<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1935 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number: 0-16217
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 33-0041789
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4710 BELLAIRE BOULEVARD, SUITE 301, BELLAIRE, TEXAS 77401
(Address of principal executive offices) (Zip Code)
(713) 662-2699
(Issuer's telephone number)
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 the issuer's classes of common equity,
as of the latest practicable date: 28,011,808 common shares outstanding as of
October 22, 1996.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes No X
--------- ---------
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
September 30, 1996 (unaudited) and December 31, 1995
Consolidated Statements of Loss 4
Three Months and Nine months ended September 30, 1996
and 1995 (unaudited)
Consolidated Statements of Stockholders' Equity 5
Nine months ended September 30, 1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows 6
Nine months ended September 30, 1996 and 1995 (unaudited)
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
</TABLE>
2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEPT. 30,
1996 DEC. 31
ASSETS UNAUDITED 1995
------ ------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................. $ 1,829,568 $ 333,326
Certificates of deposit............................... - 200,000
Accounts receivables, less allowance for
doubtful accounts of $43,869 and $34,000............. 1,088,812 626,146
Inventories........................................... 578,075 329,902
Prepaid expenses and other............................ 505,084 374,623
------------ ------------
Total Current Assets 4,001,539 1,863,997
Notes receivable....................................... 815,069 248,967
Property and equipment, less accumulated depreciation
of $381,073 and $272,240............................. 1,709,501 1,401,634
Patents and purchased technologies, less accumulated
amortization of $275,500 and $155,361................. 1,422,626 1,224,777
Goodwill, less accumulated amortization of $180,164
and $55,553........................................... 3,076,019 2,576,481
Other intangible assets, less accumulated
amortization of $67,695 and $38,900................... 236,077 144,872
Other.................................................. 241,402 423,991
------------ ------------
$ 11,502,233 $ 7,884,719
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term borrowings................................. $ 141,890 $ 1,111,658
Current maturities of long-term debt.................. 174,000 264,396
Accounts payable...................................... 556,340 974,400
Accrued expenses...................................... 361,845 895,506
------------ ------------
Total current liabilities........................... 1,234,075 3,245,960
Long-term debt, less current maturities................ 737,264 3,535,461
Minority interest...................................... 16,488 16,488
------------ ------------
Total Liabilities.................................... 1,987,827 6,797,909
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 95,241 and 30 shares issued.............. 10,470,300 750,000
Common stock, $.001 par value, 50,000,000 shares
authorized; 28,461,808 and 23,927,285 shares issued... 28,464 23,927
Additional paid-in capital............................ 22,621,005 20,270,015
Deficit............................................... (23,437,193) (19,794,812)
Treasury stock, at cost, 450,000 shares............... (16,488) (16,488)
Less notes receivable for sale of stock............... (151,682) (145,832)
------------ ------------
Total Stockholders' Equity........................... 9,514,406 1,086,810
------------ ------------
$ 11,502,233 $ 7,884,719
============ ============
</TABLE>
3
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30 SEPT. 30 SEPT. 30 SEPT. 30
1996 1995 1996 1995
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues............................................ $ 1,034,539 $ 809,047 $ 3,338,307 $ 1,981,620
Cost of revenues.................................... 840,922 487,374 2,802,422 1,273,103
----------- ----------- ----------- -----------
Gross profit..................................... 193,617 321,673 535,885 708,517
Expenses:
Selling, general and administrative expenses.... 1,215,784 1,257,097 3,331,281 3,223,369
Research and development expenses............... 57,717 112,300 218,388 524,540
----------- ----------- ----------- -----------
