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, 2020 . 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 60 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 over 40 years and, in recent years, has targeted and expanded into the oil and gas industry. NTIC also markets and sells a portfolio of 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. (NTICChina ), 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 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 across several 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. 17 -------------------------------------------------------------------------------- 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.
NTIC's Subsidiaries and Joint Venture Network
NTIC has ownership interests in nine operating subsidiaries inNorth America ,South America ,Europe andAsia . The following table sets forth a list of NTIC's operating subsidiaries as ofNovember 30, 2020 , the country in which the subsidiary is organized and NTIC's ownership percentage in each subsidiary: NTIC Subsidiary Name Country Percent (%) Ownership NTIC (Shanghai) Co., Ltd China 100 % NTI Asean LLC United States 60 % Zerust Prevenção de Corrosão S.A. Brazil 85 % ZERUST-EXCOR MEXICO, S. de R.L. de C.V Mexico 100 % Natur-Tec India Private Limited India 75 % Natur Tec Lanka (Pvt) Ltd Sri Lanka(1) 75 % NTIC Europe GmbH Germany 100 % Zerust Singapore Pte Ltd Singapore(2) 60 % Zerust Vietnam Co. Ltd Vietnam(2) 60 %
(1)
and, therefore, indirectly owned by NTIC.
(2)
Asean LLC and, therefore, indirectly owned by NTIC.
The results of these subsidiaries are fully consolidated in NTIC's consolidated financial statements.
NTIC participates in 19 active joint venture arrangements inNorth America ,Europe andAsia . Each of these joint ventures generally manufactures and markets products in the geographic territory to which it is assigned. While most of NTIC's joint ventures exclusively sell rust and corrosion inhibiting products, some of the joint ventures also sell NTIC's Natur-Tec® resin compounds. NTIC has historically funded its investments in joint ventures with cash generated from operations.
The following table sets forth a list of NTIC's operating joint ventures as of
NTIC
Percent (%)
Joint Venture Name Country Ownership
TAIYONIC LTD. Japan 50%
ACOBAL SAS France 50%
EXCOR KORROSIONSSCHUTZ - TECHNOLOGIEN UND PRODUKTE GMBH
50%
ZERUST AB Sweden 50%
MOSTNIC-ZERUST Russia 50%
18--------------------------------------------------------------------------------
NTIC
Joint Venture Name Country Percent (%) Ownership
ZERUST OY Finland 50%
HARITA-NTI LTD India 50%
ZERUST (U.K.) LTD. United Kingdom 50%
EXCOR-ZERUST S.R.O. Czech Republic 50%
EXCOR SP. Z.O.O. Poland 50%
ZERUST A.?. Turkey 50%
ZERUST CONSUMER PRODUCTS, LLC United States 50%
ZERUST - DNEPR Ukraine 50%
KOREA ZERUST CO., LTD. South Korea (1) 30%
ZERUST-NIC (TAIWAN) CORP. Taiwan (1) 30%
PT. CHEMINDO - NTIA Indonesia (1) 30%
ZERUST SPECIALTY TECH CO. LTD. Thailand (1) 30%
CHONG WAH-NTIA SDN. BHD. Malaysia (1) 30%
NTIA ZERUST PHILIPPINES, INC. Philippines (1) 30%
____________________
(1) Indirect ownership interest through NTI Asean.
NTIC receives funds from its joint ventures as fees received for services that
NTIC provides to its joint ventures and as dividend distributions. The fees for
services provided to joint ventures are determined based on either a flat fee or
a percentage of sales depending on local laws and tax regulations. With respect
to NTIC's joint venture in Germany (EXCOR), NTIC recognizes an agreed upon
quarterly fee for services. NTIC recognizes equity income from each joint
venture based on the overall profitability of the joint venture. Such
profitability is subject to variability from quarter to quarter, which, in turn,
subjects NTIC's earnings to variability from quarter to quarter. The profits of
each joint venture are shared by the respective joint venture owners in
accordance with their respective ownership percentages. NTIC typically directly
or indirectly owns 50% or less of each of its joint venture entities and, thus,
does not control the decisions of these entities regarding whether to pay
dividends and, if paid, what amount is paid in a given year. The payment of a
dividend by an entity is determined by a joint vote of the owners and is not at
the sole discretion of NTIC.
