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ntic20220531_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to __________________

Commission File Number: 001-11038

____________________

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

41-0857886

(I.R.S. Employer Identification No.)

4201 Woodland Road

P.O. Box 69

Circle Pines, Minnesota 55014

(Address of principal executive offices) (Zip Code)

(763) 225-6600
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.02 per share	NTIC	Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of July 8, 2022, there were 9,232,483 shares of common stock of the registrant outstanding.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

May 31, 2022

TABLE OF CONTENTS

Description		Page

PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of May 31, 2022 (unaudited) and August 31, 2021	3
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended May 31, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended May 31, 2022 and 2021	5
	Consolidated Statements of Equity (unaudited) for the Three and Nine Months Ended May 31, 2022 and 2021	6
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended May 31, 2022 and 2021	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 4.	Controls and Procedures	37
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	40
Item 5.	Other Information	40
Item 6.	Exhibits	40
SIGNATURES		40

This quarterly report on Form 10-Q contains certain forward-looking statements that are within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. For more information, see “Part I. Financial Information – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements.”

As used in this report, references to “NTIC,” the “Company,” “we,” “our” or “us,” unless the context otherwise requires, refer to Northern Technologies International Corporation and its wholly-owned and majority-owned subsidiaries, all of which are consolidated on NTIC’s consolidated financial statements.

As used in this report, references to: (1) “NTIC China” refer to NTIC’s wholly-owned subsidiary in China, NTIC (Shanghai) Co., Ltd.; (2) “NTI Europe” refer to NTIC’s wholly-owned subsidiary in Germany, NTIC Europe GmbH; (3) “Zerust Mexico” refer to NTIC’s wholly-owned subsidiary in Mexico, ZERUST-EXCOR MEXICO, S. de R.L. de C.V.; (4) “Zerust India” refer to NTIC’s wholly-owned subsidiary in India effective as of September 1, 2021, Harita-NTI Limited; and (5)“NTI Asean” refer to NTIC’s majority-owned holding company subsidiary, NTI Asean LLC, which holds investments in certain entities that operate in the Association of Southeast Asian Nations (ASEAN) region.

NTIC’s consolidated financial statements do not include the accounts of any of its joint ventures. Except as otherwise indicated, references in this report to NTIC’s joint ventures do not include any of NTIC’s wholly-owned or majority-owned subsidiaries.

As used in this report, references to “EXCOR” refer to NTIC’s joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH.

All trademarks, trade names or service marks referred to in this report are the property of their respective owners.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2022 (UNAUDITED)

AND AUGUST 31, 2021 (AUDITED)

	May 31, 2022			August 31, 2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6,123,269		$	7,680,641
Available for sale securities		5,574			4,634
Receivables:
Trade, excluding joint ventures, less allowance for doubtful accounts of $382,000 as of May 31, 2022 and August 31, 2021		13,834,580			11,128,805
Trade, joint ventures		857,172			624,808
Fees for services provided to joint ventures		1,243,214			1,505,127
Income taxes		418,967			386,574
Inventories		13,866,229			11,114,207
Prepaid expenses		2,619,260			1,302,293
Total current assets		38,968,265			33,747,089

PROPERTY AND EQUIPMENT, NET		12,071,277			11,821,458
OTHER ASSETS:
Investments in joint ventures		22,194,433			27,623,768
Deferred income taxes		—			92,554
Patents and trademarks, net		717,795			709,572
Goodwill		4,782,376			—
Intangible asset, net		6,029,650			—
Operating lease right of use asset		421,601			376,438
Total other assets		34,145,855			28,802,332
Total assets	$	85,185,397		$	74,370,879

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	6,004,897		$	4,290,972
Line of credit		4,700,000			—
Income taxes payable		99,865			178,923
Accrued liabilities:
Payroll and related benefits		2,029,241			2,879,468
Other		1,333,153			894,497
Current portion of operating lease		74,331			272,336
Total current liabilities		14,241,487			8,516,196
LONG-TERM LIABILITIES:
Deferred income tax, net		1,920,970			—
Operating lease, less current portion		347,270			104,102
Total long-term liabilities		2,268,240			104,102

COMMITMENTS AND CONTINGENCIES (Note 14)

EQUITY:
Preferred stock, no par value; authorized 10,000 shares; none issued and outstanding		—			—
Common stock, $0.02 par value per share; authorized 15,000,000 shares as of May 31, 2022 and August 31, 2021; issued and outstanding 9,232,483 and 9,184,811, respectively		184,650			183,696
Additional paid-in capital		19,706,248			18,736,268
Retained earnings		50,714,961			46,973,094
Accumulated other comprehensive loss		(5,383,400	)		(3,525,030	)
Stockholders’ equity		65,222,459			62,368,028
Non-controlling interests		3,453,211			3,382,553
Total equity		68,675,670			65,750,581
Total liabilities and equity	$	85,185,397		$	74,370,879

