Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

** **

**(Mark one)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended November 30,2009**

 

**o****         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                            to                             .**

 

**Commission File Number:  001-11038**

** **

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** **

**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**(State or other jurisdiction of incorporation or  organization) |   | **41-0857886**(IRS Employer Identification No.) |
|-----------------------------------------------------------------------------|--------|-------------------------------------------------|

 

**4201 Woodland Rd**

**Circle Pines, Minnesota****55014**

(Address of principal executive offices)

** **

**(763) 225-6600******(Registrant’s telephone number including areacode)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES  x NO o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  YES oNO o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|-----------------------------|
|                                          |   |                        |
| Non-accelerated filer o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  YES o NO x

 

As of January 14,2010, 4,240,679 shares of common stock of the registrant were outstanding.

 

 

 

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**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**FORM 10-Q**

**November 30, 2009**

 

**TABLE OFCONTENTS**

 
| **Description**     | ** **                                                                                                     | **Page** |
|---------------------|----------------------------------------------------------------------------------------------------------------|----------|
|                |                                                                                                           |     |
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                      |     |
|                |                                                                                                           |     |
| Item 1.             | Financial Statements                                                                                           |     |
|                |                                                                                                           |     |
|                | Consolidated Balance Sheets as of November 30,  2009 (unaudited) and August 31, 2009                 | 3        |
|                |                                                                                                           |     |
|                | Consolidated Statements of Operations (unaudited) for  the Three Months Ended November 30, 2009 and 2008  | 4        |
|                |                                                                                                           |     |
|                | Consolidated Statements of Cash Flows (unaudited) for  the Three Months Ended November 30,  2009 and 2008 | 5        |
|                |                                                                                                           |     |
|                | Notes to Consolidated Financial Statements (unaudited)                                                         | 6-12     |
|                |                                                                                                           |     |
| Item 2.             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                    | 13       |
|                |                                                                                                           |     |
| Item 3.             | Quantitative  and Qualitative Disclosures about Market Risk                                                    | 22       |
|                |                                                                                                           |     |
| Item 4.             | Controls and  Procedures                                                                                       | 23       |
|                |                                                                                                           |     |
| **PART II.**   | **OTHER INFORMATION**                                                                                          |     |
|                |                                                                                                           |     |
| Item 1.             | Legal Proceedings                                                                                              | 23       |
|                |                                                                                                           |     |
| Item 1A.            | Risk Factors                                                                                                   | 23       |
|                |                                                                                                           |     |
| Item 2.             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                   | 24       |
|                |                                                                                                           |     |
| Item 3.             | Defaults  Upon Senior Securities                                                                               | 24       |
|                |                                                                                                           |     |
| Item 4.             | Submission  of Matters to a Vote of Security Holders                                                           | 24       |
|                |                                                                                                           |     |
| Item 5.             | Other Information                                                                                              | 24       |
|                |                                                                                                           |     |
| Item 6.             | Exhibits                                                                                                       | 25       |
|                |                                                                                                           |     |
| **SIGNATURE  PAGE** | 26                                                                                                             |
|                |                                                                                                           |     |
| **EXHIBIT  INDEX**  | 27                                                                                                             |

 

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*This quarterly report on Form 10-Q contains certainforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, and are subject to the safe harbor created bythose sections.  For more information,see “Part I. Financial Information – Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations– Forward-LookingStatements.”*

 

*As usedin this**report**,references**to “NTIC,” the “Company,” “we,” “our” or “us,” unless the contextotherwise requires, refer to Northern Technologies International Corporation,its wholly owned subsidiaries – NTI Facilities, Inc., NorthernTechnologies Holding Company, LLC and React-NTI, LLC, all of which areconsolidated on NTIC’s financial statements.*

 

*Alltrademarks, trade names or service marks referred to in this report are theproperty of their respective owners.*

 

# ****

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# **PART I - FINANCIAL INFORMATION**

# ** **

## **ITEM1.           FINANCIAL STATEMENTS**

## ** **

**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATEDBALANCE SHEETS AS OF NOVEMBER 30, 2009 (UNAUDITED) AND AUGUST 31, 2009**

