Northern Technologies International (NTIC) - 2023 Q2 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements, detailing performance and financial position for the period - The financial statements are unaudited and prepared in conformity with U.S. GAAP, with operating results not necessarily indicative of the full fiscal year[26][28] - The Company is evaluating the impact of ASU No. 2016-13 on credit losses, effective for fiscal years beginning after December 15, 2022[29] - The Company purchased an adjacent property for $1.2 million for warehousing and light industrial production, increasing property and equipment[31] - Future amortization expense for intangible assets is estimated at $6,409,028, with $294,873 remaining for fiscal 2023 and $589,746 annually for fiscal 2024-2027[34] - The Company entered into a new $10.0 million senior secured revolving line of credit with JPMorgan Chase Bank, N.A., maturing January 6, 2024, replacing a previous agreement with PNC Bank[38][43] - Cash dividends of $0.07 per common share were declared on October 20, 2022, and January 20, 2023[44] - The Company's business is organized into two reportable segments: ZERUST® (corrosion prevention) and Natur-Tec® (bio-based and compostable polymer resins)[51] - Three joint ventures (South Korea, Sweden, and France) accounted for 68.1% of trade joint venture receivables as of February 28, 2023[58] - Income tax expense for the six months ended February 28, 2023, was $292,528, largely due to foreign operations, with a full valuation allowance against U.S. deferred tax assets[63] - Subsequent to the reporting period, NTIC China entered into a RMB 10,000,000 (USD $1.45 million) revolving line of credit with China Construction Bank Corporation[64] Consolidated Balance Sheets Balance Sheet Summary | Metric | Feb 28, 2023 | Aug 31, 2022 | Change | | :----- | :----------- | :----------- | :----- | | Total Assets | $86,710,505 | $86,193,953 | +$516,552 | | Total Current Assets | $40,176,602 | $40,234,881 | -$58,279 | | Property and Equipment, Net | $13,445,966 | $12,170,493 | +$1,275,473 | | Total Liabilities | $18,002,511 | $18,949,657 | -$947,146 | | Total Equity | $68,707,994 | $67,244,296 | +$1,463,698 | Consolidated Statements of Operations Operations Summary | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net Sales | $18,270,825 | $16,748,639 | 9.1% | $38,223,591 | $34,942,052 | 9.4% | | Gross Profit | $6,403,186 | $4,984,335 | 28.5% | $12,756,310 | $10,687,265 | 19.4% | | Operating Income | $1,287,307 | $445,223 | 189.1% | $2,116,883 | $1,711,834 | 23.7% | | Net Income Attributable to NTIC | $885,248 | $182,847 | 384.1% | $1,387,490 | $4,676,606 | -70.4% | | Basic EPS | $0.10 | $0.02 | 400.0% | $0.15 | $0.51 | -70.6% | | Diluted EPS | $0.09 | $0.02 | 350.0% | $0.14 | $0.48 | -70.8% | Consolidated Statements of Comprehensive Income Comprehensive Income Summary | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 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 Attributable to NTIC | $1,640,490 | $458,317 | $2,358,478 | $4,927,151 | Consolidated Statements of Equity Equity Summary | Metric | Feb 28, 2023 | Aug 31, 2022 | Change | | :----- | :----------- | :----------- | :----- | | Common Stock Shares Outstanding | 9,336,357 | 9,232,483 | +103,874 | | Common Stock Amount | $187,327 | $184,650 | +$2,677 | | Additional Paid-in Capital | $21,058,721 | $19,939,131 | +$1,119,590 | | Retained Earnings | $50,792,813 | $50,716,613 | +$76,200 | | Accumulated Other Comprehensive Loss | ($6,774,510) | ($7,245,132) | +$470,622 | | Total Equity | $68,707,994 | $67,244,296 | +$1,463,698 | Consolidated Statements of Cash Flows Cash Flow Summary | Cash Flow Activity | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | Change | | :----------------- | :-------------------------- | :-------------------------- | :----- | | Net Cash Provided by Operating Activities | $2,204,834 | $2,118,728 | +$86,106 | | Net Cash Used in Investing Activities | ($1,923,336) | ($5,792,833) | +$3,869,497 | | Net Cash (Used in) Provided by Financing Activities | ($111,605) | $2,786,371 | -$2,897,976 | | Net Increase (Decrease) in Cash and Cash Equivalents | $117,221 | ($192,830) | +$310,051 | | Cash and Cash Equivalents at End of Period | $5,451,111 | $7,487,811 | -$2,036,700 | Notes to Consolidated Financial Statements Note 1. Interim Financial Information - The accompanying unaudited consolidated financial statements present fairly the financial position, operations, equity changes, and cash flows in conformity with U.S. GAAP[26] - Operating