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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 May 31, 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 July 13, 2023, there were 9,369,923 shares of common stock of the registrant outstanding.

 

 

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

May 31, 2023

 

TABLE OF CONTENTS

 

Description

Page
     

PART IFINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

 
     
 

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

3
     
 

Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended May 31, 2023 and 2022

4
     
 

Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended May 31, 2023 and 2022

5
     
 

Consolidated Statements of Equity (unaudited) for the Three and Nine Months Ended May 31, 2023 and 2022

6
     
 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended May 31, 2023 and 2022

7
     
 

Notes to Consolidated Financial Statements (unaudited)

8
     
Item 2.

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

19
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32
     

Item 4.

Controls and Procedures

33
     

PART IIOTHER INFORMATION

 
   

Item 1.

Legal Proceedings

34
     

Item 1A.

Risk Factors

34
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34
     

Item 3.

Defaults Upon Senior Securities

35
     

Item 4.

Mine Safety Disclosures

35
     

Item 5.

Other Information

35
     

Item 6.

Exhibits

35
     

SIGNATURES

36

 

 

_________________

 

 

 

 

1

 
 

 

 

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.

 

_________________

 

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.

 

 

 

 

 

 

 

2

 

PART I - FINANCIAL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2023 (UNAUDITED)

AND AUGUST 31, 2022 (AUDITED)

   

May 31, 2023

   

August 31, 2022

 

ASSETS

               
CURRENT ASSETS:                

Cash and cash equivalents

  $ 6,195,194     $ 5,333,890  

Available for sale securities

          5,590  
Receivables:                

Trade, excluding joint ventures, less allowance for doubtful accounts

               

of $439,000 as of May 31, 2023 and August 31, 2022

    15,311,650      

14,136,930

 

Trade, joint ventures

    668,847       697,861  

Fees for services provided to joint ventures

    1,226,010       1,765,117  

Income taxes

    155,828        

Inventories

    13,900,812       16,341,729  

Prepaid expenses

    1,831,566       1,953,764  

Total current assets

  $ 39,289,907     $ 40,234,881  
                 

PROPERTY AND EQUIPMENT, NET

  $ 13,810,930     $ 12,170,493  
OTHER ASSETS:                

Investments in joint ventures

    22,855,448       21,814,754  

Intangible asset, net

    6,281,625       6,633,878  

Goodwill

    4,782,376       4,782,376  

Operating lease right of use asset

    293,137       557,571  

Total other assets

    34,212,586       33,788,579  

Total assets

  $ 87,313,423     $ 86,193,953  
                 

LIABILITIES AND EQUITY

               
CURRENT LIABILITIES:                

Accounts payable

  $ 4,687,675     $ 7,796,494  
Term loan     2,812,504        

Line of credit

    5,200,000       5,900,000  

Income taxes payable

          30,742  
Accrued liabilities:                

Payroll and related benefits

    2,035,785       2,297,543  

Other

    734,414       667,292  

Current portion of operating leases

    80,183       373,330  

Total current liabilities

  $ 15,550,561     $ 17,065,401  
LONG-TERM LIABILITIES:                

Deferred income tax, net

    1,618,960       1,700,015  

Operating leases, less current portion

    212,954       184,241  

Total long-term liabilities

  $ 1,831,914     $ 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 May 31, 2023 and August 31, 2022; issued and outstanding 9,369,923 and 9,232,483, respectively

    187,398       184,650  

Additional paid-in capital

    21,426,721       19,939,131  

Retained earnings

    51,662,515       50,716,613  

Accumulated other comprehensive loss

    (6,879,447 )     (7,245,132 )

Stockholders’ equity

    66,397,187       63,595,262  

Non-controlling interests

    3,533,761       3,649,034  

Total equity

    69,930,948       67,244,296  

Total liabilities and equity

  $ 87,313,423     $ 86,193,953  

 

See notes to consolidated financial statements.

