UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2011

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-053150

NACEL ENERGY CORPORATION

600 17 th Street, Suite 2800S
Denver, Colorado 80202
Telephone (720) 204-1150

Incorporated in Wyoming
 
IRS ID# 20-4315791

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 the filing requirements for the past 90 days.   Yes  þ   No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  o No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting
company þ

Check whether the issuer is a shell Company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o No  þ

Shares of common stock outstanding on August 18, 2011: 69,741,124

 
 
 

NACEL ENERGY CORPORATION

INDEX

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011

PART I. FINANCIAL INFORMATION
   
3
 
Item 1. Financial Statements
   
3
 
Consolidated Balance Sheets
   
3
 
Consolidated Statements of Income (Loss)
   
4
 
Consolidated Statements of Cash Flows
   
5
 
Notes to Consolidated Financial Statements
   
6
 
Item 2. Management’s Discussion and Analysis or Plan of Operation
   
11
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
14
 
Item 4. Controls and Procedures
   
14
 
PART II. OTHER INFORMATION
   
15
 
Item 1. Legal Proceedings
   
15
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
16
 
Item 3. Defaults Upon Senior Securities
   
16
 
Item 4. Submission of Matters to a Vote of Security Holders
   
16
 
Item 5. Other Information
   
16
 
Item 6. Exhibits
   
17
 
 
 
2
 
 
PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
Nacel Energy Corporation
(A Development Stage Company)
 Consolidated Balance Sheets
(Unaudited)

   
June 30,
   
March 31,
 
   
2011
   
2011
 
ASSETS
           
Current Assets
           
Cash
  $ 57,583     $ 48,857  
Related party receivable
    409,538       84,987  
Total current assets
    467,121       133,844  
Property, plant and equipment, net of accumulated depreciation of $17,722 and $15,849, respectively
    148,744       149,443  
Investments
    414,324       263,705  
TOTAL ASSETS
  $ 1,030,189     $ 546,992  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Accounts payable
  $ 77,470     $ 62,777  
Accounts payable - related party
    11,058       12,018  
Accrued expenses
    2,021       1,805  
Shareholder line of credit
    580,753       460,753  
Notes payable
    75,000       75,000  
Convertible note, net of a 100% discount of $302,700 and $74,242, respectively
    -       -  
Embedded derivative liabilities
    758,914       342,866  
Total current liabilities
    1,505,216       955,219  
                 
STOCKHOLDERS' DEFICIT
               
Common stock of $.001 par value. Authorized 75,000,000 shares; issued and outstanding 67,341,124 and 56,860,409, respectively
    67,341       56,860  
Additional paid-in capital
    6,834,191       6,233,319  
Deficit accumulated during the development stage
    (7,376,559 )     (6,698,406 )
Total stockholders' deficit
    (475,027 )     (408,227 )
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
  $ 1,030,189     $ 546,992  

See accompanying notes to unaudited consolidated financial statements
 
 
3
 
 
Nacel Energy Corporation
( A Development Stage Company)
Consolidated Statements of Income (Loss)
(Unaudited)

               
February 7, 2006
 
               
(Inception)
 
   
Three months ended June 30,
   
through
 
   
2011
   
2010
   
June 30, 2011
 
                   
General and administrative expenses
  $ 102,331     $ 115,776     $ 3,467,144  
Wind projects donated by related party
    -       -       490,000  
Wind project development costs
    7,720       30,994       2,014,033  
Depreciation
    1,873       3,109       29,195  
Total operating expenses
    111,924       149,879       6,000,372  
                         
Other income (expense)
                       
Interest expense
    (246,947 )     (554,296 )     (2,586,243 )
Interest income
    -       -       3,848  
Other income
    -       -       419  
Loss on debt extinguishment
    -       (1,815,327 )     (1,513,549 )
Income (loss) from equity method investment
    150,619       -       120,324  
Gain (loss) on derivative financial instruments
    (469,901 )     2,322,312       2,599,014  
Total other income (expense)
    (566,229 )     (47,311 )     (1,376,187 )
Net income (loss)
  $ (678,153 )   $ (197,190 )   $ (7,376,559 )
                         