 
| ** **                                                                                                                                     | ** ** | **November 30,  2009** | ** ** | **August 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                     |       |                        |       |                      |       |
| CURRENT ASSETS:                                                                                                                                |       |                        |       |                      |       |
| Cash and cash equivalents                                                                                                                      |       | $                           | 2,341,999  |                      | $          | 138,885 |   |
| Receivables:                                                                                                                                   |       |                        |       |                      |       |
| Trade excluding corporate joint ventures, less  allowance for doubtful accounts of $79,000 at November 30, 2009 and  August 31, 2009 |       | 1,996,317                   |       | 1,373,802                 |       |
| Trade corporate joint ventures                                                                                                                 |       | 928,964                     |       | 662,954                   |       |
| Technical and other services, corporate joint  ventures                                                                                        |       | 1,295,133                   |       | 1,760,602                 |       |
| Income taxes                                                                                                                                   |       | 149,197                     |       | 173,038                   |       |
| Inventories                                                                                                                                    |       | 2,050,091                   |       | 2,002,622                 |       |
| Prepaid expenses                                                                                                                               |       | 279,654                     |       | 138,086                   |       |
| Deferred income taxes                                                                                                                          |       | 218,900                     |       | 218,900                   |       |
| Total current assets                                                                                                                           |       | 9,260,255                   |       | 6,468,889                 |       |
|                                                                                                                                           |       |                        |       |                      |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                    |       | 3,457,316                   |       | 3,542,169                 |       |
|                                                                                                                                           |       |                        |       |                      |       |
| OTHER ASSETS:                                                                                                                                  |       |                        |       |                      |       |
| Investments in corporate joint ventures:                                                                                                       |       |                        |       |                      |       |
| Industrial chemical                                                                                                                            |       | 14,885,034                  |       | 13,727,097                |       |
| Industrial non-chemical                                                                                                                        |       | 333,076                     |       | 337,025                   |       |
| Deferred income taxes                                                                                                                          |       | 1,336,700                   |       | 1,336,700                 |       |
| Notes receivable                                                                                                                               |       | 140,000                     |       | 140,000                   |       |
| Industrial patents and trademarks, net                                                                                                         |       | 909,486                     |       | 888,065                   |       |
| Other                                                                                                                                          |       | 36,007                      |       | 42,975                    |       |
|                                                                                                                                           |       | 17,640,303                  |       | 16,471,862                |       |
|                                                                                                                                           |       | $                           | 30,357,874 |                      | $          | 26,482,920 |   |
|                                                                                                                                           |       |                        |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                 |       |                        |       |                      |       |
| CURRENT LIABILITIES:                                                                                                                           |       |                        |       |                      |       |
| Borrowings made on line of credit                                                                                                              |       | $                           | —     |                      | 1,077,000  |   |
| Current portion of note payable (Note 6)                                                                                                       |       | 1,171,472                   |       | 1,179,973                 |       |
| Accounts payable                                                                                                                               |       | 1,128,700                   |       | 630,363                   |       |
| Accrued liabilities:                                                                                                                           |       |                        |       |                      |       |
| Payroll and related benefits                                                                                                                   |       | 355,731                     |       | 261,579                   |       |
| Deferred joint venture royalties                                                                                                               |       | 288,000                     |       | 288,000                   |       |
| Other                                                                                                                                          |       | 393,803                     |       | 304,202                   |       |
| Total current liabilities                                                                                                                      |       | 3,337,706                   |       | 3,741,117                 |       |
|                                                                                                                                           |       |                        |       |                      |       |
| COMMITMENTS AND CONTINGENCIES (Note 13)                                                                                                        |       |                        |       |                      |       |
|                                                                                                                                           |       |                        |       |                      |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                     |       |                        |       |                      |       |
| Preferred stock, no par value; authorized 10,000  shares; none issued and outstanding                                                          |       | —                      |       | —                    |       |
| Common stock, $0.02 par value per share; authorized  10,000,000 shares; issued and outstanding 4,240,679 and 3,756,596, respectively           |       | 84,814                      |       | 75,132                    |       |
| Additional paid-in capital                                                                                                                     |       | 8,889,935                   |       | 5,631,767                 |       |
| Retained earnings                                                                                                                              |       | 15,763,669                  |       | 15,327,962                |       |
| Accumulated other comprehensive income                                                                                                         |       | 2,281,750                   |       | 1,706,942                 |       |
| Total stockholders’ equity                                                                                                                |       | 27,020,168                  |       | 22,741,803                |       |
|                                                                                                                                           |       | $                           | 30,357,874 |                      | $          | 26,482,920 |   |

 

Seenotes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIESINTERNATIONALCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)**