 

3

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022

   

Three Months Ended May 31,

   

Nine Months Ended May 31,

 
   

2023

   

2022

   

2023

   

2022

 
NET SALES:                                

Net sales

  $ 20,969,726     $ 18,964,921     $ 59,193,317     $ 53,906,973  

Cost of goods sold

    13,280,584       12,722,833       38,747,865       36,977,620  

Gross profit

    7,689,142       6,242,088       20,445,452       16,929,353  
                                 
JOINT VENTURE OPERATIONS:                                

Equity in income from joint ventures

    1,346,658       1,364,597       3,664,793       3,662,178  

Fees for services provided to joint ventures

    1,361,311       1,329,988       3,795,862       3,835,755  

Total joint venture operations

    2,707,969       2,694,585       7,460,655       7,497,933  
                                 
OPERATING EXPENSES:                                

Selling expenses

    3,723,165       3,450,308       10,649,316       9,659,457  

General and administrative expenses

    3,150,643       2,560,487       9,365,431       7,675,622  

Research and development expenses

    1,150,711       1,102,942       3,401,885       3,557,437  

Total operating expenses

    8,024,519       7,113,737       23,416,632       20,892,516  
                                 

OPERATING INCOME

    2,372,592       1,822,936       4,489,475       3,534,770  
                                 

REMEASUREMENT GAIN ON ACQUISITION OF EQUITY METHOD INVESTEE

                      3,951,550  
                                 

INTEREST INCOME

    8,876       15,925       18,495       36,777  

INTEREST EXPENSE

    (136,168 )     (23,784 )     (342,643 )     (34,079 )
                                 

INCOME BEFORE INCOME TAX EXPENSE

    2,245,300       1,815,077       4,165,327       7,489,018  
                                 

INCOME TAX EXPENSE

    542,295       604,314       834,823       1,260,437  
                                 

NET INCOME

    1,703,005       1,210,763       3,330,504       6,228,581  
                                 

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

    177,409       210,596       417,418       551,808  
                                 

NET INCOME ATTRIBUTABLE TO NTIC

  $ 1,525,596     $ 1,000,167     $ 2,913,086     $ 5,676,773  
                                 
NET INCOME ATTRIBUTABLE TO NTIC PER COMMON SHARE:                                

Basic

  $ 0.16     $ 0.11     $ 0.31     $ 0.62  

Diluted

  $ 0.16     $ 0.11     $ 0.30     $ 0.59  
                                 
WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:                                

Basic

    9,369,923       9,227,912       9,355,776       9,216,216  

Diluted

    9,628,069       9,578,797       9,702,610       9,682,646  

CASH DIVIDENDS DECLARED PER COMMON SHARE

  $ 0.07     $ 0.07     $ 0.21     $ 0.21  

 

 

See notes to consolidated financial statements.

 

 

4

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022

   

Three Months Ended May 31,

   

Nine Months Ended May 31,

 
   

2023

   

2022

   

2023

   

2022

 

NET INCOME

  $ 1,703,005     $ 1,210,763     $ 3,330,504     $ 6,228,581  

OTHER COMPREHENSIVE INCOME (LOSS) – FOREIGN CURRENCY TRANSLATION ADJUSTMENT

    (92,228 )     (1,554,024 )     388,568       (1,936,793 )

COMPREHENSIVE INCOME (LOSS)

    1,610,777       (343,261 )     3,719,072       4,291,788  

COMPREHENSIVE LOSS ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

    (190,118 )     (181,283 )     (440,301 )     (473,385 )

COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO NTIC

  $ 1,800,895     $ (161,978 )   $ 4,159,373     $ 4,765,173  

 

See notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

5

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2023 AND 2022

   

STOCKHOLDERS EQUITY THREE MONTHS ENDED MAY 31, 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 FEBRUARY 28, 2023

    9,366,357     $ 187,327     $ 21,058,721     $ 50,792,813     $ (6,774,510 )   $ 3,443,643     $ 68,707,994  

