<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, 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: 6,393,054 common shares outstanding as of
November 9, 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
September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Loss
Three and nine months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Stockholders' Equity
Nine months ended September 30, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows
Nine months ended September 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 15
ITEM 2. CHANGES IN SECURITIES 15
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, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
SEPT. 30 DEC. 31
2000 1999
UNAUDITED AUDITED
--------- -------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................................... $ 429,775 $ 284,498
Accounts receivable......................................................................... 20,268 132
Inventories................................................................................. 212,541 41,159
Current portion of notes receivable......................................................... - 20,000
Prepaid expenses and other.................................................................. 25,638 49,732
------------ ------------
Total Current Assets................................................................... 688,222 395,521
Notes receivable and advances................................................................... 140,000 120,000
Property and equipment, less accumulated depreciation
of $208,494 and $184,423.................................................................... 1,846,724 1,024,404
Patents and purchased technologies, less accumulated
amortization of $433,925 and $367,187........................................................ 1,323,828 1,390,567
Goodwill, less accumulated amortization of
$1,133,918 and $1,053,073................................................................... 1,646,099 1,726,945
Other .......................................................................................... 169,149 73,056
------------ ------------
$ 5,814,022 $ 4,730,493
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Notes payable............................................................................... $ 849,250 $ 567,500
Accounts payable............................................................................ 93,283 155,938
Accrued expenses ........................................................................... 281,875 253,060
------------ ------------
Total current liabilities.............................................................. 1,224,408 976,498
Deferred dividends payable on preferred stock,
including accrued interest .................................................................... 103,011 164,851
------------ ------------
Total Liabilities...................................................................... 1,327,419 1,141,349
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; 140,265 and 148,585 shares issued ......................................... 14,026,478 14,858,477
Common stock, $.001 par value, 50,000,000 shares
authorized; 6,393,054 and 4,260,275 shares issued ..................................... 6,393 4,261
Additional paid-in capital.................................................................. 33,165,327 29,471,037
Accumulated deficit......................................................................... (42,711,595) (40,744,631)
------------ ------------
Total Stockholders' Equity............................................................. 4,486,603 3,589,144
------------ ------------
$ 5,814,022 $ 4,730,493
============ ============
</TABLE>
3
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
UNAUDITED
<TABLE>
<CAPTION>
THREE NINE MONTHS
MONTHS ENDED ENDED SEPT. 30
------------------------ --------------------------
SEPT. 30 SEPT. 30 SEPT. 30 SEPT. 30
2000 1999 2000 1999
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues..................................................... $ 20,870 $ 5,740 $ 25,037 $ 175,107
Cost of revenues............................................. 103,679 27,339 108,053 313,234
---------- --------- ----------- -----------
Gross loss.............................................. (82,809) (21,599) (83,016) (138,127)
Selling, general and administrative expenses ................ 317,117 427,234 1,519,043 1,386,409
---------- --------- ----------- -----------
Operating loss.......................................... (399,926) (448,833) (1,602,059) (1,524,536)
Other Income (Expense):
Interest income.......................................... 12,103 11,370 38,566 29,151
Interest expense......................................... (26,826) (113,541) (100,588) (155,213)
Other.................................................... 6,285 (383,358) 7,624 (382,623)
---------- --------- ----------- -----------
Total Other Expense - net............................... (8,438) (485,529) (54,398) (508,685)
---------- --------- ----------- -----------
Net Loss .................................................... $ (408,364) $ (934,362) $(1,656,457) $(2,033,221)
========== ========== =========== ===========
Computation of net loss per share:
Net loss before dividends on preferred stock ................ $ (408,364) (934,362) $(1,656,457) $(2,033,221)
Dividends on preferred stock ................................ (27,465) - (310,507) (663,387)
Dividends in arrears on preferred stock...................... - - (896,778) (471,173)
---------- ---------- ----------- -----------
Net loss applicable to common stockholders................... $ (435,829) $ (934,362) $(2,863,742) $(3,167,781)
========== ========== =========== ===========
Weighted average number of common
shares outstanding....................................... 6,051,884 3,623,620 5,344,083 3,609,663
========== ========== =========== ===========
Net loss per share - basic and assuming dilution............. ($.07) ($.26) ($.54) ($.88)
========== ========== =========== ===========
</TABLE>
(See Note 1)
4
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR NINE MONTHS ENDED SEPTEMBER 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 Series I
preferred stock 5,340 534,000 - - - - 534,000
Issuance of common stock - - 1,229,000 1,229 1,233,725 - 1,234,954
Issuance of common stock
upon conversion of Series F
