U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 33-58972
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NATHANIEL ENERGY CORPORATION
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(Name of Small Business Issuer in its Charter)
DELAWARE 84-157255
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(State of Incorporation) (IRS Employer Identification No.)
4871 North Mesa Drive 80108
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 690-8300
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Check whether the issuer (1)filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2)has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Applicable only to issuers involved in bankruptcy proceedings during the
preceding five years
Check whether the registrant filed 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 confirmed by a court.
Yes No X
--- ---
Applicable only to corporate issuers
State the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date: December 31, 2002, 1,416,636
shares of common stock, $.0001 par value.
Transitional Small Business Disclosure Format
(Check One)
Yes No X
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PART I. FINANCIAL INFORMATION Page Numbers
Item 1. Financial Statements (unaudited)
Balance Sheet as of March 31,2003 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2. Management's Discussion & Analysis 16
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 18
Item 2: Changes in Securities and Use of 18
Proceeds
Item 3: Defaults Upon Senior Securities 18
Item 4: Submission of Matters to a Vote of
Security Holders 18
Item 5: Other Information
Subsequent Events 18
Signatures 19
Certification of Chief Executive Officer
Certification of Chief Financial Officer
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudied)
Nathaniel Energy Corporation
BALANCE SHEETS
March 31, December 31,
2003 2002
------------ -------------
ASSETS
CURRENT ASSETS
Cash $ 11,745 $ 202,057
Accounts receivable 41,180 4,784
Inventory 249,400 248,040
Other current assets 198,241 125,797
------------ ------------
Total current assets 500,566 580,678
PROPERTY AND EQUIPMENT
(net of accumulated depreciation) 1,774,021 1,809,556
OTHER ASSETS
Investment in Keyes Helium Project 1,450,000 1,450,000
Accounts receivable related party 157,925 152,482
Goodwill (net) 16,367 16,367
------------ ------------
1,624,292 1,618,849
------------ ------------
TOTAL ASSETS $ 3,898,879 $ 4,009,083
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 504,886 $ 524,498
Payroll taxes payable 1,740 1,464
Accrued wages 2,116,046 1,928,546
Accrued interest payable 658,909 496,563
Notes payable 4,090,673 4,095,470
Current portion of long-term debt 313,582 320,541
------------ ------------
Total current liabilities 7,685,836 7,367,082
Long-term debt, net of current portion 376,750 292,331
Short-term debt to be refinanced on a long-term basis
------------ ------------
Total long-term liabilities 376,750 292,331
Minority Interest 46,278 26,358
STOCKHOLDERS' DEFICIT
Preferred stock, 2,000,000 shares of $.001 par value
authorized, none issued or outstanding
Common stock, 75,000,000 shares of $.001 par value
authorized, 38,262,664 shares, 36,912,664 shares and
issued and outstanding at March 31, 2003 and December 31, 2002 38,263 36,913
Additional paid-in capital 7,481,404 6,682,704
Less: Unpaid stock subscriptions receivable (175,500) (175,500)
Accumulated deficit (11,554,152) (10,220,805)
------------ ------------
Total stockholders' deficit (4,209,985) (3,676,688)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,898,879 $ 4,009,083
============ ============
The accountants' report and accompanying notes are an integral part of the financial statements.
3
Nathaniel Energy Corporation
STATEMENTS OF OPERATIONS
For the Year Ended
March 31, March 31,
2003 2002
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Revenue
Sales $ 104,915 $ 135,906
Cost of Sales 147,464 79,039
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Gross (Loss) (42,549) 56,867
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Selling, general and administrative expenses
Non-cash compensation 200,000 2,371,001
Research and development -- 596
Other selling general and administrative expenses 896,342 96,950
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1,096,342 2,468,547
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Loss from operations (1,138,891) (2,411,680)
Other income and (expense)
Investment in Keyes Helium Project 20,733 --
Loss on disposal of equipment (13,207) --
Interest expense (182,062) (20,441)
------------ ------------
Loss before income taxes (1,313,427) (2,432,121)
Income tax benefit -- --
------------ ------------
Loss before minority interest (1,313,427) (2,432,121)
Minority interest (19,920) --
------------ ------------
Net loss $ (1,333,347) $ (2,432,121)
============ ============
Weighted average number of common shares 38,262,664 26,712,623
============ ============
Basic net loss per share (0.04) (.09)
============ ============
The accountants' report and accompanying notes are an integral part of the financial statements.
