NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION This Management's Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess NTIC's financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading "Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward-Looking Statements" in this report and under "Part 1. Item 1A. Risk Factors" in our annual report on Form 10-K for the fiscal year endedAugust 31, 2022 . The following discussion of the results of the operations and financial condition of NTIC should be read in conjunction with NTIC's consolidated financial statements and the related notes thereto included under the heading "Part I. Item 1. Financial Statements." Business Overview NTIC develops and markets proprietary, environmentally beneficial products and services in over 65 countries either directly or via a network of subsidiaries, joint ventures, independent distributors, and agents. NTIC's primary business is corrosion prevention marketed mainly under the ZERUST® brand. NTIC has been selling its proprietary ZERUST® products and services to the automotive, electronics, electrical, mechanical, military, and retail consumer markets for almost 50 years and, more recently, has also expanded into the oil and gas industry. Additionally, NTIC markets and sells a portfolio of proprietary bio-based and certified compostable (fully biodegradable) polymer resin compounds and finished products under the Natur-Tec® brand. These products are intended to reduce NTIC's customers'carbon footprint and provide environmentally sound waste disposal options. NTIC's ZERUST® rust and corrosion inhibiting products include plastic and paper packaging, liquids, coatings, rust removers, cleaners, and diffusers as well as engineered solutions designed specifically for the oil and gas industry. NTIC also offers worldwide, on-site, technical consulting for rust and corrosion prevention issues. NTIC's technical service consultants work directly with the end users of NTIC's ZERUST® rust and corrosion inhibiting products to analyze their specific needs and develop systems to meet their performance requirements. InNorth America , NTIC sells its ZERUST® corrosion prevention solutions through a network of independent distributors and agents supported by a direct sales force. Internationally, NTIC sells its ZERUST® corrosion prevention solutions through its wholly-owned subsidiary inChina ,NTIC (Shanghai) Co., Ltd. (NTIC China), startingSeptember 1, 2021 its wholly-owned subsidiary inIndia ,HNTI Ltd. (Zerust India), its majority-owned joint venture holding company for NTIC's joint venture investments in theAssociation of Southeast Asian Nations (ASEAN) region,NTI Asean LLC (NTI Asean), certain majority-owned and wholly-owned subsidiaries, and joint venture arrangements inNorth America ,Europe , andAsia . NTIC also sells products directly to its European joint venture partners through its wholly-owned subsidiary inGermany ,NTIC Europe GmbH (NTI Europe). One of NTIC's strategic initiatives is to expand into and penetrate other markets for its ZERUST® corrosion prevention technologies. Consequently, for the past several years, NTIC has focused significant sales and marketing efforts on the oil and gas industry, as the infrastructure that supports that industry is typically constructed using metals that are highly susceptible to corrosion. NTIC believes that its ZERUST® corrosion prevention solutions will minimize maintenance downtime on critical oil and gas industry infrastructure, extend the life of such infrastructure, and reduce the risk of environmental pollution due to leaks caused by corrosion. NTIC markets and sells its ZERUST® rust and corrosion prevention solutions to customers in the oil and gas industry in a continuously increasing number of countries either directly, through its subsidiaries, or through its joint venture partners and other strategic partners. The sale of ZERUST® corrosion prevention solutions to customers in the oil and gas industry typically involves long sales cycles, often including multi-year trial periods with each customer and a slow integration process thereafter. 16
-------------------------------------------------------------------------------- Natur-Tec® bio-based and compostable plastics are manufactured using NTIC's patented and/or proprietary technologies and are intended to replace conventional petroleum-based plastics. The Natur-Tec® biopolymer resin compound portfolio includes formulations that have been optimized for a variety of applications, including blown-film extrusion, extrusion coating, injection molding, and engineered plastics. These resin compounds are certified to be fully biodegradable in a composting environment and are currently being used to produce finished products, including can liners, shopping and grocery bags, lawn and leaf bags, branded apparel packaging bags and accessories, and various foodservice items, such as disposable cutlery, drinking straws, food-handling gloves, and coated paper products. InNorth America , NTIC markets its Natur-Tec® resin compounds and finished products primarily through a network of regional and national distributors as well as independent agents. NTIC continues to see significant opportunities for finished bioplastic products and, therefore, continues to strengthen and expand its North American distribution network for finished Natur-Tec® bioplastic products. Internationally, NTIC sells its Natur-Tec® resin compounds and finished products both directly and through its wholly-owned subsidiary inChina and majority-owned subsidiaries inIndia andSri Lanka , and through distributors and certain joint ventures.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and shipping, created significant volatility and disruption in financial markets and resulted in weakened economic conditions. While as part of efforts to contain the spread of COVID-19, federal, state, local and foreign governments imposed various restrictions on the conduct of business and travel during 2020 and 2021, most of these restrictions have been lifted, except inChina where many remained in place as ofNovember 31, 2022 . Because of these restrictions, NTIC continued to experience softened demand for its products inChina during the first quarter of fiscal 2023.
