UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 ENDED
SEPTEMBER 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________to ___________________
Commission File Number: 33-58972
NATHANIEL ENERGY CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 84-1572525
(State or other (IRS Employer Identification No.)
jurisdiction of
incorporation or organization)
8001 S. InterPort Blvd., Englewood, Colorado 80112
(Address of principal executive offices)
(303) 690-8300
(Issuer's telephone number, including area code)
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 __
--
There are 68,362,664 shares of common stock issued and outstanding as of
November 10, 2003.
Transitional Small Business Disclosure Format (check one) : Yes [ ] No [ X ]
NATHANIEL ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
TABLE OF CONTENTS
-----------------
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (un-audited)
Balance Sheet as of September 30, 2003 and December 30, 2002 2
Statements of Operations for the Three and Nine Months ended 3
September 30, 2003 and 2002
Statements of Cash Flows for the Nine Months ended 4
September 30, 2003 and 2002
Notes to Financial Statements 5-16
Item 2. Managements Discussion and Analysis 17
Item 3. Controls and Procedures 22
PART II. OTHER INFORMATION 23
The accompanying notes are an integral part of these consolidated financial
statements.
1
NATHANIEL ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
------------------- --------------------
(Unaudited)
Assets
Current assets:
Cash $ 1,020,557 $ 202,057
Accounts receivable 756,415 4,784
Inventory 249,400 248,040
Prepaid expenses 87,640 3,396
Advances receivable 18,344 25,550
------------------- --------------------
Total current assets 2,132,356 483,827
Property and equipment, net of accumulated
depreciation 11,826,976 1,809,556
Intangible assets, net 135,500 -
Cash restricted for property and equipment 199,970 -
Investment - 1,450,000
Related party receivables 285,795 226,833
Deposits 60,127 22,500
Other assets 35,417 16,367
------------------- --------------------
Total Assets $ 14,676,141 $ 4,009,083
=================== ====================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,359,787 $ 524,498
Accrued compensation 1,210,765 1,928,546
Accrued interest 1,306,698 496,563
Accrued property tax 105,057 -
Payroll liabilities 3,728 1,464
Notes payable, current portion 329,101 -
Notes payable - stockholders, current portion 120,359 4,416,011
------------------- --------------------
Total current liabilities 4,435,495 7,367,082
Long-term debt 253,360 292,331
Long-term debt, stockholder 15,097,215 -
------------------- --------------------
Total liabilities 19,786,070 7,659,413
------------------- --------------------
Minority interest - 26,358
------------------- --------------------
Stockholders' equity:
Common stock 38,363 36,913
APIC 8,764,763 6,682,704
Subscription receivable (175,500) (175,500)
Accumulated deficit (13,737,555) (10,220,805)
------------------- --------------------
Total stockholders' equity (5,109,929) (3,676,688)
------------------- --------------------
Total Liabilities and Stockholders' Equity $ 14,676,141 $ 4,009,083
=================== ====================
The accompanying notes are an integral part of these consolidated financial statements.
2
NATHANIEL ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIOD ENDED SEPTEMBER 20, 2003
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- ------------------ -------------- -----------------
Revenue $ 2,716,970 $ 82,536 $ 5,625,518 $ 230,346
Cost of revenue 2,834,531 222,142 5,672,998 385,168
-------------- ------------------ -------------- -----------------
Gross profit (loss) (117,561) (139,606) (47,480) (154,822)
Selling, general and administrative expenses 1,126,838 271,569 2,647,341 3,145,290
-------------- ------------------ -------------- -----------------
Loss from operations (1,244,399) (411,175) (2,694,821) (3,300,112)
Other income (expense)
Partnership income - - 20,733 -
Loss on disposal of equipment - - (13,207) -
Interest expense (320,597) (211,928) (882,021) (345,856)
Investment income 75 - 1,119 -
Other income - - 25,089 -
-------------- ------------------ -------------- -----------------
Loss before income taxes and minority interest (1,564,921) (623,103) (3,543,108) (3,645,968)
Income tax expense - - - -
-------------- ------------------ -------------- -----------------
Loss before minority interest (1,564,921) (623,103) (3,543,108) (3,645,968)
Minority interest 146,578 - 26,358 -
-------------- ------------------ -------------- -----------------
Net loss $(1,418,343) $ (623,103) $ (3,516,750) $ (3,645,968)
============== ================== ============== =================
Loss per share, basic and diluted $ (0.04) $ (0.02) $ (0.09) $ (0.13)
============== ================== ============== =================
Weighted average shares outstanding 38,362,664 36,066,524 38,087,664 29,021,984
The accompanying notes are an integral part of these consolidated financial statements.
3
NATHANIEL ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 and 2002
(UNAUDITED)
2003 2002
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,516,750) $ (3,645,968)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 479,557 85,133
Minority interest (26,358) -
Stock issued for services 845,000 2,511,200
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (207,119) 22,455
Inventory 260,017 (95,000)
Prepaid expenses (18,926) -
Advances receivable 7,206 -
Increase (decrease) in:
Accounts payable and accrued expenses 1,616,153 (52,007)
------------------- -------------------
Net cash flows from operating activities (561,220) (1,174,187)
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (37,627) -
Other assets (19,000) -
Cash restricted for property and equipment (199,970) -
Related party receivable (58,962) (53,480)
Acquisitions of assets, net of cash received (9,396,414) (2,331,177)
------------------- -------------------
Net cash flows from investing activities (9,711,973) (2,384,657)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 11,147,215 4,860,000
Repayments of notes payable (55,522) (729,152)
Stock issued for cash - 34,750
------------------- -------------------
Net cash flows from financing activities 11,091,693 4,165,598
------------------- -------------------
Net increase in cash 818,500 606,754
Cash, beginning of period 202,057 4,066
------------------- -------------------
Cash, end of period $ 1,020,557 $ 610,820
=================== ===================
Cash paid for:
Interest $ 71,886 $ 68,884
Income taxes - -
The accompanying notes are an integral part of these consolidated financial statements.
4
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
Note 1- Significant Accounting Policies and Nature of Operations:
Condensed footnotes:
As contemplated by the Securities and Exchange Commission instructions
to Form 10-QSB, the following footnotes have been condensed and
therefore do not contain all disclosures required in connection with
annual financial statements. Reference should be made to the notes to
Nathaniel Energy Corporation's annual financial statements set forth
in Form 10-KSB for the year ended December 31, 2002.