4
Nathaniel Energy Corporation
STATEMENTS OF CASH FLOWS
or the Period ended
March 31, March 31,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,333,347) $(2,432,121)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Amortization --
Depreciation 58,754 15,987
Allowance for loss on equipment 13,207 --
Non cash compensation 200,000 2,371,001
Changes in assets and liabilities: --
(Increase) decrease in accounts receivable 61,917 5,797
Increase in inventory 1,360 --
Increase (decrease) in accrued expenses 184,444 12,181
Increase (decrease) in accounts payable (20,367) 7,248
----------- -----------
Net cash flows from operating activities 499,315 2,412,214
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Keyes Helium Project --
Purchase of equipment (48,216) (175,268)
Loans to Ripetouch Greenhouse (5,443) (3,233)
----------- -----------
Net cash flows from investing activities (53,659) (178,501)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of debt 121,982 195,355
Stock issued for cash 600,000 --
Debt repaid (44,523) (9,060)
Minority interest 19,920
----------- -----------
Net cash flows from financing activities 697,379 186,295
----------- -----------
NET INCREASE (DECREASE) IN CASH (190,312) (12,113)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 202,057 (9,233)
CASH AND CASH EQUIVALENTS, END OF YEAR 11,745 (21,346)
=========== ===========
CASH PAID FOR INTEREST 182,062 20,441
=========== ===========
CASH PAID FOR INCOME TAXES -- --
=========== ===========
NON CASH FINANCING ACTIVITIES
Conversion of debt to shares $ 200,000 $ 2,371,001
=========== ===========
The accountants' report and accompanying notes are an integral part of the financial statements.
5
National Energy Corporation
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies and Nature of Operations
Description of Business
National Energy Corporation ("the Company") is in the business of developing
energy reclamation processes and recycling, including the operation of used tire
recycling and collection services since 1997. Until November 1998, the Company
operated a tire recycling and collection service in Kansas City, Missouri. In
November 1998, the Company sold that recycling and collection business and
purchased a facility in Hutchins, Texas which includes 26 acres of property used
for tire disposal and reclamation. During 2002 and 2003, the Company operated
the Hutchins facility, as well as engaging in the development of alternative
energy conversion processes and related technologies. The Company has an
exclusive license to a patented tire combustor.
The Company is the successor to Nathaniel, Ltd., an entity incorporated in the
State of Colorado on February 24, 1992. In 1998, Nathaniel, Ltd. was
recapitalized via stock exchanges with two publicly traded shell companies, as
more fully described in Footnote 3.
Business Segments
Nathaniel's operations are presently conducted in a single, energy division,
including tire reclamation and combustor services.
Investment
Investment in certain companies in which the Company owns a 20% or less interest
are accounted for under the cost method.
Revenue Recognition
The Company charges tipping fees to the public for disposing of waste tires.
These fees are fully earned and recognized when the tires are accepted at the
facility. The Company also earns revenue from the sale of processed tire shreds.
This revenue is recognized when the shreds are delivered to the end user. The
Company enters into contracts for the delivery of tire shreds. These contracts
specify quality standards for attributes such as shred size and steel content.
The Company's customers accept shipments of tire shreds subject to these
specifications. The Company employs internal quality control processes to reduce
the risk of significant returns and allowances of tire shreds sold. Sales
returns are accrued based on the Company's historical experience.
Cash and Cash Equivalents
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less, to be cash equivalents.
Property and Equipment and Related Depreciation
Property and equipment are recorded at cost. Depreciation is provided using the
straight-line method. Estimated useful lives of the assets used in the
computation of depreciation are as follows:
Machinery and equipment 5 - 7 years
Buildings 25 years
Vehicles 5 years
6
Licenses and Goodwill
Licenses and goodwill are intangible assets recorded at their purchased cost.
Intangible assets deemed to have an indefinite useful life will be subject to an
annual review for impairment using fair value measurement techniques. Pursuant
to FASB 142, the Company will perform its annual impairment review during the
fourth quarter each year, commencing in the fourth quarter of 2002. Intangible
assets such as licenses having a definite term are amortized over the useful
life.
Inventory
Inventory consists of processed and partially processed tire shreds, which are
held for sale to end users. At March 31, 2003 and December 31, 2002, the Company
had contracts to sell processed tire shred at an agreed upon per ton price. Tire
shred inventory is valued at its cost to produce, but in an amount not to exceed
realizable value, determined with respect to existing contractual sales prices,
less costs to complete the tire processing.
Advertised Costs
The Company expenses non-direct advertising costs as incurred. The Company did
not incur any direct response advertising costs during the periods ended March
31, 2003 and March 31, 2002 to be capitalized and deferred to future periods.
Net Income (Loss) Per Common Share
SFAS No.128, "Earnings Per Share" requires presentation of basic (loss) or
earnings per share ("Basic EPS") and diluted (loss) or earnings per share
("Diluted EPS").
The computation of basic loss per share is computed by dividing loss available
to common stockholders by the weighted average number of outstanding common
shares during the period. Diluted loss per share gives effect to all dilutive
potential common shares outstanding during the period. The computation of
diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings. During the
periods presented, the Company had no potentially dilutive securities
outstanding.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Equity Issued for Non-cash Compensation
The Company values shares issued in considered of services or other non-cash
compensation at a price paid in contemporaneous cash sales of equivalent
securities. If no contemporaneous cash sales exist, the Company values non-cash
equity issuances at the fair value of the goods or services received in
exchange. Options or warrants issued to non-employees and consultants are
recorded using the fair value method, based on a Black-Scholes option pricing
model. The Company uses the intrinsic value method to account for options issued
to employees.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, short-term
debt and accounts payable approximate cost because of the immediate or
short-term maturity of these financial instruments. The fair value of the
Company's long-term note and interest receivable from officers and related
parties does not significantly differ from cost at March 31, 2003.
