority interest                                                            |       | $                                                 | —     |   | $ | 3,354,210 |   |

 

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

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**NathanielEnergy Corporation**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

SEPTEMBER 30, 2006 and2005

(Unaudited)

1. Significant Accounting Policies and Nature ofOperations:

***Unaudited InterimFinancial Statements***

The accompanying unaudited interim financialstatements, which include the Company’s wholly owned subsidiary, have beenprepared by the Company in accordance with generally accepted accountingprinciples pursuant to Regulation S-B of the Securities and ExchangeCommission. The financial information has not been audited and should not berelied 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, 2005.In the opinion of management, the interim financial statements reflect alladjustments, including normal recurring adjustments, necessary for fairpresentation of the interim periods presented. The results of operations forthe three and nine months ended September 30, 2006 are not necessarilyindicative of results of operations to be expected for the full year.

***Description ofBusiness***

NathanielEnergy Corporation is a renewable hydrocarbon-based Energy from Waste (EfW)company providing municipalities and industries with solutions to divert wastefrom landfills and providing a clean alternative energy comparable to that offossil fuels. Our primary focus is on our proprietary patented technology, theThermal GasifierTM, which is a 2-stage gasification system designed to convertindustrial and commercial waste, biomass, waste tires and other solid,hydrocarbon-based materials into clean economical thermal and electricalenergy, while exceeding the most stringent EPA and European Union  emission regulations.

We have been in thealternative fuel processing business, including waste 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, 2006, our tire fuel processing business hasgenerated 100% of our total revenue.

Ourbusiness objective for our patented technology, the Thermal GasifierTM, followsthree main strategies; a) creating energy infrastructures, b) building, owningand operating EfW plants, and c) licensing.

Ourprimary plan is to seek qualified joint venture partners to build, own andoperate small EfW plants or utilize our technology under a license where wewill become an ongoing participant in the project. We are focused on formingjoint ventures with partners who possess one or more of the followingattributes; financial capability to cover certain development and capitalcosts for the projects, governmental resources to assist in the permitting,technical expertise, and host business applications that will jointly supportsuccessful operations with the potential to use that joint venture businessarrangement in multiple locations. We plan to license the Thermal GasifierTMtechnology to qualified companies, joint venture partners, and distributorshipsas we advance our commercialization activities and the technology matures.

We continue to utilize the Thermal GasifierTM units inItaly in our sales, marketing and research efforts. We are using the EfW plantin Cologna Veneta, Italy as “proof of process” for our first commercial ThermalGasifiersTM in our business development activities demonstrating  a lowercost, clean dependable energy alternative to fossil fuels worldwide. We havebegun a process to evaluate the EfW project in Italy and all of the facilityequipment for additional involvement with the project owner for possibletechnical enhancements to improve the output and reliability of the plant. Wehave recognized no revenue from the sale or delivery of our Thermal GasifiersTMfor the period ended September 30, 2006.

5

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** **

During September 2005, weentered into a Purchase and Sale Agreement with Midstream Energy Services, LLCpursuant to which we agreed to sell the assets which comprise our helium andgas processing facilities and operations to Midstream. On March 7, 2006, weclosed the Purchase and Sale Agreement and sold those assets. The results ofoperations of our helium and gas processing facilities and operations throughthe date of the closing are shown as income from discontinued operations in ourstatement of operations. See Note 2. — “Disposition of a Business Segment”. Theestimated gain on the sale of our helium and gas processing facilities andoperations is shown as income from sale of assets in our statement of operations.

**CriticalAccounting Policies**

The financial statements include the accounts ofNathaniel Energy Corporation and its subsidiaries. All material inter-companyaccounts and transactions have been eliminated in consolidation. Certain priorperiod amounts have been reclassified to conform to the current periodpresentation with no effect on net income or loss.

***Inventory***

Tire-derived-fuel (TDF) inventory is valued at itscost to produce a salable product using the first-in first-out method, but inan amount not to exceed realizable value, determined with respect to existingcontractual sales prices, less costs to complete the waste tire processing. TDFinventory value at September 30, 2006 is zero.

The Thermal GasifiersTM are valued at that portion ofthe 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 paymentsreceived. Our customer continues to have difficulty with a third partysubcontractor’s fuel preparation system that prepares the fuel for the ThermalGasifiersTM so that it meets the specifications agreed to in our contract tomeet our output performance guarantee. In addition, our customer is in theprocess of retrofitting downstream thermal equipment provided to them by thesame third party subcontractor. The retrofit is required to bring thedownstream thermal equipment into specification to accept the synthesis gasthat our units produce. Because both the fuel supply and downstream thermalequipment capability concerns are of significant importance to our customer, wehave agreed to evaluate and recommend modifications that would improve theoutput and reliability of those systems and the overall EfW facility while wecontinue to pursue payment of amounts due us on our contract.  Because management determined that the timingof receipt and amount of any payment we could expect to receive is uncertain,we reduced the carrying value of the construction in progress inventory to zeroduring fiscal 2005.  We are reimbursedfor our out of pocket expenses, including shipping expenses incurred during thestart up phase and we record those expenses and the reimbursement of thoseexpenses in cost of revenue and revenue, respectively. The Thermal GasifierTMinventory value at September 30, 2006 is zero.

We continue to provide technical support while weundertake the evaluation process of assessing the EfW facility in ColognaVeneta, Italy for modifications to improve the output and reliability of theplant. In conjunction with the enhancements to the EfW facility we continue towork toward the completion of the start-up and testing of the two ThermalGasifiersTM. Both units have been operated in start up phase.

6

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*** ***

***Research andDevelopment***

Research and developmentexpenditures, all of which relate directly to the design and development of ourThermal GasifierTM technology, are expensed as incurred. For the three and ninemonths ended September 30, 2006 and 2005, we incurred costs for outsideresources and expensed $4,151and $-0-, and $43,393 and $117,125 respectively.