Unaudited Interim Financial Statements:
The accompanying unaudited interim financial statements, which include
the Company's 51% owned subsidiary, have been prepared by the Company
in accordance with generally accepted accounting principles pursuant
to Regulation S-B of the Securities and Exchange Commission. The
financial information has not been audited and should not be relied on
to the same extent as audited financial statements. Certain
information and footnote disclosures normally included in audited
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. Accordingly,
these interim financial statements should be read in conjunction with
the Company's financial statements and related notes as contained in
Form 10-KSB for the year ended December 31, 2002. In the opinion of
management, the interim financial statements reflect all adjustments,
including normal recurring adjustments, necessary for fair
presentation of the interim periods presented. The results of
operations for the nine months ended September 30, 2003 are not
necessarily indicative of results of operations to be expected for the
full year.
Description of Business:
Nathaniel Energy Corporation (the "Company") is a renewable energy
company that provides industry with an alternative energy equal to
that of fossil fuels. Its proprietary patented technology, the Thermal
Combustor(tm), is a 2-stage gasification system designed to combust
waste, biomass, tires and any other solid, carbon-based materials into
inexpensive electrical and thermal energy, while exceeding the most
stringent EPA and European Union regulations.
The Company's patented technology has three main global applications:
licensing, creating energy infrastructures and building mini power
plants. The Company intends to license the Thermal Combustor(tm)
technology to qualified companies, joint venture partners, and
distributorships. The Company intends to build energy infrastructures
that will produce special gases and byproducts. The Company intends to
build mini power plants for businesses that seek an independent source
of energy. These mini power plants are built at the businesses
premises ("in the fence") that can reduce the businesses dependence on
fossil fuels and power from the local utility. In some cases, the mini
power plants can become a businesses self sustained utility.
The Company has been in the business of developing energy reclamation
processes and recycling, including the operation of used tire
recycling and collection services, since 1997. Additionally, the
Company, in April 2003, completed the acquisition of a natural gas
processing facility in Keyes,
5
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
Oklahoma. The Company operates a 26 acre tire reclamation and
processing facility in Hutchins, Texas. In addition to operating the
Hutchins facility and the Keyes gas operations plant, the Company is
engaged in the development of alternative energy conversion processes
and related technologies and has an exclusive license to the patented
technology known as the Thermal Combustor(tm).
On April 3, 2003 the Company completed the acquisition of Keyes Helium
Company, LLC ("Keyes Helium") from Colorado Interstate Gas/El Paso
("CIG") (the Company purchased its initial interest in Keyes Helium on
August 27, 2002). It also acquired the Keyes Gathering System, Sturgis
Gas Processing Plant and Compressor Station. These facilities are
located on a 15 acre site in Keyes, Oklahoma. These facilities receive
and process natural gas, removing liquid gases and helium and then
sending the natural gas into a natural gas pipeline. The Company's
interest in Keyes Helium is through a 51% owned subsidiary, Nathaniel
Energy Oklahoma Holding Corporation ("NEC OK") that owns 100% of Keyes
Helium.
Business Segments:
The Company's operates two separate segments which are presently
conducted in three separate facilities:
- the tire reclamation and processing in Hutchins, Texas,
- the natural gas processing, gas liquids and helium
production in Keyes, Oklahoma and the alternate energy
engineering and corporate offices in Englewood, Colorado.
Critical Accounting Policies:
The financial statements include the accounts of Nathaniel Energy
Corporation and its subsidiaries. All material inter-company accounts
and transactions have been eliminated in consolidation.
Revenue Recognition:
The Company's tire reclamation and processing facility recognizes
revenue several ways, first when tires are accepted at the facility
("tipping fees") and secondly from the sale of processed tire shreds.
The revenues from tipping fees are fully earned when the tires are
accepted at the facility and the processed tire shred revenues are
recognized when the shreds are delivered to the end user. Internal
quality controls are in place to ensure that shreds meet the standards
required in contracts for the delivery of shreds. This quality control
reduces the risk of significant returns and allowances of tire shreds
sold. Sales returns are reprocessed and added back to the existing
tire shreds.
The Company's helium, liquid gas and natural gas revenues are
recognized in the period of delivery. The revenues are fully earned
when recognized. The processing plant has various types of quality
control equipment in place to ensure that the processed gases meet the
requirements of the Bureau of Land Management ("BLM"), the natural gas
pipeline operators and its wholesale gas customers. The Company has a
month-to-month contract in place with a natural gas marketing firm for
the natural gas delivered to the pipeline and a contract for the
helium processed. The natural gas liquids processed are currently sold
as produced.
6
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
The Company's alternate energy operation will recognize revenue from
the sale of Thermal Combustors(tm) based upon the terms of each
individual contract.
Property and Equipment and Related Depreciation:
Property and equipment are recorded at cost. Depreciation is provided
for using the straight-line method. Estimated useful lives of the
assets used in the computation of depreciation are as follows:
Machinery and equipment 5 - 20 years
Buildings 25 years
Vehicles 5 years
Gathering pipeline 20 years
Inventory:
The tire processing facility inventory consists of processed and
partially processed tire shreds, which are held for sale to end-users.
Small portions of the partially shredded tire inventory are being used
to augment incoming tires to meet the tonnage demand for our tire
shred sales. During the tire shredding process, additional higher wire
content shreds are being added to the inventory on a daily basis. This
results in a small drop in inventory that is being offset by the
additional volumes from ongoing production. Further processing of
higher wire content shreds being added into inventory cannot be
realized until the Company has additional funds to purchase machinery
dedicated to this purpose.
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. The gas processing facility has helium inventory stored in
the BLM facility in Texas; this inventory is based on the
last-in-first-out method. There was negligible helium inventory at
September 30, 2003. There is a contract with the BLM which encompasses
activity fees, compression fees, storage fees and an annual fee to the
BLM.
Reclassifications:
Certain expenses reported in the second quarter 2003 10QSB filing have
been reclassified to conform to the current period presentation. This
reclassification involves the movement of expenses from selling,
general and administrative to cost of revenue. These reclassifications
had no effect on net income or stockholders' equity.
Recent Accounting Pronouncements:
In January 2003, The FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", an interpretation of Accounting
Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements".