7
Income Taxes
Under SFAS 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are generally determined based on the difference between the
financial statements and the tax bases of assets and liabilities using enacted
tax rates in effect for the years in which the differences are expected to
reverse. Recognition of a deferred tax asset is allowed if future realization is
more-likely-than-not. The Company has provided a full valuation allowance for
its deferred tax asset because its realization is not considered
more-likely-than-not.
Stock-Based Compensation
The FASB's SFAS No. 123, "Accounting for Stock-Based Compensation" encourages,
but does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, compensation cost for the
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. During the periods presented, the Company had no stock
options subject to the provisions of applicable accounting standards. (See
"Stock Option Plan", below.)
Long-Lived Assets
In accordance with the Financial Accounting Standards Board's ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the Company reviewed its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the related carrying amount may not be recoverable. Recovery of
assets to be held and used is measured by a comparison of the carrying amount of
the assets to the future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less the cost to sell.
Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board FASB issued Statement of
Financial Accounting Standards FASB No. 145, "Rescission of SFAS Statements No.
4, 44, and 64, amendment of FASB Statement No. 13, and the Technical
Corrections". SFAS No. 145 rescinds Statement No. 4, which required gains and
losses from extinguishments of debt to be classified as an extraordinary item,
net of tax. SFAS 145, when adopted, will require applying the criteria of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in
determining how to classify gains and/or losses resulting from extinguishments
of debt. The effective date of adoption of SFAS No. 145 is for fiscal years
beginning after May 15, 2002. The Company does not expect the adoption of SFAS
No. 145 to have a material effect on its financial position o results of
operations.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated With
Exit of Disposal Activities". This Statement requires the recognition of costs
related to exit or disposal activities at the time they are incurred, rather
then the previously accepted method of recognizing such costs at the commitment
date of such activities. SFAS 146 is effective for such activities entered into
or modified after December 31, 2002. The provision of this statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated by management. As a
result, the Company cannot determine the potential effects that adoption of SFAS
146 will have on the financial statements with respect to future disposal
decision, if any.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure", which amended Statement No. 123,
"Accounting for Stock Based Compensation". SFAS No. 148 provides for the use of
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock based compensation. It also mends the disclosure
requirements of Statement No. 123 to require prominent disclosure of the
8
Company's method of accounting for such compensation and the effect of the
method used on reported results in annual and interim financial statement. SFAS
No. 148 is effective for annual periods ending after December 15, 2002 and
interim periods beginning after December 15, 2002. The Company does not expect
the adoption of SFAS No. 148 to have a material effect on its financial position
or results of operations. See "Stock Option Plan" below.
2. Going Concerns
The Company has experienced repeated operating losses, resulting in minimal
capital resources presently available to meet obligations which normally can be
expected to be incurred by similar companies, and to carry out its planned
operations. It has deficiency in working capital at December 31, 2002
approximating $6.8 million, a deficiency in stockholders equity approximately $4
million. It has a deficiency in working capital at December 31, 2002,
approximately $6.8 million and a deficiency in shareholders' equity of
approximately $4.0 million.
Management has negotiated financing arrangements to provide cash flow for the
Company's continued operations. For the first three quarters of 2002, the
Company arranged debt financing of approximately $3,500,000 which was used to
acquire equipment and an interest in a Helium project, which is expected to
generate positive cash flow (see Note 10). In addition, the Company has both
formally and informally renegotiated repayment terms for existing obligations
which are currently in default. Cash flow is supplemented by operating cash
flows from the Company's Texas tire facility.
Management's Plan Going Forward
Management plans to increase revenues in its facilities in its' Texas tire
recycling plant and in its Oklahoma helium plant and gathering station by
expanding current operations. The Hutchins, Texas tire reclamation facility has
been outfitted to 90% of its maximum manufacturing capacity by means of new
equipment purchased in 2002, innovative design and strategic placement of
existing equipment. These developments will allow the facility to process the
maximum tire quantities per pro-forms projections that will increase its revenue
streams. On April 03, 2003 the Nathaniel Energy Corporation acquired the
remaining 81.45% of Keyes Helium Company, LLC from Colorado Interstate Gas/El
Paso. In addition the Company purchased the Keyes Gathering System and the
Sturgis Gas Processing Plant and compressor station. These facilities are
located in Keyes, OK on a 14,924-acre site. Keyes Helium Plant operates a
three-stage helium extraction, purification and lignification plant that is
strategically connected on the Bureau of Land Management's (EIM) helium reserve
and pipeline system making it beneficial for companies to utilize our services.
On April 3, 2003 the Company executed a "Take and Pay" Operation Agreement with
Colorado Interstate Gas (CIG) for a minimum three year term for the processing
and sale of low Btu gas for their pipeline needs. The Company is negotiating new
leases to add revenues to the already profitable operation that will increase
cash flow to the Company. The Company has entered into negotiations with third
party companies (Producers) for gathering and processing gas from additional
wells and gathering fields.
