**United States**

**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

**FORM10-QSB**

**(MarkOne)**

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

**EXCHANGE ACT OF 1934**

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

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

**EXCHANGE ACT 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 of principalexecutive 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

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act. Yes o No x

APPLICABLE ONLY TOISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THEPRECEDING FIVE YEARS

Check whether the registrant filed all documents andreports required to be filed by Section 12, 13 or 15(d) of the Exchange Actafter the distribution of securities under a plan confirmed by a court. Yes oNo o

APPLICABLE ONLY TOCORPORATE ISSUERS

State the number of shares outstanding of each of theissuer’s class of common equity, as of the latest practicable date: August 9,2006, 90,731,596 shares of common stock, $.001 par value.

**Transitional Small BusinessDisclosure Format (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 June 30, 2006 and  December 31, 2005                           |   |   |
|     |   |                                                                                              |   |   |
|     |   | Consolidated  Statements of Operations for the Three and Six Months  ended June 30, 2006 and 2005 |   |   |
|     |   |                                                                                              |   |   |
|     |   | Consolidated  Statements of Cash Flows for the Six Months ended June 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                                                                                        |   |   |

 

2

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**NathanielEnergy Corporation**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
|                                                                                                                                                                             |       |                    |       |                        |       |
| Assets                                                                                                                                                                           |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                  |       |                    |       |                        |       |
| Cash                                                                                                                                                                             |       | $                       | 1,140,599  |                        | $          | 260,032 |   |
| Accounts  receivable                                                                                                                                                             |       | 104,960                 |       | 85,418                      |       |
| Prepaid expenses                                                                                                                                                                 |       | 125,361                 |       | 88,698                      |       |
| Deferred tax  asset                                                                                                                                                              |       | —                  |       | 759,000                     |       |
| Assets held for  sale                                                                                                                                                            |       | —                  |       | 2,036,783                   |       |
| Total current assets                                                                                                                                                             |       | 1,370,920               |       | 3,229,931                   |       |
| Property, plant and  equipment, net of accumulated depreciation                                                                                                                  |       | 1,157,087               |       | 1,256,708                   |       |
| Intangible assets, net                                                                                                                                                           |       | 245,453                 |       | 322,482                     |       |
| Deposits                                                                                                                                                                         |       | 99,702                  |       | 88,322                      |       |
| Assets held for sale                                                                                                                                                             |       | —                  |       | 9,768,510                   |       |
| Total Assets                                                                                                                                                                     |       | $                       | 2,873,162  |                        | $          | 14,665,953 |   |
| Liabilities and  Stockholders’ Equity (Deficit)                                                                                                                             |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                             |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                 |       | $                       | 777,509    |                        | $          | 628,784 |   |
| Accrued  compensation and payroll liabilities                                                                                                                                    |       | 31,667                  |       | 75,757                      |       |
| Accrued interest                                                                                                                                                                 |       | 16,035                  |       | 14,760                      |       |
| Other accrued  expenses                                                                                                                                                          |       | 115,465                 |       | 5,399                       |       |
| Notes payable,  current portion                                                                                                                                                  |       | 297,894                 |       | 1,014,235                   |       |
| Notes payable -  stockholder, current portion                                                                                                                                    |       | —                  |       | 3,354,210                   |       |
| Liabilities held  for sale                                                                                                                                                       |       | —                  |       | 7,307,128                   |       |
| Total current  liabilities                                                                                                                                                       |       | 1,238,570               |       | 12,400,273                  |       |
| Long-term debt                                                                                                                                                                   |       | 194,299                 |       | 277,589                     |       |
| Liabilities held for  sale                                                                                                                                                       |       | —                  |       | 4,892,151                   |       |
| Total liabilities                                                                                                                                                                |       | 1,432,869               |       | 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 and 90,698,263  shares issued and outstanding at June 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                                                                                                                                                              |       | (59,353,169             | )          | (64,579,522                 | )          |
| Total Stockholders’  Equity (Deficit)                                                                                                                                       |       | 1,440,293               |       | (2,904,060                  | )          |
| Total Liabilities and Stockholders’ Equity (Deficit)                                                                                                                        |       | $                       | 2,873,162  |                        | $          | 14,665,953 |   |

 

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

3

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**NathanielEnergy Corporation Consolidated Statements of Operations**