Stock issued for employee stock purchase plan

    3,566       71       36,697                         36,768  

Stock option expense

                331,303                         331,303  

Dividends paid to stockholders

                      (655,894 )                 (655,894 )

Dividend received by non-controlling interest

                                  (100,000 )     (100,000 )

Net income

                      1,525,596             177,409       1,703,005  

Other comprehensive income (loss)

                            (104,937 )     12,709       (92,228 )

BALANCE AT MAY 31, 2023

    9,369,923     $ 187,398     $ 21,426,721     $ 51,662,515     $ (6,879,447 )   $ 3,533,761     $ 69,930,948  
                                                         

BALANCE AT FEBRUARY 28, 2022

    9,221,517     $ 184,430     $ 19,379,032     $ 50,361,068     $ (3,858,689 )   $ 3,371,928     $ 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             210,594       1,210,763  

Other comprehensive loss

                            (1,524,711 )     (29,311 )     (1,554,022 )

BALANCE AT MAY 31, 2022

    9,232,483     $ 184,650     $ 19,706,248     $ 50,714,961     $ (5,383,400 )   $ 3,453,211     $ 68,675,670  

 

 

     

STOCKHOLDERS’ EQUITY NINE MONTHS ENDED MAY 31, 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, 2022

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

Stock issued for employee stock purchase plan

      7,186       143       75,321                         75,464  

Stock options exercised

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

Stock option expense

                  998,311                         998,311  

Dividends paid to stockholders

                        (1,967,184 )                 (1,967,184 )

Dividend received by non-controlling interest

                                    (555,574 )     (555,574 )

Net income

                        2,913,086             417,418       3,330,504  

Other comprehensive income

                              365,685       22,883       388,568  

BALANCE AT MAY 31, 2023

      9,369,923     $ 187,398     $ 21,426,721     $ 51,662,515     $ (6,879,447 )   $ 3,533,761     $ 69,930,948  
                                                           

BALANCE AT AUGUST 31, 2021

      9,184,811     $ 183,696     $ 18,736,268     $ 46,973,092     $ (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

                        5,676,775             551,808       6,228,581  

Other comprehensive loss

                              (1,858,370 )     (78,421 )     (1,936,791 )

BALANCE AT MAY 31, 2022

      9,232,483     $ 184,650     $ 19,706,248     $ 50,714,961     $ (5,383,400 )   $ 3,453,211     $ 68,675,670  

 

See notes to consolidated financial statements.

6

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED MAY 31, 2023 AND 2022

   

Nine Months Ended May 31,

 
   

2023

   

2022

 
CASH FLOWS FROM OPERATING ACTIVITIES:                

Net income

  $ 3,330,504     $ 6,228,581  
Adjustments to reconcile net income to net cash provided by operating activities:                

Stock-based compensation

    998,311       698,649  

Depreciation expense

    766,091       722,443  

Amortization expense

    441,603       474,121  

Loss on disposal of assets

    (8,534 )      

Remeasurement gain on acquisition of equity method investee

          (3,951,550 )

Equity in income from joint ventures

    (3,664,793 )     (3,662,178 )

Dividends received from joint ventures

    3,510,716       5,723,176  

Deferred income taxes

    (76,114 )     152,372  
Changes in current assets and liabilities:                
Receivables:                

Trade, excluding joint ventures

    (1,502,567 )     (1,348,254 )

Trade, joint ventures

    29,014       (232,364 )

Fees for services provided to joint ventures

    539,107       261,913  

Income taxes

    (155,828 )     (134,942 )

Inventories

    2,254,758       (2,093,668 )

Prepaid expenses and other

    184,516       (635,478 )

Accounts payable

    (2,902,121 )     908,605  

Income tax payable

    (29,401 )     (420,529 )

Accrued liabilities

    (209,459 )     (912,803 )

Net cash provided by operating activities

    3,505,803       1,778,094  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                

Acquisition of Zerust India business, net of cash acquired

          (5,062,003 )

