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Northern Technologies International (NTIC) - 2024 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION Item 1. Financial Statements Presents NTIC's unaudited consolidated financial statements for Q1 FY2024, including core financial statements and detailed explanatory notes Consolidated Balance Sheets Presents NTIC's consolidated financial position, detailing assets, liabilities, and equity at period-end | ASSETS (USD) | Nov 30, 2023 | Aug 31, 2023 | | :----------------------------------- | :----------- | :----------- | | Cash and cash equivalents | $6,094,032 | $5,406,173 | | Total current assets | $38,269,414 | $39,671,556 | | Property and equipment, net | $14,256,990 | $14,065,354 | | Investments in joint ventures | $24,599,520 | $23,705,714 | | Total assets | $88,802,064 | $89,344,303 | | LIABILITIES AND EQUITY (USD) | | | | Line of credit | $3,000,000 | $3,600,000 | | Term loan | $2,810,686 | $2,757,176 | | Total current liabilities | $15,854,269 | $16,721,372 | | Total equity | $71,016,154 | $70,698,797 | Consolidated Statements of Operations Presents NTIC's consolidated financial performance, detailing net sales, gross profit, operating income, and net income for the period | Metric (USD) | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Net sales | $20,181,675 | $19,952,766 | | Gross profit | $7,334,274 | $6,353,124 | | Equity in income from joint ventures | $1,102,241 | $1,189,404 | | Fees for services provided to joint ventures | $1,248,958 | $1,181,805 | | Operating income | $1,376,433 | $829,576 | | Income before income tax expense | $1,311,737 | $744,413 | | Net income attributable to NTIC | $895,521 | $502,242 | | Basic EPS | $0.09 | $0.05 | | Diluted EPS | $0.09 | $0.05 | Consolidated Statements of Comprehensive Income Presents NTIC's comprehensive income, including net income and foreign currency translation adjustments, for the reporting period | Metric (USD) | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Net income | $1,084,941 | $633,680 | | Other comprehensive income (loss) – foreign currency translation adjustment | $301,319 | $(53,917) | | Comprehensive income attributable to NTIC | $1,202,463 | $717,988 | Consolidated Statements of Equity Presents changes in NTIC's consolidated equity, detailing common stock, retained earnings, and comprehensive loss components | Equity Item (USD) | Balance at Aug 31, 2023 | Balance at Nov 30, 2023 | | :----------------------------------- | :---------------------- | :---------------------- | | Common Stock Amount | $188,482 | $188,552 | | Additional Paid-in Capital | $21,986,767 | $22,377,726 | | Retained Earnings | $51,004,427 | $51,240,016 | | Accumulated Other Comprehensive Loss | $(6,823,403) | $(6,516,461) | | Non-controlling Interests | $4,342,524 | $3,726,321 | | Total Equity | $70,698,797 | $71,016,154 | - Key changes in equity for the three months ended November 30, 2023: * Stock issued for employee stock purchase plan: $40,096 * Stock option expense: $350,933 * Dividends paid to shareholders: $(659,932) * Net income: $895,521 * Comprehensive income: $301,31920 Consolidated Statements of Cash Flows Presents NTIC's consolidated cash flows, categorizing activities into operating, investing, and financing for the period | Cash Flow Activity (USD) | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $3,076,892 | $2,002,543 | | Net cash used in investing activities | $(423,871) | $(453,539) | | Net cash used in financing activities | $(2,019,836) | $(730,386) | | Net increase in cash and cash equivalents | $687,858 | $732,431 | | Cash and cash equivalents at end of period | $6,094,032 | $6,066,321 | Notes to Consolidated Financial Statements Offers detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies and key financial components 1. Interim Financial Information Explains the basis of preparation for the unaudited interim financial statements and their indicative nature - The unaudited consolidated financial statements are prepared in conformity with U.S. GAAP and include all necessary normal recurring adjustments. Operating results for the three months ended November 30, 2023, are not necessarily indicative of the full fiscal year2224 2. Accounting Pronouncements Discusses the adoption of new accounting