United States
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 ended September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____ to _______
Commission file number 000-27783
NATHANIEL ENERGY CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 84-1572525
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
8001 South InterPort Blvd. Suite 260, 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 [ ]
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 [ ]
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: October 26, 2004, 70,198,263 shares
of common stock, $.001 par value.
Transitional Small Business Disclosure Format (Check One) Yes [ ] No [X]
NATHANIEL ENERGY CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 2
Consolidated Statements of Operations for the Three
and Nine Months ended September 30,2004 and 2003 3
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 16
Signatures 17
Nathaniel Energy Corporation
Consolidated Balance Sheets
September 30, December 31,
2004 2003
(unaudited)
---------------- ------------
Assets
Current assets:
Cash $ 507,085 $ 504,782
Accounts receivable 1,667,954 960,555
Inventory 3,014,305 637,174
Prepaid expenses 141,224 130,669
Advances and other receivables 6,480 30,718
--------------- -----------
Total current assets 5,337,048 2,263,898
Property, plant and equipment, net of accumulated
depreciation 10,380,964 11,662,969
Intangible assets, net 308,549 339,473
Restricted cash 254,432 899,300
Related party receivables 11,438 345,959
Deposits 60,127 50,000
Other assets - 42,794
-------------- ------------
Total Assets $16,352,558 $15,604,393
=============== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,262,299 $ 1,689,072
Accrued compensation and payroll liabilities 42,326 109,065
Accrued interest 508,070 141,402
Accrued property tax 127,311 38,331
Accrued income taxes 410,377 -
Other accrued expenses 237,783 25,018
Notes payable, current portion 493,258 406,644
------------ ------------
Total current liabilities 4,081,424 2,409,532
Long-term debt 373,008 230,989
Long-term debt, stockholder 8,892,151 6,892,151
--------------- ---------------
Total liabilities 13,346,583 9,532,672
--------------- ---------------
Minority interest 338,919 34,139
Stockholders' equity:
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, 70,198,263 and 69,719,414 shares,
respectively, issued and outstanding 70,198 69,719
Common stock to be issued 20,318 20,285
Additional paid-in capital 64,851,656 64,682,652
Accumulated deficit (62,275,116) (58,735,074)
--------------- ---------------
Total stockholders' equity 2,667,056 6,037,582
--------------- ---------------
Total Liabilities and Stockholders' Equity $16,352,558 $15,604,393
=============== ===============
The accompanying notes are an integral part ofthe financial statements.
2
Nathaniel Energy Corporation
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue $ 3,433,929 $ 2,716,970 $10,390,073 $ 5,625,518
Cost of revenue 2,833,250 2,834,531 8,846,865 5,672,998
----------- ----------- ----------- -----------
Gross profit (loss) 600,679 (117,561) 1,543,208 (47,480)
Selling, general and administrative
expenses 653,974 1,126,838 2,056,771 2,647,341
Write-down of inventory - - 274,000 -
Impairment of assets - - 1,403,046 -
----------- ----------- ----------- -----------
Total operating expenses 653,974 1,126,838 3,733,817 2,647,341
Loss from operations (53,295) (1,244,399) (2,190,609) (2,694,821)
Other income (expense)
Partnership income - - - 20,733
Loss on disposal of equipment - - (18,912) (13,207)
Write-off of related party
receivable - - (264,587) -
Interest expense (146,926) (320,597) (422,576) (882,021)
Other income - 75 71,800 26,208
---------- ----------- ----------- -----------
Loss before income taxes and
minority interest (200,221) (1,564,921) (2,824,884) (3,543,108)
Income tax expense (151,695) - (410,378) -
---------- ------------ ----------- -----------
Loss before minority interest (351,916) (1,564,921) (3,235,262) (3,543,108)
Minority interest (111,495) 146,578 (304,780) 26,358
---------- ----------- ----------- -----------
Net loss $ (463,411) $(1,418,343) $(3,540,042) $(3,516,750)
=========== =========== =========== ===========
Loss per share, basic and diluted $ (0.01) $ (0.04) $ (0.05) $ (0.09)
=========== =========== =========== ===========
Weighted average common
shares outstanding 70,198,263 38,362,664 69,866,008 38,244,349
========== ============ =========== ===========
The accompanying notes are an integral part of the financial statements.