Basic and diluted net income (loss) per share
  $ (0.01 )   $ (0.01 )     N/A  
                         
Basic and diluted weighted average common shares outstanding
    61,832,890       22,555,058       N/A  

See accompanying notes to unaudited consolidated financial statements
 
4
 
 
Nacel Energy Corporation
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)

               
February 7, 2006
 
   
Three Months Ended June 30,
   
(Inception) through
 
   
2011
   
2010
   
June 30, 2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net loss
  $ (678,153 )   $ (197,190 )   $ (7,376,559 )
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    1,873       3,109       29,195  
Amortization of debt discount and deferred financing costs
    235,500       538,564       2,444,489  
Stock for services
    7,000       -       417,390  
Wind projects donated by related party
    -       -       490,000  
Imputed interest
    -       -       15,725  
Stock issued for executive compensation
    -       -       1,068,500  
Impairment of fixed assets
    -       -       14,022  
Loss on extinguishment of debt
    -       1,815,327       1,513,549  
(Gain) loss on equity method investment
    (150,619 )     -       (120,324 )
(Gain) loss on derivatives
    469,901       (2,322,312 )     (2,599,014 )
Changes in:
                       
Prepaid and other current assets
    -       -       -  
Deposits
    -       183,220       -  
Accounts payable
    14,693       (27,700 )     256,020  
Accounts payable - related party
    (6,950 )     -       5,068  
Accrued expenses
    6,206       (203 )     8,011  
Net Cash Used in Operating Activities
    (100,549 )     (7,185 )     (3,833,928 )
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Advances to equity method investee
    (324,551 )     -       (409,538 )
Purchase of fixed assets
    (1,174 )     -       (191,961 )
Net Cash Used in Investing Activities
    (325,725 )     -       (601,499 )
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Cash paid for financing costs
    -       -       (120,000 )
Proceeds from shareholder line of credit
    120,000       -       578,010  
Borrowings on debt
    315,000       150,000       1,880,000  
Proceeds from sale of common stock
    -       -       955,000  
Proceeds from exercise of warrant
    -       -       1,200,000  
Net cash Provided by Financing Activities
    435,000       150,000       4,493,010  
NET INCREASE IN CASH
    8,726       142,815       57,583  
CASH AT BEGINNING OF PERIOD
    48,857       57,763       -  
CASH AT END OF PERIOD
  $ 57,583     $ 200,578     $ 57,583  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
                       
Interest
  $ 7,262     $ 15,935     $ 116,219  
Income taxes
    -       -       -  
NON-CASH TRANSACTIONS
                       
Debt discount from derivative liabilities
    315,000       935,000       2,673,979  
Warrants issued for deferred financing costs
    -       -       68,592  
Shares issued for settlement of accounts payable
    -       178,548       178,548  
Shares issued for payment and conversion of notes payable
    235,500       207,324       1,916,259  
Reclassification of derivative liabilities to additional paid-in capital
    368,853       -       368,853  
Stock issued for Investment
    -       -       294,000  

See accompanying notes to unaudited consolidated financial statements
 
5
 
 
NACEL ENERGY CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED

NOTE 1 - BASIS OF PRESENTATION

The unaudited interim financial statements included herein have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. We suggest that these interim financial statements be read in conjunction with the audited financial statements and notes thereto included in our Form 10-K for the year ended March 31, 2011, as filed with the SEC. We believe that all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein and that the disclosures made are adequate to make the information not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in Form 10-K have been omitted.

Fair Value Measurements

In September 2006, the FASB issued ASC 820 (previously SFAS 157) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of ASC 820 were effective January 1, 2008.

As defined in ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observations of those inputs. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
 
 
6
 
 
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of June 30, 2011. As required by ASC 820, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.

 
 
June 30, 2011
 
 
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Freestanding and Embedded derivatives
    —       —     $ 758,914     $ 758,914  
 
The derivatives listed above are carried at fair value. The fair value amounts in current period earnings associated with the Company’s derivatives resulted from Level 3 fair value methodologies. The observable data includes the quoted market prices and estimated volatility factors.