Total expenses...................................... 1,273,501 1,369,397 3,549,669 3,747,909
----------- ----------- ----------- -----------
Operating loss................................... (1,079,884) (1,047,724) (3,013,784) (3,039,392)
Other Income (Expense):
Interest income................................. 51,195 77,238 125,350 245,530
Interest expense................................ (26,246) (26,069) (234,069) (74,537)
Equity in net loss of joint venture............. (15,000) (44,894) (45,000) (176,892)
Other........................................... (202,872) 3,553 (166,424) 4,825
----------- ----------- ----------- -----------
Total Other Income (Expense)........................ (192,923) 9,828 (320,143) (1,074)
----------- ----------- ----------- -----------
Net Loss............................................ $(1,272,807) $(1,037,896) $(3,333,927) $(3,040,466)
=========== =========== =========== ===========
Net Loss per share.................................. ($.06) ($.05) ($.15) ($.17)
====== ====== ====== ======
Weighted average number of common
shares outstanding ................................. 25,327,553 19,715,763 23,638,290 18,202,928
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
UNAUDITED
<TABLE>
<CAPTION>
Additional
Preferred Common Stock Paid-In
Shares Amount Shares Amount Capital
---------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 30 $ 750,000 23,927,285 $23,927 $20,270,015
Stock issued for services
or settlement
of liability - - 363,492 364 274,636
Issuance of common stock
upon conversion of
convertible note and
accrued interest thereon - - 248,131 249 157,935
Issuance of common stock
upon conversion of Series D
preferred stock (30) (750,000) 1,249,313 1,250 748,750
Issuance of Series E
preferred stock 50 1,250,000 - - -
Issuance of common stock
upon conversion of Series E
preferred stock (12) (300,000) 541,516 542 299,458
Issuance of Series F
preferred stock 92,500 9,250,000 - - -
Issuance of Series F
preferred in
lieu of cash dividends 2,703 270,300 - - -
Issuance of common stock
for cash - - 750,000 750 749,250
Issuance of common stock
to acquire minority interest of
subsidiary - - 1,382,071 1,382 620,518
Costs & fees associated
with equity issuances - - - - (499,557)
Interest on notes
receivable from stockholders - - - - -
Dividends on preferred
stock - - - - -
Net loss for the period - - - - -
------ ----------- ---------- ------- -----------
Balance September 30, 1996 95,241 $10,470,300 28,461,808 $28,464 $22,621,005
====== =========== ========== ======= ===========
Balance December 31, 1994 80 - 18,692,489 $18,692 $17,613,667
Issuance of common stock
upon conversion Series A, B
and C convertible preferred
stock (80) - 424,506 424 (424)
Issuance of common stock
from treasury - - - - -
Sale of common stock - - 2,929,713 2,929 2,104,368
Sale of EET shares (401k)
plan - - 12,343 12 12,285
Cancellation of treasury
stock - - (3,000) (3) (2,997)
Interest in notes
receivable from stockholders - - - - -
Net loss for the period - - - - -
------ ----------- ---------- ------- -----------
Balance September 30, 1995 - $ - 22,056,051 $22,054 $19,726,899
====== =========== ========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Notes
-------------------------- Receivable
Deficit Shares Amount Stockholder Total
---------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1995 $(19,794,812) 450,000 $(16,488) $(145,832) $ 1,086,810
Stock issued for services
or settlement
of liability - - - - 275,000
Issuance of common stock
upon conversion of
convertible note and
accrued interest
thereon - - - - 158,184
Issuance of common stock
upon conversion of Series D
preferred stock - - - - -
Issuance of Series E
preferred stock - - - - 1,250,000
Issuance of common stock
upon conversion of Series E
preferred stock - - - - -
Issuance of Series F
preferred stock - - - - 9,250,000
Issuance of Series F
preferred in
lieu of cash dividends - - - - 270,300
Issuance of common stock
for cash - - - - 750,000
Issuance of common stock
to acquire minority interest of
subsidiary - - - - 621,900
Costs & fees associated
with equity issuances - - - - (499,557)
Interest on notes
receivable from
stockholders - - - (5,850) (5,850)
Dividends on preferred
stock (308,454) - - - (308,454)
Net loss for the period (3,333,927) - - - (3,333,927)
------------ -------- --------- ----------- ===========
Balance September 30, 1996 $(23,437,193) 450,000 $(16,488) $(151,682) $ 9,514,406
============ ======== ======== =========== ===========
Balance December 31, 1994 $(12,454,572) 803,000 $(32,312) $(138,032) $ 5,007,443
Issuance of common stock
