**UnitedStates**

**Securitiesand Exchange Commission**

**Washington,D.C. 20549**

** **

**FORM10-QSB**

** **

**(MarkOne)**

** **

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

** **

**For thequarterly period ended March 31, 2006**

** **

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

** **

**For thetransition period from               to                **

** **

**Commission file number 000-27783**

** **

**NATHANIELENERGY CORPORATION**

(Nameof Small Business Issuer in its Charter)

 

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

 

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

(Addressof principal executive offices) (Zip Code)

 

Issuer’stelephone number: **(303) 690-8300**

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý  No  o

 

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

 

Check whether the registrantfiled all documents and reports required to be filed by Section 12, 13 or 15(d)of the Exchange Act after the distribution of securities under a plan confirmedby a court. Yes  o  No  o

 

Applicable only to corporateissuers

 

State the number of sharesoutstanding of each of the issuer’s class of common equity, as of the latestpracticable date: May 8, 2006, 90,698,263 shares of common stock, $.001 parvalue.

 

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

 

 

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**NATHANIEL ENERGY CORPORATION**

 

 
|     | TABLE  OF CONTENTS                                              |                                                                                      |
|----------|-----------------------------------------------------------------|-------------------------------------------------------------------------------------------|
|     |                                                            |                                                                                      |
| PART I.  | FINANCIAL INFORMATION                                           |                                                                                      |
|     |                                                            |                                                                                      |
| Item 1   | Financial Statements  (unaudited)                               |                                                                                      |
|     |                                                            |                                                                                      |
|     |                                                            | Consolidated Balance Sheets as of  March 31, 2006 and December  31, 2005             |   |
|     |                                                            |                                                                                      |   |
|     |                                                            | Consolidated Statements of  Operations for the Three Months ended March 31, 2006 and 2005 |   |
|     |                                                            |                                                                                      |   |
|     |                                                            | Consolidated Statements of  Cash Flows for the Three Months ended March 31, 2006 and 2005 |   |
|     |                                                            |                                                                                      |   |
|     |                                                            | Notes to Consolidated  Financial Statements                                               |   |
|     |                                                            |                                                                                      |
| Item 2.  | Management’s Discussion and  Analysis or Plan of Operation |                                                                                      |
|     |                                                            |                                                                                      |
| Item 3.  | Controls and Procedures                                         |                                                                                      |
|     |                                                            |                                                                                      |
|     |                                                            |                                                                                      |
| PART II. | OTHER INFORMATION                                               |                                                                                      |
|     |                                                            |                                                                                      |
| Item 1.  | Legal Proceedings                                               |                                                                                      |
|     |                                                            |                                                                                      |
| Item 2.  | Unregistered Sales of Equity  Securities And Use of Proceeds    |                                                                                      |
|     |                                                            |                                                                                      |
| Item 3.  | Defaults Upon Senior  Securities                                |                                                                                      |
|     |                                                            |                                                                                      |
| Item 4.  | Submission of Matters to a  Vote of Security Holders            |                                                                                      |
|     |                                                            |                                                                                      |
| Item 5.  | Other Information                                               |                                                                                      |
|     |                                                            |                                                                                      |
| Item 6.  | Exhibits                                                        |                                                                                      |
|     |                                                            |                                                                                      |
|     | Signatures                                                      |                                                                                      |

 

i

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**Nathaniel Energy Corporation**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                          | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                          | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
|                                                                                                                                                |       |                     |       |                        |       |
| Assets                                                                                                                                              |       |                     |       |                        |       |
| Current assets:                                                                                                                                     |       |                     |       |                        |       |
| Cash                                                                                                                                                |       | $                        | 2,638,607  |                        | $          | 260,032 |   |
| Accounts receivable                                                                                                                                 |       | 93,818                   |       | 85,418                      |       |
| Prepaid expenses                                                                                                                                    |       | 43,971                   |       | 88,698                      |       |
| Deferred tax asset                                                                                                                                  |       | —                   |       | 759,000                     |       |
| Assets held for sale                                                                                                                                |       | —                   |       | 2,036,783                   |       |
| Total current assets                                                                                                                                |       | 2,776,396                |       | 3,229,931                   |       |
| Property, plant and equipment, net of  accumulated depreciation                                                                                     |       | 1,192,974                |       | 1,256,708                   |       |
| Intangible assets, net                                                                                                                              |       | 283,968                  |       | 322,482                     |       |
| Deposits                                                                                                                                            |       | 93,647                   |       | 88,322                      |       |
| Assets held for sale                                                                                                                                |       | —                   |       | 9,768,510                   |       |
| Total Assets                                                                                                                                        |       | $                        | 4,346,985  |                        | $          | 14,665,953 |   |
| Liabilities and Stockholders’ Equity  (Deficit)                                                                                                |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                |       |                     |       |                        |       |
| Accounts payable                                                                                                                                    |       | $                        | 930,139    |                        | $          | 628,784 |   |
| Accrued compensation and payroll  liabilities                                                                                                       |       | 31,667                   |       | 75,757                      |       |
| Accrued interest                                                                                                                                    |       | 15,398                   |       | 14,760                      |       |
| Other accrued expenses                                                                                                                              |       | 338,385                  |       | 5,399                       |       |
| Notes payable, current portion                                                                                                                      |       | 1,007,607                |       | 1,014,235                   |       |
| Notes payable - stockholder, current  portion                                                                                                       |       | —                   |       | 3,354,210                   |       |
| Liabilities held for sale                                                                                                                           |       | —                   |       | 7,307,128                   |       |
| Total current liabilities                                                                                                                           |       | 2,323,196                |       | 12,400,273                  |       |
| Long-term debt                                                                                                                                      |       | 228,654                  |       | 277,589                     |       |
| Liabilities held for sale                                                                                                                           |       | —                   |       | 4,892,151                   |       |
| Total liabilities                                                                                                                                   |       | 2,551,850                |       | 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, 90,698,263 shares issued and outstanding at March 31,  2006 and December 31, 2005 |       | 90,698                   |       | 90,698                      |       |
| Common stock to be issued                                                                                                                           |       | 318                      |       | 318                         |       |
| Additional paid-in capital                                                                                                                          |       | 60,702,446               |       | 61,584,446                  |       |
| Accumulated deficit                                                                                                                                 |       | (58,998,327              | )          | (64,579,522                 | )          |
| Total Stockholders’ Equity (Deficit)                                                                                                           |       | 1,795,135                |       | (2,904,060                  | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit)                                                                                          |       | $                        | 4,346,985  |                        | $          | 14,665,953 |   |