**THREE MONTHS ENDED NOVEMBER 30, 2009 AND 2008**

 
| ** **                                                                                         | ** ** | **November 30,  2009** | ** ** | **November 30,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| NORTH AMERICAN OPERATIONS:                                                                         |       |                        |       |                        |       |
| Net sales                                                                                          |       | $                           | 2,711,402  |                        | $          | 3,270,944 |   |
| Cost of goods sold                                                                                 |       | 1,757,496                   |       | 2,292,967                   |       |
| Gross profit                                                                                       |       | 953,906                     |       | 977,977                     |       |
|                                                                                               |       |                        |       |                        |       |
| Operating expenses:                                                                                |       |                        |       |                        |       |
| Selling                                                                                            |       | 561,652                     |       | 770,570                     |       |
| General and administrative                                                                         |       | 920,029                     |       | 941,438                     |       |
| Lab and technical support                                                                          |       | 35,117                      |       | 6,067                       |       |
|                                                                                               |       | 1,516,798                   |       | 1,718,075                   |       |
|                                                                                               |       |                        |       |                        |       |
| NORTH AMERICAN OPERATING LOSS                                                                      |       | (562,892                    | )          | (740,098                    | )          |
|                                                                                               |       |                        |       |                        |       |
| CORPORATE JOINT VENTURES AND HOLDING COMPANIES:                                                    |       |                        |       |                        |       |
| Equity in income of industrial chemical corporate joint  ventures and holding companies            |       | 724,456                     |       | 655,532                     |       |
| Equity in (loss) income of industrial non-chemical corporate  joint ventures and holding companies |       | (18,557                     | )          | 3,234                       |       |
| Fees for technical support and other services provided  to corporate joint ventures                |       | 1,151,930                   |       | 1,320,719                   |       |
| Expenses incurred in support of corporate joint  ventures                                          |       | (856,566                    | )          | (1,178,034                  | )          |
|                                                                                               |       |                        |       |                        |       |
| INCOME FROM ALL CORPORATE JOINT VENTURES AND  HOLDING COMPANIES                                    |       | 1,001,263                   |       | 801,451                     |       |
|                                                                                               |       |                        |       |                        |       |
| INTEREST INCOME                                                                                    |       | 1,496                       |       | 445                         |       |
| INTEREST EXPENSE                                                                                   |       | (25,987                     | )          | (31,898                     | )          |
| OTHER INCOME                                                                                       |       | 6,825                       |       | 6,826                       |       |
| MINORITY INTEREST                                                                                  |       | —                      |       | 9,160                       |       |
|                                                                                               |       |                        |       |                        |       |
| INCOME BEFORE INCOME TAX EXPENSE                                                                   |       | 420,705                     |       | 45,886                      |       |
|                                                                                               |       |                        |       |                        |       |
| INCOME TAX (BENEFIT) EXPENSE                                                                       |       | (15,000                     | )          | 33,000                      |       |
|                                                                                               |       |                        |       |                        |       |
| NET INCOME                                                                                         |       | $                           | 435,705    |                        | $          | 12,886 |   |
|                                                                                               |       |                        |       |                        |       |
| NET INCOME PER COMMON SHARE:                                                                       |       |                        |       |                        |       |
| Basic                                                                                              |       | $                           | 0.11       |                        | $          | 0.00 |   |
| Diluted                                                                                            |       | $                           | 0.10       |                        | $          | 0.00 |   |
|                                                                                               |       |                        |       |                        |       |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:                                                |       |                        |       |                        |       |
| Basic                                                                                              |       | 4,149,096                   |       | 3,735,433                   |       |
| Diluted                                                                                            |       | 4,165,441                   |       | 3,770,572                   |       |

 

Seenotes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

**THREE MONTHS ENDED NOVEMBER 30, 2009 AND 2008**

 
| ** **                                                                                   | ** ** | **November 30,  2009** | ** ** | **November 30,  2008** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |       |                        |       |                        |       |
| Net income                                                                                   |       | $                           | 435,705    |                        | $          | 12,886 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                        |       |                        |       |
| Expensing of fair value of stock options vested                                              |       | 46,302                      |       | 25,000                      |       |
| Depreciation expense                                                                         |       | 95,254                      |       | 97,818                      |       |
| Amortization expense                                                                         |       | 38,475                      |       | 38,633                      |       |
| Minority interest                                                                            |       | —                      |       | (9,160                      | )          |
| Equity in (income) loss from corporate joint  ventures:                                      |       |                        |       |                        |       |
| Industrial chemical                                                                          |       | (724,456                    | )          | (655,532                    | )          |
| Industrial non-chemical                                                                      |       | 18,557                      |       | (3,234                      | )          |
| Change in current assets and liabilities:                                                    |       |                        |       |                        |       |
| Receivables:                                                                                 |       |                        |       |                        |       |
| Trade excluding corporate joint ventures                                                     |       | (504,596                    | )          | (25,469                     | )          |
| Trade corporate joint ventures                                                               |       | (266,010                    | )          | (387,401                    | )          |
| Technical and other services receivables, corporate  joint ventures                          |       | 465,469                     |       | 904,589                     |       |
| Income taxes                                                                                 |       | 23,841                      |       | (104,444                    | )          |
| Inventories                                                                                  |       | (47,469                     | )          | 296,222                     |       |
| Prepaid expenses and other                                                                   |       | (134,600                    | )          | (185,409                    | )          |
| Accounts payable                                                                             |       | 141,950                     |       | 12,080                      |       |
| Accrued liabilities                                                                          |       | 183,753                     |       | (647,437                    | )          |
| Net cash used in operating activities                                                        |       | (227,823                    | )          | (630,858                    | )          |
|                                                                                         |       |                        |       |                        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |       |                        |       |                        |       |
| Dividends received from corporate joint ventures                                             |       | 8,801                       |       | 2,056,311                   |       |
| Additions to property and equipment                                                          |       | (10,401                     | )          | (80,615                     | )          |
| Additions to industrial patents                                                              |       | (59,896                     | )          | (15,996                     | )          |
| Net cash (used in) provided by investing activities                                          |       | (61,497                     | )          | 1,959,700                   |       |
|                                                                                         |       |                        |       |                        |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |       |                        |       |                        |       |
| Bank overdraft                                                                               |       | —                      |       | (1,039,757                  | )          |
| Repayment of note payable                                                                    |       | (8,501                      | )          | (7,041                      | )          |
| Proceeds from issuance of common stock                                                       |       | 3,552,000                   |       | —                      |       |
| Stock options exercised                                                                      |       | 9,225                       |       |                        |       |
| Net repayments made on line of credit                                                        |       | (1,077,000                  | )          | (86,000                     | )          |
| Proceeds from employee stock purchase plan                                                   |       | 16,710                      |       | —                      |       |
| Net cash provided by (used in) financing activities                                          |       | 2,492,434                   |       | (1,132,798                  | )          |
|                                                                                         |       |                        |       |                        |       |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | 2,203,114                   |       | 196,045                     |       |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                             |       | 138,885                     |       | 260,460                     |       |
|                                                                                         |       |                        |       |                        |       |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                   |       | $                           | 2,341,999  |                        | $          | 456,505 |   |