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2022 AND 2021

	Three Months Ended May 31,						Nine Months Ended May 31,
	2022			2021			2022			2021
NET SALES:
Net sales, excluding joint ventures	$	18,436,253		$	14,164,604		$	51,654,355		$	38,619,353
Net sales, to joint ventures		528,668			1,253,920			2,252,618			2,361,165
Total net sales		18,964,921			15,418,524			53,906,973			40,980,518

Cost of goods sold		12,722,833			10,152,582			36,977,620			26,997,582
Gross profit		6,242,088			5,265,942			16,929,353			13,982,936

JOINT VENTURE OPERATIONS:
Equity in income from joint ventures		1,364,597			2,033,536			3,662,178			5,779,260
Fees for services provided to joint ventures		1,329,988			1,589,621			3,835,755			4,388,866
Total joint venture operations		2,694,585			3,623,157			7,497,933			10,168,126

OPERATING EXPENSES:
Selling expenses		3,450,308			3,171,657			9,659,457			8,745,433
General and administrative expenses		2,560,487			2,072,195			7,675,622			6,125,151
Research and development expenses		1,102,942			1,066,493			3,557,437			3,217,410
Total operating expenses		7,113,737			6,310,345			20,892,516			18,087,994

OPERATING INCOME		1,822,936			2,578,754			3,534,770			6,063,068

REMEASUREMENT GAIN ON ACQUISITION OF EQUITY METHOD INVESTEE		—			—			3,951,550			—
INTEREST INCOME		15,925			10,676			36,777			95,852
INTEREST EXPENSE		(23,784	)		(3,044	)		(34,079	)		(10,661	)
INCOME BEFORE INCOME TAX EXPENSE		1,815,077			2,586,386			7,489,018			6,148,259

INCOME TAX EXPENSE		604,314			276,338			1,260,437			929,588
NET INCOME		1,210,763			2,310,048			6,228,581			5,218,671

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS		210,596			256,132			551,808			589,781
NET INCOME ATTRIBUTABLE TO NTIC	$	1,000,167		$	2,053,916		$	5,676,773		$	4,628,890

NET INCOME ATTRIBUTABLE TO NTIC PER COMMON SHARE:
Basic	$	0.11		$	0.23		$	0.62		$	0.51
Diluted	$	0.11		$	0.21		$	0.59		$	0.47

WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:
Basic		9,227,912			9,109,861			9,216,216			9,107,243
Diluted		9,578,797			9,972,000			9,682,646			9,829,052

CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.07		$	0.065		$	0.21		$	0.13

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2022 AND 2021

	Three Months Ended May 31,					Nine Months Ended May 31,
	2022			2021		2022			2021
NET INCOME	$	1,210,763		$	2,310,048	$	6,228,581		$	5,218,671
OTHER COMPREHENSIVE INCOME– FOREIGN CURRENCY TRANSLATION ADJUSTMENT		(1,554,022	)		262,267		(1,936,791	)		757,273
COMPREHENSIVE INCOME		(343,259	)		2,572,315		4,291,790			5,975,944
COMPREHENSIVE INCOME ATTRIBUTABLE TO NON- CONTROLLING INTERESTS		(181,283	)		266,771		(473,385	)		654,551
COMPREHENSIVE INCOME ATTRIBUTABLE TO NTIC	$	(161,976	)	$	2,305,544	$	4,765,175		$	5,321,393

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2022 AND 2021

	STOCKHOLDERS’ EQUITY – THREE MONTHS ENDED MAY 31, 2022 AND 2021
										Accumulated
					*Additional*					*Other*			*Non-*
	*Common Stock*				*Paid-in*		*Retained*			*Comprehensive*			*Controlling*			*Total*
	*Shares*		*Amount*		*Capital*		*Earnings*			*Income (Loss)*			*Interests*			*Equity*

BALANCE AS OF FEBRUARY 28, 2022		9,221,517	$	184,430	$	19,379,032	$	50,361,068		$	(3,858,689	)	$	3,371,926		$	69,437,767
Stock issued for employee stock purchase plan		2,966		59		35,054		—			—			—			35,113
Stock options exercised		8,000		161		59,279		—			—			—			59,440
Stock option expense		—		—		232,883		—			—			—			232,883
Dividends paid to stockholders		—		—		—		(646,274	)		—			—			(646,274	)
Dividend received by non-controlling interest		—		—		—		—			—			(100,000	)		(100,000	)
Net income		—		—		—		1,000,167			—			210,596			1,210,763
Other comprehensive gain		—		—		—		—			(1,524,711	)		(29,311	)		(1,554,022	)
BALANCE AS OF MAY 31, 2022		9,232,483	$	184,650	$	19,706,248	$	50,714,961		$	(5,383,400	)	$	3,453,211		$	68,675,670

