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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to __________________

 

Commission File Number: 001-11038

____________________

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of incorporation or organization)

41-0857886

(I.R.S. Employer Identification No.)

  

4201 Woodland Road

P.O. Box 69

Circle Pines, Minnesota 55014

(Address of principal executive offices) (Zip Code)

 

(763) 225-6600
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.02 per share

NTIC

Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company 

Emerging growth company 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

 

As of April 6, 2021, there were 9,104,636 shares of common stock of the registrant outstanding.

 

 

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

February 28, 2021

 

TABLE OF CONTENTS

 

Description

 

Page

     

PART I.

FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

 
     
  Consolidated Balance Sheets as of February 28, 2021 (unaudited) and August 31, 2020 1
     
  Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended February 28, 2021 and February 29, 2020 2
     
  Consolidated Statements of Comprehensive Income (unaudited) for the Three and Six Months Ended February 28, 2021 and February 29, 2020 3
     
  Consolidated Statements of Equity (unaudited) for the Three and Six Months Ended  February 28, 2021 and February 29, 2020 4
     
  Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended February 28, 2021 and February 29, 2020 5
     
  Notes to Consolidated Financial Statements (unaudited) 6-17
     
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18-35

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

36

     

Item 4.

Controls and Procedures

36

     

PART II.

OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

37

     

Item 1A.

Risk Factors

37

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

     

Item 3.

Defaults Upon Senior Securities

37

     

Item 4.

Mine Safety Disclosures

37

     

Item 5.

Other Information

38

     

Item 6.

Exhibits

38

     

SIGNATURE PAGE

39

 

_________________

 

 

 

 

i

 

 

 

This quarterly report on Form 10-Q contains certain forward-looking statements that are 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, and are subject to the safe harbor created by those sections. For more information, see Part I. Financial Information Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements.

 

_________________

 

As used in this report, references to NTIC, the Company, we, our or us, unless the context otherwise requires, refer to Northern Technologies International Corporation and its wholly-owned and majority-owned subsidiaries, all of which are consolidated on NTICs consolidated financial statements.

 

As used in this report, references to: (1) NTIC China refer to NTICs wholly-owned subsidiary in China, NTIC (Shanghai) Co., Ltd.; (2) NTI Europe refer to NTICs wholly-owned subsidiary in Germany, NTIC Europe GmbH; (3) Zerust Mexico refer to NTICs wholly-owned subsidiary in Mexico, ZERUST-EXCOR MEXICO, S. de R.L. de C.V; and (4)NTI Asean refer to NTICs majority-owned holding company subsidiary, NTI Asean LLC, which holds investments in certain entities that operate in the Association of Southeast Asian Nations (ASEAN) region, including the following countries: Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand and Vietnam.

 

NTICs consolidated financial statements do not include the accounts of any of its joint ventures. Except as otherwise indicated, references in this report to NTICs joint ventures do not include any of NTICs wholly-owned or majority-owned subsidiaries.

 

As used in this report, references to EXCOR refer to NTICs joint venture in Germany, Excor Korrosionsschutz Technologien und Produkte GmbH.

 

As used in this report, references to Tianjin Zerust refer to NTICs former joint venture in China, Tianjin-Zerust Anticorrosion Co., Ltd.

 

All trademarks, trade names or service marks referred to in this report are the property of their respective owners.

 

 

 

 

ii

 

PART I - FINANCIAL INFORMATION

 

ITEM 1

FINANCIAL STATEMENTS

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 2021 (UNAUDITED)

AND AUGUST 31, 2020 (AUDITED)


 

  

February 28, 2021

  

August 31, 2020

 

ASSETS

        

CURRENT ASSETS:

        

Cash and cash equivalents

 $6,788,535  $6,403,032 

Available for sale securities

  5,913,480   5,544,722 

Receivables:

        

Trade excluding joint ventures, less allowance for doubtful accounts of $100,000 at February 28, 2021 and $90,000 at August 31, 2020

  10,286,535   8,072,212 

Trade joint ventures

  448,021   475,900 

Fees for services provided to joint ventures

  1,315,876   927,286 

Income taxes

  289,104   19,907 

Inventories

  11,210,584   10,961,796 

Prepaid expenses

  1,270,453   797,495 

Total current assets

  37,522,588   33,202,350 
         

PROPERTY AND EQUIPMENT, NET

  7,144,909   7,110,789 
         

OTHER ASSETS:

        

Investments in joint ventures

  24,860,148   24,090,826 

Deferred income taxes

  215,184   209,729 

Patents and trademarks, net

  776,405   802,006 

Operating lease right of use asset

  596,935   658,788 

Total other assets

  26,448,672   25,761,349 

Total assets

 $71,116,169  $66,074,488 
         

LIABILITIES AND EQUITY

        

CURRENT LIABILITIES:

        

Accounts payable

 $4,394,539  $3,205,241 

Income taxes payable

  623,960   310,922 

Accrued liabilities:

        

