<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
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
[_] 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 CORPORATE ISSUERS
State the number of shares outstanding of the issuer's classes of common equity,
as of the latest practicable date: 29,144,441 common shares outstanding as of
November 10, 1997.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes No X
--- ---
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
September 30, 1997 (unaudited) and December 31, 1996
Consolidated Statements of Loss 4
Three and nine months ended September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Stockholders' Equity 5
Nine months ended September 30, 1997 and 1996 (unaudited)
Consolidated Statements of Cash Flows 6
Nine months ended September 30, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 11
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 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 AND REPORTS ON FORM 8-K 16
2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPT. 30 DEC. 31
1997 1996
UNAUDITED AUDITED
------------- -------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents........................................ $ 321,056 $ 1,126,912
Accounts receivable, less allowance for
doubtful accounts of $48,665 and $125,000....................... 1,114,713 997,411
Inventories...................................................... 447,782 585,615
Prepaid expenses and other....................................... 339,479 270,200
------------ ------------
Total Current Assets 2,223,030 2,980,138
Notes receivable.................................................. 1,759,538 1,374,843
Property and equipment, less accumulated depreciation of
$475,858 and $375,158............................................ 918,024 1,060,705
Patents and purchased technologies, less accumulated
amortization of $324,692 and $320,853............................ 560,939 1,412,739
Goodwill, less accumulated amortization of $519,067
and $264,890..................................................... 2,737,116 2,991,293
Other intangible assets, less accumulated
amortization of $117,284 and $79,570............................. 186,488 224,202
Other............................................................. 119,248 277,799
------------ ------------
$ 8,504,383 $ 10,321,719
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt............................. $ 165,000 $ 79,288
Accounts payable and accrued expenses............................ 790,134 874,368
------------ ------------
Total current liabilities....................................... 955,134 953,656
Long-term debt, less current maturities........................... 667,842 821,631
Dividends payable on preferred stock, including accrued interest.. 104,695 -
------------ ------------
Total Liabilities............................................... 1,727,671 1,775,287
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 124,454 and 101,429 shares issued................... 12,445,447 10,765,447
Common stock, $.001 par value, 100,000,000 shares authorized;
29,144,441 and 27,111,497 shares issued......................... 29,147 27,114
Additional paid-in capital....................................... 24,725,089 23,809,619
Deficit.......................................................... (30,263,489) (25,902,116)
Less notes receivable for sale of stock.......................... (159,482) (153,632)
------------ ------------
Total Stockholders' Equity...................................... 6,776,712 8,546,432
------------ ------------
$ 8,504,383 $ 10,321,719
============ ============
</TABLE>
3
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30 SEPT. 30 SEPT. 30 SEPT. 30
1997 1996 1997 1996
------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues....................................... $ 1,029,625 $ 1,034,539 $ 3,297,754 $ 3,338,307
Cost of revenues............................... 711,281 840,922 2,212,905 2,802,422
----------- ----------- ----------- -----------
Gross profit................................ 318,344 193,617 1,084,849 535,885
Selling, general and administrative expenses... 1,007,573 1,273,501 3,286,234 3,549,669
----------- ----------- ----------- -----------
Operating loss before valuation adjustment.. (689,229) (1,079,884) (2,201,385) (3,013,784)
Valuation adjustment relating to certain
long-lived assets.............................. 1,029,994 - 1,029,994 -
----------- ----------- ----------- -----------
Operating loss.............................. (1,719,223) (1,079,884) (3,231,379) (3,013,784)
Other Income (Expense):
Interest income............................ 37,561 51,195 111,922 125,350
Interest expense........................... (24,932) (26,246) (72,335) (234,069)
Other...................................... (15,708) (217,872) (38,561) (211,424)
----------- ----------- ----------- -----------
Total Other Income (Expense)................... (3,079) (192,923) 1,026 (320,143)
----------- ----------- ----------- -----------