3
Nathaniel Energy Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30, September 30,
2004 2003
-------------- -------------
Cash flows from operating activities:
Net loss $ (3,540,042) $ (3,516,750)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 727,149 479,557
Stock issued for services -- 845,050
Minority interest 304,780 (26,358)
Loss on equipment 18,912 --
Loss on related party receivables 264,587 --
Write down of inventory 274,000 --
Impairment of assets 1,403,046 --
Non-cash settlement of debt (65,800) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventory (2,325,351) 260,017
Restricted cash 644,868 (199,970)
Accounts receivable (707,399) (207,119)
Prepaid expenses (10,555) (18,926)
Advances receivable 24,238 7,206
Related party receivable 19,450 (58,962)
Other assets (10,128) (56,677)
Increase in:
Accounts payable and accrued expenses 1,837,827 1,616,153
-------------- --------------
Net cash provided by (used in) operating activities (1,140,416) (876,779)
-------------- --------------
Cash flows from investing activities:
Acquisition of assets (793,384) (9,396,414)
-------------- --------------
Net cash used in investing activities (793,384) (9,396,414)
-------------- --------------
Cash flows from financing activities:
Payments on debt (63,897) (55,522)
Proceeds from issuance of notes and loans 2,000,000 11,147,215
-------------- --------------
Net cash provided by financing activities 1,936,103 11,091,693
-------------- --------------
Net increase in cash 2,303 818,500
Cash and cash equivalents, beginning of period 504,782 202,057
-------------- --------------
Cash and cash equivalents, end of period $ 507,085 $ 1,020,557
============== ==============
Cash paid for interest $ 31,168 $ 71,886
============== ==============
Cash paid for income taxes $ -- $ --
============== ==============
Non cash financing activity:
Notes payable related to construction in progress $ 325,780 $ --
============== ==============
Issuance of shares of common stock for intangibles $ -- $ 150,000
============== ==============
Issuance of shares of common stock to settle
accounts and notes payable $ 230,800 --
============== ==============
Cancellation of shares of common stock
in settlement of a receivable from an officer $ 50,484 --
============== ==============
The accompanying notes are an integral part of the financial statements.
4
Nathaniel Energy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 and 2003
(Unaudited)
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,
2003.
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements, which include our 51%
owned subsidiary, have been prepared 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 our financial statements and related notes as
contained in Form 10-KSB for the year ended December 31, 2003. 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 three and nine months ended
September 30, 2004 are not necessarily indicative of results of operations to be
expected for the full year.
Description of Business
Nathaniel Energy Corporation is a renewable energy company that provides
industry with an alternative energy comparable to that of fossil fuels. Our
proprietary patented technology, the Thermal Combustor(TM), is a 2-stage
gasification system designed to convert 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. By
converting waste material into valuable process heat and electricity using best
available technology, we are able to provide a total solution to select
industrial and municipal customers.
We focus our business and utilize our patented technology in three main
areas:
- - licensing and joint venture of the proprietary technology,
- - building, owning, operating and maintaining energy infrastructures, and
- - building, owning, operating and maintaining mini power plants.
We plan to enter into licensing and sale agreements to begin the commercial
penetration of our patented technology. We also plan to build, own, operate and
maintain energy infrastructures that will provide industries and municipalities
an efficient, clean energy and waste removal solution. Additionally, we plan to
build, own, operate and maintain mini power plants for businesses that seek an
independent and controllable source of energy. These mini power plants will be
built on our customers' business premises ("in the fence") and will reduce their
dependence on energy produced from fossil fuels provided by the local utility as
well as providing those customers a waste disposal solution.
We have also been in the fuel processing business, including used tire recycling
and collection services, since 1997. We have operated a 27 acre fuel processing
facility in Hutchins, Texas since 1999 and have operated a helium and gas
processing facility in Keyes, Oklahoma since April 2003.
5
Nathaniel Energy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2004 and 2003
(Unaudited)
Critical Accounting Policies
The financial statements include the accounts of Nathaniel Energy Corporation
and its subsidiary. All material inter-company accounts and transactions have
been eliminated in consolidation.
Inventory
Tire shred inventory is valued at the lower of cost to produce or net realizable
value, using the first-in first-out method of accounting. Net realizable value
is determined by reference to existing contractual sales prices reduced by costs
to complete the tire processing. Tire shred inventory value at September 30,
2004 is zero. Our gas processing facility has helium inventory in process stored
in the BLM (Bureau of Land Management) facility in Texas. Helium inventory is
valued at the lower of cost or market using the first-in-first-out method of
accounting. Under our contract with the BLM, the BLM provides certain services
for which we pay activity fees, compression fees, storage fees and an annual
fee. The BLM fees are expensed as incurred. We are also building two Thermal
Combustors (TM) for resale in Italy, included as construction in progress and
valued at cost.
Components of inventory at September 30, 2004 are as follows:
Helium and natural gas liquids $ 301,063
Construction in progress 2,713,242
----------
Total $3,014,305
==========
Research and Development
Research and development expenditures, all of which relate directly to the
design and development of our Thermal Combustor (TM) technology, are expensed as
incurred. For the nine months ended September 30, 2004 and 2003, we expensed
$306,319 and $-0-, respectively, as selling, general and administrative
expenses.
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment purchased or constructed is recorded at cost.
Direct costs, such as labor and materials, and indirect costs, such as overhead
used during construction are capitalized. Major units of property replacements
or improvements are capitalized and minor items are expensed. Gain or loss is
recorded in income for the difference between the net book value relative to
proceeds received, if any, when the asset is sold or retired. Depreciation is
provided for using straight-line and accelerated methods. 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
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", we review our 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. Management uses significant
judgments, assumptions and estimates to calculate future cash flows expected to
be generated by the assets under impairment review.
6
Nathaniel Energy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2004 and 2003
(Unaudited)
Revenue Recognition
Our fuel processing facility earns revenue when tires are accepted at the
facility ("tipping fees") and from the sale of processed tire shreds. The
revenues from tipping fees are fully earned and recognized when tires are
accepted at the facility. Processed tire shred revenues are recognized when the
shreds are delivered to the end user. We have established internal quality
control processes to ensure that shreds meet the standards required by contract
for the delivery of shreds. Our quality control process reduces the risk of
significant returns and allowances of tire shreds sold. Returns and allowances
are nominal.
