<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998.
[ ] 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: 3,479,858 common shares outstanding as of
October 31, 1998.
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, 1998 (unaudited) and December 31, 1997
Consolidated Statements of Loss 4
Three and nine months ended September 30, 1998 and 1997
(unaudited)
Consolidated Statements of Stockholders' Equity 5
Nine months ended September 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows 6
Nine months ended September 30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10
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
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPT. 30 DEC. 31
1998 1997
UNAUDITED AUDITED
------------- -------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.............................. $ 1,004,118 $ 348,991
Accounts receivable, less allowance for
doubtful accounts of $18,000 in 1997.................. - 285,623
Inventories............................................ 84,842 6,395
Current portion of notes receivable.................... 80,000 100,000
Prepaid expenses and other............................. 190,301 103,087
---------- ----------
Total Current Assets 1,359,261 844,096
Notes receivable........................................ 910,610 881,960
Property and equipment, less accumulated depreciation
of $133,070 and $98,972................................ 421,663 149,946
Patents and purchased technologies, less accumulated
amortization of $107,002 and $268,787.................. 1,608,745 1,797,128
Goodwill, less accumulated amortization of $736,943
and $603,793........................................... 2,043,075 2,652,391
Other intangible assets, less accumulated
amortization of $67,132 and $107,007................... 87,868 126,765
Other................................................... 123,401 292,291
---------- ----------
$ 6,554,623 $ 6,744,577
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt................... $ 500,000 $ 3,800
Accounts payable....................................... 148,950 248,362
Accrued expenses....................................... 158,651 207,302
Deferred dividends payable on preferred stock,
including accrued interest............................ 317,768 193,448
---------- ----------
Total current liabilities............................. 1,125,369 652,912
Long-term debt, less current maturities................. - 503,178
Deferred dividends payable on preferred stock,
including accrued interest............................ - 13,985
---------- ----------
Total Liabilities..................................... 1,125,369 1,170,075
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 136,980 and 115,364 shares issued......... 13,697,981 11,536,406
Common stock, $.001 par value, 100,000,000 shares
authorized; 3,479,858 shares issued................... 31,320 31,320
Additional paid-in capital............................. 26,323,048 26,348,323
Accumulated deficit.................................... (34,455,813) (32,180,115)
Less notes receivable for sale of stock................ (167,282) (161,432)
---------- ----------
Total Stockholders' Equity............................ 5,429,254 5,574,502
---------- ----------
$ 6,554,623 $ 6,744,577
========== ==========
</TABLE>
3
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30 SEPT. 30 SEPT. 30 SEPT. 30
1998 1997 1998 1997
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.............................................. $ - $ 1,029,625 $ 17,086 $ 3,297,754
Cost of revenues...................................... - 711,281 10,755 2,212,905
--------- ----------- ----------- -----------
Gross profit..................................... - 318,344 6,331 1,084,849
Selling, general and administrative expenses.......... 536,643 1,007,573 1,718,630 3,286,234
--------- ----------- ----------- -----------
Operating loss before valuation adjustment....... (536,643) (689,229) (1,172,299) (2,201,385)
Valuation adjustment relating to certain long-lived
assets............................................. - 1,029,994 - 1,029,994
--------- ----------- ----------- -----------
Operating loss................................... (536,643) (1,719,223) (1,712,299) (3,231,379)
--------- ----------- ----------- -----------
Other Income (Expense):
Interest income................................... 23,716 37,561 35,381 111,922
Interest expense.................................. (131,842) (24,932) (172,008) (72,335)
Gain on sale of assets............................ - - 369,679 -
Other............................................. 586 (15,708) 1,082 (38,561)
--------- ----------- ----------- -----------
Total Other Income (Expense).......................... (107,540) (3,079) 234,134 1,026
--------- ----------- ----------- -----------
Net Loss.............................................. $(644,183) $(1,722,302) $(1,478,165) $(3,230,353)