Payroll and related benefits

  1,829,991   1,314,978 

Other

  975,780   880,118 

Current portion of operating lease

  226,979   386,345 

Total current liabilities

  8,051,249   6,097,604 

LONG-TERM LIABILITIES:

        

Operating lease, less current portion

  369,956   272,443 

Total long-term liabilities

  369,956   272,443 
         

COMMITMENTS AND CONTINGENCIES (Note 12)

          
         

EQUITY:

        

Preferred stock, no par value; authorized 10,000 shares; none issued and outstanding

      

Common stock, $0.02 par value per share; authorized 15,000,000 shares as of February 28, 2021 and August 31, 2020; issued and outstanding 9,104,636 and 9,099,990, respectively

  182,093   182,000 

Additional paid-in capital

  17,793,646   17,415,043 

Retained earnings

  44,455,982   42,472,810 

Accumulated other comprehensive loss

  (2,969,563)  (3,410,438)

Stockholders’ equity

  59,462,158   56,659,415 

Non-controlling interests

  3,232,806   3,045,026 

Total equity

  62,694,964   59,704,441 

Total liabilities and equity

 $71,116,169  $66,074,488 

 

See notes to consolidated financial statements.

 

 

1

 
 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020


         

   

Three Months Ended

   

Six Months Ended

 
   

February 28, 2021

   

February 29, 2020

   

February 28, 2021

   

February 29, 2020

 

NET SALES:

                               

Net sales, excluding joint ventures

  $ 12,255,941     $ 12,988,153     $ 24,454,749     $ 27,033,937  

Net sales, to joint ventures

    526,941       245,630       1,107,245       831,246  

Total net sales

    12,782,882       13,233,783       25,561,994       27,865,183  
                                 

Cost of goods sold

    8,531,679       8,687,301       16,845,000       18,492,385  

Gross profit

    4,251,203       4,546,482       8,716,994       9,372,798  
                                 

JOINT VENTURE OPERATIONS:

                               

Equity in income from joint ventures

    1,920,012       1,360,804       3,745,724       2,654,794  

Fees for services provided to joint ventures

    1,462,684       1,256,213       2,799,245       2,614,538  

Total joint venture operations

    3,382,696       2,617,017       6,544,969       5,269,332  
                                 

OPERATING EXPENSES:

                               

Selling expenses

    2,832,008       3,110,240       5,573,776       5,997,532  

General and administrative expenses

    1,958,974       2,345,113       4,052,956       4,394,800  

Research and development expenses

    1,075,180       1,006,395       2,150,917       1,968,036  

Total operating expenses

    5,866,162       6,461,748       11,777,649       12,360,368  
                                 

OPERATING INCOME

    1,767,737       701,751       3,484,314       2,281,762  
                                 

INTEREST INCOME

    15,638       55,042       85,176       104,080  

INTEREST EXPENSE

    (5,249 )     (9,377 )     (7,617 )     (14,821 )
                                 

INCOME BEFORE INCOME TAX EXPENSE

    1,778,126       747,416       3,561,873       2,371,021  
                                 

INCOME TAX EXPENSE

    274,660       463,594       653,250       727,660  
                                 

NET INCOME

    1,503,466       283,822       2,908,623       1,643,361  
                                 

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

    190,891       103,988       333,649       250,977  
                                 

NET INCOME ATTRIBUTABLE TO NTIC

  $ 1,312,575     $ 179,834     $ 2,574,974     $ 1,392,384  
                                 

NET INCOME ATTRIBUTABLE TO NTIC PER COMMON SHARE:

                               

Basic

  $ 0.14     $ 0.02     $ 0.28     $ 0.15  

Diluted

  $ 0.13     $ 0.02     $ 0.26     $ 0.15  
                                 

WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:

                               

Basic

    9,104,636       9,097,236       9,104,623       9,095,604  

Diluted

    9,867,918       9,461,727       9,756,268       9,383,867  

CASH DIVIDENDS DECLARED PER COMMON SHARE

  $ 0.065     $ 0.065     $ 0.065     $ 0.13

 

 

See notes to consolidated financial statements.

 

2

 
 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020


 

   

Three Months Ended

   

Six Months Ended

 
   

February 28, 2021

   

February 29, 2020

   

February 28, 2021

   

February 29, 2020

 

NET INCOME

  $ 1,503,466     $ 283,822     $ 2,908,623     $ 1,643,361  

OTHER COMPREHENSIVE INCOME (LOSS) – FOREIGN CURRENCY TRANSLATION ADJUSTMENT

    196,341       (158,343 )     495,006       (32,667 )
                                 

COMPREHENSIVE INCOME

    1,699,807       125,479       3,403,629       1,610,694  

COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS

    177,117       57,630       387,780       227,481  

COMPREHENSIVE INCOME ATTRIBUTABLE TO NTIC

  $ 1,522,690     $ 67,849     $ 3,015,849     $ 1,383,213  

 

 

See notes to consolidated financial statements.

