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 November 30, 2011 and the results of their operations for the three months ended November 30, 2011 and November 30, 2010 and their cash flows for the three months ended November 30, 2011 and November 30, 2010, 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, 2011.  These consolidated financial statements also should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section appearing in this report.

 

Operating results for the three months ended November 30, 2011 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2012.

 

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

 

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 approximate $160,000 in each of the next five fiscal years.

 

5.           INVESTMENTS IN JOINT VENTURES

 

The 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 financial statements have subsequently been adjusted to approximate U.S. GAAP in all material respects.  All material profits recorded on sales from the Company to its joint ventures, that remain in inventory, have been eliminated for financial reporting purposes.

 

Financial information from the audited and unaudited financial statements of the Company’s joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH (EXCOR), the Company’s joint venture holding company in the Association of Southeast Asian Nations, or ASEAN, region, NTI ASEAN, LLC (NTI ASEAN), and all of the Company’s other joint ventures, are summarized as follows:

 

The Company records expenses that are directly attributable to the joint ventures on the statements of operations on the line “Expenses incurred in support of joint ventures”.  The expenses include items such as employee compensation and benefit expenses, travel expense and consulting expense.

 

The Company did not make any joint venture investments during the three months ended November 30, 2011 and 2010.

 

6.           CORPORATE DEBT

 

In connection with the purchase of its corporate headquarters, in September 2006, Northern Technologies Holding Company, LLC (NTI LLC) obtained a term loan from PNC Bank, National Association (PNC Bank) with a principal amount of $1,275,000 that was to mature on May 1, 2011.  On January 10, 2011, NTI LLC refinanced its term loan in the then principal amount of approximately $1,141,788.  The term loan matures on January 10, 2016, bears interest at an annual rate based on the daily LIBOR rate plus 2.15% and is payable in 59 consecutive monthly installments equal to approximately $6,343 (inclusive of principal but exclusive of interest) commencing in February 2011.  The term loan is secured by a first lien on the real estate and building owned by NTI LLC and all of the assets of the Company and is guaranteed by the Company.

 

The Company has a revolving line of credit with PNC Bank of $3,000,000.  No amounts were outstanding under the line of credit as of November 30, 2011 and August 31, 2011.  At the option of the Company, outstanding advances under the line of credit bear 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. Interest is payable in arrears (a) for the portion of advances bearing interest under the prime rate on the last day of each month during the term thereof and (b) for the portion of advances bearing interest under the LIBOR option on the last day of the respective LIBOR interest period selected for such advance.  Any unpaid interest is payable on the maturity date. As of November 30, 2011, the interest rate was 3.09% and the weighted average rate was 3.02% for the three months ended November 30, 2011.  As of August 31, 2011, the interest rate was 2.50% and the weighted average rate was 2.43% for fiscal 2011.  The revolving line of credit is secured by cash, receivables and inventory.

 

The term loan and the line of credit are governed under separate loan agreements (collectively, the Loan Agreements).  The Loan Agreements contain standard covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio, and negative covenants, which, among other things, limit 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 Agreements, the Company is subject to a minimum fixed charge coverage ratio of 1.10:1.00.

 

On January 10, 2012, the Company and PNC Bank entered into a Waiver and First Amendment to Loan Documents pursuant to which the Company and PNC Bank amended the loan agreement and other documents evidencing the Company’s $3,000,000 line of credit with PNC Bank effective as of January 11, 2012 to extend the maturity date of the line of credit from January 10, 2012 to January 9, 2013, and waive a technical covenant default by the Company to deliver a compliance certificate for the period ending November 30, 2011.  All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same.  See Note 14 entitled “Subsequent Event.”

 

7.           STOCKHOLDERS’ EQUITY

 

During the three months ended November 30, 2011, the Company did not purchase or retire any shares of its common stock, and no stock options to purchase shares of common stock were exercised.

 

The Company granted stock options under the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan (the 2007 Plan) to purchase an aggregate of 26,000 shares of its common stock to various employees and directors during the three months ended November 30, 2011.  The weighted average per share exercise price of the stock options is $16.45, which is equal to the fair market value of the Company’s common stock on the date of grant.

 

During the three months ended November 30, 2011, the Company granted stock bonuses under the 2007 Plan for an aggregate of 42,707 shares of its common stock to various employees at a grant price of $14.42 per share.  The aggregate fair value of the shares of the Company’s common stock as of the date of grant of the stock bonuses was $615,830, based on the closing sale price of a share of the Company’s common stock on the date of grant. The fair value of common stock granted during the three months ended November 30, 2011 was based on fiscal 2011 performance and was included in accrued liabilities at August 31, 2011.

 

During the three months ended November 30, 2010, the Company did not purchase or retire any shares of its common stock.  The following stock options to purchase shares of common stock were exercised during the three months ended November 30, 2010:

 

The Company granted stock options under the 2007 Plan to purchase an aggregate of 30,000 shares of its common stock to various employees and directors during the three months ended November 30, 2010.  The weighted average per share exercise price of the stock options is $9.43, which is equal to the fair market value of the Company’s common stock on the date of grant.