========= =========== =========== ===========
Computation of net loss per share:
Net loss before dividends on preferred stock.......... $(644,183) $(1,722,302) $(1,478,165) $(3,230,353)
Dividends on preferred stock.......................... - - (797,533) (1,131,020)
--------- ----------- ----------- -----------
Net loss applicable to common stockholders............ $(644,183) $(1,722,302) $(2,275,698) $(4,361,373)
========= =========== =========== ===========
Weighted average number of common
shares outstanding ................................ 3,479,858 3,238,271 3,479,858 3,159,998
========= =========== =========== ===========
Net loss per share - basic and assuming dilution ..... ($.18) ($.54) ($.65) ($1.38)
========= =========== =========== ===========
</TABLE>
4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
<TABLE>
<CAPTION>
Preferred Common Stock Additional Notes
--------------------- ------------------ Paid-In Receivable
Shares Amount Shares Amount Capital Deficit Stockholder Total
------- ----------- --------- ------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 115,364 $11,536,406 3,479,858 $31,320 $26,348,323 $(32,180,115) $ (161,432) $ 5,574,502
Issuance of Series G
Subseries II preferred stock 14,500 1,450,000 - - - - - 1,450,000
Issuance of Series F & G
preferred stock in lieu of
cash dividends 7,116 711,575 - - - - - 711,575
Costs associated with equity
transactions - - - - (25,275) - - (25,275)
Interest on notes receivable
from stockholders - - - - - - (5,850) (5,850)
Dividends on preferred stock - - - - - (797,533) - (797,533)
Net loss for the period - - - - - (1,478,165) - (1,478,165)
---------- ---------- ---------- ------- ----------- ----------- --------- ----------
Balance September 30, 1998 136,980 $13,697,981 3,479,858 $31,320 $26,323,048 $(34,455,813) $ (167,282) $ 5,429,254
========== ========== ========== ======= =========== =========== ========= ==========
Balance December 31, 1996 101,429 $10,765,447 3,012,388 $27,114 $23,809,619 $(25,902,116) $ (153,632) $ 8,546,432
Issuance of common stock upon
conversion of Series E
preferred stock (25) (625,000) 225,883 2,033 622,967 - - -
Issuance of Series G
Subseries I preferred stock 16,400 1,640,000 - - - - - 1,640,000
Issuance of Series F & G
preferred stock in lieu of
cash dividends 6,650 665,000 - - - - - 665,000
Costs associated with equity
transactions - - - - (78,626) - - (78,626)
Interest on notes receivable
from stockholders - - - - - - (5,850) (5,850)
Dividends on preferred stock - - - - - (759,891) - (759,891)
Deemed dividends on
preferred stock - - - - 371,129 (371,129) - -
Net loss for the period - - - - - (3,230,353) - (3,230,353)
---------- ---------- ---------- ------- ----------- ----------- --------- ----------
Balance September 30, 1997 124,454 $12,445,447 3,238,271 $29,147 $24,725,089 $(30,263,489) $ (159,482) $ 6,776,712
========== ========== ========== ======= =========== =========== ========= ==========
</TABLE>
5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SEPT. 30 SEPT. 30
1998 1997
----------- -----------
<S> <C> <C>
Net cash used in operating activities......................... $(1,208,644) $(1,866,091)
----------- -----------
Cash flows from investing activities:
Cash received from sale of assets......................... 210,125 -
Payment of patent costs................................... (12,382) (40,848)
(Increase) decrease in notes receivable................... 599,531 (384,695)
Purchase of property and equipment........................ (351,250) (7,519)
----------- -----------
Net cash provided (used) in investing activities... 446,024 (433,062)
----------- -----------
Cash flows from financing activities:
Issuance of preferred stock............................... 1,450,000 1,640,000
Repayment of notes payable and long-term debt............. (6,978) (68,077)
Payment of costs and fees of equity issuances............. (25,275) (78,626)
----------- -----------
Net cash provided by financing activities.......... 1,417,747 1,493,297
----------- -----------
Net increase (decrease) in cash and cash equivalents.......... 655,127 (805,856)
Cash and cash equivalents, beginning of period................ 348,991 1,126,912
----------- -----------
Cash and cash equivalents, end of period...................... $ 1,004,118 $ 321,056
=========== ===========
</TABLE>
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, 1997 included in the
Company's Annual report on Form 10-KSB for the year then ended. The report of
the Company's independent auditors for the year ended December 31, 1997 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 basic net loss per common share is computed by dividing the net loss, plus
the dividends on preferred stock, by the weighted average number of common
shares outstanding. Preferred stock dividends include: (i) dividends stated in
the respective certificate of designations; 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.