NTIC accounts for the investments and financial results of its joint ventures in its financial statements utilizing the equity method of accounting.
NTIC considers EXCOR to be individually significant to NTIC's consolidated assets and income. Therefore, NTIC provides certain additional information regarding EXCOR in the notes to NTIC's consolidated financial statements and in this section of this report.
Impact of the COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the novel coronavirus (COVID-19) outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility in financial markets and has resulted in an economic recession. The outbreak and continuing rapid spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide and has caused weakened economic conditions, both inthe United States and abroad. 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, some of which remain in place in whole or in part and some of which have been or may be reinstated. Government restrictions, such as stay-at-home orders, quarantines and worker absenteeism as a result of COVID-19, have led to a significant number of business closures and slowdowns. These business closures and slowdowns have adversely impacted and will likely continue to adversely impact NTIC directly and have caused some of NTIC's customers and suppliers to operate at a fraction of their capacities or wholly lock down, which has disrupted and may continue to disrupt NTIC's sales and production. 19 -------------------------------------------------------------------------------- As the events surrounding the COVID-19 pandemic unfolded, NTIC's primary focus was, and continues to be, the health, safety and wellbeing of its employees, customers and suppliers. In order to continue its operations, as permitted by respective state, local and foreign governments, NTIC has adopted numerous safety measures in accordance withU.S. Centers for Disease Control and Prevention ,World Health Organization , and federal, state, local and foreign guidance in order to protect its employees, customers and suppliers. These safety measures include, but are not limited to, adhering to social distancing protocols, enabling the majority of its employees to work from home, suspending non-essential travel, disinfecting facilities and workspaces extensively and frequently, suspending all non-essential visitors and requiring employees who must be present at NTIC's facilities to wear face coverings. NTIC expects to continue such safety measures for the foreseeable future and may take further actions, or adapt these existing policies, as government authorities may require or recommend or as it may determine to be in the best interests of its employees, customers and suppliers. NTIC has been balancing its safety-focused approach with the needs of its customers. Government mandated measures resulting in the substantial curtailment of business activities generally have excluded certain essential businesses and services, including certain manufacturing. With the exception of the temporary closures of NTIC's facilities inChina andIndia during the second and third fiscal quarters of 2020, NTIC's manufacturing activities are generally considered part of the "critical sector" with respect to state and local government orders. This has allowed NTIC to continue to receive orders and provide uninterrupted order fulfillment to its customers. However, its facilities have been operating at a reduced capacity in order to abide by local government requirements and recommendations, such as social distancing practices, and in response to reduced demand. During the first quarter of fiscal 2021, certain of NTIC's facilities were impacted by reduced levels of production, manufacturing inefficiencies due to the reconfiguration of certain of its manufacturing processes in order to implement social distancing protocols and reduced demand. NTIC has engaged and continues to engage in communications with its suppliers in an attempt to identify and mitigate supply chain risks and proactively manage inventory levels in order to align production with demand. While domestic and international governmental measures may be modified or extended, NTIC currently expects that its global facilities will remain operational, although operating at reduced production capacity at certain of its facilities. However, such expectation is dependent upon future governmental actions and demand for NTIC's products, the stability of its global supply chain and the ability of carriers to transport supplies to its facilities and products to its customers. As a result of the global economic slowdown caused by the COVID-19 pandemic, NTIC continued to experience softened demand in various regions and markets during the first quarter of fiscal 2021, which had a adverse effect on NTIC's operating results and financial condition. NTIC anticipates continued softened global demand for its products and services during the remainder of fiscal 2021 and possibly beyond. Due to the international reach of COVID-19, NTIC's international joint ventures have also been adversely impacted, which has had and may continue to have a material adverse effect on NTIC's joint venture operations and equity in income from joint ventures. It is currently not possible to predict the precise potential impact, as well as the extent of any future impact, of the COVID-19 pandemic on NTIC's business and on the global economy as a whole. It is also currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. A prolonged situation could have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on NTIC's business, operating results and financial condition.