 

During the three months ended November 30, 2010, the Company granted stock bonuses under the 2007 Plan for an aggregate of 22,686 shares of its common stock to various employees.  The fair value of the shares of the Company’s common stock as of the date of grant of the stock bonuses was $319,649, based on the closing sale price of a share of the Company’s common stock on the date of grant. The fair value of common stock granted during the three months ended November 30, 2010 was based on fiscal 2010 performance and was included in accrued liabilities at August 31, 2010.

 

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.

 

Options to purchase shares of common stock of 26,000 were excluded from the computation of common share equivalents for both the three months ended November 30, 2011 and 2010, as the exercise prices of such options were greater than market price of a share of common stock.

 

The following is a reconciliation of the earnings per share computation for the three months ended November 30, 2011 and 2010:

 

 

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. Earnings per common share were based on the weighted average number of common shares outstanding during the periods when computing the basic earnings per share. When dilutive, stock options are included as equivalents using the treasury stock market method when computing the diluted earnings per share.

 

10.         STOCK-BASED COMPENSATION

 

The Company has two stock-based compensation plans under which stock options and other stock-based awards have been granted, including the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan and the Northern Technologies International Corporation Employee Stock Purchase Plan (the ESPP).  The Compensation Committee of the Board of Directors and the Board of Directors administers these plans.

 

The 2007 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.  Subject to adjustment as provided in the 2007 Plan, up to a maximum of 800,000 shares of the Company’s common stock.  Options granted under the 2007 Plan generally have a term of five years and become exercisable over a three- or four-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.  To date, only stock options and stock bonuses have been granted under the 2007 Plan.

 

The maximum number of shares of common stock of the Company available for issuance under the ESPP is 100,000 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.

 

The Company granted options to purchase 26,000 and 30,000 shares of its common stock during the three months ended November 30, 2011 and 2010, respectively.  The fair value of option grants is determined at date of grant, using the Black-Scholes option pricing model with the assumptions listed below.  Based on these valuations, the Company recognized compensation expense of $72,523 and $44,143 during the three months ended November 30, 2011 and 2010, respectively, related to the options that vested during such time period.  The stock-based expense recorded reduced after-tax net income per share by $0.01 for each of the three months ended November 30, 2011 and 2010.  As of November 30, 2011, the total compensation cost for non-vested options not yet recognized in the Company’s consolidated statements of operations was $245,646 net of estimated forfeitures.  Additional stock-based compensation expense of $217,570 is expected through the remainder of fiscal year 2012, and expense of $28,076 and $0 is expected to be recognized during fiscal 2013 and fiscal 2014, respectively.  Future option grants will impact the compensation expense recognized.

 

The Company currently estimates a ten percent forfeiture rate for stock options and continually reviews this estimate for future periods.

 

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:

 

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:

 

The weighted average fair value of options granted during the three months ended November 30, 2011 and 2010 was $7.14 and $3.60, respectively.  The weighted average remaining contractual life of the options outstanding as of November 30, 2011 and 2010 was 2.81 years and 3.47 years, respectively.

 

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

 

Fees for services provided to joint ventures by geographic location as a percentage of total fees for services provided to joint ventures the three months ended November 30, 2011 and 2010 were as follows:

 

The following table sets forth the Company’s net sales for the three months ended November 30, 2011 and 2010 by segment:

 

The following table sets forth the Company’s cost of goods sold for the three months ended November 30, 2011 and 2010 by segment:

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

The Company’s management 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.

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

The geographical distribution of long-lived assets is set forth as follows:

 

		November 30,
		2011				2010
United States		$	3,456,123			$	3,386,100
Brazil			133,858				56,207
Consolidated		$	3,589,981			$	3,442,307

Long-lived assets consist primarily 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.

 

12.         RESEARCH AND DEVELOPMENT

 

The Company expenses all costs related to product research and development as incurred.   The Company incurred $814,305 and $1,193,456 of expense during the three months ended November 30, 2011 and 2010, respectively, in connection with its research and development activities.  These costs related to product research and development are the net amount after being reduced by reimbursements related to certain research and development contracts of $197,000 and $25,992 for the three months ended November 30, 2011 and 2010, respectively.  The net fees are accounted for in the “Research and Development Expenses” section of the consolidated statements of operations.

 

The Company has certain research and development contracts.  The Company accrues proceeds received under such contracts and offsets research and development expenses incurred in equal installments over the timelines associated with completion of the contracts’ specific objectives and milestones. At November 30, 2011 and August 31, 2011, the Company did not have any deferred amounts in other accrued liabilities as the Company had not yet performed under the obligations of the contract at that time.

13.         COMMITMENTS AND CONTINGENCIES

 

On September 27, 2011, 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 and certain officers and employees for the fiscal year ending August 31, 2012.  For fiscal 2012 as in past years, the total amount available under the bonus plan will be up to 25% of the Company’s earnings before interest, taxes and other income (EBITOI) and will be $0 if EBITOI is below 70% of a pre-established target EBITOI for fiscal 2012.  Each plan participant’s percentage of the overall bonus pool will be 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 2012 compared to the pre-established target EBITOI for fiscal 2012 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 are discretionary and may be paid to executive officer participants in both cash and shares of NTIC common stock, the exact amount and percentages of which will be 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 2012.