 

3

 
 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020


 

  

STOCKHOLDERS EQUITY THREE MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020

         
                  

Accumulated

         
          

Additional

      

Other

  

Non-

     
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Controlling

  

Total

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Interests

  

Equity

 
                             

BALANCE AT NOVEMBER 30, 2020

  9,104,636  $182,093  $17,632,811  $43,735,209  $(3,179,678) $3,255,689  $61,626,124 

Stock issued for employee stock purchase plan

                     

Stock option expense

        160,835            160,835 

Dividends paid to stockholders

           (591,802)        (591,802)

Dividend received by non-controlling interest

                 (200,000)  (200,000)

Net income

           1,312,575      190,891   1,503,466 

Other comprehensive income (loss)

              210,115   (13,774)  196,341 

BALANCE AT FEBRUARY 28, 2021

  9,104,636  $182,093  $17,793,646  $44,455,982  $(2,969,563) $3,232,806  $62,694,964 
                             

BALANCE AT NOVEMBER 30, 2019

  9,097,236  $181,945  $16,367,555  $45,614,389  $(4,490,364) $3,244,530  $60,918,055 

Stock issued for employee stock purchase plan

                     

Stock option expense

        339,652            339,652 

Dividends paid to stockholders

           (591,320)        (591,320)

Dividend received by non-controlling interest

                     

Net income

           179,834      103,988   283,822 

Other comprehensive loss

              (111,985)  (46,358)  (158,343)

BALANCE AT FEBRUARY 29, 2020

  9,097,236  $181,945  $16,707,207  $45,202,903  $(4,602,349) $3,302,160  $60,791,866 

 

 

  

STOCKHOLDERS EQUITY SIX MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020

         
                  

Accumulated

         
          

Additional

      

Other

  

Non-

     
  

Common Stock

  

Paid-in

  

Retained

  

Comprehensive

  

Controlling

  

Total

 
  

Shares

  

Amount

  

Capital

  

Earnings

  

Income (Loss)

  

Interests

  

Equity

 

BALANCE AT AUGUST 31, 2020

  9,099,990  $182,000  $17,415,043  $42,472,810  $(3,410,438) $3,045,026  $59,704,441 

Stock options exercised

                     

Stock issued for employee stock purchase plan

  4,646   93   36,099            36,192 

Stock option expense

        342,504            342,504 

Dividends paid to stockholders

           (591,802)        (591,802)

Dividend received by non-controlling interest

                 (200,000)  (200,000)

Net income

           2,574,974      333,649   2,908,623 

Other comprehensive income

              440,875   54,131   495,006 

BALANCE AT FEBRUARY 28, 2021

  9,104,636  $182,093  $17,793,646  $44,455,982  $(2,969,563) $3,232,806  $62,694,964 
                             

BALANCE AT AUGUST 31, 2019

  9,086,816  $181,736  $16,013,338  $44,992,718  $(4,593,178) $3,074,679  $59,669,293 

Stock options exercised

  6,823   137   (137)            

Stock issued for employee stock purchase plan

  3,597   72   35,536            35,608 

Stock option expense

        658,470            658,470 

Dividends paid to stockholders

           (1,182,199)        (1,182,199)

Dividend received by non-controlling interest

                     

Net income

           1,392,384      250,977   1,643,361 

Other comprehensive loss

              (9,171)  (23,496)  (32,667)

BALANCE AT FEBRUARY 29, 2020

  9,097,236  $181,945  $16,707,207  $45,202,903  $(4,602,349) $3,302,160  $60,791,866 

 

See notes to consolidated financial statements.

 

4

 
 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020 


    

  

Six Months Ended

 
  

February 28,

2021

  

February 29,

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income

 $2,908,623  $1,643,361 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Stock-based compensation

  342,504   658,470 

Depreciation expense

  451,498   428,711 

Amortization expense

  100,821   118,171 

Change in allowance for doubtful accounts

  10,000    

Equity in income from joint ventures

  (3,745,724)  (2,654,794)

Dividends received from joint ventures

  3,323,503   5,558,926 

Deferred income taxes

  (3,182)  111,768 

Changes in current assets and liabilities:

        

Receivables:

        

Trade, excluding joint ventures

  (2,004,152)  (10,778)

Trade, joint ventures

  27,879   285,298 

Fees for services provided to joint ventures

  (388,590)  72,781 

Income taxes

  (270,867)  221,211 

Inventories

  (83,028)  (908,423)

Prepaid expenses and other

  (450,263)  122,676 

Accounts payable

  1,036,818   850,534 

Income tax payable

  290,252   (10,833)

Accrued liabilities

  413,157   (2,284,150)

Net cash provided by operating activities

  1,959,249   4,207,710 
         

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Purchase of available for sale securities

  (868,758)  (6,946,908)

Proceeds from the sale of available for sale securities

  500,000   4,000,000 

Purchases of property and equipment

  (466,572)  (296,786)

Investments in patents

  (75,220)  (45,414)

Net cash used in investing activities

  (910,550)  (3,289,108)
         

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Dividends paid on NTIC common stock

  (591,802)  (1,182,199)

Dividends received by non-controlling interests

  (200,000)   

Proceeds from employee stock purchase plan

  36,192   35,608 

Net cash used in financing activities

  (755,610)  (1,146,591)
         

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

  92,414   (2,359)
         
         

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  385,503   (230,348)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

  6,403,032   5,856,758 
         

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 $6,788,535  $5,626,410 

 

See notes to consolidated financial statements.

