Northern Technologies International (NTIC) - 2022 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION Details the company's financial statements, management analysis, market risks, and internal controls Financial Statements Presents NTIC's unaudited consolidated financial statements as of May 31, 2022, covering balance sheets, operations, and cash flows Consolidated Balance Sheets Total assets increased to $85.2 million from $74.4 million, driven by inventories and intangibles, liabilities also rose Consolidated Balance Sheet Highlights (as of May 31, 2022 vs. August 31, 2021) | Balance Sheet Item | May 31, 2022 | August 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $6,123,269 | $7,680,641 | | Inventories | $13,866,229 | $11,114,207 | | Total current assets | $38,968,265 | $33,747,089 | | Goodwill | $4,782,376 | $0 | | Intangible asset, net | $6,029,650 | $0 | | Total assets | $85,185,397 | $74,370,879 | | Line of credit | $4,700,000 | $0 | | Total current liabilities | $14,241,487 | $8,516,196 | | Total liabilities | $16,509,727 | $8,620,298 | | Total equity | $68,675,670 | $65,750,581 | Consolidated Statements of Operations Nine-month net sales grew 31.5% to $53.9 million, net income reached $5.7 million due to a $3.95 million remeasurement gain Consolidated Statements of Operations Summary | Metric | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | | :--- | :--- | :--- | | Total net sales | $53,906,973 | $40,980,518 | | Gross profit | $16,929,353 | $13,982,936 | | Operating income | $3,534,770 | $6,063,068 | | Remeasurement gain on acquisition | $3,951,550 | $0 | | Net income attributable to NTIC | $5,676,773 | $4,628,890 | | Diluted EPS | $0.59 | $0.47 | Quarterly Performance (Three Months Ended May 31) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Total net sales | $18,964,921 | $15,418,524 | | Gross profit | $6,242,088 | $5,265,942 | | Operating income | $1,822,936 | $2,578,754 | | Net income attributable to NTIC | $1,000,167 | $2,053,916 | | Diluted EPS | $0.11 | $0.21 | Consolidated Statements of Cash Flows Nine-month operating cash flow was $1.8 million, investing used $6.5 million for Zerust India, resulting in a $1.6 million cash decrease Cash Flow Summary (Nine Months Ended May 31) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,778,094 | $1,053,695 | | Net cash used in investing activities | ($6,531,034) | ($399,780) | | Net cash provided by (used in) financing activities | $2,634,650 | ($1,309,609) | | Net decrease in cash | ($1,557,372) | ($522,109) | - The acquisition of the Zerust India business was the primary use of cash in investing activities, costing $5,062,003 net of cash acquired[23] - The company drew $4,700,000 from its line of credit, which was a major source of financing cash flow[23] Notes to Consolidated Financial Statements Notes detail accounting policies, COVID-19 impact, Zerust India acquisition gain, segment sales, and corporate debt - Business Combination: The company acquired the remaining 50% of its Indian joint venture, Zerust India, for $6.25 million in cash, effective September 1, 2021. This resulted in the recognition of $4.8 million in goodwill, $6.3 million in customer relationships, and a remeasurement gain of $3.95 million[31][34][39] - COVID-19 Impact: The company continued to be impacted by shipping issues, supply chain disruptions, longer lead times, and raw material cost increases during the first nine months of fiscal 2022[27] Segment Net Sales (Nine Months Ended May 31) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | ZERUST® net sales | $41,988,394 | $32,882,882 | | Natur-Tec® net sales | $11,918,579 | $8,097,636 | | Total net sales | $53,906,973 | $40,980,518 | - Corporate Debt: The company has a revolving line of credit with PNC Bank, which was temporarily increased to $7.0 million. As of May 31, 2022, $4.7 million was outstanding, primarily used to fund the Zerust India acquisition[51][53] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and nine-month fiscal 2022 performance, covering business overview, financial highlights, results, and liquidity Business Overview NTIC operates in ZERUST® corrosion prevention and Natur-Tec® bio-based polymer products, serving industrial and environmental markets - The company's primary business is corrosion prevention, marketed mainly under the ZERUST® brand, with a history of over 45 years[81] - A key strategic initiative is the expansion of ZERUST® corrosion prevention technologies into the oil and gas industry[84] - The Natur-Tec® brand offers a portfolio of bio-based and certified compostable polymer resins and finished products intended to replace conventional plastics[81][87] Financial Overview and Highlights Nine-month consolidated net sales grew 31.5%, driven by Zerust India acquisition, with net income boosted by a $3.95 million gain - Consolidated net sales increased 31.5% for the nine months ended May 31, 