BALANCE AS OF FEBRUARY 28, 2021		9,104,636	$	182,093	$	17,793,646	$	44,455,982		$	(2,969,563	)	$	3,232,806		$	62,694,964
Stock issued for employee stock purchase plan		5,225		104		38,038		—			—			—			38,142
Stock option expense		—		—		160,834		—			—			—			160,834
Dividends paid to stockholders		—		—		—		(592,141	)		—			—			(592,141	)
Net income		—		—		—		2,053,916			—			256,132			2,310,048
Other comprehensive gain		—		—		—		—			251,628			10,639			262,267
BALANCE AS OF MAY 31, 2021		9,109,861	$	182,197	$	17,992,518	$	45,917,757		$	(2,717,935	)	$	3,499,577		$	64,874,114

	STOCKHOLDERS’ EQUITY – NINE MONTHS ENDED MAY 31, 2022 AND 2021
										Accumulated
					*Additional*					*Other*			*Non-*
	*Common Stock*				*Paid-in*		*Retained*			*Comprehensive*			*Controlling*			*Total*
	*Shares*		*Amount*		*Capital*		*Earnings*			*Income (Loss)*			*Interests*			*Equity*

BALANCE AS OF AUGUST 31, 2021		9,184,811	$	183,696	$	18,736,268	$	46,973,094		$	(3,525,030	)	$	3,382,553		$	65,750,581
Stock issued for employee stock purchase plan		5,601		112		73,533		—			—			—			73,645
Stock options exercised		42,071		842		197,798		—			—			—			198,640
Stock option expense		—		—		698,649		—			—			—			698,649
Dividends paid to stockholders		—		—		—		(1,934,906	)		—			—			(1,934,906	)
Dividend received by non-controlling interest		—		—		—		—			—			(402,729	)		(402,729	)
Net income		—		—		—		5,676,773			—			551,808			6,228,581
Other comprehensive income		—		—		—		—			(1,858,370	)		(78,421	)		(1,936,791	)
BALANCE AS OF MAY 31, 2022		9,232,483	$	184,650	$	19,706,248	$	50,714,961		$	(5,383,400	)	$	3,453,211		$	68,675,670

BALANCE AS OF AUGUST 31, 2020		9,099,990	$	182,000	$	17,415,043	$	42,472,810		$	(3,410,438	)	$	3,045,026		$	59,704,441
Stock issued for employee stock purchase plan		9,871		197		74,137		—			—			—			74,334
Stock option expense		—		—		503,338		—			—			—			503,338
Dividends paid to stockholders		—		—		—		(1,183,943	)		—			—			(1,183,943	)
Dividend received by non-controlling interest		—		—		—		—			—			(200,000	)		(200,000	)
Net income		—		—		—		4,628,890			—			589,781			5,218,671
Other comprehensive income		—		—		—		—			692,503			64,770			757,273
BALANCE AS OF MAY 31, 2021		9,109,861	$	182,197	$	17,992,518	$	45,917,757		$	(2,717,935	)	$	3,499,577		$	64,874,114

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED MAY 31, 2022 AND 2021

	Nine Months Ended May 31,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,228,581		$	5,218,671
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation		698,649			503,338
Change in allowance for doubtful accounts		—			30,000
Depreciation expense		722,443			681,484
Amortization expense		474,121			151,710
Remeasurement gain on acquisition of equity method investee		(3,951,550	)		—
Equity in income from joint ventures		(3,662,178	)		(5,779,260	)
Dividends received from joint ventures		5,723,176			3,505,455
Deferred income taxes		152,372			(8,526	)
Changes in current assets and liabilities:
Receivables:
Trade, excluding joint ventures		(1,348,254	)		(2,904,707	)
Trade, joint ventures		(232,364	)		(564,149	)
Fees for services provided to joint ventures		261,913			(499,954	)
Income taxes		(134,942	)		(223,024	)
Inventories		(2,093,668	)		(177,927	)
Prepaid expenses and other		(635,478	)		(223,457	)
Accounts payable		908,605			703,100
Income tax payable		(420,529	)		(162,615	)
Accrued liabilities		(912,803	)		803,555
Net cash provided by operating activities		1,778,094			1,053,695

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Zerust India business, net of cash acquired (see Note 3)		(5,062,003	)		—
Purchase of available for sale securities		(941	)		(800,000	)
Proceeds from the sale of available for sale securities		—			1,219,670
Investment in joint venture		(341,392	)		—
Purchases of property and equipment		(961,704	)		(723,441	)
Investments in patents		(164,994	)		(96,009	)
Net cash used in investing activities		(6,531,034	)		(399,780	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend received by non-controlling interest		(402,729	)		(200,000	)
Proceeds from line of credit		4,700,000			—
Dividends paid on NTIC common stock		(1,934,906	)		(1,183,943	)
Proceeds from the exercise of stock options		198,640			—
Proceeds from employee stock purchase plan		73,645			74,334
Net cash provided by (used in) financing activities		2,634,650			(1,309,609	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		560,918			133,585


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,557,372	)		(522,109	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		7,680,641			6,403,032

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	6,123,269		$	5,880,923

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. INTERIM FINANCIAL INFORMATION

In the opinion of management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, which are of a normal recurring nature, and present fairly the consolidated financial position of Northern Technologies International Corporation and its subsidiaries (the Company) as of May 31, 2022 and August 31, 2021, the results of the Company’s operations for the three and nine months ended May 31, 2022 and 2021, the changes in stockholders’ equity for the three and nine months ended May 31, 2022 and 2021, and the Company’s cash flows for the nine months ended May 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2021. These consolidated financial statements also should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section appearing in this report.

