Northern Technologies International (NTIC) - 2024 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for Northern Technologies International Corporation Item 1. Financial Statements Presents NTIC's unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed notes for Q3 FY2024 Consolidated Balance Sheets Summarizes NTIC's financial position, detailing assets, liabilities, and equity as of May 31, 2024, and August 31, 2023 | Metric | May 31, 2024 ($) | August 31, 2023 ($) | | :---------------------- | :--------------- | :------------------ | | Total Current Assets | 37,903,269 | 39,671,556 | | Total Assets | 89,265,544 | 89,344,303 | | Total Current Liabilities | 14,794,433 | 16,721,372 | | Total Long-Term Liabilities | 1,897,636 | 1,924,134 | | Stockholders' Equity | 68,851,469 | 66,356,273 | Consolidated Statements of Operations Details NTIC's revenues, expenses, and net income for the three and nine months ended May 31, 2024 and 2023 Three Months Ended May 31: | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :---------------------- | :----------- | :----------- | :----------- | :--------- | | Net Sales | 20,686,197 | 20,969,726 | (283,529) | (1.4%) | | Gross Profit | 7,893,094 | 7,579,853 | 313,241 | 4.1% | | Operating Income | 1,523,917 | 1,906,586 | (382,669) | (20.1%) | | Net Income Attributable to NTIC | 976,604 | 1,059,590 | (82,986) | (7.8%) | | Diluted EPS | 0.10 | 0.11 | (0.01) | (9.1%) | Nine Months Ended May 31: | Metric | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :---------------------- | :----------- | :----------- | :----------- | :--------- | | Net Sales | 61,710,410 | 59,193,317 | 2,517,093 | 4.3% | | Gross Profit | 23,566,532 | 20,236,045 | 3,330,487 | 16.5% | | Operating Income | 5,106,621 | 3,549,718 | 1,556,903 | 43.9% | | Net Income Attributable to NTIC | 3,573,294 | 1,973,329 | 1,599,965 | 81.1% | | Diluted EPS | 0.36 | 0.20 | 0.16 | 80.0% | Consolidated Statements of Comprehensive Income Presents NTIC's net income and other comprehensive income components for the three and nine months ended May 31, 2024 and 2023 Three Months Ended May 31: | Metric | 2024 ($) | 2023 ($) | | :------------------------------------------ | :-------- | :-------- | | Net Income | 1,155,322 | 1,236,999 | | Other Comprehensive Income (Loss) – Foreign Currency Translation Adjustment | (251,995) | (92,228) | | Comprehensive Income | 903,327 | 1,144,771 | Nine Months Ended May 31: | Metric | 2024 ($) | 2023 ($) | | :------------------------------------------ | :-------- | :-------- | | Net Income | 4,108,791 | 2,390,747 | | Other Comprehensive Income (Loss) – Foreign Currency Translation Adjustment | (296,281) | 388,568 | | Comprehensive Income | 3,812,510 | 2,779,315 | Consolidated Statements of Equity Outlines changes in NTIC's stockholders' equity, including net income, dividends, and other adjustments, for the nine months ended May 31, 2024 Equity Changes (Nine Months Ended May 31, 2024): | Metric | Amount ($) | | :-------------------------------------- | :---------- | | Balance at August 31, 2023 | 70,698,797 | | Stock issued for ESPP | 79,967 | | Stock options exercised | 0 | | Stock option expense | 1,038,022 | | Dividends paid to stockholders | (1,980,745) | | Dividend received by non-controlling interest | (1,075,076) | | Net income | 4,108,791 | | Other comprehensive income | (296,281) | | Balance at May 31, 2024 | 72,573,475 | Consolidated Statements of Cash Flows Reports NTIC's cash inflows and outflows from operating, investing, and financing activities for the nine months ended May 31, 2024 and 2023 Nine Months Ended May 31: | Cash Flow Activity | 2024 ($) | 2023 ($) | | :---------------------- | :---------- | :---------- | | Operating Activities | 7,583,905 | 3,505,803 | | Investing Activities | (2,601,176) | (2,678,748) | | Financing Activities | (4,587,474) | 81,773 | | Effect of Exchange Rate Changes | (6,604) | (47,524) | | Net Increase in Cash | 388,651 | 861,304 | | Cash at End of Period | 5,794,824 | 6,195,194 | Notes to Consolidated Financial Statements Provides detailed explanations of NTIC's accounting policies, financial instruments, and segment information supporting the financial statements - The Company adopted ASU No. 2016-13 (CECL model) on September 1, 2023, which did not have a material impact on its financial position or operating results[45] Inventories (as of May 31, 2024 vs. August 31, 2023): | Category | May 31, 2024 ($) | August 31, 2023 ($) | | :----------------- | :--------------- | :------------------ | | Production materials | 4,887,783 | 4,960,355 | | Finished goods | 8,354,598 | 8,136,134 | | Total | 13,242,381 | 13,096,489 | Intangible Assets, Net (as of May 31, 2024 vs. August 31, 2023): | Category | May 31, 2024 Net ($) | August 31, 2023 Net ($) | | :--------------------- | :------------------- | :---------------------- | | Patents and trademarks | 619,055 | 658,752 | | Customer relationships | 5,183,383 | 5,500,733 | | Total | 5,802,438 | 6,159,485 | Amortization expense for intangible assets was $147,749 (three months) and $442,975 (nine months) ended May 31, 2024[10] - NTIC's revolving line of credit with JPMorgan Chase Bank, N.A. was renewed to extend the maturity date to January 6, 2025[13][14] - Outstanding borrowings were $1,988,380 as of May 31, 2024, and the Company was in compliance with all covenants[18] - NTIC China has two term loans with China Construction Bank Corporation, totaling $2,762,049 as of May 31, 2024, with an annual interest rate of 3.25%[49] Net Income Attributable to NTIC Per Common Share (Diluted): | Period | 2024 ($) | 2023 ($) | | :---------------------- | :------- | :------- | | Three Months Ended May 31 | 0.10 | 0.11 | | Nine Months Ended May 31 | 0.36 | 0.20 | Net Sales by Segment (Nine Months Ended May 31): | Segment | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :----------- | :----------- | :----------- | :----------- | :--------- | | ZERUST® | 45,461,075 | 45,929,422 | (468,347) | (1.0%) | | Natur-Tec® | 16,249,335 | 13,263,895 | 2,985,440 | 22.5% | | Total | 61,710,410 | 59,193,317 | 2,517,093 | 4.3% | - Two joint ventures (Korea and Thailand) accounted for 54.8% of the Company's trade joint venture receivables as of May 31, 2024[100] - Income tax expense for the nine months ended May 31, 2024, was $848,391, largely due to foreign operations, with the Company recording a full valuation allowance against U.S. deferred tax assets[80] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes NTIC's financial condition, operating results, liquidity, and capital resources for Q3 FY2024, including segment performance and risks Business Overview Introduces NTIC's core businesses, ZERUST® corrosion prevention and Natur-Tec® bio-based polymer resins, and strategic initiatives - NTIC develops and markets proprietary, environmentally beneficial products and services in over 65 countries, primarily under the ZERUST® brand for corrosion prevention and Natur-Tec® for bio-based and compostable polymer resins[136] - A strategic initiative is to expand ZERUST® corrosion prevention technologies into the oil and gas industry, aiming to minimize maintenance downtime and extend infrastructure life[137] - Natur-Tec® products, including biopolymer resin compounds and finished products, are designed to replace petroleum-based plastics and are certified fully biodegradable in commercial composting environments[138] Financial Overview Summarizes NTIC's key financial performance, including sales trends, operating expenses, and profitability for Q3 FY2024 - Consolidated net sales decreased 1.4% for the three months ended May 31, 2024, but increased 4.3% for the nine months, driven by increased Natur-Tec® sales partially offset by decreased ZERUST® demand[85] - Total operating expenses increased 7.1% and 7.3% for the three and nine months, respectively, primarily due to increased personnel expenses, benefits, and travel[86] - Cost of goods sold as a percentage of net sales decreased to 61.8% for both periods, primarily due to lower raw material prices and insourcing of finished goods production[140] Net Income Attributable to NTIC (Diluted EPS): | Period | 2024 ($) | 2023 ($) | | :---------------------- | :------- | :------- | | Three Months Ended May 31 | 0.10 | 0.11 | | Nine Months Ended May 31 | 0.36 | 0.20 | Results of Operations Details NTIC's financial performance by segment, analyzing sales, expenses, and joint venture contributions for Q3 FY2024 Net Sales by Product Segment (Three Months Ended May 31): | Segment | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :----------- | :----------- | :----------- | :----------- | :--------- | | ZERUST® | 14,837,235 | 16,100,674 | (1,263,439) | (7.8%) | | Natur-Tec® | 5,848,962 | 4,869,052 | 979,910 | 20.1% | | Total | 20,686,197 | 20,969,726 | (283,529) | (1.4%) | Net Sales by Product Segment (Nine Months Ended May 31): | Segment | 2024 ($) | 2023 ($) | Change ($) | Change (%) | | :----------- | :----------- | :----------- | :----------- | :--------- | | ZERUST® | 45,461,075 | 45,929,422 | (468,347) | (1.0%) | | Natur-Tec® | 