Worldwide Supply Chain Disruptions
Worldwide supply chain disruptions, which were initially brought about by the impact of the COVID-19 pandemic, have persisted despite the recovery in the global economy and financial markets. These issues continued during the first quarter of fiscal 2023 and, although these issues have shown some improvement, are expected to continue to some degree throughout fiscal 2023. NTIC has experienced longer lead times for raw materials, has been forced to find new suppliers of certain raw materials, and has experienced raw material cost increases compared to prior fiscal quarters. Additionally, NTIC has experienced significantly longer shipping times and significant price increases per shipping container compared to prior fiscal quarters due to ocean freight capacity issues resulting from increased demand for shipping and reduced capacity and equipment. These and other issues resulting from worldwide supply chain disruptions have recently improved but are expected to continue to some degree throughout fiscal 2023 and could continue to have a material adverse effect on NTIC's business, operating results and financial condition. The precise financial impact and duration, however, cannot be reasonably estimated at this time. Financial Overview
NTIC's management, including its chief executive officer, who is NTIC's chief operating decision maker, reports and manages NTIC's operations in two reportable business segments based on products sold, customer base and distribution center: ZERUST® products and services and Natur-Tec® products.
Highlights of NTIC's financial results for the three months endedNovember 30, 2022 include the following, with increases or decreases in each case as compared to the respective prior fiscal year period:
? NTIC's consolidated net sales increased 9.7% during the three months ended
November 30, 2022 compared to the three months endedNovember 30, 2021 primarily as a result of an increase in sales of and demand for both Zerust® and Natur-Tec® products, as well as targeted price increases on certain products. 17
--------------------------------------------------------------------------------
? During the three months ended
net sales were derived from sales of ZERUST® products and services, which
increased 6.6% to
ended
existing customers as a result of increased global demand and targeted price
increases on certain of our products. NTIC's consolidated net sales for the
three months ended
customers in the oil and gas industry, a 66.9% increase compared to
for the three months ended November 30, 2021 .
? Net sales of Natur-Tec® products increased 21.6% during the three months ended
primarily due to an increase in demand of finished product sales in North
America and at NTIC's majority-owned subsidiary in
Private Limited .
? Cost of goods sold as a percentage of net sales decreased slightly to 68.2%
during the three months ended
three months ended
price increases to customers and increased sales made to customers in the oil
and gas industry, which products carry higher margins than our Zerust
industrial products.
? NTIC's equity in income from joint ventures decreased 13.5% to
during the three months ended
the three months ended
an increase in operating expenses and a decrease in gross margins at the joint
ventures.
? Net sales at the joint ventures decreased 8.5% to
months ended
ended
demand during the three months ended November 30, 2022 .
? NTIC's total operating expenses increased 11.7% to
months ended
ended
personnel expenses, including benefits and travel, and expenses incurred
during the current fiscal year period in connection with the startup of a new
indirect, majority owned subsidiary formed to assume the operations of a
former joint venture in
? Since NTIC acquired the remaining 50% ownership interest of Zerust India
effective
three months ended
on acquisition of equity method investee" on NTIC's consolidated statements of
operations.
? NTIC incurred net income attributable to NTIC of $502,242 , or $0.05 per
diluted common share, for the three months ended
net income attributable to NTIC of
share, for the three months ended
attributable to NTIC incurred in the three months ended
$3,951,550 was due to the gain from the Zerust India acquisition. 18
--------------------------------------------------------------------------------
Results of Operations
The following table sets forth NTIC's results of operations for the three months
ended
Three Months Ended
November 30, % of November 30, % of $ %
2022 Net Sales 2021 Net Sales Change Change
Net sales $ 19,952,766 n/a $ 18,193,413 n/a $ 1,759,353 9.7 %
Cost of goods sold 13,599,642 68.2 % 12,490,483 68.7 % 1,109,159 8.9 %
Equity in income from
joint ventures 1,189,404 n/a 1,374,749 n/a (185,345 ) (13.5 )%
Fees for services
provided to joint
ventures 1,181,805 n/a 1,258,858 n/a (77,053 ) (6.1 )%
Selling expenses 3,507,434 17.6 % 3,237,758 17.8 % 269,676 8.3 %
General and
administrative
expenses 3,130,599 15.7 % 2,596,347 14.3 % 534,252 20.6 %
Research and
development expenses 1,256,724 6.3 % 1,235,821 6.8 % 20,903 1.7 %
Net Sales . NTIC's consolidated net sales increased 9.7% to $19,952,766 during
the three months ended November 30, 2022 compared to the three months ended
November 30, 2021 . This increase was primarily a result of increased demand
across all market segments, including oil and gas, as well as targeted price
increases on certain products.
The following table sets forth NTIC's net sales by product segment for the three
months ended
Three Months Ended
November 30, November 30, $ %
2022 2021 Change Change
Total ZERUST® sales
6.6 % Total Natur-Tec® sales 4,582,765 3,769,628 813,137 21.6 % Total net sales$ 19,952,766 $ 18,193,413 $ 1,759,353 9.7 % During the three months endedNovember 30, 2022 , 77.0% of NTIC's consolidated net sales were derived from sales of ZERUST® products and services, which increased 6.6% to$15,370,001 during the three months endedNovember 30, 2022 compared to$14,423,785 during the three months endedNovember 30, 2021 . This increase was primarily a result of increased demand inNorth America , as well as targeted price increases on certain products.