Operating results for the three and nine months ended May 31, 2022 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2022.

The Company evaluates events occurring after the date of the consolidated financial statements requiring recording or disclosure in the consolidated financial statements.

Impact of COVID-19 Pandemic

As a result of the novel coronavirus (COVID-19) pandemic and related government mandated restrictions on the Company’s business as well as the businesses of its joint ventures, customers and suppliers, disruption to the Company’s business and the manufacture and sale of its products and services continued to occur during the first nine months of fiscal 2022 and is expected to continue during the remainder of fiscal 2022 and into fiscal 2023. In the first nine months of fiscal 2022, the Company continued to be impacted by shipping issues, including freight container shortages, shipping delays, and increased costs, and supply chain issues, including longer lead times and raw material cost increases.

2. ACCOUNTING PRONOUNCEMENTS

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019, issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is still evaluating the impact of this ASU.

Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial position or operating results.

3. BUSINESS COMBINATION

On September 21, 2021, the Company announced that it acquired the remaining 50% ownership interest in its Indian joint venture, Harita-NTI Limited (Zerust India), for $6,250,000 in cash, effective as of September 1, 2021, the date the Company obtained control. Prior to September 1, 2021, the Company owned 50% of the outstanding capital stock of Zerust India. The Company had historically accounted for this investment under the equity method of accounting. This purchase was funded with cash on hand and borrowings under the Company’s revolving line of credit. The Company undertook the acquisition to enhance its Zerust business in India.

The purchase price of $6,250,000 was funded with cash on hand and borrowings under the Company’s revolving line of credit, which was increased in connection with the transaction to $5,000,000.

Because the Company increased its ownership interest in Zerust India to 100%, the acquisition of Zerust India has been accounted for in accordance with Accounting Standards Codification (ASC) 805, Business Combinations, by using the acquisition method of accounting. Effective September 1, 2021, Zerust India became a consolidated subsidiary within the Company’s financial statements.

The following table summarizes the purchase price allocation that includes the fair values of the separately identifiable assets acquired and liabilities assumed as of September 1, 2021:

Cash and cash equivalents		$	1,187,997
Trade account receivable			1,954,769
Inventories			886,650
Prepaid expenses and other			396,545
Property, plant and equipment			219,077
Operating lease, right of use asset			355,000
Customer relationships			6,347,000
Goodwill			4,782,376
Current liabilities			(1,370,314	)
Deferred tax liability			(1,904,100	)
Operating lease liability			(355,000	)
	Net assets acquired	$	12,500,000
Less:
	Fair value of previously held equity method investment		(1,637,362	)
	Cumulative foreign currency translation		(661,088	)
	Gain recognized on acquisition		(3,951,550	)
			(6,250,000	)
Cash paid for acquisition		$	6,250,000

The excess of the fair value of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The fair values of assets acquired and liabilities assumed may be subject to change as additional information is received.

The fair value of the intangible asset associated with customer relationships was estimated using a discounted cash flow method with the application of the multi-period excess earnings method. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows attributable to only the subject intangible asset after deducting contributory asset charges.

The rate used to discount the estimated future net cash flows to their present values for the intangible assets was based upon a weighted average cost of capital calculation. The discount rate was determined after consideration of market rates of return on debt and equity capital, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the assets acquired from Zerust India. The weighted average discount rate used to determine the fair value of the customer relationships was 15.3%.

The amortization period for the intangible assets is 15 years. The intangible assets are being amortized on a straight-line basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such asset. Goodwill associated with the acquisition was primarily attributable to the expansion opportunity of the Company’s Zerust business in India.

Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquisition at its acquisition date fair value and recognize the resulting gain or loss in earnings. As such, since the Company acquired the remaining 50% ownership interest of Zerust India effective September 1, 2021, the Company recognized a gain of $3,951,550 during the nine months ended May 31, 2022. This gain is included in “Remeasurement gain on acquisition of equity method investee” on the Company’s consolidated statements of operations for the nine months ended May 31, 2022.

The Company has included the financial results of Zerust India in the consolidated financial statements from September 1, 2021. Net revenue and net income related to Zerust India since the date of acquisition totaled $7,260,964 and $664,775, respectively. The transaction costs associated with the acquisition were approximately $0 and $115,000, respectively, and are recorded in general and administrative expense as incurred during the three and nine months ended May 31, 2022.