Net Loss....................................... $(1,722,302) $(1,272,807) $(3,230,353) $(3,333,927)
=========== =========== =========== ===========
Net Loss per share............................. ($.06) ($.06) ($.15) ($.18)
===== ===== ===== =====
Weighted average number of common
shares outstanding .......................... 29,144,441 25,327,553 28,439,989 23,638,290
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
UNAUDITED
<TABLE>
<CAPTION>
Preferred Common Stock Additional
-------------------------- ----------------------- Paid-In
Shares Amount Shares Amount Capital Deficit
---------- -------------- ---------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 101,429 $10,765,447 27,111,497 $27,114 $23,809,619 $(25,902,116)
Issuance of common stock
upon conversion of
Series E preferred
stock (25) (625,000) 2,032,944 2,033 622,967 -
Issuance of Series G
preferred stock 16,400 1,640,000 - - - -
Issuance of Series F & G
preferred stock in lieu
of cash dividends 6,650 665,000 - - - -
Costs associated with
equity transactions - - - - (78,626) -
Interest on notes
receivable from
stockholders - - - - - -
Dividends on preferred
stock - - - - - (759,891)
Deemed dividends on
preferred stock - - - - 371,129 (371,129)
Net loss for the period - - - - - (3,230,353)
--------- ------------- ---------- ------------ ----------- -------------
Balance September 30, 1997 124,454 $12,445,447 29,144,441 $29,147 $24,725,089 $(30,263,489)
========= ============= ========== ============ =========== =============
Balance December 31, 1995 30 $ 750,000 23,927,285 $23,927 $20,270,015 $(19,794,812)
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
to acquire Minority
interest of subsidiary - - 1,382,071 1,382 620,518 -
Issuance of common stock
for cash - - 750,000 750 749,250 -
Costs and fees associated
with equity issuances - - - - (499,557) -
Interest on notes
receivable from
stockholders - - - - - -
Dividends on preferred
stock - - - - - (308,454)
Net loss for the period - - - - - (3,333,927)
--------- ------------- ---------- ------------ ----------- -------------
Balance September 30, 1996 95,241 $10,470,300 28,461,808 $28,464 $22,621,005 $(23,437,193)
========= ============= ========== ============ =========== =============
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock Notes
-------------------------- Receivable
Shares Amount Stockholder Total
---------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
Balance December 31, 1996 - - $(153,632) $ 8,546,432
Issuance of common stock
upon conversion of
Series E preferred
stock - - - -
Issuance of Series G
preferred stock - - - 1,640,000
Issuance of Series F & G
preferred stock in lieu
of cash dividends - - - 665,000
Costs associated with
equity transactions - - - (78,626)
Interest on notes
receivable from
stockholders - - (5,850) (5,850)
Dividends on preferred
stock - - - (759,891)
Deemed dividends on
preferred stock - - - -
Net loss for the period - - - (3,230,353)
--------- ------------- ---------- ------------
Balance September 30, 1997 - - $ (159,482) $ 6,776,712
========= ============= ========== ============
Balance December 31, 1995 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
to acquire Minority
interest of subsidiary - - - 621,900
Issuance of common stock
for cash - - - 750,000
Costs and fees associated
with equity issuances - - - (499,557)
Interest on notes
receivable from
stockholders - - (5,850) (5,850)
Dividends on preferred
stock - - - (308,454)
Net loss for the period - - - (3,333,927)
--------- ------------- ---------- ------------
Balance September 30, 1996 450,000 $ (16,488) $ (151,682) $ 9,514,406
========= ============= ========== ============
</TABLE>
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SEPTEMBER 30 SEPTEMBER 30
1997 1996
------------ ------------
Net cash used in operating activities........ $(1,866,091) $(4,391,813)
----------- -----------
Cash flows from investing activities:
Increase in note receivable.............. (384,695) (566,102)
Increase in patents and purchased
technology.............................. (40,848) (320,237)
Purchase of property and equipment....... (7,519) (451,200)
Payment for non-compete agreements....... - (120,000)
----------- -----------
Net cash used in investing
activities ......................... (433,062) (1,457,539)
----------- -----------
Cash flows from financing activities:
Issuance of common stock................. - 750,000
Issuance of preferred stock.............. 1,640,000 7,800,000
Issuance of notes payable and long-term
debt.................................... - 250,000
Repayment of notes payable and long-term
debt.................................... (68,077) (1,398,197)
Payment of cash dividends on preferred
stock................................... - (27,151)
Payment of costs and fees of equity
issuances............................... (78,626) (229,058)
Redemption of restricted certificate of
deposit................................. - 200,000
----------- -----------
Net cash provided by financing
activities ......................... 1,493,297 7,345,594
----------- -----------
