<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 JUNE 30, 2000
[ ] 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: 5,992,805 common shares outstanding as of
July 17, 2000.
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
June 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Loss
Three and six months ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 (unaudited) 6
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 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
</TABLE>
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
JUNE 30, DEC. 31,
2000 1999
UNAUDITED AUDITED
--------- -------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents............................................................... $ 574,693 $ 284,498
Accounts receivable..................................................................... 3,263 132
Inventories............................................................................. 80,784 41,159
Current portion of notes receivable..................................................... 20,000 20,000
Prepaid expenses and other.............................................................. 45,385 49,732
------------ ------------
Total Current Assets............................................................... 724,125 395,521
Notes receivable and advances (See Note 4).................................................. 215,000 120,000
Property and equipment, less accumulated depreciation
of $191,284 and $184,423................................................................ 1,717,166 1,024,404
Patents and purchased technologies, less accumulated
amortization of $411,678 and $367,187.................................................... 1,346,075 1,390,567
Goodwill, less accumulated amortization of
$1,106,970 and $1,053,073............................................................... 1,673,048 1,726,945
Other....................................................................................... 77,702 73,056
------------ ------------
$ 5,753,116 $ 4,730,493
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable........................................................................... $ 782,500 $ 567,500
Accounts payable........................................................................ 165,557 155,938
Accrued expenses (See Note 3)........................................................... 513,557 253,060
------------ ------------
Total current liabilities.......................................................... 1,461,614 976,498
Deferred dividends payable on preferred stock,
including accrued interest ................................................................ 99,854 164,851
------------ ------------
Total Liabilities.................................................................. 1,561,468 1,141,349
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 136,357 and 148,585 shares issued...................................... 13,635,712 14,858,477
Common stock, $.001 par value, 50,000,000 shares
authorized; 5,992,805 and 4,260,275 shares issued.................................. 5,993 4,261
Additional paid-in capital.............................................................. 32,825,709 29,471,037
Accumulated deficit..................................................................... (42,275,766) (40,744,631)
------------ ------------
Total Stockholders' Equity......................................................... 4,191,648 3,589,144
------------ ------------
$ 5,753,116 $ 4,730,493
============ ============
</TABLE>
3
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- ---------------------------
JUNE 30 JUNE 30 JUNE 30 JUNE 30
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ....................................................... $ 1,625 $ 41,466 $ 4,167 $ 169,367
Cost of revenues................................................ 1,539 69,524 4,374 285,895
----------- ----------- ----------- -----------
Gross income (loss).................................... 86 (28,058) (207) (116,528)
Selling, general and administrative expenses.................... 783,984 475,849 1,201,926 959,173
----------- ----------- ----------- -----------
Operating loss.................................................. (783,898) (503,907) (1,202,133) (1,075,701)
----------- ----------- ----------- -----------
Other Income (Expense):
Interest income............................................. 15,444 5,695 26,463 17,131
Interest expense............................................ (21,860) (20,379) (73,762) (41,022)
Other....................................................... 164 735 1,339 735
----------- ----------- ----------- -----------
Total Other Expense - net.............................. (6,252) (13,949) (45,960) (23,156)
----------- ----------- ----------- -----------
Net Loss ....................................................... $ (790,150) $ (517,856) $(1,248,093) $(1,098,857)
=========== =========== =========== ===========
Computation of net loss per share:
Net loss before dividends on preferred stock ................... $ (790,150) $ (517,856) $(1,248,093) $(1,098,857)
Dividends on preferred stock ................................... - (603,330) (283,042) (663,387)
Accumulated dividends on preferred stock........................ (896,778) (471,173) (896,778) (471,173)
----------- ----------- ----------- -----------
Net loss applicable to common stockholders...................... $(1,686,928) $(1,592,359) $(2,427,913) $(2,233,417)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding.......................................... 5,399,398 3,612,930 4,986,293 3,602,570
=========== =========== =========== ===========
Net loss per share - basic and assuming dilution................ ($.32) ($.44) ($.49) ($.62)
=========== =========== =========== ===========
</TABLE>
(See Note 1)
4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR SIX MONTHS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK ADDITIONAL
----------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ----------- --------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999 148,585 $14,858,477 4,260,275 $4,261 $29,471,037 $(40,744,631) $ 3,589,144