The extent to which the COVID-19 pandemic will continue to impact NTIC's business will likely depend on numerous evolving factors that NTIC may not be able to accurately predict, including:
? the duration and scope of the pandemic;
? governmental, business and individuals' actions that have been and continue to
be taken in response to the pandemic;
? the impact of the pandemic on economic activity and actions taken in response;
20
--------------------------------------------------------------------------------? the effect on NTIC's customers and demand for its products and services;
? NTIC's ability to continue to manufacture and sell its products and services,
including as a result of travel restrictions and people working from home;
? the ability of NTIC's customers to pay for its products and services; and
? any closures of NTIC's facilities and the facilities of its customers and
suppliers.
Any of these events could materially adversely affect NTIC's business, operating results and financial condition.
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.
NTIC's consolidated net sales decreased 12.7% during the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . NTIC's consolidated net sales for the three months endedNovember 30, 2020 were adversely affected by reduced demand globally as a result of the COVID-19 pandemic. NTIC anticipates that the COVID-19 pandemic will continue to adversely affect NTIC's consolidated net sales, including sales of its ZERUST® products and services and Natur-Tec® products, and earnings during the remainder of fiscal 2021 and possibly beyond. During the three months endedNovember 30, 2020 , 80.0% of NTIC's consolidated net sales were derived from sales of ZERUST® products and services, which increased 2.7% to$10,220,551 compared to$9,949,512 for the three months endedNovember 30, 2019 . This increase was due to increased sales to new and existing customers inChina , partially offset by a slight decrease in North American sales as a result of decreased demand, primarily as a result of the continued impact of the COVID-19 pandemic. NTIC has focused its sales efforts of ZERUST® products and services by strategically targeting customers with specific corrosion issues in new market areas, including the oil and gas industry and other industrial sectors that offer sizable growth opportunities. NTIC's consolidated net sales for the three months endedNovember 30, 2020 included$562,693 of sales made to customers in the oil and gas industry compared to$520,844 for the three months endedNovember 30, 2019 . 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. NTIC's sales of ZERUST® products and services for the three months endedNovember 30, 2020 were adversely affected by reduced demand globally as a result of the COVID-19 pandemic. During the three months endedNovember 30, 2020 , 20.0% of NTIC's consolidated net sales were derived from sales of Natur-Tec® products compared to 32.0% during the three months endedNovember 30, 2019 . Net sales of Natur-Tec® products decreased 45.4% during the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 primarily due to a decrease in finished product sales inNorth America and finished product sales at NTIC's majority-owned subsidiary inIndia ,Natur-Tec India Private Limited (Natur-TecIndia ) and reduced demand globally as a result of the COVID-19 pandemic. The COVID pandemic continues having a material impact on demand from many large users of bioplastics including college campuses, stadiums, arenas, restaurants, and corporate office complexes. These are expected to be some of the last businesses to re-open and many of these institutions have still not announced re-opening plans. Furthermore, production across the apparel industry has declined sharply, further decreasing demand for our Natur-Tec bioplastic bags, which have become an important part of the sustainability initiatives within this industry. Cost of goods sold as a percentage of net sales decreased to 65.1% during the three months endedNovember 30, 2020 compared to 67.0% during the three months endedNovember 30, 2019 primarily as a result of a decreased percentage of product sales from Natur-Tec® products, which have lower gross margins than NTIC's traditional ZERUST® industrial products and services or its oil and gas products. 21
-------------------------------------------------------------------------------- NTIC's equity in income from joint ventures increased 41.1% to$1,825,712 during the three months endedNovember 30, 2020 compared to$1,293,990 during the three months endedNovember 30, 2019 . This increase was primarily due to an increase in net sales at the joint ventures, which increased 5.2% to$26,777,343 during the three months endedNovember 30, 2020 compared to$25,460,294 for the three months endedNovember 30, 2019 . The increase in the net sales of NTIC's joint ventures was due primarily to increased sales to existing customers as a result of increased demand for existing products. NTIC's total operating expenses increased 0.2% to$5,911,487 during the three months endedNovember 30, 2020 compared to$5,898,620 for the three months endedNovember 30, 2019 . This increase was primarily due to a slight increase in research and development expenses, partially offset by a decrease in other expenses due to the suspension of travel and work from home initiatives as a result of the COVID-19 pandemic during fiscal 2020. NTIC spent$1,075,737 and$961,641 during the three months endedNovember 30, 2020 and 2019, respectively, in connection with its research and development activities. NTIC anticipates that it will spend a total of between$3,900,000 and$4,100,000 in fiscal 2021 on research and development activities. NTIC incurred net income attributable to NTIC of$1,262,399 , or$0.13 per diluted common share, for the three months endedNovember 30, 2020 compared to$1,212,550 , or$0.13 per diluted common share, for the three months endedNovember 30, 2019 . Although NTIC's earnings for the three months endedNovember 30, 2020 were comparable to the three months endedNovember 30, 2019 , NTIC anticipates that its earnings will continue to be subject to volatility due to the COVID-19 pandemic during the remainder of fiscal 2021 and possibly beyond. NTIC also 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.