 

5

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


 

 

1.

INTERIM FINANCIAL INFORMATION

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, which are of a normal recurring nature, and present fairly the consolidated financial position of Northern Technologies International Corporation and its subsidiaries (the Company) as of February 28, 2021 and August 31, 2020, the results of the Company’s operations for the three and six months ended February 28, 2021 and February 29, 2020, the changes in stockholders’ equity for the three and six months ended February 28, 2021 and February 29, 2020, and the Company’s cash flows for the six months ended February 28, 2021 and February 29, 2020, in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).

 

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2020. These consolidated financial statements also should be read in conjunction with the “Managements Discussion and Analysis of Financial Condition and Results of Operations” section appearing in this report.

 

Operating results for the three and six months ended February 28, 2021 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2021.

 

The Company evaluates events occurring after the date of the consolidated financial statements requiring recording or disclosure in the consolidated financial statements.

 

Impact of COVID-19 Pandemic

 

In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a global pandemic. As a result of the COVID-19 pandemic and related government mandated restrictions on the Company’s business as well as the businesses of its joint ventures, customers and suppliers, disruption to the Company’s business and the manufacture and sale of its products and services has occurred in the first six months of fiscal 2021 and is expected to continue during the remainder of fiscal 2021 and possibly beyond.

 

 

2.

ACCOUNTING PRONOUNCEMENTS

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which revises guidance for the accounting for credit losses on financial instruments within its scope, and in November 2018, issued ASU No. 2018-19 and in April 2019, issued ASU No. 2019-04 and in May 2019, issued ASU No. 2019-05, and in November 2019, issued ASU No. 2019-11, which amended the standard. The new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments and modifies the impairment model for available-for-sale debt securities. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Entities are required to apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is still evaluating the impact of this ASU.

 

6

 

Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial position or operating results.

 

 

3.

INVENTORIES

 

Inventories consisted of the following:

 

   

February 28, 2021

   

August 31, 2020

 

Production materials

  $ 3,896,245     $ 3,866,791  

Finished goods

    7,314,339       7,095,005  
    $ 11,210,584     $ 10,961,796  

 

 

4.

PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

   

February 28, 2021

   

August 31, 2020

 

Land

  $ 310,365     $ 310,365  

Buildings and improvements

    8,335,825       8,167,783  

Machinery and equipment

    5,166,444       4,940,912  
      13,812,634       13,419,060  

Less accumulated depreciation

    (6,667,725 )     (6,308,271 )
    $ 7,144,909     $ 7,110,789  

 

 

5.

PATENTS AND TRADEMARKS, NET

 

Patents and trademarks, net consisted of the following:

 

  

February 28, 2021

  

August 31, 2020

 

Patents and trademarks

 $2,983,072  $2,907,852 

Less accumulated amortization

  (2,206,667)  (2,105,846)
  $776,405  $802,006 

 

Patent and trademark costs are amortized over seven years. Costs incurred related to patents and trademarks are capitalized until filed and approved, at which time the amounts capitalized to date are amortized, and any further costs, including maintenance costs, are expensed as incurred. Amortization expense is estimated to be $200,000 in each of the next four fiscal years.

 

 

6.

INVESTMENTS IN JOINT VENTURES

 

The consolidated financial statements of the Company’s foreign joint ventures are initially prepared using the accounting principles accepted in the respective joint ventures’ countries of domicile. Amounts related to foreign joint ventures reported in the below tables and the accompanying consolidated financial statements have subsequently been adjusted to conform with U.S. GAAP in all material respects. All material profits on sales recorded that remain on the consolidated balance sheet from the Company to its joint ventures and from joint ventures to other joint ventures have been eliminated for financial reporting purposes.

 

7

 

Financial information from the audited and unaudited financial statements of the Company’s joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH (EXCOR), and all the Company’s other joint ventures are summarized as follows:

 

  

As of February 28, 2021

 
  

Total

  

EXCOR

  

All Other

 

Current assets

 $61,766,682  $27,772,018  $33,994,664 

Total assets

  65,973,432   30,256,723   35,716,709 

Current liabilities

  15,175,228   3,268,087   11,907,141 

Noncurrent liabilities

  332,479      332,479 

Joint ventures’ equity

  50,465,725   26,988,636   23,477,089 

Northern Technologies International Corporation’s share of joint ventures’ equity

  24,860,148   13,494,320   11,365,828 

Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings

  22,625,070   13,463,415   9,161,655 

 

  

Three Months Ended February 28, 2021

 
  

Total

  

EXCOR

  

All Other

 

Net sales

 $29,058,402  $10,542,097  $18,516,306 

Gross profit

  13,079,478   6,099,187   6,980,291 

Net income

  3,838,007   2,262,321   1,575,686 

Northern Technologies International Corporation’s share of equity in income from joint ventures