***Property, Plant andEquipment and Related Depreciation***

Property, plant and equipment purchased or constructedis recorded at cost. Direct costs, such as labor and materials, and indirectcosts, such as overhead used during construction are capitalized. Major unitsof property replacements or improvements are capitalized and minor items areexpensed. Gain or loss is recorded in income for the difference between the netbook value relative to proceeds received, if any, when the asset is sold orretired. Depreciation is provided for using the straight-line method. Estimateduseful lives of the assets used in the computation of depreciation are asfollows:

 

| Machinery and equipment     |   | 5 years    |   |
|-----------------------------|--------|------------|--------|
| Buildings and  improvements |   | 5-15 years |   |
| Vehicles                    |   | 5 years    |   |

 

***Long-Lived Assets***

In accordance with the Financial Accounting StandardsBoard’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets”, the Company reviews itslong-lived assets, including intangible assets, for impairment whenever eventsor changes in circumstances indicate that the related carrying amount may notbe recoverable. Recovery of assets to be held and used is measured by acomparison of the carrying amount of the assets to the future net cash flowsexpected to be generated by the asset. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets. Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less the cost to sell.  Managementuses significant judgments, assumptions and estimates to calculate future cashflows expected to be generated by the assets under impairment review.

***Revenue Recognition***

Our tire fuel processingfacility recognizes revenue in two ways. First when waste tires are accepted atthe facility we receive a disposal fee (“tipping fees”) and secondly from thesale of processed tire-derived-fuel. The revenues from tipping fees are fullyearned when the waste tires are accepted at the facility and the processed tireshred revenues are recognized when the TDF is delivered to the end user.Internal quality controls are in place to ensure that the tire-derived-fuelmeets the standards required in contracts for the delivery to our customers.This quality control reduces the risk of significant returns and allowances oftire-derived-fuel sold. Sales returns are reprocessed and added back to the existingproduction of tire-derived-fuel. Sales returns are booked based on the Company’shistorical experience.

We recognize revenue fromthe sale of our Thermal GasifiersTM upon completion, delivery and customeracceptance, using the completed contract method of accounting. We recognizerevenue for consulting services during the period those services are provided.We have recognized no revenue from the sale of our Thermal GasifiersTM as ofSeptember 30, 2006.

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

SFAS No. 128, “EarningsPer Share” requires presentation of basic (loss) or earnings per share (“BasicEPS”) and diluted (loss) or earnings per share (“Diluted EPS”).

The computation of basicloss per share is computed by dividing loss available to common stockholders bythe weighted average number of outstanding common shares during the period.Diluted loss per share gives effect to all dilutive potential common sharesoutstanding during the period. The computation of diluted EPS does not assumeconversion, exercise or contingent exercise of securities that would have ananti-dilutive effect on earnings. During the periods presented, we had nopotentially dilutive securities outstanding.

***Use of Estimates***

The preparation of ourfinancial statements in conformity with generally accepted accountingprinciples requires our management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.

**2. Disposition of a Business Segment**

On March 7, 2006Nathaniel Energy Corporation, its wholly-owned subsidiary Nathaniel EnergyOklahoma Holdings Corporation (“NEOHC”) and NEOHC’s wholly-owned subsidiary,MCNIC Rodeo Gathering, Inc. closed a Purchase and Sale Agreement with MidstreamEnergy Services, LLC pursuant to which NEOHC sold the assets which comprisedNathaniel’s helium and gas processing facilities and operations to Midstream.Pursuant to the Purchase and Sale Agreement, the purchase price was subject tothe following adjustments:

upward for any capitalexpenditures made by Nathaniel relating to the helium and gas operations fromAugust 1, 2005.

upward for expensesincurred by Nathaniel from August 1, 2005 to operate the helium and gas assets.

upward for all amountsowed to Nathaniel or its affiliates as of the closing under the contracts whichare included in the assets to be sold.

upward by up to$1,800,000 if Midstream and Colorado Interstate Gas entered into an agreementfor nitrogen and/or air services which commences on or near January 1, 2007.This agreement was entered into.

downward for any expensesrelating to the operation of the gas assets which are attributed to the periodbefore closing that were unpaid at the closing, and the liability for which istransferred to Midstream.

downward for amounts dueunder the contracts which are included in the gas assets to be sold that wereunpaid as of the closing, and the liability for which is transferred toMidstream.

downward for allfunds, receivables and the like, that are attributable to the gas assets beingsold, for all periods from August 1, 2005 to the extent retained by Nathaniel.

Additionally, thePurchase and Sale Agreement provided that in the event any adjustments were notfinally determined prior to the closing, they were to be determined after theclosing.

Midstream assumed all theliabilities under the contracts included in the gas assets being sold thatarose after the closing date.

Nathaniel used$14,482,171 of the sale proceeds to satisfy its indebtedness to Richard Strain,which reduced the company’s debt by approximately 89%.

8

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At the closing, givingeffect to agreed adjustments, Midstream delivered $16,915,676 to Nathaniel onaccount of the purchase price.  Thepurchase price was increased by $83,893 to $16,999,569 to reflect post-closingadjustments which were finally determined pursuant to the terms of the Purchaseand Sale Agreement.

We have recorded the$83,893 adjustment in our Consolidated Statements of Operations for the threeand nine months ended September 30, 2006 as gain on sale of assets, net of tax.

On April 10, 2006, in accordance with the terms of thePurchase and Sale Agreement, we received a letter from Midstream detailingcertain title defects in the gas gathering pipeline system which would have hada potential negative post-closing adjustment to the purchase price of $271,300.Pursuant to the Purchase and Sale Agreement, we corrected those defects at acost to us of $7,829.  We recordedadditional gain on sale of assets of $42,171in the second quarter of 2006,representing the excess of our original estimated cost to cure these defects,over the actual cost incurred. On October 1, 2006 we received a letter fromMidstream claiming that certain title defects remained. We do not believe thatthese claims amount to defects under the Purchase and Sale Agreement whichrequire correction under the terms of that agreement. Accordingly, we have notrecorded any contingency for this on our balance sheet or statement of operationsfor the nine months ended September 30, 2006.

The estimated gain on sale of the helium and gasprocessing facilities and operations is as follows as of September 30, 2006:

 

| Final sales price                       |   |     |       | $          | 16,999,569 |   |
|-----------------------------------------|--------|----------|------------|------------|------------|--------|
| Book value of  assets sold              |   | $        | 10,438,310 |       |       |   |
| Less:  Liabilities assumed by Midstream |   | (530,618 | )          |       |       |
| Expense of sale                         |   | 213,204  |       |       |       |
|                                    |   |     |       | 10,120,896 |       |
| Pretax gain on  sale of assets          |   |     |       | 6,878,673  |       |
| Income tax  expense                     |   |     |       | 759,000    |       |
| Gain on sale of assets,  net of tax     |   |     |       | $          | 6,119,673  |   |
|                                         |        |          |            |            |            |        |  |

 

**3. Notes Payable**

On June 9, 2006, we paidoff the borrowings outstanding on our line of credit of $790,000. The line ofcredit was secured by a letter of credit provided by our majority stockholder,Richard Strain.

