<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 MARCH 31, 1999
[_] 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 [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: 3,604,548 common shares outstanding as of
April 30, 1999
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
March 31, 1999 (unaudited) and December 31, 1998
Consolidated Statements of Loss 4
Three months ended March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Stockholders' Equity 5
Three months ended March 31, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows 6
Three months ended March 31, 1999 and 1998 (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 15
ITEM 2. CHANGES IN SECURITIES 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31 DEC. 31
1999 1998
UNAUDITED AUDITED
--------- -------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.............................. $ 564,839 $ 719,212
Accounts receivable.................................... 62,568 5,617
Inventories............................................ 101,813 186,783
Current portion of notes receivable.................... 131,500 105,000
Prepaid expenses and other............................. 92,769 84,341
------------ ------------
Total Current Assets.................................. 953,489 1,100,953
Notes receivable........................................ 725,314 761,639
Property and equipment, less accumulated depreciation
of $174,044 and $167,031............................... 854,548 841,998
Patents and purchased technologies, less accumulated
amortization of $156,099 and $131,551.................. 1,600,439 1,586,017
Goodwill, less accumulated amortization of $894,489
and $815,717........................................... 1,885,528 1,964,301
Other intangible assets, less accumulated
amortization of $82,818 and $74,975.................... 72,182 80,025
Other................................................... 41,809 43,473
------------ ------------
$ 6,133,309 $ 6,378,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt................... $ 500,000 $ 500,000
Accounts payable....................................... 127,449 208,202
Accrued expenses....................................... 519,020 519,453
Deferred dividends payable on preferred stock.......... 191,927 191,927
------------ ------------
Total current liabilities............................. 1,338,396 1,419,582
Deferred dividends payable on preferred stock,
including accrued interest............................ 175,551 163,553
------------ ------------
Total Liabilities..................................... 1,513,947 1,583,135
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 149,406 and 147,468 shares issued......... 14,940,632 14,746,815
Common stock, $.001 par value, 100,000,000 shares
authorized; 3,604,548 and 3,558,502 shares issued..... 3,605 3,559
Additional paid-in capital............................. 27,422,224 27,148,991
Accumulated deficit.................................... (37,575,917) (36,934,862)
Less notes receivable for sale of stock................ (171,182) (169,232)
------------ ------------
Total Stockholders' Equity............................ 4,619,362 4,795,271
------------ ------------
$ 6,133,309 $ 6,378,406
============ ============
</TABLE>
3
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31 MARCH 31
1999 1998
-------- ----------
<S> <C> <C>
Revenues............................................ $ 127,901 $ 17,086
Cost of revenues.................................... 216,371 10,755
---------- ----------
Gross profit................................... (88,470) 6,331
Selling, general and administrative expenses ....... 483,319 630,769
---------- ----------
Operating loss................................. (571,789) (624,438)
---------- ----------
Other Income (Expense):
Interest income................................. 11,436 3,269
Interest expense................................ (20,645) (20,136)
Gain on sale of assets.......................... - 369,679
Other........................................... - 199
---------- ----------
Total Other Income (Expense)........................ (9,209) 353,011
---------- ----------
Net Loss............................................ $ (580,998) $ (271,427)
========== ==========
Computation of net loss per share:
Net loss before dividends on preferred stock........ $ (580,998) $ (271,427)
Dividends on preferred stock........................ (60,057) -
---------- ----------
Net loss applicable to common stockholders.......... $ (641,055) $ (271,427)
========== ==========
Weighted average number of common
shares outstanding.............................. 3,552,620 3,479,858
========== ==========
Net loss per share - basic and assuming dilution.... ($.18) ($.08)
========== ==========
</TABLE>
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THREE MONTHS ENDED MARCH 31, 1999 AND 1998
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, 1998 147,468 $14,746,815 3,558,502 $ 3,559 $27,148,991 $(36,934,862) $(169,232) $4,795,271
Issuance of Series G Subseries III
preferred stock 4,190 419,000 - - - - - 419,000
Issuance of common stock upon
conversion of Series F
preferred stock (2,252) (225,183) 46,046 46 225,137 - - -
Costs associated with equity
transactions - - - - (11,961) - - (11,961)
Interest on notes receivable from
stockholders - - - - - - (1,950) (1,950)
Deemed dividends on preferred stock - - - - 60,057 (60,057) - -
Net loss for the period - - - - - (580,998) - (580,998)
------- ----------- --------- -------- ----------- ------------ --------- ---------