Interpretation No. 46 addresses consolidation by business enterprises
of variable interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not sufficient
to permit the entity to finance its activities without additional
subordinated support from
7
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
other parties, which is provided through other interest that will
absorb some or all of the expected losses of the entity; (ii) the
equity investors lack one or more of the following essential
characteristics of a controlling financial interest: the direct or
indirect ability to make decisions about the entities activities
through voting rights or similar rights; or the obligation to absorb
the expected losses of the entity if they occur, which makes it
possible for the entity to finance its activities; the right to
receive the expected residual returns of the entity if they occur,
which is the compensation for the risk of absorbing the expected
losses.
Interpretation No. 46 also requires expanded disclosures by the
primary beneficiary (as defined) of a variable interest entity and by
an enterprise that holds a significant variable interest in a variable
interest entity but is not the primary beneficiary. Interpretation No.
46 applies immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Interpretation No.
46 may be applied prospectively with a cumulative-effect adjustment as
of the date on which it is first applied or by restating previously
issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated. Management does not expect the adoption of Interpretation
No. 46 to have a material impact on the Company's consolidated
financial position or results of operations.
In June 2003, the FASB issued an Exposure Draft for proposed SFAS
entitled "Qualifying Special Purpose Entities ("QSPE") and Isolation
of transferred Assets", an amendment of SFAS No. 140 ("The Exposure
Draft"). The Exposure Draft is a proposal that is subject to change
and as such, is not yet authoritative. If the proposal is enacted in
its current form, it will amend and clarify SFAS 140. The Exposure
Draft would prohibit an entity from being a QSPE if it enters into an
agreement that obliged a transferor of financial assets, its
affiliates, or its agents to deliver additional cash or other assets
to fulfill the special-purposes entity's obligation to beneficial
interest holders.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies under what circumstances a contract with initial
investments meets the characteristics of a derivative and when a
derivative contains a financing component. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003. The
Company does not expect that the adoption of SFAS No. 149 will have a
significant effect on the Company's financial statement presentation
or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an
obligation of the issuer. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS No. 150 is to be implemented by reporting
the cumulative effect of a change in accounting principle for
financial
8
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
instruments created before the issuance date of SFAS No. 150 and still
existing at the beginning of the interim period of adoption.
Restatement is not permitted. The Company does not expect that the
adoption of SFAS No. 150 will have a significant effect on the
Company's financial statement presentation or disclosures.
Note 2-Basis of Presentation:
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course
of business. As reflected in the accompanying consolidated financial
statements the Company has experienced recurring operating losses,
capital resources presently available to meet and has a deficiency in
working capital at September 30, 2003 of approximately $2.3 million,
and a deficiency in stockholders' equity of approximately $5.1
million.
Management has undertake certain efforts to eliminate the deficiencies
adn generate positive cash flow, as described below.
In April 2003 the Company purchased Keyes Helium, Keyes Gathering
Systems and Sturgis Gas Processing Plant from CIG. It is anticipated
that this acquisition and related additions will generate positive
cash flow. The funds generated will be used to finance the Company's
operations and to pay down debt.
The Company, in October of 2003, significantly restructured its debt,
including conversion of $10 million of debt to equity. Additionally,
$795,000 of accrued interest has been incorporated into a new,
long-term note, and an additional $488,000 of accrued interest has
been forgiven. This restructuring will significantly reduce the cash
needed for debt repayment until 2005 and beyond.
The Company also has begun negotiations on new contracts to increase
revenue and cash flow. These contracts are discussed below.
Management's Plan Going Forward:
Management plans to increase revenues in its Texas tire recycling
plant and in its Oklahoma helium plant, gas gathering system and gas
processing plant 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 operate at maximum production
that will increase its revenue.
On April 3, 2003 the Company completed the acquisition of 51% of Keyes
Helium. In addition the Company purchased 51% of the Keyes Gathering
System and 51% of the Sturgis Gas Processing Plant and its associated
compressors. These facilities are located in Keyes, OK on a
14.924-acre site. The Keyes Helium plant operates a three-stage helium
extraction, purification and liquification process that is
strategically connected to the BLM helium reserve and pipeline system
making it beneficial for companies to utilize our services. Based on
the Keyes Helium Plant being connected on the BLM pipeline, the Plant
can deliver crude helium to buyers and receive third party crude
helium for toll-
9
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
processing. The strategic location of being second in line of a series
of plants connected to the BLM pipeline provides a higher line
pressure at the interconnect to insure reliable delivery of crude
helium to the Keyes Helium Plant. The pipeline connection, in and of
itself, provides the Company with a competitive advantage over others
that would have to truck the crude helium versus sending the gas flow
through the pipeline. On April 3, 2003 the Company executed a "Take
and Pay" Operating Agreement with CIG for a minimum three year term
for the processing and sale of low Btu gas for their pipeline needs.
The Company is negotiating toll-processing agreements to add revenues
to the helium operation. In addition, the Company has entered into
negotiations with third party companies (Producers) for the gathering
and processing of new volumes natural gas from additional wells and
gathering fields. The Company anticipates that these toll-processing
agreements would generate an estimated $760,000 of gross profit once
completed. The Company believes that the new natural gas agreements
would enable the Company to double the gas flow through the Gas
Processing Plant, generating new combined gross profit of
approximately $1.7 million per year, if completed in early 2004 as
anticipated. No assurance can be given that these agreements will be
reached or, if they are reached, that these estimated results will be
achieved.
Note 3-Acquisitions:
On August 27, 2002, the Company and an outside investor acquired 100%
of the outstanding common shares of MICNIC Rodeo Gathering, Inc.
("MICNIC"), an 18.55% limited partner in Keyes Helium, from Michigan
Pipeline & Processing Corp. The purchase price of the acquisition was
$1,450,000, all paid by the Company. The investor was allocated 49% of
the MICNIC common stock, and the Company retained 51%. The investor
provided total cash of $1,800,000 to the Company to finance the
acquisition. Including other loans related to this project, including
the subsequent acquisition of the remaining Keyes Helium interest
described below, this individual holds $15,097,215 of the Company's
debt at September 30, 2003. An additional amount of $1,000,000 was
loaned to the Company in October, 2003. On April 9, 2002 this
individual converted $1,350,000 of debt to equity.
On April 3, 2003 the Company acquired the remaining 81.45% of Keyes
Helium from CIG for an amount of $8,658,855. Concurrently, the Company
purchased the Keyes Gathering System and the Sturgis Gas Processing
Plant with the related compressors, both subsidiaries of El Paso Gas,
for an aggregate amount of $1,288,360.