Reclassifications
 
Certain prior year amounts have been reclassified to conform to the current year presentation.

NOTE 2 - GOING CONCERN
 
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Nacel Energy has incurred material recurring losses from operations. Since inception, Nacel Energy has incurred losses of approximately $7 million. In addition, Nacel Energy is experiencing a continuing operating cash flow deficiency. These factors, among others, raise substantial doubt about Nacel Energy’s ability to continue as a going concern for a reasonable period of time.

Nacel Energy is pursuing, and will continue to pursue, additional equity financing and/or debt financing while managing cash flow in an effort to provide funds and cash flow to meet its obligations on a timely basis and to support wind project development activities.

The consolidated financial statements do not contain any adjustments to reflect the possible future effects on the classification of assets or the amounts and classification of liability that may result should Nacel Energy be unable to continue as a going concern.

NOTE 3 – SHAREHOLDER LINE OF CREDIT

As of March 31, 2011, Nacel Energy had an agreement with a shareholder and director for a $460,753 line of credit that bears interest at 8%.

On June 1, 2011, we ratified the terms for the line of credit to allow an additional increase in the balance to $600,000.

As of June 30, 2011, the line of credit extended by the director was $580,753, leaving $19,247 available for borrowing.  There was a balance of accrued interest in the amount of $2,376 as of June 30, 2011.
 
 
7
 
 
NOTE 4 – CONVERTIBLE NOTE PAYABLE

May 6, 2010 $600,000 Convertible Note

On May 6, 2010, Nacel executed and delivered, pursuant to a private placement with a single institutional investor, a $600,000 Convertible Promissory Note (the “Convertible Note”) in exchange for the investor’s execution and delivery of a $500,000 Secured & Collateralized Promissory Note (the “Secured Note”) to the Company.

The original principal amount of the Convertible Note is $600,000, and the Convertible Note provides for a 12% one-time interest charge. The Convertible Note has a maturity date of three (3) years from May 6, 2010 at which time all principal and accrued interest shall be due and payable in full. Prepayment is not permitted unless approved by the holder in writing. However, the Convertible Note is payable on demand by the holder in an amount not to exceed the cash amount paid under the Secured Note.

The Convertible Note is convertible by the holder, at its election, at any time to the extent of funds advanced on the Secured Note. The subject conversion amount is converted into shares of Nacel’s common stock based on a conversion price of seventy percent (70%) of the lowest trade price in the 30 trading days prior to the conversion. However, the Company has the right to enforce a conversion floor of $0.65 per share. Thus, if the conversion price is less than $0.65 per share, the holder would incur a conversion loss which is satisfied by either (a) cash payment by the Company in an amount sufficient to pay the conversion loss ($0.65 per share less the conversion price) times the number of shares being converted), or (b) the Company may convert the conversion amount into shares at $0.65 per share and add the conversion loss to the unpaid balance of the Convertible Note.

The Secured Note is for $500,000 with a 14.4% one-time interest charge.  The Secured Note has a maturity date of three (3) years from May 6, 2010 at which time all principal and accrued interest shall be due and payable in full. The Secured Note is secured by an investment asset account with a value of $500,000. During the three months ended June 30, 2011, Nacel received advances of $162,800 toward the note receivable which fully extinguished the Secured Note. As a result, Nacel recognized an additional $100,000 of principal on the Convertible Note due to the original issue discount inherent between the $500,000 Secured Note and the $600,000 Convertible Note.  As discussed in Note 7, the embedded conversion option in the Convertible Note is classified as a liability in accordance with ASC 815. The fair value of the liability exceeded the carrying amount of the note on the date of the advances and accordingly a full discount of $162,800 was recorded.

The outstanding principal on the Convertible Note payable as of June 30, 2011 in the consolidated balance sheet is $200,500, which is offset with a debt discount of $200,500.

During the three months ended June 30, 2011, the noteholder converted $235,500 of principal and Nacel issued a total of 10,280,715 shares of common stock. As a result of the note conversion, $235,500 of related debt discount was amortized to interest expense.

