NORTHERN TECHNOLOGIES INTERNATIONAL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

NTIC

Recent Acquisition of Zerust India

NTIC's Subsidiaries and Joint Venture Network

NTIC has ownership interests in 10 operating subsidiaries in North America, South America, Europe and Asia. The following table sets forth a list of NTIC's operating subsidiaries as of November 30, 2021, the country in which the subsidiary is organized and NTIC's ownership percentage in each subsidiary:

85%

100%

100%

(1) Natur Tec Lanka (Pvt) Ltd. is 100% owned by Natur-Tec India Private Limited

and, therefore, indirectly owned by NTIC.

(2) Zerust Singapore Pte Ltd and Zerust Vietnam Co. Ltd are 100% owned by NTI

The following table sets forth a list of NTIC's operating joint ventures as of November 30, 2021, the country in which the joint venture is organized and NTIC's ownership percentage in each joint venture:

(1) Indirect ownership interest through NTI Asean.

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 as of November 30, 2021. 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

Any of these events could materially adversely affect NTIC's business, operating results and financial condition.

Worldwide Supply Chain Disruptions

NTIC's management, including its chief executive officer, who is NTIC's chief operating decision maker, reports and manages NTIC's operations in two reportable business segments based on products sold, customer base and distribution center: ZERUST® products and services and Natur-Tec® products.

Highlights of our second quarter of fiscal 2022 financial results include:

? NTIC's consolidated net sales increased 42.4% during the three months ended

November 30, 2021 compared to the three months ended November 30, 2020. NTIC's

consolidated net sales for the three months ended November 30, 2021 were

positively affected by incremental sales as a result of the Zerust India

acquisition and to a lesser extent increased demand, partially offset by

softened demand in certain regions and markets due to the COVID-19 pandemic.

NTIC expects this softness in sales as a result of the pandemic to continue

? During the three months ended November 30, 2021, 79.3% of NTIC's consolidated

net sales were derived from sales of ZERUST® products and services, which

increased 41.1% to $14,423,785 compared to $10,220,551 for the three months

ended November 30, 2020. This increase was due to incremental sales as a

result of the Zerust India acquisition and increased sales to new and existing

customers due to increased global demand.. NTIC's consolidated net sales for

the three months ended November 30, 2021 included $971,816 of sales made to

customers in the oil and gas industry compared to $562,693 for the three

? Net sales of Natur-Tec® products increased 47.3% during the three months ended

November 30, 2021 compared to the three months ended November 30, 2020

primarily due to an increase in finished product sales in North America and at

NTIC's majority-owned subsidiary in India, Natur-Tec India Private Limited.

? Cost of goods sold as a percentage of net sales increased to 68.7% during the

three months ended November 30, 2021, compared to 65.1% during the three

months ended November 30, 2020 primarily as a result of price increases on raw

? NTIC's equity in income from joint ventures decreased 24.7% to $1,374,749

during the three months ended November 30, 2021 compared to $1,825,712 during

the three months ended November 30, 2020. This decrease was primarily due to

the fact that Zerust India is now a consolidated subsidiary within NTIC's

financial statements and to a lesser extent an increase in operating expenses

? Net sales at the joint ventures increased 0.9% to $27,022,995 during the three

months ended November 30, 2021, compared to $26,777,343 for the three months

ended November 30, 2020. 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 global demand for existing products, partially offset by a

decrease in net sales at the joint ventures as a result of the Zerust India

? NTIC's total operating expenses increased 19.6% to $7,069,926 during the three

months ended November 30, 2021 compared to $5,911,487 for the three months

? Since NTIC acquired the remaining 50% ownership interest of Zerust India

effective September 1, 2021, NTIC recognized a gain of $3,951,550 during the

three months ended November 30, 2021, which is included in "Remeasurement gain

on acquisition of equity method investee" on NTIC's consolidated statements of

? NTIC incurred net income attributable to NTIC of $4,493,759, or $0.46 per

diluted common share, for the three months ended November 30, 2021 compared to

$1,262,399, or $0.13 per diluted common share, for the three months ended

November 30, 2020. Of this increase, $3,951,550, was due to the gain from the

The following table sets forth NTIC's results of operations for the three months ended November 30, 2021 and 2020.

65.1 % 4,177,162 50.2 %

The following table sets forth NTIC's net sales by product segment for the three months ended November 30, 2021 and 2020 by segment:

Total ZERUST® sales $ 14,423,785 $ 10,220,551 $ 4,203,234

The following table sets forth NTIC's net sales of ZERUST® products for the three months ended November 30, 2021 and 2020:

Research and Development Expenses. NTIC's research and development expenses increased 14.9% for the three months ended November 30, 2021 compared to the same period in fiscal 2021 primarily due to incremental expenses due to the Zerust India acquisition, as well as increased personnel and development efforts.

Income Tax Expense. Income tax expense was $504,380 during the three months ended November 30, 2021 compared to $378,590 during the three months ended November 30, 2020. Income tax expense was calculated based on management's estimate of NTIC's annual effective income tax rate.

Liquidity and Capital Resources

Uses of Cash and Cash Flows. Net cash provided by operating activities during the three months ended November 30, 2021 was $3,319,024, which resulted principally from NTIC's net income, dividends received from joint ventures, deferred income tax, depreciation expense, and stock-based compensation, partially offset by the remeasurement gain on acquisition of equity method investee and equity in income from joint ventures. Net cash provided by operating activities during the three months ended November 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.

Capital Expenditures and Commitments. NTIC spent $315,390 on capital expenditures during the three months ended November 30, 2021, which related primarily to the purchase of new equipment and facility improvements. NTIC expects to spend an aggregate of approximately $2,200,000 to $2,500,000 on capital expenditures during fiscal 2022, which it expects will relate primarily to anticipated renovation and equipment costs.

Off-Balance Sheet Arrangements

NTIC is exposed to some market risk stemming from changes in foreign currency exchange rates, commodity prices and interest rates.

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.

Critical Accounting Policies and Estimates

Recent Accounting Pronouncements

See Note 2 to NTIC's consolidated financial statements for a discussion of recent accounting pronouncements.

? The effect of COVID-19 on NTIC's business, operating results and financial

disruption in the global credit and financial markets on NTIC's business;

? 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,

fluctuations in foreign currency exchange rates, import duties, taxes, and

? The effect of the United Kingdom's process to exit the European Union on

NTIC's operating results, including, in particular, future net sales of NTIC's

? The effect of the health of the U.S. automotive industry on NTIC's business;

? NTIC's dependence on the success of its joint ventures and fees and dividend

? Risks associated with NTIC's recent acquisition of the remaining 50% ownership

? 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, including supply chain disruptions and weather related

? 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

? NTIC's ability to introduce new products and services that respond to changing

? Market acceptance of NTIC's existing and new products, especially in light of

services and NTIC's ability to grow market share and succeed in penetrating

? Increased competition, especially with respect to NTIC's ZERUST® products and

? NTIC's reliance upon and its relationships with its distributors, independent

? Oil prices, which may affect sales of NTIC's ZERUST® products and services to

? The costs and effects of complying with laws and regulations and changes in

? Unforeseen product quality or other problems in the development, production,

? Unforeseen production expenses incurred in connection with new customers and

? Changes in applicable laws or regulations and NTIC's failure to comply with

? Changes in generally accepted accounting principles and the effect of new

? The effect of extreme weather conditions on NTIC's operating results; and

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