On March 7, 2006, werepaid total principal of $12,246,361 related to all previous obligations dueRichard Strain out of the proceeds we received from the sale of our helium andgas processing assets to Midstream.  Asof September 30, 2006 and December 31, 2005, our total indebtedness to RichardStrain was $ -0- and $12,246,361, respectively.

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**4. Related Party Transactions**

OnSeptember 29, 2005, we entered into and closed a Stock Purchase Agreement withRichard Strain pursuant to which we purchased 4,900 shares of common stock ofNathaniel Energy Oklahoma Holdings Corporation (“NEOHC”), our 51% ownedsubsidiary, for $3,354,210. On March 7, 2006, we closed the Purchase andSale Agreement with Midstream and received $16,915,676. From the $16,915,676received, we paid Mr. Strain $13,600,171 in satisfaction of ourOctober 2003 promissory notes of $6,892,151, our March 2004promissory note of $2,000,000, our September 2005 promissory note of$3,354,210 and accrued interest through March 7, 2006 on those notes of$1,353,810.

The NEOHC sharespurchased represented 49% of NEOHC. As a result of this acquisition, NEOHCbecame a wholly-owned subsidiary of Nathaniel.

Pursuant to our Purchaseand Sale Agreement with Midstream for the sale of our helium and gasoperations, the purchase price under that agreement was subject to an upwardadjustment by up to $1,800,000 if Midstream and Colorado Interstate Gas enteredinto an agreement for nitrogen and/or air blending services which commences onor before January 1, 2007. This agreement was entered into in December 2005. Asa result of this upward adjustment, we paid Richard Strain an additional$882,000 at closing.

**5. Economic Dependency — MajorCustomer**

One customer accountedfor approximately 26% and 21%, and 32% and 19% of our total revenue for thethree and nine months ended September 30, 2006 and 2005, respectively.

**6. Income Tax Expense**

On September 29, 2005, we acquired a 49% interest inNEOHC from Richard Strain. See Note 4-”Related Party Transactions”. As a resultof that acquisition, we own 100% of NEOHC as of September 30, 2005 and weinclude taxable income or loss of NEOHC with our taxable income or loss forfederal income tax purposes for periods subsequent to that date.

As ofDecember 31, 2005, the Company has approximately $19,300,000 in netoperating loss carry forwards available to offset future taxable incomeexpiring between 2018 and 2025. Approximately $2,700,000 of this loss islimited under the change in control provisions of Internal Revenue CodeSection 382. Losses in excess of those so limited will be available tooffset future taxable income without limitation during our fiscal year 2006until their expiration.

As aresult of the sale of our helium and gas processing assets on March 7,2006, we estimate that we will utilize approximately $2,034,000 of ourDecember 31, 2005 net operating loss carry forward to offset the gain onthe sale of those assets and have recorded a deferred tax asset and totalprovision benefit of $759,000 at December 31, 2005. The gain on sale of ourhelium and gas processing assets has not been finally determined at September30, 2006 as all expenses of sale have not been finalized, however, we estimatethat our tax gain on sale will be offset by our estimated current year’s lossand tax losses carried forward to fiscal 2006, and therefore, we have reversedour deferred tax asset of $759,000 for the nine months ended September 30,2006.

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Weexpect to utilize a deduction for qualifying capital gains for Oklahoma Stateincome tax purposes to eliminate approximately $7,700,000 of gain from the saleof our interest in Keyes Helium Company LLC. Oklahoma law states that thecapital gain deduction applies to the sale of ownership interests in anOklahoma company owned by individuals for at least two years for a sale ofassets occurring on or after January 1, 2006, however, inconsistency inOklahoma tax law which would be expected to extend the two year holding periodto corporate taxpayers creates some uncertainty. It is expected that theinconsistency in the law will be corrected in 2007 by the Oklahoma legislatureto conform the holding period to two years for all taxpayers. If the Oklahomalegislature does not correct these inconsistencies, we would incur anadditional  Oklahoma income tax liabilityof approximately $390,000. This contingency has not been recorded in ourbalance sheet or statement of operations for the nine months ended September30, 2006.

Weconsider it less likely than not that the balance of the net operating lossesand deductible temporary differences will be realized within the next twelvemonth period and have established a valuation allowance for the remainingdeferred tax asset generated by those losses and temporary differences.

**7. Business Segments**

The Company conductsbusiness in two separate facilities presently managed as two energy operatingbusiness segments, alternative energy and tire fuel processing. The locationand use of our facilities are shown as follows:

- the alternative energy engineering and corporate offices inEnglewood, Colorado and

- the tire fuelprocessing operation in Hutchins, Texas.

For the nine months endedSeptember 30, 2006:
| ** **                                                    | ** ** | **Fuel  Processing** | ** ** | **Alternate Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Revenue                                                       |       | $                    | 900,975    |                      | —     |                         |       |      | $          | 900,975 |   |
| Significant non  cash expenses- depreciation and amortization |       | $                    | 231,885    |                      | $          | 74,835                       |       |      |       | $ | 306,720 |   |
| Net income  (loss)                                            |       | $                    | 5,275,254  |                      | $          | (566,892                     | )          | $         | 193,428    |   | $ | 4,901,790 |   |
| Capital  expenditures                                         |       | $                    | 38,974     |                      | —     |                         | —     |      | $          | 38,974 |   |
| Total assets as of  September 30, 2006                        |       | $                    | 2,186,012  |                      | $          | 200,414                      |       | —    |       | $ | 2,386,426 |   |
|                                                               |            |                      |            |                           |            |                              |            |           |            |  |  |  |  |

 