Net increase (decrease) in cash ............. (805,856) 1,496,242
Cash and cash equivalents, beginning of
period...................................... 1,126,912 333,326
----------- -----------
Cash and cash equivalents, end of period .... $ 321,056 $ 1,829,568
=========== ===========
6
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The interim financial statements of North American Technologies Group, Inc. and
its subsidiaries (the "Company") which are included herein are unaudited and
have 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 two years in the period ended December 31, 1996. The report of the
Company's independent auditors for the year ended December 31, 1996 contains an
explanatory paragraph as to the substantial doubt of the Company's ability to
continue as a going concern. No adjustments have been made to the accompanying
financial statements to give effect to this uncertainty. The interim results
reflected in the accompanying financial statements are not necessarily
indicative of the results of operations for a full fiscal year.
The loss per common share is computed by dividing the loss from operations,
increased by the dividends on preferred stock, by the weighted average number of
common shares outstanding and common stock equivalents, if dilutive. Preferred
stock dividends include (i) dividends stated in the respective certificates of
designation, and (ii) dividends deemed to have been issued by virtue of a
conversion price that is computed at the date of conversion using a discount to
the market price of the Company's common stock. The deemed dividends are
included in the earnings per share calculation in order to comply with the SEC's
position regarding the accounting treatment of preferred stock issued with
certain conversion features. In order to comply with this SEC position, the
Company restated its financial statements for the quarter ended September 30,
1996, and the accompanying financial statements reflect this restatement.
In accordance with FAS 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", management reviews long-lived
assets and intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be fully
recoverable. As part of this assessment, management prepares an analysis of the
undiscounted cash flows for each product that has significant long-lived or
intangible asset values associated with it. Inherent in this analysis is an
estimate of both future revenues and profitability for these products.
Management uses a wide variety of information when preparing these estimates,
including items such as the product's market demand as exhibited by purchase
orders, estimates of the market size, current raw material availability and
pricing, as well as management's ability and willingness to fund the
commercialization of the product. Given the early stages of these products'
commercialization, these estimates are subject to revision in the future as
additional information becomes available, or as the Company's strategy regarding
the future commercialization of certain products changes. It is reasonably
likely that a revision of an estimate could occur that would result
7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in an adjustment to the carrying value of an asset and such adjustment could be
material to the operating results and financial position of the Company. Any
such adjustment would be included in the continuing operations for that period.
The analysis of long-lived asset values as of September 30, 1997 indicated there
was an impairment to certain assets' carrying values relating to the Company's
porous pipe business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
STOCKHOLDERS' EQUITY
Through May 1997, twenty-five shares of Series E Convertible Preferred Stock
were converted into 2,032,944 shares of the Company's common stock. At this
time, there are no outstanding shares of the Series E convertible preferred
stock.
In March 1997, the Company issued 16,400 shares of Series G- Subseries I
Cumulative Convertible Preferred Stock ("Series G Shares") for cash proceeds of
$1,640,000. Dividends accrue on the Series G 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 until April 1999, 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
G Shares. The holders of the Series G Shares have certain liquidation
preferences. The Series G Shares may be converted into the Company's common
stock at the option of the holder at an initial conversion price, subject to
certain adjustments, of $.45 per share. On or after April 8, 2001, the Series G
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 G Shares at their face
value of $100 per share on or after April 8, 2004.
In June 1997, the Company declared dividends of $704,542 on the outstanding
shares of Series F Convertible Preferred Stock ("Series F Shares") and $55,350
on the Series G Shares. Per the terms of their respective agreements, the
holders of these shares elected to receive their dividend payments as follows:
the issuance of 6,117 Series F Shares, 469 Series G Shares, and a deferred
dividend of $102,277.