 

Seenotes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**1.****            ****INTERIMFINANCIAL INFORMATION**

 

In the opinion of management,the accompanying unaudited consolidated financial statements contain allnecessary adjustments, which are of a normal recurring nature, and presentfairly the consolidated financial position of Northern TechnologiesInternational Corporation and its subsidiaries (the “Company”) as of November 30,2009 and the results of their operations for the three months ended November 30,2009 and November 30, 2008 and their cash flows for the three months endedNovember 30, 2009 and November 30, 2008, in conformity withaccounting principles generally accepted in the United States of America (“U.S.GAAP”).

 

These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes contained in the Company’s annual report on Form 10-Kfor the fiscal year ended August 31, 2009 and with the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section appearing in this report. Operating results for the three months ended November 30, 2009 arenot necessarily indicative of the results that may be expected for the fullfiscal year ending August 31, 2010.

 

The Company has evaluatedsubsequent events occurring through January 14, 2010, the date on whichthis quarterly report on Form 10-Q was issued.

 

**2.****            ****INVENTORIES**

 

Inventories consisted of the following:

 
| ** **           | ** ** | **November 30,  2009** | ** ** | **August 31,********2009** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Production materials |       | $                           | 983,244    |                            | $          | 947,677 |   |
| Finished goods       |       | 1,066,847                   |       | 1,054,945                       |       |
|                 |       | $                           | 2,050,091  |                            | $          | 2,002,622 |   |

 

**3.****            ****PROPERTYAND EQUIPMENT**

 

Property and equipmentconsisted of the following:

 
| ** **                    | ** ** | **November 30,  2009** | ** ** | **August 31,  2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Land                          |       | $                           | 310,365    |                      | $          | 310,365 |   |
| Buildings and improvements    |       | 3,083,594                   |       | 3,083,598                 |       |
| Machinery and equipment       |       | 1,596,439                   |       | 1,641,878                 |       |
|                          |       | 4,990,398                   |       | 5,035,841                 |       |
| Less accumulated depreciation |       | (1,533,082                  | )          | (1,493,672                | )          |
|                          |       | $                           | 3,457,316  |                      | $          | 3,542,169 |   |

 

**4.****            ****INDUSTRIALPATENTS AND TRADEMARKS, NET**

 

Industrial patents andtrademarks consisted of the following:

 
| ** **                    | ** ** | **November 30,  2009** | ** ** | **August 31,  2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Patents and trademarks        |       | $                           | 1,490,239  |                      | $          | 1,430,352 |   |
| Less accumulated amortization |       | (580,754                    | )          | (542,287                  | )          |
|                          |       | $                           | 909,486    |                      | $          | 888,065 |   |

 

Patent and trademark costsare amortized over seven years once a patent or trademark is filed andapproved.  Amortization expense related to patents and trademarks was$38,475 and $33,962 for the three months ended November 30, 2009 and 2008,respectively.  Amortization expense isestimated to approximate $160,000 in each of the next five fiscal years.

 

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**5.****            ****INVESTMENTSIN CORPORATE JOINT VENTURES**

 

Composite financial information from the audited andunaudited financial statements of the Company’s joint ventures carried on theequity basis is summarized as follows:

 
| ** **                                                                                             | ** ** | **November 30,********2009** | ** ** | **August 31,********2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| Current assets                                                                                         |       | $                                 | 46,611,112 |                            | $          | 43,863,290 |   |
| Total assets                                                                                           |       | 53,707,381                        |       | 50,224,882                      |       |
| Current liabilities                                                                                    |       | 14,896,221                        |       | 17,260,943                      |       |
| Noncurrent liabilities                                                                                 |       | 5,738,166                         |       | 2,325,943                       |       |
| Joint ventures’ equity                                                                            |       | 33,072,994                        |       | 30,637,996                      |       |
| Northern Technologies International Corporation’s  share of corporate joint ventures’ equity |       | $                                 | 15,218,110 |                            | $          | 14,064,122 |   |

 
| ** **                                                                                                    | ** ** | **November 30,********2009** | ** ** | **November 30, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------|------------|
| Net sales                                                                                                     |       | $                                 | 19,480,538 |                       | $          | 21,109,585 |   |
| Gross profit                                                                                                  |       | 9,600,769                         |       | 9,466,704                  |       |
| Net income                                                                                                    |       | 1,405,086                         |       | 1,102,716                  |       |
| Northern Technologies International Corporation’s  share of equity in income of corporate joint ventures |       | $                                 | 705,899    |                       | $          | 658,766 |   |

 

The financial statements of the Company’s foreignjoint ventures are prepared using accounting principles accepted in the jointventures’ countries of domicile.  Amountsrelated to foreign joint ventures reported in the above tables and theaccompanying financial statements have been adjusted to approximate U.S. GAAPin all material respects.  All materialprofits recorded on sales from the Company to its joint ventures have beeneliminated for financial reporting purposes.