2022, positively affected by the Zerust India acquisition and increased demand[102] - Equity in income from joint ventures decreased by 36.6% for the nine-month period, primarily because Zerust India is now a consolidated subsidiary and due to lower gross margins at other joint ventures[102] - Net income for the nine-month period included a $3,951,550 gain from the remeasurement of the previously held equity interest in Zerust India[106] Results of Operations Nine-month net sales rose 31.5% to $53.9 million, COGS increased to 68.6%, and equity income from JVs decreased 36.6% Net Sales by Segment (Nine Months Ended May 31) | Segment | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Total ZERUST® sales | $41,988,394 | $32,882,882 | +27.7% | | Total Natur-Tec® sales | $11,918,579 | $8,097,636 | +47.2% | | Total net sales | $53,906,973 | $40,980,518 | +31.5% | - Cost of goods sold as a percentage of net sales increased to 68.6% for the nine-month period from 65.9% in the prior year, primarily due to price increases on raw materials, labor, and shipping[113] - Equity in income from joint ventures decreased 36.6% to $3.7 million for the nine-month period, mainly because Zerust India is no longer accounted for under the equity method post-acquisition[114] - Total operating expenses increased by 15.5% for the nine-month period, with the Zerust India acquisition contributing $1.7 million in incremental expenses[102] Liquidity and Capital Resources Working capital was $24.7 million, with $4.7 million outstanding on the credit line, temporarily increased to $7.0 million - Working capital was $24.7 million as of May 31, 2022, compared to $25.2 million as of August 31, 2021[129] - The company had $4.7 million outstanding on its revolving line of credit as of May 31, 2022, primarily used to fund the Zerust India acquisition. The line of credit was temporarily increased from $5.0 million to $7.0 million[130] - The company terminated its joint venture in Russia in May 2022, which is not expected to have a material adverse effect on financial results[132] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency, commodity prices, and interest rates, with key exposures to Euro, Yen, and plastic resins - 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 against the U.S. Dollar[151][165] - Commodity price exposure exists for raw materials, primarily various plastic resins[152][166] - Interest rate risk is present due to the variable rate on the revolving line of credit, which had an outstanding balance of $4,700,000 as of May 31, 2022[152][166] Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal controls beyond Zerust India integration - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[167] - No material changes were made to internal control over financial reporting during the quarter, except for changes to integrate the newly acquired Zerust India business[168] PART II—OTHER INFORMATION Covers legal proceedings, risk factors, equity sales, and other material information Legal Proceedings The company is involved in various legal actions, but management expects no material adverse effect on financial results - The company is subject to various claims and legal actions in the ordinary course of business, but management does not expect them to have a material impact on the company's financial condition[77][169] Risk Factors New risks include the Russia-Ukraine conflict, potentially impacting operations, macroeconomic conditions, and oil prices - The ongoing conflict between Russia and Ukraine is identified as a new risk factor that may adversely affect the company's business and results of operations[170] - The conflict could heighten other risks, including adverse macroeconomic conditions, increased cybersecurity threats, supply chain disruptions, and capital market volatility[171] - The sale of ZERUST® products to the oil and gas industry is dependent on oil prices, which may be impacted by the Russia-Ukraine conflict and could cause customers to halt projects or decrease capital budgets[172] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were issued or shares repurchased in Q3 fiscal 2022, with $2.64 million remaining for repurchase - No shares were repurchased during the third quarter of fiscal 2022[174][175] - As of May 31, 2022, $2,640,548 remained available for repurchase under the company's stock repurchase program[176] Other Information The company temporarily increased its revolving line of credit from $5.0 million to $7.0 million until August 16, 2022 - On May 20, 2022, the company's line of credit was temporarily increased from $5,000,000 to $7,000,000 until August 16, 2022[180] Exhibits This section lists filed exhibits, including CEO/CFO certifications, the amended credit note, and Inline XBRL financial statements - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and the Amended and Restated Revolving Line of Credit Note (10.2)[182]