The following table sets forth NTIC's net sales of ZERUST® products for the
three months ended
Three Months Ended
November 30, November 30, $ %
2022 2021 Change Change
ZERUST® industrial net sales $ 13,114,638 $ 12,611,530 $ 503,108 4.0 %
ZERUST® joint venture net sales 633,466 840,439 $ (206,973 ) -24.6 %
ZERUST® oil & gas net sales 1,621,897 971,816 $ 650,081 66.9 %
Total ZERUST® net sales $ 15,370,001 $ 14,423,785 $ 946,216 6.6 %
NTIC's total ZERUST® net sales increased during the three months ended November
30, 2022 , compared to the prior fiscal year period, primarily due to increased
sales to new and existing customers as a result of increased global demand and
targeted price increases on certain products, partially offset by a decrease in
joint venture net sales. Overall, demand for ZERUST® products and services
depends heavily on the overall health of the markets in which NTIC sells its
products, including the automotive, oil and gas, agriculture, and mining markets
in particular.
19-------------------------------------------------------------------------------- ZERUST® oil and gas net sales increased 66.9% during the three months endedNovember 30, 2022 compared to the same period last fiscal year primarily as a result of new opportunities with new customers. NTIC anticipates that its sales of ZERUST® products and services into the oil and gas industry will continue to remain subject to significant volatility from quarter to quarter as sales are recognized, specifically due to the volatility of oil prices. Demand for oil and gas products around the world depends primarily on market acceptance and the reach of NTIC's distribution network. Because of the typical size of individual orders and overall size of NTIC's net sales derived from sales of oil and gas products, the timing of one or more orders can materially affect NTIC's quarterly sales compared to prior fiscal year quarters. During the three months endedNovember 30, 2022 , 23.0% of NTIC's consolidated net sales were derived from sales of Natur-Tec® products, compared to 20.7% during the three months endedNovember 30, 2021 . Sales of Natur-Tec® products increased 21.6% to$4,582,765 during the three months endedNovember 30, 2022 compared to$3,769,628 during the three months endedNovember 30, 2021 as a result of increased global demand. COVID-19 adversely impacted demand for Natur-Tec® products from across the apparel industry, as well as many large users of bioplastics, including college campuses, stadiums, arenas, restaurants, and corporate office complexes. While NTIC has experienced a recovery in many of these areas to pre-pandemic levels, NTIC still expects some of these customers will be the last businesses to fully re-open and operate at full pre-pandemic capacities. Cost of Goods Sold. Cost of goods sold increased 8.9% for the three months endedNovember 30, 2022 compared to the three months endedNovember 30, 2021 primarily as a result of the increase in net sales, as described above, and price increases on raw materials used in NTIC's products, as well as increased labor and shipping costs. Cost of goods sold as a percentage of net sales decreased slightly to 68.2% for the three months endedNovember 30, 2022 compared to 68.7% for the three months endedNovember 30, 2021 primarily as a result of passing along price increases to customers and increased sales made to customers in the oil and gas industry, which products carry higher margins than our Zerust industrial products. Although NTIC has taken certain actions to address inflationary pressures and pass on related cost increases to its customers, we expect some of these inflationary pressures to persist in fiscal 2023. Some improvements from these actions as well as some improvements in gross margin were realized in the three months endedNovember 30, 2022 . Equity in Income from Joint Ventures. NTIC's equity in income from joint ventures decreased 13.5% to$1,189,404 during the three months endedNovember 30, 2022 compared to$1,374,749 during the three months endedNovember 30, 2021 . This decrease was primarily due to an increase in operating expenses and a decrease in gross margins at the joint ventures. NTIC's equity in income from joint ventures fluctuates based on net sales and profitability of the joint ventures during the respective periods. Of the total equity in income from joint ventures, NTIC had equity in income from joint ventures of$871,144 attributable to EXCOR during the three months endedNovember 30, 2022 compared to$910,773 attributable to EXCOR during the three months endedNovember 30, 2021 . NTIC had equity in income from all other joint ventures of$318,260 during the three months endedNovember 30, 2022 , compared to$463,976 during the three months endedNovember 30, 2021 . Fees for Services Provided to Joint Ventures. NTIC recognized fee income for services provided to joint ventures of$1,181,805 during the three months endedNovember 30, 2022 compared to$1,258,858 during the three months endedNovember 30, 2021 , representing a decrease of 6.1%, or$77,053 . Fee income for services provided to joint ventures is traditionally a function of the sales made by NTIC's joint ventures; however, at various joint ventures, the fee income for services is a fixed amount that does not fluctuate with the change in sales which was experienced by certain joint ventures during the three months endedNovember 30, 2022 . Total net sales of NTIC's joint ventures decreased to$24,730,289 during the three months endedNovember 30, 2022 compared to$27,022,995 for the three months endedNovember 30, 2021 , representing a decrease of 8.5%. This decrease was primarily a result of decreased demand during the three months endedNovember 30, 2022 due in part to geopolitical uncertainty. Net sales of NTIC's joint ventures are not included in NTIC's product sales and are not included in NTIC's consolidated financial statements. Of the total fee income for services provided to joint ventures, fees of$193,828 were attributable to EXCOR during the three months endedNovember 30, 2022 compared to$218,430 attributable to EXCOR during the three months endedNovember 30, 2021 . 20
-------------------------------------------------------------------------------- Selling Expenses. NTIC's selling expenses increased 8.3% for the three months endedNovember 30, 2022 compared to the same period in fiscal 2022 due primarily to an increase in travel and personnel expenses during the current fiscal year period compared to the prior fiscal year period. Selling expenses as a percentage of net sales decreased slightly to 17.6% for the three months endedNovember 30, 2022 compared to 17.8% during the three months endedNovember 30, 2021 primarily due to the increase in net sales, partially offset by the increased selling expenses, as previously described. General and Administrative Expenses. NTIC's general and administrative expenses increased 20.6% for the three months endedNovember 30, 2022 compared to the same period in fiscal 2022 due primarily to increased professional services and travel and personnel expenses during the current fiscal year period compared to the prior fiscal year period, as well as expenses incurred during the current fiscal year period in connection with the startup of a new indirect, majority owned subsidiary formed to assume the operations of a former joint venture inTaiwan . As a percentage of net sales, general and administrative expenses increased to 15.7% for the three months endedNovember 30, 2022 from 14.3% for the three months endedNovember 30, 2021 primarily due to the increase in general and administrative expenses, partially offset by the increase in net sales.