 

*The accompanying notes are an integral part of the financialstatements.*

 

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**Nathaniel Energy Corporation Consolidated Statementsof Operations**

(Unaudited)

 
| ** **                                                        | ** ** | **For the Three Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                        | ** ** | **March 31,  2006**                           | ** ** | **March 31,  2005** | ** ** |
| Revenue                                                           |       | $                                                  | 239,527    |   | $ | 210,364 |   |
| Cost of revenue                                                   |       | 210,447                                            |       | 226,128 |   |
| Gross profit (loss)                                               |       | 29,080                                             |       | (15,764 | ) |
| Selling, general and administrative  expenses                     |       | 508,934                                            |       | 383,290 |   |
| Research and development expense                                  |       | 28,201                                             |       | 117,125 |   |
| Total operating expenses                                          |       | 537,135                                            |       | 500,415 |   |
| Loss from operations                                              |       | (508,055                                           | )          | (516,179 | ) |
| Other income (expense)                                            |       |                                               |       |   |   |
| Interest expense                                                  |       | (104,685                                           | )          | (64,160 | ) |
| Loss from continuing operations                                   |       | (612,740                                           | )          | (580,339 | ) |
| Income from discontinued operations, net of  tax                  |       | 194,961                                            |       | 255,048 |   |
| Gain on sale of assets, net of tax                                |       | 5,998,974                                          |       | —- |   |
| Net income (loss)                                                 |       | $                                                  | 5,581,195  |   | $ | (325,291 | ) |
| Loss per share from continuing operations,  basic and diluted     |       | $                                                  | (0.01      | ) | $ | (0.01 | ) |
| Income per share from discontinued  operations, basic and diluted |       | 0.00                                               |       | 0.00 |   |
| Income per share from gain on sale of  assets, basic and diluted  |       | 0.07                                               |       | 0.00 |   |
| Net income (loss) per share, basic and  diluted                   |       | $                                                  | 0.06       |   | $ | (0.01 | ) |
| Weighted average common shares outstanding                        |       | 90,698,263                                         |       | 70,676,041 |   |

 

*The accompanying notes are an integral part of the financialstatements.*

 

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**Nathaniel Energy Corporation**

**Consolidated Statements of Cash Flows**

(Unaudited)

 
| ** **                                                                                 | ** ** | **For the Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,  2006**                           | ** ** | **March 31,  2005** | ** ** |
| Cash flows from operating activities:                                                      |       |                                               |       |   |   |
| Net income (loss)                                                                          |       | $                                                  | 5,581,195  |   | $ | (325,291 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                               |       |   |   |
| Depreciation and amortization                                                              |       | 108,859                                            |       | 39,332 |   |
| Gain on sale of assets                                                                     |       | (5,998,974                                         | )          |   |   |
| Income tax expense                                                                         |       | 759,000                                            |       | — |   |
| Changes in operating assets and  liabilities:                                              |       |                                               |       |   |   |
| (Increase) decrease in:                                                                    |       |                                               |       |   |   |
| Accounts receivable                                                                        |       | (8,400                                             | )          | (14,145 | ) |
| Inventory                                                                                  |       | —                                             |       | 286,458 |   |
| Prepaid expenses                                                                           |       | 44,727                                             |       | 52,801 |   |
| Restricted cash                                                                            |       | —                                             |       | 237,000 |   |
| Related party receivable                                                                   |       | —                                             |       | (4,242 | ) |
| Other assets                                                                               |       | (5,325                                             | )          | (550 | ) |
|                                                                                       |       |                                               |       |   |   |
| Accounts payable and accrued expenses                                                      |       | 590,889                                            |       | 29,937 |   |
| Net effect on cash from discontinued  operations                                           |       | (1,277,957                                         | )          | 206,294 |   |
| Net cash provided by (used in) operating  activities                                       |       | (205,986                                           | )          | 507,594 |   |
| Cash flows from investing activities:                                                      |       |                                               |       |   |   |
| Acquisition of minority interest                                                           |       | (882,000                                           | )          | — |   |
| Cash provided by (used in) discontinued  operations                                        |       | 15,767,484                                         |       | (40,148 | ) |
| Net cash provided by (used in) investing  activities                                       |       | 14,885,484                                         |       | (40,148 | ) |
| Cash flows from financing activities:                                                      |       |                                               |       |   |   |
| Payments on debt                                                                           |       | (3,408,772                                         | )          | (76,001 | ) |
| Cash used in discontinued operations                                                       |       | (8,892,151                                         | )          | (741 | ) |
| Net cash used in financing activities                                                      |       | (12,300,923                                        | )          | (76,742 | ) |
| Net increase in cash                                                                       |       | 2,378,575                                          |       | 390,704 |   |
| Cash and cash equivalents, beginning of  year                                              |       | 260,032                                            |       | 33,897 |   |
| Cash and cash equivalents, end of period                                                   |       | $                                                  | 2,638,607  |   | $ | 424,601 |   |
| Cash paid for interest                                                                     |       | $                                                  | 1,370,411  |   | $ | 22,224 |   |
| Cash paid for income taxes                                                                 |       | $                                                  | —     |   | $ | —- |   |
| Non cash financing activity:                                                               |       |                                               |       |   |   |   |   |
| Issuance of stock to settle accrued  expenses, accounts and notes payable                  |       | $                                                  | —     |   | $ | 87,500 |   |

 

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

 

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**Nathaniel Energy Corporation**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

MARCH31, 2006 and 2005

(Unaudited)

 

1. Significant AccountingPolicies and Nature of Operations:

 

***Unaudited Interim Financial Statements***

 

The accompanying unauditedinterim financial statements, which include the Company’s wholly owned subsidiaries,have been prepared by the Company in accordance with generally acceptedaccounting principles 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 months ended March 31, 2006 are not necessarily indicative of resultsof operations to be expected for the full year.