Helium, liquid gas and natural gas revenues are recognized in the period of
delivery. The revenues are fully earned when recognized. We ensure that our
processed gases meet the requirements of the Bureau of Land Management ("BLM"),
the natural gas pipeline operators and wholesale gas customers through our
quality control equipment installed at our processing plant. We have a
month-to-month contract in place with a natural gas marketing firm for the
natural gas delivered to the pipeline and a long-term contract for the helium
processed. The natural gas liquids processed are currently sold as produced
under a month-to-month agreement.
We recognize revenue from the sale of Thermal Combustors (TM) upon completion,
delivery and acceptance by the purchaser, using the completed contract method of
accounting.
Earnings Per Share
Basic earnings per share are computed by dividing earnings available for common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share are computed by dividing earnings
available for common stockholders by the diluted weighted-average number of
common shares outstanding during the period. Diluted earnings per share reflect
the potential dilution that could occur if securities or other agreements to
issue common stock which have met market price or other contingencies were
exercised or converted into common stock. Fully diluted earnings per share are
not presented as the result would be antidilutive.
Use of Estimates
The preparation of our financial statements in conformity with generally
accepted accounting principles requires our 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.
Reclassifications
We have reclassified certain prior period amounts to conform to the current
period presentation.
2. Acquisition and Minority Interest
On April 3, 2003 we completed the acquisition of the remaining 81.45% of Keyes
Helium Company, LLC ("Keyes Helium") from Colorado Interstate Gas ("CIG") a
subsidiary of El Paso Corporation through our subsidiary Nathaniel Energy
Oklahoma Holdings Corporation ("NEC OK"). We purchased our initial 18.55%
interest in Keyes Helium on August 26, 2002. On April 3, 2003 we also acquired
the Keyes gathering system and 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, remove liquid gases and helium
and then send the natural gas into a natural gas pipeline. We transferred 49% of
the ownership of NEC OK to a principal investor in consideration of an aggregate
of $11,997,476 of debt financing to effectuate the acquisition. Accordingly, our
interest in Keyes Helium and the helium operations is through our 51% ownership
of NEC OK. NEC OK owns 100% of Keyes Helium.
The following table represents selected unaudited pro forma income statement
information for the nine months ended September 30, 2003, including the
operations of the 2003 acquisitions as if the acquisitions were owned for the
entire period shown.
Nine months ended September 30, 2003
Revenue $ 7,038,603
Net (loss) (3,641,403)
Loss per share $ (0.10)
7
Nathaniel Energy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2004 and 2003
(Unaudited)
3. Notes Payable
On March 17, 2004 we borrowed $2,000,000 from Richard Strain, a related party,
bringing our total indebtedness to Mr. Strain to $8,892,151 at September 30,
2004. Our Promissory Note II to Mr. Strain relating to the $2,000,000 loan
provides a fixed effective interest rate of 4.3% and is payable in equal
installments of $540,000 due on October 1, 2005, January 1, 2006, April 1, 2006
and July 1, 2006. Mr. Strain has the right, at any time, to convert all or any
portion of the outstanding indebtedness of $8,892,151 into shares of our common
stock. The conversion price is equal to 103% of the average closing price of our
common stock for the five trading days prior to March 17, 2004, which was $0.78
per share. The conversion price exceeded the market value of the stock on March
17, 2004.
On August 1, 2004, we issued a $126,153 promissory note to Merrick & Company, a
vendor providing services for delivery on our Thermal Combustor (TM) contract in
Italy, in payment for services rendered. The note is due on November 1, 2004. If
the note is not paid on that date, the payee may at its option extend the
payment term and interest will accrue on the unpaid principal at the prime rate
plus 2% per annum (6.75% at September 30, 2004) from November 2, 2004 through
January 31, 2005, and then at the prime rate plus 5% per annum (9.75% at
September 30, 2004) from February 1, 2005, until the note is paid. On September
8, 2004, we entered into a $199,627 promissory note agreement with Merrick &
Company also in payment for services rendered under the same terms and
conditions as those of the promissory note dated August 1, 2004. As of November
1, 2004, no payments have been made on either of the promissory notes, and
Merrick has consented to extension of the payment term.
4. Economic Dependency - Major Customer
With the acquisition of the Keyes Helium and the Sturgis gas processing plant
and compressor station and Keyes gathering system, approximately 38% and 37% of
our total revenue for the nine months ended September 30, 2004 and 2003,
respectively is from helium and processed natural gas sales to Air Products and
Chemicals, Inc. ("Air Products"). Although we generate additional sales of
liquid gases and monthly fees from a take and pay blending contract with CIG
which reduces our dependency on any one customer, Air Products purchases all of
our helium produced under a contract with us through 2021. Our contract with Air
Products is subject to early termination in 2008 and 2015 if either party
requests a price determination that is not agreed to by the other party. If the
contract is not terminated by either party prior to 2021, it will continue until
terminated by either party providing two years' advance notice of their intent
to terminate. Should Air Products terminate this contract, we believe we would
be able to sell the helium produced to other major companies which have
previously stated an interest in purchasing the helium.