NTIC's working capital, defined as current assets less current liabilities, was
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 $ %
2020 Net Sales 2019 Net Sales Change Change
Net sales, excluding
joint ventures $ 12,198,808 95.5 % $ 14,045,784 96.0 % (1,846,976 ) (13.1% )
Net sales, to joint
ventures 580,304 4.5 % 585,616 4.0 % (5,312 ) (0.9% )
Cost of goods sold 8,313,321 65.1 % 9,805,084 67.0 % (1,491,763 ) (15.2% )
Equity in income from
joint ventures 1,825,712 n/a 1,293,990 n/a 531,722 41.1 %
Fees for services
provided to joint
ventures 1,336,561 n/a 1,358,325 n/a (21,764 ) (1.6% )
Selling expenses 2,741,768 21.5 % 2,887,292 19.7 % (145,524 ) (5.0% )
General and
administrative
expenses 2,093,982 16.4 % 2,049,687 14.0 % 44,295 2.2 %
Research and
development expenses 1,075,737 8.4 % 961,641 6.6 % 114,096 11.9 %
22--------------------------------------------------------------------------------Net Sales . NTIC's consolidated net sales decreased 12.7% to$12,779,112 during the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . NTIC's consolidated net sales to unaffiliated customers excluding NTIC's joint ventures decreased 13.1% to$12,198,808 during the three months endedNovember 30, 2020 compared to the same period in fiscal 2020. These decreases were primarily a result of reduced demand globally as a result of the COVID-19 pandemic. NTIC anticipates that the COVID-19 pandemic will continue to adversely affect NTIC's consolidated net sales, including sales of its ZERUST® products and services and Natur-Tec® products, during the remainder of fiscal 2021 and possibly beyond.
The following table sets forth NTIC's net sales by product segment for the three
months ended
Three Months Ended
November 30, November 30, $ %
2020 2019 Change Change
Total ZERUST® sales
2.7 % Total Natur-Tec® sales 2,558,561 4,681,888 (2,123,327 ) (45.4% ) Total net sales$ 12,779,112 $ 14,631,400 $ (1,852,288 ) (12.7% ) During the three months endedNovember 30, 2020 , 80.0% of NTIC's consolidated net sales were derived from sales of ZERUST® products and services, which increased 2.7% to$10,220,551 during the three months endedNovember 30, 2020 compared to$9,949,512 during the three months endedNovember 30, 2019 . This increase was primarily a result of increased demand inChina partially offset by the continued decreased demand inNorth America as a result of the COVID-19 pandemic.
The following table sets forth NTIC's net sales of ZERUST® products for the
three months ended
Three Months Ended
November 30, November 30, $ %
2020 2019 Change Change
ZERUST® industrial net sales $ 9,077,554 $ 8,843,052 $ 234,502 2.7 %
ZERUST® joint venture net sales 580,304 585,616 (5,312 ) (0.9% )
ZERUST® oil & gas net sales 562,693 520,844 41,849 8.0 %
Total ZERUST® net sales $ 10,220,551 $ 9,949,512 $ 271,039 2.7 %
NTIC's total ZERUST® net sales increased during the three months ended November
30, 2020 , compared to the prior fiscal year period, primarily due to overall
increased demand for ZERUST® industrial products and services in China and
overall increased demand for ZERUST® oil and gas products and services. NTIC's
sales of ZERUST® industrial products and services for the three months ended
November 30, 2020 were adversely affected by reduced demand globally as a result
of the COVID-19 pandemic.