3. Recapitalization
On July 3, 1998, the Company's predecessor, Nathaniel, Ltd., ("Nathaniel") and
G-VII Energy Corp., completed an Agreement and Plan of Reorganization whereby
G-VII Energy Corp., issued 4,500,000 shares of its common stock in exchange for
all of the outstanding common stock of Nathaniel. Immediately prior to the
Agreement and Plan or Reorganization, the Company had 50,309 shares of common
stock issued and outstanding. In addition, the Company issued an additional
456,075 shares of common stock, and paid $155,000 in fees and assumption of
liabilities. Nathaniel, Ltd., was incorporated in the state of Colorado on
February 24, 1992, but did not commence business until 1997.
On December 1, 1998, the Company merged with G-VII Energy Corp. In connection
with the merger, the Company issued 6,956,384 of its common stock in exchange
for all of the outstanding common stock of G-VII Energy Corp. Immediately prior
to the agreement, the Company had 51,000 shares of common stock outstanding.
G-VII Energy Corp., was incorporated in the state of Delaware on March 26, 1987.
Prior to its merger with Nathaniel, Ltd., activities were limited to its
formation and obtaining initial capitalization.
Ajax Reinsurance Limited was incorporated in the state of Delaware on January
18, 1996. Prior to its merger with Nathaniel, Ltd., in December 1998, its
activities were limited to formation and obtaining initial capitalization.
The acquisitions were accounted for as recapitalizations of Nathaniel, Ltd.,
because the shareholders of Nathaniel controlled the Company after the
acquisitions. Therefore, Nathaniel, Ltd., is treated as the acquiring entity.
9
There was no adjustment to the carrying value of the assets or liabilities of
Nathaniel, Ltd., in the exchanges. Ajax Reinsurance Limited is the surviving
entity for legal purposes, the Nathaniel, Ltd., is the surviving entity for
accounting purposes.
Acquisitions
On August 27, 2002 the Company acquired a 100% interest of Michigan Pipeline &
Processing Corp. (MPPC) for $1,450,000. MPPC owns 100% of the stock of MICNIC
has an 18.55% interest. Keyes Helium Company, LLC.
5. Investment in Keyes Helium Company, LLC
On August 26, 2002, the Company and an outside investor acquired 100% of the
outstanding common shares of MICNIC Rodeo Gathering, Inc., an 18.55% limited
partner in Keyes Helium Company, LLC, for $1,450,000. The investor retained 49%
of the MICNIC Rodeo Gathering, Inc., common stock, and the Company retained 51%.
The investor provided total cash of $1,800,000 to finance the acquisition.
Including loans related to this project, this individual holds $3,950,000 of the
Company's debt, and converted $1,350,000 of debt to equity.
6. Property and Equipment
Following is a summary of property and equipment at March 31, 2003 and December
31, 2002:
Machinery and equipment $ 1,410,220 $ 1,405,109
Buildings 100,000 100,000
Vehicles 229,448 212,835
Land 290,000 290,000
Furniture and Fixtures 18,759 18,759
Land Improvements 80,167 79,672
----------- -----------
2,128,594 1,106,375
Less: accumulated depreciation (354,573) (296,819)
----------- -----------
$ 1,774,021 $ 1,809,556
----------- -----------
7. Note Payable
(a) At December 31, 2001, the Company had $106,50 in bridge financing payable
to an individual with interest at 12%. The Note contained various
conversion rights between $2.35 per share and $3.125 per shares. During
2002 the Note as converted to stock, (40.925 shares of $.001 par value
common stock) with full registration rights due at the time of any
registration by the Company. In addition, upon conversion, the noteholder
will receive warrants to purchase a like number of share at the same price
as the conversion price. This note was converted in November 2002.
(b) As of December 31, 2001 the Company had 1,350,000 of notes payable to an
individual. As of April 19,2002, the holder of these notes agreed to
convert the entire balance plus interest into 8,250,000 shares of common
stock. Under SFAS No. 6, at December 31, 2001 these notes are presented at
long-term obligations of the Company.
(c) At December 31, 2001, the Company was obligated under three eighteen-month
promissory notes payable (in default) to individuals with a total face
amount of $72,000. Interest as payable quarterly at rates of 10-11% until
the due date in September 2001, after which a 15% interest rate went into
effect. The Company paid a broker loan acquisition fee totaling $7,894 and
issued warrants of the purchase of 8,750 shares of common stock with a fair
value of $5,688 in connection with these loans. The warrants were not
exercised and expired in September 2001. During 2002 one of the notes for
$50,00 was repaid accordingly the balance of $32,000 remains outstanding as
of December 31, 2002.
(d) At December 31, 2002 and 2001, the Company was obligated under a 12%
unsecured demand note with an outstanding balance of $18,250.
10
(e) At December 31, 2001, the Company was obligated to the wife of an employee
under a 12% promissory note due December 11, 2001, with an outstanding
balance of $40,000. In July 2002, this note, plus accrued interest thereon,
was converted at the option of the holder into 205,882 shares of stock at
$0.17 per share. The former noteholder also has warrants outstanding for
205,882 shares at $0.17.