5. Related Party Transactions
See Note 3 - "Notes Payable" regarding loans from Richard Strain.
During the quarter ended June 30, 2004, we wrote off a $264,587 related party
receivable from Ripetouch Greenhouse LLC, an entity controlled by our former
chief executive officer, Stan Abrams since debt collection was determined to be
uncertain. In prior years, we paid certain expenses related to site clean-up on
behalf of Ripetouch Greenhouse LLC.
During February 2004, our Board of Directors adopted a policy that all related
party transactions must be approved by a majority of the disinterested directors
and that those transactions will be based on commercially reasonable terms which
are no less favorable to us than terms we could obtain in an arms-length
transaction with unaffiliated third parties.
6. Asset Impairment
During the quarter ended June 30, 2004, management changes prompted a review and
update of the expected cash flows expected to be realized from certain long
lived assets and the impact of that review on the asset carrying value in
accordance with SFAS 144. Based on this review, an asset impairment of
$1,403,046 was recognized on the assets at the fuel processing facility in
Hutchins, Texas. The Company discounted the cash flows expected from the
impaired long lived assets to determine their current value and the impairment
amount. The Company is working to add new contracts to increase the fuel
processing facility revenue, but any new contracts cannot be assured, and have
not been considered in the most recent cash flow expectations. We realized no
impairment of long lived assets during the three months ended September 30,
2004.
8
Nathaniel Energy Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SEPTEMBER 30, 2004 and 2003
(Unaudited)
7. Inventory
During the quarter ended June 30, 2004, tire shred inventory at the fuel
processing facility was written down by $274,000 to a net realizable value of
zero. The net realizable value was calculated using estimated selling prices
less costs to process the inventory into a salable form. During the quarter
ended September 30, 2004, all costs associated with our tire shred inventory
were expensed in cost of revenue.
We have included in inventory $2,713,242 of costs associated with our Thermal
Combustor (TM) project in Italy as work in progress. We expect to incur
additional costs during the next quarter resulting from our previous work in
progress, but do not expect those costs to exceed our contract selling price
plus freight and delivery costs which are billable separately. We expect to
fully recover costs included in work in progress pursuant to our contract with
L&R Energy Company LLC or recover our costs pursuant to a payment guarantee we
received from the project owner, EcoIdea S.R.L., however, we can not assure that
we will recover all of our costs. Based on current negotiations and alternatives
for cost recovery, we do not consider it necessary to record an impairment of
our work in process on the Thermal Combustors (TM) at September 30, 2004. See
Subsequent Event Note.
8. Business Segments
The Company conducts business in three separate facilities presently managed as
two energy operating business segments, helium and gas processing and fuel
processing. The location and use of our facilities are shown as follows:
- - a fuel processing operation 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.
9. Subsequent Event
On November 2, 2004, we announced the successful gasification of refuse derived
fuel (RDF) in Cologna Veneta, Italy, from one of the two Thermal Combustors (TM)
we supplied in connection with our Gasifier Supply and Start Up Agreement with
L&R Energy Company LLC proving that our patented technology is successful and
viable on a commercial level.
One of our Thermal Combustors (TM) successfully gasified and combusted RDF and
produced over one megawatt of electricity.
Although we proved out our technology, we were unable to complete the
functionality test process required under our contract to receive our first
payment of $1,500,000 representing 50% of the total contract price. We stopped
the testing process to address the poor quality fuel being supplied by other
contract parties that is and remains outside the specifications and
densification requirements to successfully operate the Thermal Combustors.(TM)
We believe that it was necessary to stop the testing process to protect our
equipment from damage and to discuss the contract issues surrounding the fuel
specifications with the other contract parties. To date we are continuing a
dialog with the other parties, but we have not come to a mutual understanding to
address the contract issues. We have retained special counsel to preserve our
rights and remedies, and to protect our interests with respect to the contract.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Certain information contained in this report may include "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and is subject to the safe harbor created by that act. The safe harbor
created by the Securities Litigation Reform Act will not apply to certain
"forward looking statements" because we issued "penny stock" (as defined in
Section 3(a)(51) of the Securities Exchange Act of 1934 and Rule 3a51-1 under
the Exchange Act) during the three year period preceding the date(s) on which
those forward looking statements were first made, except to the extent otherwise
specifically provided by rule, regulation or order of the Securities and
Exchange Commission. We caution readers that certain important factors may
affect our actual results and could cause such results to differ materially from
any forward-looking statements which may be deemed to have been made in this
Report or which are otherwise made by or on behalf of us. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may", "will", "expect", "believe", "explore",
"consider", "anticipate", "intend", "could", "estimate", "plan", or "continue"
or the negative variations of those words or comparable terminology are intended
to identify forward-looking statements. Factors that may affect our results
include, but are not limited to, the risks and uncertainties associated with:
- - Our ability to reach a resolution of the disputes surrounding our contracts
for the Italy project.
- - Risks as to whether we will prevail in any proceeding to enforce our rights
under the Italy project contracts.
- - Our ability to pay our notes payable when due.
- - Our ability to raise capital necessary to implement our business plan.
- - Our ability to finance and complete planned projects.