 

***Description of Business***

 

Nathaniel Energy Corporation is a renewablehydrocarbon-based waste-to-energy company that provides municipalities andindustries with solutions that divert waste from landfills while providing aclean alternative energy comparable to that of fossil fuels. Our proprietarypatented technology, the Thermal GasifierTM, is a 2-stage gasification systemdesigned to convert industrial and commercial waste, biomass, tires and anyother solid, hydrocarbon-based materials into economical clean thermal andelectrical energy, while exceeding the most stringent EPA and European Unionregulations.

 

We have been in the alternative fuel processingbusiness, including waste tire recycling and collection services, since 1997.We have operated a 27 acre tire fuel processing facility in Hutchins, Texassince 1999. During the three months ended March 31, 2006, our tire fuelprocessing business has generated 100% of our revenue.

 

We plan to focus our patented technology, the ThermalGasifierTM in three main areas; creating energy infrastructures; building,owning and operating small hydrocarbon-based waste-to-energy plants andlicensing. The Company’s mission is to become an environmental partner withmunicipalities and commercial and industrial businesses for the diversion ofsolid waste from landfills, while providing an economically cost effective,clean energy alternative to fossil fuels worldwide.

 

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 a business’ premises (“inside the fence”) and can reduce thedependence a business has on fossil fuels and power from the local utility. Insome cases, the energy infrastructures can become a business’ self sustainingutility. We plan to identify new and existing sites where we can build, own andoperate small hydrocarbon-based waste-to-energy plants through our ownresources or in conjunction with joint venture partners. Eventually, we plan tolicense the Thermal GasifierTM technology to qualified companies, joint venturepartners, and distributorships as we mature our commercialization activities.

 

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Wecontinue to provide technical assistance to the project owner of our twoThermal GasifiersTM in Cologna Veneta, Italy. We began to utilize the operatingThermal GasifierTM units in Italy in our sales, marketing and research effortsduring 2005. We are using the waste-to-energy plant in Cologna Veneta, Italy as“proof of process” for our first commercial Thermal GasifiersTM in our businessdevelopment activities demonstrating a lower cost, clean dependable energyalternative to fossil fuels worldwide. We have recognized no revenue from thesale or delivery of our Thermal GasifiersTM through the period ended March 31,2006. During the first quarter of 2005, we formed Cleanergy, Inc., aDelaware corporation, as a wholly owned subsidiary for purposes of advancingour business for the commercialization of our Thermal GasifierTM technologythrough hydrocarbon-based waste-to-energy projects. Cleanergy, Inc. had nofinancial activity through the period ended March 31, 2006. The Company hasemployed the services of an experienced executive to advance the business planand secure a sales pipeline of hydrocarbon-based waste-to-energy projects andbusiness development activities.

 

During September 2005, we entered into a Purchase andSale Agreement with Midstream Energy Services, LLC pursuant to which we agreedto sell the assets which comprise our helium and gas processing facilities andoperations to Midstream. On March 7, 2006, we closed the Purchase and SaleAgreement and sold those assets. The results of operations of our helium andgas processing facilities and operations through the date of the closing areshown as income from discontinued operations in our statement of operations.See Note 2. – “Disposition of a Business Segment”. The estimated gain on thesale of our helium and gas processing facilities and operations is shown asincome from sale of assets in our statement of operations.

 

**Critical Accounting Policies**

 

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

 

***Inventory***

 

Tire-derived-fuel (TDF)inventory is valued at its cost to produce a salable product using the first-infirst-out method, but in an amount not to exceed realizable value, determinedwith respect to existing contractual sales prices, less costs to complete the wastetire processing. TDF inventory value at March 31, 2006 is zero.

 

We continue to providetechnical support during the completion of the start-up and testing of the waste-to-energyplant utilizing two Thermal GasifiersTM installed in Italy, under a contract forresale to a customer. Both units have been operated in start up phase. TheThermal GasifiersTM are valued at that portion of the contract price wereasonably expect to receive upon completion and acceptance by our customer,reduced by our contractual exposure to penalties contained in the contractwhich could be incurred if our Thermal GasifiersTM do not produce the volume ofsteam specified in the contract and payments received. Our customer continuesto have difficulty with a third party subcontractor’s fuel preparation systemthat prepares the fuel for the Thermal GasifiersTM so that it meets thespecifications agreed to in our contract to meet our output performanceguarantee. In addition, our customer is in the process of retrofittingdownstream thermal equipment provided to them by the same third partysubcontractor. The retrofit is required to bring the downstream thermal equipmentinto specification to accept the synthesis gas that our units produce. Althoughboth the fuel supply and downstream thermal equipment capability concerns arebeing addressed by our customer, we continue to provide technical support forthe plant and advise our customer while pursuing payment of amounts due us onour contract with our customer. 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 reimbursed for our out of pocket expenses, includingshipping expenses incurred during the start up phase and we record thoseexpenses and the reimbursement of those expenses in cost of revenue andrevenue, respectively. The Thermal GasifierTM inventory value at March 31, 2006is zero.

 

6

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***Research and Development***

 

Researchand development expenditures, all of which relate directly to the design anddevelopment of our Thermal GasifierTM technology, are expensed as incurred. Forthe three months ended March 31, 2006 and 2005, we incurred costs for thirdparty engineering consulting and analysis and expensed $28,201 and $117,125,respectively.

 

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

 

Property, plant andequipment purchased or constructed is recorded at cost. Direct costs, such aslabor and materials, and indirect costs, such as overhead used duringconstruction are capitalized. Major units of property replacements orimprovements are capitalized and minor items are expensed. Gain or loss isrecorded in income for the difference between the net book value relative toproceeds received, if any, when the asset is sold or retired. Depreciation isprovided for using straight-line and accelerated methods. Estimated usefullives of the assets used in the computation of depreciation are as follows:

 

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

 

***Long-Lived Assets***

 

In accordance with theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets”, the Company reviews its long-lived assets,including intangible assets, for impairment whenever events or changes incircumstances indicate that the related carrying amount may not be recoverable.Recovery of assets to be held and used is measured by a comparison of thecarrying amount of the assets to the future net cash flows expected to be generatedby the asset. If such assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount of theassets exceeds the fair value of the assets. Assets to be disposed of arereported at the lower of the carrying amount or fair value less the cost tosell. Management uses significant judgments, assumptions and estimates tocalculate future cash flows expected to be generated by the assets underimpairment review.

