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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 February 28, 2023

or

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 April 11, 2023, there were 9,366,358 shares of common stock of the registrant outstanding.

 

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

February 28, 2023

 

TABLE OF CONTENTS

 

Description

Page
     

PART IFINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

1
 

Consolidated Balance Sheets as of February 28, 2023 (unaudited) and August 31, 2022 (audited) 

1
 

Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended February 28, 2023 and 2022

2
 

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended February 28, 2023 and 2022

3
 

Consolidated Statements of Equity (unaudited) for the Three and Six Months Ended February 28, 2023 and 2022

4
 

Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended February 28, 2023 and 2022

5
 

Notes to Consolidated Financial Statements (unaudited)

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

31
     

PART IIOTHER INFORMATION

 
   

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34
     

SIGNATURES

35

 

_________________

 

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. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements.

 

i

 

 

_________________

 

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 NTICs consolidated financial statements.

 

As used in this report, references to: (1) NTIC China refer to NTICs wholly-owned subsidiary in China, NTIC (Shanghai) Co., Ltd.; (2) NTI Europe refer to NTICs wholly-owned subsidiary in Germany, NTIC Europe GmbH; (3) Zerust Mexico refer to NTICs wholly-owned subsidiary in Mexico, ZERUST-EXCOR MEXICO, S. de R.L. de C.V.; (4) Zerust India refer to NTICs wholly-owned subsidiary in India effective as of September 1, 2021, HNTI Limited (formerly Harita-NTI Limited); and (5)NTI Asean refer to NTICs 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.

 

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

 

As used in this report, references to EXCOR refer to NTICs 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.

 

 

 

 

 

 

ii

 

 

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 2023 (UNAUDITED) AND AUGUST 31, 2022 (AUDITED)


 

   

February 28, 2023

   

August 31, 2022

 
ASSETS                
CURRENT ASSETS:                

Cash and cash equivalents

  $ 5,451,111     $ 5,333,890  

Available for sale securities

          5,590  
Receivables:                

Trade, excluding joint ventures, less allowance for doubtful accounts of $439,000 as of February 28, 2023 and August 31, 2022

    14,675,017       14,136,930  

Trade, joint ventures

    1,614,934       697,861  

Fees for services provided to joint ventures

    1,108,907       1,765,117  

Income taxes

    313,270        

Inventories

    15,180,239       16,341,729  

Prepaid expenses

    1,833,124       1,953,764  

Total current assets

  $ 40,176,602     $ 40,234,881  

PROPERTY AND EQUIPMENT, NET

  $ 13,445,966     $ 12,170,493  
OTHER ASSETS:                

Investments in joint ventures

    21,522,496       21,814,754  

Intangible asset, net

    6,409,028       6,633,878  

Goodwill

    4,782,376       4,782,376  

Operating lease right of use asset

    374,037       557,571  

Total other assets

    33,087,937       33,788,579  

Total assets

  $ 86,710,505     $ 86,193,953  
                 
LIABILITIES AND EQUITY                
CURRENT LIABILITIES:                

Accounts payable

  $ 6,307,443     $ 7,796,494  

Line of credit

    7,100,000       5,900,000  

Income taxes payable

          30,742  
Accrued liabilities:                

Payroll and related benefits

    1,304,717       2,297,543  

Other

    1,292,950       667,292  

Current portion of operating leases

    173,179       373,330  

Total current liabilities

  $ 16,178,289     $ 17,065,401  
LONG-TERM LIABILITIES:                

Deferred income tax, net

    1,623,364       1,700,015  

Operating leases, less current portion

    200,858       184,241  

Total long-term liabilities

  $ 1,824,222     $ 1,884,256  
                 
COMMITMENTS AND CONTINGENCIES (Note 12)            
                 
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 February 28, 2023 and August 31, 2022; issued and outstanding 9,366,357 and 9,232,483, respectively

    187,327       184,650  

Additional paid-in capital

    21,058,721       19,939,131  

Retained earnings

    50,792,813       50,716,613  

Accumulated other comprehensive loss

    (6,774,510 )     (7,245,132 )

Stockholders’ equity

    65,264,351       63,595,262  

Non-controlling interests

    3,443,643       3,649,034  

Total equity

    68,707,994       67,244,296  

Total liabilities and equity

  $ 86,710,505     $ 86,193,953  

 

See notes to consolidated financial statements.