ZERUST® oil and gas net sales increased 8.0% during the three months ended
November 30, 2020 compared to the same period last fiscal year primarily as a
result of increased demand. 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 ended November 30, 2020 , 20.0% of NTIC's consolidated
net sales were derived from sales of Natur-Tec® products, compared to 32.0%
during the three months ended November 30, 2019 . Sales of Natur-Tec® products
decreased 45.4% to $2,558,561 during the three months ended November 30, 2020
compared to $4,681,888 during the three months ended November 30, 2019 . This
decrease was primarily due to a decrease in finished product sales in North
America and finished product sales at NTIC's majority-owned subsidiary in India ,
and decreased demand globally as a result of the COVID-19 pandemic. The COVID
pandemic has adversely impacted demand from across the apparel industry, as well
as many large users of bioplastics, including college campuses, stadiums,
arenas, restaurants, and corporate office complexes. NTIC currently expects
these customers will be some of the last businesses to re-open, and accordingly,
anticipates that the COVID-19 pandemic will continue to significantly adversely
affect sales of Natur-Tec® products during the remainder of fiscal 2021 and
possibly beyond.
23-------------------------------------------------------------------------------- Cost of Goods Sold. Cost of goods sold decreased 15.2% for the three months endedNovember 30, 2020 compared to the three months endedNovember 30, 2019 . Cost of goods sold as a percentage of net sales decreased to 65.1% for the three months endedNovember 30, 2020 compared to 67.0% for the three months endedNovember 30, 2019 primarily due to a decreased percentage of product sales from Natur-Tec® products, which have lower gross margins than NTIC's traditional ZERUST® industrial products and services or its ZERUST® oil and gas products. Equity in Income from Joint Ventures. NTIC's equity in income from joint ventures increased 41.1% to$1,825,712 during the three months endedNovember 30, 2020 compared to$1,293,990 during the three months endedNovember 30, 2019 . This increase was primarily a result of increased profitability of the joint ventures, which fluctuates based on net sales, during the respective periods. Of the total equity in income from joint ventures, NTIC had equity in income from joint ventures of$1,010,537 attributable to EXCOR during the three months endedNovember 30, 2020 compared to$821,164 during the three months endedNovember 30, 2019 . NTIC had equity in income from all other joint ventures of$815,175 during the three months endedNovember 30, 2020 , compared to$472,827 during the three months endedNovember 30, 2019 . Fees for Services Provided to Joint Ventures. NTIC recognized fee income for services provided to joint ventures of$1,336,561 during the three months endedNovember 30, 2020 compared to$1,358,325 during the three months endedNovember 30, 2019 , representing a slight decrease of$21,764 , or 1.6%. 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 increase in sales which was experienced by certain joint ventures during the first quarter of fiscal 2021. Total net sales of NTIC's joint ventures increased 5.2% to$26,777,343 during the three months endedNovember 30, 2020 compared to$25,460,294 for the three months endedNovember 30, 2019 due to increased demand. Net sales of NTIC's joint ventures are not included in NTIC's consolidated financial statements. Of the total fee income for services provided to joint ventures, fees of$228,826 were attributable to EXCOR during the three months endedNovember 30, 2020 compared to$212,101 attributable to EXCOR during the three months endedNovember 30, 2019 . Selling Expenses. NTIC's selling expenses decreased 5.0% for the three months endedNovember 30, 2020 compared to the same period in fiscal 2020 due primarily to decreased travel expenses and other expenses due to work from home arrangements necessitated by the COVID-19 pandemic. Selling expenses as a percentage of net sales increased to 21.5% for the three months endedNovember 30, 2020 from 19.7% during the three months endedNovember 30, 2019 primarily due to the decrease in net sales, as previously described. General and Administrative Expenses. NTIC's general and administrative expenses increased 2.2% for the three months endedNovember 30, 2020 compared to the same period in fiscal 2020 primarily due to the timing of various audit and tax fees, partially offset by decreased travel expenses and other expenses due to work from home arrangements necessitated by the COVID-19 pandemic. As a percentage of net sales, general and administrative expenses increased to 16.4% for the three months endedNovember 30, 2020 from 14.0% for the three months endedNovember 30, 2019 primarily due to the decrease in net sales, as previously described. Research and Development Expenses. NTIC's research and development expenses increased 11.9% for the three months endedNovember 30, 2020 compared to the same period in fiscal 2020 primarily due to increased personnel and development efforts, partially offset by decreased travel expenses and other expenses due to work from home arrangements necessitated by the COVID-19 pandemic. 24 -------------------------------------------------------------------------------- Interest Income. NTIC's interest income increased to$69,538 during the three months endedNovember 30, 2020 compared to$49,038 during the three months endedNovember 30, 2019 due primarily to increased levels of invested capital. Interest Expense. NTIC's interest expense decreased to$2,368 during the three months endedNovember 30, 2020 compared to$5,444 during the three months endedNovember 30, 2019 . Income Before Income Tax Expense. NTIC incurred income before income tax expense equal to$1,783,747 for the three months endedNovember 30, 2020 compared to$1,623,605 for the three months endedNovember 30, 2019 .