(f) In May 2002, the shareholder referred to in (b) loaned the Company an
additional $1,650,000. The new loan carries a 10% interest rate and
requires monthly principal and interest payments of $25,000 per month
beginning in September 2002 and ending September 2003, after which the
required monthly installments will be $50,000 until paid in full. The
shareholder may at any time convert the outstanding balance due on this
note to the Borrower's Common Stock at the rate of 50% of the average of
the BID and ASK price of Borrower's Common Stock at the close of trading,
averaged for the ten (10) days prior to the effective date of the calling
of this note conversion to the Borrower's Common Stock. (g) At December
2002, the Company was obligated to a shareholder under a 5% promissory note
due upon demand. The note plus accrued interest thereon, was converted at
the option of the holder at $0.50 per share for the $100,000 debt. (h) As
of March 31, 2003, the Company was obligated to a shareholder under an 8.0%
unsecured demand note with an outstanding balance of $65,000.
The Company has the following installment debt outstanding at March 31, 2003 and
December 31, 2002:
2003 2002
---- ----
13.75% installment note, collateralized by
trailer, monthly payments of $849 principal plus
interest through October 2003 11,866 13,956
13.75% installment note, collateralized by
trailer, monthly payments of $1,016 principal plus
interest through May 2002 2,101 1,940
4.5% installment note, collateralized by
equipment, monthly payments of $2,531 principal
plus interest through September 2007 118,400 118,400
22.56% installment obligation, collateralized by
equipment, monthly payments of $1,397 principal
plus interest through January 2006 36,302 38,367
14% installment note, collateralized by land and
equipment, monthly interest only payments of
$2,567 principal plus interest due July 1, 2003 220,000 220,000
10.25% installment note, collateralized by
vehicle, monthly payments of $730 principal plus
interest through August 2004 12,068 13,860
1.90% installment note, collateralized by
equipment, monthly payments of $707 principal plus
interest through November 2005 22,765 24,771
8.45% installment note, collateralized by
equipment, monthly payments of $454 principal plus
interest through November 2006 20,927 22,130
10.58% installment note, collateralized by
equipment, monthly payments of $3,231 principal
plus interest through February 2005 137,321 143,242
9.50% installment note, collateralized by
equipment, monthly payments of $1,148 principal
plus interest through March 2004 13,091 16,175
8.45% installment note, collateralized by truck,
monthly payments of $663 principal plus interest
through November 2007 30,491 --
11
Total $ 625,332 $ 612,871
Current Portion (313,582) (320,540)
-------- ---------
Long-term Portion $ 311,750 $ 292,331
========= ==========
Maturities of long-term installment debt are as follows:
December 31, Amount
------------ ------
2003 $ 90,187
2004 76,725
2005 83,473
2006 70,156
Thereafter --
--------
$320,541
========
8. Income Taxes
The components of the provision for income taxes are as follows:
For the years ended December 31, 2002 2001
---- ----
Current tax expense (benefit) $ 1,836,000 $ (95,000)
U.S. federal X X
Deferred tax (Income)
U..S. federal - (552,000)
------------
Total deferred - -
------------ ----------
Total tax provision (benefit)
from continuing operation $(1,836,000) $ (647,000)
=========== ==========
The actual and expected tax rates are similar for both years.
The Company's deferred tax assets and liabilities as of December 31, 2002 and
2001 are as follows:
2002 2001
---- ----
Deferred income tax assets $1,166,000 $3,002,200
Due to net operating loss carry forwards 552,000 552,000
Due to deductible temporary differences
Loss valuation allowance (1,719,000) (3,554,000)
---------- ---------
Total deferred income tax asset $ - $ -
The increase in the valuation account approximates $1,836,000
As of December 31, 2002, the Company has approximately $9,000,000 in net
operation loss carry forwards available to offset future taxable income, and
expiring between 2018 and 2022. A portion of these losses may be limited under
the change in control provisions of Internal Revenue Code Section 382
12
9. Stockholders' Equity
Preferred Stock
The Board of Directors may authorize the issuance of up to 2,000,000 shares of
$0.001 par value Preferred Stock from time to time in one or more series and
shall have such voting, redemption, liquidation and dividend rights as the Board
may deem advisable. As of December 31, 2002, no preferred series shares had been
designated by the Board.
Common Stock
Effective April 24, 2002, the Company increased it authorized common shares,
$0.001 par value, from 20,000,000 to 75,000,000, which is shown retroactively to
December 31, 2001 and 2002.
Common Stock Purchase Warrants
At December 31, 2002 and 2001, the Company had outstanding 500,000 common stock
purchase warrants exercisable through December 2004 at a price of $3.00 per
share and 205,882 at $0.17. The options are exercisable at date of issuance.
10. Related Party Transactions
The Company has paid certain expenses related to site clean up on behalf of Ripe
Touch Greenhouse, LLC, ("RTG") an entity controlled by the Company's president.