 

***Revenue Recognition***

 

Ourtire fuel processing facility recognizes revenue in two ways. First when wastetires are accepted at the facility we receive a disposal fee (“tipping fees”)and secondly from the sale of processed tire-derived-fuel. The revenues fromtipping fees are fully earned when the waste tires are accepted at the facilityand the processed tire-derived-fuel revenues are recognized when the TDF is deliveredto 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.

 

Werecognize revenue from the sale of our Thermal GasifiersTM upon completion,delivery and customer acceptance, using the completed contract method ofaccounting. We have recognized no revenue from the sale of our ThermalGasifiersTM as of March 31, 2006.

 

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

 

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

 

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

 

****Use of Estimates****

 

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

 

**2.Disposition of a Business Segment**

 

OnMarch 7, 2006 Nathaniel Energy Corporation, its wholly-owned subsidiaryNathaniel Energy Oklahoma Holdings Corporation (“NEOHC”) and NEOHC’swholly-owned subsidiary, MCNIC Rodeo Gathering, Inc. closed a Purchase and SaleAgreement with Midstream Energy Services, LLC pursuant to which NEOHC sold theassets which comprises Nathaniel’s helium and gas processing facilities andoperations to Midstream. Pursuant to the Purchase and Sale Agreement, thepurchase price was subject to the following adjustments:

 

upwardfor any capital expenditures made by Nathaniel relating to the helium and gasoperations from August 1, 2005.

 

upwardfor expenses incurred by Nathaniel from August 1, 2005 to operate the heliumand gas assets.

 

upwardfor all amounts owed to Nathaniel or its affiliates as of the closing under thecontracts which are included in the assets to be sold.

 

upwardby up to $1,800,000 if Midstream and Colorado Interstate Gas entered into anagreement for nitrogen and/or air services which commences on or near January1, 2007. This agreement was entered into.

 

downwardfor any expenses relating to the operation of the gas assets which are attributedto the period before closing that were unpaid at the closing, and the liabilityfor which is transferred to Midstream.

 

downwardfor amounts due under the contracts which are included in the gas assets to besold that were unpaid as of the closing, and the liability for which istransferred to Midstream.

 

downwardfor all funds, receivables and the like, that are attributable to the gasassets being sold, for all periods from August 1, 2005 to the extent retainedby Nathaniel.

 

Additionally,the Purchase and Sale Agreement provided that in the event any adjustments arenot finally determined prior to the closing, they will be determined after theclosing.

 

Atthe closing, giving effect to finally determined adjustments, Midstreamdelivered $16,915,676 to Nathaniel on account of the purchase price. Pursuantto the terms of the Purchase and Sale Agreement, we have submitted adjustmentsto the amount received from Midstream which increase 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

 

8

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upwardadjustments have not been agreed at this time. Pursuant to the Purchase andSale Agreement, and agreed with Midstream, we will jointly submitted ourrespective positions regarding costs and expenses incurred in the ordinarycourse of business to an independent certified public accounting firm for accountingdispute resolution.

 

Midstreamassumed all the liabilities under the contracts included in the gas assetsbeing sold that arose after the closing date.

 

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

 

The estimated gain on saleof the helium and gas processing facilities and operations computed withoutregard to any potential upward purchase price adjustments, is as follows as ofMarch 31, 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                        |   | 250,000  |       |       |       |
|                                   |   |     |       | 10,157,692 |       |
| Pretax gain on sale of assets          |   |     |       | 6,757,984  |       |
| Income tax expense                     |   |     |       | 759,000    |       |
| Gain on sale of assets, net of tax     |   |     |       | $          | 5,998,984  |   |
|                                        |        |          |            |            |            |        |  |

 

****3.Notes Payable****

 

Inconnection with our purchase of a 49% interest in our 51% owned subsidiary,Nathaniel Energy Oklahoma Holdings, Corporation., from Richard Strain, ourmajority stockholder and major debt holder as of September 29, 2005, we issueda $3,354,210 promissory note to Mr. Strain, which was payable on demand byRichard Strain at any time after December 31, 2005, or earlier on the date ofthe commencement of any bankruptcy or insolvency proceedings against us, ifany. We had the right to pre-pay the promissory note at any time withoutpenalty. The promissory note bore interest at the prime rate plus 1.5%annually. We recorded the $3,354,210 promissory note as a current note payabledue stockholder with a corresponding reduction in our additional paid-incapital on our balance sheet as of September 30, 2005. The promissory note was securedby a first priority security interest in all of our assets and a pledge of theNathaniel Energy Oklahoma Holdings, Corporation (NEOHC) shares that wepurchased. See Note 4. – “Related Party Transactions”.

 

OnMarch 7, 2006, we repaid total principal of $12,246,361 related to this and allprevious obligations due Richard Strain out of the proceeds we received fromthe sale of our helium and gas processing assets to Midstream. As of March 31,2006 and December 31, 2005, our total indebtedness to Richard Strain was $ -0-and $12,246,361, respectively.

 

9

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****4.Related Party Transactions****

 

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

 

TheNEOHC shares purchased represent 49% of NEOHC. As a result of this acquisition,NEOHC became a wholly-owned subsidiary of Nathaniel. See Note 3 – “NotesPayable” which discussed a promissory note issued to Richard Strain related tothe Stock Purchase Agreement.

 

Pursuantto our Purchase and Sale Agreement with Midstream for the sale of our heliumand gas operations, the purchase price under that agreement was subject to anupward adjustment by up to $1,800,000 if Midstream and Colorado Interstate Gasentered into an agreement for nitrogen and/or air blending services which commenceson or before January 1, 2007. This agreement was entered into in December 2005.As a result of this upward adjustment, we paid Richard Strain an additional$882,000 at closing.