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$22,726,127 and$21,855,747 atNovember 30, 2020 andAugust 31, 2020 , 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. Net Income Attributable to NTIC. Net income attributable to NTIC increased$49,849 to$1,262,399 , or$0.13 per diluted common share, for the three months endedNovember 30, 2020 compared to$1,212,550 , or$0.13 per diluted common share, for the three months endedNovember 30, 2019 . This increase was primarily the result of the increase in equity in income from joint venture operations during the three months endedNovember 30, 2020 compared to the prior fiscal year period. NTIC anticipates that its earnings will continue to be adversely affected by the COVID-19 pandemic in the second quarter of fiscal 2021 and beyond and 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 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
fluctuations of the
Liquidity and Capital Resources
Sources ofCash and Working Capital . NTIC's working capital, defined as current assets less current liabilities, was$28,172,918 atNovember 30, 2020 , including$6,953,341 in cash and cash equivalents and$6,382,785 in available for sale securities, compared to$27,104,746 atAugust 31, 2020 , including$6,403,032 in cash and cash equivalents and$5,544,722 in available for sale securities. As ofNovember 30, 2020 , NTIC had a revolving line of credit with PNC Bank of$3,000,000 with no amounts outstanding. At the option of the Company, outstanding advances under the line of credit bore interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by the Company or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate. 25 -------------------------------------------------------------------------------- The line of credit was evidenced by an amended and restated committed line of credit note in the principal amount of up to$3,000,000 . The line of credit had a$1,200,000 standby letter of credit sub-facility, with any standby letters of credit issued thereunder being at the sole discretion of PNC Bank. Any lines of credit issued by PNC Bank would decrease the availability under the revolving line of credit. The line of credit was subject to standard covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio, and negative covenants, which, among other things, limited 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 was subject to a minimum fixed charge coverage ratio of 1.10:1.00. As ofNovember 30, 2020 , NTIC was in compliance with all debt covenants. OnDecember 21, 2020 , the Company and PNC Bank amended the loan agreement and the Company issued an amended and restated the promissory note relating to the revolving line of credit. The material changes made by these amendments, which include changes to the rate at which interest accrues and certain other revisions, are described in Note 7 to NTIC's consolidated financial statements. The other material terms of the revolving line of credit and loan agreement with PNC Bank and other related documents remain in effect. 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 if NTIC's Board of Directors decides to reinstate them, and any stock repurchases for at least the next 12 months. During the remainder of fiscal 2021, NTIC expects to continue to invest directly and through its use of working capital in NTIC China, ZerustMexico , NTI Europe, 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. In order to take advantage of such new product and market opportunities to expand its business and increase its revenues, NTIC may decide to finance such opportunities by 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. 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. Uses of Cash and Cash Flow. Net cash provided by operating activities during the three months endedNovember 30, 2020 was$1,601,120 , which resulted principally from NTIC's net income, dividends received from joint ventures, depreciation expense, and stock-based compensation, partially offset by equity in income from joint ventures. Net cash used in operating activities during the three months endedNovember 30, 2019 was$1,567,157 , which resulted principally from NTIC's equity in income from joint ventures, an increase in inventory and increases in trade receivables excluding joint ventures, and income tax payable, partially offset by NTIC's net income, depreciation and amortization and an increase in accounts payable and accrued liabilities. 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 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. 26 -------------------------------------------------------------------------------- NTIC experienced an increase in trade receivables and a decrease in inventory as ofNovember 30, 2020 compared toAugust 31, 2020 . Trade receivables excluding joint ventures as ofNovember 30, 2020 increased$1,479,307 compared toAugust 31, 2020 , primarily related to the timing of collections. Outstanding trade receivables, excluding joint ventures balances, as ofNovember 30, 2020 decreased 6 days to an average of 71 days from balances outstanding from these customers as ofAugust 31, 2020 . Outstanding trade receivables from joint ventures as ofNovember 30, 2020 increased$199,491 compared toAugust 31, 2020 primarily due to the timing of payments. Outstanding balances from trade receivables from joint ventures increased an average of 12 days from an average of 94 days from balances outstanding from these customers compared toAugust 31, 2020 . The average days