and G preferred stock (21,762) (2,176,209) 778,384 778 2,175,431 - -
Issuance of common stock
upon conversion of dividends
in arrears and accrued
interest - - 106,966 107 279,742 (269,589) 10,260
Issuance of common stock
upon conversion of deferred
dividends and accrued interest - - 18,429 18 72,691 - 72,709
Costs associated with equity
transactions - - - - (128,729) - (128,729)
Deemed dividends on
preferred stock - - - - 40,918 (40,918) -
Deemed interest on
convertible note - - - - 20,512 - 20,512
Net loss for the period - - - - - (1,656,457) (1,656,457)
------- ----------- --------- ------ ----------- ------------ -----------
Balance September 30, 2000 140,265 $14,026,478 6,393,054 $6,393 $33,165,327 $(42,711,595) $ 4,486,603
======= =========== ========= ====== =========== ============ ===========
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 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 - - - - (40,799) - (40,799)
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) $ 3,950,997
======= =========== ========= ====== =========== ============ ===========
</TABLE>
5
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
UNAUDITED
<TABLE>
<CAPTION>
SEPT. 30 SEPT. 30
2000 1999
----------- -----------
<S> <C> <C>
Net cash used in operating activities.............................................................. $(1,356,246) $(1,334,419)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ............................................................... (846,391) (203,663)
Advance on long term supply agreement...(See Note 4).............................................. (132,567) -
Payment of patent costs .......................................................................... - (39,711)
(Increase) Decrease in notes receivable .......................................................... - 24,739
----------- -----------
Net cash used in investing activities .......................................................... (978,958) (218,635)
----------- -----------
Cash flows from financing activities:
Issuance of common stock.......................................................................... 1,000,000 -
Issuance of preferred stock ...................................................................... 1,326,000 900,000
Proceeds from convertible note.................................................................... 265,000 167,500
Payment of costs and fees of equity issuances .................................................... (110,519) (34,949)
----------- -----------
Net cash provided by financing activities ...................................................... 2,480,481 1,032,551
----------- -----------
Net increase (decrease) in cash and cash equivalents .............................................. 145,277 (520,503)
Cash and cash equivalents, beginning of period .................................................... 284,498 719,212
----------- -----------
Cash and cash equivalents, end of period ............................................... $ 429,775 $ 198,709
=========== ===========
</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 a conversion price that at the
date of issuance is less than 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 and nine months
ended September 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 9,000,000 shares
of common stock at September 30, 2000.
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 third quarter 2000, the Company issued 5,340 shares of its Series I
Convertible Preferred Stock (Series I) for cash proceeds of $534,000. The
Series I earns a dividend of 10% per annum, is convertible into the Company's
common stock at $2.00 per share and has certain liquidation preferences.
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 nine months ended September 30, 2000, holders of the Company's Series F
and G Cumulative Convertible Preferred Stock converted 21,762 Series F and G
shares into 778,384 shares of the Company's common stock.
Through September 30, 1999, holders of the Company's Series F Cumulative
Convertible Preferred Stock converted 3,153 Series F Shares into 66,584 shares
of the Company's common stock.
At September 30, 2000, the conversion rates of the Company's Series F, Series G-
I, II and III, Series H and Series I convertible preferred stock were $3.15,
$2.10, $0.87, $1.39, $1.85 and $2.00, 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 were issued and the
notes were paid off in the third quarter 2000. The value of such shares on the
date of the agreement was $234,954.
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 advanced $136,200 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 September 30, 2000, $133,000 was
outstanding 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 AND COST OF REVENUES
On July 31, 2000 the Company announced that it had started up its composite
crosstie production line at the Company's Houston, Texas manufacturing facility.
During the construction period, the Company capitalized the cost ($131,000) of
its employees involved with installing, testing, breaking in and calibrating the
crosstie manufacturing equipment. Crossties produced during the construction
period that met the Company's quality control standards were sold for $21,000
and the cost of raw materials used during the setup and calibrating process
($15,000) was charged to cost of revenues. September 2000 was the first month of
continuous crosstie production at the Houston, Texas plant and at September 30,
2000 the Company had over 700 crossties in inventory. Crossties produced at the
Houston facility will initially be used to satisfy existing contractual demand.
The production of TieTek crossties at the Houston manufacturing plant during
September 2000 resulted in inventory costs in excess of the market value of the
inventory on hand. This excess is primarily the result of the small scale and
labor intensive nature of the initial manufacturing runs and the high costs
associated with intermittent processing. The excess ($89,000) of manufacturing
costs over the market value of the finished goods inventory has been written off
to cost of revenues at September 30, 2000.
Reduction in manufacturing costs will depend upon continuous operation,
production efficiencies, economies of scale and strategic raw material
purchases.
The Company had revenues of $4,167 for the nine months ended September 30, 2000
from the sale of crossties in inventory which were produced in Delaware.
