<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, 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.)
14315 WEST HARDY ROAD, HOUSTON, TEXAS 77060
(Address of principal executive offices) (Zip Code)
(281) 847-0029
(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: 3,969,696 common shares outstanding as of
November 10, 1999
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT
(CHECK ONE):
Yes No X
--------- ---------
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3
September 30, 1999 (unaudited) and December 31, 1998
Consolidated Statements of Loss 4
Three and nine months ended September 30, 1999 and 1998
(unaudited)
Consolidated Statements of Stockholders' Equity 5
Nine months ended September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Cash Flows 6
Nine months ended September 30, 1999 and 1998 (unaudited)
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
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 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
</TABLE>
2
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
SEPT. 30 DEC. 31
1999 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents................................ $ 198,709 $ 719,212
Accounts receivable...................................... 18,432 5,617
Inventories.............................................. 36,248 186,783
Current portion of notes receivable...................... 20,000 105,000
Prepaid expenses and other............................... 58,227 84,341
------------ ------------
Total Current Assets.................................... 331,616 1,100,953
Notes receivable, net of allowance......................... 440,950 761,639
Property and equipment, less accumulated depreciation
of $182,630 and $167,031................................. 1,028,697 841,998
Patents and purchased technologies, less accumulated
amortization of $205,194 and $131,551.................... 1,552,083 1,586,017
Goodwill, less accumulated amortization of $1,026,125
and $815,717............................................. 1,753,893 1,964,301
Other intangible assets, less accumulated
amortization of $98,507 and $74,975...................... 56,493 80,025
Other...................................................... 46,811 43,473
------------ ------------
$ 5,210,543 $ 6,378,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt..................... $ 500,000 $ 500,000
Note payable ............................................ 167,500 -
Accounts payable......................................... 111,326 208,202
Accrued expenses......................................... 321,081 519,453
Deferred dividends payable on preferred stock............ - 191,927
------------ ------------
Total current liabilities............................... 1,099,907 1,419,582
Deferred dividends payable on preferred stock,
including accrued interest.............................. 159,639 163,553
------------ ------------
Total Liabilities....................................... 1,259,546 1,583,135
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 158,534 and 147,468 shares issued........... 15,853,403 14,746,815
Common stock, $.001 par value, 50,000,000 shares
authorized; 3,663,227 and 3,558,502 shares issued....... 3,663 3,559
Additional paid-in capital............................... 27,900,483 27,148,991
Accumulated deficit...................................... (39,631,470) (36,934,862)
Less notes receivable for sale of stock.................. (175,082) (169,232)
------------ ------------
Total Stockholders' Equity.............................. 3,950,997 4,795,271
------------ ------------
$ 5,210,543 $ 6,378,406
============ ============
</TABLE>
3
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30 Sept. 30 Sept. 30
1999 1998 1999 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues............................................ $ 5,740 $ - $ 175,107 $ 17,086
Cost of revenues.................................... 27,339 - 313,234 10,755
------------- ------------- ------------- ------------
Gross profit (loss).............................. (21,599) - (138,127) 6,331
Selling, general and administrative expenses........ 427,234 536,643 1,386,409 1,718,630
------------- ------------- ------------- ------------
Operating loss................................... (448,833) (536,643) (1,524,536) (1,712,299)
Other Income (Expense):
Interest income................................... 11,370 23,716 29,151 35,381
Interest expense.................................. (113,541) (131,842) (155,213) (172,008)
Gain on sale of assets............................ - - - 369,679
Other............................................. (383,358) 586 (382,623) 1,082
------------- ------------- ------------- ------------
Total Other Income (Expense)........................ (485,529) (107,540) (508,685) 234,134
------------- ------------- ------------- ------------
Net Loss............................................ $ (934,362) $ (644,183) $ (2,033,221) $ (1,478,165)
============= ============= ============= ============
Computation of net loss per share:
Net loss before dividends on preferred stock........ $ (934,362) $ (644,183) $ (2,033,221) $ (1,478,165)