For the nine months endedSeptember 30, 2005:
| ** **                                                    | ** ** | **Fuel   Processing** | ** ** | **Alternate Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Revenue                                                       |       | $                          | 344,455    |                      | $          | 80,000                       |       |      |       | $ | 424,455 |   |
| Significant non  cash expenses- depreciation and amortization |       | $                          | 134,482    |                      | $          | 24,945                       |       |      |       | $ | 159,427 |   |
| Net income  (loss)                                            |       | $                          | (917,491   | )                         | $          | (607,115                     | )          | $         | 700,121    |   | $ | (824,485 | ) |
| Capital  expenditures                                         |       | $                          | 910,426    |                      | —     |                         | $          | 200,516   |       | $ | 1,110,942 |   |
| Total assets as of  September 30, 2005                        |       | $                          | 1,980,452  |                      | $          | 320,395                      |       | $         | 11,780,744 |   | $ | 14,081,591 |   |

 

 

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**Item2. Management’s Discussion and Analysis of Results of Operations.**

**FORWARDLOOKING STATEMENTS**

Certain information contained in this report mayinclude “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, and is subject to the safe harborcreated by that act. The safe harbor created by the Securities LitigationReform Act will not apply to certain “forward looking statements” because weissued “penny stock” (as defined in Section 3(a)(51) of the Securities ExchangeAct of 1934 and Rule 3a51-1 under the Exchange Act) during the three yearperiod preceding the date(s) on which those forward looking statements werefirst made, except to the extent otherwise specifically provided by rule,regulation or order of the Securities and Exchange Commission. We cautionreaders that certain important factors may affect our actual results and couldcause such results to differ materially from any forward-looking statementswhich may be deemed to have been made in this Report or which are otherwisemade by or on behalf of us. For this purpose, any statements contained in thisreport that are not statements of historical fact may be deemed to beforward-looking statements. Without limiting the generality of the foregoing,words such as “may”, “will”, “expect”, “believe”, “explore”, “consider”, “anticipate”,“intend”, “could”, “estimate”, “plan”, or “continue” or “hope” or the negativevariations of those words or comparable terminology are intended to identifyforward-looking statements. Factors that may affect our results include, butare not limited to, the risks and uncertainties associated with:

·    Ourability to raise capital necessary to implement our business plan.

·    Ourability to finance and complete planned projects and facilities upgrades.

·             Ourability to execute our business plan and commercialize the Thermal GasifierTMtechnology, including building Thermal GasifiersTM that meet customers’specifications and that meet local regulatory environmental and permitrequirements.

·             Risksrelated to dependency on a small number of customers.

·             Ourability to satisfy our customers’ expectations.

·             Ourability to employ and retain qualified management and employees.

·             Changesin government regulations which are applicable to our business.

·             Theavailability of a consistent, economically viable, and sustainable waste streamsupply to fuel the Thermal GasifierTM operations.

·             Changesin the demand for our products and services, including the impact from changesin governmental regulation and funding for alternative energy.

·             Thedegree and nature of our competition, including the reliability and pricing oftraditional energy sources, economic viability of other alternative energysources such as wind and solar power.

·             Ourability to pay debt service on loans as they come due.

·             Ourability to generate sufficient cash to pay our creditors.

·             Disruptionin the economic and financial conditions primarily from the impact of terroristattacks in the United States and overseas, threats of future attacks, police andmilitary activities and other disruptive worldwide political events.

We are also subject to other risks detailed from timeto time in other Securities and Exchange Commission filings and elsewhere inthis report. Any one or more of these uncertainties, risks and other influencescould materially affect our results of operations and whether forward-lookingstatements made by us ultimately prove to be accurate. Our actual results,performance and achievements could differ materially from those expressed or impliedin these forward-looking statements. We undertake no obligation to publiclyupdate or revise any forward-looking statements, whether from new information,future events or otherwise.

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**Company Overview**

We are committed to beinga leader in the EfW and renewable energy industries. At a time when world-widedemand for electricity stretches both generating and transmission capacity andenergy security threatens economic growth, we seek to provide clean,sustainable and profitable solutions to these problems. We are an “EnvironmentalPartner” developing and leveraging synergistic technologies, diverting solidwaste from landfills to the generation of clean and economical energy. We arealso engaged in developing strategic collaborative partnerships for theresearch and development of clean and profitable carbon neutral fuels.

As we advance the “state-of-the-art”in EfW technology, our business model focuses on the development of qualifiedjoint-venture partnerships and licensed partner companies to build, own andoperate small distributed EfW plants. Our ideal project characteristically develops when high energy demandand cost combine with on-site generation of large volumes of hydrocarbon basedwaste.  Whether through joint-venture orlicensed partner, we develop efficient EfW energy infrastructures “inside thefence.”  These projects reduce theenvironmental footprint of the parent facility through reduced dependence onfossil fuels, reduced generation of waste and clean economical energyproduction.  The parent facility derivesadditional benefit if there is on-site process use for surplus heat and/orsteam.

We seek to further expandour presence in the renewable energy and biofuels marketplace through strategicjoint-venture partnerships.  Throughparticipation in commercially viable EfW projects co-located with biofuelsresearch and development we intend to leverage the beneficial byproducts of ourtechnology in conjunction with emerging biofuels technologies.

Some of our EfW plantsmay have a sustainable supply of waste fuels available from the host/customerwith no additional fuel needed. Other facilities may require additional fuel toutilize installed generation capacity, or they may need supplemental fuel toraise the average fuel grade or the volume of fuel needed to efficientlyoperate the technology. Our wholly owned subsidiary, Cleanergy, Inc. will useour knowledge of tire fuel processing operations which currently resides in ourHutchins, Texas facility, to furnish tire-derived-fuel to those EfW plants thatneed supplemental fuel for those facilities. The tire fuel processing divisionwill continue to expand and eventually grow toward a full fuel procurementagent for all other fuels at plants where the Thermal GasifierTM capacityexceeds the local waste fuel supply. This will take advantage of our existingexpertise and allow us to increase throughput at various tire fuel processingfacilities as we expand, create a new market for our tire-derived-fuel (asenvironmental regulations tighten up on our current customers) and position usas a “turn key” provider of EfW solutions.