Unaudited consolidated pro forma information assuming the acquisition had occurred on September 1, 2020 for the three and nine months ended May 31, 2021 would have an increase in net sales $2,405,098 and $6,697,005, respectively. Unaudited pro forma net income, assuming the acquisition had occurred on September 1, 2020, for the three and nine months ended May 31, 2021 was not considered material to the Company’s consolidated net income. The unaudited consolidated pro forma combined financial information does not purport to be indicative of the results which would have been obtained had the acquisition been completed as of the beginning of the earliest period presented or of results that may be obtained in the future. In addition, they do not include any benefits that may result from the acquisition due to synergies that may be derived from the elimination of any duplicative costs.

4. INVENTORIES

Inventories consisted of the following:

	May 31, 2022		August 31, 2021
Production materials	$	4,946,106	$	4,453,688
Finished goods		8,920,123		6,660,519
	$	13,866,229	$	11,114,207

5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of the following:

	May 31, 2022			August 31, 2021
Land	$	310,365		$	310,365
Buildings and improvements		14,098,634			13,149,258
Machinery and equipment		5,569,711			5,453,679
		19,978,710			18,913,302
Less accumulated depreciation		(7,907,433	)		(7,091,844	)
	$	12,071,277		$	11,821,458

6. PATENTS AND TRADEMARKS, NET

Patents and trademarks, net consisted of the following:

	May 31, 2022			August 31, 2021
Patents and trademarks	$	3,183,500		$	3,018,507
Less accumulated amortization		(2,465,705	)		(2,308,935	)
	$	717,795		$	709,572

7. INVESTMENTS IN JOINT VENTURES

The consolidated financial statements of the Company’s foreign joint ventures are initially prepared using the accounting principles accepted in the respective joint ventures’ countries of domicile. Amounts related to foreign joint ventures reported in the below tables and the accompanying consolidated financial statements have subsequently been adjusted to conform with U.S. GAAP in all material respects. All material profits on sales recorded that remain on the consolidated balance sheet from the Company to its joint ventures and from joint ventures to other joint ventures have been eliminated for financial reporting purposes.

Financial information from the audited and unaudited financial statements of the Company’s joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH (EXCOR), and all the Company’s other joint ventures are summarized as follows:

	As of May 31, 2022
	Total		EXCOR		All Other
Current assets	$	55,305,950	$	25,677,287	$	29,628,663
Total assets		59,037,744		27,727,623		31,310,121
Current liabilities		13,289,392		2,978,114		10,311,279
Noncurrent liabilities		1,223,185		—		1,223,185
Joint ventures’ equity		44,601,335		24,749,509		19,851,826
Northern Technologies International Corporation’s share of joint ventures’ equity		22,194,433		12,374,756		9,819,677
Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings		20,844,284		12,343,851		8,500,433

	Three Months Ended May 31, 2022
	Total		EXCOR		All Other
Net sales	$	26,594,077	$	10,397,916	$	16,196,160
Gross profit		10,626,570		4,990,697		5,635,873
Net income		2,714,979		1,654,389		1,060,590
Northern Technologies International Corporation’s share of equity in income from joint ventures		1,364,597		824,784		539,813
Northern Technologies International Corporation’s dividends received from joint ventures		252,000		—		252,000

	Nine Months Ended May 31, 2022
	Total		EXCOR		All Other
Net sales	$	78,218,839	$	31,010,578	$	47,208,261
Gross profit		31,504,531		15,118,133		16,386,398
Net income		7,344,175		4,646,123		2,698,052
Northern Technologies International Corporation’s share of equity in income from joint ventures		3,662,178		2,324,605		1,337,572
Northern Technologies International Corporation’s dividends received from joint ventures		5,723,176		4,255,200		1,467,976

	As of August 31, 2021
	Total		EXCOR		All Other⁽¹⁾
Current assets	$	69,394,796	$	33,886,655	$	35,508,141
Total assets		73,814,402		36,211,520		37,602,882
Current liabilities		16,366,398		5,386,377		10,980,021
Noncurrent liabilities		1,455,524		—		1,455,524
Joint ventures’ equity		55,992,480		30,825,144		25,167,336
Northern Technologies International Corporation’s share of joint ventures’ equity		27,623,768		15,412,574		12,211,194
Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings		24,702,778		14,697,490		10,005,288

	Three Months Ended May 31, 2021
	Total		EXCOR		All Other⁽¹⁾
Net sales	$	31,959,539	$	12,103,263	$	19,856,276
Gross profit		14,280,775		6,863,786		7,416,989
Net income		4,051,518		2,068,326		1,983,192
Northern Technologies International Corporation’s share of equity in income from joint ventures		2,033,536		1,039,576		993,960
Northern Technologies International Corporation’s dividends received from joint ventures		181,952		—		181,952