 

**6.****            ****CORPORATEDEBT**

 

The Company has a demand line of credit of $2,300,000with National City Bank.  Advances madeunder the demand line of credit are made at the sole discretion of NationalCity Bank and are due and payable on demand. Outstanding amounts under the demand line of credit bear interest at anannual rate based on LIBOR plus 2.25%. As of November 30, 2009, the interest rate was 2.49% and theweighted average rate was 2.50% for the three months ended November 30,2009.  As of November 30, 2008, theinterest rate was 3.87% and the weighted average rate was 5.04% for the threemonths ended November 30, 2008. Interest is payable in arrears on the 15th day of each month and ondemand. There were no amounts outstanding under the demand line of credit andno amounts were committed under the line of credit to cover letters of creditas of November 30, 2009.  As of November 30, 2008, NTIC had no borrowings under its $2,300,000demand line of credit and $600,000 was committed under the demand line ofcredit to cover a letter of credit.

 

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In connection with the purchase of its corporateheadquarters, in September 2006, the Company entered into a term loan witha principal amount of $1,275,000 that matures on May 1, 2011, bearsinterest at a fixed rate of 8.01% and is payable in 59 monthly payments equalto approximately $10,776 (inclusive of principal and interest).  All of the remaining unpaid principal andaccrued interest is due and payable on the maturity date.  The term loan is secured by a first lien onthe Company’s Circle Pines facility pursuant to a Mortgage dated as of May 3,2006 between Northern Technologies Holding Company LLC and National City Bankand is guaranteed by the Company.

 

Under the note governing the term loan, the Companyis subject to a minimum debt service coverage ratio of 1.0:1.0.  At August 31, 2009, the Company failedto meet this financial covenant and no waiver from the bank was obtained by theCompany for the covenant violation.  As aresult, an event of default occurred under the note and the bank has the rightin its discretion, by giving written notice to the Company, to declare theamount outstanding under the note immediately due and payable in full. As aresult, the Company classified all amounts outstanding with National City Bankas current liabilities on its consolidated balance sheets as of November 30,2009 and August 31, 2009.

 

**7.****            ****STOCKHOLDERS’EQUITY**

 

During the three months ended November 30,2009, the Company did not purchase or retire any shares of its commonstock.  The following stock options topurchase shares of common stock were exercised during the three months ended November 30,2009:

 
| **Options Exercised** | ** ** | **Exercise Price** | ** ** |
|-----------------------|------------|--------------------|------------|
| 1,500                 |       | $                  | 6.15       |   |
|                       |            |                    |            |  |

 

The Company granted stockoptions under the Northern Technologies International Corporation 2007 StockIncentive Plan to purchase an aggregate of 122,000 shares of its common stockto various employees during the three months ended November 30, 2009.  The weighted average per share exercise priceof the stock options is $7.88, which is equal to 100 percent of the fair marketvalue of the Company’s common stock on the date of grant.

 

In September 2009, theCompany completed a $3,552,000 registered direct offering in which it sold anaggregate of 480,000 shares of its common stock to institutional investors at apurchase price of $7.40 per share, resulting in net proceeds of $3,195,613, after deducting placement agent fees and expenses and NTIC’s offeringexpenses.

 

During the three months ended November 30,2008, the Company did not purchase or retire any shares of its common stock andno stock options to purchase shares of the Company’s common stock wereexercised or granted.  The Companygranted stock bonuses under the Northern Technologies International Corporation2007 Stock Incentive Plan for an aggregate of 21,513 shares of its common stockto various employees during the three months ended November 30, 2008.  The fair value of the shares of the Company’scommon stock as of the date of grant of the stock bonuses was $226,961, basedon the closing sale price of a share of the Company’s common stock on thatdate.

 

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**8.         TOTAL COMPREHENSIVE INCOME**

 

The Company’s total comprehensive income(loss) was as follows:

 
| ** **                                                                   | ** ** | **Three Months Ended**      | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                   | ** ** | **November 30,  2009** | ** ** | **November 30,  2008** | ** ** |
| Net income                                                                   |       | $                           | 435,705    |   | $ | 12,886 |   |
| Other comprehensive income (loss) - foreign  currency translation adjustment |       | 574,808                     |       | (1,578,958 | ) |
| Total comprehensive income (loss)                                            |       | $                           | 1,010,513  |   | $ | (1,566,072 | ) |

 

**9.****            ****NETINCOME PER COMMON SHARE**

 

Basic net income per common share is computed bydividing net income by the weighted average number of common sharesoutstanding.  Diluted net income pershare assumes the exercise of stock options using the treasury stock method, ifdilutive.