SUBSEQUENT EVENTS
In October 1997, the Company completed the sale of (i) the net assets of
Industrial Pipe Fittings, Inc. ("IPF"), and (ii) the equipment associated with
the waste management services division of EET, Inc. ("EET"). The Company
received cash proceeds from these two transactions of approximately $1,010,000,
net of a $50,000 deferred payment relating to the IPF transaction. Of these
proceeds, $331,127 was used to repay outstanding indebtedness associated with
the businesses. Under the
8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
terms of the IPF purchase agreement, an adjustment will be made no later than
November 30, 1997 to reflect the net asset values of IPF as of October 31, 1997.
This adjustment could result in either additional proceeds to be received by
IPF, or a payment to be made to the purchaser. This adjustment is not expected
to be significant.
In conjunction with the sale of the net assets of IPF, two employment contracts
with officers of IPF were terminated. In settlement of all provisions of these
employment agreements, a collective cash payment of $81,397 was made to the
individuals, the outstanding note receivables totaling $46,625 were forgiven,
and the two individuals were released from their non-competition agreements. In
addition, certain adjustments to reduce the net book value of IPF's assets were
provided for in the purchase agreement, totaling approximately $100,000. These
adjustments and other costs incurred as a result of this transaction will be
recognized in the fourth quarter financial statements. The sale of the
equipment of the waste management services division of EET will result in an
insignificant gain, which will be recognized in the fourth quarter financial
statements.
CONTINGENCIES
In August 1997, EET completed a project for a large manufacturing company
involving the use of its TechXTract technology to remove mercury and thorium
from disassembled equipment. The customer was invoiced $208,392 for the work
performed. Subsequent to the completion of the job, the customer notified EET
that mercury contamination occurred at the disposal facility where the customer
had shipped the waste from this project. The customer is alleging that EET is
responsible for the mercury contamination, and is withholding payment of the
outstanding invoice while it completes its investigation. EET strongly denies
the allegations and intends to defend itself vigorously. Although no lawsuit
has been filed as of the date of this report, the claim has been submitted to
EET's insurance carrier, which is currently performing its investigation of the
allegations. The Company believes it is fully insured with respect to this
incident, and therefore no adjustment has been made to the accompanying
financial statements.
In September 1997, a customer of IPF filed a lawsuit against IPF. The customer
had purchased approximately $12,000 of IPF's products, which were subsequently
installed as part of an underground golf course sprinkler system. The customer
alleges that the products it received were faulty, causing leaks and other
damages to the installation. The lawsuit requests damages in the amount of
$376,062. IPF denies the allegations and intends to defend itself vigorously.
The claim has been submitted to IPF's insurance carrier, which is currently
providing IPF's defense. The Company believes it is fully insured with respect
to this incident, and therefore no adjustment has been made to the accompanying
financial statements.
9
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RELATED PARTY TRANSACTIONS
Of the outstanding indebtedness of $331,127 repaid from the proceeds of the sale
of the net assets of IPF, $283,235 had been outstanding to an officer and
director of the Company.
The facilities used by IPF, which had been leased pursuant to a verbal lease
agreement with an officer and director of the Company, were formalized into a
written lease agreement in October 1997 with a lease term through January 31,
2001 and with essentially the same provisions as before. These facilities are
currently being subleased to the purchaser of the net assets of IPF for a lease
term ending on January 31, 1999, subject to lessor fulfilling certain conditions
relating to the condition of the leased premises.
10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the material contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations is
forward-looking. For the purpose of the safe harbor provisions for forward-
looking statements of the Private Securities Litigation Reform Act of 1995,
readers are urged to review the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996 for a list of certain important factors that may
cause actual results to differ materially from those described below.