 

 

 

1

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2023 AND 2022


 

   

Three Months Ended February 28,

   

Six Months Ended February 28,

 
   

2023

   

2022

   

2023

   

2022

 
NET SALES:                                

Net sales

  $ 18,270,825     $ 16,748,639     $ 38,223,591     $ 34,942,052  

Cost of goods sold

    11,867,639       11,764,304       25,467,281       24,254,787  

Gross profit

    6,403,186       4,984,335       12,756,310       10,687,265  
                                 
JOINT VENTURE OPERATIONS:                                

Equity in income from joint ventures

    1,128,731       922,832       2,318,135       2,297,581  

Fees for services provided to joint ventures

    1,252,746       1,246,909       2,434,551       2,505,767  

Total joint venture operations

    2,381,477       2,169,741       4,752,686       4,803,348  
                                 
OPERATING EXPENSES:                                

Selling expenses

    3,418,717       2,971,391       6,926,151       6,209,149  

General and administrative expenses

    3,084,189       2,518,788       6,214,788       5,115,135  

Research and development expenses

    994,450       1,218,674       2,251,174       2,454,495  

Total operating expenses

    7,497,356       6,708,853       15,392,113       13,778,779  
                                 

OPERATING INCOME

    1,287,307       445,223       2,116,883       1,711,834  
                                 

REMEASUREMENT GAIN ON ACQUISITION OF EQUITY METHOD INVESTEE

                      3,951,550  

INTEREST INCOME

    3,451       9,909       9,619       20,852  

INTEREST EXPENSE

    (115,144 )     (7,404 )     (206,475 )     (10,295 )

INCOME BEFORE INCOME TAX EXPENSE

    1,175,614       447,728       1,920,027       5,673,941  
                                 

INCOME TAX EXPENSE

    181,795       151,743       292,528       656,123  

NET INCOME

    993,819       295,985       1,627,499       5,017,818  
                                 

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

    108,571       113,138       240,009       341,212  

NET INCOME ATTRIBUTABLE TO NTIC

  $ 885,248     $ 182,847     $ 1,387,490     $ 4,676,606  
                                 
NET INCOME ATTRIBUTABLE TO NTIC PER COMMON SHARE:                                

Basic

  $ 0.10     $ 0.02     $ 0.15     $ 0.51  

Diluted

  $ 0.09     $ 0.02     $ 0.14     $ 0.48  
                                 
WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:                                

Basic

    9,366,357       9,214,817       9,353,989       9,211,858  

Diluted

    9,747,461       9,683,426       9,745,166       9,736,060  
                                 

CASH DIVIDENDS DECLARED PER COMMON SHARE

  $ 0.07     $ 0.07     $ 0.14     $ 0.14  

 

 

See notes to consolidated financial statements.

 

2

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2023 AND 2022


 

   

Three Months Ended February 28,

   

Six Months Ended February 28,

 
   

2023

   

2022

   

2023

   

2022

 

NET INCOME

  $ 993,819     $ 295,985     $ 1,627,499     $ 5,017,818  

OTHER COMPREHENSIVE LOSS – FOREIGN CURRENCY TRANSLATION ADJUSTMENT

    534,713       26,295       480,796       (382,769 )
                                 

COMPREHENSIVE INCOME

    1,528,532       322,280       2,108,295       4,635,049  

COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

    (111,958 )     (136,037 )     (250,183 )     (292,102 )

COMPREHENSIVE INCOME ATTRIBUTABLE TO NTIC

  $ 1,640,490     $ 458,317     $ 2,358,478     $ 4,927,151  

 

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2023 AND 2022


 

   

STOCKHOLDERS EQUITY THREE MONTHS ENDED FEBRUARY 28, 2023 AND 2022

                 
                                   

Accumulated

                 
                   

Additional

           

Other

   

Non-

         
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Controlling

   

Total

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Interests

   

Equity

 
                                                         