(Unaudited) 
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **June 30,  2006**                            | ** ** | **June 30,  2005**                          | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
| Revenue                                                           |       | $                                                  | 310,732    |                                             | $          | 111,966 |   | $ | 550,259 |   | $ | 322,330 |   |
| Cost of revenue                                                   |       | 231,881                                            |       | 186,403                                          |       | 442,328 |   | 412,531 |   |
| Gross profit  (loss)                                              |       | 78,851                                             |       | (74,437                                          | )          | 107,931 |   | (90,201 | ) |
| Selling, general  and administrative expenses                     |       | 463,309                                            |       | 398,203                                          |       | 972,243 |   | 781,493 |   |
| Research and  development expense                                 |       | 11,041                                             |       | —                                           |       | 39,242 |   | 117,125 |   |
| Total operating  expenses                                         |       | 474,350                                            |       | 398,203                                          |       | 1,011,485 |   | 898,618 |   |
| Loss from  operations                                             |       | (395,499                                           | )          | (472,640                                         | )          | (903,554 | ) | (988,819 | ) |
| Other income  (expense)                                           |       |                                               |       |                                             |       |   |   |   |   |
| Interest income (expense), net                                    |       | 19                                                 |       | (67,321                                          | )          | (104,666 | ) | (131,481 | ) |
| Other income                                                      |       | —                                             |       | 7,842                                            |       | — |   | 7,842 |   |
| Loss from  continuing operations                                  |       | (395,480                                           | )          | (532,119                                         | )          | (1,008,220 | ) | (1,112,458 | ) |
| Income from  discontinued operations, net of tax                  |       | (1,533                                             | )          | 219,321                                          |       | 193,428 |   | 474,369 |   |
| Gain on sale of  assets, net of tax                               |       | 42,171                                             |       | —                                           |       | 6,041,145 |   | — |   |
| Net income  (loss)                                                |       | $                                                  | (354,842   | )                                                | $          | (312,798 | ) | $ | 5,226,353 |   | $ | (638,089 | ) |
| Loss per share  from continuing operations, basic and diluted     |       | $                                                  | (0.00      | )                                                | $          | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| Income per share  from discontinued operations, basic and diluted |       | 0.00                                               |       | 0.00                                             |       | 0.00 |   | 0.01 |   |
| Income per share  from gain on sale of assets, basic and diluted  |       | 0.00                                               |       | 0.00                                             |       | 0.07 |   | 0.00 |   |
| Net income  (loss) per share, basic and diluted                   |       | $                                                  | (0.00      | )                                                | $          | (0.01 | ) | $ | 0.06 |   | $ | (0.01 | ) |
| Weighted average common  shares outstanding                       |       | 90,717,310                                         |       | 70,698,263                                       |       | 90,707,787 |   | 70,687,213 |   |

 

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

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**NathanielEnergy Corporation**

**ConsolidatedStatements of Cash Flows**

(Unaudited) 
| ** **                                                                                              | ** ** | **For the Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **June 30,  2006**                          | ** ** | **June 30,  2005** | ** ** |
| Cash flows from  operating activities:                                                                  |       |                                             |       |   |   |
| Net income (loss)                                                                                       |       | $                                                | 5,226,353  |   | $ | (638,089 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities:              |       |                                             |       |   |   |
| Depreciation and amortization                                                                           |       | 214,110                                          |       | 78,666 |   |
| Gain on sale of assets                                                                                  |       | (6,041,145                                       | )          |   |   |
| Income tax expense                                                                                      |       | 759,000                                          |       | — |   |
| Disposition of equipment                                                                                |       | 2,629                                            |       |   |   |
| Changes in  operating assets and liabilities:                                                           |       |                                             |       |   |   |
| (Increase) decrease in:                                                                                 |       |                                             |       |   |   |
| Accounts receivable                                                                                     |       | (19,542                                          | )          | (18,883 | ) |
| Inventory                                                                                               |       | —                                           |       | 536,423 |   |
| Prepaid expenses                                                                                        |       | (36,663                                          | )          | (207,095 | ) |
| Restricted cash                                                                                         |       | —                                           |       | 237,000 |   |
| Other assets                                                                                            |       | (11,380                                          | )          | (111,494 | ) |
| Accounts payable and accrued expenses                                                                   |       | 215,976                                          |       | 375,234 |   |
| Net effect on cash from discontinued operations                                                         |       | (1,277,958                                       | )          | 442,846 |   |
| Net cash  provided by (used in) operating activities                                                    |       | (968,620                                         | )          | 694,608 |   |
| Cash flows from  investing activities:                                                                  |       |                                             |       |   |   |
| Acquisition of minority interest                                                                        |       | (882,000                                         | )          | — |   |
| Equipment purchases                                                                                     |       | (33,477                                          | )          | (406,062 | ) |
| Cash provided by (used in) discontinued operations                                                      |       | 15,809,655                                       |       | (45,643 | ) |
| Net cash  provided by (used in) investing activities                                                    |       | 14,894,178                                       |       | (451,705 | ) |
| Cash flows from  financing activities:                                                                  |       |                                             |       |   |   |
| Payments on debt                                                                                        |       | (4,270,180                                       | )          | (137,979 | ) |
| Proceeds from issuance of notes and loans                                                               |       | 117,340                                          |       | 221,607 |   |
| Cash used in discontinued operations                                                                    |       | (8,892,151                                       | )          | (1,526 | ) |
| Net cash  provided by (used in) financing activities                                                    |       | (13,044,991                                      | )          | 82,102 |   |
| Net increase in  cash                                                                                   |       | 880,567                                          |       | 325,005 |   |
| Cash and cash  equivalents, beginning of period                                                         |       | 260,032                                          |       | 33,897 |   |
| Cash and cash  equivalents, end of period                                                               |       | $                                                | 1,140,599  |   | $ | 358,902 |   |
| Cash paid for  interest                                                                                 |       | $                                                | 1,390,215  |   | $ | 51,026 |   |
| Cash paid for  income taxes                                                                             |       | $                                                | 71,493     |   | $ | — |   |
| Non cash financing  activity: Issuance of stock to settle accrued expenses, accounts and notes  payable |       | $                                                | 33         |   | $ | 87,500 |   |

 

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

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**NathanielEnergy Corporation**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

JUNE 30, 2006 and 2005 

(Unaudited) 

1. Significant Accounting Policies and Nature ofOperations: 

***Unaudited InterimFinancial Statements***

The accompanying unaudited interim financialstatements, which include the Company’s wholly owned subsidiaries, 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 six months ended June 30, 2006 are not necessarily indicative ofresults of operations to be expected for the full year. 