Issuance of Series H
preferred stock 8,102 810,210 - - - - 810,210
Issuance of common stock - - 1,000,000 1,000 999,000 - 1,000,000
Issuance of common stock
upon conversion
of Series F and G preferred
stock (20,330) (2,032,975) 636,564 637 2,032,338 - -
Issuance of common stock
upon conversion
of dividends in arrears and
accrued interest - - 77,537 77 250,390 (242,124) 8,343
Issuance of common stock
upon conversion
of deferred dividends and
accrued interest - - 18,429 18 72,691 - 72,709
Costs associated with equity
transactions - - - - (61,177) - (61,177)
Deemed dividends on
preferred stock - - - - 40,918 (40,918) -
Deemed interest on
convertible note - - - - 20,512 - 20,512
Net loss for the period - - - - - (1,248,093) (1,248,093)
------- ----------- --------- ------ ----------- ------------ -----------
Balance June 30, 2000 136,357 $13,635,712 5,992,805 $5,993 $32,825,709 $(42,275,766) $ 4,191,648
======= =========== ========= ====== =========== ============ ===========
Balance December 31, 1998 147,468 $14,746,815 3,558,502 $3,559 $26,979,759 $(36,934,862) $ 4,795,271
Issuance of Series G
Subseries III preferred
stock 9,000 900,000 - - - - 900,000
Issuance of common stock upon
conversion of Series F
preferred stock (2,903) (290,265) 60,617 60 290,205 - -
Dividends on preferred stock - - - - (532,142) (532,142)
Costs associated with equity
transactions - - - - (38,849) - (38,849)
Deemed dividends on
preferred stock - - - - 131,245 (131,245) -
Issuance of Series F & G
preferred stock in
lieu of cash dividends 5,219 521,867 - - - - 521,867
Expense associated with
Directors options - - - - 8,000 - 8,000
Net loss for the period - - - - - ( 1,098,857) (1,098,857)
------- ----------- --------- ------ ----------- ------------ -----------
Balance June 30, 1999 158,784 $15,878,417 3,619,119 $3,619 $27,370,360 $(38,697,106) $ 4,555,290
======= =========== ========= ====== =========== ============ ===========
</TABLE>
5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
UNAUDITED
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
June 30 June 30
2000 1999
------- -------
<S> <C> <C>
Net cash used in operating activities ...................................................... $ (829,215) (929,391)
Cash flows from investing activities:
Purchase of property and equipment ........................................................ (699,623) (195,513)
Advance on long term supply agreement (See Note 4)......................................... (95,000) -
Payment of patent costs ................................................................... - (39,711)
Decrease in notes receivable .............................................................. - 9,825
---------- ---------
Net cash used in investing activities ...................................................... (794,623) (225,399)
---------- ---------
Cash flows from financing activities:
Issuance of common stock................................................................... 1,000,000 -
Issuance of preferred stock ............................................................... 792,000 900,000
Issuance of notes payable.................................................................. 165,000 -
Payment of costs and fees of equity issuances ............................................. (42,967) (34,949)
---------- ---------
Net cash provided by financing activities ................................................ 1,914,033 865,051
---------- ---------
Net increase (decrease) in cash and cash equivalents ....................................... 290,195 (289,739)
Cash and cash equivalents, beginning of period ............................................. 284,498 719,212
---------- ---------
Cash and cash equivalents, end of period ................................................... $ 574,693 $ 429,473
========== =========
</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, 1999 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, 1999 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 and dividends in arrears 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 an issue price 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 six months ended June
30, 2000 and 1999 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 8,700,000 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 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.
7
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Notes to Consolidated Financial Statements
(2) STOCKHOLDERS' EQUITY
In the second quarter 2000, the Company issued 1,000,000 shares of common stock
in a private transaction. The issue price was $1.00 per share.
In March 2000, the Company issued 7,752 shares of its Series H Convertible
Preferred Stock (Series H) for cash proceeds of $757,000 and $18,210 in services
of a financial advisor; and in May 2000, issued an additional 350 shares for
cash proceeds of $35,000. The Series H earns a dividend of 10% per annum, is
convertible into the company's common stock at $1.85 per share and has certain
liquidation preferences.
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 4,810
Subseries III Shares for $481,000 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 Series H shares in March and May 2000, the
Company recognized deemed dividends of $40,918 and in connection with the sale
of the Subseries III Shares in March 1999, the Company recognized deemed
dividends of $60,057.
In the six months ended June 30, 2000, holders of the Company's Series F and G
Cumulative Convertible Preferred Stock converted 20,330 Series F and G shares
into 636,564 shares of the Company's common stock.
Through June 30, 1999, holders of the Company's Series F Cumulative Convertible
Preferred Stock converted 2,903 Series F Shares into 60,617 shares of the
Company's common stock.
At June 30, 2000, the conversion rates of the Company's Series F, Series G-I, II
and III and Series H convertible preferred stock were $3.31, $2.13, $0.87, $1.42
and $1.85, respectively.