- - Our ability to execute our business plan and commercialize the Thermal
Combustor (TM) technology, including building Thermal Combustors(TM) that
meet customers' specifications and that meet local regulatory environmental
and permit requirements.
- - Risks related to dependency on a small number of customers.
- - Risks related to dependency on project partners and vendors for timely
completion of project milestones.
- - Our ability to satisfy our customers'expectations.
- - Our ability to employ and retain qualified management and employees.
- - Changes in government regulations which are applicable to our business.
- - The availability of a consistent, economically viable, and sustainable
waste stream supply to fuel the Thermal Combustor(TM) operations.
- - Changes in the demand for our products and services, including the impact
from changes in governmental regulation and funding for alternative energy.
- - The degree and nature of our competition, including the reliability and
pricing of traditional energy sources and the economic viability of other
alternative energy sources such as wind and solar power.
- - Operating hazards related to our Thermal Combustor(TM) business.
- - Potential mechanical failure of our plants or products.
- - Our ability to effectively protect our patents and proprietary technology
from infringement.
- - Our ability to generate sufficient cash to pay our creditors.
- - Disruption in the economic and financial conditions primarily from the
impact of terrorist attacks in the United States and overseas, threats of
future attacks, police and military activities and other disruptive
worldwide political events.
We are also subject to other risks detailed from time to time in other
Securities and Exchange Commission filings and elsewhere in this report. Any one
or more of these uncertainties, risks and other influences could materially
affect our results of operations and whether forward-looking statements made by
us ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether from new information, future
events or otherwise.
10
Company Overview
Our mission is to provide a lower cost, clean energy alternative to fossil fuels
worldwide. Our operational plan focuses on three major business models:
o license and sale of the proprietary technology,
o build, own and operate energy infrastructures, and
o build, own and operate mini power plants.
Revenue is generated in two business areas, the largest being our helium and gas
processing plant, generating 96% of our revenue, or $9,923,264 for the nine
months ended September 30, 2004. The second business, our fuel processing
operation, generated 4% of our revenue, or $466,809 during the same period.
Our revenue during the nine months ended September 30, 2004 increased
significantly over the nine months ended September 30, 2003 due to inclusion for
the entire period the revenue from the Keyes helium plant, the Sturgis gas plant
and the Keyes gathering system. We acquired these operating assets on April 3,
2003 and included revenue and expense associated with those assets in our
operation for the period owned.
Our long term goal is to generate the majority of our revenue and cash flow from
the licensing and joint venture of our proprietary technology, in addition to
building, owning and operating energy infrastructures and mini power plants. As
a result, the majority of our resources are focused on developing these
businesses and we expect to market our capabilities, raise capital for the
project construction and manage the projects from start to finish.
Historically, we have not had difficulty finding potential project
opportunities. Worldwide, industries and governments seek lower cost and clean
energy alternatives to fossil fuels. We expect that demand for these energy
alternatives will grow. A key to our success will be wisely choosing among
project opportunities and focusing our resources on those projects with the
greatest chance of success and returns for stockholders.
We have accomplished one of our 2004 goals in proving the commercial application
of our Thermal Combustor(TM) technology. In addition, we are exploring numerous
project opportunities that will utilize our Thermal Combustor's(TM) patented
technology.
Executive Management
We are currently conducting a search for a seasoned CEO. We believe current
management has sufficient skills and experience to lead and manage the existing
operations and projects currently in process.
Intellectual Property
We own three U.S. patents, the latest issued in March 2003, and have a patent
application pending. A European patent application covering the Thermal
Combustor(TM) technology is also pending. The Thermal Combustor(TM) is used to
produce energy using alternate fuel sources, which is then sold by the Company.
11
Results of Operations
The following tables set forth certain unaudited quarterly results of operations
of Nathaniel Energy for the first three quarters of 2004. The quarterly
operating results are not necessarily indicative of future results of
operations.
Three Months Ended (unaudited)
March 31 June 30 September 30 September 30 September 2004 vs. 2003
2004 2004 2004 2003 increase (decrease)
$ %
----------- ------------ ----------- -------- ------ ------
Revenue $3,346,792 $3,609,352 $3,433,929 $2,716,970 $716,959 26%
Cost of revenue 2,891,376 3,122,239 2,833,250 2,834,531 (1,281) -
----------- ------------ ----------- ----------- --------
Gross profit (loss) 455,416 487,113 600,679 (117,561) 718,240 542
Selling, general and
administrative expenses 675,007 727,790 653,974 1,126,838 (472,864) (42)
Write-down of inventory -- 274,000 -- --
Impairment of assets -- 1,403,046 -- --
----------- ------------ ----------- ----------
Income (loss) from operations (219,591) (1,917,723) (53,295) (1,244,399)
Interest expense, net (144,582) (131,068) (146,926) (320,597)
Other non-operating
income (expense) 6,000 (217,699) -- 75
----------- ------------ ----------- -----------
Loss before income taxes and
minority interest (358,173) (2,266,490) (200,221) (1,564,921)
Income tax expense (127,411) (131,272) (151,695) --
Minority interest (93,647) (99,638) (111,495) 146,578
----------- ------------ ----------- -----------
Net loss $ (579,231) $(2,497,400) $ (463,411) $(1,418,343)
----------- ------------ ----------- -----------
Significant non cash charges and
expenses:
Depreciation and amortization $ 236,316 $ 279,778 $ 211,055 $ 162,455
Asset impairment $ -- 1,403,046 -- --
Related party receivable
write off $ -- 264,587 -- --
Inventory write down $ -- 274,000 -- --
For the quarter ended September 30, 2004 revenue increased by 26% compared to
same period in 2003 due to our new contracts finalized in January 2004 and
$599,086 in equipment upgrades completed in March 2004 at our helium and gas
plants which provided additional plant processing and delivery capacity. Revenue
from the helium and gas processing operations was $3,264,237 for the three
months ended September 30, 2004, compared to $2,522,691 for the three months
ended September 30, 2003, an increase of 29%. Revenue from the fuel processing
operation was $169,692 during the period, down from $194,279 in the third
quarter of the prior year, a decrease of 13%.