***Description ofBusiness***

NathanielEnergy Corporation is a renewable hydrocarbon-based waste-to-energy companythat provides municipalities and industries with solutions that divert wastefrom landfills while 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 (EU) emissionregulations.  

We havebeen in the alternative fuel processing business, including waste tirerecycling and collection services, since 1997. We have operated a 27 acre tirefuel processing facility in Hutchins, Texas since 1999. During the three andsix months ended June 30, 2006, our tire fuel processing business generated100% of our revenue.

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

Ourprimary plan is to seek qualified joint venture partners to build, own andoperate small waste-to-energy plants or utilize our technology under a licensewhere we will become an ongoing participant in the project. We are focused onforming joint 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 in Italy in oursales, marketing and research efforts. As we work to advance thewaste-to-energy plant in Cologna Veneta, Italy we plan to use it as “Proof ofProcess” for our first commercial Thermal GasifiersTM in our businessdevelopment activities demonstrating  a lower cost, clean dependableenergy alternative to fossil fuels worldwide. We have begun a process toevaluate the waste-to-energy project in Italy and all of the facility equipmentfor additional involvement with the project owner for possible technicalenhancements to improve the output and reliability of the plant. We haverecognized no revenue from the sale or delivery of our Thermal GasifiersTMthrough the period ended June 30, 2006. 

6

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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 ofoperations.

**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 the net 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 June 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 waste-to-energyfacility while we continue 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 June 30, 2006 is zero.

We continue to provide technical support while weundertake the evaluation process of assessing the waste-to-energy facility inCologna Veneta, Italy for modifications to improve the output and reliabilityof the plant. In conjunction with the enhancements to the waste-to-energy facilitywe continue to work toward the completion of the start-up and testing of thetwo Thermal GasifiersTM. Both units have been operated in start-up phase. 

7

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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 sixmonths ended June 30, 2006 and 2005, we incurred costs for third partyengineering consulting and analysis and expensed $11,041 and $39,242; $0 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 straight-line and acceleratedmethods. Estimated useful lives of the assets used in the computation ofdepreciation are as follows: 

| 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 processedtire-derived-fuel 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 the contracts for 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 theexisting production of tire-derived-fuel. Sales returns are booked based on theCompany’s historical experience.

We recognize revenue fromthe sale of our Thermal GasifiersTM upon completion, delivery and customeracceptance, using the completed contract method of accounting. We haverecognized no revenue from the sale of our Thermal GasifiersTM as of June 30,2006.

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****NetIncome (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 ofEstimates****

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 comprisesNathaniel’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 anycapital expenditures made by Nathaniel relating to the helium and gasoperations from August 1, 2005.

upward forexpenses incurred by Nathaniel from August 1, 2005 to operate the helium andgas assets.

upward for allamounts owed to Nathaniel or its affiliates as of the closing under thecontracts which are 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 anyexpenses relating to the operation of the gas assets which are attributed tothe period before closing that were unpaid at the closing, and the liabilityfor which is transferred to Midstream.

downward foramounts due under the contracts which are included in the gas assets to be soldthat were unpaid as of the closing, and the liability for which is transferredto Midstream.

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 are notfinally determined prior to the closing, they will 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 itsindebtedness to Richard Strain, which reduced the company’s debt byapproximately 89%.

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At the closing, givingeffect to finally determined adjustments, Midstream delivered $16,915,676 toNathaniel on account of the purchase price. Pursuant to the terms of thePurchase and Sale Agreement, we submitted adjustments to the amount receivedfrom Midstream which increase the purchase price by $280,414, primarily relatedto costs and expenses we incurred in the ordinary course of business from theeffective date of the transaction of August 1, 2005 through February 28, 2006.  These potential upward adjustments wererefined through the date of closing and, in addition to other negativeadjustments proposed by Midstream, were submitted to BKD LLP, an independentcertified public accounting firm unaffiliated to Midstream and us, forresolution pursuant to the dispute provisions of the Purchase and SaleAgreement. 

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 duringthe current quarter at a cost to us of $7,829. We recorded additional gain on sale of assets of $42,171in the currentquarter, representing the excess of our original estimated cost to cure thesedefects, over the actual cost incurred. Although we believe we have correctedthe title defects, we have not received a confirmation of agreement fromMidstream.

The estimated gain on sale of the helium and gasprocessing facilities and operations computed without regard to any potentialupward purchase price adjustments, is as follows as of June 30, 2006:
| Sale price at closing                   |   |     |       | $          | 16,915,676 |   |
|-----------------------------------------|--------|----------|------------|------------|------------|--------|
| Book value of  assets sold              |   | $        | 10,438,310 |       |       |   |
| Less:  Liabilities assumed by Midstream |   | (530,618 | )          |       |       |
| Expense of sale                         |   | 207,839  |       |       |       |
|                                    |   |     |       | 10,115,531 |       |
| Pretax gain on  sale of assets          |   |     |       | 6,800,145  |       |
| Income tax  expense                     |   |     |       | 759,000    |       |
| Gain on sale of assets,  net of tax     |   |     |       | $          | 6,041,145  |   |
|                                         |        |          |            |            |            |        |  |

 

**3. Subsequent Event**

On August 2, 2006, we received the final report fromBKD, LLP with their determination on each of the disputed adjustments resultingin a net increase in the purchase price of $83,893 to $16,999,569, whichincreases our gain on sale of assets. The increase in gain on sale of assets of$83,893 will be included in our statement of operations for the third quarter2006 net of any other expenses of sale which may arise during the thirdquarter.