BALANCE AT NOVEMBER 30, 2021

    9,203,446     $ 184,069     $ 19,146,510     $ 50,823,730     $ (3,862,085 )   $ 3,338,620     $ 69,630,844  

Stock options exercised

    18,071       361       (361 )                        

Stock option expense

                232,883                         232,883  

Dividends paid to stockholders

                      (645,511 )                 (645,511 )

Dividend received by non-controlling interest

                                  (102,729 )     (102,729 )

Net income

                      182,847             113,138       295,985  

Other comprehensive income

                            3,396       22,899       26,295  

BALANCE AT FEBRUARY 28, 2022

    9,221,517     $ 184,430     $ 19,379,032     $ 50,361,066     $ (3,858,689 )   $ 3,371,928     $ 69,437,767  
                                                         

BALANCE AT NOVEMBER 30, 2022

    9,336,357     $ 187,327     $ 20,721,235     $ 50,563,210     $ (7,305,836 )   $ 3,707,259     $ 67,873,195  

Stock option expense

                337,486                         337,486  

Dividends paid to stockholders

                      (655,645 )                 (655,645 )

Dividend received by non-controlling interest

                                  (375,574 )     (375,574 )

Net income

                      885,248             108,571       993,819  

Other comprehensive income

                            531,326       3,387       534,713  

BALANCE AT FEBRUARY 28, 2023

    9,336,357     $ 187,327     $ 21,058,721     $ 50,792,813     $ (6,774,510 )   $ 3,443,643     $ 68,707,994  

 

 

   

STOCKHOLDERS EQUITY SIX MONTHS ENDED FEBRUARY 28, 2023 AND 2022

                 
                                   

Accumulated

                 
                   

Additional

           

Other

   

Non-

         
   

Common Stock

   

Paid-in

   

Retained

   

Comprehensive

   

Controlling

   

Total

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Income (Loss)

   

Interests

   

Equity

 
                                                         

BALANCE AT AUGUST 31, 2021

    9,184,811     $ 183,696     $ 18,736,268     $ 46,973,092     $ (3,525,030 )   $ 3,382,555     $ 65,750,581  

Stock options exercised

    34,071       681       138,519                         139,200  

Stock issued for employee stock purchase plan

    2,635       53       38,479                         38,532  

Stock option expense

                465,766                         465,766  

Dividends paid to stockholders

                      (1,288,632 )                 (1,288,632 )

Dividend received by non-controlling interest

                                  (302,729 )     (302,729 )

Net income

                      4,676,606             341,212       5,017,818  

Other comprehensive loss

                            (333,659 )     (49,110 )     (382,769 )

BALANCE AT FEBRUARY 28, 2022

    9,221,517     $ 184,430     $ 19,379,032     $ 50,361,066     $ (3,858,689 )   $ 3,371,928     $ 69,437,767  
                                                         

BALANCE AT AUGUST 31, 2022

    9,232,483     $ 184,650     $ 19,939,131     $ 50,716,613     $ (7,245,132 )   $ 3,649,034     $ 67,244,296  

Stock options exercised

    130,254       2,605       413,958                         416,563  

Stock issued for employee stock purchase plan

    3,620       72       38,624                         38,696  

Stock option expense

                667,008                         667,008  

Dividends paid to stockholders

                      (1,311,290 )                 (1,311,290 )

Dividend received by non-controlling interest

                                  (455,574 )     (455,574 )

Net income

                      1,387,490             240,009       1,627,499  

Other comprehensive income

                            470,622       10,174       480,796  

BALANCE AT FEBRUARY 28, 2023

    9,336,357     $ 187,327     $ 21,058,721     $ 50,792,813     $ (6,774,510 )   $ 3,443,643     $ 68,707,994  

 

See notes to consolidated financial statements.

