Northern Technologies International Corporation — Q1 FY2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended November 30, 2015; comparative results are for the three months ended November 30, 2014. NTIC develops and sells corrosion-prevention products and services under ZERUST and bio-based, compostable products under Natur-Tec, and earns fees and equity income from joint ventures. The statements are unaudited.
Financial performance and position
| Metric | Q1 FY2016 | Q1 FY2015 / comparison |
|---|---|---|
| Net sales | $7.024 million | $7.214 million; down 2.6% |
| Gross profit and margin | $2.149 million; 30.6% | $2.407 million; 33.4% |
| Operating income (loss) | $(85,591) | $1.638 million |
| Net income (loss) attributable to NTIC | $(234,351); $(0.05) per diluted share | $1.008 million; $0.22 per diluted share |
| Equity income from joint ventures | $983,753 | $1.607 million; down 38.8% |
| Fees for services to joint ventures | $1.485 million | $2.134 million; down 30.4% |
| Operating cash flow | $(750,248) | $(384,121) |
| Cash and cash equivalents | $3.072 million at Nov. 30 | $2.624 million at Aug. 31 |
| Available-for-sale securities | $528,867 at Nov. 30 | $2.027 million at Aug. 31 |
| Working capital | $14.756 million at Nov. 30 | $15.604 million at Aug. 31 |
| Total assets / total equity | $50.593 million / $47.065 million at Nov. 30 | $51.566 million / $47.894 million at Aug. 31 |
| Debt and credit availability | No borrowings; $3.0 million revolving facility | Facility maturity extended to Jan. 7, 2017 |
Investing activities provided $1.222 million, primarily from sales of marketable securities; financing activities used $12,706. Cash increased $448,034 during the quarter. The company reported a comprehensive loss attributable to NTIC of $1.103 million, including a $865,128 foreign-currency translation loss. Interest expense was $4,726.
Material changes and management commentary
- ZERUST sales fell 4.2% to $5.978 million, while Natur-Tec sales rose 7.2% to $1.047 million. Oil-and-gas sales declined 32.2% to $340,239; management cited lower Brazil sales and potentially low oil prices. Natur-Tec growth was attributed mainly to finished-product sales in North America and India.
- Lower joint-venture profitability, the wind-down of Tianjin Zerust, and currency effects reduced equity income. Fees from joint ventures also fell, including the loss of Tianjin Zerust fees. Joint ventures’ aggregate sales declined 24.9% to $21.871 million; those sales are not NTIC consolidated sales.
- Gross margin declined as cost of goods sold increased to 69.4% of sales from 66.6%, partly reflecting a higher share of lower-margin Natur-Tec products. Operating expenses increased 4.3% to $4.704 million, with China-transition costs and higher selling and administrative expenses among the cited factors.
- NTIC terminated its China joint-venture arrangements effective December 31, 2014, began liquidation of Tianjin Zerust, and now conducts China operations through wholly owned NTIC China. Management expects quarterly results to remain volatile during the transition and gives no assurance NTIC China will achieve the former venture’s sales or income.
- Management expects fiscal 2016 research and development spending of $4.0–$4.4 million and capital expenditures of approximately $300,000–$400,000. It expects available resources to fund operations and planned needs for at least 12 months, while noting that additional financing could be pursued and might be unavailable on acceptable terms or dilute shareholders.
Risks, contingencies, and unusual items
- NTIC disclosed lawsuits relating to the former China venture, including proceedings against former venture-related individuals in China and a Minnesota action against Cortec Corporation. Recovery amounts are not estimable; the Minnesota case had discovery and trial scheduling extending into 2016 and 2017. Management stated that any liability for the matters was not expected to materially affect results, financial position, or cash flows.
- Because NTIC has limited recent financial information from Tianjin Zerust, management identified potential impairment exposure of approximately $1.130 million on its investment and approximately $114,000 on a receivable. No investment impairment adjustment was recorded in the quarter.
- Foreign-currency exposure is unhedged; the company also faces plastic-resin commodity risk. Management identified oil prices, international operations, joint-venture performance and distributions, customer demand, and the lengthy sales cycle for oil-and-gas products as important sources of uncertainty.
- The filing reports $862,183 of China-related expenses during the quarter in the note on China operations, while MD&A separately identifies $504,385 of expenses related to China formation and anticipated liquidation in its discussion of operating expenses. The filing text does not clearly reconcile these amounts.
Investor facts to verify
- Reconcile the reported $862,183 of China-related costs with the $504,385 cited in MD&A, including classification and scope.
- Track customer and revenue transition to NTIC China, liquidation progress, and any new information affecting the Tianjin Zerust investment or receivable.
- Assess the sustainability of joint-venture earnings, service fees, and cash distributions, alongside foreign-exchange effects.
- Monitor margins, oil-and-gas demand, Natur-Tec order variability, and cash generation against planned R&D and capital spending.
- Follow the China-related litigation, credit-facility renewal terms and covenant compliance, and any financing or share-repurchase decisions.