****4.Notes Payable****

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

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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 June 30, 2006 and December 31, 2005, our total indebtedness to RichardStrain was $ -0- and $12,246,361, respectively. 

****5.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 Purchase and Sale Agreement with Midstream for the saleof our helium and gas operations, the purchase price under that agreement wassubject to an upward adjustment by up to $1,800,000 if Midstream and ColoradoInterstate Gas entered into an agreement for nitrogen and/or air blendingservices which commences on or before January 1, 2007. This agreement wasentered into in December 2005. As a result of this upward adjustment, we paidRichard Strain an additional $882,000 at closing.

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**6. Economic Dependency – MajorCustomer**

One customer accountedfor approximately 33% and 36%, and 19% and 18% of our total revenue for thethree and six months ended June 30, 2006 and 2005, respectively.  

**7. Income Tax Expense**

On September 29, 2005, we acquired a 49% interest inNEOHC from Richard Strain. See Note 5-”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 June 30,2006 as all expenses of sale have not been finalized, however, we estimate thatour tax gain on sale will be offset by our estimated current year’s loss andtax losses carried forward to fiscal 2006, and therefore, we have reversed ourdeferred tax asset of $759,000 in the six months ended June 30, 2006.

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

**8. Business Segments**

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

·       thealternative energy engineering and corporate offices in Englewood, Colorado,and

·       thetire fuel processing operation in Hutchins, Texas.

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For the six months ended June 30, 2006:

 
| ** **                                                    | ** ** | **Fuel  Processing** | ** ** | **Alternate Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Revenue                                                       |       | $                    | 550,259    |                      |       |                         |       |      | $          | 550,259 |   |
| Significant non cash  expenses- depreciation and amortization |       | $                    | 164,220    |                      | $          | 49,890                       |       |      |       | $ | 214,110 |   |
| Net income (loss)                                             |       | $                    | 5,428,142  |                      | $          | (395,217                     | )          | $         | 193,428    |   | $ | 5,226,353 |   |
| Capital expenditures                                          |       | —               |       | $                         | 33,477     |                         | —     |      | $          | 33,477 |   |
| Total assets as of June 30, 2006                              |       | $                    | 2,647,803  |                      | $          | 225,359                      |       | —    |       | $ | 2,873,162 |   |
|                                                               |            |                      |            |                           |            |                              |            |           |            |  |  |  |  |

 

For the six monthsended June 30, 2005:

 
| ** **                                                    | ** ** | **Fuel  Processing** | ** ** | **Alternate Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Revenue                                                       |       | $                    | 242,330    |                      | $          | 80,000                       |       |      |       | $ | 322,330 |   |
| Significant non cash  expenses- depreciation and amortization |       | $                    | 78,666     |                      | —     |                         |       |      | $          | 78,666 |   |
| Net income (loss)                                             |       | $                    | (607,401   | )                         | $          | (505,057                     | )          | $         | 474,369    |   | $ | (638,089 | ) |
| Capital expenditures                                          |       | $                    | 406,062    |                      | —     |                         | $          | 45,643    |       | $ | 451,705 |   |
| Total assets as of June 30, 2005                              |       | $                    | 1,575,898  |                      | $          | 587,428                      |       | $         | 12,011,673 |   | $ | 14,174,999 |   |

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**Item 2. Management’s Discussion andAnalysis 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 SecuritiesExchange Act of 1934 and Rule 3a51-1 under the Exchange Act) during the threeyear period preceding the date(s) on which those forward looking statementswere first 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:

·    Our ability to raise capitalnecessary to implement our business plan.

·    Our ability to finance andcomplete 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.

·             Ourability to enter into agreements or relationships with municipalities andcommercial and industrial businesses in connection with the commercializationof our Thermal GasifierTM.

·             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, policeand military 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 orimplied in these forward-looking statements. We undertake no obligation topublicly update or revise any forward-looking statements, whether from newinformation, future events or otherwise.

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**Company Overview**

We are committed to being a leader in the Renewable EnergyIndustry.  We are an “EnvironmentalPartner” that diverts waste streams from landfills to generate economical cleanenergy to reduce the demand on fossil fuels. As an emerging world leaderin the business of waste-to-energy conversion, we have an opportunity to builda stable revenue stream and profitable operation through the development offacilities which process waste materials into energy in an environmentallyresponsible manner.  The combination oftechnology with significantly better environmental performance and risingenergy prices has made waste-to-energy a compelling solution to challenges forboth waste removal and energy supply.

Ouroperational plan focuses on identifying qualified joint venture partners tobuild, own and operate small waste-to-energy plants or utilize our technologyunder a license where we will become an ongoing participant in the project. Weplan to build energy infrastructures for certain industries that have a need todispose of hydrocarbon-based materials and seek an independent source of energyin the form of heat, steam and/or electricity. These energy infrastructureswould be built on the businesses’ premises (“inside the fence”) and can reducethe dependence a business has on fossil fuels and power from the local utility.In some cases, the energy infrastructures can become a business’ selfsustaining utility. We are currently evaluating several sites and continue toidentify new and existing sites where we can build, own and operate smallwaste-to-energy plants in conjunction with joint venture partners or throughour own resources.