For the nine months ended September 30, 1997, there were deemed dividends
totaling $371,129 on the Company's Series E and Series G, Subseries I, preferred
stock.
Diluted net loss per common share is computed by dividing the net loss, adjusted
on an as if converted basis, by the weighted average number of common shares
outstanding plus potential dilutive securities. For the three months and nine
months ended September 30, 1998 and 1997, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share. These securities include options and warrants on
1,724,972 shares of common stock, convertible debt and preferred stock
convertible into 37,037 and 4,181,560 shares of common stock, respectively.
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,
7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 certain 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
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 assets as of September 30, 1997 indicated there was
an impairment to certain assets' carry values relating to the Company's porous
pipe business. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
STOCKHOLDERS EQUITY
At the Annual Meeting of Stockholders held on May 12, 1998 (the "Annual
Meeting"), the Company's shareholders approved an amendment to the Company's
Restated Certificate of Incorporation to effect a reverse stock split providing
for nine (9) shares of the Company's outstanding stock to be converted into one
(1) new share of the Company's common stock. The reverse stock split was
effective for trading on May 13, 1998. Accordingly, the financial statements
and all per share data have been restated to reflect the reverse stock split.
Also at the Annual Meeting, the Company's stockholders' approved the issuance of
up to $2,000,000 of the Company's Series G Subseries II Cumulative Convertible
Preferred Stock ("Subseries II Shares"). The Subseries II Shares have
substantially the same terms as the Series G Subseries I Cumulative Convertible
Preferred Stock ("Subseries I Shares"), except that the initial conversion price
was determined based on a formula related to the market price of the Company's
common stock for a ten day period in June 1998, and has been calculated to be
$.86625. As of September 30, 1998, the Company had sold 14,500 Subseries II
Shares for cash proceeds of $1,450,000. In November 1998 the Company sold an
additional 4,000 Subseries II Shares, of which 3,750 shares were issued for cash
proceeds of $375,000 and 250 shares were issued in payment of services rendered.
In June 1998, the Company declared dividends of $675,310 on the outstanding
Series F Convertible Preferred Stock ("Series F Shares"), and $122,223 on the
outstanding Subseries I and Subseries II Shares. Per the terms of their
respective agreements, the holders of these shares elected to receive their
dividend payments as follows: the issuance of 5,922 Series F Shares, 1,006
Subseries I Shares, 188 Subseries II Shares, and a deferred dividend of $85,957.
8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SALE OF ASSETS
In March 1998, the Company completed the sale of certain assets of EET, Inc.
("EET") to an unrelated company. The assets sold related primarily to EET's
patented TechXTract technology used to provide on-site decontamination of
buildings and equipment contaminated with polychlorinated biphenyls, radioactive
isotopes or other toxic materials. The Company received consideration of
$200,000 cash and two notes receivable totaling $800,271. The first promissory
note is in the principal amount of $363,436, bears interest at 6% per annum, and
is payable in twelve quarterly payments beginning September 30, 1998. The
second promissory note is in the principal amount of $436,835, bears interest at
9 1/2% per annum, and is payable in twelve annual payments beginning September
30, 2001. The Company recognized a gain of approximately $370,000 on this
transaction.
9
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: 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, 1997 for a list of certain important factors that may
cause actual results to differ materially from those described below.
The Company evaluates its portfolio of technologies on a periodic basis to
determine the best method to use for each technology's commercialization. The
Company realizes that the optimum development of its technologies may sometimes
necessitate licensing or selling a technology to an outside interest who is in a
better position to realize its full potential. As a result of this evaluation
in 1997, the Company has sold or licensed certain of its businesses and
technologies that had been sufficiently commercialized and which might better be
developed by outside interests with resources or capabilities in specific areas
related to those businesses. During 1997 and through the first quarter of 1998,
the Company completed the following transactions: (a) sold the technology to
manufacture air conditioner base support pads from recycled products and certain
related equipment of GAIA Technologies, Inc. (June 1997); (b) sold the net
assets of Industrial Pipe Fittings, Inc. (October 1997); (c) sold certain
assets of EET, Inc. that were used in its Waste Management Services division
(October 1997) and that related to EET's patented TechXTract technology (March
1998); and (d) licensed the Riserclad technology and sold certain assets of
Riserclad International, Inc. (December 1997).