Research and Development Expenses. NTIC's research and development expenses
increased 1.7% for the three months ended
Interest Income. NTIC's interest income decreased to$6,168 during the three months endedNovember 30, 2022 compared to$10,943 during the three months endedNovember 30, 2021 due primarily to changes in the invested cash balances. Interest Expense. NTIC's interest expense increased to$91,331 during the three months endedNovember 30, 2022 compared to$2,891 during the three months endedNovember 30, 2021 due primarily to increased outstanding borrowings under the line of credit and increased interest rates, in each case during the current fiscal year period compared to the prior fiscal year period. Remeasurement Gain on Acquisition of Equity Method Investee. Authoritative guidance on accounting for business combinations requires that an acquirer re-measure its previously held equity interest in the acquisition at its acquisition date fair value and recognize the resulting gain or loss in earnings. As such, since NTIC acquired the remaining 50% ownership interest of Zerust India effectiveSeptember 1, 2021 , NTIC recognized a gain of$3,951,550 during the three months endedNovember 30, 2021 . This gain is included in "Remeasurement gain on acquisition of equity method investee" on NTIC's consolidated statements of operations. There was no comparable such gain during the current fiscal year period. Income Before Income Tax Expense. NTIC had income before income tax expense of$744,413 for the three months endedNovember 30, 2022 compared to income before income tax expense of$5,226,213 for the three months endedNovember 30, 2021 .
Income Tax Expense. Income tax expense was
NTIC considers the earnings of certain foreign joint ventures to be indefinitely invested outsidethe United States on the basis of estimates that NTIC's future domestic cash generation will be sufficient to meet future domestic cash needs. As a result,U.S. income and foreign withholding taxes have not been recognized on the cumulative undistributed earnings of$19,303,110 and$21,256,923 as ofNovember 30, 2022 andAugust 31, 2022 , respectively. To the extent undistributed earnings of NTIC's joint ventures are distributed in the future, they are not expected to result in any material additional income tax liability after the application of foreign tax credits. 21 -------------------------------------------------------------------------------- Net Income Attributable to NTIC. Net income attributable to NTIC decreased to$502,242 , or$0.05 per diluted common share, for the three months endedNovember 30, 2022 compared to$4,493,759 , or$0.46 per diluted common share, for the three months endedNovember 30, 2021 . This decrease was primarily due to the$3,951,550 remeasurement gain on acquisition of equity method investee recognized during the prior fiscal year period, which did not repeat this fiscal year, and to a lesser extent, the increase in operating expenses and cost of goods sold and decrease in joint venture income contribution. NTIC anticipates that its earnings will continue to be adversely affected to some extent by COVID-19, inflation and worldwide supply chain disruptions, among other factors. Additionally, NTIC anticipates that its quarterly net income will continue to remain subject to significant volatility primarily due to the financial performance of its subsidiaries and joint ventures, sales of its ZERUST® products and services into the oil and gas industry, and sales of its Natur-Tec® bioplastics products, which sales fluctuate more on a quarterly basis than the traditional ZERUST® business. Other Comprehensive Income - Foreign Currency Translations Adjustment. The changes in the foreign currency translations adjustment were due to the fluctuation of theU.S. dollar compared to the Euro and other foreign currencies during the three months endedNovember 30, 2022 compared to the same period in fiscal 2022.
