Northern Technologies International (NTIC) - 2022 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the quarter ended November 30, 2021, detailing the impact of the Zerust India acquisition Consolidated Balance Sheets Total assets increased to $83.2 million driven by the Zerust India acquisition, with total equity rising to $69.6 million Consolidated Balance Sheet Highlights (as of Nov 30, 2021 vs. Aug 31, 2021) | Account | November 30, 2021 | August 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $37,265,090 | $33,747,089 | | Total Assets | $83,244,745 | $74,370,879 | | Total Current Liabilities | $11,389,728 | $8,516,196 | | Total Liabilities | $13,613,901 | $8,620,298 | | Total Equity | $69,630,844 | $65,750,581 | - The acquisition of Zerust India resulted in the recognition of $4.8 million in Goodwill and $6.3 million in a net Intangible asset, which were not present on the August 31, 2021 balance sheet[13] Consolidated Statements of Operations Net sales grew 42.4% to $18.2 million, while a $4.0 million remeasurement gain from the Zerust India acquisition significantly boosted net income to $4.5 million Consolidated Statement of Operations (Three Months Ended Nov 30) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Net Sales | $18,193,413 | $12,779,112 | 42.4% | | Gross Profit | $5,702,930 | $4,465,791 | 27.7% | | Operating Income | $1,266,611 | $1,716,577 | -26.2% | | Remeasurement Gain on Acquisition | $3,951,550 | $0 | N/A | | Net Income Attributable to NTIC | $4,493,759 | $1,262,399 | 256.0% | | Diluted EPS | $0.46 | $0.13 | 253.8% | Consolidated Statements of Cash Flows Operating cash flow increased to $3.3 million, while investing activities used $5.4 million primarily for the Zerust India acquisition Cash Flow Summary (Three Months Ended Nov 30) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $3,319,024 | $1,601,120 | | Net cash used in investing activities | ($5,429,590) | ($1,177,869) | | Net cash provided by financing activities | $1,834,611 | $36,192 | | Net increase in cash and cash equivalents | $366,924 | $550,309 | Notes to Consolidated Financial Statements Key notes detail the Zerust India acquisition's $4.0 million gain, segment sales growth, and the revolving credit facility extension - The company acquired the remaining 50% ownership of its Indian joint venture, Harita-NTI Limited (Zerust India), for $6.25 million in cash, effective September 1, 2021. As a result, Zerust India is now a consolidated subsidiary[27] - A gain of $3,951,550 was recognized from remeasuring the previously held 50% equity interest in Zerust India to its fair value upon acquisition[35] - On January 4, 2022, the company extended its revolving line of credit with PNC Bank to January 7, 2023. The credit limit will be decreased from $5.0 million to $3.0 million beginning February 23, 2022[75] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 42.4% net sales increase, segment performance, gross margin pressures, and the impact of the Zerust India acquisition on net income Business Overview and Recent Acquisition NTIC's core business segments are ZERUST® and Natur-Tec®, with the recent $6.25 million acquisition of Zerust India enhancing its market position - The company's primary business is corrosion prevention (ZERUST®), with a secondary focus on bio-based and compostable plastics (Natur-Tec®)[78] - The acquisition of the remaining 50% of Zerust India was completed for $6.25 million, funded by cash and borrowings. Zerust India is now a consolidated subsidiary[86][87][88] - The acquisition added $2,452,812 in net sales and $292,528 in net income for the quarter and resulted in a one-time gain of $3,951,550 from remeasuring the previously held equity interest[89][90] Results of Operations Consolidated net sales increased 42.4% to $18.2 million, driven by segment growth, though gross margin declined due to higher costs, and equity income decreased due to the Zerust India consolidation Net Sales by Segment (Q1 FY2022 vs Q1 FY2021) | Segment | Q1 FY2022 | Q1 FY2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total ZERUST® sales | $14,423,785 | $10,220,551 | $4,203,234 | 41.1% | | Total Natur-Tec® sales | $3,769,628 | $2,558,561 | $1,211,067 | 47.3% | | Total net sales | $18,193,413 | $12,779,112 | $5,414,301 | 42.4% | - Cost of goods sold as a percentage of net sales increased to 68.7% from 65.1% in the prior year, primarily due to price increases on raw materials and higher labor costs[118] - Equity in income from joint ventures decreased by 24.7% to $1.4 million, mainly because Zerust India is now a consolidated subsidiary and its income is no longer accounted for under the equity method[119] - Total operating expenses increased by 19.6% to $7.1 million, driven by incremental expenses from the Zerust India acquisition and increased personnel and travel costs[110] Liquidity and Capital Resources Working capital stood at $25.9 million with $8.0 million in cash, and the company utilized $2.5 million of its revolving credit facility - Working capital was $25.9 million as of November 30, 2021, with cash and cash equivalents of $8.0 million[132] - The company has a revolving line of credit with PNC Bank, which was increased to $5.0 million. As of November 30, 2021, $2.5 million was outstanding[133] - A cash dividend of $0.07 per share was paid on November 17, 2021. The company had previously suspended its dividend in April 2020 before reinstating it in January 2021[147] - No shares were repurchased during the quarter. $2,640,548 remains available for repurchase under the authorized plan[146] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include unhedged foreign currency exposure, commodity price fluctuations, and variable interest rates on its credit facility - The company is exposed to foreign currency exchange rate risk, with principal exposures to the Euro, Japanese Yen, Indian Rupee, Chinese Renminbi, South Korean Won, and English Pound[168] - NTIC does not hedge against its foreign currency exchange rate risk[168] - The company is exposed to commodity price changes, primarily for a variety of plastic resins[169] - Interest rate risk exists due to borrowings on the revolving line of credit, which bear interest at a variable rate (daily LIBOR plus 2.50%)[169] Controls and Procedures Management concluded that disclosure controls were effective, with no material changes to internal controls except for the integration of Zerust India - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[170] - No material changes were made to internal control over financial reporting, except for changes to begin integrating Zerust India's internal controls[171] PART II—OTHER INFORMATION Legal Proceedings The company is involved in routine legal actions, with management assessing no material impact on financial results - The company is subject to various claims and legal actions in the ordinary course of business[70] - Management believes that any potential liability from these legal matters will not have a material impact on the company's financial condition[70] Risk Factors This section is inapplicable as the company qualifies as a smaller reporting company - This item is inapplicable as the company is a smaller reporting company[174] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were issued, and no shares were repurchased under the stock repurchase program during the quarter - No unregistered sales of equity securities occurred during the three months ended November 30, 2021[175] - The company did not repurchase any of its shares during the quarter[177] - As of November 30, 2021, up to $2,640,548 remained available for repurchase under the company's stock repurchase program[180] Other Information A revision to the Zerust India acquisition's preliminary purchase price allocation was disclosed, impacting goodwill, deferred tax liability, and intangible assets - The preliminary purchase price allocation for the Zerust India acquisition was revised after the Q1 fiscal 2022 earnings release[181] - The revision resulted in a $913,000 increase in goodwill, a $774,000 increase in deferred tax liability, and a $139,000 decrease in intangible assets compared to the figures in the earnings release[181] Exhibits This section lists filed exhibits, including loan agreements, CEO/CFO certifications, and Inline XBRL financial statements - Exhibits filed include the Amended and Restated Loan Agreement with PNC Bank, CEO/CFO certifications (Rule 13a-14(a) and Section 906), and Inline XBRL data[183]