Subsequently, also on April 3, 2003, the Company transferred its
entire interest in Keyes Helium, the Sturgis Gas Plant and the Keyes
Gathering System to NEC OK. The outside investor described above also
contributed his ownership interest in Keyes Helium to NEC OK. NEC OK
therefore owns 100% of Keyes Helium. The Company owns 51% of NEC OK
and the outside investor owns the remaining 49 % of NEC OK.
10
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
Pro Forma Income Statement
The following table represents pro forma income statement information
for the nine months ended September 30, 2003 and 2002, including the
operations of the 2003 acquisitions as if the acquisitions had
occurred at the beginning of the periods presented.
Nine Months Ended
September 30,
----------------------------------------------------
2003 2002
------------------------ ------------------------
Revenue $ 7,038,737 $ 5,181,503
Net loss (3,735,905) (2,644,243)
Loss per sare $(0.10) $(0.09)
For the period ended September 30, 2002 the financial information was
obtained from the previous owner.
Note 4-Property and Equipment:
Following is a summary of property and equipment at September 30, 2003
and December 31, 2002:
September 30, December 31,
2003 2002
------------------ --------------------
Machinery and equipment $ 8,539,055 $ 1,405,109
Pipeline 2,830,750 -
Buildings 400,000 100,000
Vehicles 215,399 212,835
Land 290,000 290,000
Furniture, fixtures and equipment 132,915 18,759
Improvements 179,733 79,672
---------------- --------------
12,587,852 2,106,375
Less accumulated depreciation (760,876) (296,819)
---------------- --------------
Net book value $ 11,826,976 $ 1,809,556
================ ==============
Depreciation expense recorded in the financial statements was $210,035
and $69,146 for the three months ended September 30, 2003 and 2002,
respectively and $465,057 and $85,133 for the nine months ended
September 30, 2003 and 2002, respectively.
11
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
Note 5-Segment Information:
The Company operates in two separate industry segments, tire
reclamation and processing and natural gas and helium processing and
production. Information regarding these segments are stated below.
Nine Months Ended
September 30,
----------------------------------------------------
2003 2002
--------------- ---------------
Revenue:
Tire reclamation and corporate $ 445,591 $ 230,346
Helium and gas operations 5,179,927 -
Loss before income taxes:
Tire reclamation and corporate (3,158,992) (3,645,968)
Helium and gas operations ( 357,758) -
Note 6-Note Payable:
On April 3, 2003 a single investor and creditor loaned the Company an
aggregate of $10,047,215 to facilitate the acquisition of Keyes
Helium, the Keyes Gathering System and the Sturgis Gas Processing
Plant with the related compressors. An additional $1 million was
loaned in September, 2003 and $1 million in October, 2003. These notes
were to be repaid in quarterly installments beginning in September
2003 in an amount not to exceed $500,000 per quarter, which would
include interest at 8% until they matured in 2010. The assets of the
Keyes Helium plant collateralize the loan. In addition to the
collateral the investor received 49% of the stock in NEC OK, a
subsidiary of the Company to which the entire Keyes Helium, Keyes
Gathering System and Sturgis Gas Processing Plant interests were
transferred, while the Company owns the remaining 51%.
Effective October 3, 2003, the Company and the investor entered into a
Conversion Agreement pursuant to which the investor would settle an
aggregate of $10 million of debt through the issuance of 50,000,000
shares of common stock to be issued by the Company to NEC Energy, LLC,
a designee of the investor.
The Company currently has 75,000,000 shares of common stock authorized
for issuance. Prior to the conversion transaction, the Company had
38,262,664 shares of common stock issued and outstanding. Accordingly,
the Company did not have a sufficient number of shares of common stock
authorized for issuance to issue all of the shares of common stock in
the conversion. The Conversion Agreement provided that to the extent
that the Company did not have sufficient shares of common stock
authorized to issue all of the shares in the conversion, NEC Energy
had the irrevocable right to the shares that could not be issued. The
Company has issued 30,000,000 shares of common stock to NEC Energy,
and NEC Energy has the irrevocable right to an additional 20,000,000
shares of common
12
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
stock. In the Conversion Agreement, the Company agreed to take all
required corporate action to seek the shareholders' approval to
increase the number of authorized shares to a number which is at least
sufficient for the Company to deliver all of the shares of common
stock issuable to NEC Energy pursuant to the Conversion Agreement.
Giving effect to the issuance of all of the shares of common stock
under the Conversion Agreement, NEC Energy will own 56.6% of the
issued and outstanding shares of common stock of Nathaniel Energy. A
change in control of the Company occurred as a result of the closing
of the Conversion Agreement.
In connection with the conversion, NEC Energy received the right to
demand registration of the resale of the shares at any time after
January 3, 2004. Additionally, NEC Energy was granted piggyback
registration rights relating to certain registration statements which
Nathaniel Energy files after January 3, 2004, if any.
In September and October of 2003, the investor advanced an additional
$2,000,000 to the Company. This debt has been incorporated into a new
note bearing interest at the rate of eight percent per annum.
Principal plus interest are payable in four quarterly payments of
$540,000 each on October 1, 2005 and January 1st, April 1st and July
1st 2006.
The balance of the principal amount due to the creditor of $4,097,215
was incorporated into a second new note. Accrued interest of $794,936
will be included in the new note, for an aggregate principal balance
of $4,892,152. The new note will bear interest at 8% per year. No
payments will be due until March 31, 2007, at which time the note and
accrued interest will be repaid in quarterly payments of $572,876
through December 31, 2009.
In connection with the new notes, the investor forgave $488,294 of
accrued interest. This amount will be credited to additional paid-in
capital.
Note 7-Stockholders' Equity:
During the nine months ended September 30, 2003, the Company issued
1,400,000 shares of common stock, valued at $995,000, for services.
As of September 30, 2003, the Company had agreed to issue 100,000
shares of common stock, valued at $125,000, to an individual for legal
services. These shares have not yet been issued and this amount is
recorded in accounts payable at September 30, 2003.
During the third quarter of 2003, certain employees who are officers,
directors and shareholders waived accrued compensation aggregating
$1,088,459. The employees agreed that the remaining accrued
compensation due them of $864,885 can be paid, at the option of the
Company, either out of profits or in stock. If paid in stock, the
deemed value of the stock shall be $1.00 per share.
13
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
The Company subsequently agreed that it would pay an aggregate of
$340,000 in cash to two of the employees. The Company agreed that it
would issue 289,365 shares of common stock in payment of the remaining
accrual to these two employees. These shares have not yet been issued.