 

There was $320,814 for management bonuses accrued for three months ended November 30, 2011 compared to a management bonus accrual of $357,000 for the three months ended November 30, 2010.

 

A subsidiary of the Company, NTI Facilities, Inc., leases property located at 23205 Mercantile Road, Beachwood, Ohio.  Remaining rentals payable under such leases are as follows: fiscal 2012 - $178,875; fiscal 2013 - $238,500; fiscal 2014 - $59,500 and thereafter - $0. 

 

One customer accounted for 0% and 10.6% of the Company’s trade receivables, excluding joint ventures at November 30, 2011 and 2010, respectively.  Two joint ventures accounted for 73.3% and 48.0% of the Company’s trade joint venture receivables at November 30, 2011 and 2010, respectively.

 

From time to time, the Company is subject to various claims and legal actions in the ordinary course of its business.  The Company is not currently involved in any legal proceeding in which the Company believes, based on information currently available, that there is a reasonable possibility of a material loss.

 

14.         SUBSEQUENT EVENT

 

On January 10, 2012, the Company and PNC Bank entered into a Waiver and First Amendment to Loan Documents pursuant to which the Company and PNC Bank amended the loan agreement and other documents evidencing the Company’s $3,000,000 line of credit with PNC Bank effective as of January 11, 2012 to extend the maturity date of the line of credit from January 10, 2012 to January 9, 2013, and waive a technical covenant default by the Company to deliver a compliance certificate for the period ending November 30, 2011.  All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same.

 

 

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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.” 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 55 countries either directly or via a network of 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 ® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 35 years, and more recently, has targeted and expanded into the oil and gas industry.  NTIC also sells a portfolio of bio-based and biodegradable (compostable) polymer resin compounds and finished products marketed under the Natur-Tec ® brand.  These products are intended to reduce NTIC’s customers’ carbon footprint and provide environmentally sound disposal options.

 

NTIC’s ZERUST ® rust and corrosion inhibiting products include plastic and paper packaging, liquids and coatings, rust removers and cleaners, diffusers and variations of these products designed specifically for the oil and gas industry.   NTIC’s 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 technical requirements.  In North America, NTIC sells its ZERUST ® corrosion prevention solutions through a direct sales force as well as a network of independent distributors and agents.  Internationally, NTIC sells its ZERUST ® corrosion prevention solutions through its majority owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A. (Zerust Brazil), and joint venture arrangements in North America, Europe and Asia.

 

One of NTIC’s strategic initiatives is to expand into and penetrate other markets for its ZERUST ® corrosion prevention solutions.  For the past several years, NTIC has focused its sales and marketing efforts on the oil and gas industry since the infrastructure that supports that industry is typically constructed using metals that are highly susceptible to corrosion and 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 corrosion leaks.  Petroleo Brasileiro S.A. (Petrobras), an oil company located in Brazil, has conducted extensive multi-year product field trials of NTIC’s ZERUST ® rust and corrosion inhibiting products against competitive alternatives.  During fiscal 2010, Zerust Brazil received a Phase I contract for an initial implementation of $1.4 million (BRL$ 2.5 million) in ZERUST ® products.  During fiscal 2011, Zerust Brazil signed a Phase 2 expanded contract with Petrobras to supply an additional $2.6 million (BRL$ 4.21 million) in ZERUST ® products.  NTIC is also pursuing opportunities to market its ZERUST ® rust and corrosion prevention solutions to other targeted potential customers in the oil and gas industry across several countries through NTIC’s joint venture partners and other strategic partners.  NTIC believes the sale of its ZERUST ® corrosion prevention solutions to customers in the oil and gas industry will involve a long sales cycle, likely including a one- to two-year trial period with each customer and a slow integration process thereafter.

 

Natur-Tec ® bio-based and biodegradable plastics are manufactured using NTIC’s patented and/or proprietary technologies and are intended to replace conventional petroleum-based plastics.  The Natur-Tec ® bioplastics portfolio includes biopolymer resin compounds which are available in several grades tailored for a variety of applications, such as blown-film extrusion, extrusion coating, injection molding and rigid, engineered plastics, and finished products, including shopping and grocery bags, lawn and leaf bags, can liners, pet waste collection bags, cutlery, packaging foam and coated paper products, which are engineered to be fully biodegradable in a composting

In fiscal 2011, NTIC and HNTI signed a memorandum of understanding with the Indian conglomerate ITC Limited to jointly develop and commercialize biopolymer extrusion coated paper products targeted at the consumer goods packaging market in India. The two companies will jointly develop solutions in the Indian market towards providing biodegradable/compostable products such as food service ware, food packaging, personal care product packaging and other fast-moving consumer goods packaging. The biopolymer resin compounds will be manufactured by HNTI for integration with paper manufactured by ITC’s Paperboards and Specialty Papers Division.  In addition, during fiscal 2011, NTIC entered into an agreement with Italy-based Naturfuels s.r.l. to distribute its Natur-Tec ® bioplastic materials and products in the Italian and Swiss markets.  Under the terms of the distribution agreement, NTIC will supply Naturfuels with NTIC’s patented high-strength Natur-Tec ® compostable film grade resin compounds to be used for the production of bio-plastic shopping and garbage bags on conventional plastic film production equipment.