standards and their impact on the Company's financial reporting - The Company adopted ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, on September 1, 2023. This adoption did not have a material impact on the Company's consolidated financial position or operating results25 3. Inventories Provides a breakdown of NTIC's inventory components, including production materials and finished goods | Inventory Type (USD) | Nov 30, 2023 | Aug 31, 2023 | | :------------------- | :----------- | :----------- | | Production materials | $4,580,739 | $4,960,355 | | Finished goods | $8,011,776 | $8,136,134 | | Total Inventories | $12,592,515 | $13,096,489 | 4. Property and Equipment, Net Details NTIC's property and equipment, net of accumulated depreciation, and related depreciation expense | Property & Equipment (USD) | Nov 30, 2023 | Aug 31, 2023 | | :------------------------- | :----------- | :----------- | | Land | $496,965 | $496,965 | | Buildings and improvements | $17,649,550 | $17,250,392 | | Machinery and equipment | $6,050,458 | $5,984,364 | | Less accumulated depreciation | $(9,939,983) | $(9,666,367) | | Total Property and equipment, net | $14,256,990 | $14,065,354 | - Depreciation expense increased to $307,010 for the three months ended November 30, 2023, from $262,876 in the prior year period27 5. Intangible Assets, Net Outlines NTIC's intangible assets, including patents, trademarks, and customer relationships, and associated amortization expense | Intangible Assets (USD) | Nov 30, 2023 Net | Aug 31, 2023 Net | | :---------------------- | :--------------- | :--------------- | | Patents and trademarks | $650,022 | $658,752 | | Customer relationships | $5,394,950 | $5,500,733 | | Total intangible assets, net | $6,044,972 | $6,159,485 | - Amortization expense for intangible assets was $147,655 for the three months ended November 30, 2023, consistent with $147,811 in the prior year period. Future amortization expense is estimated at $528,439 for Fiscal 20242829 6. Investments in Joint Ventures Presents financial information related to NTIC's investments in joint ventures, including assets, equity, and operational results | Joint Venture Financials (USD) | Nov 30, 2023 Total | Aug 31, 2023 Total | | :----------------------------- | :----------------- | :----------------- | | Total assets | $63,316,496 | $59,729,348 | | Joint ventures' equity | $49,692,091 | $47,941,339 | | NTIC's share of joint ventures' equity | $24,599,516 | $23,705,714 | | NTIC's share of joint ventures' undistributed earnings | $23,654,848 | $20,493,861 | | Joint Venture Operations (USD) | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | | :----------------------------- | :------------------------------ | :------------------------------ | | Net sales | $23,560,661 | $24,730,289 | | Net income | $2,204,482 | $2,646,908 | | NTIC's share of equity in income from joint ventures | $1,102,241 | $1,189,400 | | NTIC's dividends received from joint ventures | $371,104 | $3,042,688 | 7. Corporate Debt Details NTIC's corporate debt, including its revolving line of credit and term loans, along with associated covenants - NTIC has a senior secured revolving line of credit of up to $10.0 million with JPMorgan Chase Bank, N.A., with $3.0 million outstanding as of November 30, 2023. The maturity date was extended to January 6, 202532339192 - NTIC China has two term loans totaling $2,810,686 as of November 30, 2023, with China Construction Bank Corporation, each for RMB 10,000,000 at an annual interest rate of 3.25%3897 - The Credit Agreement includes covenants such as maintaining a Fixed Charge Coverage Ratio of at least 1.25 to 1.00, with NTIC in compliance as of November 30, 2023369596 8. Stockholders' Equity Discusses changes in stockholders' equity, including dividends declared and shares issued under the ESPP - A cash dividend of $0.07 per share of common stock was declared on October 18, 2023, payable on November 15, 2023. No shares were repurchased during the three months ended November 30, 20234041 - 3,496 shares of common stock were issued under the Employee Stock Purchase Plan (ESPP) on September 1, 2023, with 58,538 shares remaining available for sale41 9. Net Income Per Common Share Provides calculations for basic and diluted net income per common share, including