results for the three and six months ended February 28, 2023, are not necessarily indicative of the results expected for the full fiscal year ending August 31, 2023[28] Note 2. Accounting Pronouncements - The Company is evaluating the impact of ASU No. 2016-13, which introduces an expected losses approach for credit losses on financial instruments, effective for fiscal years beginning after December 15, 2022[29] Note 3. Inventories Inventory Breakdown | Inventory Category | Feb 28, 2023 | Aug 31, 2022 | Change | | :----------------- | :----------- | :----------- | :----- | | Production materials | $5,629,424 | $6,496,656 | -$867,232 | | Finished goods | $9,550,815 | $9,845,073 | -$294,258 | | Total Inventories | $15,180,239 | $16,341,729 | -$1,161,490 | Note 4. Property and Equipment, Net Property and Equipment Breakdown | Category | Feb 28, 2023 | Aug 31, 2022 | Change | | :------- | :----------- | :----------- | :----- | | Land | $310,365 | $310,365 | $0 | | Buildings and improvements | $16,428,804 | $14,778,759 | +$1,650,045 | | Machinery and equipment | $5,792,363 | $5,643,320 | +$149,043 | | Less accumulated depreciation | ($9,085,566) | ($8,561,951) | -$523,615 | | Total Property and Equipment, Net | $13,445,966 | $12,170,493 | +$1,275,473 | - On February 28, 2023, the Company purchased an adjacent property for $1,200,000, including a 26,000 sq ft industrial building for warehousing and light industrial production[31] - Depreciation expense for the six months ended February 28, 2023, was $488,838, up from $430,991 in the prior year period[32] Note 5. Intangible Assets, Net Intangible Assets Breakdown | Category | Feb 28, 2023 (Net) | Aug 31, 2022 (Net) | Change | | :------- | :----------------- | :----------------- | :----- | | Patents and trademarks | $696,728 | $710,011 | -$13,283 | | Customer relationships | $5,712,300 | $5,923,867 | -$211,567 | | Total Intangible Assets, Net | $6,409,028 | $6,633,878 | -$224,850 | - Amortization expense for intangible assets was $294,873 for the six months ended February 28, 2023, down from $315,631 in the prior year[34] Estimated Future Amortization Expense | Fiscal Year | Estimated Amortization Expense | | :---------- | :----------------------------- | | 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 | Note 6. Investments in Joint Ventures - The Company's consolidated financial statements do not include the accounts of its joint ventures, but amounts are adjusted to conform with U.S. GAAP[11][35] NTIC's Share of Joint Venture Equity | Metric | Feb 28, 2023 | Aug 31, 2022 | | :----- | :----------- | :----------- | | NTIC's share of joint ventures' equity | $21,522,496 | $21,814,754 | | NTIC's share of joint ventures' undistributed earnings | $20,493,861 | $21,256,923 | Joint Venture Performance Summary | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Joint Ventures' Net Sales | $25,482,590 | $24,601,767 | $50,212,879 | $51,624,762 | | Joint Ventures' Net Income | $1,969,046 | $1,851,591 | $4,615,954 | $4,629,196 | | NTIC's share of equity in income from joint ventures | $1,128,731 | $922,832 | $2,318,135 | $2,297,581 | | NTIC's dividends received from joint ventures | $422,048 | $320,365 | $3,464,736 | $5,362,636 | Note 7. Corporate Debt - The Company entered into a Credit Agreement with JPMorgan Chase Bank, N.A. for a $10.0 million senior secured revolving line of credit, including a $5.0 million sublimit for standby letters of credit[38] - Borrowings of $7,100,000 were outstanding as of February 28, 2023, under the new Credit Facility, which matures on January 6, 2024[38][39] - The Credit Agreement contains covenants, including maintaining a Fixed Charge Coverage Ratio of at least 1.25 to 1.00, and restricts common stock repurchases or dividend payments if it would cause a default[41] - The previous loan agreement with PNC Bank, National Association, was terminated on January 6, 2023[43] Note 8. Stockholders' Equity Cash Dividends Declared | Declaration Date | Amount | Record Date | Payable Date | | :--------------- | :----- | :---------- | :----------- | | Oct 20, 2022 | $0.07 | Nov 3, 2022 | Nov 16, 2022 | | Jan 20, 2023 | $0.07 | Feb 1, 2023 | Feb 15, 2023 | - No shares of common stock were repurchased during the six months ended February 28, 2023 and 2022[44] - 3,620 shares of common stock were issued under the Employee Stock Purchase Plan on September 1, 2022[45] Note 9. Net Income Per Common Share EPS Calculation | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to NTIC | $885,248 | $182,847 | $1,387,490 | $4,676,606 | | Basic – weighted shares outstanding | 9,366,357 | 9,214,817 | 9,353,989 | 9,211,858 | | 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 | - Options outstanding to purchase 305,514 shares were excluded from diluted EPS computation for the three and six months ended February 28, 2023, as they were anti-dilutive[47] Note 10. Stock-Based Compensation Stock Option Activity | Stock Option Activity | Number of Options Outstanding | Weighted Average Exercise Price | | :-------------------- | :---------------------------- | :------------------------------ | | Outstanding as of Aug 31, 2022 | 1,544,727 | $10.23 | | Granted | 277,613 | $11.41 | | Exercised | (178,331) | $6.03 | | Outstanding as of Feb 28, 2023 | 1,644,009 | $10.52 | - Compensation expense recognized for the six months ended February 28, 2023, was $674,971, up from $465,766 in the prior year[50] - As of February 28, 2023, $1,686,298 of unrecognized compensation expense is expected to be recognized over 2.5 years[50] Note 11. Segment and Geographic Information - The Company's two reportable segments are ZERUST® (rust and corrosion inhibiting products and services) and Natur-Tec® (bio-based and compostable polymer resins and finished products)[51] Segment Net Sales | Segment Net Sales | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 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 | Geographic Net Sales | Geographic Net Sales | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 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 | $1,529,763 | $883,513 | $2,163,228 | $1,723,952 | | Outside the U.S.A. to unaffiliated customers | $9,990,065 | $10,749,163 | $21,831,205 | $21,945,815 | | Total net sales | $18,270,825 | $16,748,639 | $38,223,591 | $34,942,052 | - Fees for services provided to joint ventures were $2,434,551 for the six months ended February 28, 2023, with Germany, Poland, and Japan being the top contributors[55] - Total property and equipment, net, by geographic location as of February 28, 2023, was $6,891,392 in the United States, $5,885,664 in China, and $668,910 in Other[56] Note 12. Commitments and Contingencies - Three joint ventures (South Korea, Sweden, and France) accounted for 68.1% of the Company's trade joint ventures receivables as of February 28, 2023[58] - Management believes that the amount of liability, if any, with respect to legal matters will not materially affect the Company's consolidated results of operations, financial position, or cash flows[59] Note 13. Fair Value Measurements Fair Value of Assets | Asset | Fair value as of Feb 28, 2023 | Fair value as of Aug 31, 2022 | Level | | :---- | :---------------------------- | :---------------------------- | :---- | | Available for sale securities | $0 | $5,590 | Level 1 | - There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended February 28, 2023 or 2022[61] Note 14. Supplemental Cash Flow Information Cash Paid for Interest | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cash paid for interest | $115,144 | $7,404 | $206,475 | $10,295 | Note 15. Income Taxes Income Tax Expense | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income Tax Expense | $181,795 | $151,743 | $292,528 | $656,123 | - Income tax expense was largely due to foreign operations, and the Company has a full valuation allowance against U.S. deferred tax assets[63][97] - U.S. income and foreign withholding taxes have not been recognized on cumulative undistributed foreign earnings of $20,493,861 as of February 28, 2023, as they are considered indefinitely invested[98] Note 16. Subsequent Events - On April 7, 2023, NTIC China secured a RMB 10,000,000 (USD $1.45 million) revolving line of credit with China Construction Bank Corporation, with a one-year term and 3.25% annual interest rate[64][65] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial performance, highlighting sales growth, margin improvements, and the impact of non-recurring items Business Overview - NTIC's primary business is ZERUST® corrosion prevention products and services, targeting automotive, electronics, military, and oil and gas industries[67][68][70] - NTIC also markets Natur-Tec® bio-based and compostable polymer resins and finished products, aiming to replace conventional petroleum-based plastics[67][72] - International sales of ZERUST® are conducted through subsidiaries and joint ventures in China, India, ASEAN, Europe, and North America[69] Impact of COVID-19 - COVID-19 and government restrictions continued to disrupt NTIC's business, especially in China, during the first six