 

NTIC’s Joint Venture Network

 

NTIC participates, either directly or indirectly, in 24 active joint venture arrangements in North America, Europe and Asia.  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 sell NTIC’s Natur-Tec ® resin compounds and finished products and NTIC’s Polymer Energy LLC joint venture manufactures and sells Polymer Energy ™ equipment that converts waste plastic into diesel, gasoline and heavy fractions.  NTIC historically has funded its joint venture investments with cash generated from operations.

 

NTIC’s receipt of funds from its joint ventures is dependent upon fees for services that NTIC provides to its joint ventures based primarily on the revenues of the joint ventures and NTIC’s receipt of dividend distributions from the joint ventures.  NTIC receives fees for services provided to its joint ventures based primarily on the net sales of the individual joint ventures.  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 primary joint venture in Germany (EXCOR), NTIC recognizes an agreed upon quarterly fee for such services.  With respect to NTIC’s ASEAN joint venture holding company (NTI ASEAN), NTIC does not receive a fee for such services, but rather receives a bi-annual dividend based on available cash.  NTIC recognizes equity income from its joint ventures based on the overall profitability of its joint ventures. 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 NTIC’s joint ventures are shared by the respective joint venture owners in accordance with their respective ownership percentages.  NTIC typically owns only 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, how much they should be 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 does not consolidate the results of its joint ventures on its consolidated financial statements.  NTIC’s investments in its joint ventures are accounted for using the equity method.  Although Zerust Brazil originated as a joint venture of NTIC, it is no longer considered a joint venture, but rather it is a majority owned subsidiary of NTIC and thus unlike NTIC’s joint ventures, its results are consolidated on NTIC’s consolidated financial statements.  NTIC holds 85% of the equity and 85% of the voting rights of Zerust Brazil.  Although NTIC owns a 62.5% ownership interest in Polymer Energy LLC, NTIC has not consolidated the Polymer Energy LLC joint venture in NTIC’s consolidated financial statements for the three months ended November 30, 2011 or any prior period since Polymer Energy LLC has had limited activity since its inception in 2003 and NTIC believes that the impact of not consolidating this entity on NTIC’s consolidated financial statement has been immaterial.  No license fees were received by Polymer Energy LLC and no other financial activity took place during the three months ended November 30, 2011, and accordingly, during such period, NTIC received and recorded no fees for services

NTIC considers EXCOR and NTI ASEAN to be individually significant to NTIC’s consolidated assets and income; and therefore, provides certain additional information regarding these entities in the notes to NTIC’s consolidated financial statements and in this section of this report.

 

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 increased 17.9% during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.  This increase was primarily a result of increased sales of ZERUST ® rust and corrosion inhibiting products and services and sales of Natur-Tec ® products.  During the three months ended November 30, 2011, 92.1% of NTIC’s consolidated net sales were derived from sales of ZERUST ® products and services, which increased 14.9% to $4,452,646 during the three months ended November 30, 2011 compared to $3,875,428 during the three months ended November 30, 2010 due to increased demand from existing customers and the addition of new customers.  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 ended November 30, 2011 included $604,920 of sales made by Zerust Brazil, and of those sales, $45,861 in sales were made to the oil and gas industry sector in Brazil.    Overall demand for ZERUST ® products and services depends heavily on the overall health of the markets in which NTIC sells its products, including in particular the automotive market.

 

During the three months ended November 30, 2011, $379,468, or 7.9%, of NTIC’s consolidated net sales were derived from sales of Natur-Tec ® products compared to 5.4% during the three months ended November 30, 2010.  Net sales of Natur-Tec ® products increased 70.2% during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.  This increase was due to increased sales to Natur-Tec ® distributors on the West Coast of the United States.  NTIC has continued to strengthen and expand its West Coast distribution network in California, as well as expand its industrial distribution reach to geographical “green” hotspots such as Oregon, Washington, Minnesota and New England.  Additionally, NTIC has continued to target key national and regional retailers utilizing independent sales agents.  Demand for the Natur-Tec ® products depends primarily on market acceptance and the extent of NTIC’s distribution network.

 

Cost of goods sold as a percentage of net sales increased to 66.4% during the three months ended November 30, 2011 compared to 65.7% during the three months ended November 30, 2010 primarily as a result of a slight increase in shipping costs, production overhead and raw material prices and a higher percentage of sales of Natur-Tec ® products, which generally carry smaller margins than ZERUST ® products and services.