For the nine months ended September 30, 2004 revenue increased by $4,764,555 or
85% to $10,390,073 from $5,625,518 for the nine months ended September 30, 2003.
The increase is primarily due to inclusion of revenue from the operation of the
Keyes helium plant, the Sturgis gas plant and the Keyes gathering system for the
entire nine month period ended September 30, 2004 of which, due to its
acquisition on April 3, 2003, only six months of revenue was included for the
nine month period ended September 30, 2003. All revenue and expense of our 51%
owned subsidiary, Nathaniel Energy Oklahoma Holdings Corporation, which operates
the Keyes Helium plant, the Sturgis gas plant and the Keyes gathering system
have been included in consolidated operations beginning April 3, 2003. Revenue
from helium and gas processing operations was $9,923,264 for the nine months
ended September 30 2004 compared to $5,179,927 for the nine months ended
September 30 2003, ($7,038,603 pro forma for the entire nine month period in
2003) an increase of 92% (41% pro forma). The increase in revenue from helium
and gas processing operations is due primarily to inclusion of three months
additional revenue for the nine months ended September 30, 2004 compared to the
nine months ended September 30, 2003 and an increase in our plant processing and
delivery capacity due to upgrades completed during the first quarter of 2004.
Revenue from fuel processing operations was $466,809 during the nine months
ended September 30 2004, up slightly by $21,218 from $445,591 for the same
period in 2003.
Gross profit for the three months ended September 30, 2004 was $600,679
representing a gross margin of 18% compared to a gross loss of ($117,561)
representing a gross margin of (4)% for the three months ended September 30,
2003, an increase in gross profit of $718,240 and an increase in gross margin of
22%. For the three months ended September 30, 2004, helium and gas processing
operation gross profit was $607,001 representing a gross margin of 19% which was
offset by a gross loss of ($6,322) representing a gross loss of (4%) margin at
the fuel processing operation. Gross profit for the nine months ended September
30, 2004 was $1,543,208 with gross margin of 15% compared to gross loss for the
nine months ended September 30, 2003 of ($47,480) with a gross margin of (1)%,
an increase in gross profit of $1,590,688 and an increase in gross margin of
16%. The increase in gross profit and margin is primarily due to our continuing
effort to improve our operations at our helium and gas processing facility
including our capital expenditures to upgrade equipment at the facility, new
contracts with gas customers and suppliers and inclusion of three months
additional revenue for the nine months ended September 30, 2004 compared to the
nine months ended September 30, 2003.
12
On January 9, 2004 we completed a new contract with Nexus Energy Company to
receive additional gas through Nexus Energy Company's existing pipeline for
processing at our Keyes helium facilities. In accordance with this contract, we
extract helium and natural gas liquids from this new gas stream. New gas supply
processing began at our Keyes plant in March 2004 after the successful upgrade
of our helium equipment performed by Air Products and Chemicals, Inc. Total cost
of the upgrade was $599,086.
Total selling, general and administrative expenses decreased $472,864 or 42%
from $1,126,838 for the three months ended September 30, 2003 to $653,974 for
the three months ended September 30, 2004 due primarily to a decrease in
compensation and compensation related costs and promotion expense of $647,621,
offset by increased research and development, legal and outside services
expense.
Selling, general and administrative expenses decreased $590,570 from $2,647,341
for the nine months ended September 30, 2003 to $2,056,771 for the nine months
ended September 30, 2004. The primary reasons for the decrease were a reduction
of $845,050 in non cash marketing, legal and professional expense and a
reduction in compensation expense of $227,248, primarily offset by other net
cost increases including an increase in Thermal Combustor(TM) research and
development expense of $306,319, an increase in our gas and helium operations
general and administrative expense of $87,827, representing a full nine months
in 2004 compared to six months in 2003 and an increase in outside service and
legal expense of approximately $149,000.
Interest expense for the nine months ended September 30, 2004 decreased by
$459,445 to $422,576 from $882,021 for the nine months ended September 30, 2003
resulting primarily from the conversion of $10 million of indebtedness due
Richard Strain into shares of our common stock.
Liquidity and Capital Resources
As of September 30, 2004 we owed $483,486 to financial institutions with an
average interest rate of 8.8%. $253,174 of the amount due is secured by
equipment and $230,312 is secured by a certificate of deposit in the amount of
$237,000, which is included in restricted cash on the balance sheet at September
30, 2004.