weighted average shares outstanding | EPS Metric | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | | Net income attributable to NTIC | $895,521 | $502,242 | | Basic – weighted shares outstanding | 9,427,588 | 9,317,680 | | Diluted – weighted shares outstanding | 9,706,581 | 9,718,931 | | Basic net income per share | $0.09 | $0.05 | | Diluted net income per share | $0.09 | $0.05 | - Options to purchase 580,869 shares of common stock were excluded from diluted EPS computation for the three months ended November 30, 2023, as they were anti-dilutive42 10. Stock-Based Compensation Details stock option activity, weighted average exercise price, and recognized stock-based compensation expense | Stock Option Activity | As of Aug 31, 2023 | Granted (3 months) | As of Nov 30, 2023 | | :-------------------- | :----------------- | :----------------- | :----------------- | | Options Outstanding | 1,557,131 | 269,845 | 1,826,976 | | Weighted Average Exercise Price | $11.08 | $13.25 | $11.40 | - The Company recognized $350,933 in stock-based compensation expense for the three months ended November 30, 2023, with $2,037,871 of unrecognized expense remaining, expected to be recognized over 2.75 years44 11. Segment and Geographic Information Provides financial data segmented by NTIC's ZERUST® and Natur-Tec® businesses and geographic regions - NTIC operates in two reportable segments: ZERUST® (corrosion prevention) and Natur-Tec® (bio-based and compostable polymer products)45 | Segment Net Sales (USD) | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | | :---------------------- | :------------------------------ | :------------------------------ | | ZERUST® net sales | $15,405,745 | $15,370,001 | | Natur-Tec® net sales | $4,775,930 | $4,582,765 | | Total net sales | $20,181,675 | $19,952,766 | | Geographic Net Sales (USD) | Three Months Ended Nov 30, 2023 | Three Months Ended Nov 30, 2022 | | :------------------------- | :------------------------------ | :------------------------------ | | Inside the U.S.A. to unaffiliated customers | $12,097,843 | $7,478,161 | | Outside the U.S.A. to joint ventures | $851,452 | $633,465 | | Outside the U.S.A. to unaffiliated customers | $7,232,380 | $11,841,140 | | Total net sales | $20,181,675 | $19,952,766 | - Fees for services provided to joint ventures increased by 5.7% to $1,248,958, with Germany, Poland, and Japan being the largest contributors49 12. Commitments and Contingencies Discusses trade receivables from joint ventures and management's assessment of legal matters' financial impact - Three joint ventures (Korea, Thailand, Japan) accounted for 68.2% of trade joint venture receivables as of November 30, 2023. Management believes legal matters will not materially affect the Company's financial position5253 13. Supplemental Cash Flow Information Provides additional details on cash flow activities, specifically cash paid for interest during the period - Cash paid for interest increased to $111,138 for the three months ended November 30, 2023, from $91,331 in the prior year period54 14. Income Taxes Details income tax expense, its drivers, and the valuation allowance recorded against U.S. deferred tax assets - Income tax expense increased to $226,796 for the three months ended November 30, 2023, from $110,733 in the prior year, primarily due to foreign operations. A full valuation allowance is recorded against U.S. deferred tax assets55 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes NTIC's financial condition and operational results for Q1 FY2024, detailing business overview, performance, liquidity, capital resources, and market risks Business Overview Describes NTIC's core businesses, ZERUST® and Natur-Tec®, and strategic initiatives for market expansion - 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 products57 - Strategic initiatives include expanding ZERUST® into the oil and gas industry, which involves long sales cycles, and strengthening the North American distribution network for Natur-Tec® bioplastic products606162 Financial Overview Summarizes NTIC's operational structure into two reportable business segments: ZERUST® and Natur-Tec® - NTIC manages its operations in two reportable business segments: ZERUST® products and services, and Natur-Tec® products64 Results of Operations