Payment terms of the remaining $235,520 due to a third employee have
not been finalized.
The company and two other employees have agreed to settle $314,213 of
accrued wages through the issuance of 731,865 shares of common stock.
These shares have not yet been issued.
Note 8-Related Party Transactions:
The Company 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 September 30, 2003 and
2002 was $260,475 and $219,143, respectively. The advances are
collateralized 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.
Also, see Notes 7 and 9 for a discussion of certain related party
transactions as they relate to accrued compensation and patent
licenses, respectively.
Note 9-Intellectual Property:
The Company owns three U.S. patents, the latest issued in February
2003. Also pending are a U.S. application for a patent, and a European
patent application each covering the Thermal Combustor(tm) technology.
The combustor is used to produce energy using alternate fuel sources
which is then sold by the Company. The Company's ownership of
technology is by assignment of the patents and pending applications
from Stanley Abrams, the Company's chief executive officer, pursuant
to an agreement dated July 7, 1998 and amended in September 2003.
These patents and patent applications are for utility patents directed
to devices and methods of uses. Two U.S. patents expire September 6,
2011 and December 4, 2012, respectively, while the third patent issued
in February 2003 will expire in February 2020. Under the assignment
agreement, the Company is required, upon written demand, to reassign
the patents and patent applications to Mr. Abrams in the event both
Stanley Abrams and Brett Abrams are not employed as officers of the
Company and neither of them is a director, except as a result of
termination for cause, voluntary resignation, death or legal
incompetence. Furthermore, the agreement provides for a reassignment
of the technology to Messrs. Abrams in the event the Company ceases
business operations or becomes bankrupt.
In April 2002 the Company, Alternate Capital, LLC ("ACL") and Stan
Abrams, in connection with a consulting agreement between the Company
and ACL, entered into an agreement regarding the reassignment of the
above mentioned patents to Stan Abrams. This agreement provides for
the reassignment of the patents if either of the following events
occurs: (i) ACL votes in favor of removing either Stan or Brett Abrams
as an officer or director of the Company for any reason other than for
cause, or (ii) either voluntary or involuntary bankruptcy proceedings
are filed by or against the Company and (a) prior to such filing, ACL
shall have voted against (or provided the Company with
14
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
written disapproval of) the Company's obtaining third-party financing,
and (b) such vote or disapproval was a contributing factor to the
filing of the bankruptcy proceedings by or against the Company.
Note 10-Economic Dependency - Major Customer:
During 2002 the Company's primary sales were made through several
local customers and two major users of its tire derived fuel (TDF).
The two major users each represented approximately 20% of its tire
reclamation sales activities. With the acquisition of the Keyes
Helium, Sturgis Plant and Gathering system the majority of the sales
will be from helium sales and processed natural gas sales, while there
will be some additional sales of liquid gases and monthly fees from a
take and pay blending contract with Colorado Interstate Gas. The
various products have enabled the Company to reduce its dependency on
any one customer, however one major company purchases all of the
helium produced under contract through 2007. Should this contract
expire there are other major companies which have a stated interest in
purchasing the helium.
Note 11-Intangible Assets:
The Company has capitalized web site development costs, pursuant to
EITF 00-2. The total costs capitalized were $150,000, which are being
amortized over three years. Amortization expense for the three and
nine months ended September 30, 2003 is $12,500. There was no
comparative expense in 2002.
Note 12-Subsequent Events:
Subsequent to September 30, 2003:
- Effective October 3, 2003, the Company and the investor
described in Note 6 entered into a Conversion Agreement
pursuant to which the investor would settle an aggregate of
$10 million of debt through the issuance of 50,000,000
shares of common stock to be issued by the Company to NEC
Energy, LLC, a designee of the investor.
In September and October of 2003, the investor advanced an
additional $2,000,000 to the Company ($1,000,000 in each
month). This debt has been incorporated into a new note
bearing interest at the rate of eight percent per annum.
Principal plus interest are payable in four (4) quarterly
payments of $540,000 each on October 1, 2005 and January
1st, April 1st and July 1st 2006.
The balance of the principal amount due to the creditor of
$4,097,215 was incorporated into a second new note. Accrued
interest of $794,936 will be included in the new note, for
an aggregate principal balance of $4,892,152. The new note
will bear interest at 8% per year. No payments will be due
until March 31, 2007, at which time the note and accrued
interest will be repaid in quarterly payments of $572,876
through December 31, 2009.
15
NATHANIEL ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
In connection with the new notes, the investor forgave
$488,294 of accrued interest. This amount will be credited
to additional paid-in capital.
- The Company paid $340,000 of accrued compensation to two
officers.
- The Company finalized and executed a contract to sell two
Thousand Combustors(tm) for $2,100,000.
16
Item 2: Management's Discussion and Analysis of Results of Operations,
Liquidity and Financial Condition.
Forward-looking Statements:
This report specifies forward-looking statements of management of the
Company ("forward-looking statements") including, without limitation,
forward-looking statements regarding our expectations, beliefs,
intentions and future strategies.
Forward-looking statements are statements that estimate the happening
of future events and are not based on historical facts.
Forward-looking statements may be identified by the use of
forward-looking terminology, such as "could", "may", "will", "expect",
"shall", "estimate", "anticipate", "probable", "possible", "should",
"continue", "intend" or similar terms, variations of those terms or
the negative of those terms. The forward-looking statements specified
in this report have been compiled by management of the Company on the
basis of assumptions made by management and considered by management
to be reasonable. Future operating results of the Company, however,
are impossible to predict and no representation, guaranty, or warranty
is to be inferred from those forward-looking statements.
The assumptions used for purposes of the forward-looking statements
specified in the following information represent estimates of future
events and are subject to uncertainty as to possible changes in
economic, legislative, industry, and other circumstances. Such factors
include, but are not limited to, changes in the regulatory
environment, general conditions in the environmental industry, the
Company's competitive position, and economic conditions in the market.
As a result, the identification and interpretation of data and other
information and their use in developing and selecting assumptions from
and among reasonable alternatives require the exercise of judgment. To
the extent that the assumed events do not occur, the outcome may vary
substantially from anticipated or projected results, and, accordingly,
no opinion is expressed on the achievability of those forward-looking
statements. We cannot guaranty that any of the assumptions relating to
the forward-looking statements specified in the following information
are accurate, and we assume no obligation to update any such
forward-looking statements.