upon conversion Series A, B
and C convertible preferred
stock - - - - -
Issuance of common stock
from treasury - (350,000) 12,824 - 12,824
Sale of common stock - - - - 2,107,297
Sale of EET shares (401k)
plan - - - - 12,297
Cancellation of treasury
stock - (3,000) 3,000 - -
Interest in notes
receivable from stockholders - - - (5,936) (5,936)
Net loss for the period (3,040,466) - - - (3,040,466)
------------ -------- -------- ----------- -----------
Balance September 30, 1995 $(15,495,038) 450,000 $(16,488) $(143,968) $ 4,093,459
============ ======== ======== =========== ===========
</TABLE>
5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPT. 30 SEPT. 30
1996 1995
-------------- ------------
<S> <C> <C>
Net cash used in operating activities..................... $(4,525,280) $(3,476,907)
----------- -----------
Cash flows from investing activities:
Increase in note receivable........................... (566,102) (1,451,971)
Increase in patents and purchased technology.......... (320,237) (80,302)
Purchase of property and equipment.................... (451,200) (226,577)
Decrease (increase) in other assets................... 133,467 (110,526)
Payment for non-compete agreements.................... (120,000) (105,000)
----------- -----------
Net cash used in investing activities....... (1,324,072) (1,974,376)
----------- -----------
Cash flows from financing activities:
Issuance of common stock.............................. 750,000 2,119,594
Issuance of preferred stock........................... 7,800,000 -
Issuance of notes payable and long-term debt.......... 250,000 2,925,744
Repayment of notes payable and long-term debt......... (1,398,197) (712,500)
Redemption of preferred stock......................... - (305,000)
Payment of dividends on preferred stock............... (27,151) -
Payments of costs and fees of equity issuances........ (229,058) -
Redemption of restricted certificate of deposit....... 200,000 -
Payment of dividend on preferred stock of subsidiary.. - (5,432)
----------- -----------
Net cash provided by financing activities........ 7,345,594 4,022,406
----------- -----------
Net increase (decrease) in cash........................... 1,496,242 (1,428,877)
Cash and cash equivalents, beginning of year.............. 333,326 3,266,518
----------- -----------
Cash and cash equivalents, end of year.................... $ 1,829,568 $ 1,837,641
=========== ===========
</TABLE>
6
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim financial information of North American Technologies Group, Inc. and
its subsidiaries (the "Company") which is included herein is unaudited and has
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB. In the
opinion of management, these interim financial statements include all the
necessary adjustments to fairly present the results of the interim periods, and
all such adjustments are of a normal recurring nature. The interim financial
statements should be read in conjunction with the audited financial statements
for the three years in the period ended December 31, 1995. The interim results
reflected in the accompanying financial statements are not necessarily
indicative of the results of operations for a full fiscal year.
During March and June 1995, the Company acquired 100% of the outstanding stock
of EET, Inc. ("EET") and Industrial Pipe Fittings, Inc. ("IPF"). In December
1995, the Company acquired certain assets of GAIA Technologies, Inc. and its
affiliates (collectively "GAIA"). In June 1996, the Company, through its wholly
owned subsidiary Riserclad International, Inc. ("Riserclad"), acquired certain
assets of MPT Services, Inc. The acquisitions of EET and IPF were accounted for
as poolings-of-interests, and accordingly the financial statements for all
periods prior to the acquisitions have been restated to combine the previously
separate entities. The acquisitions of GAIA and MPT Services, Inc. were
accounted for using the purchase method of accounting, and accordingly the
results of those companies' operations have been included from their respective
acquisition dates.
The loss per common share is computed by dividing the loss from operations, plus
the dividends on preferred stock, by the weighted average number of common
shares outstanding and common stock equivalents, if dilutive.
2. STOCKHOLDERS' EQUITY
Series D Convertible Preferred Stock
- ------------------------------------
Since December 31, 1995 the 30 outstanding shares of Series D convertible
preferred stock have been converted into 1,249,313 shares of the Company's
common stock.