On March 7, 2006 we soldsubstantially all of the assets that comprise our helium and gas processingfacilities and operations to Midstream Energy Services, LLC pursuant to aPurchase and Sale Agreement signed in September 2005. Revenue generated fromour discontinued operations, the helium and gas processing business, hasprovided operating and capital funds for improving our current tire fuelprocessing operations and further advancing it toward a full service fuelprocurement operation, in addition to, furthering the commercialization of ourThermal GasifiersTM. By improving and advancing our fuel processing division andfurthering the commercialization of our patented technology, we plan to securehydrocarbon-based EfW projects through our subsidiary Cleanergy, Inc. Cleanergyhas had no activity to date.

The tire fuel processingfacility improvements and expansion which began in 2005 provide the foundationto diversify this business segment toward alternative fuel procurement. Thefacility is strategically located less than a mile from the third largest trainintermodal station in the nation and is currently the only waste tire storageand processing facility licensed by the State of Texas to operate in the Dallasmetro area. With the completion of our equipment installation and siteimprovements we have been able to increase the production and the volume ofwaste tires we process. We have seen an increase in the volume of waste tireswe can accept at the facility resulting in higher tipping fee revenues.  The improvements have enabled us to continueto increase revenue and cash flow from this operation. We expect to continue toimprove our tire handling and product delivery capabilities to increase theefficiency of the facility.

During the three and ninemonths ended September 30, 2006, we generated $350,716 and $900,975, or 100%,of our revenue, from our tire fuel processing division.  We have recognized no revenue from our ThermalGasifierTM business segment during the three and nine months ended September 30,2006.

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Our long term goal is toproduce the majority of our revenue and cash flow from the commercialization ofour Thermal GasifierTM technology through hydrocarbon-based EfW projects. Duringthe first quarter 2005, we formed Cleanergy, Inc., a Delaware corporation, as awholly owned subsidiary of the Company for the purpose of advancing ourbusiness plan to commercialize our Thermal GasifierTM technology. We plan tofocus the majority of our resources on this business operation, which will besupported through the advancement of our tire fuel processing division’sexpansion for fuel procurement for the hydrocarbon-based EfW projects.

We are actively involvedin ongoing business development activities and historically, we have not haddifficulty finding potential project opportunities.   Currently the company is in the process of evaluatingcertain project opportunities and providing detailed proposals for selectedqualified projects. Worldwide, industries and municipalities seek solutions fordiverting solid waste from landfills and lower cost and clean energyalternatives to fossil fuels. Demand for these solutions is expected to grow. Akey to our success will be qualifying and wisely choosing among projectopportunities and focusing our resources on projects with the greatest chanceof success and returns for stockholders.

We continue to providetechnical support to the project owner while we undertake the evaluationprocess of assessing the EfW facility in Cologna Veneta, Italy formodifications to improve the output and reliability of the plant. Inconjunction with the enhancements to the EfW facility we continue to worktoward the completion of the start-up and testing of the two Thermal GasifiersTMwhile having access to the facility for marketing and development activities.Our mission for the remainder of 2006 is to expand on our sales pipeline ofqualified hydrocarbon-based EfW projects. 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.

 

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**Results of Operations**

The following tables set forth certain unauditedquarterly results of operations of Nathaniel Energy for the first threequarters of 2006. The quarterly operating results are not necessarilyindicative of future results of operations.
| ** **                                              | ** ** | ** **         | ** ** | ** **        | ** ** | ** **             | ** ** | **Three Months Ended (unaudited)** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | ** **         | ** ** | ** **        | ** ** | ** **             | ** ** | ** **                                        | ** ** | **September 2006 vs. 2005** | ** ** |
| ** **                                              | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **September 30,**                            | ** ** | **Increase (decrease)** | ** ** |
| ** **                                              | ** ** | **2006**           | ** ** | **2006**          | ** ** | **2006**               | ** ** | **2005**                                          | ** ** | **$ ** | ** ** | **%** | ** ** |
| Revenue                                                 |       | $                  | 239,527    |              | $          | 310,732                |       | $                                                 | 350,716    |   | $ | 102,125 |   | $ | 248,591 |   | 243 | % |
| Cost of revenue                                         |       | 210,447            |       | 231,881           |       | 362,671                |       | 202,607                                           |       | 160,064 |   | 79 | % |
| Gross profit (loss)                                     |       | 29,080             |       | 78,851            |       | (11,955                | )          | (100,482                                          | )          | 88,527 |   | 88 | % |
|                                                    |       |               |       |              |       |                   |       |                                              |       |   |   |   |   |
| Selling general and administrative  expense             |       | 537,135            |       | 474,350           |       | 395,489                |       | 418,205                                           |       | (22,716 | ) | (5 | )% |
| Operating loss                                          |       | (508,055           | )          | (395,499          | )          | (407,444               | )          | (518,687                                          | )          |   |   |   |   |
|                                                    |       |               |       |              |       |                   |       |                                              |       |   |   |   |   |
| Interest income  (expense), net                         |       | (104,685           | )          | 19                |       | 4,353                  |       | (46,462                                           | )          |   |   |   |   |
| Other non-operating income  (expense)                   |       | —             |       | —            |       | —                 |       | 133,047                                           |       |   |   |   |   |
| Gain on sale of  equipment                              |       | —             |       | —            |       | —                 |       | 19,957                                            |       |   |   |   |   |
| Loss from continuing  operations before income taxes    |       | (612,740           | )          | (395,480          | )          | (403,091               | )          | (412,145                                          | )          |   |   |   |   |
| Income (loss) from  discontinued operations, net of tax |       | 194,961            |       | (1,533            | )          | —                 |       | 225,752                                           |       |   |   |   |   |
| Gain on sale of assets,  net of tax                     |       | 5,998,974          |       | 42,171            |       | 78,528                 |       | —                                            |       |   |   |   |   |
| Net income (loss)                                       |       | $                  | 5,581,195  |              | $          | (354,842               | )          | $                                                 | (324,563   | ) | $ | (186,393 | ) |   |   |   |   |
| Net income (loss) per  common share, basic and diluted  |       | $                  | 0.06       |              | $          | (0.00                  | )          | $                                                 | (0.01      | ) | $ | (0.01 | ) |   |   |   |   |
| Weighted-average common  shares outstanding-diluted     |       | 90,698,263         |       | 90,717,310        |       | 90,731,596             |       | 70,698,263                                        |       |   |   |   |   |
| Shares outstanding at end of period                     |       | 90,698,263         |       | 90,731,596        |       | 90,731,596             |       | 70,698,263                                        |       |   |   |   |   |
|                                                         |            |                    |            |                   |            |                        |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

For the three monthsended September 30, 2006, our revenue increased by $248,591, or 243% to$350,716 from $102,125 during the same period in 2005. The increase is dueprimarily to two reasons. During the third quarter 2006, our tire fuelprocessing operation significantly increased production and delivery of tirederived fuel to our customer, utilizing new equipment installed at the facilityduring the third quarter of 2005 and increased its acceptance of waste tires,generating tipping fee revenue resulting in a combined increase in revenue ofapproximately $165,000 over the same quarter in 2005. During most of the thirdquarter of 2005, the tire fuel processing facility shut down to install newequipment and upgrade the facility. In addition, during the third quarter 2006,we recognized revenue of approximately $83,000 on a waste tire reclamationproject awarded us by the State of Texas. We had no tire reclamation projectrevenue during the third quarter 2005. The tire fuel processing divisiongenerated all of our revenue during the third quarter of 2006 and 2005.