 

4

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2023 AND 2022


 

   

Six Months Ended February 28,

 
   

2023

   

2022

 
CASH FLOWS FROM OPERATING ACTIVITIES:                

Net income

  $ 1,627,499     $ 5,017,818  
Adjustments to reconcile net income to net cash provided by operating activities:                

Stock-based compensation

    667,008       465,766  

Depreciation expense

    488,838       430,991  

Amortization expense

    294,873       315,631  

Remeasurement gain on acquisition of equity method investee

          (3,951,550 )

Loss on disposal of assets

    (8,534 )      

Equity in income from joint ventures

    (2,318,135 )     (2,297,581 )

Dividends received from joint ventures

    3,464,736       5,362,636  

Deferred income taxes

    (70,166 )     139,338  
Changes in current assets and liabilities:                
Receivables:                

Trade, excluding joint ventures

    (911,765 )     321,322  

Trade, joint ventures

    (917,073 )     (281,153 )

Fees for services provided to joint ventures

    656,210       426,425  

Income taxes

    (313,270 )     (286,458 )

Inventories

    996,522       (990,628 )

Prepaid expenses and other

    259,712       (1,136,130 )

Accounts payable

    (1,293,897 )     674,147  

Income tax payable

    (29,503 )     (376,544 )

Accrued liabilities

    (388,221 )     (1,715,302 )

Net cash provided by operating activities

    2,204,834       2,118,728  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                

Acquisition of Zerust India business, net of cash acquired

          (5,062,003 )

Proceeds from the sale of available for sale securities

    5,590        

Proceeds from sale of property and equipment

    13,000        

Purchases of property and equipment

    (1,871,903 )     (618,533 )

Investments in patents

    (70,023 )     (112,297 )

Net cash used in investing activities

    (1,923,336 )     (5,792,833 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                

Net proceeds from line of credit

    1,200,000       4,200,000  

Dividends paid on NTIC common stock

    (1,311,290 )     (1,288,632 )

Proceeds from the exercise of stock options

    416,563       139,200  

Dividends received by non-controlling interest

    (455,574 )     (302,729 )

Proceeds from employee stock purchase plan

    38,696       38,532  

Net cash (used in) provided by financing activities

    (111,605 )     2,786,371  
                 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

    (52,672 )     694,904  
                 
                 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    117,221       (192,830 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    5,333,890       7,680,641  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 5,451,111     $ 7,487,811  

 

See notes to consolidated financial statements.

 

5

 

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 February 28, 2023 and August 31, 2022 and the results of the Company’s operations for the three and six months ended February 28, 2023 and 2022, the changes in stockholders’ equity for the three and six months ended February 28, 2023 and 2022, and the Company’s cash flows for the six months ended February 28, 2023 and 2022, 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, 2022. These consolidated financial statements also should be read in conjunction with the “Managements Discussion and Analysis of Financial Condition and Results of Operations” section appearing in this report.

 

Operating results for the three and six months ended February 28, 2023 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2023.

 

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

 

 

2.

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.

 

6

 

 

3.

INVENTORIES

 

Inventories consisted of the following:

 

   

February 28, 2023

   

August 31, 2022

 

Production materials

  $ 5,629,424     $ 6,496,656  

Finished goods

    9,550,815       9,845,073  
    $ 15,180,239     $ 16,341,729  

 

 

4.

PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

   

February 28, 2023

   

August 31, 2022

 

Land

  $ 310,365     $ 310,365  

Buildings and improvements

    16,428,804       14,778,759  

Machinery and equipment

    5,792,363       5,643,320  
      22,531,532       20,732,444  

Less accumulated depreciation

    (9,085,566 )     (8,561,951 )
    $ 13,445,966     $ 12,170,493  

 

On February 28, 2023, the Company purchased the property immediately adjacent to NTIC’s headquarters in Circle Pines, Minnesota, which includes a 26,000 square foot industrial building for $1,200,000. The building will be used primarily for warehousing space and light industrial production.

 

Depreciation expense was $225,962 and $488,838 for the three and six months ended February 28, 2023, respectively, compared to $215,685 and $430,991 for the three and six months ended February 28, 2022, respectively.

 

 

5.