 

NTIC’s equity in income of joint ventures decreased 19.9% to $1,357,680 during the three months ended November 30, 2011 compared to $1,695,131 during the three months ended November 30, 2010 which was primarily a result of a 22.4% decrease in the profitability of NTIC’s largest joint venture, EXCOR in Germany during the same time period. The decrease in profitability was due to increased operating expenses during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.  NTIC recognized a 0.5% decrease in fees for services provided to joint ventures during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.  This slight decrease was primarily a result of the devaluation of the EURO and other currencies compared to the U.S. dollar, partially offset by a 6.3% increase in total net sales of NTIC’s joint ventures to $28,795,232 during the three months ended November 30, 2011 compared to $ 27,101,587 during the three months ended November 30, 2010.

NTIC’s total operating expenses decreased 3.8%, or $132,329, to $3,393,068 during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.

 

NTIC expenses all costs related to product research and development as incurred.  NTIC incurred $814,305 and $1,193,456 of expense during the three months ended November 30, 2011 and 2010, respectively, in connection with its research and development activities.  These represent net amounts after being reduced by reimbursements related to certain research and development contracts.  Such reimbursements totaled $197,000 and $25,992 for the three months ended November 30, 2011 and 2010, respectively.  NTIC anticipates that it will spend between $4,300,000 and $4,500,000 in total during fiscal 2012 on research and development activities related to its new technologies.  This estimate is a net range after being reduced by anticipated reimbursements related to certain research and development contracts.

 

Net income attributable to NTIC increased 6.6% to $958,757, or $0.22 per diluted common share, for the three months ended November 30, 2011 compared to $899,781, or $0.21 per diluted common share, for the three months ended November 30, 2010.  This slight increase was primarily the result of an increase in sales and corresponding gross profit, partially offset by decreased equity income from NTIC’s joint ventures.  NTIC anticipates that its quarterly net income will remain subject to significant volatility primarily due to the financial performance of its joint ventures and sales of its ZERUST ® products and services into the oil and gas industry and Natur-Tec ® bioplastics products, which sales fluctuate more on a quarterly basis than the traditional ZERUST ® business.

 

NTIC’s working capital was $11,359,574 at November 30, 2011, including $3,407,371 in cash and cash equivalents compared to $9,085,748 at August 31, 2011, including $3,266,362 in cash and cash equivalents.

 

Net Sales . NTIC’s consolidated net sales increased 17.9% to $4,832,114 during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.  NTIC’s consolidated net sales to unaffiliated customers excluding NTIC’s joint ventures increased 24.1% to $4,277,643, during the three months ended November 30, 2011 compared to the same prior fiscal year period.  This increase was primarily a result of increased demand and sales of ZERUST ® rust and corrosion inhibiting packaging products and services to existing customer and new customers. Net sales to joint ventures decreased 15.0% to $554,471 during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.  This decrease was due primarily to the timing of various shipments to several of our joint ventures.

The following table sets forth additional detail regarding NTIC’s net sales by product category for the three months ended November 30, 2011 and November 30, 2010:

 

*	Excludes net sales by NTIC’s joint ventures which are not combined with NTIC’s sales in NTIC’s consolidated financial statements or in any description of NTIC’s sales.

During the three months ended November 30, 2011, 92.1% of NTIC’s consolidated net sales were derived from sales of ZERUST® products and services, which increased 14.9% to $4,452,646 during the three months ended November 30, 2011 compared to $3,875,428 during the three months ended November 30, 2010 due to increased demand from existing customers and new customers.  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 during the three months ended November 30, 2011 included $604,920 of sales made by Zerust Brazil, and of those sales, $45,861 in sales were made to the oil and gas industry sector in Brazil.  Overall demand for ZERUST ® products and services depends heavily on the overall health of the markets in which it sells its products, including in particular the automotive market.

During the three months ended November 30, 2011, $379,468, or 7.9%, of NTIC’s consolidated net sales were derived from sales of Natur-Tec ® products compared to 5.4% during the three months ended November 30, 2010.  Net sales of Natur-Tec ® products increased 70.2% during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.  This increase was due to increased sales to Natur-Tec ® distributors on the West Coast of the United States.  NTIC has continued to strengthen and expand its West Coast distribution network in California, as well as expand its industrial distribution reach to geographical “green” hotspots such as Oregon, Washington, Minnesota and New England.  Additionally, NTIC has continued to target key national and regional retailers utilizing independent sales agents.  Demand for the Natur-Tec ® products depends primarily on market acceptance and the extent of NTIC’s distribution network.

 

Cost of Goods Sold .  Cost of goods sold increased 19.3% for the three months ended November 30, 2011 compared to the three months ended November 30, 2010 primarily as a result of increased net sales as described above.  Cost of goods sold as a percentage of net sales increased to 66.4% for the three months ended November 30, 2011 compared to 65.7% for the three months ended November 30, 2010 primarily as a result of a slight increase in shipping costs, production overhead and raw material prices and a higher percentage of sales of Natur-Tec® products, which generally carry smaller margins than ZERUST® products and services.