During the nine monthsended September 30, 2006, revenue increased $476,520, or 112%, to $900,975 from$424,455 for the same period in 2005. The increase is primarily due to our tirefuel processing division revenue which has operated during 2006 with new fuelprocessing equipment and continual improvements in our processing line toaccept delivery of waste tires, resulting in an increase in revenue of$473,520. In addition, we recognized $83,000 of revenue on a waste tirereclamation project awarded us by the State of Texas during the nine months

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ended September 30,2006.  During the nine months endedSeptember 30, 2005, we recognized revenue of $344,455 from the tire fuelprocessing facility due primarily to the shut down in the third quarter toinstall new equipment and upgrade the facility and production down time for equipmentrepair we experienced during the first half of 2005. The increase in our tirefuel processing revenue during 2006 was offset by a decrease in revenue of$80,000 for start-up consulting services provided to our customer for theThermal GasifierTM built in Cologna Veneta, Italy during the nine months endedSeptember 30, 2005. No such revenue was recognized during the comparable periodin the current year.

Gross loss for the threemonths ended September 30, 2006 was $11,955, a decrease in gross loss of $88,527,or 88% compared to gross loss of $100,482 for the three months ended September30, 2005. The decrease in gross loss is due primarily to our increase inrevenue, which contributed $248,591 to our decrease in gross loss, offset by anincrease in payroll and employee related benefit expenses of $52,703 resultingfrom an increase in headcount and overtime at the tire fuel processingfacility, an increase in outside services and rental expense of $55,264 forcontract labor and equipment to complete our waste tire reclamation projectwith the State of Texas, an increase in deprecation expense of $33,911resulting from new equipment placed in service for which depreciation expensebegan after the three months ended September 30, 2005, and an increase in operatingsupplies and utility costs of $25,827 due to the full operation of the tirefuel processing facility during the three months ended September 30, 2006,compared to limited operation during the same period in 2005 resulting from theshut down to install new equipment and upgrade the facility. During the threemonths ended September 30, 2005 we recognized a write down in our inventory of$1,496 which was included in our gross loss related to the two ThermalGasifiersTM we built for our customer in Cologna Veneta, Italy.

Gross income for the ninemonths ended September 30, 2006 was $95,976, an increase of $286,661, or 150%compared to gross loss of $190,685 for the nine months ended September 30,2005. Gross income from our tire fuel processing operation increased by$322,301, or 142% from a gross loss of $226,325 during the nine months endedSeptember 30, 2005 to a gross profit of $95,976 in the current year. Theincrease in gross profit is primarily due to an increase in revenue of $556,520and a decrease in repair and maintenance expenses of $67,570 as a result of newequipment placed in service during the fourth quarter of 2005, offset by anincrease in depreciation expense of $132,896 resulting from new equipmentplaced in service during the fourth quarter of 2005 for which we realizedepreciation for the nine months ended September 30, 2006, an increase inoutside services and rental expense of $55,264 for contract labor and equipmentto complete our waste tire reclamation project with the State of Texas, andincrease in operating supplies and utility costs of $62,190 due to increasedprocessing of waste tires through the tire fuel processing facility and fulloperation of the facility for the nine months ended September 30, 2006, and anincrease in payroll and employee related benefits of $35,450 resulting from anincrease in headcount and overtime. During the nine months ended September 30,2005, gross profit from consulting services for the start-up of the ThermalGasifiersTM built in Cologna Veneta, Italy was $35,640. We recognized no grossprofit from our Thermal GasifierTM business during the same period in 2006.

Total selling, generaland administrative expenses decreased by $22,716 or 5% from $418,205 for thethree months ended September 30, 2005 to $395,489 for the three months endedSeptember 30, 2006. The decrease in selling, general and administrativeexpenses for the three months ended September 30, 2006 is due primarily to adecrease in legal and professional expenses. During the three months endedSeptember 30, 2005 we incurred nonrecurring legal and professional expensesrelated to the acquisition of the minority interest in our discontinuedoperations.  For the nine months endedSeptember 30, 2006, selling, general and administrative expenses increased by$90,149, a 7% increase, to $1,406,974 from $1,316,825 during the same period in2005. The increase is primarily due to an increase in payroll and relatedemployee expenses of approximately $130,000 resulting from bonus payments madeduring the nine months ended September 30, 2006 and an increase in intangibleasset amortization expense of $37,390 offset by a decrease in research anddevelopment expense of $73,732.

Net interest expensedecreased by $50,815 from $46,462 for the three months ended September 30, 2005to net interest income of $4,353 for the three months ended September 30, 2006due primarily to the payment of the majority of our interest bearing debt andinvestment of excess cash in temporary interest bearing deposit accounts.  Net interest expense decreased by $77,629from $177,942 for the nine months ended September 30, 2005 to $100,313 for thenine months ended September 30, 2006 due primarily to payment of the majorityof our interest bearing debt from the proceeds on the sale of our discontinuedoperations during the first quarter of 2006.

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Other income decreased from $133,047 and $140,889 forthe three and nine months ended September 30, 2005 to  $-0- for the three and nine months endedSeptember 30, 2006. Other income included $133,047 income from the settlementof a note payable during the three and nine months ended September 30, 2005. Weentered into a $728,637 note payable with a vendor on August 2005. DuringSeptember 2005, we made an advance payment on, and extinguished the note. Thevalue of the note of $728,637 less our principal cash payments and our lump sumpayment through September 2005 of $520,590 and an unsecured non-interestbearing note we exchanged in the settlement of $70,000 is $138,047, which wereflected 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.