INTANGIBLE ASSETS, NET

 

Intangible assets, net consisted of the following:

 

   

As of February 28, 2023

 
   

Gross Carrying

Amount

   

Accumulated

Amortization

   

Net Carrying

Amount

 

Patents and trademarks

  $ 3,295,678     $ (2,598,950 )   $ 696,728  

Customer relationships

    6,347,000       (634,700 )     5,712,300  

Total intangible assets, net

  $ 9,642,678     $ (3,233,650 )   $ 6,409,028  

 

   

As of August 31, 2022

 
   

Gross Carrying

Amount

   

Accumulated

Amortization

   

Net Carrying

Amount

 

Patents and trademarks

  $ 3,225,655     $ (2,515,644 )   $ 710,011  

Customer relationships

    6,347,000       (423,133 )     5,923,867  

Total intangible assets, net

  $ 9,572,655     $ (2,938,777 )   $ 6,633,878  

 

7

 

Amortization expense related to intangible assets was $147,062 and $294,873 for the three and six months ended February 28, 2023, respectively, compared to $195,737 and $315,631 for the three and six months ended February 28, 2022, respectively.

 

As of February 28, 2023, future amortization expense related to intangible assets for each of the next five fiscal years and thereafter is estimated as follows:

 

Remainder of fiscal 2023

  $ 294,873  

Fiscal 2024

    589,746  

Fiscal 2025

    589,746  

Fiscal 2026

    589,746  

Fiscal 2027

    589,746  

Thereafter

    3,755,171  

Total

  $ 6,409,028  

 

 

6.

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 February 28, 2023

 
   

Total

   

EXCOR

   

All Other

 

Current assets

  $ 54,425,899     $ 25,538,114     $ 28,887,785  

Total assets

    57,924,227       27,376,219       30,548,008  

Current liabilities

    14,002,680       3,163,365       10,839,315  

Noncurrent liabilities

    346,645       -       346,645  

Joint ventures’ equity

    43,574,902       24,212,854       19,362,048  

Northern Technologies International Corporation’s share of joint ventures’ equity

    21,522,496       12,106,429       9,416,067  

Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings

    20,493,861       12,075,524       8,418,337  

 

   

Three Months Ended February 28, 2023

 
   

Total

   

EXCOR

   

All Other

 

Net sales

  $ 25,482,590     $ 9,708,482     $ 15,774,108  

Gross profit

    10,035,811       4,733,435       5,302,376  

Net income

    1,969,046       1,365,170       603,876  

Northern Technologies International Corporation’s share of equity in income from joint ventures

    1,128,731       676,800       451,931  

Northern Technologies International Corporation's dividends received from joint ventures

    422,048             422,048  

 

   

Six Months Ended February 28, 2023

 
   

Total

   

EXCOR

   

All Other

 

Net sales

  $ 50,212,879     $ 19,854,403     $ 30,358,476  

Gross profit

    19,729,379       9,453,477       10,275,902  

Net income

    4,615,954       3,107,457       1,508,497  

Northern Technologies International Corporation’s share of equity in income from joint ventures

    2,318,135       1,547,944       770,191  

Northern Technologies International Corporation's dividends received from joint ventures

  $ 3,464,736     $ 2,459,500     $ 1,005,236  

 

8

 

   

As of August 31, 2022

 
   

Total

   

EXCOR

   

All Other

 

Current assets

  $ 52,428,831     $ 26,047,914     $ 26,380,917  

Total assets

    55,854,457       27,932,532       27,921,925  

Current liabilities

    10,981,833       2,943,895       8,037,938  

Noncurrent liabilities

    1,138,980             1,138,980  

Joint ventures’ equity

    43,733,644       24,988,637       18,745,007  

Northern Technologies International Corporation’s share of joint ventures’ equity

    21,814,754       12,494,320       9,320,434  

Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings

  $ 21,256,923     $ 12,463,415     $ 8,793,508  

 

   

Three Months Ended February 28, 2022

 
   

Total

   

EXCOR

   

All Other

 

Net sales

  $ 24,601,767     $ 9,312,434     $ 15,289,333  

Gross profit

    9,845,002       4,658,450       5,186,552  

Net income

    1,851,591       1,170,187       681,404  

Northern Technologies International Corporation’s share of equity in income from joint ventures

    922,832       589,048       333,784  

Northern Technologies International Corporation's dividends received from joint ventures

  $ 320,365           $ 320,365  

 

   

Six Months Ended February 28, 2022

 
   

Total

   

EXCOR

   

All Other

 

Net sales

  $ 51,624,762     $ 20,612,662     $ 31,012,100  

Gross profit

    20,877,961       10,127,436       10,750,525  

Net income

    4,629,196       2,991,734       1,637,462  

Northern Technologies International Corporation’s share of equity in income from joint ventures

    2,297,581       1,499,821       797,760  

Northern Technologies International Corporation's dividends received from joint ventures

  $ 5,362,636     $ 4,255,200     $ 1,107,436  

 

 

7.