April 28, 2011 $105,000 Convertible Note

On April 28, 2011, we executed and delivered, pursuant to a private placement with a single institutional investor, a $105,000 Convertible Promissory Note (the “Convertible Note”) in exchange for a $50,000 payment. The Convertible Note provides for 0% interest and has a maturity date of May 28, 2011 when all principal and accrued interest was due and payable in full. Prepayment was permitted. The Convertible Note is convertible into shares of our common stock, at the holder’s election, under the same terms as provided for in the $600,000 Convertible Note being a conversion price of seventy percent (70%) of the lowest trade price in the 30 trading days prior to the conversion.  As discussed in Note 7, the embedded conversion option in the Convertible Note is classified as a liability in accordance with ASC 815. The fair value of the liability exceeded the carrying amount of the note on the date of the advances and accordingly a full discount of $105,000 was recorded.

On May 2, 2011, it was agreed that the Convertible Note would be surrendered and that such surrender would be accepted as payment of $105,000 against the $500,000 Secured Note referenced above.
 
 
8
 
 
November 8, 2010 $600,000 Convertible Note

On November 8, 2010, Nacel executed and delivered its $600,000 Convertible Promissory Note (the “Convertible Note”) in exchange for an investor’s execution and delivery of a $500,000 Secured & Collateralized Promissory Note (the “Secured Note”) to Nacel. On April 28, 2011, Nacel received a $102,200 payment on the Secured Note resulting in an equivalent amount of principal being due under the Convertible Note. The terms of the Convertible Note and the Secured Note are identical to the terms of the May 6, 2010 Convertible Note as described above in this Note 5.   As discussed in Note 7, the embedded conversion option in the Convertible Note is classified as a liability in accordance with ASC 815. The fair value of the liability exceeded the carrying amount of the note on the date of the advances and accordingly a full discount of $102,200 was recorded.

The following table summarizes the changes in convertible notes for the three months ended June 30, 2011:

Convertible notes at March 31, 2011, net of discount
 
 
-
 
Cash additions
 
 
315,000
 
Non-cash additions – original issue discounts
   
155,000
 
Addition of discounts
 
 
(470,000
)
Accretion of discounts
 
 
235,500
 
Conversions of principal
 
 
(235,500
)
Convertible notes at June 30, 2011, net of discount
 
 
-
 

NOTE 5 - EQUITY TRANSACTIONS

During the quarter ending June 30, 2011, Nacel issued 200,000 shares of common stock for services performed in the prior period valued at $7,000. Additionally, during the quarter ending June 30, 2011, 10,280,715 shares of common stock valued at $235,500 were issued for conversion of notes payable.

NOTE 6 – WARRANTS

Nacel did not issue any new Warrants during the quarter.

A summary of the options for the three months ended June 30, 2011 is as follows:

   
Warrants
   
Weighted-Average
Exercise Price
   
Weighted-Average
Remaining
Contracted Life
(Years)
   
Aggregate
Intrinsic Value
 
Outstanding on March 31, 2011
    10,583,333     $ 0.30       2.93     $ -  
Granted
    -       -       -       -  
Exercised
    -       -       -       -  
Forfeited
    -       -       -       -  
Expired
    (3,000,000 )     0.30       -       -  
                                 
Outstanding on June 30, 2011
    7,583,333     $ 0.30       3.81     $ -  

NOTE 7 - DERIVATIVE LIABILITY

The embedded conversion options in Nacel’s convertible notes described in Note 4 do not contain an explicit limit on the number of shares to be issued upon settlement. The related warrants described in Note 6 contain a reset provision that can cause an adjustment to the conversion price if Nacel sells or issues an equity instrument at a price lower than the initial conversion price. These provisions result in these instruments being classified as liabilities under ASC 815-15 (“Derivatives and Hedging”). The fair value of these liabilities will be re-measured at the end of every reporting period and the change in fair value will be reported in our consolidated statement of operations as a gain or loss on derivative financial instruments.
 