	Nine Months Ended May 31, 2021
	Total		EXCOR		All Other⁽¹⁾
Net sales	$	87,795,284	$	32,196,843	$	55,598,441
Gross profit		39,802,014		18,661,980		21,140,034
Net income		11,540,949		6,351,721		5,189,228
Northern Technologies International Corporation’s share of equity in income from joint ventures		5,779,260		3,182,691		2,596,569
Northern Technologies International Corporation’s dividends received from joint ventures		3,505,455		1,809,900		1,695,555

__________

(1) Includes Zerust India since Zerust India was not a consolidated subsidiary of the Company as of August 31, 2021 or May 31, 2021. See Note 3 entitled “Business Combination.”

8. INTANGIBLE ASSET, NET

Intangible asset, net consisted of the following as of May 31, 2022:

	May 31, 2022			August 31, 2021
Customer relationships	$	6,347,000		$	—
Less accumulated amortization		(317,350	)		—
Net Carrying Amount	$	6,029,650		$	—

The customer relationships were established as a part of purchase accounting related to our Zerust India acquisition. See Note 3 entitled “Business Combination.” The Company amortizes the intangible asset related to the customer relationships using the straight-line method over the estimated useful lives of the asset, which is 15 years. Total amortization expense was $105,783 and $317,350 for the three and nine months ended May 31, 2022, respectively. Amortization expense is estimated to be $423,000 in each of the next five fiscal years.

9. CORPORATE DEBT

The Company has a revolving line of credit with PNC Bank, National Association (PNC Bank) of $7,000,000 as of May 31, 2022, which will decrease to $5,000,000 effective August 16, 2022. The line of credit has a maturity date of January 7, 2023 and bears interest at an annual rate equal to the daily Bloomberg Short-Term Bank Yield Index plus 250 basis points (2.50%). The line of credit is governed under an Amended and Restated Loan Agreement dated August 31, 2021.

On May 20, 2022, to maintain financial flexibility, the Company issued an Amended and Restated Revolving Line of Credit Note to PNC Bank, which increased the Company’s line of credit from $5,000,000 to $7,000,000 until August 16, 2022, at which time the line of credit will go back to $5,000,000 until its expiration date on January 7, 2023. Additionally, on January 4, 2022, the Company issued an Amended and Restated Revolving Line of Credit Note, which extended the maturity date to January 7, 2023 and revised the rate at which amounts outstanding under the line of credit bear interest to equal a per annum rate equal to the daily Bloomberg Short-Term Bank Yield Index plus 250 basis points (2.50%). The other material terms of the line of credit were not affected by these amendments or other immaterial amendments that have been executed since the execution of the Amended and Restated Loan Agreement dated August 31, 2021.

Borrowings of $4,700,000 were outstanding under the line of credit as of May 31, 2022 and no amounts were outstanding as of August 31, 2021. Such outstanding borrowings were used primarily to fund the Company’s acquisition of the remaining ownership interest of Zerust India. The average interest rate during each of the three and nine months ended May 31, 2022 was 2.92% and 2.69%, respectively.

The obligations of the Company under the loan agreement are secured by a lien on all of the Company’s personal property, excepting certain liens consented to in writing by PNC. The loan agreement contains covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio of 1.10:1.00, and negative covenants, which, among other things, limit the incurrence of additional indebtedness, loans and equity investments, disposition of assets, mergers and consolidations and other matters customarily restricted in such agreements. As of May 31, 2022, the Company was in compliance with all debt covenants.

As of May 31, 2022 and August 31, 2021, the Company did not have any letters of credit outstanding with respect to the letter of credit sub-facility available under the revolving line of credit with PNC Bank. As of May 31, 2022 and August 31, 2021, the Company had $72,418 of letters of credit with JP Morgan Chase Bank that are performance based and set to expire between 2021 and 2022.

10. STOCKHOLDERS’ EQUITY

During the nine months ended May 31, 2022, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to holders of record of the Company’s common stock as of the following record dates:

Declaration Date	Amount		Record Date	Payable Date
October 20, 2021	$	0.07	November 3, 2021	November 17, 2021
January 21, 2022	$	0.07	February 2, 2022	February 16, 2022
April 22, 2022	$	0.07	May 4, 2022	May 18, 2022

On April 23, 2020, the Company announced the temporary suspension of its quarterly cash dividend pending clarity on the financial impact of COVID-19 on the Company. On January 15, 2021, the Company announced the reinstatement of its quarterly cash dividend. During the nine months ended May 31, 2021, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to holders of record of the Company’s common stock as of the following record dates:

Declaration Date	Amount		Record Date	Payable Date
January 15, 2021	$	0.065	February 3, 2021	February 17, 2021
April 23, 2021	$	0.065	May 5, 2021	May 19, 2021

During the nine months ended May 31, 2022 and 2021, the Company repurchased no shares of its common stock.