Dividends on preferred stock........................ ( - ) ( - ) (663,387) (797,533)
Dividends on preferred stock, in arrears............ ( - ) ( - ) (471,173) -
------------- ------------- ------------- ------------
Net loss applicable to common stockholders.......... $ (934,362) $ (644,183) $ (3,167,781) $ (2,275,698)
============= ============= ============= ============
Weighted average number of common
shares outstanding................................ 3,623,620 3,479,858 3,609,663 3,479,858
============= ============= ============= ============
Net Loss per share - basic and assuming dilution.... ($.26) ($.18) ($.88) ($.65)
============= ============= ============= ============
(See Note 1)
</TABLE>
4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 30, 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 9,000 900,000 - - - - - 900,000
Issuance of Series F & G preferred
stock in lieu of cash dividends 5,219 521,867 - - - - - 521,867
Issuance of common stock upon
conversion of Series F
preferred stock (3,153) (315,279) 66,584 66 315,213 - - -
Issuance of common stock upon
conversion of deferred dividends - - 38,141 38 244,838 - - 244,876
Costs associated with equity
transactions - - - - (34,949) - - (34,949)
Interest on notes receivable from
stockholders - - - - - - (5,850) (5,850)
Expense associated with Directors
Options - - - - 8,000 - - 8,000
Dividends on preferred stock - - - - - (532,142) - (532,142)
Deemed dividends on preferred stock - - - - 131,245 (131,245) - -
Deemed interest-convertible note
payable - - - - 87,145 - - 87,145
Net loss for the period - - - - - (2,033,221) - (2,033,221)
------- ----------- --------- ------- ----------- ------------ --------- -----------
Balance September 30, 1999 158,534 $15,853,403 3,663,227 $ 3,663 $27,900,483 $(39,631,470) $(175,082) $ 3,950,997
======= =========== ========= ======= =========== ============ ========= ===========
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
======= =========== ========= ======= =========== ============ ========= ===========
</TABLE>
5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
UNAUDITED
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Sept. 30 Sept. 30
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(2,033,221) $ (1,478,165)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization......................... 323,387 433,720
Compensation expense.................................. 8,000 -
(Gain) loss on disposition of equipment and other
assets............................................. 1,164 (368,353)
Discount on notes receivable.......................... - 105,000
Adjustment to notes receivable........................ - 70,000
Allowance to notes receivable......................... 380,950 -
Provision for bad debts............................... - 17,090
Accrued interest receivable on notes receivable,
stockholders........................................ (5,850) (5,850)
Deemed Interest-convertible note payable ............. 87,145 -
Accrued interest payable on deferred dividends........ 38,757 24,377
Changes in assets and liabilities:
Accounts receivable.................................. (12,815) 285,623
Inventories.......................................... 150,535 (80,861)
Prepaid expenses and other current assets............ 26,114 (87,214)
Other assets......................................... (3,338) 154,052
Accounts payable and accrued expenses................ (295,247) (278,063)
------------- -------------
Net cash used in operating activities.............. (1,334,419) (1,208,644)
------------- -------------
Cash flows from investing activities:
Cash received from sale of assets...................... - 210,125
Payment of patent costs................................ (39,711) (12,382)
(Increase) decrease in notes receivable................ 24,739 599,531
Purchase of property and equipment..................... (203,663) (351,250)
------------- -------------
Net cash provided (used) in investing activities... (218,635) 446,024
------------- -------------
Cash flows from financing activities:
Issuance of preferred stock............................ 900,000 1,450,000
Proceeds from convertible note......................... 167,500 -
Repayment of notes payable and long-term debt.......... - (6,978)
Payment of costs and fees of equity issuances.......... (34,949) (25,275)
------------- -------------
Net cash provided by financing activities.......... 1,032,551 1,417,747
------------- -------------
Net increase (decrease) in cash and cash equivalents..... (520,503) 655,127
Cash and cash equivalents, beginning of period........... 719,212 348,991
------------- -------------
Cash and cash equivalents, end of period................. $ 198,709 $ 1,004,118
============= =============
</TABLE>
6
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Notes to Consolidated Financial Statements
(1)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 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 about conditions that raise substantial doubt about 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.