 

Options to purchase shares of common stock of195,139 and 65,140 were excluded from the computation of common shareequivalents as of November 30, 2009 and 2008, respectively, as stockoption exercise prices were greater than market price of a share of commonstock.

 

**10.****         ****STOCK-BASED COMPENSATION**

 

In January 2007, the Company’s stockholdersapproved the Northern Technologies International Corporation 2007 StockIncentive Plan (the “2007 Plan”) and the Northern Technologies InternationalCorporation Employee Stock Purchase Plan (the “ESPP”).  The Compensation Committee of the Board ofDirectors administers both of the plans.

 

The 2007 Plan replaced the Northern TechnologiesInternational Corporation 2000 Stock Incentive Plan, which was terminated withrespect to future grants, but will continue to govern grants outstanding undersuch plan.  The 2007 Plan provides forthe grant of incentive stock options, non-statutory stock options, stockappreciation rights, restricted stock, stock unit awards, performance awardsand stock bonuses to eligible recipients to enable the Company and its subsidiariesto attract and retain qualified individuals through opportunities for equityparticipation in the Company, and to reward those individuals who contribute tothe achievement of the Company’s economic objectives.  Up to a total of 400,000 shares of theCompany’s common stock has been reserved for issuance under the 2007 Plan,subject to adjustment as provided in the 2007 Plan.  Options granted under the 2007 Plan generallyhave a term of five years and become exercisable over a three- or four-year periodbeginning on the one-year anniversary of the date of date.  Options are granted at per share exerciseprices equal to the market value of the Company’s common stock on the date ofgrant.  To date, only stock options andstock bonuses have been granted under the 2007 Plan.

 

The maximum number of shares of common stock of theCompany available for issuance under the ESPP is 100,000 shares, subject toadjustment as provided in the ESPP.  TheESPP provides for six-month offering periods beginning on September 1 and March 1of each year.  The purchase price of theshares is 90% of the lower of the fair market value of common stock at thebeginning or end of the offering period. This discount may not exceed the maximum discount rate permitted forplans of this type under Section 423 of the Internal Revenue Code of 1986,as amended.  The ESPP is compensatory forfinancial reporting purposes.

 

The Company granted options to purchase 126,000 and30,000 shares of its common stock during the three months ended November 30,2009 and 2008, respectively.  The fairvalue of option grants is determined at date of grant, using the Black-Scholesoption pricing model with the assumptions listed below.  Based on thesevaluations, the Company recognized compensation expense of $46,302 and $25,000during the three months ended November 30, 2009 and 2008, respectively,related to the options that vested during such time period.  The stock-based expense recorded reducedafter-tax net income per share by $0.01 for the three months ended

 

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November 30, 2009 and 2008.  As of November 30, 2009, the totalcompensation cost for non-vested options not yet recognized in the Company’sstatements of income was $394,901, net of estimated forfeitures.  Additional stock-based compensation expenseof $138,907 is expected through the remainder of fiscal year 2010, and expenseof $147,610 and $108,383 is expected to be recognized during fiscal 2011 and2012, respectively.  Future option grantswill impact the compensation expense recognized.

 

The Company currently estimates a ten percentforfeiture rate for stock options, but will continue to review this estimate infuture periods.

 

The fair value of each option grant is estimated onthe grant date using the Black-Scholes option-pricing model with the followingassumptions and results for the grants:

 
| ** **                      | ** ** | **November 30,  2009** | ** ** | **November 30,   2008** | ** ** |
|---------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Dividend yield                  |       | 2.00                        | %          | 2.00                         | %          |
| Expected volatility             |       | 48.1                        | %          | 46.7                         | %          |
| Expected life of option         |       | 5 years                     |       | 5 years                      |       |
| Average risk-free interest rate |       | 2.34                        | %          | 2.88                         | %          |

 

The weighted average fair value of options grantedduring the three months ended November 30, 2009 and 2008 was $2.96 and$4.78, respectively.

 

**11.****         ****GEOGRAPHICAND SEGMENT INFORMATION**

 

Net sales by geographic location as a percentage oftotal consolidated net sales were as follows:

 
| ** **                                                                              | ** ** | **November 30,  2009** | ** ** | **November 30,  2008** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| Inside the U.S.A. to  unaffiliated customers                                            |       | 74.9%                            |       | 89.3%                       |       |
| Outside the U.S.A. to:                                                                  |       |                             |       |                        |       |
| Corporate joint ventures in which the Company is a  shareholder directly and indirectly |       | 19.6                             |       | 7.2                         |       |
| Unaffiliated customers                                                                  |       | 5.5                              |       | 3.5                         |       |
|                                                                                    |       | 100.0                            | %          | 100.0                       | %          |

 

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

 