Description of Business:
Nathaniel Energy Corporation (the "Company") is a renewable energy
company that provides industry with an alternative energy equal to
that of fossil fuels. Its proprietary patented technology, the Thermal
Combustor(tm), is a 2-stage gasification system designed to combust
waste, biomass, tires and any other solid, carbon-based materials into
inexpensive electrical and thermal energy, while exceeding the most
stringent EPA and European Union regulations.
The Company's patented technology has three main global applications:
licensing, creating energy infrastructures and building mini power
plants. The Company intends to license the Thermal Combustor(tm)
technology to qualified companies, joint venture partners, and
distributorships. The Company intends to build energy infrastructures
that will produce special gases and byproducts. The Company intends to
build mini power plants for businesses that seek an independent source
of energy. These mini power plants are built at the businesses
premises ("in the fence") that can reduce the
17
businesses dependence on fossil fuels and power from the local
utility. In some cases, the mini power plants can become a businesses
self sustained utility.
The Company has been in the business of developing energy reclamation
processes and recycling, including the operation of used tire
recycling and collection services, since 1997. Additionally, the
Company, in April 2003, completed the acquisition of a natural gas
processing facility in Keyes, Oklahoma. The Company operates 26 acre
tire reclamation and processing facility in Hutchins, Texas. In
addition to operating the Hutchins facility and the Keyes gas
operations plant, the Company is engaged in the development of
alternative energy conversion processes and related technologies and
has an exclusive license to a patented technology known as the Thermal
Combustor(tm).
Critical Accounting Policies:
The financial statements include the accounts of Nathaniel Energy
Corporation and its subsidiaries. All material inter-company accounts
and transactions have been eliminated in consolidation.
Revenue Recognition:
The Company's tire reclamation and processing facility recognizes
revenue several ways, first when tires are accepted at the facility
("tipping fees") and secondly from the sale of processed tire shreds.
The revenues from tipping fees are fully earned when the tires are
accepted at the facility and the processed tire shred revenues are
recognized when the shreds are delivered to the end user. Internal
quality controls are in place to ensure that shreds meet the standards
required in contracts for the delivery of shreds. This quality control
reduces the risk of significant returns and allowances of tire shreds
sold. Sales returns are reprocessed and added back to the existing
tire shreds.
The Company's helium, liquid gas and natural gas revenues are
recognized in the period of delivery. The revenues are fully earned
when recognized. The processing plant has various types of quality
control equipment in place to ensure that the processed gases meet the
requirements of the Bureau of Land Management ("BLM"), the natural gas
pipeline operators and its wholesale gas customers. The Company has a
month-to-month contract in place with a natural gas marketing firm for
the natural gas delivered to the pipeline and a contract for the
helium processed. The natural gas liquids processed are currently sold
as produced.
The Company's alternate energy operation will recognize revenue from
the sale of Thermal Combustors(tm) based upon the terms of each
individual contract.
Results of Operations for the three months ended September 30,2003
----------------------------------------------------------------------
compared to the three months ended September 30, 2002
-----------------------------------------------------
For the three months ended September 30, 2003 revenue increased from
$82,536 in 2002 to $2,716,970 in 2003 an increase of $2,634,434 or
3,192%. This increase in revenue is primarily due to Nathaniel
Energy's acquisition of the Keyes Helium and Sturgis Gas Plant and
Gathering System from CIG. The Company purchased the facility on April
3, 2003. Revenues from the gas and helium processing operations were
$2,522,691 during the quarter, with none during the preceding year.
18
Revenues from tire operations were $194,279 during the quarter, an
increase of $111,743, or 135%, from $82,536 in the preceding year.
Cost of sales increased from $222,142 in 2002 to $2,834,531 in 2003 an
increase of $2,612,389 or 1,176%. The increase is primarily due to the
acquisition of the Keyes Helium and Sturgis Gas Plant and Gathering
System from CIG. Cost of revenue for the gas and helium processing
operations was $2,646,889, with none in the preceding year. Major
components include cost of products of $1,839,165, payroll costs of
$151,487, utilities and taxes of $238,074, depreciation of $139,363
and other costs of $278,800. Cost of revenue from tire operations was
$187,642 during the quarter, a decrease of $34,500, or 16%, from
$222,142 in the preceding year.
Total selling general and administrative expenses increased $855,269
or 315% from $271,569 for the period ended September 30, 2002 to
$1,126,838 in 2003. This increase in expenses is primarily due to
adding personnel resources and support services based on the
acquisition of the Keyes Helium and Sturgis Gas Plant and Gathering
System from CIG. The major components of the current period expense of
$1,126,838 are: payroll costs $358,781, travel and entertainment of
$30,938 and investor relations and promotional expenses of $505,191
and professional fees of $125,000. The professional fees of $125,000
have been accrued and will be paid in shares of common stock.
Interest expense increased from $211,928 for the period ended
September 30, 2002 to $320,597 in the comparable period of 2003; the
increase is due to additional debt financing.
Results of Operations for the nine months ended September 30, 2003
----------------------------------------------------------------------
compared to the nine months ended September 30, 2002
----------------------------------------------------
For the nine months ended September 30, 2003 revenue increased from
$230,346 in 2002, to $5,625,518 in 2003, an increase of $5,395,172 or
2,342%. This increase in revenue is primarily due to Nathaniel
Energy's acquisition of the Keyes Helium and Sturgis Gas Plant and
Gathering System from CIG. The Company purchased the facility on April
3, 2003. Revenues from the gas and helium processing operations were
$5,179,927 during the period, with none during the preceding year.
Revenues from tire operations were $445,591 during the period, an
increase of $215,245, or 93%, from $230,346 in the preceding year.
Cost of sales increased from $385,168 in 2002 to $5,672,998 in 2003,
an increase of $5,287,830, or 1,373%. The increase is primarily due to
an increase in the operations of the Company with the acquisition of
the Keyes Helium and Sturgis Gas Plant facility. Cost of revenue for
the gas and helium processing operations was $5,059,282, with none in
the preceding year. Major components include cost of products of
$3,406,432, payroll costs of $314,575, storage costs of $415,815,
utilities and taxes of $332,598, depreciation of $276,877 and other
costs of $312,985. Cost of revenue from tire operations was $613,716
during the period, an increase of $228,548, or 59%, from $385,168 in
the preceding year.