10
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During the fourth quarter of 1998 and the first quarter of 1999, the Company
produced 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 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 the Delaware production runs generated $5,740 and
$175,107 in revenue for the three and nine months ended September 30, 1999.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES (SGA)
SGA expenses increased 10% to $1,519,043 for the nine months ended September 30,
2000 from $1,386,409 for the prior period. This increase is primarily a result
of the crosstie royalty settlement agreement in June 2000 for $285,000 (see Note
3) and increases in consulting expense ($177,000), employee relocation expense
($36,000) temporary and subcontract expense ($27,000); offset by decreases in
amortization ($151,000), wages ($194,000), legal ($47,000), travel ($29,000) and
repairs and maintenance ($32,000). SGA expenses decreased 26% to $317,117 for
the three months ended September 30, 2000 compared with $427,234 for the three
months ended September 30, 1999 primarily because of a reduction in salary and
benefits of $67,000 and amortization ($32,000).
OTHER INCOME AND (EXPENSE)
Total other expense decreased $477,000 to $8,438 in the three months ended
September 30, 2000 compared with the prior year quarter as a result of a
reduction in deemed interest expense ($87,145) and allowance for notes
receivable ($380,950). In the nine months ended September 30, 2000 total other
expense decreased $454,287 to $54,398 due to a reduction in deemed interest
($66,633) and allowance for notes receivable ($380,950).
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 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 operations of the TieTek Composite
Railroad Crosstie business and corporate overhead. As of September 30, 2000,
the Company had a deficit working capital balance of $536,186 including a cash
balance of $429,775.
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 is being used to satisfy
existing contractual orders 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 nine months of 2000, the Company spent approximately $846,000
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 and Series I 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 September 30,
2000, of $2.10, $0.87, and $1.39 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
In September 2000 the Company issued 5,340 shares of its Series I Cumulative
Convertible Preferred Stock raising $534,000 in cash. The Series I Preferred
ranks pari parsu with the Series F, G and H Preferred, earns dividends at 10%
per year and is convertible at the option of the holder at $2.00 per share
subject to certain adjustments.
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 September 30, 2000, $2.2 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 October 2000 the Company had raised over $3 million
which was used for working capital and plant start-up. In February 2000, the
Company 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. In August 2000, the period of exclusivity in the engagement letter
expired. 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 recurring losses from operations and the need for additional financing
for capital expenditures and working capital, 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.
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
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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.
The Company and a wholly-owned subsidiary, NATK IPF, Inc. have been named in an
action filed in October 2000 alleging overstatement of inventory sold in October
1997. The action claims actual damages of $42,000 plus punitive damages and
statutory penalties. Management is evaluating the action and presently cannot
estimate the Company's exposure at this time.
A wholly-owned subsidiary of the Company is a party to an action involving the
performance of certain fabrication work performed by Industrial Pipe Fittings
(IPF) before the assets of IPF were sold in October 1997. The amount of the
claim is $29,000. Discovery is ongoing and management cannot evaluate the
Company's exposure at this time.
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 an accredited investor 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 an accredited investor
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.
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PART II: OTHER INFORMATION
In September 2000 the Company issued 5,340 shares of its Convertible Preferred
Stock, Series I (the "Series I Shares") for cash proceeds of $534,000. 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 $32,040 will be paid to an investment
banker for services provided in connection with this transaction.
In September 2000 the Company borrowed an additional $100,000 from a private
entity for a period of one year and extended the maturity date of an existing
loan from the same entity for $167,500 plus interest of $16,750 to September 1,
2001. The new note payable for $284,250 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 an accredited investor pursuant to the exemption from the
registration requirements of the Securities Act of 1933, as amended, provided by
Section 4(2) thereof and the rules and regulations promulgated thereunder.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES:
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, H and I dividends will accumulate in arrears.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) On July 31, 2000 the Annual Meeting of Stockholders of the Company was held
at the LaQuinta Inn, 15510 John F. Kennedy Blvd., Houston, Texas.
(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
with zero shares voting against and zero shares abstaining on such matter:
Edwin H. Knight 7,005,700
---------
Frank J. Vella 7,005,700
---------
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NORTH AMERICAN TECHNOLOGIES GROUP, INC.
PART II: OTHER INFORMATION
At the Annual Meeting, the appointment of BDO Seidman, LLP, as independent
auditors for the Company and its subsidiaries for the 2000 fiscal year, was
approved by a vote of 7,005,700 and zero against, with zero shares abstaining on
such matter.
ITEM 5: OTHER INFORMATION: NONE
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
EXHIBIT NO. DESCRIPTION OF EXHIBIT MANNER OF FILING
4.8 Certificate of Designation of Cumulative Filed herewith
Convertible Preferred Stock, Series I
27 Financial Data Schedule Filed herewith
(B) REPORTS ON FORM 8-K: None
17
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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 13, 2000 /s/ Henry W. Sullivan
----------------------------------------
Henry W. Sullivan
President and Chief Executive Officer
Date: November 13, 2000 /s/ Russell L. Allen
----------------------------------------
Russell L. Allen
Treasurer and Chief Financial Officer
18