The Company is currently focusing its resources on the commercialization of the
TieTek Composite Railroad Crossties. The Company took a significant step in
this regard by commencing commercial production of its crossties pursuant to a
manufacturing agreement with a private company located in Delaware. As of
October 31, the Company had produced 2,000 crossties utilizing the Company's
small-scale molding machine and the private company's facility and personnel.
The Company anticipates producing up to 5,000 crossties in total before year
end, of which approximately 4,500 are needed to meet current and expected sales
orders and are scheduled to be shipped before year-end. This production is
differentiated from the Company's prior efforts in that production is now
dedicated to meeting commercial orders rather than being used for testing
purposes. On the basis of the test results and initial commercial orders, the
Company is continuing with the manufacturing arrangement in Delaware in
conjunction with the construction of a new manufacturing facility to be located
outside of Houston, Texas. The Company anticipates using the proceeds from the
sale of its Series G, Subseries II, preferred stock to purchase the necessary
equipment for this facility, as well as fund its working capital requirements
for the short-term.
10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
The Company sold or licensed most of its technologies during 1997 and is
currently focusing its resources on the commercialization of the TieTek
Composite Railroad Crosstie. The revenues of $17,086 for the nine months ended
September 30, 1998 were recognized during the first quarter of 1998 and
consisted primarily of chemical sales of EET's TechXTract product. These
revenues are significantly less than the amount for the three months ended
September 30, 1997 of $1,029,625 and for the nine months ended September 30,
1997 of $3,297,754 when the Company derived revenues from its subsidiaries IPF,
Riserclad, and GAIA, in addition to EET. With the sale of the TechXTract
related assets of EET in March 1998, the Company has not had any sources of
revenues until October 1998 when shipments commenced for the TieTek Crossties
produced in Delaware subject to a manufacturing agreement with a private
company. It is anticipated that up to 5,000 TieTek Crossties in total will be
produced in Delaware prior to year-end, of which approximately 4,500 are for
existing and expected sales orders. Additional revenues will occur from
production at the Company's new facility outside of Houston, Texas, which is
expected to commence operations in the first quarter of 1999.
GROSS PROFIT
The gross profit percentage of 37% for the nine months ended September 30, 1998
was recognized during the first quarter of 1998 on the sales of EET's TechXTract
chemicals. This gross profit percentage does not differ significantly from the
combined gross profit percentage from several of the Company's subsidiaries of
33% recognized in the nine months ended September 30, 1997.
The initial production of TieTek Crossties in Delaware will result in a negative
gross margin reflecting expected start-up costs, the small scale of this initial
manufacturing run, the tolling fee paid to private company, and the inability to
make volume purchases of raw materials. The Company believes this production
run has allowed the Company to demonstrate its ability to meet customer demand
and begin to seed the market for future purchase orders, along with providing
critical design and operational information for its new plant. The Company's
future ability to improve its gross margin depends upon its ability to increase
production efficiencies and manage raw material purchases. To address these
needs, the Company has designed its new manufacturing facility in Houston,
Texas to utilize an automated molding machine, and is in the process of hiring
an experienced purchasing manager. These actions are expected to result in
acceptable margins once full-scale commercial production commences next year.
11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SELLING, GENERAL & ADMINISTRATIVE EXPENSES ("SGA")
SGA expenses decreased 47% to $536,643 for the current three month period
compared to the same period of the prior year, and decreased 48% to $1,718,630
for the current nine month period compared to the same period of the prior year.
The reduction in SGA consists primarily of decreases in salary and other payroll
related costs. These reductions have been made possible by the implementation of
the Company's strategy to license or sell certain of its technologies or
products during 1997, and therefore reduce the corporate structure needed to
support the remaining businesses. The Company anticipates that SGA will remain
at the current levels until production of the TieTek Crossties requires
additional increases.