 
9
 

The following table summarizes the change in derivative liabilities for the three months ended June 30, 2011:

Derivative liabilities at March 31, 2011
 
$
342,866
 
Addition of new derivative liabilities
 
 
630,600
 
Reclassification of derivative liabilities to additional paid-in capital due to note conversions
   
(368,853)
 
Excess fair value of derivative liabilities over carrying value of notes
   
(315,600)
 
Change in fair value of embedded conversion option and warrants during the period
 
 
469,901
 
Derivative liabilities at June 30, 2011
 
$
758,914
 

Nacel used the Black-Scholes option pricing model to value the embedded conversion feature and warrants above using the following assumptions: number of options as set forth in the convertible note and warrant agreements; no expected dividend yield; expected volatility ranging from 171% - 181%; risk-free interest rates ranging from 0.38% - 0.81% and expected terms based on the contractual term.

NOTE 8 – INVESTMENT IN CROWNBUTTE WIND POWER, INC. AND RELATED PARTY RECEIVABLE

Nacel accounts for its investment in Crownbutte Wind Power, Inc. ("CWP") as an equity-method investment under ASC 323-10 “Investments – Equity Method and Joint Ventures”.

For the quarter ended June 30, 2011, Nacel allocated losses from CWP of $199,381 to its investment account. Nacel also performed services for Crownbutte and received a five-year warrant to purchase 3,500,000 shares of Crownbutte common stock for $0.0225 per share. Nacel recorded this transaction as an addition to the investment account, using the fair value of $350,000 on the grant date. The net change in the investment account was $150,619, which is recorded as income from equity-method investment. This results in an investment balance of $414,324 at June 30, 2011.

As a result of additional issuance of common stock by CWP, Nacel’s ownership percentage was reduced to 28% as of June 30, 2011. As of June 30, 2011, the aggregate market value of Nacel’s shares in CWP was $630,000.

During the quarter ended June 30, 2011, Nacel advanced $324,551 to CWP for payment of various expenses. The advances do not bear interest and are due on demand. On May 31, 2011, Crownbutte granted Nacel the option to convert $111,687 of its payable to Nacel into Crownbutte common stock at a price of $0.0225 per share.

CWP has a fiscal year end of December 31. CWP’S net loss for the six months ended June 30, 2011 and 2010 was $852,636 and $1,878,929, respectively. CWP's net loss for the quarters ended June 30, 2011 and 2010 was $731,534 and $1,485,359, respectively.

NOTE 9   SUBSEQUENT EVENTS.

In July, 2011, in furtherance of its prior determination that the Snowflake wind energy project was not financially viable, the Company allowed its Wind Project Agreement (lease) covering 640 acres of land located in Navajo County, Arizona to terminate with the nonpayment of the annual lease amount.

On July 20, 2011, the Company issued 2,400,000 shares of its common stock to an institutional investor in connection with converting $36,960 in indebtedness.
 
 
10
 

Item 2. Management’s Discussion and Analysis or Plan of Operation

At the directive of the Securities and Exchange Commission to use “plain English” in its public filings, the Company will use such terms as “we”, “our” and “us” in place of Nacel Energy Corporation or “the Company.” When such terms are used in this manner throughout this document they are in reference only to the corporation, Nacel Energy Corporation and its subsidiary, and are not used in reference to the board of directors, corporate officers, management, or any individual employee or group of employees.

Forward-Looking Statements
 
This Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-Q, including, without limitation, the statements under both “Notes to Consolidated Financial Statements” and “Item 2. Management’s Discussion and Analysis or Plan of Operation” located elsewhere herein regarding the Company’s financial position and liquidity, the amount of and its ability to make debt service payments, its strategies, financial instruments, and other matters, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations are disclosed in this Form 10-Q.
 