During the nine months ended May 31, 2022, the Company granted stock options under the Northern Technologies International Corporation 2019 Stock Incentive Plan (as amended, the 2019 Plan) to purchase an aggregate of 174,840 shares of its common stock to various employees and directors. The weighted average per share exercise price of the stock options is $16.97. The exercise price of the stock options is equal to the fair market value of the Company’s common stock on the date of grant. During the nine months ended May 31, 2022, stock options to purchase an aggregate of 51,218 shares of common stock were exercised at a weighted average exercise price of $6.60 per share, resulting in the net issuance of 42,071 shares of common stock since some of the options were exercised on a net cashless exercise basis.

During the nine months ended May 31, 2021, the Company granted stock options under the 2019 Plan to purchase an aggregate of 419,874 shares of its common stock to various employees and directors. The weighted average per share exercise price of the stock options is $8.24. The exercise price of the stock options is equal to the fair market value of the Company’s common stock on the date of grant. During the nine months ended May 31, 2021, no stock options to purchase common stock were exercised.

The Company issued 2,636 and 4,646 shares of common stock on September 1, 2021 and 2020, respectively, under the Northern Technologies International Corporation Employee Stock Purchase Plan (ESPP). The Company issued 2,966 and 5,225 shares of common stock on March 1, 2022 and 2021, respectively, under the ESPP. The ESPP is compensatory for financial reporting purposes. As of May 31, 2021, 69,220 shares of common stock remained available for sale under the ESPP.

11. NET INCOME PER COMMON SHARE

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share assumes the exercise of stock options using the treasury stock method, if dilutive.

The following is a reconciliation of the net income per share computation for the three and nine months ended May 31, 2022 and 2021:

	Three Months Ended May 31,				Nine Months Ended May 31,
Numerator:	2022		2021		2022		2021
Net income attributable to NTIC	$	1,000,167	$	2,053,916	$	5,676,773	$	4,628,890

Denominator:
Basic – weighted shares outstanding		9,227,912		9,109,861		9,216,216		9,107,243
Weighted shares assumed upon exercise of stock options		350,886		862,139		466,430		721,809
Diluted – weighted shares outstanding		9,578,797		9,972,000		9,682,646		9,829,052
Basic net income per share:	$	0.11	$	0.23	$	0.62	$	0.51
Diluted net income per share:	$	0.11	$	0.21	$	0.59	$	0.47

The dilutive impact summarized above relates to the periods when the average market price of the Company’s common stock exceeded the exercise price of the potentially dilutive option securities granted. Net income per common share was based on the weighted average number of common shares outstanding during the periods when computing basic net income per share. When dilutive, stock options are included as equivalents using the treasury stock market method when computing the diluted net income per share. Excluded from the computation of diluted net income per share for the three and nine months ended May 31, 2022 were options outstanding to purchase 327,793 shares of common stock. Excluded from the computation of diluted net income per share for the three and nine months ended May 31, 2021 were options outstanding to purchase 136,221 shares of common stock.

12. STOCK-BASED COMPENSATION

The Company has three stock-based compensation plans under which stock options or other stock-based awards have been granted: the Northern Technologies International Corporation Amended and Restated 2019 Stock Incentive Plan, the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan (2007 Plan) and the Northern Technologies International Corporation Employee Stock Purchase Plan. The 2019 Plan replaced the 2007 Plan with respect to future grants; and, therefore, no further awards may be made under the 2007 Plan. The Compensation Committee of the Board of Directors and the Board of Directors administer these plans.

The 2019 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, stock unit awards, performance awards, and stock bonuses to eligible recipients to enable the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company and to reward those individuals who contribute to the achievement of the Company’s economic objectives. On January 15, 2021, the Company’s stockholders approved certain amendments to the 2019 Plan, including an increase in the number of shares of common stock available for issuance under the plan by an additional 800,000 shares. Subject to adjustment as provided in the 2019 Plan, up to a maximum of 1,600,000 shares of the Company’s common stock are issuable under the 2019 Plan. Options granted generally have a term of ten years and become exercisable over a one- or three-year period beginning on the one-year anniversary of the date of grant. Options are granted at per share exercise prices equal to the market value of the Company’s common stock on the date of grant. The Company issues new shares upon the exercise of options. As of May 31, 2022, options to purchase an aggregate of 895,484 shares of the Company’s common stock were outstanding under the 2019 Plan and 704,516 shares of the Company’s common stock remain available for grant under the 2019 Plan. As of May 31, 2022, options to purchase an aggregate of 654,789 shares of the Company’s common stock were outstanding under the 2007 Plan.