The balance receivable at March 31, 2003 and December 31, 2002 was $157,925 and
$152,482 respectively. The advances are secured by an assignment of the assets
of RTG and are non-interest bearing. The majority of the receivable relates to
payments made on behalf of RTG for the processing and removal of tires from
RTG's property in Calhan, Colorado. The Company expects to collect these monies
from RTG out of proceeds from the sale of bald tire shreds processed from the
property, which have been assigned to Nathaniel. The Board of Directors of the
Company has also approved the acquisition of all of the assets and liabilities
of Ripe Touch Greenhouse for stock. The details of this proposed acquisition
have not been finalized.
Expenses incurred of a site clean up over the period ended December 31, 2002 was
$115,787. The balance of the liability at March 31, 2003 and December 31, 2002
was 101,118 and $74,351 respectively (see Note 3.) The advances are informal as
to terms, are unsecured, and are non-interest bearing., in the caption wages
payable.
The Company issued to its treasurer 1,000,000 shares of its common stock in July
2001 at $0.17 per share, for services rendered.
Intellectual Property
Nathaniel Energy owns two U.S. patents, the U.S. application for a patent, which
is scheduled to issued in January 2003 and a European patent application
covering the Thermal Combustor technology. Nathaniel Energy's ownership of
technology is by assignment from Stanley Abrams, Nathaniel Energy's Chief
Executive Officer. These patents are and patent applications are for utility
patents directed to devices and methods of uses. The two U.S. patents expire
September 6, 2011 and December 4, 2012, respectively, while the patent expected
to issue 2003 will have a life of seventeen years from the date of issue.
Concurrent with an in consideration for the assignment of the technology in July
1998, Nathaniel Energy entered into a companion agreement with Messrs. Stanley
and Brett Abrams which requires a reassignment of the Thermal Combustor
technology to them in the event either one or neither of them is not fully
employed by Nathaniel Energy as an officer, Stanley as president and chief
executive officer, Brett as a vice president and chief operating officer and
both as directors. Furthermore, this companion agreement provides for a
reassignment of the technology to Messrs. Abrams in the event Nathaniel Energy
ceases business operations or becomes financially bankrupt. Nathaniel Energy and
Messrs. Abrams intend to examine the desirability of replacing and may replace
the assignment of ownership in the technology to Nathaniel Energy with the grant
by Messrs. Abrams of a perpetual, non-expiring, royalty free license to
Nathaniel Energy subject to automatic termination upon the occurrence of any one
of the events that would now require Nathaniel at the present time to reassign
the technology to Messrs. Abrams. Counsel has suggested to Messrs. Abrams and
Nathaniel Energy that a license may be a more desirable and effective means of
achieving the results intended by all parties than is achieved by the existing
assignment and companion agreement, particularly in the event of business
cessation or bankruptcy.
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11. Economic Dependency - Major Customer
During 2002 and 2001, the Company's primary sales are made through several local
customers an two major users of its Tire Derived Fuel (TDF). Th3e two major
users represent approximately 20% of its Tire Reclamation sales activities for
both years.
12. Consulting Agreement
On March 1, 2002 Alternate Capital, LLC (Consultant) agreed to provide
consulting services to the Company for 13,500,000 Company shares representing at
least 50% of the total outstanding stock of the Company on a fully diluted
basis, including, but not limited to issuances of options, warrants, and similar
stock rights, etc. The Consultant distributed these shares among its members in
proportion to their ownership interest in the Consultant. These shares are
unregistered and are subject to restrictions on transferability under applicable
securities laws. The term of the agreement is for 25 years. Financing services;
The consultant agreed to provide or arrange, for a third party solicited by the
consultant, to provide at least on of the following for the benefit of the
Company within 14 months (from March 1, 2002); (a) arranging for $650,000, or
greater, of purchase money mortgage financing to purchase certain equipment, (b)
providing for a lease arrangement for such equipment, (c) arranging financing
for a financial project for the Company or in which the Company has a financial
interest.
In consideration for the services the Consultant has rendered and shall render
to the Company, the Company shall pay to the Consultant, a continuing
Consideration Fee equal to ten percent (10%) of Company's pre-tax profits and as
well any as subsidiary the Company owns at lease one (1) percent f , before
depreciation and amortization and before deductions for stock based compensation
(including, but not limited to stock options) and before nay non-cash
expenditures. Such Consideration Fee, to the extent there is a profit, shall be
paid to Consultant in quarterly installments within sixty (60) days after each
calendar quarter, with a yearly adjustment after the annual financial are
completed, but not later than April 15 of the year following the year. Provided,
that the Consideration Fee for calendar year 2002 shall be payable in a single;
payment not later than April 15, 2003.
The Company grants to the Consultant a right of first refusal on all funding the
Company seeks, whether in the form of loans or capital infusion. The Company
will provide to the Consultant notification of such funding needs and the
Consultant shall have twenty (20) days after receipt of such notification to
provide to the Company a Letter of Intent, with the proposed term of such
funding.