Some ofour waste-to-energy plants may have a sustainable supply of waste fuelsavailable from the host/customer with no additional fuel needed, which is theideal situation. Other facilities may require additional fuel to utilizeinstalled generation capacity, or they may need supplemental fuel to raise theaverage fuel value or the volume of fuel needed to efficiently operate thetechnology. Our wholly owned subsidiary, Cleanergy, Inc. will use our knowledgeof tire fuel processing operations which currently resides in our Hutchins,Texas facility, to furnish tire-derived-fuel to those waste-to-energy plantsthat need supplemental fuel for those facilities. The tire fuel processingdivision will continue to expand and eventually grow toward a full fuelprocurement agent for all other fuels at plants where the Thermal GasifierTMcapacity exceeds the local waste fuel supply. This will take advantage of ourexisting expertise and allow us to increase throughput at various tire fuelprocessing facilities as we expand, create a new market for ourtire-derived-fuel (as environmental regulations tighten up on our currentcustomers) and position us as a “turn key” provider of waste-to-energysolutions.

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 waste-to-energy projects through our subsidiary Cleanergy,Inc. Cleanergy has 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 ramp up operations at this facility byincreasing its production and the volume of waste tires it processes. We haveseen an increase in the volume of waste tires we can accept at the facilityresulting in higher tipping fee revenues. The improvements have enabled us to continue to increase revenue andcash flow from this operation. We expect to continue to improve our tirehandling and product delivery capabilities to increase the efficiency of thefacility.

During the three and six months ended June 30, 2006, we generated$310,732 and $550,259 of our revenue, or 100%, from our tire fuel processingdivision.  We have recognized no revenuefrom our Thermal GasifierTM business segment to date.

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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 waste-to-energyprojects. During the first quarter 2005, we formed Cleanergy, Inc., a Delawarecorporation, as a wholly owned subsidiary of the Company for the purpose ofadvancing our business plan to commercialize our Thermal GasifierTM technology.We plan to focus the majority of our resources on this business operation,which will be supported through the advancement of our tire fuel processingdivision’s expansion for fuel procurement for the hydrocarbon-based waste-to-energyprojects.

We are actively involvedin ongoing business development activities and historically, we have not haddifficulty finding potential project opportunities.  Using the services of an experienced seniorexecutive we have developed a sales pipeline of hydrocarbon-basedwaste-to-energy projects and business development leads.  Currently the company is in the process ofevaluating certain project opportunities and providing detailed proposals forselected qualified projects. Worldwide, industries and municipalities seeksolutions for diverting solid waste from landfills and lower cost and cleanenergy alternatives to fossil fuels. Demand for these solutions is expected togrow. A key 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 our shareholders.

We continue to provide technical support to the project owner while weundertake the evaluation process of assessing the waste-to-energy facility inCologna Veneta, Italy for modifications to improve the output and reliabilityof the plant. In conjunction with the enhancements to the waste-to-energyfacility we continue to work toward the completion of the start-up and testingof the two Thermal GasifiersTM while having access to the facility for marketingand development activities. Our mission in 2006 is to expand on our salespipeline of qualified hydrocarbon-based waste-to-energy projects, providedetailed proposals for qualified projects and to contract for one or more ofthose projects. Once contracted we would initiate implementation as a partner or joint venture member in at leastone commercial operation utilizing our Thermal GasifierTM technology, which willbe operated through the wholly owned subsidiary, Cleanergy, Inc. We haveidentified a number of opportunities that we are currently pursuing, however wecan not assure that any of these opportunities will result in a project thatgenerates revenue within the next twelve months.

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**Results of Operations**

InMarch 2006, we disposed of our helium and gas processing facilities andoperations. For purposes of the financial statements, these facilities havebeen accounted for as a discontinued operation. Items of revenue and directexpenses incurred or properly allocable to the helium and gas processingfacilities have been reclassified in the 2005 year to conform to the currentyear presentation. Unless otherwise noted, the operating results discussedherein relate to our continuing operations.

The following tables set forth certain unauditedquarterly results of operations of Nathaniel Energy for the first quarter of2006. The quarterly operating results are not necessarily indicative of futureresults of operations. 
| ** **                                                             | ** ** | ** **               | ** ** | ** **              | ** ** | **Three Months Ended (unaudited)** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|
| ** **                                                             | ** ** | **March 31,  2006** | ** ** | **June 30,  2006** | ** ** | **June 30,  2005**                           | ** ** | **June 2006 vs. 2005  Increase (decrease)** | ** ** |
| ** **                                                             | ** ** | ** **               | ** ** | ** **              | ** ** | ** **                                        | ** ** | **$** | ** ** | **%** | ** ** |
| Revenue                                                                |       | $                        | 239,527    |                    | $          | 310,732                                           |       | $ | 111,966 |   | $ | 198,766 |   | 177 | % |
| Cost of revenue                                                        |       | 210,447                  |       | 231,881                 |       | 186,403                                           |       | 45,478 |   | 24 | % |
| Gross profit (loss)                                                    |       | 29,080                   |       | 78,851                  |       | (74,437                                           | )          | 153,288 |   | 206 | % |
|                                                                   |       |                     |       |                    |       |                                              |       |   |   |   |   |
|                                                                   |       |                     |       |                    |       |                                              |       |   |   |   |   |
| Selling general and administrative  expense                            |       | 537,135                  |       | 474,350                 |       | 398,203                                           |       | 76,147 |   | 19 | % |
| Operating income (loss)                                                |       | (508,055                 | )          | (395,499                | )          | (472,640                                          | )          |   |   |   |   |
|                                                                   |       |                     |       |                    |       |                                              |       |   |   |   |   |
| Interest income  (expense), net                                        |       | (104,685                 | )          | 19                      |       | (67,321                                           | )          |   |   |   |   |
| Other income                                                           |       | —                   |       | —                  |       | 7,842                                             |       |   |   |   |   |
| Loss from continuing  operations    before income taxes |       | (612,740                 | )          | (395,480                | )          | (532,119                                          | )          |   |   |   |   |
| Income (loss) from  discontinued operations, net of tax                |       | 194,961                  |       | (1,533                  | )          | 219,321                                           |       |   |   |   |   |
| Gain on sale of assets,  net of tax                                    |       | 5,998,974                |       | 42,171                  |       | —                                            |       |   |   |   |   |
|   Net income (loss)                                               |       | $                        | 5,581,195  |                    | $          | (354,842                                          | )          | $ | (312,798 | ) |   |   |   |   |
| Net income (loss) per  common share (basic and diluted)                |       | $                        | 0.06       |                    | $          | (0.00                                             | )          | $ | (0.01 | ) |   |   |   |   |
| Weighted-average common  shares outstanding-diluted                    |       | 90,698,263               |       | 90,717,310              |       | 70,698,263                                        |       |   |   |   |   |
| Shares outstanding at end of period                                    |       | 90,698,263               |       | 90,731,596              |       | 70,698,263                                        |       |   |   |   |   |
|                                                                        |            |                          |            |                         |            |                                                   |            |  |  |  |  |  |  |  |  |