 

Equity in Income of Joint Ventures. NTIC had equity in income of joint ventures of $1,357,680 during the three months ended November 30, 2011 compared to equity in income of joint ventures of $1,695,131 during the three months ended November 30, 2010 which is primarily a result of a 22.4% decrease in the profitability of NTIC’s largest joint venture, EXCOR in Germany during the same time period.  Of the total equity in income of joint ventures, NTIC had equity in income of joint ventures of $728,528 attributable to EXCOR during the three months ended November 30, 2011 compared to $938,227 attributable to EXCOR during the three months ended November 30, 2010.  Of the total equity in income of joint ventures, NTIC had equity in income of joint ventures of $369,462 attributable to NTI ASEAN during the three months ended November 30, 2011 compared to $320,607 attributable to NTI ASEAN during the three months ended November 30, 2010.  NTIC had equity in income of all other joint ventures of $259,691 during the three months ended November 30, 2011 compared to $436,297 during the three months ended November 30, 2010.

Fees for Services Provided to Joint Ventures.   NTIC recognized fee income for services provided to joint ventures of $1,445,252 during the three months ended November 30, 2011 compared to $1,451,780 during the three months ended November 30, 2010, representing a slight decrease of 0.4%.  The slight decrease in fees for services provided to joint ventures was primarily the result of the devaluation of the EURO and other currencies compared to the U.S. dollar, partially offset by a 6.3% increase in total net sales of NTIC’s joint ventures to $28,795,232 during the three months ended November 30, 2011 compared to $27,101,587 during the three months ended November 30, 2010.  Sales of NTIC’s joint ventures are not included in NTIC’s product sales and are not combined with NTIC’s sales in NTIC’s consolidated financial statements or in any description of NTIC’s sales.  Of the total fee income for services provided to its joint ventures, fees of $249,447 were attributable to EXCOR during the three months ended November 30, 2011 compared to $257,276 attributable to EXCOR during the three months ended November 30, 2010.  This decrease was the result of foreign currency exchange rate fluctuations.  NTIC does not receive fees attributable to NTI ASEAN.  NTIC receives dividend payments based on fees paid from the joint ventures that comprise the NTI ASEAN investments.

NTIC sponsors a worldwide joint venture conference periodically in which all of NTIC’s joint ventures and subsidiaries are invited to participate.  NTIC defers a portion of its fees for services provided to joint ventures in each accounting period leading up to the next conference, reflecting that NTIC has not fully earned the payments received during that period.  The next joint venture conference is scheduled to be held in summer of 2012 or 2013.  No additional income during either the three months ended November 30, 2011 or 2010 was deferred related to this future conference since $288,000 had been accrued prior to such time, which represents the amount that NTIC expects to spend to hold the next conference.  This amount is based on the historical experience of NTIC, current conditions and the intentions of NTIC’s management.  NTIC does not anticipate deferring any additional fees for services provided to joint ventures until after the next conference.  The costs associated with these joint venture conferences are offset against the deferral as incurred, generally in the period in which the conference is held and immediately before.

 

Selling Expenses .  NTIC’s selling expenses increased 11.0% for the three months ended November 30, 2011 compared to the three months ended November 30, 2010 due to increases in compensation and employee benefits, lab testing related expenses, commissions expenses, travel and related expenses, consulting expenses and selling expenses incurred at Zerust Brazil.  Selling expenses as a percentage of net sales decreased to 22.9% during the three months ended November 30, 2011, from 24.4% during the three months ended November 30, 2010, due primarily to the increase in net sales, partially offset by the increase in selling expenses as previously described.

 

General and Administrative Expenses .  NTIC’s general and administrative expenses increased 15.0% for the three months ended November 30, 2011 compared to the three months ended November 30, 2010 due to an increase in compensation and benefits expenses associated with an increase in headcount and annual performance raises, partially offset by a decrease in consulting expenses.  As a percentage of net sales, general and administrative expenses decreased slightly to 26.3% for the three months ended November 30, 2011 from 26.9% for the three months ended November 30 2010.

 

Expenses Incurred in Support of Joint Ventures.   Expenses incurred in support of NTIC’s joint ventures were $200,264 during the three months ended November 30, 2011 compared to $228,721 during the three months ended November 30, 2010, representing a decrease of 12.4%.  The decrease was due to a decrease in travel and legal expenses.

 

Research and Development Expense .  NTIC’s research and development expenses decreased 31.8% for the three months ended November 30, 2011 compared to the three months ended November 30, 2010 due to a decrease in consulting expenses, lab and testing expenses, and an increase in offsetting research and development contracts and grant income.

 

Interest Income .  NTIC’s interest income increased to $8,060 during the three months ended November 30, 2011 compared to $3,933 during the three months ended November 30, 2010 primarily due to increased cash balances earning interest during the most recent period.

Interest Expense .  NTIC’s interest expense decreased to $5,966 during the three months ended November 30, 2011 compared to $23,234 during the three months ended November 30, 2010 primarily due to lower average outstanding debt levels during the most recent period.

 

Income Before Income Tax Expense .  Income before income tax expense increased to $1,041,421 for the three months ended November 30, 2011 compared to $1,016,874 for the three months ended November 30, 2010.