Until a certain not for up to $800,000 is paid, the Company and the Consultant
agree not to enter into any agreements or transactions which could or may causes
the Consultant to fail to maintain at least fifty percent (50%) of Company's
outstanding shares on a fully diluted basis. If the Company does issue (in any
fashion whatsoever) any additional shares, warrants, or options after the date
hereof, the Company agrees to give Consultant an equal or greater number of
shares that is sufficient for Consultant to maintain ownership of at least fifty
percent (50%) of Company's outstanding shares on a fully diluted basis. For the
purposes herein, fully diluted shall include, but not be limited to issuances of
options, warrants, and similar stock rights, etc.
Since the note was paid the anti-dilution clause is not longer effective.
In connection with the Consulting Agreement, the Consultant agreed to a
$2,000,000 penalty if the Consultant did not provide funding for Nathaniel
Energy Corporation (arranging financing for a financial project) in the
Financing Services section of the agreement. In connection with a "Compliance
Acknowledgement" of June 7, 2002 the Consultant shall be permitted to retain the
13,500,000 share of the Company's common stock without any penalty related
thereto, and the Company agrees that it has no right, title or interest
whatsoever in said shares of the Company's common stock.
14
13. Commitments and Contingencies
Nathaniel Europe Limited
On December 10, 1999m the Company entered into a proposed agreement with
McCormack consultants ("MCC") to form an Irish based company to be known as
Nathaniel Europe Limited ("NEL"). Under the terms of the proposed agreement, the
Company was required to contribute to NEL a thermal combustor capable of
processing 500,000 tons of solid waste material per year. In addition, the
Company was required to provide NEL with a cash investment of $350,000 and
assign rights to the use of its technology for Ireland and the United Kingdom.
In exchange for the above plus the issuance of additional shares to equal 20% of
shares of the Company (2,560,614 shares of common stock as of December 31,
1999), the Company was to receive 20% of the initially issued shares of NEL, as
well as 40% of the net revenues of NSC for the first 24 months of the
operations. Subsequent to December 10, 1999, MCC assigned its interest in the
contract to Life Energy Corporation . NEC takes the position that such
assignment became invalid because of the non-compliance of performance on the
part of MCC. On February 4, 2000 MCC and associates met in the offices of NEC
and changed all terms and conditions of the original proposed Agreement and the
NEC board adopted minutes reflecting the changes to provide for performance on
the part of MCC, which they never complied to or completed again making the
proposed Agreement null and void.
After a series of disagreements as to the responsibilities of each of the
parties to NEL agreement, Life Energy Corporation notified the Company that they
considered the Company to be in violation of several provisions of that
agreement. Nathaniel Energy disputes this claim. On July 18, 2000 and again on
October 6, 2000 Nathaniel Energy Corporation's attorney notified McCormack and
Consultants that the agreement dated December 10, 1999 between Nathaniel Energy
Corporation and McCormack Consultants was invalid and non-enforceable due to
fraudulent misrepresentations on the part of McCormack and non-performance on
the terms of the agreement. Nathaniel Energy's counsel demanded the return of
the Nathaniel Combustor and properties that were being unlawfully held by
McCormack et al. On December 31, 2001, Life Energy Corporation is maintaining
physical possession of the combustor equipment in Ireland. The Company has
investigated its options for reclaiming the equipment, and intends to vigorously
contest Life Energy's claims. The likelihood of successful recovery of the
combustor equipment and the extent of potential damage to its condition cannot
be determined at this time. The accompanying financial statements of the year
ended December 31, 2001 include a charge to operations of approximately $470,000
to reflect this uncertainty, representing a charge off of the net carrying value
of the combustor equipment.
Other Litigation and Claims
The Company is a defendant in AMB Fabrication and Machining, LLC, vs. Nathaniel
Energy Corporation, Case No. 2002 CV 0094, District Court, County of Douglas,
Colorado. The plaintiff alleges damages of approximately $41,000 for unpaid
labor and materials invoices. The Company is defending on the basis that the
plaintiff's claims are partially paid and the balance claimed is unreasonable.
The unpaid amount is included in accounts payable at December 31, 2002.
The Company is subject to a variety of litigation and claims relating to past
due payments for goods and services. The Company is in the process of
negotiating settlement arrangements for these items, and the estimated
settlement amounts are recorded on the books in accounts payable.
14. Subsequent Events
On April 03, 2003 the Nathaniel Energy Corporation acquired the remaining 81.45%
of Keyes Helium Company, LLC from Colorado Interstate Gas/El Paso for an amount
of $8,658,855.12. In addition, the Company purchased the Keyes Gathering System
and the Sturgis Gas Processing Plant and Compressor Station for an amount of
$1,288,360, both of which are subsidiaries of El Paso Gas.
On April 03, 2003 Keyes Helium Company, LLC was purchased by Nathaniel Energy
Oklahoma Holding Corporation (NEC OK) for $8,658,855. This Corporation is owned
51% by Nathaniel Energy Corporation.
15
Item 2. Management's Discussion and Analysis of Results of Operations,
Liquidity and Financial Condition.