The following table sets forth the Company’s netsales for the three months ended November 30, 2009 and 2008 by segment:

 
| ** **                      | ** ** | **November 30,  2009** | ** ** | **November 30,  2008** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales              |       | $                           | 2,627,555  |                        | $          | 2,788,628     |       | $             | (161,073   | ) | (5.8 | )% |
| Natur-Tec® sales           |       | 83,846                      |       | 482,316                     |       | (398,470      | )          | (82.6         | )%         |
| Total  North American net sales |       | $                           | 2,711,402  |                        | $          | 3,270,944     |       | $             | (559,542   | ) | (20.6 | )% |

 

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The following table sets forth the Company’scost of sales for the three months ended November 30, 2009 and 2008 bysegment:

 
| ** **                                  | ** ** | **November 30,  2009** | ** ** | **% of Product  Sales*** | ** ** | **November 30,  2008** | ** ** | **% of Product  Sales*** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
| Direct  Cost of Sales                       |       |                        |       |                     |       |                        |       |                     |       |
| ZERUST®  cost of goods sold            |       | $                           | 1,417,508  |                     | 53.9       | %                           | $          | 1,596,583                |       | 57.3 | % |
| Natur-Tec® cost of goods sold          |       | 59,018                      |       | 70.4                     | %          | 399,188                     |       | 82.8                     | %          |
| Indirect  Cost of goods sold                |       | 280,970                     |       | —                   |       | 297,196                     |       | —                   |       |
| Total  North American netcost of goods sold |       | $                           | 1,757,496  |                     | 64.8       | %                           | $          | 2,292,967                |       | 70.1 | % |

 

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

 

TheCompany’s management utilizes product net sales and direct and indirect cost ofgoods sold for each product in reviewing the financial performance of a producttype.  Further allocation of Companyexpenses or assets, aside from amounts presented in the tables above, is notutilized in evaluating product performance, nor does such allocation occur forinternal financial reporting.

 

**12.  RESEARCHAND DEVELOPMENT**

 

During the year ended August 31,2009, the Company was awarded multiple research and developmentcontracts.  The Company accrues proceeds received under the grants andoffsets research and development expenses incurred in equal installments overthe timelines associated with completion of the grants specific objectives andmilestones. At November 30 and August 31, 2009, the Company deferredamounts received of $181,953 and $145,562 in other accrued liabilities, as theCompany had not yet performed under the obligations of the contracts.

 

The Company expenses all costsrelated to product research and development as incurred.  The Companyincurred $797,785 and $722,078 during the three months ended November 30,2009 and 2008, respectively, in connection with its research and developmentactivities.  These amounts are reduced by reimbursements of $109,172 and$0 for the three months ended November 30, 2009 and 2008,respectively.  The net fees are accounted for in the “Expenses incurred insupport of corporate joint ventures” section of statements of operations.

 

**13.       COMMITMENTSAND CONTINGENCIES**

 

On November 20, 2009, the Company’s Board ofDirectors, upon recommendation of the Compensation Committee, approved thematerial terms of an annual bonus plan for the Company’s executive officers andcertain employees for the fiscal year ending August 31, 2010, the purposeof which is to align the interests of the Company, its executive officers andstockholders by providing an incentive for the achievement of key corporate andindividual performance measures that are critical to the success of the Companyand linking a significant portion of each executive officer’s annualcompensation to the achievement of such measures.  The following is a brief summary of thematerial terms approved by the Board:

 

·                  The total amount available under the bonusplan will be up to 25% of the Company’s earnings before interest, taxes andother income (EBITOI);

 

·                  The total amount available under the cashbonus plan will be $0 if EBITOI, as adjusted to take into account amounts to bepaid under the bonus plan, fall below 70% of target EBITOI; and

 

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·                  The payment of bonuses under the plan will bepurely discretionary and will be paid to executive officer participants in bothcash and stock, the exact amount and percentages of which will be determined bythe Company’s Board of Directors, upon recommendation of the Compensation Committee.

 

There was a $158,000management bonus accrual as of November 30, 2009 compared to a managementbonus accrual of zero as of November 30, 2008.

 

In April 2007, REACT-NTI,LLC (“React LLC”), a company that is 75% owned by the Company, was served witha summons and complaint that was filed by Shamrock Technologies, Inc. (“Shamrock”)in state court in New York.  This casehas been removed to the Federal District Court for the Southern District of NewYork.  The lawsuit seeks payment fromReact LLC of commissions in the approximate amount of $314,500 owed by ReactLLC under a license agreement between React LLC and Shamrock.  The complaint alleges breach of the licenseagreement by React LLC and seeks damages in an unspecified amount for suchbreach as well as damages of approximately $300,000 for the alleged failure ofReact LLC to purchase from Shamrock certain inventory manufactured for sale toa customer.  Shamrock further claims lostprofits with respect to sales made by Shamrock that were manufactured byparties other than React LLC.  React LLCacknowledges that React LLC has not made payment for product in the approximateamount of $300,000 to Shamrock as the invoice for this was only received afterShamrock had already filed its complaint, but denies all of the claims ofbreach of the license agreement by it and believes that damages caused byShamrock’s breach of the license agreement and tortious conduct exceed anyamounts owing to Shamrock.  React LLCformally responded to the complaint after removal by moving to dismiss or staybecause of Shamrock’s failure to comply with alternative dispute resolutionprocedures contained in the license agreement. By court order, the matter was stayed so that the parties could attemptmediation.  The parties mediated for oneday and were unsuccessful in resolving the matter. The parties proceeded withdiscovery, exchanging answers to interrogatories and documents, and the partiesalso obtained documents by subpoena from third parties.  With more complete information, the partiesdecided to dismiss their respective claims without prejudice and return tomediation.  A mediation session was heldon December 4, 2008, and the parties continued to negotiate through themediator thereafter without any final agreement by either party.  Because the mediation and negotiation processdid not result in a final settlement, there can be no permanent assurance atthe present time that the matter will not result in a material adverse effect onthe Company’s business, financial condition or results of operations at somepoint in the future.