 

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****5.Subsequent Events****

 

On April 10, 2006, inaccordance with the terms of the Purchase and Sale Agreement, we received aletter from Midstream detailing certain title defects in the gas gatheringpipeline system. Pursuant to the Purchase and Sale Agreement, we have anobligation 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 anticipate that the titledefects can be corrected within the six month period provided in the Purchaseand Sale Agreement at an estimated cost to us of approximately $50,000. Thiscost has been included in accrued expenses on our balance sheet as of March 31,2006 and reflected as a reduction in the gain on sale of assets in ourstatement of operations.

 

**6. EconomicDependency – Major Customer**

 

Onecustomer accounted for approximately 40% and 17% of our total revenue for thethree months ended March 31, 2006 and 2005, respectively.

 

**7. IncomeTax Expense**

 

On September 29, 2005, weacquired a 49% interest in NEOHC from Richard Strain. See Note 3-“Related PartyTransactions”. As a result of that acquisition, we own 100% of NEOHC as ofSeptember 30, 2005 and we include taxable income or loss of NEOHC with ourtaxable income or loss for federal income tax purposes for periods subsequentto that date.

 

Asof December 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 these losses arelimited under the change in control provisions of Internal Revenue CodeSection 382. Losses so limited will be available to offset future taxableincome without limitation during our fiscal year 2006 until their expiration.

 

Asa result 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 March 31,2006 as all upward and downward adjustments provided in the Purchase and SaleAgreement have not been finalized, however, we estimate that our tax gain onsale will be offset by our estimated current year’s loss and tax losses carriedforward to fiscal 2006, and therefore, we have reversed our deferred tax asset of$759,000 at March 31, 2006.

 

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

 

**8. BusinessSegments**

 

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

 

• the tire fuel processing operation inHutchins, Texas, and

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

 

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For the three months ended March 31, 2006:

 
| ** **                                                    | ** ** | **Fuel  Processing** | ** ** | **Alternate Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|------------------------------|------------|-----------|------------|
| Revenue                                                       |       | $                    | 239,527    |                 | —     |                         |       |      | $          | 227,430 |   |
| Significant non cash expenses- depreciation  and amortization |       | $                    | 83,914     |                 | $          | 24,945                       |       |      |       | $ | 108,859 |   |
| Net income (loss)                                             |       | $                    | 5,575,654  |                 | $          | (189,420                     | )          | $         | 194,961    |   | $ | 5,581,195 |   |
| Total assets as of March 31, 2006                             |       | $                    | 4,096,480  |                 | $          | 250,505                      |       | —    |       | $ | 4,346,985 |   |
|                                                               |            |                      |            |                      |            |                              |            |           |            |  |  |  |  |

 

For the three months ended March 31, 2005:

 
| ** **                                                    | ** ** | **Fuel  Processing** | ** ** | **Alternate Energy** | ** ** | **Discontinued  Operations** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|------------------------------|------------|-----------|------------|
| Revenue                                                       |       | $                    | 130,364    |                      | $          | 80,000                       |       |      |       | $ | 210,364 |   |
| Significant non cash expenses- depreciation  and amortization |       | $                    | 40,041     |                      | —     |                         |       |      | $          | 40,041 |   |
| Net income (loss)                                             |       | $                    | (300,631   | )                         | $          | (279,708                     | )          | $         | 255,048    |   | $ | (325,291 | ) |
| Capital expenditures                                          |       | —               |       | —                    |       | $                            | 40,148     |      | $          | 40,148 |   |
| Total assets as of March 31, 2005                             |       | $                    | 914,561    |                      | $          | 820,870                      |       | $         | 11,858,159 |   | $ | 13,593,590 |   |

 

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**Item 2. Management’s Discussion and Analysis ofResults of Operations.**

 

**FORWARD LOOKING STATEMENTS**

 

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

 

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

 

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

 

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

 

•             Our ability to enter into agreements orrelationships with municipalities and commercial and industrial businesses inconnection with the commercialization of our Thermal GasifierTM.

 

•             Risks related to dependency on a small numberof customers.

 

•             Our ability to satisfy our customers’expectations.

 

•             Our ability to employ and retain qualifiedmanagement and employees.

 

•             Changes in government regulations which areapplicable to our business.

 

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

 

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

 

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

 

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

 

•             Our ability to generate sufficient cash topay our creditors.

 

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

 

We are also subject to otherrisks detailed from time to time in other Securities and Exchange Commissionfilings and elsewhere in this report. Any one or more of these uncertainties,risks and other influences could materially affect our results of operationsand whether forward-looking statements made by us ultimately prove to beaccurate. Our actual results, performance and achievements could differmaterially from those expressed or implied in these forward-looking statements.We undertake no obligation to publicly update or revise any forward-lookingstatements, whether from new information, future events or otherwise.

 

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**CompanyOverview**

 

Ourmission is to become an environmental partner with municipalities andcommercial and industrial businesses for the diversion of solid waste fromlandfills, while providing an economically cost effective, clean energyalternative to fossil fuels worldwide. Our operational plan focuses on threemajor business models in the commercialization of our Thermal GasifierTMtechnology; creating energy infrastructures; building, owning and operatingsmall hydrocarbon-based waste-to-energy plants; and licensing. On September 30,2005, we signed a Purchase and Sale Agreement with Midstream Energy Services,LLCpursuant to which oursubsidiaries Nathanial Energy Oklahoma Holdings Corporation (NEOHC) and MCNIC RodeoGathering, Inc. agreed to sell substantially all of the assets that compriseour helium and gas processing facilities and operations to Midstream. We closedthis transaction on March 7, 2006. Midstream is a privately owned full serviceenergy company engaged in the gathering, processing, treating, compression,dehydration, transportation and marketing of natural gas and natural gasliquids, based in Tulsa, Oklahoma. Midstream is not affiliated with Nathaniel. Revenuegenerated from our discontinued operations, the helium and gas processingbusiness, has provided operating and capital funds for improving our currenttire fuel processing operations and further advancing it toward a full servicefuel procurement operation, in addition to, furthering the commercialization ofour Thermal GasifiersTM. We believe that it was in our best interest to exit thehelium and gas processing business and focus our resources in the emergingalternative energy industry through the commercialization of our proprietarypatented Thermal GasifierTM technology. By improving and advancing our fuelprocessing division and furthering the commercialization of our patentedtechnology, we plan to secure hydrocarbon-based waste-to-energy projectsthrough our subsidiary; Cleanergy, Inc. Cleanergy, Inc. has had no activity todate.