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, 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
8,400,000 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. Substantially all of such assets are related to the TieTek
Crossties. Inherent in this analysis is an estimate of both future revenues and
profitability for these products. Management uses a wide variety of information
when performing this review, 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 the TieTek Crosstie commercialization, these estimates are subject to
revision in the future as additional information becomes available, or
7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Notes to Consolidated Financial Statements
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.
(2) 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 proceeds of
$419,000. In May 1999, the Company issued an additional 4,810 Subseries III
Shares for $481,000 in 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 and May
1999, the Company recognized deemed dividends of $60,057 and $71,188
respectively.
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 the second quarter 1999,
an additional 650.9129 Series F Shares were converted into 14,571 shares of the
Company's common stock. During the third quarter 1999 an additional 250.1336
Series F Shares were converted into 5,967 shares of the Company's common stock.
On June 29, 1999, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation reducing the number of
authorized shares of the Company's common stock from 100,000,000 to 50,000,000.
8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Notes to Consolidated Financial Statements
(3) 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 ("acquiring
company"). The assets sold related primarily to EET's patented TechXTract(TM)
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 original
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.
The acquiring company failed to make the required September 30, 1999 payment of
principal and interest when due. Subsequently, interest was paid through
September 30, 1999. The parties are presently negotiating a restructuring of
the notes and the Company has provided a reserve of $380,950.
(4) LONG TERM DEBT
Included in current maturities of long term debt is an unsecured note payable to
an individual for $500,000 due August 18, 1999. Because of the Company's
current financial condition, it was unable to repay this note on the due date.
In November 1999, the Company and the Lender entered into an agreement (the
"Conversion Agreement") to convert the loan into 182,875 shares of the Company's
common stock (the "Conversion Shares"), subject to certain conditions. The
lender has agreed to certain restrictions on the sale of the conversion shares
and has the right after February 12, 2000 to require the Company to repurchase
all remaining conversion shares for the amount of the original note plus unpaid
interest less the net proceeds received on the sales of conversion shares. In
the event the sales of conversion shares equal the amount of the original note
plus interest, the Company has the right to cancel the remaining conversion
shares.
(5) NOTE PAYABLE
In September 1999 the Company borrowed $167,500 from a private entity and issued
a note payable due September 9, 2000 which is convertible into shares of the
Company's common stock. Since the conversion rate at the time of issuance of
the note was below the market price of the Company's common stock, the Company
recorded "deemed interest" in the amount of $87,145.
9
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Notes to Consolidated Financial Statements
(6) TIETEK ROYALTY
In December 1997, as compensation for the acquisition for the outstanding
stock of TieTek, Inc. the company entered into a fifteen-year agreement (TieTek
Royalty Agreement) providing for royalty payments to the owners of Gaia
Holdings, Inc. and Thor Ventures, the developers of the TieTek technology. One
of the owners is a director and officer of the Company and another is a former
director of the Company.
The TieTek Royalty Agreement provides for the payment of an alternate minimum
royalty beginning March 1999 in the event the Company does not expeditiously
proceed with the construction of a plant as defined in the royalty agreement.
The alternate minimum royalty obligation is $162,500 per calendar quarter until
the Company begins commercial sales of product. Management believes that it has
complied with the terms of the agreement and no minimum royalty is due. The
Company has therefore neither paid nor accrued any alternate minimum royalty.
In October 1999, the Company was informed by certain royalty holders that they
disagree with the Company's interpretation of the royalty agreement and believe
that an alternate minimum royalty is due and have requested that it be paid. The
Company plans to meet with representatives of the royalty holders and attempt to
reach an amicable resolution of the issue.
10
<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 sold or licensed its other technologies after the
decision to focus its resources on the TieTek Crosstie.
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. The Company believes that these production runs began
the commercial market introduction of the TieTek Crosstie, demonstrating its
ability to satisfy the customer requirements. As of December 31, 1998, the
Company had produced approximately 5,000 crossties utilizing the Company's
small-scale molding and cooling equipment and the private company's facility and
personnel. In March 1999, the Company manufactured approximately 1,000
crossties pursuant to this same manufacturing agreement. No crossties were
manufactured in the second and third quarter of 1999.