Results of Operations for the Period ended March 31, 2003
For the period March 31, 2003 revenue decreased from $135,906 in 2002, to
$104,915, a decrease of $30,994 or 22.8 percent. This decrease in revenue is
primarily due to Nathaniel Energy's suspension of new tire receipts in the
Dallas facility during the months of April through December 2002. This
suspension was a result of making design changes required by Texas for the
re-issuance of permits to operate the facility. The decrease was partially
offset by increased sales of tire shreds from existing inventory and the fact
that the company was able to ramp up tire receipts during the period ended March
31, 2003. The Company estimates it has achieved sixty percent (60%) of tire
receipts of the same period in 2002.
Cost of sales increased from $79,039 in 2002 to $147,464 in 2003, a increase of
$68,425, or 86.5 percent. The increase is primarily due to an increase in wages
and equipment repairs during the period. Selling general and administrative
expenses decreased $1,347,204 or 55 percent from $2,443,546 for the period ended
March 31, 2002, to $1,096,342 in 2003. This is primarily due to the recording of
$2,698,449 in non-cash compensation related to the issuance of the Company's
common stock to financial consultants in the third quarter of 2002, as compared
with $200,000 in non-cash compensation recorded for the corresponding period of
2003. Other selling, general and administrative expenses increased, from $96,950
to $896,342, reflecting an increase in travel, professional fees, marketing and
Communications; encompassing brand awareness, positioning, aggregation of
content, research analysis, design and functionality of website and collateral
material.
Interest expense increased from $20,441 in the period ended March 31, 2002 to
$182,062 in comparable period of 2003, which is due to the additional $4,128,000
in debt financing added during 2002.
Liquidity and Capital Resources
As of March 31, 2002, Nathaniel Energy has outstanding notes payable of
$4,095,470, including installment notes with financial institutions secured by
equipment totaling $654,000, with an average interest rate of 11.1%. The
remaining $4,196,000 in outstanding notes consist of secured and unsecured term
loans from individuals with an average interest rate of 12.1%. Of this amount,
$247,000 is due immediately since the notes are past their scheduled due dates.
The remaining $3,950,000 is to be repaid in varying installments in 2003.
16
Item 2. Management's Discussion and Analysis of Results of Operations,
Liquidity and Financial Condition (continued)
Nathaniel Energy has cash of $11,745 at March 31, 2003. This amount is earmarked
for the purchase of equipment and additional investment in Keyes Helium Company,
LLC.
Nathaniel Energy's investment in Keyes Helium through its majority owned
subsidiary, as of March 31, 2003, represented an 18.55% interest in Keyes
Helium, which is expected to provide net cash flow from production of
approximately $480,000 per year to the subsidiary. Nathaniel Energy has
committed to use eighty percent of this cash flow to retire its obligation to a
non-management affiliate who provided funding for the acquisition.
The following is a summary of Nathaniel Energy's cash flows from operating,
investing, and financing activities during the periods indicated:
Period ended March 31, (Rounded)
2003 2002
---- ----
Operating activities $ 499,315 $2,412,214
Investing activities (53,659) (178,501)
Financing activities 697,379 186,295
--------- ----------
Net effect on cash $(190,312) $ (12,113)
========= ==========
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PART 2: OTHER INFORMATION
Item 1: Legal Proceedings
Other Litigation and Claims:
The Company is a defendant in AMB Fabrication and Machining, LLC, vs. Nathaniel
Energy Corporation, Case No. 2002 CV 0094, District Court, County of Douglas,
Colorado. The plaintiff alleges damages of approximately $41,000 for unpaid
labor and materials invoices. The Company is defending on the basis that the
plaintiff's claims are partially paid and the balance claimed is unreasonable.
The unpaid amount is included in accounts payable at December 31, 2002.
The Company is subject to a variety of litigation and claims relating to past
due payments for goods and services. The Company is in the process of
negotiating settlement arrangements for these items, and the estimated
settlement amounts are recorded on the books in accounts payable.
Item 2: Changes in Securities and Use of Proceeds
Not Applicable
Item 3: Defaults Upon Senior Securities
Not Applicable
Item 4: Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5: Other Information
Subsequent Events:
On April 03, 2003 the Nathaniel Energy Corporation acquired the remaining 81.45%
of Keyes Helium Company, LLC from Colorado Interstate Gas/El Paso for an amount
of $8,658,855.12. In addition, the Company purchased the Keyes Gathering System
and the Sturgis Gas Processing Plant and Compressor Station for an amount of
$1,288,360, both of which are subsidiaries of El Paso Gas.
On April 03, 2003 Keyes Helium Company, LLC was purchased by Nathaniel Energy
Oklahoma Holding Corporation (NEC OK) for $8,658,855. This Corporation is owned
51% b Nathaniel Energy Corporation.
In addition, the Company elected George Cretecos as a new Director to the Board
and appointed him the new COO of the Company operations. The Board approved the
hiring of James Woodley as the company's interim CFO to become effective on May
27, 2003. Mr. Woodley will replace Gene Bailey as CFO. Mr. Bailey has been
appointed to the position of Vice President of Helium and Gas Operations.
(a) EXHIBITS
99.1 Certificate of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
99.2 Certificate of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATHANIEL ENERGY CORPORATION
(Registrant)
Date: May 15, 2003
By: /s/ Stan Abrams
----------------------------------
Stan Abrams, CEO
Nathaniel Energy Corporation
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