Analyzes NTIC's financial performance, detailing net sales, cost of goods sold, equity income, and operating expenses for the period | Metric (USD) | Nov 30, 2023 | Nov 30, 2022 | $ Change | % Change | | :----------------------------------- | :----------- | :----------- | :------- | :------- | | Net sales | $20,181,675 | $19,952,766 | $228,909 | 1.1% | | Cost of goods sold | $12,847,401 | $13,599,642 | $(752,241) | (5.5%) | | Equity in income from joint ventures | $1,102,241 | $1,189,404 | $(87,163) | (7.3%) | | Fees for services provided to joint ventures | $1,248,958 | $1,181,805 | $67,153 | 5.7% | | Selling expenses | $3,686,058 | $3,507,434 | $178,624 | 5.1% | | General and administrative expenses | $3,517,061 | $3,130,599 | $386,462 | 12.3% | | Research and development expenses | $1,105,921 | $1,256,724 | $(150,803) | (12.0%) | | Net income attributable to NTIC | $895,521 | $502,242 | $393,279 | 78.3% | - Consolidated net sales increased 1.1%, primarily due to a 4.2% increase in Natur-Tec® product sales, while ZERUST® sales saw a modest 0.2% increase6769 - Gross profit margin improved as cost of goods sold as a percentage of net sales decreased to 63.7% from 68.2%, mainly due to lower raw material prices6773 - Equity in income from joint ventures decreased 7.3%, primarily due to a decline in net income from the German joint venture (EXCOR), partially offset by increases in other joint ventures6774 - Total operating expenses increased 5.2%, driven by higher personnel, professional services, and travel expenses, while R&D expenses decreased 12.0%67757778 Liquidity and Capital Resources Assesses NTIC's liquidity and capital resources, including working capital, cash flows, and future capital expenditure plans | Metric (USD) | Nov 30, 2023 | Aug 31, 2023 | | :----------------------------------- | :----------- | :----------- | | Working capital | $22,415,145 | $22,950,184 | | Cash and cash equivalents | $6,094,032 | $5,406,173 | - NTIC believes existing cash, forecasted cash flows, and financing arrangements will be adequate for at least the next 12 months, with plans to invest in subsidiaries, joint ventures, R&D, and the oil & gas and Natur-Tec® businesses87 - Net cash provided by operating activities increased to $3,076,892 for the three months ended November 30, 2023, primarily due to decreases in dividends receivable from joint ventures and trade receivables98 - Trade receivables (excluding joint ventures) decreased by $1,405,769, with average days outstanding improving from 71 to 67 days. Trade receivables from joint ventures increased by $590,713, with average days outstanding increasing from 34 to 83 days100101102 - Capital expenditures for the period were $390,729, mainly for a new warehouse facility and equipment. Expected capital expenditures for fiscal 2024 are $1.6 million to $2.1 million for ERP software and facility improvements104108 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 Q1 fiscal 2024. The business experiences seasonality, with Q2 net sales potentially impacted by Chinese New Year, North American holidays, and lower winter temperatures109 Market Risk Identifies NTIC's exposure to foreign currency, commodity price, and interest rate risks and their potential financial impact - NTIC is exposed to foreign currency exchange rate risk (Euro, Yen, Rupee, Renminbi, Won, Pound vs. USD), commodity price risk (plastic and bioplastic resins), and interest rate risk on its floating-rate credit facility and fixed-rate term loans110111112113 Critical Accounting Policies and Estimates Confirms no material changes to NTIC's critical accounting policies and estimates from the prior fiscal year - There have been no material changes to NTIC's critical accounting policies and estimates from those disclosed in the annual report on Form 10-K for the fiscal year ended August 31, 2023114 Recent Accounting Pronouncements Refers to Note 2 for details on recent accounting pronouncements and their non-material impact on NTIC - Refer to Note 2 of the consolidated financial statements for a discussion of recent accounting pronouncements, specifically the adoption of ASU No. 2016-13 which had no material impact11525 Forward-Looking Statements Highlights uncertainties and risk factors that could cause actual results to differ materially from forward-looking statements - The report contains forward-looking statements subject to uncertainties and factors that could cause actual results to differ materially, including worldwide supply chain disruptions, economic conditions, geopolitical conflicts (Russia-Ukraine, Israel-Hamas), and risks associated with international operations and joint ventures116118120 - Other risks include variability in sales of ZERUST® oil & gas and Natur-Tec® products, fluctuations in raw material costs, increased competition, and the ability to introduce new products and manage intellectual property120 Item 3. Quantitative and Qualitative Disclosures About Market Risk Details NTIC's exposure to market risks, including foreign currency, commodity prices, and interest rates, noting no hedging for currency risk - NTIC is exposed to market risk from foreign currency exchange rates (Euro, Yen, Rupee, Renminbi, Won, Pound against USD), commodity prices (plastic and bioplastic resins), and interest rates on its floating-rate credit facility and fixed-rate term loans123124125126 - Fluctuations in foreign currency exchange rates could impact reported net income, as fees for services and dividend distributions from foreign entities are paid in local currencies. NTIC does not hedge against this risk124 Item 4. Controls and Procedures Management concluded NTIC's disclosure controls were ineffective due to a material weakness in internal control over financial reporting concerning employee retention credits - NTIC's disclosure controls and procedures were not effective as of November 30, 2023, due to a material weakness in internal control over financial reporting128 - The material weakness relates to ineffective controls over the probability assessment for recognizing income from employee retention credits (ERCs), requiring a restatement of prior financial statements129131 - Management is implementing remediation steps, including preparing technical accounting memorandums for material unusual transactions, to address the material weakness132 PART II—OTHER INFORMATION Item 1. Legal Proceedings Refers to Note 12 for details on legal proceedings, with management assessing no material financial impact from these matters - Refer to Note 12 of the consolidated financial statements for details on legal proceedings. Management believes any liability from these matters will not materially affect the Company's consolidated results of operations, financial position, or cash flows13453 Item 1A. Risk Factors This item is inapplicable to NTIC, qualifying as a smaller reporting company exempt from this disclosure requirement - This item is inapplicable to NTIC as a smaller reporting company135 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered equity sales or stock repurchases during the period, detailing remaining repurchase program availability - NTIC did not issue any unregistered equity securities during the three months ended November 30, 2023136 | Period | Total Shares Purchased | Average Price Paid Per Share | | :----------------------------------- | :--------------------- | :--------------------------- | | September 1, 2023 through November 30, 2023 | 0 | $0 | - As of November 30, 2023, $2,640,548 in shares of NTIC common stock remained available for repurchase under the stock repurchase program, which has no expiration date141 Item 3. Defaults Upon Senior Securities This item is not applicable to NTIC for the reporting period - This item is not applicable139 Item 4. Mine Safety Disclosures This item is not applicable to NTIC for the reporting period - This item is not applicable140 Item 5. Other Information Discloses the renewal of NTIC's Credit Agreement, extending the Credit Facility's maturity date to January 6, 2025 - On January 5, 2024, NTIC renewed its Credit Agreement with JPMorgan Chase Bank, N.A., extending the Credit Facility's maturity date from January 6, 2024, to January 6, 2025142 Item 6. Exhibits Lists exhibits filed with the quarterly report, including the renewed Line of Credit Note, CEO/CFO certifications, and XBRL data - Key exhibits include the renewed Line of Credit Note (Exhibit 10.1), certifications from the President/CEO and CFO (Exhibits 31.1, 31.2, 32.1, 32.2), and Inline XBRL formatted financial statements (Exhibit 101)143