months of fiscal 2023[74] - Demand in China improved during the second quarter of fiscal 2023 after government restrictions were lifted, but overall demand remained softened for the six-month period[74] Worldwide Supply Chain Disruptions - Worldwide supply chain disruptions continued during the first six months of fiscal 2023, causing longer lead times, the need for new raw material suppliers, and increased costs[75] - The Company experienced significantly longer shipping times and higher prices per shipping container due to ocean freight capacity issues[75] - While some improvements have occurred, these disruptions are expected to continue throughout the remainder of fiscal 2023 and could have a material adverse effect on NTIC's business[75] Financial Overview Key Financial Metrics | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Consolidated Net Sales | $18,270,825 | $16,748,639 | 9.1% | $38,223,591 | $34,942,052 | 9.4% | | Cost of Goods Sold as % of Net Sales | 65.0% | 70.2% | -5.2 pp | 66.6% | 69.4% | -2.8 pp | | Equity in Income from Joint Ventures | $1,128,731 | $922,832 | 22.3% | $2,318,135 | $2,297,581 | 0.9% | | Total Operating Expenses | $7,497,356 | $6,708,853 | 11.7% | $15,392,113 | $13,778,779 | 11.8% | | Net Income Attributable to NTIC | $885,248 | $182,847 | 384.1% | $1,387,490 | $4,676,606 | -70.4% | | Diluted EPS | $0.09 | $0.02 | 350.0% | $0.14 | $0.48 | -70.8% | - ZERUST® products and services accounted for 78.0% of consolidated net sales for the six months, increasing 8.3% YoY, while Natur-Tec® products accounted for 22.0%, increasing 13.4% YoY[78] - Sales to the oil and gas industry increased by 121.1% to $3,427,132 for the six months ended February 28, 2023[78] - The decrease in net income attributable to NTIC for the six months was primarily due to a $3,951,550 remeasurement gain from the Zerust India acquisition in the prior fiscal year, which did not recur[78] Results of Operations Key Operational Metrics | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net Sales | $18,270,825 | $16,748,639 | 9.1% | $38,233,591 | $34,942,052 | 9.4% | | Cost of Goods Sold | $11,867,639 | $11,764,304 | 0.9% | $25,467,281 | $24,254,787 | 5.0% | | Equity in Income from Joint Ventures | $1,128,731 | $922,832 | 22.3% | $2,318,135 | $2,297,581 | 0.9% | | Fees for Services Provided to Joint Ventures | $1,252,746 | $1,246,909 | 0.5% | $2,434,551 | $2,505,767 | -2.8% | | Selling Expenses | $3,418,717 | $2,971,391 | 15.1% | $6,926,151 | $6,209,149 | 11.5% | | General and Administrative Expenses | $3,084,189 | $2,518,788 | 22.4% | $6,214,788 | $5,115,135 | 21.5% | | Research and Development Expenses | $994,450 | $1,218,674 | -18.4% | $2,251,174 | $2,454,495 | -8.3% | - Net income attributable to NTIC for the six months ended February 28, 2023, decreased by 70.4% to $1,387,490, primarily due to the $3,951,550 remeasurement gain on the Zerust India acquisition in the prior year[99] Net Sales Net Sales Breakdown | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Total Net Sales | $18,270,825 | $16,748,639 | 9.1% | $38,223,591 | $34,942,052 | 9.4% | | Total ZERUST® sales | $14,458,747 | $13,117,777 | 10.2% | $29,828,748 | $27,541,562 | 8.3% | | ZERUST® oil & gas net sales | $1,805,235 | $577,921 | 212.4% | $3,427,132 | $1,549,737 | 121.1% | | Total Natur-Tec® sales | $3,812,078 | $3,630,862 | 5.0% | $8,394,843 | $7,400,490 | 13.4% | - ZERUST® oil and gas net sales increased significantly due to new opportunities with new and existing customers, though sales are subject to volatility from oil prices and order timing[83] - Natur-Tec® sales increased due to increased global demand, with recovery in many areas to pre-pandemic levels, though some customers are still operating below full capacity[84] Cost of Goods Sold COGS Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Cost of Goods Sold | $11,867,639 | $11,764,304 | 0.9% | $25,467,281 | $24,254,787 | 5.0% | | Cost of Goods Sold as % of Net Sales | 65.0% | 70.2% | -5.2 pp | 66.6% | 69.4% | -2.8 pp | - The decrease in cost of goods sold as a percentage of net sales was primarily due to passing along price increases to customers and increased sales of higher-margin ZERUST® oil & gas products[85] Equity in Income from Joint Ventures Joint Venture Income | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Equity in Income from Joint Ventures | $1,128,731 | $922,832 | 22.3% | $2,318,135 | $2,297,581 | 0.9% | - The increase was primarily due to an improvement in gross margins and operating profits at the joint ventures[87] - NTIC's equity in