Additionally, the company has $8,892,151 in secured loans from Richard Strain.
$2,000,000 of this total was loaned to us in March 2004 with principal and
interest payable due in four quarterly payments of $540,000 each on October 1,
2005, and January 1, April 1, and July 1, 2006. Another $2,000,000 of this total
was loaned to us in 2003 with principal and interest payable due in four
quarterly payments of $540,000 each on October 1, 2005, and January 1, April 1,
and July 1, 2006. The remaining amount due Mr. Strain of $4,892,151 is due in
quarterly principal and interest payments of $582,876 from March 2007 through
December 31, 2009. All loan amounts from Mr. Strain to us may be converted, at
Mr. Strain's option, into shares of our common stock at a conversion rate equal
to 103% of the average closing price on the five trading days prior to March 17,
2004, or $0.78 per share. Additionally, we agreed to register the shares of
common stock issuable upon conversion of these loans by September 18, 2004. This
registration has not occurred.
During the quarter ended September 30, 2004, a note holder agreed to accept
33,333 shares of common stock for payment of $12,000 of accrued interest due.
On August 1 and September 8, 2004, we issued promissory notes with Merrick &
Company, a vendor, in the amounts of $126,153 and $199,627, respectively, for
services they provided related to our Thermal Combustor (TM) project in Italy
due November 1, 2004. If the notes are not paid on that date, the payee may, at
its option extend the payment term and interest will accrue on the unpaid
principal at the prime rate plus 2% through January 31, 2005, and at the prime
rate plus 5% from February 1, 2005 until paid. No payments have been made under
either of these notes, and Merrick has consented to an extension of the payment
terms.
Included in accounts payable is $421,030 for equipment upgrades and services due
to Air Products, a significant customer, with no stated interest rate. The
payable will be repaid over the next nine months, approximately, with monthly
installments that vary with revenue levels.
The following is a summary of our cash flows sources (uses) from operating,
investing, and financing activities during the periods indicated:
For the Nine Months
Ended September 30,
2004 2003
------------- --------------
Operating activities $(1,140,416) $ (876,779)
Investing activities (793,384) (9,396,414)
Financing activities 1,936,103 11,091,693
------------- --------------
Net effect on cash $ 2,303 $ 818,500
============= ==============
13
For the nine months ended September 30, 2004, net cash used in operating
activities of $1,140,416 is due to a net cash operating loss of approximately
$613,000 and an increase in inventory of approximately $2,325,000, offset by an
increase in accounts payable and accrued expenses of approximately $1,838,000.
The net cash operating loss includes our net loss of approximately $3,540,000
offset by approximately $2,974,000 of non cash expenses in our operating loss
including depreciation and amortization, minority interest, and the write down
of inventory, fixed assets and related party receivables. During the first nine
months of 2004, $881,868 of the restricted cash balance was used to construct
two Thermal Combustors (TM) which also significantly increased inventory
compared to December 31, 2003.
On July 1, 2004 we served notice of termination of the October 28, 2003 Gasifier
Supply and Start-Up Agreement with L & R Energy Company LLC (L&R) relating to
the supply of two MCF 1800 BHP Thermal Combustors(TM) for a waste to energy
project in Cologna Veneta, Italy.
On July 16, 2004 we entered into a new $3 million contract with EcoIdea S.L.R.,
L&R and others for our work on the Cologna Veneta project. Under the new
agreement, we placed one Thermal Combustor(TM) in service with natural gas by
July 29, 2004 and the plant produced at least one kilowatt of electricity at
that time, meeting the initial milestone toward the completion of the project in
accordance with the new agreement. Under the terms of the new agreement, we are
required to have two Thermal Combustors(TM) operating on RDF and producing
57,600,000 BTU's per hour, capable of producing 19,240 Kilograms of steam per
hour, by September 30, 2004. Our responsibilities to perform our obligations
under the new agreement are subject to other parties involved in the project
fulfilling their respective obligations, which need to be completed before we
can perform certain aspects of our obligations. At the time the new agreement
with EcoIdea S.L.R., L&R and others was entered into, we rescinded our
termination of the Gasifier Start-Up and Supply Agreement with L&R, and amended
it consistent with the new agreement with EcoIdea S.L.R., L&R and others. This
agreement provided liquidated damages at a rate of 3% of the contract price per
month if we had not completed this contract by September 30, 2004.
On September 13, 2004, we executed an amendment to the new contact executed on
July 16, 2004 with all contract parties to allow for one Thermal Combustor(TM)
to be completed by September 30, 2004 to receive 50% of our total price under
our contract, or $1,500,000, with the second Thermal Combustor (TM) to be
completed by October 30, 2004. This amendment was effective as of August 25,
2004. In addition, the amendment to the July 16, 2004 agreement shortened the
performance testing requirements from fifteen days under the Gasifier Supply and
Start-Up Agreement with L&R to four days under the amended contract.
On November 2, 2004, we announced the successful gasification of RDF in Cologna
Veneta, Italy, from one of the two Thermal Combustors(TM) we supplied in
connection with our amended Gasifier Supply and Start Up Agreement with L&R,
producing over one megawatt of electricity. The one Thermal Combustor(TM)
successfully gasifying waste in Italy proves our technology is viable for
commercialization on a wide scale level in the 1 - 50 Megawatt markets. We are
currently focusing on our plan to market our technology to niche energy markets.