OTHER INCOME AND EXPENSE
During the quarter ended September 30, 1998, the Company discounted a five year
note receivable with an outstanding principal balance of $525,000 for a cash
payment of $420,000. The discount amount of $105,000 has been included in
interest expense for the current quarter.
During the first quarter of 1998, the Company recognized a gain on the sale of
certain EET assets of $369,679.
LIQUIDITY AND CAPITAL RESOURCES
Through the year ended December 31, 1997 the Company had incurred operating
losses which could continue in the near term at expected levels of between
$100,000 to $200,000 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. Due to these factors, the report of the Company's independent
auditors for the year ended December 31, 1997 contains an explanatory paragraph
as to the substantial doubt about the Company's ability to continue as a going
concern. The Company's long-term viability and growth will depend upon the
successful commercialization of the TieTek Composite Railroad Crosstie and its
ability to obtain adequate financing, as to which there can be no assurances.
Since June 1997 the Company has licensed or sold most of its technologies. As a
result of these transactions, the Company received cash proceeds from the sale
of certain assets of $1,202,221, of which approximately $326,000 was used to
repay certain outstanding indebtedness of IPF. The Company also received
$100,000 cash as a license fee for the Riserclad technology. In addition, as
the technologies and businesses were licensed or sold, the Company reduced its
payroll costs
12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
significantly. The Company currently employs six employees.
Over the past two years the Company's principal source of capital has been a
group of venture capital investors led by NationsBanc Capital Corporation. The
initial round of financing was a private placement of shares of Series F
Cumulative Preferred Stock and warrants to purchase common stock, which raised
$6,550,000 in cash proceeds in April and May 1996. The Company completed a
second round of financing with many of the same venture capital investors in
March 1997 in a private placement of shares of Series G Cumulative Preferred
Stock - Subseries I, which raised $1,640,000 in cash proceeds.
At the Annual Meeting of Stockholders on May 12, 1998, the Company's
shareholders approved the issuance of up to $2,000,000 of the Company's Series G
Subseries II Cumulative Convertible Preferred Stock ("Subseries II Shares"). The
Subseries II Shares have substantially the same terms of the Series G Subseries
I Cumulative Convertible Preferred Stock ("Subseries I Shares"), except that the
initial conversion price was determined based on a formula related to the market
price of the Company's common stock during a ten day period in June 1998, and
has been calculated to be $.86625. As of September 30, 1998, the Company had
sold 14,500 shares of the Subseries II Shares for cash proceeds of $1,450,000.
In November 1998 the Company sold an additional 4,000 Subseries II Shares, of
which 3,750 shares were issued for cash proceeds of $375,000, and 250 shares
were issued in payment of services rendered. The Company anticipates completing
the sale of the remaining $150,000 before the end of the year. The Company
estimates that approximately $1.0 to 1.5 million of funds generated from the
sale of the Subseries II Shares, in conjunction with other financing, will be
used to purchase capital equipment for the manufacturing facility described
below.
The Company is concentrating its resources on the development of its TieTek
Composite Railroad Crosstie business, and in that connection is in the process
of equipping a new plant in Houston, Texas in which to commence commercial
operations. Management of the Company anticipates that it will require initial
capital expenditures of approximately $2,000,000 related to this facility, with
additional potential capital expenditures of $3,000,000 to further expand the
plant's capacity during 1999 as warranted by market demand. In addition, with
the commencement of operations the Company's management anticipates that the
Company's net working capital requirements could increase up to $1,000,000
depending upon the operating capacity of the plant. Management's assessments of
capital expenditures and working capital requirements are only estimates, and
actual expenditures will likely vary from the estimates, and such variances
could be material.
The Company's current available assets, and the remainder of the proceeds from
the sale of the Subseries II Shares, may not alone be adequate to meet the
Company's liquidity requirements over the next twelve months. The Company will
explore a wide range of alternative financing sources
13
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the remainder of its liquidity requirements, and such sources could include
equity, debt, sale/leaseback, leasing or licensing arrangements. While
management believes that financing will be available, there can be no assurances
to that effect. If the Company is unable to obtain the required financing in a
timely manner, the Company may be required to delay the full commercialization
of the crosstie business.