The Company granted options to purchase an aggregate of 174,840 and 419,874 shares of its common stock during the nine months ended May 31, 2022 and 2021, respectively. The fair value of option grants is determined at the date of grant using the Black-Scholes option pricing model with the assumptions listed below. The Company recognized compensation expense of $232,883 and $698,649 during the three and nine months ended May 31, 2022, respectively, and compensation expense of $160,834 and $503,338 during the three and nine months ended May 31, 2021, respectively, related to the options that vested during such time period. As of May 31, 2022, the total compensation cost for non-vested options not yet recognized in the Company’s consolidated statements of operations was $1,242,602. Stock-based compensation expense of $232,883 is expected through the remainder of fiscal 2022 and $671,526 and $338,193 is expected to be recognized during fiscal 2023 and fiscal 2024, respectively, based on outstanding options as of May 31, 2022. Future option grants will impact the compensation expense recognized. Stock-based compensation expense is included in general and administrative expense on the consolidated statements of operations.

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions and results for the grants:

	Three and Nine Months Ended May 31,
	2022			2021
Dividend yield		1.65	%		2.37	%
Expected volatility		45.4	%		45.6	%
Expected life of option (in years)		10			10
Average risk-free interest rate		0.77	%		0.28	%

The weighted average per share fair value of options granted during the nine months ended May 31, 2022 and 2021 was $7.29 and $3.12, respectively. The weighted average remaining contractual life of the options outstanding as of May 31, 2022 and 2021 was 6.02 years and 6.40 years, respectively.

13. SEGMENT AND GEOGRAPHIC INFORMATION

Segment Information

The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s business is organized into two reportable segments: ZERUST® and Natur-Tec®. The Company has been selling its proprietary ZERUST® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 45 years and, more recently, has targeted and expanded into the oil and gas industry. The Company also sells a portfolio of bio-based and compostable (fully biodegradable) polymer resins and finished products under the Natur-Tec® brand.

The following table sets forth the Company’s net sales for the three and nine months ended May 31, 2022 and 2021 by segment:

	Three Months Ended May 31,				Nine Months Ended May 31,
	2022		2021		2022		2021
ZERUST® net sales	$	14,446,832	$	12,378,215	$	41,988,394	$	32,882,882
Natur-Tec® net sales		4,518,089		3,040,309		11,918,579		8,097,636
Total net sales	$	18,964,921	$	15,418,524	$	53,906,973	$	40,980,518

The following table sets forth the Company’s cost of goods sold for the three and nine months ended May 31, 2022 and 2021 by segment:

	Three Months Ended May 31,										Nine Months Ended May 31,
	2022		% of Product Sales*			2021		% of Product Sales*			2022		% of Product Sales*			2021		% of Product Sales*
Direct cost of goods sold
ZERUST®	$	8,409,392		58.2	%	$	7,091,220		57.3	%	$	25,267,333		60.2	%	$	18,928,272		57.6	%
Natur-Tec®		3,432,152		76.0	%		2,251,996		74.1	%		9,129,686		76.6	%		5,703,807		70.4	%
Indirect cost of goods sold		881,289		—			809,366		—			2,580,601		—			2,365,503		—
Total net cost of goods sold	$	12,722,833				$	10,152,582				$	36,977,620				$	26,997,582

* The percent of segment sales is calculated by dividing the direct cost of goods sold for each individual segment category by the net sales for each segment category.

The Company utilizes product net sales and direct and indirect cost of goods sold for each product in reviewing the financial performance of a product type. Further allocation of Company expenses or assets, aside from amounts presented in the tables above, is not utilized in evaluating product performance, nor does such allocation occur for internal financial reporting.

Geographic Information

Net sales by geographic location for the three and nine months ended May 31, 2022 and 2021 were as follows:

	Three Months Ended May 31,				Nine Months Ended May 31,
	2022		2021		2022		2021
Inside the U.S.A. to unaffiliated customers	$	6,884,726	$	6,717,886	$	18,157,010	$	16,198,372
Outside the U.S.A. to:
Joint ventures in which the Company is a shareholder directly and indirectly		528,665		1,253,919		2,252,618		2,361,165
Unaffiliated customers		11,551,530		7,446,719		33,497,345		22,420,981
	$	18,964,921	$	15,418,524	$	53,906,973	$	40,980,518

Net sales by geographic location are based on the location of the customer.

Fees for services provided to joint ventures by geographic location as a percentage of total fees for services provided to joint ventures during the three and nine months ended May 31, 2022 and 2021 were as follows:

	Three Months Ended May 31,
	2022		% of Total Fees for Services Provided to Joint Ventures			2021		% of Total Fees for Services Provided to Joint Ventures
Germany	$	204,316		15.4	%	$	232,026		14.6	%
Poland		171,181		12.9	%		226,174		14.2	%
Japan		168,075		12.6	%		200,270		12.6	%
France		123,869		9.3	%		119,172		7.5	%
Sweden		130,681		9.8	%		127,710		8.0	%
United Kingdom		89,363		6.7	%		113,886		7.2	%
Thailand		95,574		7.2	%		108,842		6.8	%
Finland