Shipments of crossties from these production runs generated $121,742 in revenues
for the three months ended December 31, 1998; $127,901 in revenue for the three
months ended March 31, 1999 and $41,466 in revenue for the three months ended
June 30, 1999. The Company had an inventory of approximately 1,300 crossties as
of March 31, 1999 and less than 500 at June 30, 1999.
The Company had revenues of $5,740 in the third quarter 1999 from the sale of
crossties in inventory.
GROSS PROFIT
The production of TieTek Crossties in Delaware under the manufacturing agreement
resulted in a negative gross margin, reflecting expected start-up costs, the
small scale and labor intensive nature of this initial manufacturing run, the
tolling fee paid to the manufacturer, and the purchase of low volumes of raw
materials in the spot market. The production runs provided critical design and
11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
operating information for the full scale, automated new plant. Gross margin
improvement will depend upon continuous operation, production efficiencies,
economies of scale and strategic raw material purchasing. To address these
needs, the Company has designed its new manufacturing facility in Houston, Texas
to utilize an automated molding machine, and has hired an experienced purchasing
manager. These actions are expected to result in acceptable margins once
commercial production volumes are achieved.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SGA)
SGA expenses decreased 20% to $427,234 for the three months ended September 30,
1999 compared to the three months ended September 30, 1998; and decreased 19%
for the nine months ended September 30, 1999 compared with the previous nine
months. This reduction consists primarily of decreases in salary and other
payroll related costs, insurance and depreciation and amortization associated
with the Company's product lines that have been sold or disposed. 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 late 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(TM) product line of $369,679. In
the quarter ended September 30, 1999 the Company provided a reserve of $380,950
against notes receivable of $761,890 related to the sale of the TechXTract(TM)
product line. See note 3.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 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 September 30, 1999,
the Company had a deficit working capital balance of $768,291 including a cash
balance of $198,709.
Included in current maturities of long-term debt is an unsecured note payable to
an individual for $500,000 due August 18, 1999. Because of the Company's
current financial condition, it was unable to repay this note on the due date.
In November 1999, the Company and the Lender entered into an agreement (the
"Conversion Agreement") to convert the loan into 182,875 shares
12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
of the Company's common stock (the "Conversion Shares"), subject to certain
conditions. The lender has agreed to certain restrictions on the sale of the
conversion shares and has the right after February 12, 2000 to require the
Company to repurchase all remaining conversion shares for the amount of the
original note plus unpaid interest less the net proceeds received on the sales
of conversion shares. In the event the sales of conversion shares equal the
amount of the original note plus interest, the Company has the right to cancel
the remaining conversion shares.
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. No crossties were produced in the second and
third quarter of 1999. The Company anticipates building production capacity in
late 1999 or early 2000 to meet anticipated demand. This will require
significant expenditures, including the competitive purchase of manufacturing
equipment and the cost of hiring and training a workforce to operate the plant.
The start-up period can be expected to result in accelerated short-term
operating losses compared with the low level of activity during the past year.
The Company has an existing purchase order for 20,000 crossties for delivery in
2000. In addition, the Company is engaged in discussions with a major railroad
regarding a commercial order for the purchase of a significant number of the
Company's composite railroad ties. However, as of the date of this report no
purchase order has been issued and no assurance can be given that the terms of a
purchase order acceptable to the Company can be agreed to.
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 debt, 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
including Bank of America Capital Investors. 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.
13
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
. In March 1999, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries III (the Subseries III Shares) for cash proceeds of
$413,000 and a payment to a financial advisor of $6,000. In May 1999, the
Company issued additional Subseries III Shares for cash proceeds of $466,000
and payments to a financial advisor of $15,000.
The Series F Shares, and the Series G - Subseries I, II and 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 September 30, 1999, of $4.13, $2.46, $.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
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.
As of September 30, 1999 $471,173 dividends were in arrears.