For the nine months ended September 30, 1998, the Company utilized net cash of
$1,208,644 in operating activities, primarily as a result of its operating
losses offset by the gain on the sale of certain EET assets. The Company
generated net cash of $446,024 from investing activities, primarily from
payments received on notes receivables of $599,531 and the cash proceeds of
$200,000 from the sale of the EET assets. These proceeds were partially offset
by the purchases of equipment of $351,250. The Company generated $1,417,747
from financing activities, reflecting the sale of $1,450,000 of the Company's
Series G Subseries II preferred stock.
The Company has begun to make capital expenditures related to the $2,000,000
budgeted for the new facility. During the three months ended September 30, 1998
the Company had made payments for capital expenditures relating to TieTek
Crosstie manufacturing facility of approximately $330,000, including
approximately $200,000 associated with the commencement of production in
Delaware. Subsequent to September 30, 1998 the Company has made additional
capital expenditures totaling $440,000, with open commitments on equipment
purchase orders of $350,000. In anticipated that the Company will receive
financing of $600,000 to offset these expenditures through a sale/leaseback
arrangement on the automated molding machine.
IMPACT OF YEAR 2000 PROBLEM
The Year 2000 Problem is a result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's computer programs that have date sensitive software may recognize a
date of "00" as the year 1900 rather than 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage on other routine business activities. Based on a recent assessment,
management determined that the Company will be required to modify or replace
portions of its software so that its computer systems will properly utilize
dates beyond December 31, 1999. The Company presently believes that conversion
to a Year 2000 Complaint version of its software will mitigate the Year 2000
Problem. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 Problem could have a material impact on the
operations of the Company. The Company has initiated formal communication with
all of its significant suppliers and large customers to determine the extent to
which the Company is vulnerable to the failure of these third parties to solve
their own year 2000 Problems. However, there can be no guarantee that the
systems of the other companies on which
14
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the Company's system rely will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company. The Company
has purchased an upgrade to its existing accounting software that is certified
to be Year 2000 Compliant at a cost of $10,000, and anticipates to complete the
conversion within the next 90 days. The conversion costs are not expected to be
significant.
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, 1997 and on its
Form 10-QSB for the quarters ended March 31, 1998 and June 30, 1998. During the
three months ended September 30, 1998 there were no significant developments
related to these proceedings.
ITEM 2: CHANGES IN SECURITIES:
Pursuant to approval by the Company's stockholders on May 12, 1998, the Company
issued 500 shares of its Cumulative Convertible Preferred Stock, Series G -
Subseries II (the "Subseries II Shares") during the three months ended September
30, 1998, and 4,000 Subseries II Shares in November 1998. Of these shares,
4,250 were issued for cash proceeds of $425,000 and 250 shares were issued in
payment for services rendered. During the three months ended June 30, 1998 the
Company had sold 14,000 Subseries II Shares for cash proceeds of $1,400,000.
These shares have been issued to NationsBanc Capital Corporation and other
Institutional and Accredited Investors pursuant to the exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 4(2) thereof and the rules and regulations promulgated thereunder.
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:
(27) Financial Data Schedule
(B) REPORTS ON FORM 8-K: None
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 12, 1998 /s/ Tim B. Tarrillion
--------------------------------------
Tim B Tarrillion
President and Chief Executive Officer
Date: November 12, 1998 /s/ Judith Knight Shields
--------------------------------------
Judith Knight Shields
Chief Financial Officer and Chief
Accounting Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NORTH
AMERICAN TECHNOLOGIES GROUP INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,004,118
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 84,842
<CURRENT-ASSETS> 1,359,261
<PP&E> 554,733
<DEPRECIATION> 133,070
<TOTAL-ASSETS> 6,554,623
<CURRENT-LIABILITIES> 1,125,369
<BONDS> 0
0
13,697,981
<COMMON> 31,320
<OTHER-SE> (8,300,047)
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 17,086
<TOTAL-REVENUES> 17,086
<CGS> 10,755
<TOTAL-COSTS> 10,755
<OTHER-EXPENSES> 1,718,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,008
<INCOME-PRETAX> (1,478,165)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,478,165)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,478,165)
<EPS-PRIMARY> (.65)
<EPS-DILUTED> (.65)
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