Purchase of available for sale securities

          (941 )

Proceeds from the sale of available for sale securities

    5,590        

Investment in joint venture

          (341,392 )

Purchases of property and equipment

    (2,607,988 )     (961,704 )

Proceeds from the sale of property and equipment

    13,000        

Investments in patents

    (89,350 )     (164,994 )

Net cash used in investing activities

    (2,678,748 )     (6,531,034 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                

Dividend received by non-controlling interest

    (555,574 )     (402,729 )
Repayments on the line of credit     (700,000 )      

Proceeds from line of credit

          4,700,000  
Proceeds from term loan     2,812,504        

Dividends paid on NTIC common stock

    (1,967,184 )     (1,934,906 )

Proceeds from the exercise of stock options

    416,563       198,640  

Proceeds from employee stock purchase plan

    75,464       73,645  

Net cash provided by financing activities

    81,773       2,634,650  
                 

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

    (47,524 )     560,918  
                 
                 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    861,304       (1,557,372 )

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    5,333,890       7,680,641  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 6,195,194     $ 6,123,269  

 

See notes to consolidated financial statements.

 

7

 

 

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, 2023 and August 31, 2022, the results of the Company’s operations and other comprehensive income for the three and nine months ended May 31, 2023 and 2022, the changes in stockholders’ equity for the three and nine months ended May 31, 2023 and 2022, and the Company’s cash flows for the nine months ended May 31, 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 nine months ended May 31, 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.

 

 

3.

INVENTORIES

 

Inventories consisted of the following:

 

   

May 31, 2023

   

August 31, 2022

 

Production materials

  $ 4,723,520     $ 6,496,656  

Finished goods

    9,177,292       9,845,073  
    $ 13,900,812     $ 16,341,729  

 

8

 

 

4.

PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

   

May 31, 2023

   

August 31, 2022

 

Land

  $ 496,965     $ 310,365  

Buildings and improvements

    16,733,247       14,778,759  

Machinery and equipment

    5,960,024       5,643,320  
      23,190,236       20,732,444  

Less accumulated depreciation

    (9,379,306 )     (8,561,951 )
    $ 13,810,930     $ 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 $277,253 and $766,091 for the three and nine months ended May 31, 2023, respectively, compared to $291,452 and $722,443 for the three and nine months ended May 31, 2022, respectively.

 

 

5.

INTANGIBLE ASSETS, NET

 

Intangible assets, net consisted of the following:

 

   

As of May 31, 2023

 
   

Gross Carrying
Amount

   

Accumulated
Amortization

   

Net Carrying
Amount

 

Patents and trademarks

  $ 3,315,005     $ (2,639,897 )   $ 675,108  

Customer relationships

    6,347,000       (740,483 )     5,606,517  

Total intangible assets, net

  $ 9,662,005     $ (3,380,380 )   $ 6,281,625  

 

   

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  

 

Amortization expense related to intangible assets was $146,730 and $441,603 for the three and nine months ended May 31, 2023, respectively, compared to $158,490 and $474,121 for the three and nine months ended May 31, 2022, respectively.

 

As of May 31, 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

  $ 167,471    

Fiscal 2024

    589,746    

Fiscal 2025

    589,746    

Fiscal 2026

    589,746    

Fiscal 2027

    589,746    

Thereafter

    3,755,170    

Total

  $ 6,281,625    

 

9

 

 

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 May 31, 2023

 
   

Total

   

EXCOR

   

All Other

 

Current assets

  $ 55,424,661     $ 26,845,344     $ 28,579,317  

Total assets

    59,769,982       28,974,034       30,795,948  

Current liabilities

    13,229,032       3,008,256       10,220,776  

Noncurrent liabilities

    300,142       -       300,142  

Joint ventures’ equity

    46,240,808       25,965,777       20,275,031  

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

    22,855,448       12,982,891       9,872,553  

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

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

 

   