 

For the three months ended June 30, 2006, our revenueincreased by $198,766, or 177% to $310,732 from $111,966 during the same periodin 2005. The increase is due to an increase in processing waste tires andresulting revenue from the sale of tire-derived-fuel from our tire fuelprocessing facility.  Our ability toincrease our processing of waste tires is due to our purchase of new equipmentfor and improvements in the operation of the tire fuel processing facility,placed in service during the second half of 2005. For the three months endedJune 30, 2006 and 2005, revenue from our Thermal Gasifier TM business segmentwas $0.

For the six months ended June 30, 2006, our revenue increased by$227,929, or 71% to $550,259 from $322,330 during the same period in 2005. Theincrease is due primarily to an increase in processing waste tires andresulting revenue from the sale of tire-derived-fuel from our tire fuelprocessing facility which was offset by a reduction in revenue from our ThermalGasifierTM business segment.  Revenue fromour tire fuel processing facility increased by $307,929 or 127% to $550,259 forthe six months ended June 30, 2006 from $242,330 during the same period in2005. Our ability to increase our processing of waste tires is due to ourpurchase of new equipment for and improvements in the operation of the tire fuelprocessing facility, placed in service during the second half of 2005. For thesix months ended June 30, 2006, revenue from our Thermal Gasifier TM businesssegment was $0, a decrease

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of $80,000 from the sameperiod in 2005. Revenue of $80,000 during the six months ended June 30, 2005related to non-recurring consulting and start-up services we provided ourcustomer for the Thermal GasifiersTM we built and installed in Cologna Veneta,Italy.

Gross profit for thethree months ended June 30, 2006 was $78,851, an increase of $153,288, or 206%compared to gross loss of $74,437 for the three months ended June 30, 2005. Ourincrease in gross profit is due to the increase in revenue of $198,766 offsetby an increase in cost of revenue of $45,478 from our tire fuel processingfacility.  The increase in cost ofrevenue for our tire fuel processing facility of $45,478 is due primarily to anincrease in depreciation expense of $49,825 from new equipment placed inservice at the facility during the second half of 2005. In addition, repairsand maintenance expenses decreased by $35,523 due to the use of new equipmentoffset by expenses related to increased production including an increase inleased equipment and transportation expense of $26,570 and utility expense of$6,937.

Gross profit for the sixmonths ended June 30, 2006 was $107,931, an increase of $198,132, or 220%compared to gross loss of $90,201 for the six months ended June 30, 2005. Ourincrease in gross profit is due to the increase in revenue of $227,929 offsetby an increase in cost of revenue of $29,797. Cost of revenue for our tire fuel processing facility increased by$72,537 to $442,328 during the six months ended June 30, 2006 from $369,791 forthe six months ended June 30, 2005, due primarily to an increase indepreciation expense of $98,985 from new equipment placed in service at thefacility during the second half of 2005, an increase in operating costsresulting from increased production of tire-derived-fuel of $47,341 includingequipment rentals, supplies and transportation expense, offset by a decrease inrepairs and maintenance of $68,306. This increase in cost of revenue was offsetby a decrease in cost of revenue from our Thermal Gasifier TM business segmentof $42,740 for the six months ended June 30, 2005 to $0 during the six monthsended June 30, 2006 primarily related to out of pocket expenses related tonon-recurring consulting and start-up services we provided our customer for theThermal GasifiersTM. 

Total selling, generaland administrative expenses increased by $76,147 or 19% from $398,203 for thethree months ended June 30, 2005 to $474,350 for the three months ended June30, 2006. The increase in selling, general and administrative expenses is dueprimarily to an increase in amortization expense for intangible assets relatedto engineering and design of our Thermal GasifierTM of $24,945, an increase inresearch and development expense of $11,041, an increase in printing expense of$10,571 related to our shareholder’s meeting, approximately $21,000 ofpersonnel costs related to the temporary retention of personnel previouslyincluded in discontinued operations, and an increase in franchise tax expenseof $8,500.