Liquidity and Capital Resources
Sources ofCash and Working Capital . NTIC's working capital, defined as current assets less current liabilities, was$25,408,920 as ofNovember 30, 2022 , including$6,066,321 in cash and cash equivalents and$5,590 in available for sale securities, compared to$23,169,480 as ofAugust 31, 2022 , including$5,333,890 in cash and cash equivalents and$5,590 in available for sale securities. OnJanuary 6, 2023 , NTIC entered into a Credit Agreement (the "Credit Agreement") withJPMorgan Chase Bank, N.A . ("JPM"), which provides NTIC with a senior secured revolving line of credit (the "Credit Facility") of up to$10.0 million . The Credit Facility includes a$5.0 million sublimit for standby letters of credit. Unless terminated earlier, the Credit Facility will mature onJanuary 6, 2024 , and the principal amount thereunder, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on such date. Borrowings under the Credit Agreement bear interest at a floating rate, at the option of NTIC, equal to either the CB Floating Rate or the Adjusted SOFR Rate. The term "CB Floating Rate" means the greater of the Prime Rate inthe United States or 2.50%. The term "Adjusted SOFR Rate" means the term secured overnight financing rate for either one, three or six months (depending on the interest period selected by NTIC) plus 0.10% per annum. With respect to any borrowings using an Adjusted SOFR Rate, there is an applicable margin of 2.15% applied per annum. There is no applicable margin with respect to borrowings using a CB Floating Rate. The Credit Agreement contains customary affirmative and negative covenants, including, among other matters, limitations on NTIC's ability to incur additional debt, grant liens, engage in certain business operations and transactions, make certain investments, modify its organizational documents or form any new subsidiaries, subject to certain exceptions. Further, the Credit Agreement contains a negative covenant that restricts the ability of NTIC to redeem or repurchase its common stock or pay dividends if the result of which would cause an event of default under the Credit Agreement. The Credit Agreement also requires the Company to maintain a Fixed Charge Coverage Ratio of at least 1.25 to 1.00. The term "Fixed Charge Coverage Ratio" means the ratio, computed for the NTIC on a consolidated basis, of net income plus income tax expense, plus amortization expense, plus depreciation expense, plus interest expense, and plus dividends received from joint ventures, minus unfinanced capital expenditures and equity in income from joint ventures, all computed for the twelve month period then ending, to scheduled principal payments made, plus scheduled finance lease payments made, plus interest expense paid, plus income tax expense paid, and plus cash distributions and dividends paid, all computed for the same twelve month period then ending. The Credit Agreement also contains customary events of default, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, breach of any financial covenant and change of control. Upon the occurrence and during the continuance of any event of default, JPM may accelerate the payment of the obligations thereunder and exercise various other customary default remedies. 22 -------------------------------------------------------------------------------- As ofNovember 30, 2022 , NTIC had a revolving line of credit with PNC Bank of$7,000,000 , which was increased from$5,000,000 effective as ofMay 20, 2022 to allow for financial flexibility, and was scheduled to decrease back to$5,000,000 effective as ofAugust 16, 2022 . Subsequently, to maintain future financial flexibility, onAugust 8, 2022 ,NTIC and PNC Bank entered into an Amended and Restated Revolving Line of Credit Note and agreed to keep the line of credit at$7,000,000 until its maturity date,January 7, 2023 . As ofNovember 30, 2022 ,$5,450,000 was outstanding under the revolving line of credit, compared to$2,500,000 outstanding as ofNovember 30, 2021 . Such outstanding borrowings were used primarily to fund NTIC's acquisition of the remaining ownership interest of Zerust India. Outstanding advances under the line of credit bear interest at the daily Bloomberg Short-Term Bank Yield Index (BSBY) rate plus 250 basis points (2.50%). The line of credit is scheduled to mature onJanuary 7, 2023 . The line of credit is governed under an Amended and Restated Loan Agreement datedAugust 31, 2021 . The loan agreement contains standard covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio, and negative covenants, which, among other things, limit the incurrence of additional indebtedness, loans and equity investments, disposition of assets, mergers and consolidations and other matters customarily restricted in such agreements. Under the loan agreement, NTIC is subject to a minimum fixed charge coverage ratio of 1.10:1.00. As ofNovember 30, 2022 , NTIC was in compliance with all debt covenants under the Amended and Restated Loan Agreement. As ofNovember 30, 2022 , NTIC did not have any letters of credit outstanding with respect to the letter of credit sub-facility available under the revolving line of credit with PNC Bank. In connection with the execution of the Credit Agreement described above, onJanuary 6, 2023 , loan agreement with PNC Bank was terminated. NTIC believes that a combination of its existing cash and cash equivalents, available for sale securities, forecasted cash flows from future operations, anticipated distributions of earnings, anticipated fees to NTIC for services provided to its joint ventures, and funds available through existing or anticipated financing arrangements will be adequate to fund its existing operations, investments in new or existing joint ventures or subsidiaries, capital expenditures, debt repayments, cash dividends, and any stock repurchases for at least the next 12 months. During the remainder of fiscal 2023, NTIC expects to continue to invest directly and through its use of working capital in Zerust India, NTIC China, Zerust Mexico, NTI Europe, its joint ventures, research and development, marketing efforts, resources for the application of its corrosion prevention technology in the oil and gas industry, and its Natur-Tec® bio-plastics business, although the amounts of these various investments are not known at this time. NTIC also expects to use some of its capital resources to continue to transition some of its joint ventures as needed or appropriate, which may include additional acquisitions by NTIC of the remaining ownership interests of joint ventures not owned by NTIC, the formation of one or more new subsidiaries to assume the operations of a joint venture, and dissolutions or liquidations of one or more of its joint ventures. Some of these joint venture transitions may materially impact NTIC's results of operations for a particular reporting period. For example, the formation of a new indirect, majority owned subsidiary of NTIC to assume the operations of a former joint venture increased NTIC's operating expenses during the three months endedNovember 30, 2022 . NTIC traditionally has used the cash generated from its operations, distributions of earnings from joint ventures and fees for services provided to its joint ventures to fund NTIC's new technology investments and capital contributions to new and existing subsidiaries and joint ventures. NTIC's joint ventures traditionally have operated with little or no debt and have been self-financed with minimal initial capital investment and minimal additional capital investment from their respective owners. Therefore, NTIC believes there is limited exposure by NTIC's joint ventures that could materially impact their respective operations and/or liquidity. 