Three Months Ended May 31, 2023

 
   

Total

   

EXCOR

   

All Other

 

Net sales

  $ 26,312,548     $ 10,735,862     $ 15,576,686  

Gross profit

    10,494,244       5,085,837       5,408,407  

Net income

    2,692,444       1,654,151       1,038,293  

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

    1,346,658       828,631       518,027  

Northern Technologies International Corporation’s dividends received from joint ventures

    45,977             45,977  

 

   

Nine Months Ended May 31, 2023

 
   

Total

   

EXCOR

   

All Other

 

Net sales

  $ 76,525,427     $ 30,590,265     $ 45,935,162  

Gross profit

    30,223,623       14,539,314       15,684,309  

Net income

    7,308,398       4,761,608       2,546,790  

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

    3,664,793       2,376,575       1,288,218  

Northern Technologies International Corporation’s dividends received from joint ventures

    3,510,716       2,459,500       1,051,216  

 

   

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  

 

10

 

   

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  

 

 

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 $5,200,000 under the new Credit Agreement were outstanding May 31, 2023. Borrowings of $5,900,000 were outstanding as of August 31, 2022 under the previous credit agreement.

 

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.

 

11

 

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.

 

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.

 

In accordance with ASC Topic No. 470, “Debt – Modifications and Extinguishments” (Topic 470), the transactions noted above were determined to be a modification of the existing debt.

 

On each of April 10, 2023 and May 30, 2023, the Company’s wholly-owned subsidiary in China, NTIC China, entered into a loan agreement with China Construction Bank Corporation.  Each term loan provided NTIC China with a RMB 10,000,000 (USD $1.45 million). Each of the term loans matures after one year with the principal due at that time, after which an extension of the loan agreement is required. Both term loans have an annual interest rate of 3.25% with interest due monthly. Both term loans are secured by an office building owned by NTIC China and the loan agreements contain certain financial and other covenants.  The Company was in compliance with the covenants as of May 31, 2023. The current outstanding balance as of May 31, 2023 for both term loans was USD $2,812,504.

 

 

8.

STOCKHOLDERS EQUITY

 

During the nine months ended May 31, 2023, 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, 2022

 

$0.07

 

November 3, 2022

 

November 16, 2022

January 20, 2023

 

$0.07

 

February 1, 2023

 

February 15, 2023

April 21, 2023

 

$0.07

 

May 3, 2023

 

May 17, 2023

 

12

 

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

 

During the nine months ended May 31, 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 Company issued 3,566 and 2,966 shares of common stock on March 1, 2023 and 2022, respectively, under the ESPP. The ESPP is compensatory for financial reporting purposes. As of May 31, 2023,62,034 shares of common stock remained available for sale under the ESPP.

 

 

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 nine months ended May 31, 2023 and 2022:

 

   

Three Months Ended May 31,

   

Nine Months Ended May 31,

 

Numerator:

 

2023

   

2022

   

2023

   

2022

 

Net income attributable to NTIC

  $ 1,525,596     $ 1,000,167     $ 2,913,086     $ 5,676,773  

Denominator:

                               

Basic – weighted shares outstanding

    9,369,923       9,227,912       9,355,776       9,216,216  

Weighted shares assumed upon exercise of stock options

    258,146       350,885       346,834       466,430  

Diluted – weighted shares outstanding

    9,628,069       9,578,797       9,702,610       9,682,646  

Basic net income per share:

  $ 0.16     $ 0.11     $ 0.31     $ 0.62  

Diluted net income per share:

  $ 0.16     $ 0.11     $ 0.30     $ 0.59  

 

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, 2023 were options outstanding to purchase 322,246 shares of common stock. 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.

 

13

 

 

 

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 May 31, 2023

    1,644,009     $ 10.88  
Exercisable as of May 31, 2023     1,166,772     $ 10.51  

 

The weighted average per share fair value of options granted during the nine months ended May 31, 2023 and 2022 was $4.87 and $7.29, respectively. The weighted average remaining contractual life of the options outstanding as of May 31, 2023 and 2022 was 6.16 years and 6.02 years, respectively.