CORPORATE DEBT

 

On January 6, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPM”), which provides the Company with a senior secured revolving line of credit (the “Credit Facility”) of up to $10.0 million, which includes a $5.0 million sublimit for standby letters of credit. Borrowings of $7,100,000 and $5,900,000 were outstanding under the lines of credit as of February 28, 2023 and August 31, 2022, respectively.

 

Unless terminated earlier, the Credit Facility will mature on January 6, 2024, and the principal amount thereunder, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on such date. Borrowings under the Credit Agreement bear interest at a floating rate, at the option of the Company, equal to either the CB Floating Rate or the Adjusted SOFR Rate. The term “CB Floating Rate” means the greater of the Prime Rate in the United States or 2.50%. The term “Adjusted SOFR Rate” means the term secured overnight financing rate for either one, three or six months (depending on the interest period selected by the Company) plus 0.10% per annum. With respect to any borrowings using an Adjusted SOFR Rate, there is an applicable margin of 2.15% applied per annum. There is no applicable margin with respect to borrowings using a CB Floating Rate.

 

To secure the Credit Agreement, the Company assigned to JPM a continuing security interest in all of its right, title and interested in collateral made up for the assets of the Company.

 

9

 

The Credit Agreement contains customary affirmative and negative covenants, including, among other matters, limitations on the Company’s ability to incur additional debt, grant liens, engage in certain business operations and transactions, make certain investments, modify its organizational documents or form any new subsidiaries, subject to certain exceptions. Further, the Credit Agreement contains a negative covenant that restricts the ability of the Company to redeem or repurchase its common stock or pay dividends if the result of which would cause an event of default under the Credit Agreement. The Credit Agreement also requires the Company to maintain a Fixed Charge Coverage Ratio of at least 1.25 to 1.00. The term “Fixed Charge Coverage Ratio” means the ratio, computed for the Company on a consolidated basis, of net income plus income tax expense, plus amortization expense, plus depreciation expense, plus interest expense, and plus dividends received from joint ventures, minus unfinanced capital expenditures and equity in income from joint ventures, all computed for the twelve month period then ending, to scheduled principal payments made, plus scheduled finance lease payments made, plus interest expense paid, plus income tax expense paid, and plus cash distributions and dividends paid, all computed for the same twelve month period then ending.

 

The Credit Agreement also contains customary events of default, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, breach of any financial covenant and change of control. Upon the occurrence and during the continuance of any event of default, JPM may accelerate the payment of the obligations thereunder and exercise various other customary default remedies.

 

In connection with the execution of the Credit Agreement described above, on January 6, 2023, the Amended and Restated Loan Agreement dated August 31, 2021 between Northern Technologies International Corporation and PNC Bank, National Association was terminated.

 

 

8.

STOCKHOLDERS EQUITY

 

During the six months ended February 28, 2023, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to the following holders of the Company’s common stock:

 

Declaration Date

 

Amount

 

Record Date

 

Payable Date

October 20, 2022

 

$0.07

 

November 3, 2022

 

November 16, 2022

January 20, 2023

 

$0.07

 

February 1, 2023

 

February 15, 2023

 

During the six months ended February 28, 2022, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to the following holders of the Company’s common stock:

 

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

 

During the six months ended February 28, 2023 and 2022, the Company repurchased no shares of its common stock.

 

The Company issued 3,620 and 2,636 shares of common stock on September 1, 2022 and 2021, respectively, under the Northern Technologies International Corporation Employee Stock Purchase Plan (ESPP). The ESPP is compensatory for financial reporting purposes. As of February 28, 2023, 65,600 shares of common stock remained available for sale under the ESPP.

 

10

 

 

9.