income from EXCOR (Germany) was $1,547,944 for the six months ended February 28, 2023, compared to $1,499,821 in the prior year[87] Fees for Services Provided to Joint Ventures Joint Venture Service Fees | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Fees for Services Provided to Joint Ventures | $1,252,746 | $1,246,909 | 0.5% | $2,434,551 | $2,505,767 | -2.8% | - Net sales at the joint ventures decreased by 2.7% to $50,212,879 for the six months ended February 28, 2023[88] Selling Expenses Selling Expense Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Selling Expenses | $3,418,717 | $2,971,391 | 15.1% | $6,926,151 | $6,209,149 | 11.5% | | Selling Expenses as % of Net Sales | 18.7% | 17.7% | +1.0 pp | 18.1% | 17.8% | +0.3 pp | - Increases were primarily due to increased personnel expense and expenses for the startup of a new indirect, majority-owned subsidiary in Taiwan[89] General and Administrative Expenses G&A Expense Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | General and Administrative Expenses | $3,084,189 | $2,518,788 | 22.4% | $6,214,788 | $5,115,135 | 21.5% | | G&A Expenses as % of Net Sales | 16.9% | 15.0% | +1.9 pp | 16.3% | 14.6% | +1.7 pp | - Increases were primarily due to increased professional services, travel, and personnel expenses, as well as startup costs for a new indirect, majority-owned subsidiary in Taiwan[90] Research and Development Expenses R&D Expense Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Research and Development Expenses | $994,450 | $1,218,674 | -18.4% | $2,251,174 | $2,454,495 | -8.3% | - The decrease was primarily due to decreases in expenses associated with development efforts[92] Interest Income Interest Income Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Interest Income | $3,451 | $9,909 | -65.2% | $9,619 | $20,852 | -53.9% | - The decrease was primarily due to changes in the invested cash balances[93] Interest Expense Interest Expense Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Interest Expense | $115,144 | $7,404 | 1455.2% | $206,475 | $10,295 | 1905.6% | - The increase was primarily due to increased outstanding borrowings under the line of credit and increased interest rates[94] Remeasurement Gain on Acquisition of Equity Method Investee Remeasurement Gain | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Remeasurement Gain | $0 | $0 | $0 | $3,951,550 | - A gain of $3,951,550 was recognized in the prior year period (six months ended Feb 28, 2022) due to the acquisition of the remaining 50% ownership interest in Zerust India[95] Income Before Income Tax Expense Pre-Tax Income | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Income Before Income Tax Expense | $1,175,614 | $447,728 | 162.6% | $1,920,027 | $5,673,941 | -66.1% | Income Tax Expense Income Tax Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Income Tax Expense | $181,795 | $151,743 | 19.8% | $292,528 | $656,123 | -55.4% | - Income tax expense was largely due to foreign operations, and the Company has a full valuation allowance against U.S. deferred tax assets[63][97] Net Income Attributable to NTIC Net Income Analysis | Metric | 3 Months Ended Feb 28, 2023 | 3 Months Ended Feb 28, 2022 | % Change (YoY) | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | % Change (YoY) | | :----- | :-------------------------- | :-------------------------- | :------------- | :-------------------------- | :-------------------------- | :------------- | | Net Income Attributable to NTIC | $885,248 | $182,847 | 384.1% | $1,387,490 | $4,676,606 | -70.4% | | Diluted EPS | $0.09 | $0.02 | 350.0% | $0.14 | $0.48 | -70.8% | - The six-month decrease was primarily due to the $3,951,550 remeasurement gain on the Zerust India acquisition recognized in the prior fiscal year, which did not recur[99] - Quarterly net income is expected to remain volatile due to the financial performance of subsidiaries and joint ventures, and sales of ZERUST® oil and gas and Natur-Tec® products[101] Other Comprehensive Income - Foreign Currency Translations Adjustment - Fluctuations in the U.S. dollar against the Euro and other foreign currencies caused changes in the foreign currency translation adjustment[102] Liquidity and Capital Resources Liquidity Summary | Metric | Feb 28, 2023 | Aug 31, 2022 | Change | | :----- | :----------- | :----------- | :----- | | Working Capital | $23,998,313 | $23,169,480 | +$828,833 | | Cash and Cash Equivalents | $5,451,111 | $5,333,890 | +$117,221 | - NTIC entered into a new $10.0 million senior secured revolving line of credit with JPMorgan