Incomefrom discontinued operations decreased from $225,752  for the three months ended September 30, 2005to $-0- for the three months ended September 30, 2006 due primarily to the saleof the helium and gas facilities and operations to Midstream Energy Services,LLC on March 7, 2006. As a result of the sale, we recognized no income or expensefrom discontinued operations during the three months ended September 30, 2006.

Incomefrom discontinued operations decreased by $506,693 from $700,121 for the ninemonths ended September 30, 2005 to $193,428 for the nine months ended September30, 2006 due primarily to the sale of the helium and gas processing facilitiesand operations to Midstream Energy Services, LLC on March 7, 2006. As a result,income from discontinued operations for the nine months ended September 30,2006 includes only income through the date of sale.

Furtherdiscussion of this is found in Note 2.—”Disposition of a Business Segment” toour financial statements.

Gain onsale of assets, net of tax represents gain of $78,528 and $6,119,673 for thethree and nine months ended September 30, 2006, respectively, from the sale ofour helium and gas processing facilities and operations to Midstream EnergyServices, LLC on March 7, 2006. Further discussion of this is found in Note 2.—”Dispositionof a Business Segment” to the financial statements. The gain is net of $759,000of income tax expense. We recorded a deferred tax benefit of $759,000 duringthe fourth quarter of 2005 due to our expected use of approximately $2,000,000of our net operating loss carry forward from 2005 and prior fiscal years alongwith losses we expected to incur during 2006, to offset the estimated 2006 gainresulting from the sale of the helium and gas processing operations’ assets.The reversal of the deferred tax benefit was included in gain on sale ofassets, net of tax, during the first quarter of 2006

Netloss increased by $138,170 to $324,563 for the three months ended September 30,2006 from a net loss of $186,393 for the three months ended September 30, 2005due primarily to the reduction in our loss from operations of $111,243,reduction in interest expense of $50,815 and an increase in gain on sale ofassets of $78,528 offset by a reduction in other income of $133,047 and adecrease in income from discontinued operations of $225,752.

Netincome increased by $5,726,275 to $4,901,790 for the nine months endedSeptember 30, 2006 from a net loss of $824,485 for the nine months endedSeptember 30, 2005 due primarily to the gain on sale of the helium and gasprocessing facilities and operations of $6,119,673, an improvement in our lossfrom continuing operations of $196,512 resulting primarily from improved grossprofit from our tire fuel processing operation and a decrease in net interestexpense of $77,629 offset by a decrease in income from discontinued operationsof $560,693 and a decrease in other income of $140,889.

**Liquidity and Capital Resources**

As of September 30, 2006we owed $350,717 to financial institutions under installment notes with anaverage interest rate of 5.3%,of which, $307,668 is secured by land orequipment.

The remaining indebtedness consists of miscellaneousnotes to unaffiliated third parties of $87,000.

OnMarch 7, 2006 Nathaniel, its wholly-owned subsidiary NEOHC and NEOHC’swholly-owned subsidiary, MCNIC Rodeo Gathering, Inc. closed the Purchase andSale Agreement with Midstream Energy Services, LLC.  At

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theclosing, giving effect to agreed adjustments, Midstream delivered $16,915,676to Nathaniel on account of the purchase price.  The purchase price wasincreased by $83,893 to $16,999,569 to reflect post-closing adjustments whichwere finally determined pursuant to the terms of the Purchase and SaleAgreement. The increase in gain on sale of assets of $83,893 is included in ourstatement of operations for the third quarter 2006 net of any other expenses ofsale which arose during the third quarter.

OnApril 10, 2006, in accordance with the terms of the Purchase and SaleAgreement, we received a letter from Midstream detailing certain title defectsin the gas gathering pipeline system. Pursuant to the Purchase and SaleAgreement, we corrected those defects during the second quarter at a cost to usof $7,829 and reversed $42,170 which we had accrued in excess of the actualcost, as an increase in the gain on sale of assets in our statement ofoperations.  On October 1, 2006, wereceived a letter from Midstream claiming that certain title defects remained.We do not believe that these claims are defects which would require correctionunder the terms of the Purchase and Sale Agreement, although we cannot provideany assurance to that effect.

Nathanielused $13,600,171 of the sale proceeds to satisfy $12,246,361 of secured loansand promissory notes due Richard Strain, our majority stockholder and majordebt holder, and $1,353,810 of accrued interest.

DuringJune 2006, we repaid $790,000 which had been borrowed against a line of credit,plus interest payable at the prime lending rate, secured by a standby letter ofcredit, issued in our bank’s favor, and provided by Richard Strain, our majorshareholder.

Thefollowing is a summary of Nathaniel Energy’s cash flows sources (uses) fromoperating, investing, and financing activities during the periods indicated:
| ** **            | ** ** | **Period ended September 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
|                  |       |                                          |       |   |   |
| Operating  activities |       | $                                             | (1,326,609 | ) | $ | 564,948 |   |
| Investing  activities |       | 14,967,209                                    |       | (1,110,942 | ) |
| Financing  activities |       | (13,099,468                                   | )          | 238,751 |   |
|                  |       |                                          |       |   |   |
| Net effect on  cash   |       | $                                             | 541,132    |   | $ | (307,243 | ) |

 

For the period ended September 30, 2006, the netchange in cash used in operating activities of $1,326,609 is due primarily to anet income of $4,901,790, non-cash income tax expense of $759,000, depreciationand amortization expense of $306,720 and an increase in accounts payable andaccrued expenses of $108,279 offset by gain on sale of assets including in netincome of $6,119,673 and the negative net effect on cash from discontinuedoperations of $1,277,956.

The net change in cash provided by investingactivities of $14,967,209 is due to cash flows from discontinued operations of$15,888,183 offset by cash used for the acquisition of minority interest of$882,000 and asset additions of $38,974 at our tire fuel processing operationsduring the nine months ended September 30, 2006.

The net change in cash used in financing activities of$13,099,468 is due to principal repayments of debt of $4,330,557, cash flowsfrom discontinued operations related to repayment of debt of $8,892,151 offsetby issuance of notes of $123,240 during the nine months ended September 30,2006.