Balance March 31, 1999 149,406 $14,940,632 3,604,548 $ 3,605 $27,422,224 $(37,575,917) $(171,182) $4,619,362
======= =========== ========= ======== =========== ============ ========= ==========
Balance December 31, 1997 115,364 $11,536,406 3,479,858 $ 3,480 $26,376,163 $(32,180,115) $(161,432) $5,574,502
Interest on notes receivable from
stockholders - - - - - - (1,950) (1,950)
Net loss for the period - - - - - (271,427) - (271,427)
------- ----------- --------- -------- ----------- ------------ --------- ---------
Balance March 31, 1998 115,364 $11,536,406 3,479,858 $ 3,480 $26,376,163 $(32,451,542) $(163,382) 5,301,125
======= =========== ========= ======== =========== ============ ========= ==========
</TABLE>
5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 30, 1999 AND 1998
UNAUDITED
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
1999 1998
------------ ------------
<S> <C> <C>
Net cash used in operating activities........................... $ (512,704) $ (296,205)
--------- ----------
Cash flows from investing activities:
Cash received from sale of assets........................... - 200,000
Payment of patent costs..................................... (38,970) (7,556)
(Increase) decrease in notes receivable..................... 9,825 -
Purchase of property and equipment.......................... (19,563) -
--------- ----------
Net cash provided (used) in investing activities ..... (48,708) 192,444
Cash flows from financing activities:
Issuance of preferred stock................................. 419,000 -
Repayment of notes payable and long-term debt............... - ( 609)
Payment of costs and fees of equity issuances............... (11,961) -
--------- ----------
Net cash provided by financing activities ............ 407,039 ( 609)
--------- ----------
Net increase (decrease) in cash and cash equivalents ........... (154,373) (104,370)
Cash and cash equivalents, beginning of period ................. 719,212 348,991
--------- ----------
Cash and cash equivalents, end of period........................ $ 564,839 $ 244,621
========= ==========
</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, 1998 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, 1998 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 three months ended March 31,1999, there were deemed dividends totaling
$60,057 on the Company's Series G 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 ended
March 31, 1999 and 1998, 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, warrants, convertible debt, and
preferred stock convertible into an aggregate of approximately 7,600,000 shares
of common stock.
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.
STOCKHOLDERS' EQUITY
At the Annual Meeting of Stockholders held on May 12, 1998, the Company's
stockholders 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, all outstanding common stock and all per share data
included in the accompanying financial statements have been retroactively
adjusted to reflect the reverse stock split. In addition, all outstanding
common stock options and warrants and their exercise prices, along with the
preferred stock conversion prices, have been adjusted to reflect the reverse
stock split.
In March 1999, the Company issued 4,190 shares of its Series G Subseries III
Cumulative Convertible Preferred Stock ("Subseries III Shares") for cash
proceeds of $419,000. In May 1999, the Company issued an additional 4,550
Subseries III Shares for $455,000 in cash proceeds. The Subseries III Shares
have substantially the same terms as the Series G Subseries I and Series G
Subseries II Cumulative Convertible Preferred Stock ("Subseries I and Subseries
II Shares"), except that the initial conversion price for the Subseries III
Shares is $1.50, and such conversion price can never be adjusted below $1.25.
In connection with the sale of the Subseries III Shares in March 1999, the
Company recognized deemed dividends of $60,057.
Through March 31, 1999, certain holders of the Company's Series F Cumulative
Convertible Preferred Stock ("Series F Shares") converted 2,252 Series F Shares
into 46,046 shares of the Company's Common Stock. In May 1999, an additional
518.8173 Series F Shares were converted into 11,493 shares of the Company's
Common Stock.
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 its wholly-
owned subsidiary, 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. In March 1998, 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, 1998 for a list of certain important factors that may
cause actual results to differ materially from those described below.
The Company is currently focused on the commercialization of the TieTek
Composite Railroad Crosstie through its wholly-owned subsidiary, TieTek, Inc.
("TieTek"). The Company's decision to focus its resources on the TieTek
Crosstie necessitated that it sell or license its other technologies. In March
1998, the Company sold its patented TechXTract technology, concluding the
licensing and/or sale of its technologies that it had begun in June 1997.
RESULTS OF OPERATIONS
REVENUES
During the fourth quarter of 1998, the Company commenced commercial production
of its crossties pursuant to a manufacturing agreement with a private company
located in Delaware. As of December 31, 1998, the Company had produced
approximately 5,000 crossties utilizing the Company's small-scale molding
machine and the private company's facility and personnel. In March 1999, the
Company manufactured approximately 1,000 crossties pursuant to this same
manufacturing agreement.