8
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) TIETEK ROYALTY
In December 1997, in association with the acquisition of TieTek, Inc., the
Company entered into a fifteen-year royalty agreement (TieTek Royalty Agreement)
providing for royalty payments calculated on gross profits of TieTek payable to
the former owners of TieTek. One of the former 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.
In June 2000, the Company agreed to issue the royalty holders 229,000 common
shares of the Company and notes for $50,000 to satisfy the alternate minimum
royalty obligation. The common shares have certain limited registration rights
and the notes are payable upon the earlier to occur of (i) the Company receiving
more than $500,000 in cumulative net proceeds from future capital fund raising
efforts or (ii) June 8, 2002. The royalty holders agreed to release the Company
from, and to waive the right to, any future alternate minimum royalty payments
provided the Company manufactures and ships at least 500 crossties from the
Houston plant on or before December 30, 2000. The shares and notes will be
issued in the third quarter 2000 and the value of such shares on the date of the
agreement ($234,954) is included in accrued expenses at June 30, 2000 and
$50,000 is included in Notes Payable.
(4) SUPPLY AGREEMENT
In June 2000, the Company entered into a long term agreement to purchase a
minimum of 200,000 pounds per week of high density polyethylene at a fixed
price. The agreement is effective from July 1, 2000 until June 30, 2003 and from
year to year thereafter. The Company has agreed to advance $117,000 to the
supplier to finance the acquisition, installation and start-up of material
processing equipment. The supplier will repay the advance by crediting the
Company's account for every tenth delivery until the advance is repaid. The
equipment is pledged as security for the advance. At June 30, 2000 $95,000 had
been advanced under the agreement.
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, 1999 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 production of its
crossties pursuant to a manufacturing agreement with a private company located
in Delaware. The Company believes that these production runs demonstrated the
ability of the TieTek crosstie to satisfy the customers' 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.
Shipments of crossties from these production runs generated $41,466 and $169,367
in revenue for the three and six months ended June 30, 1999. The Company had an
inventory of less than 500 crossties as of June 30, 1999 and less than 50 at
June 30, 2000.
The Company had revenues of $1,625 and $4,167 for the three and six months ended
June 30, 2000 from the sale of crossties in inventory.
On July 31, 2000, the Company announced the start-up of the first TieTek
composite crosstie production line at the Company's Houston, Texas manufacturing
facility. Initial production will be used to satisfy existing contractual
volumes and backorders for the product. There were no sales of crossties from
this facility in the first six months of 2000.
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
10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
volumes of raw materials in the spot market. The production runs provided
critical design and 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 experienced operating managers. These actions are
expected to result in acceptable margins when commercial production volumes are
achieved.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SGA)
SGA expenses increased 65% to $783,984 for the three months ended June 30, 2000
compared to the three months ended June 30, 1999, and increased 25% to
$1,201,926 for the six months ended June 30, 2000 compared with the six months
ended June 30, 1999. This increase is a result of the crosstie royalty
settlement agreement in June 2000 of $285,000 (see Note 3) and $47,000 of
employee hiring and relocation costs. After exclusion of these costs, SGA for
the second quarter 2000 was approximately $450,000 compared with $475,849 for
the second quarter 1999. The Company anticipates an increase in staff to support
TieTek's Houston, Texas manufacturing plant in the second half of 2000. The
Company currently has thirteen employees.
OTHER INCOME AND (EXPENSE)
Total other expense increased $22,800 to $45,960 in the first half of 2000 as a
result of the recognition of deemed interest of $20,512 in January 2000. This
expense resulted from the issuance of debt in January 2000 which is convertible
into shares of the Company's common stock at a price less than market price on
the date of issuance. For the second quarter 2000, interest income increased
$9,749 as a result of increased cash flow from financing activities.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2000, the Company continued to incur a cash
flow deficit from operating activities averaging $100,000 to $200,000 per month.
This deficit primarily reflects the pre-commercial operations of the TieTek
Composite Railroad Crosstie business and corporate overhead. As of June 30,
2000, the Company had a deficit working capital balance of $737,489 including a
cash balance of $574,693.
The Company has made significant progress towards the commercial production of
the TieTek Crosstie. On July 31, 2000, the Company announced the start-up of
the first TieTek composite crosstie production line at the Company's Houston,
Texas manufacturing facility. Initial production will be used to satisfy
existing contractual volumes and backorders for the product.
11
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the first six months of 2000, the Company spent approximately $700,000
for the acquisition and installation of property and equipment at the Houston,
Texas manufacturing plant. These funds were obtained from the issuance of
common stock and Series H convertible preferred stock. Additional expenditures
will be necessary to fully automate the first line of the plant and meet working
capital requirements.