RESULTS OF OPERATIONS
REVENUES
Nine months ended September 30, 1997 compared with the nine months ended
September 30, 1996
Revenues for the nine months ended September 30, 1997 of $3,297,754 decreased
slightly as compared to revenues of $3,338,307 for the same period of the prior
year. Revenues for IPF increased for the nine month period, even though the
company had to replace the revenues from a large project in the second quarter
of 1996 that totaled approximately $400,000. Revenues also increased for EET
during the current nine month period. Since it was acquired in late June 1996,
Riserclad International, Inc. ("Riserclad") only reported revenues in the prior
year for the three month period ended September 30, 1996. The increases from
Riserclad's additional revenues in 1997, along with the increases in revenues
from IPF and EET were offset by a decrease in revenues from GAIA Technologies,
Inc. ("GAIA"). As a result of the recent sale of the net assets of IPF, it is
expected that revenues for the Company will decline until revenues are generated
from the Cross-tie business. (For a description of the Cross-tie business, see
"Liquidity and Capital Resources".) On a proforma basis, revenues for the nine
months ended September 30, 1997 without IPF were $1,523,819, a decrease over the
prior year's nine month period.
The reduction in GAIA's revenues occurred in both the air conditioner base
support pad ("A/C pad") and porous pipe product lines. A/C pad revenues were
affected by the transition to a new manufacturing vendor during this time. In
addition, in June 1997, the Company completed the sale of the A/C pad technology
to a private company for cash, a note receivable, and future royalty payments.
See "Liquidity and Capital Resources." The negotiation and consummation of this
transaction caused an interruption in the manufacturing and delivery of the AC
pad product during the second quarter of 1997. Porous pipe revenues have
declined significantly since last year. The Company has been discussing a
licensing arrangement with a third party vendor who would manufacture and sell
the porous pipe product for a royalty payment per foot sold. While these
discussions are continuing, no revenues are expected and the overhead associated
with this product line has been eliminated. See additional discussion regarding
the porous pipe product line in "Valuation Adjustment relating to Certain Long-
Lived Assets".
Three months ended September 30, 1997 compared with the three months ended
September 30, 1996
Revenues for the three months ended September 30, 1997 of $1,029,625 decreased
slightly from
11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
revenues of $1,034,539 for the same period of the prior year. IPF experienced
an increase in revenues during this quarter, which was offset by a decrease in
revenues from GAIA's A/C pad product line. As discussed above, the A/C pad
technology was sold in June 1997, and therefore the Company recorded no revenues
from it during the current quarter.
GROSS PROFIT
The gross profit percentage for the nine months ended September 30, 1997 of 33%
improved significantly as compared to the gross profit percentage of 16% for the
same period of the previous year. In addition, the gross profit percentage for
the three month period ended September 30, 1997 of 31% improved from 19% for the
same period of the previous year. On a proforma basis, the gross profit
percentage calculated by excluding the operations of IPF increased in the nine
months ended September 30, 1997 to 35%.
These improved gross profit percentages reflect better performance for the
current nine month period in EET's TechXTract product line and IPF's business.
The improved gross profit percentage for the current three month period reflects
primarily improved margins in EET TechXTract technology product line. Also, in
the three months ended June 30, 1996 the manufacturing operations of GAIA
experienced depressed margins, which were corrected in subsequent quarters.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES ("SGA")
SGA expenses decreased $263,435 for the current nine month period, from
$3,549,669 for the nine months ended September 30, 1996 to $3,286,234 for the
nine months ended September 30, 1997. In addition, SGA expenses for the three
month period ended September 30, 1997 of $1,007,573 decreased $265,928 as
compared with the same period of the previous year. These decreases in SGA
occurred even though there was the addition of Riserclad's overhead beginning
in July 1996, due to reductions in corporate and other subsidiary SGA. Since
the fourth quarter of 1996, the Company has reduced its salary costs by over
$1,200,000 on an annual basis. These reductions have been made possible by the
implementation of the Company's strategy to license or sell certain of its
technologies or products, as discussed in "Liquidity and Capital Resources", and
therefore reduce the corporate structure needed to support the remaining
businesses. As this program continues, further reductions in the Company's SGA
expenses are expected.