Series E Convertible Preferred Stock
- ------------------------------------
In February and March, 1996 the Company issued 50 shares of Series E convertible
preferred stock ("Series E Shares") for proceeds of $1,250,000. The Series E
holders have certain liquidation preferences, and are not entitled to any
dividends. At the option of the Series E holders, the preferred stock may be
converted into the Company's common stock using a conversion rate
7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
computed as the lesser of (a) a calculated value utilizing a discount to the
market price of the Company's common stock, as defined, or (b) $1.50 per share.
One-fourth of the Series E Shares can be converted after August 9, 1996, with
another one-fourth available for conversion every three months thereafter. In
addition, the Company at its option may redeem any of the Series E Shares still
outstanding after February 16, 1999 at $25,000 per share.
In August 1996, twelve shares of Series E convertible preferred stock were
converted into 541,516 shares of the Company's common stock.
Series F Convertible Preferred Stock
- ------------------------------------
In April and May, 1996, the Company issued 92,500 shares of Series F convertible
preferred stock ("Series F Preferred") and stock purchase warrants to purchase
9,250,000 shares of the Company's common stock ("Series F Warrants"). Cash
proceeds of $6,550,000 were received for issuance of 65,500 Series F shares and
6,550,000 Series F Warrants. The remaining 27,000 Series F shares and 2,700,000
Series F Warrants were issued in exchange for the surrender of (a) $2,700,000
in principal amount of the 13.5% convertible subordinated debentures and (b)
2,700,000 warrants. The Series F Warrants have an exercise price of $1.00 per
share, subject to certain adjustments, and expire on April 8, 2004.
Dividends accrue on the Series F Shares at a per annum rate of $13.50 per share
and are payable semi-annually. The Company may elect to defer the dividend
payments during the first three years, in which case each holder may elect to
either (i) have such deferred dividends accrue interest at a per annum rate of
13.5%, or (ii) receive payment of the dividends in the form of additional Series
F Shares. The holders of the Series F Shares have certain liquidation
preferences. The Series F Shares may be converted into the Company's common
stock at the option of the holder using a conversion rate, subject to certain
adjustments, of $1.00 per share. On or after April 8, 2001, the Series F Shares
can be converted at the holder's option using the lesser of (a) the current
conversion price; or (b) a calculated value utilizing a discount to the market
price of the Company's common stock, as defined. Subject to certain conversion
rights, the Company may redeem the Series F Shares at face value on or after
April 8, 2004.
Of the proceeds received from the Series F Shares, $1,050,000 was used to repay
the outstanding note issued in connection with the purchase of GAIA.
In July 1996, 2,703 shares of Series F convertible preferred stock were issued
in lieu of cash dividends due June 30, 1996.
8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common stock
- ------------
In July 1996, the Company issued 750,000 shares of the Company's common stock
and warrants to purchase 750,000 shares of the Company's common stock for net
cash proceeds of $750,000. The warrants have an exercise price of $1.00 per
share and expire in July 1999.
Effective August 15, 1996, the Company acquired the outstanding minority
interest of its subsidiary, North American Environmental Group, Inc. ("NAEG"),
by merging it into another wholly-owned subsidiary which was then renamed NAEG.
The 1,382,071 previously outstanding shares of NAEG were converted on a one-for-
one basis into shares of the Company's common stock. This transaction was
accounted using the purchase method of accounting, with the issuance by the
Company of 1,382,071 shares for goodwill of $621,900, which will be amortized
over a three-year period.
9
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Revenues
- --------
Revenues increased $1,356,687 for the nine months ended September 30, 1996 and
$225,492 for the three-month period ended September 30, 1996, representing
increases of 68.5% and 27.8% over revenues in the same periods of the previous
year. The revenue increase for the nine month period is the result of increased
sales from IPF, and revenues generated from the new product lines of GAIA (air-
conditioner condenser support pads ("A/C pads") and porous pipe) and Riserclad.
This increase in revenues for the nine months and the three months ended
September 30, 1996 was partially offset by a decrease in revenues from EET's
TechXTract decontamination technology. EET's revenues in the third quarter of
1996 were lower than the same period of the previous year because of a large
project that was completed in the third quarter of 1995.
Contributing to IPF's increase in revenues for the nine months ended September
30, 1996 was the completion of a large order for a pipeline system in the second
quarter that contributed $414,000 in revenues. IPF's revenues continued to
increase during the third quarter of 1996 by $200,000, or 82%, over the same
period of the previous year.