In the first quarter of 1999, the Company raised $419,000 through the sale of
its Series G - Subseries III Shares; an additional $481,000 was raised in May
1999 through the sale of 4,810 Series G - Subseries III Shares. In September
1999 the Company borrowed $167,500 from a private entity and issued a note
payable due September 9, 2000 which is convertible into shares of the Company's
common stock. In November 1999, the Company borrowed an additional $150,000
from an individual and issued a note payable due in November 2000 which is
convertible into shares of the Company's common stock. Additional financing,
however, will be necessary in order to meet working capital requirements and to
commence manufacturing operations. The Company anticipates that its first
automated manufacturing line, with a capacity of approximately 10,000 crossties
per month, will require additional capital expenditures of approximately
$2,000,000 and additional working capital of approximately $2,000,000. Through
September 30, 1999, the Company had made payments totaling $991,000 for
manufacturing equipment, and had open purchase commitments of an additional
$242,000. The Company has obtained shareholder approval to raise up to
$5,000,000 in additional 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. Expansion of the plant's capacity as warranted by market
demand will require additional capital expenditures. Management's assessments
of capital expenditures and working capital requirements
14
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
are only estimates, and actual expenditures will likely vary from the estimates,
and such variances could be material.
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 may attempt to contract for the continued
manufacture of its crossties from third parties.
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 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.
There can be no guarantee that the systems of the other companies on which the
Company's systems 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.
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, 1998. In June,
1999 the Lin Lar Golf v. Industrial Pipe Fittings, Inc. proceeding was settled
within the policy limits provided by the Company's general liability insurance.
There were no significant developments related to the other proceedings during
the third quarter of 1999.
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
proceeds of $419,000. In May 1999, an additional 4,810 Subseries III Shares
were issued for proceeds of $481,000. 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 $24,200 were made to financial advisors for services provided in
connection with these transactions.
In September 1999 the Company borrowed $167,500 from a private entity and issued
a note payable due September 9, 2000 which is convertible into shares of the
Company's common stock. Since the conversion rate at the time of issuance of
the note was below the market price of the Company's common stock, the Company
recorded "deemed interest" in the amount of $87,145.
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:
(a) On June 29, 1999 the Annual Meeting of Stockholders of the Company was held
at the Houstonian Hotel, 111 North Post Oak Lane, Houston, Texas.
16
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Part II: Other Information
(b) At the Annual Meeting, the following nominees for director to be elected by
the stockholders received the number of votes set opposite their names,
constituting, in each case, a plurality of the votes cast at the Annual
Meeting for election of the two directors to be elected by the
stockholders:
Douglas C. Williamson 8,143,811
---------
William C. Thompson 8,144,811
---------
(c) At the Annual Meeting, the Proposal to Approve the 1999 Stock Incentive
Plan was approved by a vote of 6,223,715 for and 116,167 against, with
28,388 shares abstaining on such matter.
At the Annual Meeting, the Authority to Issue up to $5,000,000 of Common
Stock or Convertible Securities in a Private Placement of a Fixed Price
Security was approved by a vote of 6,263,301 for and 98,828 against, with
6,142 shares abstaining on such matter.
At the Annual Meeting, the Authority to Issue up to $5,000,000 of Common
Stock or Convertible Securities in a Private Placement of a Future Priced
Security, was approved by a vote of 6,259,989 for and 100,775 against, with
7,507 shares abstaining on such matter.
At the Annual Meeting, the Amendment to the Company's Certificate of
Incorporation to Decrease the Number of Authorized Shares of Common Stock
from 100,000,000 to 50,000,000 was Approved by a vote of 8,119,197 for and
18,155 against, with 22,352 shares abstaining on such matter.
At the Annual Meeting, the appointment of BDO Seidman, LLP, as independent
auditors for the Company and its subsidiaries for the 1998 fiscal year, was
approved by a vote of 8,146,123 for and 4,887 against, with 8,694 shares
abstaining on such matter.
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
17
<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, 1999 /s/ Henry W. Sullivan
-------------------------------------------------
Henry W. Sullivan
President and Chief Executive Officer
Date: November 12, 1999 /s/ Russell L. Allen
-------------------------------------------------
Russell L. Allen
Chief Financial Officer
18
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