As a result of the implementation of the Company's current strategy, effective
November 1, 1997, Mr. Donovan Boyd resigned as the Chief Operating Officer and
Senior Vice President of the Company in order to take a senior operating
position with an unrelated company. He will continue in his position as a
Director of the Company, and will be available as a consultant on as "as needed"
basis through the end of 1998. Payments to be made to Mr. Boyd over the
fourteen month consulting period will be approximately $35,000.
12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
VALUATION ADJUSTMENT RELATING TO CERTAIN LONG-LIVED ASSETS
Pursuant to the provisions of FAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of", management reviews
long-lived and intangible assets whenever events of changes in circumstances
indicate the carrying amount of an asset may not be fully recoverable. See
Notes to Consolidated Financial Statements. During the third quarter of 1997,
as the Company continued to implement its strategy of licensing or selling
certain of its products or technologies, management determined that an
impairment in the value of the assets relating to the porous pipe product line
had occurred. Although discussions are still in process relating to the
licensing of the porous pipe technology, management has determined than an
adjustment is warranted in the carrying value of the assets associated with the
porous pipe product line, primarily the patent and certain of its machinery and
equipment. Accordingly, a valuation adjustment has been recognized in the
current operations of the Company totaling $1,029,994, representing
substantially all of the Company's remaining investment in the porous pipe
product line.
OTHER INCOME AND EXPENSE
Interest expense decreased in the nine months ended September 30, 1997 due to
the exchange in April 1996 of $2,700,000 in convertible debentures for Series F
preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company, in conjunction with TieTek, Inc. ("TieTek") successfully completed
a synthetic railroad cross-tie ("Cross-ties") manufacturing run in September
1997. From this run, 350 cross-ties are currently being shipped to a major
railroad company for placement under certain tracks. The successful completion
of this manufacturing run further validated the manufacturing process developed
over the last two years, the current formulation of raw material components, and
a newly developed product quality assurance system. The continued progress that
has occurred in the development of the cross-ties provides the Company with the
opportunity to exercise the TieTek purchase option and exploit the market
potential for this product.
In order to generate the cash resources needed to commercialize the Cross-tie
business, the Company has been exploring the possibility of licensing or selling
some of its existing product lines and technologies. The Company has, in fact,
completed the sale of its A/C pad technology (June 1997), the net assets of IPF
(October 1997) and the assets associated with EET's waste management services
business (October 1997). The Company is continuing to explore the possibility
of licensing or selling certain of its other products or technologies as it
continues to determine the best combination of technologies and product lines
for the future success of the Company. The Company expects that the successful
implementation of this strategy would result in a reduction of revenues
13
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
as the particular technology is licensed or sold, a corresponding reduction in
the overhead costs associated with the technology, and an increase in cash
reserves based upon the terms of each particular agreement. As of the date of
this report, the Company has had preliminary discussions regarding the terms
under which certain of the Company's other product lines and technologies might
be sold or licensed. However, there can be no assurances that any agreements
will be reached, or if reached, will provide the cash needed to fund the
remaining technologies and products, or provide a reasonable return on the
investment that the Company has already made in these technologies and products.
Through the quarter ended September 30, 1997 the Company has incurred operating
losses which could continue in the near term at expected levels of between
$200,000 to $300,000 per month. The Company has historically met its working
capital requirements through financing transactions involving the private
placement of equity securities or equity equivalents, the issuance of
convertible debentures, and through the license of its technologies. Operating
revenues have not historically provided a meaningful source of working capital
for the Company. The Company believes that the successful implementation of the
strategy (as described above) of licensing or selling certain product lines or
technologies, concurrently with the reduction of both business segment and
corporate overhead, would provide the Company with the resources needed to fund
its current operating requirements and capitalize on its remaining technologies
in the short-term. However, if management is not able to implement its strategy,
or management's estimates and expectations as to its ability to generate cash
and reduce overhead are incorrect and losses continue at historic rates, the
Company would need to secure additional capital. Due to these uncertainties, the
report of the Company's independent auditors for the year ended December 31,
1996 contains an explanatory paragraph as to the substantial doubt about the
Company's ability to continue as a going concern. In addition, the full
commercialization of the Cross-tie business will likely require additional
capital to build a manufacturing facility. Although the Company believes the
current successes related to the Cross-tie business should make such capital
available, there can be no assurances that such capital will be available, and
if it is, that it would be on terms attractive to the Company. The Company's
long-term viability and growth will depend upon the successful commercialization
of its technologies and its ability to obtain adequate financing, as to which
there can be no assurances.