Shipments of GAIA's air conditioner support pads began in February 1996.
However, the Company experienced start-up related production issues that
limited revenues and reduced gross profits during the first two quarters. The
Company entered into a new agreement on July 1, 1996 with the manufacturing
facility that produces GAIA's products. Gross profits improved during the third
quarter, however, in mid-September the A/C pad production line was halted
because of repairs needed to one of the critical components of the line. All
sales since mid-September have been from inventory. The Company is currently
evaluating its options regarding the location of and optimum manufacturing
design required for future production of this product. Sales of A/C pads in
the fourth quarter are expected to be lower due to these on-going production
problems. However, management anticipates this situation will be resolved by the
start of 1997.
<TABLE>
<CAPTION>
Gross profit
- ------------
1996 1995
----- -----
<S> <C> <C>
Three months ended June 30 5% 32%
Three months ended September 30 19% 40%
Nine months ended September 30 16% 36%
</TABLE>
The gross profit percentage for the nine months ended September 30, 1996
decreased to 16% from 36% for the same period of the previous year. The erosion
in the gross profit percentage for the nine
10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
month period ended September 30, 1996 was primarily the result of (i) the
manufacturing operations of GAIA, as discussed below, (ii) IPF's completion of
its pipeline system order for revenue of $414,000 at margins that were bid lower
than IPF's recurring product sales, and (iii) a decrease in gross profits from
EET due to a large project that was completed in the third quarter of 1995 at
favorable margins, and the completion of some lower margin projects in 1996.
The gross profit percentage increased to 19% for the three months ended
September 30, 1996 from 5% for the three months ended June 30, 1996 reflecting
improved margins at IPF and GAIA.
During the second quarter of 1996, the Company operated the manufacturing
activities of GAIA under a new cost-sharing arrangement with a manufacturing
facility in St. Francisville, Louisiana. This arrangement, coupled with lower
than expected production rates, resulted in increased manufacturing costs.
Additionally, an unscheduled shut-down of production occurred during the second
quarter to effect renovations and repairs to major pieces of equipment. The
combination of higher manufacturing costs and unanticipated renovation expenses
increased costs by approximately $200,000, which in turn eliminated any gross
profit for GAIA in the second quarter.
In order to alleviate any future erosion of GAIA's gross profits, effective
July 1, 1996, the Company entered into a new tolling arrangement with this
manufacturing facility whereby the Company pays a set price per pound of product
shipped. This arrangement improved the gross profit percentage for GAIA during
the third quarter. However, continuing problems with the Company's manufacturing
vendor and the dependability of the manufacturing system halted all production
in mid-September which again affected both revenues and margins of the A/C pad
business. The Company is currently evaluating its options regarding the location
of and optimum manufacturing design required for future production of this
product and anticipates having these problems rectified by the end of the year.
Selling, general and administrative
- -----------------------------------
Selling, general and administrative expense for the nine months ended September
30, 1996 increased $107,913, and for the three months ended September 30, 1996
decreased $41,313, as compared with the same periods of the previous year. This
is primarily the result of (i) selling, general and administrative expenses of
GAIA and Riserclad which were not included in the prior financial statements of
the Company since these acquisitions occurred on December 29, 1995 and June 18,
1996, respectively, and are accounted for using the purchase method, and (ii) a
significant increase in direct marketing expenses to enhance future revenue
growth for all of the Company's businesses. These increases offset a decrease in
the Company's corporate expenses, caused primarily by reductions in legal and
professional fees.
11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Research and development
- ------------------------
Research and development expense for the nine months ended September 30, 1996
decreased $306,152, and for the three months ended September 30, 1996 decreased
$ 54,583, as compared to the same periods of the previous year. This is
primarily the result of the completion or termination of various consulting
arrangements during the first six months of 1995. Research and development
expenses are not expected to increase above their current quarterly amounts.