Although we proved out our technology, we were unable to complete the
functionality test process required under our amended contract to receive our
first payment of $1,500,000 representing 50% of the total price. We stopped the
testing process to address the poor quality fuel being supplied by other
contract parties that is and remains outside the specifications and
densification requirements to successfully operate the Thermal Combustors(TM).
We believe that it was necessary to stop the testing process to protect our
equipment from damage and to discuss the contract issues surrounding the fuel
specifications with the other contract parties. To date we are continuing a
dialog with the other parties, but we have not come to a mutual understanding to
address the contract issues. We have retained special counsel, Sonnenschein Nath
& Rosenthal LLP, to preserve our rights and remedies, and to protect our
interests with respect to the amended contract. Although we believe we have
performed in accordance with our amended contract and are working to collect the
full contract price, the amount of payment and date of collection is uncertain
at this time. However, we do not believe any impairment currently exists with
respect to the work in process, which is being carried on the balance sheet at
approximately $2.7 million.
The net change in financing activities is due to a $2,000,000 debt issuance,
offset by debt repayments of $63,897.
For the nine month period ended September 30, 2003, net cash used in operating
activities of $876,799 is due primarily to a loss of $3,516,750 and increases in
accounts receivable of $207,119 and restricted cash of $199,970, offset by
depreciation and amortization of $479,557, a decrease in inventory of $260,017,
an increase in accounts payable and accrued expenses of $1,616,153 million and
stock issued for services of $845,050. Cash used for investing activities
resulted from capital expenditures of $9,396,414, nearly all related to the
acquisition of the helium and gas facility in Keyes, OK on April 3 2003. The net
change in financing activities is due to proceeds from debt of $11,147,215
offset by debt repayments of $55,522.
Nathaniel Energy had cash of $761,517 at September 30, 2004. This includes
$254,432 of restricted cash, $17,432 of which will be used to fund our
operations, pay current debts and fund current Thermal Combustor(TM) projects
and $237,000 of which is held as collateral for a bank loan.
Item 3. Controls and Procedures
Our Chief Operating Officer, who is our Principal Executive Officer and our
Principal Accounting Officer, conducted an evaluation of the effectiveness of
our disclosure controls and procedures. Based on this evaluation, our Chief
Operating Officer and Principal Accounting Officer concluded that our disclosure
controls and procedures were effective as of September 30, 2004 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, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
14
PART 2: OTHER INFORMATION
Item 1. Legal Proceedings.
Nathaniel Energy is involved in litigation in the normal course of its business,
none of which is anticipated to have a material adverse effect on its financial
condition, operations or prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Nathaniel Energy issued an aggregate 529,333 shares of common stock during the
three months ended September 30, 2004 in payment of accounts and notes payable
as follows:
Issuance CommonStock Total Type of
Holder Name Date Shares Price Consideration
- ----------- ----------- ------------- -------- -----------------
Sol Adler September 21, 2004 27,250 $27,250 Debt Conversion
Alvin Mordoh September 21, 2004 450,000 $162,000 Debt Conversion
Isaac Nedd September 21, 2004 52,083 $18,750 Debt Conversion
Nathaniel Energy has also agreed to issue 33,333 shares of common stock to
William Morgan, as payment for $12,000 of accrued interest. The shares will be
issued in the fourth quarter of 2004.
Each of the above issuances is exempt from registration under Section 4(2) of
the Securities Act of 1933. We did not use any underwriter or placement agent in
these transactions, and did not pay any compensation to anyone in connection
with these issuances.
All of these issuances have been or will be made directly by Nathaniel Energy to
persons who were creditors of Nathaniel Energy with whom its management had
direct contact and personal relationships, or who were introduced to Nathaniel
Energy by members of Nathaniel Energy's management.
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.
Not Applicable
15
Item 6. Exhibits.
3(i).1 Certificate of Incorporation*
3(i).2 Articles of Amendment to Articles of Incorporation, as amended on August
6, 1999*
3(i).3 Certificate of Amendment of Certificate of Incorporation, as
amended on April 24, 2002* 3(ii).1 Amended and Restated By-Laws**
10.1 Agreement dated August 25, 2004 amending an agreement dated July 16,
2004 among EcoIdea S.r.l., Electronic Solar S.r.l., European Waste Solutions,
Ltd., L&R Energy Company, LLC and Nathaniel Energy Corporation.
31 Certification of the Principal Executive Officer and Principal Accounting
Officer pursuant to Rule 13a-14(a)or Rule 15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Principal Executive Officer and Principal Accounting
Officer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
*Denotes document filed as an exhibit to our Current Report on Form 8-K for an
event dated December 31, 2002 and incorporated herein by reference. **Denotes
document filed as an exhibit to our Annual Report on Form 10-KSB for the year
ended December 31, 2003 and incorporated herein by reference.
16
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: November 12, 2004
By: /s/ George A. Cretecos
----------------------------
George A. Cretecos
Chief Operating Officer
Nathaniel Energy Corporation
17