Chase Bank, N.A., with $7.1 million outstanding as of February 28, 2023[104] - The Company expects to fund operations, investments, capital expenditures, and debt repayments through existing cash, forecasted cash flows, anticipated distributions from joint ventures, and financing arrangements for at least the next 12 months[111] - NTIC plans to continue investing in Zerust India, NTIC China, Zerust Mexico, NTI Europe, joint ventures, R&D, oil and gas technology, and Natur-Tec® bio-plastics business[111] - NTIC may transition joint ventures through acquisitions of remaining ownership interests, formation of new subsidiaries, or dissolutions, which could materially impact results[112] Sources of Cash and Working Capital Working Capital and Cash | Metric | Feb 28, 2023 | Aug 31, 2022 | Change | | :----- | :----------- | :----------- | :----- | | Working Capital | $23,998,313 | $23,169,480 | +$828,833 | | Cash and Cash Equivalents | $5,451,111 | $5,333,890 | +$117,221 | - A new $10.0 million senior secured revolving line of credit with JPMorgan Chase Bank, N.A. was established on January 6, 2023, with $7.1 million outstanding[104] - The Credit Agreement requires maintaining a Fixed Charge Coverage Ratio of at least 1.25 to 1.00 and restricts stock repurchases or dividends if it causes a default[107] - NTIC was in compliance with all debt covenants as of February 28, 2023[109] Uses of Cash and Cash Flows Cash Flow Summary | Cash Flow Activity | 6 Months Ended Feb 28, 2023 | 6 Months Ended Feb 28, 2022 | Change | | :----------------- | :-------------------------- | :-------------------------- | :----- | | Net Cash Provided by Operating Activities | $2,204,834 | $2,118,728 | +$86,106 | | Net Cash Used in Investing Activities | ($1,923,336) | ($5,792,833) | +$3,869,497 | | Net Cash Used in Financing Activities | ($111,605) | $2,786,371 (Provided) | -$2,897,976 | - Trade receivables (excluding joint ventures) increased by $538,087, with average days outstanding increasing to 75 days. Trade receivables from joint ventures increased by $917,073, with average days outstanding increasing to 256 days due to timing of a large order[118][119][120] - Receivables for services provided to joint ventures decreased by $656,210, with average days to pay decreasing to 80 days[121] Share Repurchase Plan - The Board authorized a $3,000,000 share repurchase program on January 15, 2015, with no expiration date[124] - No shares were repurchased during the six months ended February 28, 2023[124] - As of February 28, 2023, $2,640,548 remained available for repurchase under the program[124] Cash Dividends Dividend Declarations | Declaration Date | Amount | Record Date | Payable Date | | :--------------- | :----- | :---------- | :----------- | | Oct 20, 2022 | $0.07 | Nov 3, 2022 | Nov 16, 2022 | | Jan 20, 2023 | $0.07 | Feb 1, 2023 | Feb 15, 2023 | - The declaration of future dividends is not guaranteed and will be determined by the Board based on existing conditions, including earnings, financial condition, and financing agreements[125] Capital Expenditures and Commitments - Capital expenditures were $1,871,903 for the six months ended February 28, 2023, mainly for a new warehouse facility, equipment, and improvements[126] - This includes the purchase of an adjacent 26,000 square foot industrial building for $1,200,000 for warehousing and light industrial production[31][126] - NTIC expects to spend $2,000,000 to $2,500,000 on capital expenditures in fiscal 2023, including $700,000 for renovations on the newly acquired property[126] Inflation and Seasonality - Inflationary pressures adversely affected gross margins in the first six months of fiscal 2023 and are expected to persist into at least the third quarter[128] - The business experiences seasonality, with the second fiscal quarter negatively impacted by the Chinese New Year, North American holiday season, and lower winter temperatures[128] Market Risk - NTIC is exposed to foreign currency exchange rate risk, particularly with the Euro, Japanese Yen, Indian Rupee, Chinese Renminbi, South Korean Won, and English Pound against the U.S. Dollar[130] - Fluctuations in foreign currency exchange rates could lead to declines in reported net income, but changes in joint venture equity income are reflected as translation adjustments[130] - The Company is exposed to commodity price changes, primarily for plastic resins[131] - Outstanding advances under the Credit Facility bear interest at a floating rate, exposing the Company to interest rate risk[131] Critical Accounting Policies