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 through the issuance of Cumulative
Convertible Preferred Stock as follows:
. 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
$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 G - Subseries I, II and III Shares, (collectively the 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 June 30, 2000,
of $2.13, $0.87, and $1.42 per share, respectively. In accordance with the
certificates of designation for the 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 G
Shares, the Company cannot defer dividends after April 5, 1999.
In March and May 2000, the Company issued 8,102 shares of its Series H
Cumulative Convertible Preferred Stock raising $792,000 in cash. The Series H
Preferred ranks pari parsu with the Series F and G Preferred, earns dividends at
10% per year and is convertible at the option of the holder and redeemable by
the Company at $1.85 per share subject to certain adjustments.
Also, in the second quarter 2000, the Company issued 1,000,000 shares of common
stock in a private transaction. The issue price was $1.00 per share.
12
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Given the Company's financial condition, it is unlikely the Company will be in a
position to pay cash dividends on its preferred stock in the near future.
Therefore, these dividends will accumulate, and must be paid, together with
interest thereon, prior to the payment of any distributions to the common
stockholders. As of June 30, 2000, $2.3 million of dividends and interest were
in arrears on all series of the Company's preferred stock. The Company does not
anticipate any such distributions in the foreseeable future.
Additional financing will be necessary in order to meet working capital
requirements and to fully automate and expand manufacturing operations. To date,
the Company has spent almost $2 million on its first manufacturing line in
Houston and estimates an additional $1 million must be spent to fully automate
it. In June 1999, Company shareholders approved raising up to $5 million in
additional funds and through July 2000 the Company had raised $2.5 million which
was used for working capital and plant start-up. The Company has signed an
engagement letter with an investment banking firm to provide financial advisory
and investment banking services in conjunction with the completion of a second
manufacturing line and raw material handling capability in Houston. 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 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, 1999 contains an explanatory
paragraph as to the substantial doubt about the Company's ability to continue as
a going concern.
IMPACT OF YEAR 2000 PROBLEM
Like other entities, the Company could be adversely affected if the computer
systems the Company, its suppliers or customers use do not properly process and
calculate date-related information and data from the period surrounding and
including January 1, 2000. This is commonly known as the "Year 2000" or "Y2K"
issue. Additionally, this issue could impact non-computer devices such as
production equipment, elevators, etc. While the Company's project to assess and
correct Y2K related issues has been completed, and the Company has not
experienced any Y2K related events, interactions with other companies' systems
make it difficult to conclude that there will not be future effects.
Consequently, at this time, management cannot provide assurances that the Year
2000 issue will not have an impact on the Company's future operations. Through
the date of the report, the Company has had no material impact from the Y2K
issue.
13
<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, 1999. In the
second quarter 2000, the Thomas W. Reid v. North American Gold Corp. and Karr
Capital, Inc. action was settled for a nominal amount and was dismissed with
prejudice. There were no other significant developments related to these
proceedings.
ITEM 2: CHANGES IN SECURITIES:
In January 2000, the Company borrowed $165,000 from a private entity and issued
a note payable due January 18, 2001 which is convertible, at the option of the
Lender, into shares of the Company's common stock at $1.85. The convertible
note was issued to 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.
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 $20,512.
In March and May 2000, the Company issued 8,102 shares of its Convertible
Preferred Stock, Series H (the "Series H Shares") for cash proceeds of $792,000
and $18,210 for services of a financial advisor. These shares have been issued
to 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 cash payments
of $18,210 were made to a financial advisor for services provided in connection
with these transactions.
In May and June, the Company issued 1,000,000 shares of common stock for cash
proceeds of $1,000,000. These shares were issued to 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 this issuance, although in July 2000 payments of $30,000 were
made to a financial advisor for services provided in connection with this
transaction.
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, G, and H dividends will accumulate in arrears.
14
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PART II: OTHER INFORMATION
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:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT MANNER OF FILING
<C> <S> <C>
10.41 Royalty Settlement Filed herewith
Agreement dated as of
June 8, 2000
10.42 Supply Agreement dated Filed herewith*
June 19, 2000
27 Financial Data Schedule Filed herewith
</TABLE>
* Confidential treatment requested with respect to portions thereof. Such
portions have been separately filed with the Securities and Exchange
Commission.
(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: August 14, 2000 /s/ Henry W. Sullivan
---------------------------------------
Henry W. Sullivan
President and Chief Executive Officer
Date: August 14, 2000 /s/ Russell L. Allen
---------------------------------------
Russell L. Allen
Treasurer and Chief Financial Officer
16