For the period ended September 30, 2005, the netchange in cash provided by operating activities of $564,948 is due primarily toa net loss of $824,485, non-cash settlement of debt of $151,087, an increase inprepaid expenses of $127,790 offset by non-cash operating expenses for depreciationand amortization of $159,427 and changes in operating assets and liabilitieswhich increased net cash as a result of a reduction in inventory of $536,423,reduction in restricted cash of $237,000, an increase in accounts payable andaccrued expenses of $169,584 and the positive net effect on cash fromdiscontinued operations of $609,812.

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The net change in cash used in investing activities of$1,110,942 is due to the purchase of equipment and facility improvements,primarily at our tire fuel processing operations of $910,426 and cash flowsused by discontinued operations of $200,516 during the nine months endedSeptember 30, 2005.

The net change in cash provided by financingactivities of $238,751 is due to principal repayments of debt of $843,280 offsetby issuance of notes and borrowing on our line of credit of $1,082,031 duringthe nine months ended September 30, 2005.

Nathaniel Energy had cash of $801,164 at September 30,2006 which will be used to fund the Company’s operations, pay current debts,partially fund the execution of our Thermal GasifierTM business plan and makeimprovements at our tire fuel processing operations in Hutchins, Texas.

We expect that as a result of the improvements made atour tire fuel processing division during the third quarter 2005, that the tirefuel processing operation will continue to generate future positive net cashflows from operating activities, which will be sufficient to repay itsoutstanding debt balances, provide for repair and maintenance of the equipmentand cover its operating overhead expense. We will require additional workingcapital to continue to fund our corporate overhead expenses and implement ourThermal GasifierTM business plan. We are currently exploring sources ofexpansion capital, operational financing options, and strategic partners toassist in funding our business plan.

Our working capital deficit as of September 30, 2006was $102,519. Included in the calculation of our working capital deficit is anunsecured promissory note of $70,000, payable contingent upon our receipt ofpayment for the Thermal GasifiersTM installed for our customer in ColognaVeneta, Italy. This obligation is expected to be extinguished out of futurecash flows resulting from the collection, if any, of amounts due us.  Also included in the calculation of ourworking capital deficit is a reserve of approximately $100,000 related tocertain claims against the company. Litigation involving a portion of theseclaims was settled, the claims against the company were released, a court orderdismissing the claims with prejudice was entered, and the time period withinwhich to appeal or set aside the court’s order will expire during the fourthquarter of 2006.  Management does notexpect the claimant to attempt to set aside the court order.  We expect the statute of limitations willexpire for claims to the remaining portion of the reserve in the fourth quarter2006. We plan to reduce our working capital deficit by expanding our tire fueloperations into new lines of business. We have initiated discussions with a potential strategic partner forthat expansion however, we can not assure that those discussions will lead toan agreement and the success of a new line of business. We are also exploringequity investment to improve our working capital deficit.  We cannot assure that we will be able toobtain any capital investment we seek, and if we do, we cannot predict theterms and conditions upon which that capital will be available to the company.

**Item 3.Controls and Procedures**

As of the end of the period covered by this report,the company conducted an evaluation, under the supervision and with theparticipation of the Chief Executive Officer and Chief Financial Officer, ofthe company’s disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) under the Securities Exchange Act of 1934). Based on thisevaluation, the Chief Executive Officer and Chief Financial Officer concluded thatthe company’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by the company in reports that it files orsubmits under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rulesand forms.

The company’s disclosure controls and proceduresinclude, among other things, controls and procedures designed to ensure thatinformation required to be disclosed by the company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to thecompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, to allow timely decisions regarding required disclosure.

There was no change in the company’s internal controlover financial reporting during the company’s most recently completed fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the company’s internal control over financial reporting.

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**PART 2: OTHER INFORMATION**

**Item 1.Legal Proceedings.**

Nathaniel Energy is involved in litigation in thenormal course of its business, none of which is anticipated to have a materialadverse effect on its financial condition, operations or prospects.

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

None.

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

None.

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

None.

**Item 5.Other Information.**

None.

**Item 6.Exhibits.**

(a) Exhibits.
| 3.1  |   | Certificate of Incorporation*                                                                                                                                        |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Articles of Amendment to Articles of Incorporation,  filed on August 6, 1999*                                                                                        |
| 3.3  |   | Certificate of Amendment of Certificate of  Incorporation, filed on April 24, 2002*                                                                                  |
| 3.4  |   | Certificate of Amendment to Certificate of  Incorporation, filed on October 12, 2005*                                                                                |
| 3.5  |   | Amended and Restated By-Laws**                                                                                                                                       |
| 10.1 |   | Stock Purchase  Agreement dated September 29, 2005 between Nathaniel Energy Oklahoma  Holdings, Corporation (“NEHOC”) and Richard Strain*                  |
| 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 between Nathaniel Energy Corporation,  NEOHC, MCNIC Rodeo Gathering, Inc. and Midstream Energy Services*       |
| 10.4 |   | Nathaniel Energy  Corporation 2005 Equity Participation Plan*                                                                                                        |
| 10.5 |   | Employment  Agreement, dated as of October 16, 2006, between Nathaniel Energy  Corporation and Brad Bailey***                                                   |
| 31.1 |   | Certification of the Principal Executive Officer  pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 |   | Certification of the Principal Financial Officer  pursuant to Rule 13a-14(a) or Rule 15d-14(a) as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002 |
| 32.1 |   | Certification of the Principal Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002          |
| 32.2 |   | Certification of the Principal Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002          |

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*Denotes document filed as an exhibit to our QuarterlyReport on Form 10 QSB for the period ended September 30, 2005 and incorporatedherein by reference.**Denotes document filed as an exhibit to our CurrentReport on Form 8-K dated June 6, 2005 and incorporated herein by reference.***Denotes document filed as an exhibit to our Current Report on Form 8-K datedOctober 16, 2006 and incorporated herein by reference.

 

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**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the Registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

**NATHANIELENERGY CORPORATION**

(Registrant)

Date: November 13, 2006

 
|        | By:    | /s/ BRAD E.BAILEY            |
|--------|--------|------------------------------|
|   |   | Brad E. Bailey               |
|   |   | Chief Executive Officer      |
|   |   | Nathaniel Energy Corporation |

 

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