16,249,335 | 13,263,895 | 2,985,440 | 22.5% | | Total | 61,710,410 | 59,193,317 | 2,517,093 | 4.3% | - ZERUST® net sales decreased due to lower demand in North American industrial and oil & gas sectors[114][143] - Natur-Tec® sales increased significantly due to increased global demand[115][144] - Equity in income from joint ventures increased 3.7% (three months) and 0.3% (nine months), driven by profitability efforts, despite a decrease in net income from the German joint venture (EXCOR) due to customer loss and softer regional demand[146] - Fees for services provided to joint ventures decreased 10.9% (three months) and 0.8% (nine months), primarily due to decreased net sales at the German joint venture[117] - Selling expenses increased 8.7% and 9.6% for the three and nine months, respectively, mainly due to higher personnel expenses[147] - General and administrative expenses rose 9.2% and 8.3% due to increased professional services, travel, and personnel costs[118] - Interest income increased significantly due to changes in invested cash balances at subsidiaries, while interest expense decreased due to lower outstanding borrowings[119][120] Liquidity and Capital Resources Assesses NTIC's working capital, cash flows, funding strategies, and capital expenditures for the nine months ended May 31, 2024 - Working capital was $23,178,836 as of May 31, 2024, up from $22,950,184 as of August 31, 2023, with cash and cash equivalents at $5,794,824[124] - NTIC plans to fund operations, investments, capital expenditures, and debt repayments through existing cash, forecasted cash flows, JV distributions, and fees[153] - Future investments include Zerust India, NTIC China, NTI Europe, R&D, oil & gas technology, and Natur-Tec® bio-plastics[153] - Net cash provided by operating activities for the nine months ended May 31, 2024, was $7,583,904, primarily from net income, JV dividends, and non-cash adjustments[158] - Trade receivables, excluding joint ventures, decreased by $1,270,274, with average days outstanding decreasing from 71 to 66 days[177] - Trade receivables from joint ventures increased by $416,419, with average days outstanding increasing from 34 to 127 days, mainly due to balances at Thailand and South Korea[178] - NTIC's Board declared cash dividends of $0.07 per common share for each of the three quarters ended May 31, 2024, totaling $0.21 per share for the nine-month period[180] - No shares were repurchased under the stock repurchase program during the nine months ended May 31, 2024, with $2,640,548 remaining available for repurchase[161] - Capital expenditures for the nine months ended May 31, 2024, were $2,515,248, primarily for facility improvements and a new ERP software system[182] - Expected fiscal 2024 capital expenditures range from $600,000 to $1,100,000[182] Inflation and Seasonality Discusses the impact of inflationary pressures on gross margins and the seasonal nature of NTIC's business operations - Inflationary pressures adversely affected gross margins in Q3 fiscal 2024[163] - The business experiences seasonality, with Q2 typically impacted by Chinese New Year, North American holidays, and lower winter temperatures reducing corrosion[163] Market Risk Identifies NTIC's exposure to foreign currency, commodity price, and interest rate risks, and the company's approach to them - NTIC is exposed to foreign currency exchange rate risk (Euro, Yen, Rupee, Renminbi, Won, Pound vs. USD) for JV fees and dividends, but does not hedge this risk[165][183] - Commodity price risk exists for plastic and bioplastic resins[184] - Interest rate risk applies to floating-rate debt under the JPM Credit Facility and fixed-rate term loans for NTIC China[166] Critical Accounting Policies and Estimates Confirms no material changes to NTIC's critical accounting policies and estimates since the prior fiscal year-end report - There have been no material changes to NTIC's critical accounting policies and estimates from those reported in the annual report on Form 10-K for the fiscal year ended August 31, 2023[167] Recent Accounting Pronouncements Refers to Note 2 of the consolidated financial statements for details on recently adopted accounting pronouncements - Refer to Note 2 of the consolidated financial statements for a discussion of recently adopted accounting pronouncements[168] Forward-Looking Statements Highlights various uncertainties and factors that could impact NTIC's future performance, including market and operational risks - The report contains forward-looking statements subject to