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 six months ended February 28, 2023 and 2022:

 

   

Three Months Ended February 28,

   

Six Months Ended February 28,

 

Numerator:

 

2023

   

2022

   

2023

   

2022

 

Net income attributable to NTIC

  $ 885,248     $ 182,847     $ 1,387,490     $ 4,676,606  

Denominator:

                               

Basic – weighted shares outstanding

    9,366,357       9,214,817       9,353,989       9,211,858  

Weighted shares assumed upon exercise of stock options

    381,104       468,609       391,177       524,202  

Diluted – weighted shares outstanding

    9,747,461       9,683,426       9,745,166       9,736,060  

Basic net income per share:

  $ 0.10     $ 0.02     $ 0.15     $ 0.51  

Diluted net income per share:

  $ 0.09     $ 0.02     $ 0.14     $ 0.48  

 

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 six months ended February 28, 2023 were options outstanding to purchase 305,514 shares of common stock. Excluded from the computation of diluted net income per share for the three and six months ended February 28, 2022, were options outstanding to purchase 311,061 shares of common stock.

 

 

10.

STOCK-BASED COMPENSATION

 

A summary of stock option activities under the Northern Technologies International Corporation Amended and Restated 2019 Stock Incentive Plan (the 2019 Plan) and the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan (the 2007 Plan) is as follows:

 

   

Number of

Options

Outstanding

   

Weighted

Average Exercise

Price

 

Outstanding as of August 31, 2022

    1,544,727     $ 10.23  

Granted

    277,613     $ 11.41  

Exercised

    (178,331 )   $ 6.03  

Outstanding as of February 28, 2023

    1,644,009     $ 10.52  

 

The weighted average per share fair value of options granted during the six months ended February 28, 2023 and 2022 was $4.75 and $7.29, respectively. The weighted average remaining contractual life of the options outstanding as of February 28, 2023 and 2022 was 6.42 years and 6.25 years, respectively.

 

11

 

The Company recognized compensation expense of $674,971 and $465,766 during the six months ended February 28, 2023 and 2022, respectively. As of February 28, 2023, there was $1,686,298 of unrecognized compensation expense. The amount is expected to be recognized over a period of 2.5 years.

 

 

11.

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 almost 50 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 six months ended February 28, 2023 and 2022 by segment:

 

   

Three Months Ended February 28,

   

Six Months Ended February 28,

 
   

2023

   

2022

   

2023

   

2022

 

ZERUST® net sales

  $ 14,458,747     $ 13,117,777     $ 29,828,748     $ 27,541,562  

Natur-Tec® net sales

    3,812,078       3,630,862       8,394,843       7,400,490  

Total net sales

  $ 18,270,825     $ 16,748,639     $ 38,223,591     $ 34,942,052  

 

The following table sets forth the Company’s cost of goods sold for the three and six months ended February 28, 2023 and 2022 by segment:

 

   

Three Months Ended February 28,

   

Six Months Ended February 28,

 
   

2023

   

% of

Product

Sales*

   

2022

   

% of

Product

Sales*

   

2023

   

% of

Product

Sales*

   

2022

   

% of

Product

Sales*

 
Direct cost of goods sold                                                                

ZERUST®

  $ 8,115,451       56.1 %   $ 8,151,274       62.1 %   $ 17,294,705       58.0 %   $ 16,857,941       61.2 %

Natur-Tec®

    2,931,036       76.9 %     2,775,436       76.4 %     6,501,709       77.4 %     5,697,533       77.0 %

Indirect cost of goods sold

    821,152             837,594             1,670,867             1,699,313        

Total net cost of goods sold

  $ 11,867,639             $ 11,764,304             $ 25,467,281             $ 24,254,787          

_________________

*

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 six months ended February 28, 2023 and 2022 were as follows:

 

   

Three Months Ended February 28,

   

Six Months Ended February 28,

 
   

2023

   

2022

   

2023

   

2022

 

Inside the U.S.A. to unaffiliated customers

  $ 6,750,997     $ 5,115,963     $ 14,229,158     $ 11,272,285  
Outside the U.S.A. to:                                