and Estimates - No material changes to critical accounting policies and estimates from the prior annual report on Form 10-K[132] Accounting Pronouncements - Refer to Note 2 for details on accounting pronouncements[133] Forward-Looking Statements - Forward-looking statements are subject to uncertainties and factors that could cause actual results to differ materially, including worldwide supply chain disruptions, COVID-19 impact, and global economic conditions[135][136] - Risks include the effect of the Russia-Ukraine war on commodity prices and joint venture profitability, and increasing tensions between the U.S. and China affecting NTIC China's operations[136] - Variability in sales of ZERUST® oil & gas and Natur-Tec® products, and equity income from joint ventures, can lead to quarterly fluctuations in earnings[136] - The Company assumes no obligation to update, amend, or clarify forward-looking statements[138] Item 3. Quantitative and Qualitative Disclosures About Market Risk NTIC is exposed to market risks from foreign currency, commodity prices, and interest rates on its floating-rate credit facility - NTIC is exposed to foreign currency exchange rate risk, primarily with the Euro, Japanese Yen, Indian Rupee, Chinese Renminbi, South Korean Won, and English Pound against the U.S. Dollar[139][140] - Fluctuations in foreign currency exchange rates could result in declines in reported net income, but changes in joint venture equity income are reflected as foreign currency translation adjustments[140] - The Company is exposed to commodity price changes, mainly for plastic resins used in its products[141] - Borrowings under NTIC's Credit Facility with JPM bear interest at a floating rate, exposing the Company to interest rate risk[141] Item 4. Controls and Procedures Management concluded that NTIC's disclosure controls and procedures were effective as of February 28, 2023 Evaluation of Disclosure Controls and Procedures - NTIC's disclosure controls and procedures were evaluated by management, including the CEO and CFO, and concluded to be effective as of February 28, 2023[142] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter, other than changes implemented to continue integrating Zerust India's internal controls with NTIC's[143] PART II—OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 12, where management believes any liability from legal proceedings will not be material - Refer to Note 12 of the consolidated financial statements for details on legal proceedings[145] Item 1A. Risk Factors The company discloses a revised risk factor concerning its operations and the evolving political/economic conditions in China - NTIC, as a smaller reporting company, discloses a revised risk factor regarding its operations in China[146] - Risks in China include evolving political, economic, and social conditions, U.S.-China tensions, changes in laws/regulations, and potential adverse effects from local electric power shortage regulations[146][147] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were sold, and no shares were repurchased during the second fiscal quarter Recent Sales of Unregistered Equity Securities - No unregistered equity securities were issued during the three months ended February 28, 2023[148] Issuer Purchases of Equity Securities Share Repurchase Activity | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs | | :----- | :----------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | Dec 1, 2022, through Dec 31, 2022 | 0 | $0 | 0 | (1) | | Jan 1, 2023, through Jan 31, 2023 | 0 | $0 | 0 | (1) | | Feb 1, 2023, through Feb 28, 2023 | 0 | $0 | 0 | (1) | | Total | 0 | $0 | 0 | (1)(2) | - As of February 28, 2023, $2,640,548 remained available for repurchase under the stock repurchase program[152] Item 3. Defaults Upon Senior Securities This item is not applicable to the Company - This item is not applicable[153] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[154] Item 5. Other Information This item is not applicable to the Company - This item is not applicable[155] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including certifications and the new Credit Agreement - Exhibits include the Restated Certificate of Incorporation, Credit Agreement with JPMorgan Chase Bank, N.A., certifications from the CEO and CFO, and Inline XBRL formatted financial statements[157] SIGNATURES SIGNATURES The report is duly signed by the Chief Financial Officer on behalf of the company - The report was signed by Matthew C. Wolsfeld, CPA, Chief Financial Officer, on April 13, 2023[160]