 

The Company recognized compensation expense of $339,423 and $998,311 and $232,883 and $698,649 during the three and nine months ended May 31, 2023 and 2022, respectively. As of May 31, 2023, there was $1,366,860 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 nine months ended May 31, 2023 and 2022 by segment:

 

   

Three Months Ended May 31,

   

Nine Months Ended May 31,

 
   

2023

   

2022

   

2023

   

2022

 

ZERUST® net sales

  $ 16,100,674     $ 14,446,832     $ 45,929,422     $ 41,988,394  

Natur-Tec® net sales

    4,869,052       4,518,089       13,263,895       11,918,579  

Total net sales

  $ 20,969,726     $ 18,964,921     $ 59,193,317     $ 53,906,973  

 

 

 

14

 

The following table sets forth the Company’s cost of goods sold for the three and nine months ended May 31, 2023 and 2022 by segment:

 

   

Three Months Ended May 31,

   

Nine Months Ended May 31,

 
   

2023

   

% of
Product
Sales*

   

2022

   

% of
Product
Sales*

   

2023

   

% of
Product
Sales*

   

2022

   

% of
Product
Sales*

 
Direct cost of goods sold                                                                

ZERUST®

  $ 9,116,091       56.6 %   $ 8,409,392       58.2 %   $ 26,410,796       57.5 %   $ 25,267,333       60.2 %

Natur-Tec®

    3,576,676       73.5 %     3,432,152       76.0 %     10,078,385       76.0 %     9,129,686       76.6 %

Indirect cost of goods sold

    587,817             881,289             2,258,684             2,580,601        

Total net cost of goods sold

  $ 13,280,584             $ 12,722,833             $ 38,747,865             $ 36,977,620          

______________________

*

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, 2023 and 2022 were as follows:

 

   

Three Months Ended May 31,

   

Nine Months Ended May 31,

 
   

2023

   

2022

   

2023

   

2022

 

Inside the U.S.A. to unaffiliated customers

  $ 7,729,820     $ 6,884,726     $ 21,958,978     $ 18,157,010  
Outside the U.S.A. to:                                

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

    732,437       528,665       2,895,665       2,252,618  

Unaffiliated customers

    12,507,469       11,551,530       34,338,674       33,497,345  
    $ 20,969,726     $ 18,964,921     $ 59,193,317     $ 53,906,973  

 

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, 2023 and 2022 were as follows:

 

   

Three Months Ended May 31,

 
   

2023

   

% of Total
Fees for
Services
Provided to
Joint Ventures

   

2022

   

% of Total
Fees for
Services
Provided to
Joint Ventures

 

Poland

  $ 224,288       16.5 %   $ 171,181       12.9 %

Germany

    209,398       15.4 %     204,316       15.4 %

Japan

    152,593       11.2 %     168,075       12.6 %

Sweden

    144,981       10.7 %     130,681       9.8 %

France

    128,149       9.4 %     123,869       9.3 %

Finland

    103,879       7.6 %     92,036       6.9 %

Czech Republic

    99,090       7.3 %     84,797       6.4 %

Thailand

    82,725       6.1 %     95,574       7.2 %

United Kingdom

    83,586       6.1 %     89,363       6.7 %

South Korea

    61,669       4.5 %     78,542       5.9 %

Other

    70,953       5.2 %     91,554       6.9 %
    $ 1,361,311       100.0 %   $ 1,329,988       100.0 %

 

 

15

 

 

   

Nine Months Ended May 31,

 
   

2023

   

% of Total
Fees for
Services
Provided to
Joint Ventures

   

2022

   

% of Total
Fees for
Services
Provided to
Joint Ventures

 

Poland

  $ 610,911       16.1 %   $ 520,807       13.6 %

Germany

    606,189       16.0 %     639,738