various uncertainties and factors, including the impact of COVID-19, ongoing wars (Russia-Ukraine, Israel-Hamas), China operations, variability in ZERUST® oil & gas and Natur-Tec® sales, dependence on joint ventures, market acceptance, competition, raw material costs, and the implementation of a new ERP system[170][171][186][187][188][203][204] Item 3. Quantitative and Qualitative Disclosures About Market Risk Details NTIC's exposure to foreign currency, commodity price, and interest rate risks, noting the company does not hedge currency risk - NTIC's primary exchange rate exposure is with the Euro, Japanese Yen, Indian Rupee, Chinese Renminbi, South Korean Won, and English Pound against the U.S. Dollar, affecting fees and dividend distributions from foreign entities[174][183] - Commodity price exposure primarily relates to plastic and bioplastic resins used in NTIC's products[190] - Interest rate risk stems from the floating rate on the JPMorgan Chase Credit Facility ($1,988,380 outstanding as of May 31, 2024) and fixed-rate term loans for NTIC China (USD $2,762,049 outstanding at 3.25% annual interest)[207] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in ERC accounting, with remediation efforts underway - NTIC's disclosure controls and procedures were deemed not effective as of May 31, 2024, due to a material weakness in internal control over financial reporting[208] - The material weakness relates to ineffective controls over the probability assessment for recognizing income from Employee Retention Credits (ERCs), leading to a restatement of prior financial statements[209][210] - Management is remediating the material weakness by preparing technical accounting memorandums for material unusual transactions and carefully evaluating probability assessments[211] - Other than the remediation steps for the ERCs, there were no other changes in internal control over financial reporting during the quarter ended May 31, 2024, that materially affected or are reasonably likely to materially affect NTIC's internal control over financial reporting[212] PART II—OTHER INFORMATION Presents additional information not covered in the financial statements, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings Refers to Note 12 for legal proceedings, with management believing any liabilities will not materially impact financial results - Refer to Note 12 of the consolidated financial statements for details on legal proceedings[101][213] - Management believes that any liability from these matters will not materially affect the Company's consolidated results of operations, financial position, or cash flows[101][213] Item 1A. Risk Factors Discloses a new risk factor regarding the implementation of a new ERP system, citing potential disruptions and unexpected costs - A new risk factor has been disclosed regarding the installation of a new Enterprise Resource Planning (ERP) software system, which could cause business disruption, be more costly or time-consuming than expected, and may not yield anticipated benefits[214] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered equity sales or stock repurchases during Q3 FY2024, with $2,640,548 remaining for repurchases - NTIC did not issue any shares of common stock or other equity securities that were not registered under the Securities Act of 1933 during the three months ended May 31, 2024[215] - No shares were repurchased under NTIC's stock repurchase program during the three months ended May 31, 2024[216] - As of May 31, 2024, $2,640,548 remained available for repurchase[200][217] Item 3. Defaults Upon Senior Securities This item is not applicable to NTIC for the current reporting period - This item is not applicable[219] Item 4. Mine Safety Disclosures This item is not applicable to NTIC for the current reporting period - This item is not applicable[220] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q3 FY2024 - No directors or officers adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended May 31, 2024[221] Item 6. Exhibits Lists exhibits filed with the quarterly report, including CEO/CFO certifications and Inline XBRL financial data - Exhibits include certifications from the President and CEO (31.1, 32.1) and Chief Financial Officer (31.2, 32.2) as per SEC rules, and Inline XBRL formatted financial statements (101, 104)[201][222] SIGNATURES The report is signed by Matthew C. Wolsfeld, CPA, Chief Financial Officer, on behalf of NTIC - The report is signed by Matthew C. Wolsfeld, CPA, Chief Financial Officer, on July 11, 2024[224]