 

Webegan to implement our planned improvements to the tire fuel processingoperations at our facility located in Hutchins, Texas during June 2005 thatincluded; purchasing new processing equipment, improving our handling systems,expanding of our operations facility and site offices and regulatory complianceupgrades. The tire fuel processing facility improvements and expansion providethe foundation for its diversification 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. We expect that the completion of the majority of our equipmentinstallation and site improvements will now enable us to ramp up operations atthis facility by increasing its production and the volume of waste tires itprocesses. We believe that the increased production will result in increasedtipping fee revenue, and increased revenue from the sale of tire-derived-fuel. Webelieve that the addition of new equipment combined with existing equipment inconjunction with facility improvements has enabled us to enter into a three (3)year take or pay contract for the sale of tire-derived-fuel, and will provide theresources and infrastructure to enable us to sign new contracts for theacceptance of waste tires. The new equipment has also improved the quality ofthe tire-derived-fuel thereby enabling us to increase our prices approximately60% for the higher quality tire-derived-fuel. The improvements should enable usto obtain increased revenue and cash flow from this operation. We completed theprimary planned improvements during 2005 and continue to improve our tirehandling and product delivery capabilities to increase the efficiency of thefacility.

 

Duringthe three months ended March 31, 2006, we generated $239,527 of our revenue, or100%, from our tire fuel processing division. We have recognized no revenuefrom our Thermal GasifierTM business segment to date. 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-basedwaste-to-energy projects.

 

Historically,we have not had difficulty finding potential project opportunities and we haveemployed the services of an experienced senior executive to develop a salespipeline of hydrocarbon-based waste-to-energy projects and business developmentactivities. Worldwide, industries and municipalities seek solutions fordiverting solid waste from landfills and lower cost and clean energyalternatives to fossil fuels. Demand for these solutions is expected to grow. Akey to our success will be qualifying and wisely choosing among projectopportunities and focusing our resources on projects with the greatest chanceof success and returns for stockholders.

 

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Aswe continue to support the project owner and work toward obtaining finalacceptance for the two Thermal GasifierTM units in Cologna Veneta, Italy, wewill continue to have access to an operating commercial facility to use inmarketing, testing and additional research and development efforts. Our missionin 2006  is to develop a sales pipelineof qualified hydrocarbon-based waste-to-energy projects, contract for one ormore of those projects and initiate implementation as a partner or jointventure member in at least one commercial operation utilizing our ThermalGasifierTM technology, which will be operated through the wholly ownedsubsidiary, Cleanergy, Inc. We have identified a number of opportunities thatwe are currently pursuing, however we can not assure that any of theseopportunities will result in a project that generates revenue within the nexttwelve months.

 

Atthe same time, we are developing the infrastructure and business developmentactivities to support our energy infrastructure and small hydrocarbon-basedwaste-to-energy project opportunities utilizing our Thermal GasifierTMtechnology. Additionally, we plan to seek project funding that will be based onthe size, configuration and business structure of the project. We anticipatethat the timeframe from identification of a project to completion will be 12 to24 months, provided we obtain the requisite project financing.

 

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**Results ofOperations**

 

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 processing facilitieshave been reclassified in the 2005 year to conform to the current yearpresentation. Unless otherwise noted, the operating results discussed hereinrelate to our continuing operations.

 

The following tables setforth certain unaudited quarterly results of operations of Nathaniel Energy forthe first quarter of 2006. The quarterly operating results are not necessarilyindicative of future results of operations.

 
| ** **                                              | ** ** | ** **              | ** ** | **Three Months Ended (unaudited)** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **March 31  2006** | ** ** | **March 31  2005**                           | ** ** | **March 2006 vs. 2005  Increase (decrease)** | ** ** |
| ** **                                              | ** ** | ** **              | ** ** | ** **                                        | ** ** | **$** | ** ** | **%** | ** ** |
|                                                    |       |                    |       |                                              |       |   |   |   |   |
| Revenue                                                 |       | $                       | 239,527    |                                              | $          | 210,364 |   | $ | 29,163 |   | 14 | % |
| Cost of revenue                                         |       | 210,447                 |       | 226,128                                           |       | (15,681 | ) | (7 | )% |
| Gross profit                                            |       | 29,080                  |       | (15,764                                           | )          | 44,844 |   | 284 | % |
|                                                    |       |                    |       |                                              |       |   |   |   |   |
| Selling general and administrative expense              |       | 537,135                 |       | 500,415                                           |       | 36,720 |   | 7 | % |
| Operating income (loss)                                 |       | (508,055                | )          | (516,179                                          | )          |   |   |   |   |
|                                                    |       |                    |       |                                              |       |   |   |   |   |
| Interest expense                                        |       | (104,685                | )          | (64,160                                           | )          |   |   |   |   |
|                                                    |       |                    |       |                                              |       |   |   |   |   |
| Loss from continuing operations before  income taxes    |       | (612,740                | )          | (580,339                                          | )          |   |   |   |   |
| Income from discontinued operations, net of  tax        |       | 194,961                 |       | 255,048                                           |       |   |   |   |   |
| Gain on sale of assets, net of tax                      |       | 5,998,974               |       | —                                            |       |   |   |   |   |
| Net income (loss)                                       |       | $                       | 5,581,195  |                                              | $          | (325,291 | ) |   |   |   |   |
| Net income (loss) per common share (basic  and diluted) |       | $                       | 0.06       |                                              | $          | (0.01 | ) |   |   |   |   |
| Weighted-average common shares  outstanding-diluted     |       | 90,698,263              |       | 70,676,041                                        |       |   |   |   |   |
| Shares outstanding at end of period                     |       | 90,698,263              |       | 70,698,263                                        |       |   |   |   |   |
|                                                         |            |                         |            |                                                   |            |  |  |  |  |  |  |  |