23 -------------------------------------------------------------------------------- In order to take advantage of new product and market opportunities to expand its business and increase its revenues and assist with joint venture transitions, NTIC may decide to finance such opportunities by additional borrowing under its revolving line of credit or raising additional financing through the issuance of debt or equity securities. There is no assurance that any financing transaction will be available on terms acceptable to NTIC or at all or that any financing transaction will not be dilutive to NTIC's current stockholders. Uses of Cash and Cash Flows. Net cash provided by operating activities during the three months endedNovember 30, 2022 was$2,002,543 , which resulted principally from dividends received from joint ventures, NTIC's net income, an increase in inventories, depreciation and amortization expense, and stock-based compensation, partially offset by equity in income from joint ventures and an increase in accounts payable. Net cash provided by operating activities during the three months endedNovember 30, 2021 was$3,319,024 , which resulted principally from NTIC's net income, dividends received from joint ventures, deferred income tax, depreciation expense, and stock-based compensation, partially offset by the remeasurement gain on acquisition of equity method investee and equity in income from joint ventures. NTIC's cash flows from operations are impacted by significant changes in certain components of NTIC's working capital, including inventory turnover and changes in receivables and payables. NTIC considers internal and external factors when assessing the use of its available working capital, specifically when determining inventory levels and credit terms of customers. Key internal factors include existing inventory levels, stock reorder points, customer forecasts and customer requested payment terms. Key external factors include the availability of primary raw materials and sub-contractor production lead times. NTIC's typical contractual terms for trade receivables, excluding joint ventures, are traditionally 30 days and 90 days for trade receivables from its joint ventures. Before extending unsecured credit to customers, excluding NTIC's joint ventures, NTIC reviews customers' credit histories and will establish an allowance for uncollectible accounts based upon factors surrounding the credit risk of specific customers and other information. Accounts receivable over 30 days are considered past due for most customers. NTIC does not accrue interest on past due accounts receivable. If accounts receivables in excess of the provided allowance are determined uncollectible, they are charged to selling expense in the period that the determination is made. Accounts receivable are deemed uncollectible based on NTIC exhausting reasonable efforts to collect. NTIC's typical contractual terms for receivables for services provided to its joint ventures are 90 days. NTIC records receivables for services provided to its joint ventures on an accrual basis, unless circumstances exist that make the collection of the balance uncertain, in which case the fee income will be recorded on a cash basis until there is consistency in payments. This determination is handled on a case-by-case basis. NTIC experienced an increase in trade receivables and a decrease in inventory as ofNovember 30, 2022 compared toAugust 31, 2022 . Trade receivables, excluding joint ventures, as ofNovember 30, 2022 increased$261,255 compared toAugust 31, 2022 , primarily related to an increase in sales. Outstanding trade receivables, excluding joint ventures balances, increased an average of 1 day to an average of 68 days from balances outstanding from these customers as ofNovember 30, 2022 from an average of 67 days as ofAugust 31, 2022 . Outstanding trade receivables from joint ventures as ofNovember 30, 2022 decreased$104,260 compared toAugust 31, 2022 primarily due to the timing of payments. Outstanding balances from trade receivables from joint ventures decreased an average of 4 days to an average of 85 days from balances outstanding from these customers as ofNovember 30, 2022 from an average of 89 days as ofAugust 31, 2022 . The average days outstanding of trade receivables from joint ventures as ofNovember 30, 2022 were primarily due to the receivables balances at NTIC's joint ventures inThailand andJapan . 24 -------------------------------------------------------------------------------- Outstanding receivables for services provided to joint ventures as ofNovember 30, 2022 decreased$641,639 compared toAugust 31, 2022 , and the average days to pay increased an average of 2 days to an average of 87 days from an average of 85 days as ofAugust 31, 2022 . Net cash used in investing activities for the three months endedNovember 30, 2022 was$453,539 , which was primarily the result of the purchases of property and equipment, and investments in patents. Net cash used in investing activities for the three months endedNovember 30, 2021 was$5,429,590 , which was primarily the result of the purchase of the remaining 50% ownership interest in ZerustIndia , purchases of property and equipment, and investments in patents. Net cash used in financing activities for the three months endedNovember 30, 2022 was$730,386 , which resulted from dividends paid to shareholders, the repayment of borrowings under the line of credit, and dividends received by non-controlling interests, partially offset by proceeds from the exercise of stock options and proceeds from NTIC's employee stock purchase plan. Net cash provided by financing activities for the three months endedNovember 30, 2021 was$1,834,611 , which resulted from borrowings under the line of credit and proceeds from NTIC's employee stock purchase plan and the exercise of stock options, partially offset by dividends paid to shareholders and dividends received by non-controlling interests. Share Repurchase Plan. OnJanuary 15, 2015 , NTIC's Board of Directors authorized the repurchase of up to$3,000,000 in shares of NTIC common stock through open market purchases or unsolicited or solicited privately negotiated transactions. This program has no expiration date but may be terminated by NTIC's Board of Directors at any time. No repurchases occurred during the three months endedNovember 30, 2022 . As ofNovember 30, 2022 , up to$2,640,548 in shares of NTIC common stock remained available for repurchase under NTIC's stock repurchase program. Cash Dividends. OnOctober 20, 2022 , the Company's Board of Directors declared a cash dividend of$0.07 per share of the Company's common stock, payable onNovember 16, 2022 to stockholders of record onNovember 3, 2022 . OnOctober 20, 2021 , the Company's Board of Directors declared a cash dividend of$0.07 per share of the Company's common stock, payable onNovember 17, 2021 to stockholders of record onNovember 3, 2021 . The declaration of future dividends is not guaranteed and will be determined by NTIC's Board of Directors in light of conditions then existing, including NTIC's earnings, financial condition, cash requirements, restrictions in financing agreements, business conditions and other factors, including without limitation the effect of COVID-19 on NTIC's business, operating results and financial condition.