Other income and expense
- ------------------------
Other expense increased $319,069 for the nine months ended September 30, 1996 as
compared with the same period of the previous year. This is primarily the result
of increased interest expense arising from the $2,700,000 13.5% convertible
subordinated debenture and the $1,050,000 note incurred from the acquisition of
GAIA. Neither of these obligations were outstanding during the first six months
of 1995, and both debt instruments were repaid early in the second quarter of
1996. The convertible subordinated debentures and related warrants were
surrendered on April 8, 1996 in exchange for 27,000 shares of Series F
convertible preferred stock and warrants to purchase 2,700,000 shares of Company
common stock, while the $1,050,000 was repaid in April 1996 from the proceeds
received from the issuance of the Series F preferred stock. See Notes to the
Consolidated Financial Statements.
Other expense for the third quarter of 1996 increased significantly as a result
of a one-time payment made in settlement of a lawsuit and the loss on the sale
of certain laboratory equipment owned by EET. The sale of the equipment
generated a positive cash flow to the Company but resulted in a loss on the book
value of the equipment. This equipment was not being used in any of the
Company's current business lines.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash increased $1,496,242 from December 31, 1995 to September 30,
1996 to a balance of $1,829,568. This increase in cash was comprised of net cash
provided from financing activities of $7,345,594, offset by net cash used in
operating activities of $4,525,280 and net cash used in investing activities of
$1,324,072. See also the Consolidated Statements of Cash Flows for the
components of each of the preceding categories.
Since December 31, 1995 the Company has received cash of $1,250,000 and
$6,550,000 from the issuance of 50 shares of Series E and 65,500 shares of
Series F convertible preferred stock. In addition, the $2,700,000 13.5%
convertible subordinated debenture and its related warrants were surrendered in
exchange for 27,000 shares of the Series F preferred stock. The holders of the
Series
12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
F shares also received warrants to purchase 9,250,000 shares of Company common
stock at an exercise price of $1.00, subject to certain adjustments.
The Series F preferred stock provides for the payment of quarterly dividends at
the annual rate of $13.50 per share, payable in cash or, at the election of the
holder, in additional shares of Series F preferred stock. On July 10, 1996 the
Company issued 2,703 additional shares of Series F preferred stock in payment of
the accrued dividends payable of $272,456 at June 30, 1996.
In July 1996, the Company received $750,000 in cash from the issuance of 750,000
shares of the Company's common stock and warrants to purchase 750,000 shares of
the Company's common stock. The warrants have an exercise price of $1.00 and
expire in July 1999.
From the proceeds received of the Series F preferred stock described above,
$1,050,000 was used to repay the outstanding note incurred in connection with
the acquisition of GAIA. The accrued interest due to the holders of the 13.5%
subordinated debentures of approximately $198,000 was repaid simultaneous with
the conversion into the Series F Shares. In addition, in June 1996 the Company
acquired the patents and technologies of MPT Services, Inc. for a purchase price
of approximately $290,000.
13
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
As previously reported, the litigation between the Company and Biotrace
International, Inc. ("Biotrace") was referred to binding arbitration
before the American Arbitration Association. On May 6, 1996 the
arbitrator entered an award for the Company on its claims against
Biotrace in the amount of $1.8 million and denied all claims of Biotrace
against the Company. As of the date of this report, there is no
information as to whether Biotrace intends to appeal the arbitrator's
ruling. Because the Company is uncertain of its ability to collect the
amount awarded, no financial statement treatment has been given with
respect to this development.
During the third quarter, the Company settled its litigation with James
Impero, Robyn Impero, Val Weaver and Douglas Winch. These settlements
provided for the dismissal of all legal claims each has pending against
the other and financial terms that management believes are favorable to
the Company.
ITEM 2: CHANGES IN SECURITIES: None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES: None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
ITEM 5: OTHER INFORMATION: None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS: None
(B) REPORTS ON FORM 8-K: None
14
<PAGE>
SIGNATURE
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.
North American Technologies Group, Inc.
Date: November 11, 1996 /s/ Tim B. Tarrillion
-------------------------------------
Tim B. Tarrillion
President and Chief Executive Officer
/s/ Judith Knight Shields
-------------------------------------
Judith Knight Shields
Chief Financial Officer and Chief Accounting Officer
15
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