History
 
Nacel Energy Corporation is a Wyoming corporation incorporated on February 7, 2006, with our principal executive office currently located at 600 17 th Street, Suite 2800S, Denver, Colorado 80202. We are a development stage wind power generation company engaged in the business of developing wind power generation facilities from “green field” (or blank state) up to and including operation. Our domestic development efforts are primarily focused upon wind power generation facilities in the 10 MW to 40 MW range. We have not ruled out the possibility of larger projects including internationally.
. 
Current Operations

As of June 30, 2011, we had five (5) separate wind energy projects having 155 MW, or more, of total potential generating capacity located on acreage in the Panhandle area of Texas and in Arizona. We determined that a sixth wind energy project (Snowflake) located in Navajo County, Arizona was not financially viable and would be terminated. The status of each of our development stage wind energy projects was described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, as filed with the Commission. We are also actively engaged in efforts to locate and evaluate other “green field” sites for development of additional wind power generation facilities. We do not have any wind energy projects in operation currently and it is estimated that it will not be until at least late December 2012, perhaps longer, before any of our projects may become operational, and will require that we obtain substantial additional financing and/or equity, obtaining of construction and project debt financing and establishing turbine supply relationships. There are no assurances that we will be able to obtain any additional financing and/or equity and, even if obtained, that any of our wind power generation facilities will ultimately become operational or generate sufficient revenues to be profitable. Similarly, there are no assurances that we will be able to establish and maintain satisfactory relationships with a turbine supply company in order to able to develop any of our wind energy projects.
 
During the three month period ending June 30, 2011, the following activities occurred with respect to our six (6) wind power generations projects:

 
·
In May, 2011, we formally notified the Arizona Public Service Co. of our decision to terminate the Snowflake wind energy project located in Navajo County, Arizona. With the termination of the Snowflake project, we intend to allow our Wind Project Agreement (lease) to terminate with the non-payment of the annual lease amount due in July, 2011.

 
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·
We are engaged in completing necessary procedures to allow the filing of additional applications for interconnection with other public utilities with respect to a couple of our other wind power projects.

 
·
We are continuing to monitor wind data being generated at our wind power project sites and to develop wind energy studies which may be necessary for our respect wind power projects.

We continue to assess our wind power project development business regularly with regard to the need for capital equipment. During the three month period ending June 30, 2011, we acquired no additional capital equipment.

In addition to the foregoing, during the three month period ending June 30, 2011, we continued to provide assistance and support to Crownbutte Wind Power, Inc. (Crownbutte), a small public company in which we are the largest shareholder, in connection with the following:

 
·
We assisted in arranging initial financing for Crownbutte from an institutional investor which, if fully exercised could result in providing up to $2.8 million in financing for Crownbutte and its wind power projects. However, there are no assurances that all potential financing will occur, or if further financing does occur, the amount of the potential financing which may occur is uncertain and dependent on numerous factors including, without limitation, Crownbutte’s progress in developing its existing wind energy projects, Crownbutte’s financial condition and resources, strength and violatility of stock prices for its common stock and other factors over which Crownbutte has no control.
 
·
We advanced an additional $324,551 in operating capital to Crownbutte, with such advances being used for general operating capital and expenses related to the development of the 200 MW Gascoyne II wind power generation project located on 1733 acres between the towns of Bowman and Hettinger, North Dakota.
 
·
Included in funds advanced to Crownbutte, on June 15, 2011, we advanced $219,000 directly to the Midwest Independent System Operator (Midwest ISO) to complete a Feasibility Study required to connect the Gascoyne II wind power project to the electric grid.

As of June 30, 2011, we had advanced a total of $409,538 to Crownbutte, with a total of $111,687 being eligible, upon our election, for conversion into shares of Crownbutte’s common stock based on a conversion price of $0.0225 per share. We will continue in the future to provide, to the extent that we have funds available, additional advances to Crownbutte and otherwise assist Crownbutte in obtaining other financing necessary for the development of its Gascoyne II wind power project.

Plan of Operation

Since our inception, we have been a development stage company. For the three months ended June 30, 2011, we had a net loss of $678,153 and have an accumulated deficit since inception of $7,376,559. The potential future revenues from our wind power generation projects, if any, will not be generated until at least December, 2012, perhaps longer, and will require the expenditure of substantial additional capital, obtaining construction and project debt financing and establishing turbine supply relationships.