Capital Expenditures and Commitments. NTIC spent
Contractual Obligations There has been no material change to NTIC's contractual obligations as provided in "Part II. Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations," included in NTIC's annual report on Form 10-K for the fiscal year endedAugust 31, 2022 . Inflation and Seasonality Although inflation inthe United States and abroad historically has had little effect on NTIC, inflationary pressures adversely affected NTIC's gross margins during the first quarter of fiscal 2023 and are expected to persist into at least the second quarter of fiscal 2023. 25 -------------------------------------------------------------------------------- NTIC believes there is some seasonality in its business. NTIC anticipates its net sales in the second fiscal quarter may be adversely affected by the longChinese New Year , the North American holiday season and overall less corrosion taking place at lower winter temperatures worldwide. Market Risk
NTIC is exposed to some market risk stemming from changes in foreign currency exchange rates, commodity prices and interest rates.
Because the functional currency of NTIC's foreign operations and investments in its foreign joint ventures is the applicable local currency, NTIC is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. NTIC's principal exchange rate exposure is with the Euro, the Japanese Yen, the Indian Rupee, the Chinese Renminbi, the South Korean Won, and the English Pound against theU.S. Dollar. NTIC's fees for services provided to joint ventures and dividend distributions from these foreign entities are paid in foreign currencies and, thus, fluctuations in foreign currency exchange rates could result in declines in NTIC's reported net income. Since NTIC's investments in its joint ventures are accounted for using the equity method, any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment and would not change NTIC's equity in income from joint ventures reflected in its consolidated statements of operations. NTIC does not hedge against its foreign currency exchange rate risk.
Some raw materials used in NTIC's products are exposed to commodity price changes. The primary commodity price exposures are with a variety of plastic resins.
Any outstanding advances under NTIC's revolving line of credit with PNC Bank bear interest at an annual rate based on daily BSBY plus 2.50%. As ofNovember 30, 2022 , NTIC had borrowings of$5,450,000 under the line of credit that existed as of that date.
Critical Accounting Policies and Estimates
There have been no material changes to NTIC's critical accounting policies and estimates from the information provided in "Part II. Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" included in NTIC's annual report on Form 10-K for the fiscal year endedAugust 31, 2022 .
Recent Accounting Pronouncements
See Note 2 to NTIC's consolidated financial statements for a discussion of recent accounting pronouncements.
Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but
also forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are subject to the
safe harbor created by those sections. In addition, NTIC or others on NTIC's
behalf may make forward-looking statements from time to time in oral
presentations, including telephone conferences and/or web casts open to the
public, in press releases or reports, on NTIC's Internet web site, or otherwise.
All statements other than statements of historical facts included in this report
or expressed by NTIC orally from time to time that address activities, events,
or developments that NTIC expects, believes, or anticipates will or may occur in
the future are forward-looking statements, including, in particular, the
statements about NTIC's plans, objectives, strategies, and prospects regarding,
among other things, NTIC's financial condition, results of operations and
business, the anticipated effect of COVID-19 and its acquisition of Zerust India
on NTIC's business, operating results and financial condition, the outcome of
contingencies, such as legal proceedings. NTIC has identified some of these
forward-looking statements in this report with words like "believe," "can,"
"may," "could," "would," "might," "forecast," "possible," "potential,"
"project," "will," "should," "expect," "intend," "plan," "predict,"
"anticipate," "estimate," "approximate," "outlook," or "continue" or the
negative of these words or other words and terms of similar meaning. The use of
future dates is also an indication of a forward-looking statement.