For the nine months ended September 30, 1997, the Company utilized net cash of
$1,866,091 in operating activities, primarily as a result of its operating
losses. The Company utilized net cash of $433,062 in investing activities,
primarily from the investment in the TieTek note receivable of $384,695.
For the nine months ended September 30, 1997, the Company generated net cash of
$1,493,297 from financing activities, primarily from the issuance in March 1997
of 16,400 Series G Shares for $1,640,000. Dividends accrue on the Series G
Shares at a per annum rate of $13.50 per share and are payable semi-annually.
The Company may elect to defer and accrue the dividend payments until
14
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
April 1999, in which case, each holder may elect to receive payment of the
dividend in the form of additional Series G Shares. The Company elected to
defer the dividend payment due June 30, 1997 of $55,350. Of this amount,
$46,912 was paid through the issuance of 469 Series G Shares, while the balance
of $ 8,437 will accrue interest at 13.5%. The Company also elected to defer the
dividend payment due June 30, 1997 on the Series F Shares of $704,542. Of this
amount, $611,702 was paid through the issuance of 6,117 Series F Shares, while
the balance of $92,840 will accrue interest at 13.5%.
In June 1997, the Company completed the sale of the A/C pad technology to a
private company. The Company received cash of $25,000, a note receivable of
$550,000, and future royalty payments up to a maximum of $1,000,000. The note
bears interest at prime less 2 %, and is payable quarterly based upon the number
of pads sold by the company during such quarter. However, a minimum of $50,000
is due by June 30, 1998, with a minimum of $100,000 due annually thereafter. The
note is secured by equipment.
In October 1997, the Company completed the sale of the net assets of IPF and the
equipment used in the waste management services division of EET. Proceeds of
approximately $1,010,000 were received from these transactions, net of a $50,000
deferred payment relating to the IPF transaction. Of these proceeds, $331,127
was used to repay certain indebtedness associated with the businesses.
15
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is a party to legal proceedings that have been reported in its
Annual Report on Form 10-KSB for the year ended December 31, 1996. During the
nine months ended September 30, 1997, there were changes in the status of legal
proceedings as follows:
In September 1997, Lin Lar Golf, Inc. filed a lawsuit against Industrial
Pipe Fittings, Inc. in the District Court of Muskogee County, Oklahoma. The
plaintiff alleges that the products it purchased from IPF, and subsequently
installed in an underground golf course sprinkler system, were faulty, causing
leaks and other damages to the installation. The lawsuit requests damages in
the amount of $376,062. IPF denies the allegations and intends to defend itself
vigorously. The claim has been submitted to IPF's insurance carrier, which is
currently providing IPF's defense.
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:
(10.28) Asset Purchase Agreement, dated as of October 31, 1997, by and
among North American Technologies Group,Inc., Industrial Pipe Fittings, Inc.,
and Houston IPF, LLC; incorporated by reference to the Company's Current Report
on Form 8-K, dated as of October 31, 1997, filed under the Securities Exchange
Act of 1934 ( the "October 1997 Form 8-K".
(10.29) Lease Agreement, dated as of October 30, 1997, by and between David M.
Daniels, as lessor, and North American Technologies Group, Inc., as lessee;
incorporated by reference to the Company's October 1997 Form 8-K.
(27) Financial Data Schedule
(B) REPORTS ON FORM 8-K:
The Company filed a report of Form 8-K on November 14, 1997 regarding the
disposition of the net assets of its subsidiary, Industrial Pipe Fittings, Inc.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
North American Technologies Group, Inc.
Date: November 14, 1997 /s/ Judith Knight Shields
--------------------------------------------------
Judith Knight Shields
Chief Financial Officer and
Chief Accounting Officer
17
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