Shipments of crossties from these production runs generated $127,901 in revenue
for the three months ended March 31, 1999 and $121,742 in revenue for the three
months ended December 31, 1998. The Company had an inventory of approximately
1,300 crossties as of March 31, 1999, and of approximately 500 crossties as of
the date of this Report. In April 1999, the Company received a purchase order
from an independent distributor for 20,000 crossties to be delivered by the end
of 1999.
Revenues of $17,086 for the quarter ended March 31, 1998 were the result of
sales from the Company's TechXTract product line which was sold in March 1998.
GROSS PROFIT
The production of TieTek Crossties by a private manufacturer in Delaware has
resulted in a negative gross margin reflecting expected start-up costs, the
small scale of this initial manufacturing run, the tolling fee paid to the
manufacturer, and the inability to make volume purchases of raw materials.
10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company believes these production runs have 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.
The gross profit percentage of 37% for the quarter ended March 31, 1998 resulted
from sales of EET's TechXTract chemicals. This gross profit percentage does not
differ significantly from the historical percentage achieved on this product
line.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES ("SGA")
SGA expenses decreased 23% to $483,319 for the three months ended March 31, 1999
compared to the three months ended March 31, 1998. This reduction consists
primarily of decreases in salary and other payroll related costs previously
associated with the Company's TechXTract product line which was sold in March
1998. The Company anticipates that SGA will remain at the current levels until
production of the TieTek Crossties requires additional increases. The Company
anticipates an increase in staff to support TieTek's manufacturing plant in the
latter half of 1999. The Company currently has five employees.
OTHER INCOME AND EXPENSE
During the first quarter of 1998, the Company recognized a gain on the sale of
certain assets associated with the TechXTract product line of $369,679.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, the Company continued to incur a cash
flow deficit averaging $100,000 to $200,000 per month. This deficit reflects
primarily the pre-commercial operations of the TieTek Composite Railroad
Crosstie business and corporate overhead. As of March 31, 1999, the Company had
a deficit working capital balance of $384,907, including a cash balance of
$564,839. With the issuance of additional Subseries III Shares in May 1999, as
of the date of this Report the cash balance had increased to $823,254.
11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has made significant progress towards the full commercial production
of the TieTek Crosstie, including the production of approximately 5,000
crossties during the fourth quarter of 1998 and approximately 1,000 crossties
during the first quarter of 1999. Before year-end, the Company anticipates
building or acquiring production capacity to meet anticipated short term demand.
This will require significant expenditures, including the purchase of
manufacturing equipment, the cost of hiring and training a workforce to operate
the plant, and/or the cost of acquiring a suitable operation. As a result, it
can be expected that short-term operating losses could accelerate from those
experienced over the past year.
Historically, the Company has met its working capital requirements through
financing transactions involving the private placement of equity securities or
equity equivalents, the issuance of convertible debentures, and the proceeds
from the sale or license of its technologies. Over the past three years, the
Company's principal source of capital has been a group of venture capital
investors led by Bank of America Capital Investors (a new affiliate of
NationsBanc Capital Corporation). These investors have provided financing
through a series of Cumulative Convertible Preferred Stock as follows:
. In 1996, the Company issued shares of Series F Cumulative Convertible
Preferred Stock ("Series F Shares") and warrants for cash proceeds of
$6,550,000.
. In 1997, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries I (the "Subseries I Shares") for cash proceeds of
$1,640,000.
. In 1998, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries II (the "Subseries II Shares") for cash proceeds
of $1,975,000 and professional services of $25,000.
. In March 1999, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries III (the "Subseries III Shares") for cash proceeds
of $419,000. In May 1999, the Company issued additional Subseries III Shares
for cash proceeds of $455,000.
The Series F Shares, and the Subseries I, II and III Shares, Series G-II Shares,
and Series G-III Shares (collectively the "Series F and G Shares") are entitled
to an annual cumulative dividend of 13.5% and are convertible into shares of the
Company's Common Stock at conversion prices, as of April 30, 1999, of $4.51,
$2.59, $.87, and $1.50 per share, respectively. In accordance with the
certificates of designation for the Series F and G Shares, the Company has
deferred all preferred stock dividends, or satisfied such dividends through the
issuance of additional shares of preferred stock. However, pursuant to the
terms of the Series F and G Shares, the Company cannot defer dividends after
April 5, 1999. Given the Company's expected financial condition, it is unlikely
the Company will be in a position to pay cash dividends on such shares in 1999.
Therefore, these
12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
dividends will accumulate, and must be paid, together with interest thereon,
prior to the payment of any distributions to the common stockholders. The
Company does not anticipate any such distributions in the foreseeable future.