Forward-looking statements may be contained in the notes to NTIC's consolidated
financial statements and elsewhere in this report, including under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
26-------------------------------------------------------------------------------- Forward-looking statements are based on current expectations about future events affecting NTIC and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to NTIC. These uncertainties and factors are difficult to predict, and many of them are beyond NTIC's control. The following are some of the uncertainties and factors known to us that could cause NTIC's actual results to differ materially from what NTIC has anticipated in its forward-looking statements:
? The effect of worldwide disruption in supply issues on NTIC's business,
operating results and financial condition, which will likely continue through
fiscal 2023, regardless of the status of COVID-19;
? The effect of COVID-19 on NTIC's business, operating results and financial
condition, including in particular in
suppliers and subcontractors, as well as the global economy and financial
markets;
? The effect of current worldwide economic conditions, inflation, recessionary
indications and any turmoil and disruption in the global credit and financial
markets on NTIC's business, including in particular as a result of the ongoing
war between
sanctions by
which have decreased our margins and the margins of our joint ventures and
resulted in decreased joint venture profitability, which will likely continue
during fiscal 2023;
? Variability in NTIC's sales of ZERUST® products and services to the oil and
gas industry and Natur-Tec® products and NTIC's equity income of joint
ventures, which variability in sales and equity in income from joint ventures,
in turn, subject NTIC's earnings to quarterly fluctuations;
? Risks associated with NTIC's international operations and exposure tofluctuations in foreign currency exchange rates, import duties, taxes, and
tariffs;
? The effect of the
NTIC's operating results, including, in particular, future net sales of NTIC's
European and other joint ventures;
? The effect of the health of the
and the evolution of the automotive industry towards electric vehicles;
? NTIC's dependence on the success of its joint ventures and fees and dividend
distributions that NTIC receives from them;
? Risks associated with NTIC's acquisition of the remaining 50% ownership
interest in its Indian joint venture, Zerust India;
? NTIC's relationships with its joint ventures and its ability to maintain those
relationships, especially in light of anticipated succession planning issues,
and risks associated with possible future acquisitions of the remaining
ownership interests of certain joint ventures;
? Fluctuations in the cost and availability of raw materials, including resins
and other commodities, including supply chain disruptions and weather related
impacts;
? The success of and risks associated with NTIC's emerging new businesses and
products and services, including in particular NTIC's ability and the ability
of NTIC's joint ventures to sell ZERUST® products and services to the oil and
gas industry and Natur-Tec® products and the often lengthy and extensive sales
process involved in selling such products and services;
27--------------------------------------------------------------------------------
? NTIC's ability to introduce new products and services that respond to changing
market conditions and customer demand;
? Market acceptance of NTIC's existing and new products, especially in light of
existing and new competitive products;
? Maturation of certain existing markets for NTIC's ZERUST® products andservices and NTIC's ability to grow market share and succeed in penetrating
other existing and new markets;
? Increased competition, especially with respect to NTIC's ZERUST® products and
services, and the effect of such competition on NTIC's and its joint
ventures' pricing, net sales, and margins;
? NTIC's reliance upon and its relationships with its distributors, independent
sales representatives, and joint ventures;
? NTIC's reliance upon suppliers;
? Oil prices, which may affect sales of NTIC's ZERUST® products and services to
the oil and gas industry, and which may be impacted by the action of Russian
military forces in Ukraine ;
? NTIC's operations in China , and the risks associated therewith;
? The costs and effects of complying with laws and regulations and changes in
tax, fiscal, government, and other regulatory policies, including rules
relating to environmental, health, and safety matters;
? Unforeseen product quality or other problems in the development, production,
and usage of new and existing products;
? Unforeseen production expenses incurred in connection with new customers and
new products;
? Loss of or changes in executive management or key employees and the need to
hire and train local support in a timely manner in order to support customer
needs;
? Ability of management to manage around unplanned events;
? Pending and future litigation;
? NTIC's reliance on its intellectual property rights and the absence of
infringement of the intellectual property rights of others;
? NTIC's ability to maintain effective internal control over financial
reporting, especially in light of its joint venture arrangements;
? Changes in applicable laws or regulations and NTIC's failure to comply with
applicable laws, rules, and regulations;
? Changes in generally accepted accounting principles and the effect of new
accounting pronouncements;
? Fluctuations in NTIC's effective tax rate;
28--------------------------------------------------------------------------------
? The effect of extreme weather conditions on NTIC's operating results; and
? NTIC's reliance upon its management information systems. For more information regarding these and other uncertainties and factors that could cause NTIC's actual results to differ materially from what NTIC has anticipated in its forward-looking statements or otherwise could materially adversely affect its business, financial condition or operating results, see NTIC's annual report on Form 10-K for the fiscal year endedAugust 31, 2022 under the heading "Part I. Item 1A. Risk Factors." All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. NTIC wishes to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results due to the uncertainties and factors described above and others that NTIC may consider immaterial or does not anticipate at this time. Although NTIC believes that the expectations reflected in its forward-looking statements are reasonable, NTIC does not know whether its expectations will prove correct. NTIC's expectations reflected in its forward-looking statements can be affected by inaccurate assumptions NTIC might make or by known or unknown uncertainties and factors, including those described above. The risks and uncertainties described above are not exclusive, and further information concerning NTIC and its business, including factors that potentially could materially affect its financial results or condition, may emerge from time to time. NTIC assumes no obligation to update, amend, or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. NTIC advises you, however, to consult any further disclosures NTIC makes on related subjects in its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K that NTIC files with or furnishes to theSecurities and Exchange Commission .
© Edgar Online, source