 

Income Tax Expense .  Income tax expense was $106,000 during the three months ended November 30, 2011 compared to income tax expense of $122,000 during the three months ended November 30, 2010.  Income tax expense was calculated based on management’s estimate of NTIC’s annual effective income tax rate.  NTIC’s annual effective income tax rate during the three months ended November 30, 2011 and 2010 was lower than the statutory rate primarily due to NTIC’s equity in income of joint ventures being recognized based on after-tax earnings of these entities.  To the extent undistributed earnings of NTIC’s joint ventures are distributed to NTIC, it is not expected to result in any material additional income tax liability after the application of foreign tax credits. NTIC records a tax valuation allowance when it is more likely than not that some portion or all of its deferred tax assets will not be realized to reduce deferred tax assets to the amount expected to be realized.  NTIC determined based on all available evidence, including historical data and projections of future results, that it is more likely than not that all of its deferred tax assets, except for its foreign tax credit carryforwards and Minnesota state research and development credit carryforwards, will be fully realized and that NTIC’s deferred tax asset related to foreign tax credit carryforwards will not be realized due to insufficient federal taxable income within the carryforward period and the fact that for ordering purposes the foreign tax credit carryforwards are not allowed to be used until after any current year foreign tax credits are utilized. 

 

Other Comprehensive Income - Foreign Currency Translations Adjustment.   The volatility of the foreign currency translations adjustment was due to the strengthening of the U.S. dollar compared to the Euro and other foreign currencies during the three months ended November 30, 2011 compared to the three months ended November 30, 2010.

 

Liquidity and Capital Resources

 

Sources of Cash and Working Capital .  As of November 30, 2011, NTIC’s working capital was $11,359,574, including $3,407,371 in cash and cash equivalents, compared to working capital of $9,085,748, including $3,266,362 in cash and cash equivalents, at August 31, 2011.

 

In connection with the purchase of its corporate headquarters, in September 2006, Northern Technologies Holding Company, LLC (NTI LLC) obtained a term loan from PNC Bank, National Association (PNC Bank) with a principal amount of $1,275,000 that was to mature on May 1, 2011.  On January 10, 2011, NTI LLC refinanced its term loan in the then principal amount of approximately $1,141,788.  The term loan matures on January 10, 2016, bears interest at an annual rate based on the daily LIBOR rate plus 2.15% and is payable in 59 consecutive monthly installments equal to approximately $6,343 (inclusive of principal but exclusive of interest) commencing in February 2011.  The term loan is secured by a first lien on the real estate and building owned by NTI LLC and all of the assets of NTIC and is guaranteed by NTIC.

 

As of November 30, 2011, NTIC had a revolving line of credit with PNC Bank of $3,000,000 with no amounts outstanding as of such date.  The line of credit is 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 has a $1,200,000 standby letter of credit subfacility, with any standby letters of credit issued thereunder being at the sole discretion of PNC Bank.  Any standby letters of credit issued under the subfacility are subject to customary fees and charges payable by NTIC.  At the option of NTIC, outstanding advances under the line of credit bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by NTIC or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate.  Interest is payable in arrears (a) for the portion of advances bearing interest under the prime rate on the last day of each month during the term thereof and (b) for the portion of advances bearing interest under the LIBOR option on the last day of the respective LIBOR interest period selected

The term loan and the line of credit are governed under two separate loan agreements.  The loan agreements contain standard covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio, and negative covenants, which, among other things, limit 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 agreements, NTIC is subject to a minimum fixed charge coverage ratio of 1.10:1.00.

 

On January 10, 2012, NTIC and PNC Bank entered into a Waiver and First Amendment to Loan Documents pursuant to which NTIC and PNC Bank amended the loan agreement and other documents evidencing NTIC’s $3,000,000 line of credit with PNC Bank effective as of January 11, 2012 to extend the maturity date of the line of credit from January 10, 2012 to January 9, 2013, and waive a technical covenant default by NTIC to deliver a compliance certificate for the period ending November 30, 2011.  All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same.  NTIC expects to remain in compliance with all loan agreement covenants during the remainder of fiscal 2012.

 

NTIC believes that a combination of its existing cash and cash equivalents, 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, capital expenditures, debt repayments and any stock repurchases for at least the next 12 months.  During the remainder of fiscal 2012, NTIC expects to continue to invest in research and development and in marketing efforts and resources into its new businesses, product lines and markets, including in particular the application of its corrosion prevention technology into the oil and gas industry and its bio-plastics products.  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 and fees for services provided to its joint ventures to fund NTIC’s new technology investments and capital contributions to new and existing 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 it is not likely that there exists any exposure to debt by NTIC’s joint ventures that could materially impact their respective operations and/or liquidity.

 

Uses of Cash and Cash Flows .  Net cash used in operating activities during the three months ended November 30, 2011 was $1,785,543 which resulted principally from NTIC’s equity in income from joint ventures and increases in receivables, inventories and prepaid expenses, and decreases in payables and accrued liabilities partially offset by NTIC’s net income, depreciation, amortization and income taxes payable.  Net cash provided by operating activities during the three months ended November 30, 2010 was $1,992,801 which resulted principally from NTIC’s equity in income from joint ventures and increases in trade receivables, inventories and prepaid expenses and decreases in accounts payables and accrued liabilities, partially offset by NTIC’s net income and decrease in trade receivables.