The Company anticipates that its first automated manufacturing line, with a
capacity of approximately 10,000 crossties per month, will require capital
expenditures of $2,000,000 and additional working capital of up to $1,000,000.
Expansion of the plant's capacity as warranted by market demand could require
additional capital expenditures of $3,000,000. 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.
As of March 31, 1999, the Company had made payments totaling $800,000 for
manufacturing equipment, and had open purchase commitments of an additional
$400,000. In the first quarter of 1999, the Company raised $419,000 through
the sale of its Subseries III Shares; an additional $455,000 was raised in May
1999 through the sale of 4,550 Subseries III Shares. Additional financing,
however, will be necessary in order to commence manufacturing operations. The
Company intends to raise up to $4,000,000 in funds, and is currently in
discussions with several potential investors and is evaluating a number of
financing alternatives to satisfy these capital requirements. However, as of
the date of this Report, the Company has no commitments for financing and there
can be no assurance that the Company will be able to obtain financing on terms
reasonably attractive to the Company, if at all. Due to these uncertainties,
the report of the Company's independent public accountants for the year ended
December 31, 1998 contains an explanatory paragraph as to the substantial doubt
about the Company's ability to continue as a going concern. If the Company is
unsuccessful in obtaining financing for its initial facility, the Company will
attempt to contract for the continued manufacture of its crossties from third
parties.
During the quarter ended March 31, 1999, the Company used $512,704 in cash for
its operating activities, consisting of the net loss for the quarter of $580,998
adjusted for net non-cash expenses of $128,221 and an increase in working
capital of $59,927.
Investing activities used $48,708 in cash during the first three months of 1999.
These funds were used primarily for payment of patent costs.
Financing activities provided net cash of $407,039 during the three months ended
March 31, 1999. These funds were generated primarily by the sale of 4,190
shares of Series G-III Shares for cash proceeds of $419,000.
13
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. The Company has completed a
review of its exposure to the Year 2000 issue and has completed a conversion of
its accounting software to a Year 2000 Compliant version. 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. The
Company has not received responses from all of its inquiries. The Company has
been informed by its bank that the bank is substantially prepared for Year 2000.
The Company has been informed that its contract manufacturer is currently in the
process of converting to Year 2000 compliant systems, and this conversion is
scheduled for completion prior to 2000. Furthermore, the Company is completing
a new manufacturing facility in Houston, which the Company believes will be Year
2000 compliant when built, to take over production prior to 2000 and therefore
the Company does not believe that it will be materially affected if the contract
manufacturer would experience any difficulties relating to Year 2000 issues.
There can be no guarantee that the systems of the other companies on which 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 costs
incurred by the Company to convert to a Year 2000 Compliant version of
accounting software were not significant.
14
<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, 1998. During the
three months ended March 31, 1999 there were no significant developments related
to these proceedings.
ITEM 2: CHANGES IN SECURITIES:
In March 1999, the Company issued 4,190 shares of its Cumulative Convertible
Preferred Stock, Series G - Subseries III (the "Subseries III Shares") for cash
proceeds of $419,000. In May 1999, an additional 4,550 Subseries III Shares
were issued for cash proceeds of $455,000. These shares have been issued to
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. No
broker's commissions were paid in connection with these issuances, although
payments of $23,600 were made to financial advisors for services provided in
connection with these transactions.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES:
The certificates of designations for the Series F and Series G Cumulative
Convertible Preferred Stock provide that after April 5, 1999 the Company may no
longer defer the payment of cash dividends, and the holders no longer have the
ability to receive such deferred dividends through the issuance of additional
preferred shares. Due to the capital requirements necessary to expand the
Company's business, it is unlikely that the Company will be able to pay cash
dividends in the near future. Commencing with the June 30, 1999 dividend
payment date, and continuing for so long as the Company is unable to pay cash
dividends, the Series F and Series G dividends will accumulate in arrears.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: NONE
ITEM 5: OTHER INFORMATION:
In March 1999, the Company's wholly-owned subsidiary, TieTek, Inc., was issued a
patent from the U.S. Patent Office relating to the TieTek technology.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
(27) Financial Data Schedule
(B) REPORTS ON FORM 8-K: None
15
<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: May 14, 1999 /s/ Henry W. Sullivan
-----------------------------------------
Henry W. Sullivan
President and Chief Executive Officer
Date: May 14, 1999 /s/ Judith Knight Shields
-----------------------------------------
Judith Knight Shields
Chief Financial Officer and
Chief Accounting Officer
16
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