 

Forthe three months ended March 31, 2006, our revenue increased by $29,163, or 14%to $239,527 from $210,364 during the same period in 2005. The increase is dueprimarily to an increase in processing waste tires and resulting revenue fromthe sale of tire-derived-fuel from our tire fuel processing facility which wasoffset by a reduction in revenue from our Thermal GasifierTM business segment. Revenuefrom our tire fuel processing facility increased by $109,163 or 84% to $239,527for the three months ended March 31, 2006 from $130, 364 during the same periodin 2005.Our ability to increase our processing of waste tires is due to ourpurchase of new equipment for and improvements in the operation of the tirefuel processing facility, placed in service during the second half of 2005. Forthe three months ended March 31, 2006, revenue from our Thermal Gasifier TMbusiness segment was $0, a decrease of $80,000 from the same period in 2005.Revenue of $80,000 during the three months ended March 31, 2005 related tonon-recurring consulting and start up services we provided our customer for theThermal GasifiersTM we built and installed in Cologna Veneta, Italy.

 

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Grossprofit for the three months ended March 31, 2006 was $29,080, an increase of $44,844,or 284% compared to gross loss of $15,764 for the three months ended March 31,2005. Our increase in gross profit is due to the increase in revenue of $29,163and a decrease in cost of revenue of $15,683. Cost of revenue for our tire fuelprocessing facility increased by $23,839 to $210,353 during the three monthsended March 31, 2006 from $186,514 for the three months ended March 31, 2005,due primarily to an increase in depreciation expense from new equipment placedin service at the facility during the second half of 2005. This increase incost of revenue was offset by a decrease in cost of revenue from our ThermalGasifier TM business segment of $39,614 to $0 during the three months endedMarch 31, 2006. Cost of revenue of $39,614 for the three months ended March 31,2005 included out of pocket expenses related to non-recurring consulting andstart up services we provided our customer for the Thermal GasifiersTM.

 

Totalselling, general and administrative expenses increased by $36,720 or 7% from $500,415for the three months ended March 31, 2005 to $537,135 for the three monthsended March 31, 2006. The increase in selling, general and administrativeexpenses is due primarily to an increase of $140,230 in payroll and employeebenefit expense due to an increase in the number of employees including non-recurringbonuses paid upon successful completion of the sale of the helium and gasprocessing assets offset by a decrease in research and development expense of$88,924.

 

Interest expense increased by$40,525 from $64,160 for the three months ended March 31, 2005 to $104,685 forthe three months ended March 31, 2006 due primarily to interest incurred on apromissory note of $3,354,210 issued Richard Strain on September 30, 2005 forthe purchase of his 49% interest in Nathaniel Energy Oklahoma HoldingsCorporation.

 

Income from discontinuedoperations decreased by $60,087 from $255,048 for the three months ended March31, 2005 to $194,961 for the three months ended March 31, 2006 due primarily tothe sale of the helium and gas processing facilities and operations toMidstream Energy Services, LLC on March 7, 2006. As a result of the sale,income from discontinued operations during the first quarter of 2006 includedincome only through the date of sale. See Note 2.—“Disposition of a BusinessSegment”.

 

Gainon sale of assets represents the gain of $5,998,974 from the sale of our heliumand gas processing facilities and operations to Midstream Energy Services, LLCon March 7, 2006. See Note 2.—“Disposition of a Business Segment”. The gain isnet of $759,000 of income tax expense. We recorded a deferred tax benefit of$759,000 during the fourth quarter of 2005 due to our expected use ofapproximately $2,000,000 of our net operating loss carry forward from 2005 andprior fiscal years which we expect along with losses we expect to incur during2006, to offset the estimated 2006 gain resulting from the sale of the heliumand gas processing operations’ assets.

 

Netincome increased by $5,906,486 to $5,581,195 for the three months endedMarch 31, 2006 from a net loss of $325,291 for the three months endedMarch 31, 2005 due primarily to the gain on sale of the helium and gasprocessing facilities and operations and an improvement in the net incomeresulting from our tire fuel processing operation.

 

**Liquidityand Capital Resources**

 

As of March 31, 2006 we owed $358,348 to financialinstitutions under installment notes with an average interest rate of 5.3%,whichis secured by land or equipment.

 

The remaining indebtednessconsists of miscellaneous notes to unaffiliated third parties of $87,913 and$790,000 borrowing against a line of credit .

 

OnMarch 7, 2006 Nathaniel, its wholly-owned subsidiary NEOHC and NEOHC’swholly-owned subsidiary, MCNIC Rodeo Gathering, Inc. closed the Purchase andSale Agreement with Midstream Energy Services, LLC. At 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 have submitted adjustments to the amountreceived from Midstream which increases the purchase price by $280,414,primarily related to costs and expenses we incurred in the ordinary course ofbusiness from the effective date of the transaction

 

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ofAugust 1, 2005 through February 28, 2006. These potential upward adjustmentshave not been agreed at this time and pursuant to the Purchase and SaleAgreement, will be submitted to an independent certified public accounting firmfor accounting dispute resolution.

 

OnApril 10, 2006, in accordance with the terms of the Purchase and SaleAgreement, we received a letter from Midstream detailing certain title defectsin the gas gathering pipeline system. Pursuant to the Purchase and SaleAgreement, we have an obligation to correct those defects within six monthsfrom the date of the closing with Midstream. The total potential negativepost-closing adjustment to the purchase price for these defects is $271,300. Weanticipate that the title defects can be corrected within the six month periodprovided in the Purchase and Sale Agreement at an estimated cost to us ofapproximately $50,000. This cost has been included in accrued expenses on ourbalance sheet as of March 31, 2006 and reflected as a reduction in the gain onsale of assets in our statement of operations.

 

Nathaniel used $14,482,171 of the sale proceeds tosatisfy $12,246,361 of secured loans and promissory notes due Richard Strain, ourmajority stockholder and major debt holder, and $2,235,810 of accrued interest.