 $1,920,012  $1,132,578  $787,434 

Northern Technologies International Corporation's dividends received from joint ventures

 $2,198,142  $1,809,900  $388,242 

 

  

Six Months Ended February 28, 2021

 
  

Total

  

EXCOR

  

All Other

 

Net sales

 $55,835,745  $20,093,580  $35,742,165 

Gross profit

  25,521,239   11,798,194   13,723,045 

Net income

  7,489,431   4,283,395   3,206,036 

Northern Technologies International Corporation’s share of equity in income from joint ventures

 $3,745,724  $2,143,115  $1,602,609 

Northern Technologies International Corporation's dividends received from joint ventures

 $3,323,503  $1,809,900  $1,513,603 

 

8

 
  

As of August 31, 2020

 
  

Total

  

EXCOR

  

All Other

 

Current assets

 $55,825,418  $25,742,619  $30,082,799 

Total assets

  60,295,587   28,449,772   31,845,815 

Current liabilities

  11,002,867   2,424,565   8,578,302 

Noncurrent liabilities

  365,274      365,274 

Joint ventures’ equity

  48,927,446   26,025,207   22,902,239 

Northern Technologies International Corporation’s share of joint ventures’ equity

  24,090,826   13,012,606   11,078,220 

Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings

  21,855,747   12,981,701   8,874,046 

 

  

Three Months Ended February 29, 2020

 
  

Total

  

EXCOR

  

All Other

 

Net sales

 $24,289,370  $8,980,176  $15,309,194 

Gross profit

  11,102,573   5,262,082   5,840,491 

Net income

  2,721,542   1,778,027   943,516 

Northern Technologies International Corporation’s share of equity in income from joint ventures

 $1,360,804  $889,226  $471,578 

Northern Technologies International Corporation's dividends received from joint ventures

 $5,353,552  $4,675,850  $677,702 

 

  

Six Months Ended February 29, 2020

 
  

Total

  

EXCOR

  

All Other

 

Net sales

 $49,749,664  $18,348,415  $31,401,249 

Gross profit

  22,459,707   10,587,570   11,872,137 

Net income

  5,309,523   3,420,354   1,889,169 

Northern Technologies International Corporation’s share of equity in income from joint ventures

 $2,654,794  $1,710,390  $944,404 

Northern Technologies International Corporation's dividends received from joint ventures

 $5,558,926  $4,675,850  $883,133 

 

 

7.

CORPORATE DEBT

 

The Company has a revolving line of credit with PNC Bank, National Association (PNC Bank) of $3,000,000. No amounts were outstanding under the line of credit as of February 28, 2021 or the prior line of credit as of August 31, 2020. Outstanding advances under the line of credit bear interest at (i) (A) a per annum rate equal to the “London Interbank Offered Rate” for a one month period determined and applied each business day until the next business date, or if greater (B) 0.75%, plus (ii) 3.25%. The maturity date of the line of credit was extended to January 7, 2022.

 

As of February 28, 2021 and August 31, 2020, the Company 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. As of February 28, 2021 and August 31, 2020, the Company had $104,363 of letters of credit with JP Morgan Chase Bank that are performance based and set to expire in 2021 and 2022.

 

9

 

 

8.

STOCKHOLDERS EQUITY

 

On April 23, 2020, the Company announced the temporary suspension of its quarterly cash dividend pending clarity on the financial impact of COVID-19 on the Company. On January 15, 2021, the Company announced the reinstatement of its quarterly cash dividend and the Board of Directors declared a cash dividend of $0.065 per share of the Company’s common stock, payable on February 17, 2021 to shareholders of record at the close of business on February 3, 2021.

 

During the six months ended February 29, 2020, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to the following holders of the Company’s common stock:

 

Declaration Date

 

Amount

 

Record Date

 

Payable Date

October 22, 2019

 

$0.065

 

November 6, 2019

 

November 20, 2019

January 22, 2020

 

$0.065

 

February 5, 2020

 

February 19, 2020

 

During the six months ended February 28, 2021 and February 29, 2020, the Company repurchased no shares of its common stock.

 

During the six months ended February 28, 2021, the Company granted stock options under the Northern Technologies International Corporation 2019 Stock Incentive Plan (as amended, the 2019 Plan) to purchase an aggregate of 419,874 shares of its common stock to various employees and directors. The weighted average per share exercise price of the stock options is $8.24. The exercise price of the stock options is equal to the fair market value of the Company’s common stock on the date of grant. During the six months ended February 28, 2021, no stock options to purchase common stock were exercised.

 

During the six months ended February 29, 2020, the Company granted stock options under the 2019 Plan to purchase an aggregate of 300,770 shares of its common stock to various employees and directors. The weighted average per share exercise price of the stock options is $10.87, which was equal to the fair market value of the Company’s common stock on the date of grant. During the six months ended February 29, 2020, no stock options to purchase common stock were exercised.