Joint ventures in which the Company is a shareholder directly and indirectly

    1,529,763       883,513       2,163,228       1,723,952  

Unaffiliated customers

    9,990,065       10,749,163       21,831,205       21,945,815  
    $ 18,270,825     $ 16,748,639     $ 38,223,591     $ 34,942,052  

 

12

 

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 six months ended February 28, 2023 and 2022 were as follows:

 

   

Three Months Ended February 28,

 
   

2023

   

% of Total Fees for

Services Provided to

Joint Ventures

   

2022

   

% of Total Fees for

Services Provided to

Joint Ventures

 

Germany

  $ 202,964       16.2 %   $ 216,992       17.4 %

Poland

    199,927       16.0 %     172,700       13.9 %

Japan

    153,795       12.3 %     151,933       12.2 %

France

    118,938       9.5 %     115,663       9.3 %

Sweden

    112,615       9.0 %     99,178       8.0 %

Finland

    91,620       7.3 %     85,426       6.9 %

Thailand

    91,601       7.3 %     87,918       7.1 %

Czech Republic

    91,001       7.3 %     69,386       5.6 %

South Korea

    65,803       5.3 %     64,173       5.1 %

United Kingdom

    65,648       5.2 %     86,736       7.0 %

Other

    58,834       4.6 %     96,803       7.5 %
    $ 1,252,746       100.0 %   $ 1,246,908       100.0 %

 

   

Six Months Ended February 28,

 
   

2023

   

% of Total Fees for

Services Provided to

Joint Ventures

   

2022

   

% of Total Fees for

Services Provided to

Joint Ventures

 

Germany

  $ 396,792       16.3 %   $ 435,422       17.4 %

Poland

    386,623       15.9 %     349,626       14.0 %

Japan

    301,715       12.4 %     318,740       12.7 %

France

    228,295       9.4 %     231,958       9.3 %

Sweden

    213,051       8.8 %     207,248       8.3 %

Finland

    182,052       7.5 %     165,599       6.6 %

Thailand

    174,557       7.2 %     175,472       7.0 %

Czech Republic

    171,333       7.0 %     139,483       5.6 %

South Korea

    129,197       5.3 %     126,800       5.1 %

United Kingdom

    123,339       5.1 %     181,663       7.2 %

Other

    127,597       5.1 %     173,756       6.8 %
    $ 2,434,551       100.0 %   $ 2,505,767       100.0 %

 

13

 

The geographical distribution of total property and equipment and net sales is as follows:

 

   

At

February 28, 2023

   

At

August 31, 2021

 

China

  $ 5,885,664     $ 5,826,898  

Other

    668,910       565,022  

United States

    6,891,392       5,778,573  

Total property and equipment, net

  $ 13,445,966     $ 12,170,493  

 

 

   

Three Months Ended February 28,

 
   

2023

   

2022

 

China

  $ 2,871,795     $ 4,163,741  

Brazil

    1,206,790       936,089  

India

    4,364,358       4,068,781  

Other

    3,076,885       2,464,066  

United States

    6,750,997       5,115,962  

Total net sales

  $ 18,270,825     $ 16,748,639  

 

   

Six Months Ended February 28,

 
   

2023

   

2022

 

China

  $ 6,618,435     $ 8,221,593  

Brazil

    2,574,208       2,232,306  

India

    9,211,285       8,545,765  

Other

    5,590,505       4,670,103  

United States

    14,229,158       11,272,285  

Total net sales

  $ 38,223,591     $ 34,942,052  

 

Long-lived assets consist of property and equipment. These assets are periodically reviewed to assure the net realizable value from the estimated future production based on forecasted sales exceeds the carrying value of the assets.

 

Sales to the Company’s joint ventures are included in the foregoing segment and geographic information; however, sales by the Company’s joint ventures to other parties are not included. The foregoing segment and geographic information represents only sales recognized directly by the Company and sold in that geographic territory.

 

All joint venture operations, including equity in income, fees for services and related dividends, are primarily related to ZERUST® products and services.

 

 

12.

COMMITMENTS AND CONTINGENCIES

 

Concentrations

 

Three joint ventures (the Company’s joint ventures in South Korea, Sweden and France) accounted for