For the foreseeable future, our operating plan is dependent upon both the ability to conserve existing cash resources and the ability to obtain additional capital through equity financing and/or debt financing in an effort to provide funds and cash flow to meet our obligations on a timely basis and to support wind project development activities. In the event that we are unable to conserve existing cash resources and/or obtain the additional and necessary capital to pursue our wind power generation development projects, we may have to cease or significantly curtail our operations. This could materially impact our ability to continue operations.

 
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Liquidity and Capital Resources

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. Since our inception, we have been a development stage company and, accordingly, have incurred losses from our operations. For the three months ended June 30, 2011, we had a net loss of $678,153 and have an accumulated deficit since inception of $7,376,559. The potential future revenues from our wind power generation projects, if any, will not be generated until at least December 2012, perhaps longer, and will require the expenditure of substantial additional capital obtaining construction and project debt financing and establishing turbine supply relationships. In addition, our shareholder line of credit in the amount of $600,000 is due and payable on demand. These factors, among others, indicate that we may be unable to continue as a going concern for a reasonable period of time.
 
As of June 30, 2011, we had cash of $57,583 and working capital deficit of $(1,038,095). This compares to cash of $48,857 and working capital deficit of $(821,375) at March 31, 2011. Based on commitments arising from our consulting agreements and other general and administrative expenses, we anticipate that that operating expenses during each succeeding quarter will be, at a minimum, approximately $40,000. This amount does not include any capital requirements for our wind energy projects. Based on the foregoing, we will not have sufficient cash resources to finance our operations except for several months unless we are able to raise additional equity financing and/or debt financing in the immediate future. We have commenced, and will continue to pursue, efforts to raise additional equity financing and/or debt financing from a variety of sources and means. There are no assurances that we will be able to obtain any additional financing and/or equity and, even if obtained, that such financing will be in a sufficient amount to be able to continue operations for a sufficient period until one or more of our wind power generation facilities become operational or until we can generate sufficient revenues to be profitable.

As of June 30, 2011, we had borrowed $580,753 under an original $250,000 shareholder line of credit, which was amended in late June, 2011 to, among other things, increase the amount which could be borrowed up to $600,000. The first payment under the amended credit line is due on demand. The unpaid principal amount and all accrued interest are due and payable in full within 15 days after written demand for payment. There are no assurances as to how long the shareholder may wait before a written demand for payment is made to the Company. Accordingly, if a written demand for payment is made, this would have a material impact on the future liquidity of the Company and its future operations.

Recent Financings

During the quarter ending June 30, 2011, we have not completed any additional financings. For financings completed during the fiscal year ended March 31, 2011, see our Annual Report on Form 10-K dated March 31, 2011, as filed with the SEC.

Results of Operations

Three Months Ended June 30, 2011 compared to the Three Months Ended June 30, 2010

Overview. The net loss for the three months ended June 30, 2011 (“2011 Period”) was $678,153 compared to $197,190 for the three months ended June 30, 2010 (“2010 Period”), an increase of $480,963.

Expenses. Our operating expenses were $111,924 for the 2011 Period compared to operating expenses of $149,879 reported for the 2010 Period, a decrease of $37,955. This decrease in operating expenses is primarily attributable to a $13,444 decrease in general and administrative expenses, and a $23,274 decrease in wind project development costs for the 2011 Period as compared to the 2010 Period.

Our net other income for the 2011 Period was $566,299 as compared to a loss of ($47,311) for the 2010 Period. Our other expenses included a loss on derivative financial instruments of $469,901 as compared to a gain of $2,322,312 in the 2010 Period; interest expense of $246,947 for the 2011 Period as compared to $554,296 for the 2010 Period, a loss on debt extinguishment of $0 for the 2011 Period compared to a loss of $1,815,317 for the 2010 Period and income from our equity method investment of $150,619 for the 2011 Period compared to $0 for the 2010 Period.

 
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Off Balance Sheet Transactions, Arrangements, or Obligations.

We have no material off balance sheet transactions, arrangements or obligations.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
As a “smaller reporting company” (as defined by §229.10(f)(1)), we are not required to provide the information required by this item.
 
Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain a system of disclosure controls and procedures that are designed for the purpose of insuring that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report on Form 10-Q, our Chief Executive Officer and our Chief Financial Officer performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. In the course of this evaluation, our management considered the material weakness in our internal control over financial reporting as discussed in our Annual Report on Form 10-K for the period ended March 31, 2011. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report on Form 10-Q, our disclosure controls and procedures were not effective to ensure that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the registrant’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

We have identified the following material weaknesses in our internal control over financial reporting:

Lack of Independent Board of Directors and Audit Committee

Management is aware that an audit committee composed of the requisite number of independent members along with a qualified financial expert has not yet been established. Considering the costs associated with procuring and providing the infrastructure to support an independent audit committee and the limited number of transactions, management has concluded that the risks associated with the lack of an independent audit committee are not sufficient to justify the creation of such a committee at this time. Management will periodically reevaluate this situation.
   
Lack of Segregation of Duties

Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to clearly segregate duties do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation.

 
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Changes in Internal Control Over Financial Reporting

We continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financing reporting on an ongoing basis. We are committed to taking further action and implementing additional enhancements or improvements, as necessary, and as funds allow.
 
There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2011 that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.
 
PART II. OTHER INFORMATION
 
Item 1. Legal Proceedings
 
We know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 
15
 

Item 1A. Risk Factors

 As a “smaller reporting company” (as defined by §229.10(f)(1)), we are not required to provide the information required by this item.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)  Unregistered Sales of Equity Securities.

On April 4, 2011, we issued 1,100,000 shares to convert $32,340 of the $600,000 convertible note. These shares were deemed to have been held by the investor for a period of more than 6 months pursuant to Rule 144 and these shares can be sold by the investor, subject to compliance with Rule 144.

On April 14, 2011, we issued 1,280,715 shares to convert $35,860 of the $600,000 convertible note. These shares were deemed to have been held by the investor for a period of more than 6 months pursuant to Rule 144 and these shares can be sold by the investor, subject to compliance with Rule 144.

On May 9, 2011, we issued 1,000,000 shares to convert $23,800 of the $600,000 convertible note. These shares were deemed to have been held by the investor for a period of more than 6 months pursuant to Rule 144 and these shares can be sold by the investor, subject to compliance with Rule 144.

On May 11, 2011, we issued 200,000 shares in exchange for consulting services valued at $7,000. These shares were deemed to have been held by the investor for a period of more than 6 months pursuant to Rule 144 and these shares can be sold by the investor, subject to compliance with Rule 144.

On May 16, 2011, we issued 2,500,000 shares to convert $59,500 of the $600,000 convertible note. These shares were deemed to have been held by the investor for a period of more than 6 months pursuant to Rule 144 and these shares can be sold by the investor, subject to compliance with Rule 144.

On June 2, 2011, we issued 2,400,000 shares to convert $50,400 of the $600,000 convertible note. These shares were deemed to have been held by the investor for a period of more than 6 months pursuant to Rule 144 and these shares can be sold by the investor, subject to compliance with Rule 144.

On June 27, 2011, we issued 2,000,000 shares to convert $33,600 of the $600,000 convertible note. These shares were deemed to have been held by the investor for a period of more than 6 months pursuant to Rule 144 and these shares can be sold by the investor, subject to compliance with Rule 144.
 
Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders
 
The Registrant did not submit any matters to a vote of its security holders during the three-months ended June 30, 2011.
 
Item 5. Other Information
 
None

 
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Item 6. Exhibits
 
a) Exhibits.

Exhibit No.
 
Document
 
 
 
31.1
 
Certification Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 (Mark Schaftlein, Chief Executive Officer and Principal Accounting Officer)
 
 
 
32.1
 
Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Mark Schaftlein, Chief Executive Officer and Principal Accounting Officer)

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.

NACEL ENERGY CORPORATION
 
 
By:
/s/ Mark Schaftlein
 
Mark Schaftlein
 
Chief Executive Officer
   
 
Date: August 22, 2011
 
 
By:
/s/ Mark Schaftlein
 
Mark Schaftlein
 
Principal Accounting Officer
 
 
Date:
August 22, 2011
 
 
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