Total selling, generaland administrative expenses increased by $112,867 or 13% from $898,618 for thesix months ended June 30, 2005 to $1,011,485 for the six months ended June 30,2006. The increase in selling, general and administrative expenses is dueprimarily to an increase of $138,454 in payroll and employee benefit expense dueto a non-recurring bonus paid upon successful completion of the sale of thehelium and gas processing assets and increases in employee health insurancecosts, a net increase of $36,458 in depreciation and amortization expense dueto intangible asset amortization related to engineering and design of ourThermal GasifierTM offset by a reduction in depreciation expense from officecomputer equipment being fully depreciated by the end of the first quarter2006, an increase in printing expense  of$10,571 related to our shareholder’s meeting, an increase in franchise taxexpense of approximately $8,500, offset by a decrease in research anddevelopment expense of $77,883. 

Interest expense decreased by $67,340 from $67,321 forthe three months ended June 30, 2005 to net interest income of $19 for thethree months ended June 30, 2006. The decrease is a result of the pay off ofour corporate indebtedness during the first quarter of 2006 from the netproceeds on the sale of our discontinued operations and an increase in interestincome resulting from the investment of excess cash in short term interestbearing accounts.   

Interest expense decreased by $26,815 from $131,481for the six months ended June 30, 2005 to $104,666 for the six months endedJune 30, 2006 due primarily to the pay off of our corporate indebtedness duringthe first quarter 2006 from the net proceeds on the sale of our discontinuedoperations offset by interest incurred through March 7, 2006, the date ofclosing on the sale of our discontinued operations and pay off of theindebtedness, on a promissory note of $3,354,210 issued Richard Strain onSeptember 30, 2005 for the purchase of his 49% interest in Nathaniel EnergyOklahoma Holdings Corporation.

Income from discontinued operations decreased by$220,854 from $219,321 for the three months ended June 30, 2005 to a net lossof $1,533 for the three months ended June 30, 2006 due primarily to the sale ofthe helium and gas

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processing facilities and operations to MidstreamEnergy Services, LLC on March 7, 2006. As a result of the sale, we recognizedonly nominal net expenses during the three months ended June 30, 2006 fromdiscontinued operations. Further discussion of this is found in Note 2.—”Dispositionof a Business Segment” to our financial statements.

Income from discontinued operations decreased by$280,941 from $474,369 for the six months ended June 30, 2005 to $193,428 forthe three months ended June 30, 2006 due primarily to the sale of the heliumand gas processing facilities and operations to Midstream Energy Services, LLCon March 7, 2006. As a result of the sale, income from discontinued operationsduring the first quarter of 2006 included income only through the date of sale.

Further discussion of this is found in Note 2.—”Dispositionof a Business Segment” to our financial statements.

Gain onsale of assets represents the gain of $42,171 and $6,041,145 for the three andsix months ended June 30, 2006, respectively, from the sale of our helium andgas processing facilities and operations to Midstream Energy Services, LLC onMarch 7, 2006. Further discussion of this is found in Note 2.—”Disposition of aBusiness Segment” to the financial statements. The gain is net of $759,000 ofincome tax expense. We recorded a deferred tax benefit of $759,000 during thefourth quarter of 2005 due to our expected use of approximately $2,000,000 ofour net operating loss carry forward from 2005 and prior fiscal years which weexpect along with losses we expect to incur during 2006, to offset theestimated 2006 gain resulting from the sale of the helium and gas processingoperations’ assets.

Netloss increased by $42,044 to $354,842 for the three months ended June 30, 2006from a net loss of $312,798 for the three months ended June 30, 2005 dueprimarily to the reduction in our loss from operations of  $77,141, reduction in interest expense of$67,340, and an increase in gain on sale of assets of $42,171, offset by a decreasein income from discontinued operations of $220,854.

Netincome increased by $5,864,442 to $5,226,353 for the six months ended June 30,2006 from a net loss of $638,089 for the six months ended June 30, 2005 dueprimarily to the gain on sale of the helium and gas processing facilities andoperations of $6,041,145 and an improvement in our loss from continuingoperations of $104,238 resulting primarily from improved gross profit from ourtire fuel processing operation offset by a decrease in income from discontinuedoperations of $280,941.

**Liquidity and Capital Resources**

As of June 30, 2006 weowed $405,193 to financial institutions under installment notes with an averageinterest rate of 5.8%, secured by land or equipment. 

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

On March 7, 2006 Nathaniel, its wholly-ownedsubsidiary NEOHC and NEOHC’s wholly-owned subsidiary, MCNIC Rodeo Gathering,Inc. closed the Purchase and Sale Agreement with Midstream Energy Services,LLC.  At the closing, giving effect tofinally determined adjustments, Midstream delivered $16,915,676 to Nathaniel onaccount of the purchase price.  Pursuantto the terms of the Purchase and Sale Agreement, we have submitted adjustmentsto the amount received from Midstream which increases the purchase price by$280,414, primarily related to costs and expenses we incurred in the ordinarycourse of business from the effective date of the transaction of August 1, 2005through February 28, 2006. These potential upward adjustments were refinedthrough the date of closing and, in addition to other negative adjustmentsproposed by Midstream, were submitted to BKD LLP, an independent certifiedpublic accounting firm unaffiliated to Midstream and us, for resolutionpursuant to the dispute provisions of the Purchase and Sale Agreement. On August2, 2006, we received the final report from BKD, LLP with their determination oneach of the disputed adjustments resulting in a net increase in the purchaseprice of $83,893 to $16,999,569, which increases our gain on sale of assets.The increase in gain on sale of assets of $83,893 will be included in ourstatement of operations for the third quarter 2006 net of any other expenses ofsale which may arise during the third quarter.