outstanding of trade receivables from joint ventures as ofNovember 30, 2020 were primarily due to the receivables balances at NTIC's joint ventures inthe United States ,South Korea andIndia . Outstanding receivables for services provided to joint ventures as ofNovember 30, 2020 increased$221,879 compared toAugust 31, 2020 and the average days to pay increased an average of 2 days from an average of 76 days compared toAugust 31, 2020 . Net cash used in investing activities for the three months endedNovember 30, 2020 was$1,177,869 , which was primarily the result of the purchase of available for sale securities, purchases of property and equipment and investments in patents. Net cash provided by investing activities for the three months endedNovember 30, 2019 was$353,300 , which was primarily the result of cash provided by the sale of available for sale securities, partially offset by additions to property and equipment and additions to patents. Net cash provided by financing activities for the three months endedNovember 30, 2020 was$36,192 , which resulted from proceeds from NTIC's employee stock purchase plan. Net cash used in financing activities for the three months endedNovember 30, 2019 was$555,271 , which resulted from dividends paid on NTIC common stock, partially offset by proceeds from NTIC's employee stock purchase plan and the exercise of stock options. 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, 2020 . As ofNovember 30, 2020 , up to$2,640,548 in shares of NTIC common stock remained available for repurchase under NTIC's stock repurchase program. Cash Dividends. OnApril 23, 2020 , the Company announced the temporary suspension of its quarterly cash dividend pending clarity on the COVID-19 pandemic. Therefore, the Company did not declare a cash dividend during the three months endedNovember 30, 2020 . OnOctober 22, 2019 , the Company's Board of Directors declared a cash dividend of$0.065 per share of NTIC's common stock, payable onNovember 20, 2019 to stockholders of record onNovember 6, 2019 . The length of the Company's suspension of its quarterly cash dividend is currently unknown, and 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. 27 --------------------------------------------------------------------------------
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, 2020 .
Off-Balance Sheet Arrangements
NTIC does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet financial arrangements. As such, NTIC is not materially exposed to any financing, liquidity, market or credit risk that could arise if NTIC had engaged in such arrangements. Inflation and Seasonality Inflation inthe United States and abroad historically has had little effect on NTIC. Although NTIC's business historically has not been seasonal, 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.
28
--------------------------------------------------------------------------------
Any outstanding advances under NTIC's $3,000,000 amended and restated revolving
line of credit with PNC Bank bear interest at an annual rate based on LIBOR plus
3.25% for the applicable LIBOR interest period selected by the Company with a
minimum rate of 0.75%. As of November 30, 2020 , NTIC had no borrowings under the
prior 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," included in NTIC's annual report on Form 10-K for the fiscal year endedAugust 31, 2020 .
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 on NTIC's business, operating results and financial condition, the outcome of contingencies, such as legal proceedings and the effect of the liquidation of Tianjin Zerust, and the operations of NTIC China. 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." 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 COVID-19 on NTIC's business, operating results and financial
condition, including disruption to our customers, suppliers and
subcontractors, as well as the global economy and financial markets;
? The effect of current worldwide economic conditions and any turmoil anddisruption in the global credit and financial markets on NTIC's business;
29
--------------------------------------------------------------------------------? 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
? NTIC's dependence on the success of its joint ventures and fees and dividend
distributions that NTIC receives from them;
? NTIC's relationships with its joint ventures and its ability to maintain those
relationships, especially in light of anticipated succession planning issues;
? Fluctuations in the cost and availability of raw materials, including resins
and other commodities;
? 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;
? 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;
? NTIC's operations in China , and the risks associated therewith, thetermination of the joint venture agreements with Tianjin Zerust, and the
anticipated liquidation of Tianjin Zerust and the effect of all these events
on NTIC's business and future operating results;
? 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;
30--------------------------------------------------------------------------------
? 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;
? 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, including from the Tax Cuts and
Jobs Act;
? 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, 2020 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 . 31
--------------------------------------------------------------------------------
© Edgar Online, source