Total selling, general and administrative expenses decreased $497,949
or 16% from $3,145,290 for the period ended September 30, 2002 to
$2,647,341 in 2003. This is primarily due to recording $2,346,000 in
non-cash compensation and expense in 2002 and $845,000 in non-cash
compensation and expense
19
in 2003. An additional amount of $125,000 for professional fees
accrued at September 30, 2003 will be paid in common stock.
Other selling, general and administrative expenses, exclusive of the
non-cash amounts, increased from $799,290 in 2002 to $1,677,341 in
2003, an increase of $878,051 or 110%. This increase in expenses is
primarily due to adding personnel resources and support services based
on the acquisition of the Keyes Helium and Sturgis Gas Plant and
Gathering System from CIG. The major components making up the
$1,677,341 are payroll costs $651,987; outside services $55,679;
professional fees $134,875; insurance $40,088; travel and
entertainment $100,639; office rent $47,569; marketing and
communications, encompassing brand awareness, positioning, aggregation
of content, research analysis, design, investor relations and
functionality of website and collateral material $509,368.
Interest expense increased from $345,856 in the period ended September
30,2002 to $882,021 in the comparable period of 2003, which is due to
additional debt financing added during 2003.
Liquidity and Capital Resources
As of September 30, 2003 Nathaniel Energy had outstanding notes
payable of $15,546,675, including installment notes with financial
institutions, secured by equipment, totaling $582,461, with an average
interest rate of 11.1%. The remaining $15,217,574 in outstanding notes
consists of secured and unsecured term loans from individuals with an
average interest rate of 9.6%. Of this amount, $90,250 is due
immediately since the notes are past their scheduled due dates. Of the
amounts due to individuals, $15,097,215 is payable to one investor.
This investor made an additional advance of $1,000,000 in October,
2003.
Effective October 3, 2003, the Company and the investor entered into a
Conversion Agreement pursuant to which the investor would settle an
aggregate of $10 million of debt through the issuance of 50,000,000
shares of common stock to be issued by the Company to NEC Energy, LLC,
a designee of the investor.
The Company currently has 75,000,000 shares of common stock authorized
for issuance. Prior to the conversion transaction, the Company had
38,262,664 shares of common stock issued and outstanding. Accordingly,
the Company did not have a sufficient number of shares of common stock
authorized for issuance to issue all of the shares of common stock in
the conversion. The Conversion Agreement provided that to the extent
that the Company did not have sufficient shares of common stock
authorized to issue all of the shares in the conversion, NEC Energy
had the irrevocable right to the shares that could not be issued. The
Company has issued 30,000,000 shares of common stock to NEC Energy,
and NEC Energy has the irrevocable right to an additional 20,000,000
shares of common stock. In the Conversion Agreement, the Company
agreed to take all required corporate action to seek the shareholders'
approval to increase the number of authorized shares to a number which
is at least sufficient for the Company to deliver all of the shares of
common stock issuable to NEC Energy pursuant to the Conversion
Agreement.
Giving effect to the issuance of all of the shares of common stock
under the Conversion Agreement, NEC Energy will own 56.6% of the
issued and outstanding shares of common stock of Nathaniel
20
Energy. A change in control of the Company occurred as a result of the
closing of the Conversion Agreement.
In connection with the conversion, NEC Energy received the right to
demand registration of the resale of the shares at any time after
January 3, 2004. Additionally, NEC Energy was granted piggyback
registration rights relating to certain registration statements which
Nathaniel Energy files after January 3, 2004, if any.
In September and October of 2003, the investor advanced an additional
$2,000,000 to the Company. This debt has been incorporated into a new
note bearing interest at the rate of eight percent per annum.
Principal plus interest are payable in four quarterly payments of
$540,000 each on October 1, 2005 and January 1st, April 1st and July
1st 2006.
The balance of the principal amount due to the creditor of $4,097,215
was incorporated into a second new note. Accrued interest of $794,936
will be included in the new note, for an aggregate principal balance
of $4,892,152. The new note will bear interest at 8% per year. No
payments will be due until March 31, 2007, at which time the note and
accrued interest will be repaid in quarterly payments of $572,876
through December 31, 2009.
In connection with the new notes, the investor forgave $488,294 of
accrued interest. This amount will be credited to additional paid-in
capital.
Nathaniel Energy has cash of $1,220,527 at September 30, 2003. These
funds will be used to fund the Company's operations and to pay down
the existing debt. It will also be used for capital expansion of the
Keyes project.
On July 15, 2003 the Company received a contract and letter of credit
for the sale of two 1800 hp Thermal Combustors(tm). The contract is
between L & R Energy Co., LLC, European Waste Solutions, Inc. and
Electronic Solar of Italy for a RDF project in Cologna Veneta, Italy.
The letter of credit is with Banca Monte Dei Pashi Di Siena which has
a representative in New York and the letter may be presented to any
U.S. bank. The Company has 277 days from the date of formal acceptance
to construct, deliver and test the combustors in order to collect on
the letter of credit. The test will be to determine that the
combustors will generate a minimum of 42,495 pounds of steam per hour
for each unit. The pricing for the Thermal Combustors(tm) will be
finalized shortly upon completion of a detailed bill of materials but
has yet to be determined at this filing.
The Company is negotiating toll-processing agreements to add revenues
to the helium operation. In addition, the Company has entered into
negotiations with third party companies (Producers) for the gathering
and processing of new volumes natural gas from additional wells and
gathering fields. The Company anticipates that these toll-processing
agreements would generate an estimated $760,000 of gross profit once
completed. The Company believes that the new natural gas agreements
would enable the Company to double the gas flow through the Gas
Processing Plant, generating new combined gross profit of
approximately $1.7 million per year, if completed in early 2004, as
anticipated. No assurance can be given that these agreements will be
reached or, if they are reached, that these estimated results will be
achieved.
21
The following is a summary of Nathaniel Energy's cash flows from
operating, investing, and financing activities during the periods
indicated:
Period ended September 30,
2003 2002
-------------- ----------
Operating activities $ (561,220) $ (1,174,187)
Investing activities (9,512,003) (2,384,657)
Financing activities 11,091,693 4,165,598
Net effect on cash $ 1,018,470 $ 606,754
-------------- --------------
-------------- --------------
For the period ended September 30, 2003, the operating activities net
change is due primarily to a loss for the nine months of $3.5 million,
partially offset by non-cash items of depreciation and amortization of
$479,000 and non-cash expenses of $845,000, and an increase in
accounts payable and accrued expenses of $1.6 million. The net change
in investing activities is primarily the result of the acquisition of
the Keyes Helium and Sturgis Gas Plant and Gathering System assets of
$9.4 million. The net change in financing activities is primarily the
issuance of debt in the amount of $11.1 million, as described above in
this liquidity and capital resources section.