 

The Company issued 4,646 and 3,597 shares of common stock on September 1, 2020 and 2019, respectively, under the Northern Technologies International Corporation Employee Stock Purchase Plan.

 

 

9.

NET INCOME PER COMMON SHARE

 

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share assumes the exercise of stock options using the treasury stock method, if dilutive.

 

The following is a reconciliation of the net income per share computation for the three and six months ended February 28, 2021 and February 29, 2020:

 

  

Three Months Ended

  

Six Months Ended

 

Numerator:

 

February 28, 2021

  

February 29, 2020

  

February 28, 2021

  

February 29, 2020

 

Net income attributable to NTIC

 $1,312,575  $179,834  $2,574,974  $1,392,384 

Denominator:

                

Basic – weighted shares outstanding

  9,104,636   9,097,236   9,104,623   9,095,604 

Weighted shares assumed upon exercise of stock options

  763,282   364,491   651,645   288,263 

Diluted – weighted shares outstanding

  9,867,918   9,461,727   9,756,268   9,383,867 

Basic net income per share:

 $0.14  $0.02  $0.28  $0.15 

Diluted net income per share:

 $0.13  $0.02  $0.26  $0.15 

 

10

 

The dilutive impact summarized above relates to the periods when the average market price of the Company’s common stock exceeded the exercise price of the potentially dilutive option securities granted. Net income per common share was based on the weighted average number of common shares outstanding during the periods when computing basic net income per share. When dilutive, stock options are included as equivalents using the treasury stock market method when computing the diluted net income per share. Excluded from the computation of diluted net income per share for the three and six months ended February 28, 2021 were options outstanding to purchase 136,221 shares of common stock. Excluded from the computation of diluted net income per share for the three and six months ended February 29, 2020, were options outstanding to purchase 141,768 shares of common stock.

 

 

10.

STOCK-BASED COMPENSATION

 

The Company has three stock-based compensation plans under which stock options or other stock-based awards have been granted: the Northern Technologies International Corporation Amended and Restated 2019 Stock Incentive Plan, the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan (the 2007 Plan) and the Northern Technologies International Corporation Employee Stock Purchase Plan (the ESPP). The 2019 Plan replaced the 2007 Plan with respect to future grants; and, therefore, no further awards may be made under the 2007 Plan. The Compensation Committee of the Board of Directors and the Board of Directors administer these plans.

 

The 2019 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, stock unit awards, performance awards, and stock bonuses to eligible recipients to enable the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company and to reward those individuals who contribute to the achievement of the Company’s economic objectives. On January 15, 2021, the Company’s stockholders approved certain amendments to the 2019 Plan, including an increase in the number of shares of common stock available for issuance under the plan by an additional 800,000 shares. Subject to adjustment as provided in the 2019 Plan, up to a maximum of 1,600,000 shares of the Company’s common stock are issuable under the 2019 Plan.

 

Options granted generally have a term of ten years and become exercisable over a one- or three- year period beginning on the one-year anniversary of the date of grant. Options are granted at per share exercise prices equal to the market value of the Company’s common stock on the date of grant. The Company issues new shares upon the exercise of options. As of February 28, 2021, options to purchase an aggregate of 720,644 shares of the Company’s common stock were outstanding under the 2019 Plan and 879,356 shares of the Company’s common stock remain available for grant under the 2019 Plan.

 

The maximum number of shares of common stock of the Company available for issuance under the ESPP is 200,000 shares, subject to adjustment as provided in the ESPP. The ESPP provides for six-month offering periods beginning on September 1 and March 1 of each year. The purchase price of the shares is 90% of the lower of the fair market value of common stock at the beginning or end of the offering period. This discount may not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended. The ESPP is compensatory for financial reporting purposes. As of February 28, 2021, 80,047 shares of common stock remained available for sale under the ESPP.

 

11

 

The Company granted options to purchase an aggregate of 419,874 and 300,770 shares of its common stock during the six months ended February 28, 2021 and February 29, 2020, respectively. The fair value of option grants is determined at the date of grant using the Black-Scholes option pricing model with the assumptions listed below. The Company recognized compensation expense of $342,504 and $658,470 during the six months ended February 28, 2021 and February 29, 2020, respectively, related to the options that vested during such time period. As of February 28, 2021, the total compensation cost for non-vested options not yet recognized in the Company’s consolidated statements of operations was $988,337. Stock-based compensation expense of $321,670 is expected through the remainder of fiscal year 2021 and $333,333 is expected to be recognized during fiscal 2022 and fiscal 2023, respectively, based on outstanding options as of February 28, 2021. Future option grants will impact the compensation expense recognized. Stock-based compensation expense is included in general and administrative expense on the consolidated statements of operations.

 

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions and results for the grants:

 

 

Three and Six Months Ended

 

February 28, 2021

 

February 29, 2020

Dividend yield

2.37%

 

2.15%

Expected volatility

45.6%

 

45.2%

Expected life of option (in years)

10

 

10

Average risk-free interest rate

0.28%

 

1.57%

 

The weighted average per share fair value of options granted during the six months ended February 28, 2021 and February 29, 2020 was $3.12 and $4.30, respectively. The weighted average remaining contractual life of the options outstanding as of February 28, 2021 and February 29, 2020 was 6.65 years and 6.53 years, respectively.

 

 

11.

SEGMENT AND GEOGRAPHIC INFORMATION

 

Segment Information

 

The Company’s chief operating decision maker is its Chief Executive Officer. The Company’s business is organized into two reportable segments: ZERUST® and Natur-Tec®. The Company has been selling its proprietary ZERUST® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 40 years and, more recently, has targeted and expanded into the oil and gas industry. The Company also sells a portfolio of bio-based and compostable (fully biodegradable) polymer resins and finished products under the Natur-Tec® brand.

 

The following table sets forth the Company’s net sales for the three and six months ended February 28, 2021 and February 29, 2020 by segment:

 

  

Three Months Ended

  

Six Months Ended

 
  

February 28, 2021

  

February 29, 2020

  

February 28, 2021

  

February 29, 2020

 

ZERUST® net sales

 $10,284,116  $9,016,222  $20,504,667  $18,965,734 

Natur-Tec® net sales

  2,498,766   4,217,561   5,057,327   8,899,449 

Total net sales

 $12,782,882  $13,233,783  $25,561,994  $27,865,183 

 

12

 

The following table sets forth the Company’s cost of goods sold for the three and six months ended February 28, 2021 and February 29, 2020 by segment:

  

Three Months Ended

  

Six Months Ended

 
  

February 28, 2021

  

% of Segment Sales*

  

February 29, 2020

  

% of Segment Sales*

  

February 28, 2021

  

% of Segment Sales*

  

February 29, 2020

  

% of Segment Sales*

 

Direct cost of goods sold

                                

ZERUST®

 $6,065,963   59.0% $4,638,514   51.4% $11,837,052   57.7% $10,081,686   53.7%

Natur-Tec®

  1,684,180   67.4%  3,276,058   77.7%  3,451,810   68.3%  6,890,477   77.4%

Indirect cost of goods sold

  781,536      772,729      1,556,138      1,420,040    

Total net cost of goods sold

 $8,531,679      $8,687,301      $16,845,000      $18,492,385     

______________________

*

The percent of segment sales is calculated by dividing the direct cost of goods sold for each individual segment category by the net sales for each segment category.

 

The Company utilizes product net sales and direct and indirect cost of goods sold for each product in reviewing the financial performance of a product type. Further allocation of Company expenses or assets, aside from amounts presented in the tables above, is not utilized in evaluating product performance, nor does such allocation occur for internal financial reporting.

 

Geographic Information

 

Net sales by geographic location for the three and six months ended February 28, 2021 and February 29, 2020 were as follows:

 

  

Three Months Ended

  

Six Months Ended

 
  

February 28, 2021

  

February 29, 2020

  

February 28, 2021

  

February 29, 2020

 

Inside the U.S.A. to unaffiliated customers

  4,619,130   6,359,506   9,480,485   12,506,592 

Outside the U.S.A. to:

                

Joint ventures in which the Company is a shareholder directly and indirectly

  526,942   245,630   1,107,246   831,246 

Unaffiliated customers

  7,636,810   6,628,647   14,974,262   14,527,345 
  $12,782,882  $13,233,783  $25,561,994  $27,865,183 

 

Net sales by geographic location are based on the location of the customer.

 

13

 

Fees for services provided to joint ventures by geographic location as a percentage of total fees for services provided to joint ventures during the three and six months ended February 28, 2021 and 2020 were as follows:

 

  

Three Months Ended

 
  

February 28,
2021

  

% of Total Fees for Services Provided to Joint Ventures

  

February 29,
2020

  

% of Total Fees for Services Provided to Joint Ventures

 

Germany

 $231,917   15.9% $208,128   16.6%

Poland

  210,943   14.5%  170,916   13.6%

Japan

  181,493   12.4%  150,150   12.0%

France

  97,638   6.7%  85,709   6.8%

Sweden

  146,896   10.0%  98,398   7.8%

Thailand

  107,377   7.3%  90,878   7.2%

India

  95,484   6.5%  80,024   6.4%

South Korea

  78,220   5.3%  75,289   6.0%

Finland

  71,496   4.9%  74,001   5.9%

Czech Republic

  89,538   6.1%  80,200   6.4%

United Kingdom

  71,759   4.9%  64,279   5.1%

Other

  79,923   5.5%  78,241   6.2%
  $1,462,684   100.0% $1,256,213   100.0%

 

  

Six Months Ended

 
  

February 28,
2021

  

% of Total Fees for Services Provided to Joint Ventures

  

February 29,
2020

  

% of Total Fees for Services Provided to Joint Ventures

 

