NORTHERN TECHNOLOGIES INTERNATIONAL CORP Commitments Disclosure

16.	COMMITMENTS AND CONTINGENCIES

 

Other Expense

 

In June 2025, NTIC China received a notice from Ningbo Customs, the customs authority at the Ningbo Port in China, regarding the historical export classification of Natur-Tec masterbatch resin products. Ningbo Customs determined that NTIC China misclassified certain products under a code that qualified for a 13% value-added tax rebate, and reclassified them under a code that does not qualify for a value-added tax rebate. As a result, NTIC China has been assessed repayment obligations of approximately $236,785 and penalties of approximately $150,000.

Management has accrued the full estimated liability of $386,785 in fiscal year 2025 within Other Expense. NTIC is evaluating potential avenues to negotiate a reduction in penalties; however, no such reductions have been agreed upon as of the issuance date of these financial statements.

 

Operating Leases

 

The Company currently has operating leases for various buildings, equipment and vehicles. These leases are under non-cancelable operating lease agreements with expiration dates between November 30, 2025 and May 31, 2028. The Company has the option to extend certain leases to five or ten-year term(s) and has the right of first refusal on any sale.

 

The Company records lease liabilities within current liabilities or long-term liabilities based upon the length of time associated with the lease payments. The Company records its long-term operating leases as right-of-use assets. Upon initial adoption, using the modified retrospective transition approach, no leases with terms less than 12 months have been capitalized to the consolidated balance sheet consistent with ASC 842. Instead, these leases are recognized in the consolidated statement of operations on a straight-line expense throughout the lives of the leases. None of the Company’s leases contain common area maintenance or security agreements.

 

The Company has made certain assumptions and judgments when applying ASC 842, the most significant of which is that the Company elected the package of practical expedients available for transition that allow the Company to not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases and whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. Additionally, the Company did not elect to use hindsight when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset. The Company has no contingent rent agreements.

 

Present Value of Leases

 

		August 31, 2025				August 31, 2024
Right-of-use assets, net		$	493,050			$	424,558
Current portion of lease liability			344,739				325,116
Lease liability, less current portion			148,311				99,442
Total lease liability		$	493,050			$	424,558

 

The weighted-average remaining lease term was 0.80 years and 1.25 years as of August 31, 2025 and 2024, respectively. The Company’s lease agreements do not provide a readily determinable implicit rate nor is it available to the Company from its lessors. Instead, as of each of August 31, 2025 and 2024, the Company estimates the weighted-average discount rate for its operating leases to be 7.61%, based on the incremental borrowing rate.

 

Future minimum payments as of August 31, 2025 under these long-term operating leases are as follows (in thousands):

 

Fiscal 2026		$	344,739
Fiscal 2027			144,193
Fiscal 2028			38,018
Thereafter			—
Total future minimum lease payments			526,950
Less amount representing interest			(33,900	)
Present value of obligations under operating leases			493,050
Less current portion			(344,739	)
Long-term operating lease obligations		$	148,311

 

Operating lease cost under these leases was approximately $344,739 and $340,799 for the years ended August 31, 2025 and 2024, respectively.

 

Annual Bonus Plan

 

On August 28, 2025, 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, 2026. For fiscal 2026, 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 (EBITOI), 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 2026 compared to a pre-established target EBITOI for fiscal 2026, 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 the Company’s 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 2026.

 

On August 26, 2024, 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, 2025. $1,100,000 was recognized for bonuses for the fiscal year ended August 31, 2025, $800,000 of the bonus is comprised of stock options granted to management on September 1, 2024 that will be expensed over three years and $300,000 will be paid out in cash and profit sharing subsequent to year end. This is compared to $2,200,000 recognized for bonuses for the fiscal year ended August 31, 2024, $800,000 of the bonus comprised of stock options granted to management on September 1, 2023 and $1,400,000 was paid out in cash and profit sharing subsequent to year end.

 

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 August 31, 2025, 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.