For the period ended September 30, 2002, the operating activities net
change is due primarily to a loss for the nine months of $3.6 million,
partially offset by non-cash items of depreciation and amortization of
$85,000 and non-cash expenses of $2.5 million.The net change in
investing activities is primarily the result of the acquisition of
assets of $2.3 million. The net change in financing activities is
primarily the issuance of debt in the amount of $4.9 million, offset
by repayments of debt of $729,000.
Item 3: Controls and Procedures
Our Chief Executive Officer and Principal Accounting Officer conducted
an evaluation of the effectiveness of our disclosure controls and
procedures. Based on this evaluation, our Chief Executive Officer and
Principal Accounting Officer concluded that our disclosure controls
and procedures were effective as of September 30, 2003 in alerting him
in a timely manner to material information required to be included in
our SEC reports. In addition, no change in our internal control over
financial reporting occurred during the fiscal quarter ended September
30, 2003 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
22
PART II. OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
None
Item 2: CHANGE IN SECURITIES AND USE OF PROCEEDS
None
Item 3: DEFAULT UPON SENIOR SECURITIES
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
Item 5: OTHER INFORMATION
Change in Control
Effective as of October 3, 2003, a change in control of the Company
occurred as a result of the closing of a Conversion Agreement between
the Company and Richard Strain. Pursuant to the Conversion Agreement,
$10 million dollars of indebtedness of the Company to Mr. Strain
converted into an aggregate of 50,000,000 shares of the Company's
common stock to be issued to NEC Energy, LLC, a designee of Mr.
Strain.
The Company currently has 75,000,000 shares of common stock authorized
for issuance. Prior to the conversion transaction, the Company had
38,262,664 shares of common stock issued and outstanding. Accordingly,
the Company did not have a sufficient number of shares of common stock
authorized for issuance to issue all of the shares of common stock in
the conversion. The Conversion Agreement provided that to the extent
that the Company did not have sufficient shares of common stock
authorized to issue all of the shares in the conversion, NEC Energy
had the irrevocable right to the shares that could not be issued. The
Company has issued 30,000,000 shares of common stock to NEC Energy,
and NEC Energy has the irrevocable right to an additional 20,000,000
shares of common stock. In the Conversion Agreement, the Company
agreed to take all required corporate action to seek the shareholders'
approval to increase the number of authorized shares to a number which
is at least sufficient for the Company to deliver all of the shares of
common stock issuable to NEC Energy pursuant to the Conversion
Agreement.
Giving effect to the issuance of all of the shares of common stock
under the Conversion Agreement, NEC Energy owns 56.6% of the issued
and outstanding shares of common stock of the Company.
23
In connection with the conversion, NEC Energy received the right to
demand registration of the resale of the shares at any time after
January 3, 2004. Additionally, NEC was granted piggyback registration
rights relating to certain registration statements which the Company
files after January 3, 2004, if any.
Debt Financing
During September and October, 2003, Mr. Strain loaned to the Company
an additional $2,000,000 dollars bearing interest at the rate of eight
percent per annum. Principal plus interest are payable in four (4)
quarterly payments of $540,000 each on October 1, 2005 and January
1st, April 1st and July 1st 2006.
Security Ownership of certain Beneficial Owners and Management
The following table sets forth, to the knowledge of the Company, based
solely upon records available to it, certain information as of
November 10, 2003 regarding the beneficial ownership of the Company's
shares of common stock by each person who we believe to be the
beneficial owner of more than five percent (5%) of outstanding shares
of common stock by each current director, each named executive
officer, and by all current executive officers and directors of the
group:
Name and Addres
of Beneficial Owner Number of Shares Percent of Class(1)
------------------- ---------------- -----------------
NEC Energy, LLC(2)
73 Deer Park Avenue,
Suite 4 Babylon Village,
New York 11702 50,000,000(3) 56.6%
Richard Strain 6,585,000(4) 7.5%
329 Manchester Road
Poughkeepsie, New York 12603
Stanley Abrams(5) 2,596,000 2.9%
Russell "Gene" Bailey(5) 411,764(6) *
George Cretecos(5) None
All Directors and Executive
Officers as a group(3 persons)(5) 3,007,764(6) 3.4%
* Less than one percent
(1) Percentages give effect to the issuance of all 50,000,000 shares to NEC
Energy in conversion of $10,000,000 indebtedness of the Company to Richard
Strain, effective as of October 3, 2003.
24
(2) NEC Energy, LLC is 50% owned by Richard Strain and 50% owned by Como
Group, LLC, which is an affiliate of Corey Morrison.
(3) Excludes 6,585,000 shares owned by Richard Strain. Includes 30,000,000
shares, and the irrevocable right to receive 20,000,000 shares at the time
that number of shares is authorized and available for issuance.
(4) Excludes 30,000,000 shares owned by NEC Energy, LLC and 20,000,000
shares for which NEC has the irrevocable right, which shall be issued at
the time that number of shares is authorized and available for issuance.
(5) The address of this person is 8001 S. InterPort Blvd., Englewood,
Colorado 80112.
(6) Includes 205,882 shares and 205,882 shares underlying unexercised
warrants which are exercisable at a price of $.17 per share, held by Mr.
Bailey's wife.
Item 6: Exhibits and Reports
Exhibits:
3.1 Certificate of Incorporation*
3.2 First Amendment to Certificate of Incorporation*
3.3 Second Amendment to Certificate of Incorporation*
3.4 Amended and Restated Bylaws
31.1 Certificate of the Chief Executive Officer and Principal
Accounting Officer of Nathaniel Energy Corporation pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certificate of the Chief Executive Officer and Principal
Accounting Officer of Nathaniel Energy Corporation pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
Form 8-K was issued July 2, 2003 reflecting the acquisition of
Keyes Helium, Sturgis Gas Processing Plant and Gathering System.
* Incorporated herein by reference to exhibits included in the
Company's Current Report on Form 8-K for an event dated December
31, 2002, filed with the Securities and Exchange Commission on
January 17, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Nathaniel Energy Corporation
(Registrant)
By: /s/ Stanley Abrams
----------------------
Stanley Abrams, Chief Executive
Officer and Principal Accounting
Officer
26