Germany

 $460,744   16.5% $420,229   16.1%

Poland

  400,353   14.3%  365,894   14.0%

Japan

  361,455   12.9%  314,079   12.0%

France

  203,545   7.3%  179,340   6.9%

Sweden

  237,385   8.4%  207,904   8.0%

Thailand

  197,309   7.0%  193,212   7.4%

India

  183,692   6.6%  162,984   6.2%

South Korea

  163,298   5.8%  151,321   5.8%

Finland

  147,779   5.3%  141,942   5.4%

Czech Republic

  158,891   5.7%  169,214   6.5%

United Kingdom

  133,674   4.8%  149,758   5.7%

Other

  151,120   5.4%  158,661   6.1%
  $2,799,245   100.0% $2,614,538   100.0%

 

The geographical distribution of total property and equipment and net sales is as follows:

 

  

At

February 28, 2021

  

At

August 31, 2020

 

China

 $374,648  $376,088 

Other

  428,677   172,833 

United States

  6,341,584   6,561,868 

Total property and equipment

 $7,144,909  $7,110,789 

 

  

Three Months Ended

 
  

February 28, 2021

  

February 29, 2020

 

China

 $4,443,656  $3,024,384 

Brazil

  804,569   823,218 

India

  1,295,006   2,059,564 

Other

  1,620,521   967,111 

United States

  4,619,130   6,359,506 

Total net sales

 $12,782,882  $13,233,783 

 

14

 

 

  

Six Months Ended

 
  

February 28, 2021

  

February 29, 2020

 

China

 $8,987,634  $6,885,956 

Brazil

  1,518,422   1,715,196 

India

  2,495,474   4,095,774 

Other

  3,079,978   2,661,665 

United States

  9,480,486   12,506,592 

Total net sales

 $25,561,994  $27,865,183 

 

 

Long-lived assets located in China and other locations outside of the United States consist of property and equipment. These assets are periodically reviewed to assure the net realizable value from the estimated future production based on forecasted sales exceeds the carrying value of the assets.

 

Sales to the Company’s joint ventures are included in the foregoing segment and geographic information; however, sales by the Company’s joint ventures to other parties are not included. The foregoing segment and geographic information represents only sales recognized directly by the Company and sold in that geographic territory.

 

All joint venture operations, including equity in income, fees for services and related dividends, are primarily related to ZERUST® products and services.

 

 

12.

COMMITMENTS AND CONTINGENCIES

 

Annual Bonus Plan

 

On August 27, 2020, the Compensation Committee of the Board of Directors of the Company approved the material terms of an annual bonus plan for the Company’s executive officers as well as certain officers and employees for the fiscal year ending August 31, 2021. For fiscal 2021, as in past years, the total amount available under the bonus plan for all plan participants, including executive officers, is dependent upon the Company’s earnings before interest, taxes, and other income, as adjusted to take into account amounts to be paid under the bonus plan and certain other adjustments (Adjusted EBITOI). Each plan participant’s percentage of the overall bonus pool is based upon the number of plan participants, the individual’s annual base salary, and the individual’s position and level of responsibility within the Company. In the case of each of the Company’s executive officer participants, 75% of the amount of their individual bonus payout will be determined based upon the Company’s actual EBITOI for fiscal 2021 compared to a pre-established target EBITOI for fiscal 2021, and 25% of the payout will be determined based upon such executive officer’s achievement of certain pre-established individual performance objectives. The payment of bonuses under the plan is discretionary, and bonuses may be paid to executive officer participants in both cash and shares of NTIC common stock, the exact amount and percentages of which are determined by the Company’s Board of Directors, upon recommendation of the Compensation Committee, after the completion of the Company’s consolidated financial statements for fiscal 2021. There was $1,033,334 recognized for management bonuses for the six months ended February 28, 2021, compared to $800,000 recognized for management bonuses for the six months ended February 29, 2020.

 

15

 

Concentrations

 

Three joint ventures (consisting of the Company’s joint ventures in India, USA and Thailand) accounted for 72.1% of the Company’s trade joint venture receivables at February 28, 2021, and two joint ventures (consisting of the Company’s joint ventures in South Korea and Thailand) accounted for 55.8% of the Company’s trade joint venture receivables at February 29, 2020.

 

Legal Matters

 

From time to time, the Company is subject to various other claims and legal actions in the ordinary course of its business. The Company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, where the Company has assessed that a loss is probable and an amount could be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that material loss may have been incurred. In the opinion of management, as of February 28, 2021, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect the Company’s consolidated results of operations, financial position or cash flows.

 

 

13.

FAIR VALUE MEASUREMENTS

 

Assets and liabilities that are measured at fair value on a recurring basis primarily relate to marketable equity securities. These items are marked-to-market at each reporting period, and the Company estimates that market value approximates costs.

 

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:

 

           

Fair Value Measurements

Using Inputs Considered as

 
   

Fair value as of

February 28, 2021

   

Level 1

   

Level 2

   

Level 3

 

Available for sale securities

  $ 5,913,480     $ 5,913,480     $     $  

 

           

Fair Value Measurements

Using Inputs Considered as

 
   

Fair value as of

August 31, 2020

   

Level 1

   

Level 2

   

Level 3

 

Available for sale securities

  $ 5,544,722     $