 

Inconnection with our September 2005 purchase of a 49% interest in our 51% ownedsubsidiary, NEOHC, owned by Richard Strain, we issued a $3,354,210 promissorynote to Mr. Strain, which is payable on demand by Richard Strain at any timeafter December 31, 2005, or earlier on the date of the commencement of anybankruptcy or insolvency proceedings against us, if any. The promissory note boreinterest at the prime rate plus 1.5% annually. We recorded the $3,354,210promissory note as a current note payable due stockholder with a correspondingreduction in our additional paid-in capital on our balance sheet as ofSeptember 30, 2005. The promissory note was paid on the closing of the Purchaseand Sale Agreement.

 

As of March 31, 2006, wehave borrowed $790,000 against a line of credit, interest payable at the primelending rate, which is supported by a standby letter of credit, issued in ourbank’s favor, and provided by Richard Strain, our major shareholder and debtholder. Richard Strain has advised that he does not intend to renew the standbyletter of credit, and therefore, we expect to repay the line of credit on orbefore its due date in June 2006.

 

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

 
| ** **           | ** ** | **Period ended March 31,** | ** ** |
|----------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
|                 |       |                                      |       |   |   |
| Operating activities |       | $                                         | (205,986   | ) | $ | 507,594 |   |
| Investing activities |       | 14,885,484                                |       | (40,148 | ) |
| Financing activities |       | (12,300,923                               | )          | (76,742 | ) |
|                 |       |                                      |       |   |   |
| Net effect on cash   |       | $                                         | 2,378,575  |   | $ | 390,704 |   |

 

For the period ended March31, 2006, the net cash used in operating activities of $205,986 is dueprimarily to a net income of $5,581,195, increased by non-cash income taxexpense of $759,000, an increase in accounts payable and accrued expenses of$590,889, and depreciation and amortization expense of $108,859 offset by gainon sale of assets of $5,998,974 included in net income and net cash used indiscontinued operations of $1,277,957.

 

The change in net cashprovided by investing activities of $14,885,484 is due to primarily to theproceeds from the sale of our helium and gas processing facilities andoperations.

 

The change in net cash usedin financing activities of $12,300,923 is due to principal repayments of debtof $3,408,772 primarily related to a promissory note used to purchase theminority interest in NEOHC from our major shareholder, Richard Strain andrepayment of $8,892,151 secured loans, also due Richard Strain. See Note 4 tothe financial statements - “Related Party Transactions”.

 

For the period ended March31, 2005, the net cash provided by operating activities of $507,594 is due to anet loss

 

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for the quarter of $325,291,offset by a decrease in inventory of $286,458, reduction in restricted cash of$237,000 and cash provided by discontinued operations of $206,294.

 

The change in net cash usedin investing activities for the period ended March 31, 2005 of $40,148 is dueto cash used by discontinued operations.

 

The change in net cash usedin financing activities of $76,742 is primarily due to debt repayments of $76,001during the three months ended March 31, 2005.

 

Nathaniel Energy had cash of$2,638,607 at March 31, 2006 which will be used to fund the Company’soperations and overhead, pay current debts, partially fund the execution of ourThermal GasifierTM business plan and pay down our line of credit.

 

We expect that as a resultof the improvements made at our tire fuel processing division during the third andfourth quarters of 2005, that the tire fuel processing operations will generatefuture positive net cash flows from operating activities, which will provideadditional funding for our corporate overhead expenses.

 

Our working capital as of March31, 2006 was $453,200.

 

**Item 3.Controls and Procedures**

 

As of the end of the periodcovered by this report, the company conducted an evaluation, under thesupervision and with the participation of the Chief Executive Officer and ChiefFinancial Officer, of the company’s disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934). Based on this evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the company’s disclosure controls andprocedures are effective to ensure that information required to be disclosed bythe company in reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

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

 

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

 

**PART 2: OTHER INFORMATION**

 

**Item 1.Legal Proceedings.**

 

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

 

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.**

 

None.

 

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

 

Not Applicable

 

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

 

•                              Nathaniel Energy Corporation held an annualmeeting of stockholders on March 6, 2006 for the following purposes:

 

# **•**      To considerand approve the sale of Nathaniel’s gas and helium operations and facilities toMidstream Energy Services, LLC

# ** **

# **•**      To elect aboard of four directors.

# ** **

The sale of Nathaniel’s gasand helium operations and facilities assets was approved by the shareholders,voting in person or by proxy, as follows:

 

For:  66,373,629  Against:  3,050,885   Abstentions and Broker Non-Votes:  5,003.

 

The following four directorswere elected by the shareholders, in person or by proxy as follows:

 
| ** **          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| George A. Cretecos  |       | 79,402,486 |       | 185,372      |       |
| Karen Strain Smythe |       | 79,406,861 |       | 180,997      |       |
| William Mulrow      |       | 79,426,861 |       | 160,997      |       |
| Michael Burdis      |       | 48,685,000 |       | 0            |       |

 

The shareholders cast thefollowing votes for Russell “Gene” Bailey as a director, who was not elected.

 

For: 30,741,861  Withheld: 160,997

 

William Mulrow subsequentlyresigned as a director on April 6, 2004.

 

**Item 5.Other Information.**

 

**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 ofIncorporation, filed on April 24, 2002*

 

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

 

3.5              Amended and Restated By-Laws**

 

31.1 Certification of thePrincipal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2 Certification of thePrincipal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1 Certification of thePrincipal Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2 Certification of thePrincipal Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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*Denotes document filed asan exhibit to our Quarterly Report on Form 10 QSB for the period endedSeptember 30, 2005 and incorporated herein by reference.

 

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

 

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**SIGNATURES**

 

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

 

**NATHANIEL ENERGY CORPORATION**

(Registrant)

 
| Date: May 15, 2006 |   |
|--------------------|--------|
|               |   |
|               |   |
|               | By:    | */s/  George A. Cretecos* | * * |
|               |   | George A. CretecosChief Executive OfficerNathaniel Energy Corporation |

 

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