 

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.  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, and 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 traditionally 30 days and for trade receivables from its joint ventures are 90 days.  Before extending unsecured credit to customers, excluding NTIC’s joint ventures, NTIC reviews customers’ credit histories and will

NTIC experienced a slight increase in receivables and inventory as of November 30, 2011 compared to August 31, 2011 due to the increase in net sales and a desire to stock more products to shorten lead times and anticipate customer demand.  Trade receivables excluding joint ventures as of November 30, 2011 increased $330,866 compared to August 31, 2011, primarily related to the increase in NTIC’s net sales.

 

Outstanding trade receivables excluding joint ventures balances as of November 30, 2011 increased 11 days to an average of 61 days from balances outstanding from these customers as of August 31, 2011.

 

Outstanding trade receivables from joint ventures as of November 30, 2011 decreased $144,157 compared to August 31, 2011, primarily due to the timing of payments, which resulted in an increase of outstanding balances from trade receivables from joint ventures as of November 30, 2011 of 42 days from an average of 123 days from balances outstanding from these customers compared to August 31, 2011.  The significant average days outstanding of trade receivables from joint ventures as of November 30, 2011 were primarily due to the current receivable balance at NTIC’s joint venture in India.  NTIC has made separate arrangements for payments on product that NTIC’s joint venture in India has purchased from NTIC until the product is sold.

 

Outstanding services fees receivable from joint ventures as of November 30, 2011 increased $38,883 compared to August 31, 2011, primarily resulting from an extension of terms mostly associated with NTIC’s joint venture in India which resulted in an increase of 19 days of fees receivable outstanding as of November 30, 2011 to an average of 137 days compared to August 31, 2011. NTIC is in the process of converting up to $600,000 of fees receivable from its joint venture in India to equity.

 

Net cash provided by investing activities for the three months ended November 30, 2011 was $1,935,717 which was comprised of dividends received from joint ventures partially offset by additions to property and equipment and patents.  Net cash provided by investing activities for the three months ended November 30, 2010 was $1,244,875 which was comprised of dividends received from joint ventures partially offset by investments in joint ventures and additions to property and equipment and patents.

 

Net cash provided by financing activities for the three months ended November 30, 2011 was $3,385, which resulted from proceeds from the employee stock purchase plan, partially offset by principal payments on the bank loan for NTIC’s corporate headquarters buildings.  Net cash provided by financing activities for the three months ended November 30, 2010 was $269,867, which resulted from proceeds from option exercises and common stock issued as management bonus, partially offset by principal payments on the bank loan for NTIC’s corporate headquarters buildings.

 

Capital Expenditures and Commitments .  NTIC had no material lease or other material capital commitments as of November 30, 2011, except a lease agreement entered into by NTI Facilities, Inc., a subsidiary of NTIC, for approximately 16,994 square feet of office, manufacturing, laboratory and warehouse space in Beachwood, Ohio, requiring monthly payments of $17,500, which are adjusted annually according to the annual consumer price index, through November 2014.

 

NTIC spent approximately $51,000 on capital expenditures during the three months ended November 30, 2011 and expects to spend an aggregate of approximately $1,200,000 on capital expenditures during fiscal 2012.  Such

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 would have been 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 in the U.S. and abroad historically has had little effect on NTIC.  NTIC’s business has not historically been seasonal.

 

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, Indian Rupee, Chinese yuan, Korean won and the English pound against the U.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 of joint ventures reflected in its consolidated statements of income.  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.

 

At the option of NTIC, outstanding advances under NTIC’s $3,000,000 revolving line of credit with PNC Bank bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by NTIC or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate, and thus may subject NTIC to some market risk on interest rates.  As of November 30, 2011, NTIC had no borrowings under the line of credit.

 

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 ended August 31, 2011.

 

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 and Section 21E of the Securities Exchange Act of 1934 and 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

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 current worldwide economic conditions, the European sovereign debt crisis and turmoil and disruption in the global credit and financial markets on NTIC’s business;

 

·	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 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;

 

·	The variability in NTIC’s equity income of joint ventures, which in turn, subjects NTIC’s earnings to quarterly fluctuations;

 

·	Risks associated with NTIC’s international operations and exposure to fluctuations in foreign currency exchange rates and import duties and taxes;

 

·	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 into 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 and services 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, including in particular its single supply source for its base bioplastics resins;

 

·	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;

 

·	The transition the manufacturing of certain select ZERUST® rust and corrosion inhibiting products in house at NTIC’s corporate headquarters location in Circle Pines, Minnesota;

 

·	Unforeseen product quality or other problems in the development, production and usage of new and existing products;

 

·	Loss of or changes in executive management or key employees;

 

·	Ability of management to manage around unplanned events;

 

·	NTIC’s reliance on its intellectual property rights and the absence of infringement of the intellectual property rights of others;

 

·	Fluctuations in NTIC’s effective tax rate; 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 ended August 31, 2011 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, as well as 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 NTIC files with or furnishes to the Securities and Exchange Commission.