On April 10, 2006, in accordance with the terms of thePurchase and Sale Agreement, we received a letter from

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Midstream detailing certain title defects in the gasgathering pipeline system. Pursuant to the Purchase and Sale Agreement, we havean obligation to correct those defects within six months from the date of theclosing with Midstream. The total potential negative post-closing adjustment tothe purchase price for these defects is $271,300. 

We anticipated that the title defects could becorrected within the six month period provided for in the Purchase and SaleAgreement at an estimated cost to us of approximately $50,000. We correctedthose defects during the current quarter at a cost to us of $7,829 and reversed$42,170 which we had accrued in excess of the actual cost, as an increase inthe gain on sale of assets in our statement of operations. Although we believewe have corrected the title defects, we have not received a confirmation ofagreement from Midstream.

Nathaniel used$13,600,171 of the sale proceeds to satisfy $12,246,361 of secured loans andpromissory notes due Richard Strain, our majority stockholder and major debtholder, and $1,353,810 of accrued interest.

During June 2006, we repaid $790,000 which had beenborrowed against a line of credit, plus interest payable at the prime lendingrate, secured by a standby letter of credit, issued in our bank’s favor, andprovided by Richard Strain, our major shareholder.   Richard Strain had advised that he did notintend to renew the standby letter of credit.

The following is a summary of Nathaniel Energy’s cashflows sources (uses) from operating, investing, and financing activities duringthe periods indicated: 
|                       | ** ** | **Period ended June 30,** | ** ** |
|-----------------------|------------|------------------------------------------|------------|
| ** **            | ** ** | **2006**                                 | ** ** | **2005** | ** ** |
|                  |       |                                     |       |   |   |
| Operating  activities |       | $                                        | (968,620   | ) | $ | 694,608 |   |
| Investing  activities |       | 14,894,178                               |       | (451,705 | ) |
| Financing  activities |       | (13,044,991                              | )          | 82,102 |   |
|                  |       |                                     |       |   |   |
| Net effect on  cash   |       | $                                        | 880,567    |   | $ | 325,005 |   |

 

For the period ended June 30, 2006, the net cash usedin operating activities of $968,620 is due primarily to a net income of $5,226,353,increased by non-cash income tax expense of $759,000, an increase in accountspayable and accrued expenses of $215,976, and depreciation and amortizationexpense of $214,110 offset by gain on sale of assets of $6,041,145 included innet income and net cash used in discontinued operations of $1,277,958.

The change in net cash provided by investingactivities of $14,894,178 is due to primarily to the receipt of the netproceeds from the sale of our helium and gas processing facilities andoperations.

The change in net cash used in financing activities of$13,044,991 is due to principal repayments of debt of $3,408,772 primarilyrelated to a promissory note used to purchase the minority interest in NEOHCfrom our major shareholder, Richard Strain and repayment of $8,892,151 securedloans, also due Richard Strain. Further discussion of this is found in Note 5 -“Related Party Transactions” to our financial statements. In addition, werepaid $790,000, representing our total indebtedness, on our line of credit.

For the period ended June 30, 2005, the net cashprovided by operating activities of $694,608 is due to a net loss for thequarter of  $638,089 and an increase inprepaid expenses and other assets of $318,589, offset by an increase inaccounts payable and accrued expenses of $375,234, depreciation andamortization expense of $78,666, a decrease in inventory of $536,423, reductionin restricted cash of $237,000 and cash provided by discontinued operations of$442,846.

The change in net cash used in investing activitiesfor the period ended June 30, 2005 of $451,705 is primarily due to cash usedfor equipment purchases for the tire fuel processing operation of $406,062.

The change in net cash provided by financingactivities of $82,102 is primarily due to debt repayments of $137,979

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offset by $221,607 proceeds from the issuance of notespayable during the six months ended June 30, 2005.

Nathaniel Energy had cash of $1,140,599 at June 30,2006 which will be used to fund the Company’s operations and overhead, paycurrent debts and partially fund the execution of our Thermal GasifierTMbusiness plan.

We expect that as a result of the improvements made atour tire fuel processing division during the third and fourth quarters of 2005,the tire fuel processing operations will continue to generate future positivenet cash flows from operating activities, which will provide additional fundingfor our corporate overhead expenses. We have reduced our overall indebtednessduring the six months ended June 30, 2006 thereby reducing our payments on debtservice. In addition, we will reduce our corporate overhead as a result of thewinding down of resources required to transition the sale of our discontinuedoperations.

Our working capital as of June 30, 2006 was $132,350.

**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 concludedthat the company’s disclosure controls and procedures are effective to ensurethat information required to be disclosed by the company in reports that itfiles or submits under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and 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 fiscal quarterthat has materially affected, or is reasonably likely to materially affect, thecompany’s internal control over financial reporting.

**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. During thequarter, the Company incurred $20,000 which settled a suit by a former employeealleging violation of Fair Labor and Standards Act and Title VII of the CivilRights Act.

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

None.

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

Not Applicable

**Item4. Submission of Matters to a Vote of Security Holders.**

None

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**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**                                                                                                                                       |
| 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.

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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: August 11, 2006 
|        | By:    | */s/ George A. Cretecos*     | * * |
|--------|--------|------------------------------|----------|
|   |   | George A. Cretecos           |
|   |   | Chief Executive Officer      |
|   |   | Nathaniel Energy Corporation |

 

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