 

From time to time, the Company is involved invarious legal actions arising in the normal course of business.  Management is of the opinion that anyjudgment or settlement resulting from any currently pending or threatenedactions would not have a material adverse effect on the Company’s financialposition or consolidated results of operations.

 

**14.          STATEMENTS OF CASH FLOWS**

 

The Company did not declare or pay any cashdividends during fiscal 2009 and as of January 14, 2010, had not declaredor paid any cash dividends during fiscal 2010.

 

The Company issued 21,513shares of common stock as stock bonuses under its stock incentive plans tovarious employees to satisfy $226,961 of accrued payroll liability during thequarter ended November 30, 2008.  Noshares of common stock as stock bonuses were issued during the quarter ended November 30,2009.

 

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

 

This Management’s Discussion andAnalysis provides material historical and prospective disclosures intended toenable investors and other users to assess NTIC’s financial condition andresults of operations.  Statements thatare not historical are forward-looking and involve risks and uncertaintiesdiscussed under the heading “Part I. Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Forward-Looking Statements.” Thefollowing discussion of the results of the operations and financial conditionof NTIC should be read in conjunction with NTIC’s consolidated financialstatements and the related notes thereto included under the heading “Part I.Item 1.  Financial Statements.”

 

**General Overview**

 

NTIC develops and markets proprietaryenvironmentally beneficial products and technical services either directly orvia a network of joint ventures and independent distributors in over 50countries.  NTIC’s primary business iscorrosion prevention.  In addition tothis core business, NTIC has three new businesses that have started recently togenerate revenue (1) corrosion prevention technology specifically designedfor the oil and gas industry, which NTIC sells both directly and through jointventures; (2) a product line of compounds and finished products based on aportfolio of proprietary bio-plastic technologies marketed under the Natur-Tec®brand, which NTIC sells directly and through distributors and manufacturer’ssales representatives; and (3) technology and equipment that convertsplastic waste into diesel, gasoline and heavy fractions, which is exclusivelylicensed and sold through NTIC’s joint venture Polymer Energy, LLC in NorthAmerica and Asia.

 

NTIC participates, either directly or indirectlythrough holding companies, in 27 active corporate joint venture arrangements inNorth America, South America, Europe, Asia and the Middle East.  Each of these joint ventures generallymanufactures and markets finished products in the geographic territory to whichit is assigned.  While most of NTIC’sjoint ventures currently sell rust and corrosion inhibiting products and custompackaging systems, NTIC also has joint ventures that manufacture, market andsell corrosion prevention technology for the oil and gas industry and thePolymer EnergyTM technology and equipment that converts plastic waste intodiesel, gasoline, and heavy fractions. The profits of NTIC’s corporate joint ventures are shared by therespective corporate joint venture owners in accordance with their respectiveownership percentages.  NTIC typicallyowns 50% of its joint venture entities and thus does not control the decisionsof these entities regarding whether to pay dividends or how much to pay individends in any given year.

 

NTIC has been selling itsproprietary ZERUST® and EXCOR® rust and corrosion inhibiting products andservices to the automotive, electronics, electrical, mechanical, military andretail consumer markets for over 30 years. NTIC also offers worldwide on-site technical consulting for rust andcorrosion prevention issues.  In NorthAmerica, NTIC markets its technical services and ZERUST® products principallyto industrial users by a direct sales force and a network of independentdistributors.  NTIC’s technical serviceconsultants work directly with the end users of NTIC’s products to analyzetheir specific needs and develop systems to meet their technical requirements.

 

NTIC has developed proprietarycorrosion inhibiting technologies for use in the mitigation of corrosion incapital assets used in the petroleum and process chemical industry and isinitially targeting the sale of these new ZERUST® products to the oil and gasindustry sector.  During fiscal 2009,NTIC announced the signing of a multi-year contract between NTIC’s Brazilianjoint venture (Zerust Prevencao de Corrosao S.A.) and Petroleo Brasileiro S.A.(Petrobras) to install and service proprietary corrosion protectiontechnologies on the roofs of an initial set of aboveground oil storage tanks atthe Petrobras REDUC refinery in Rio de Janeiro, Brazil.  Also during fiscal 2009, NTIC signed multiplejoint research and development contracts with Petrobras’s research anddevelopment group at the Leopoldo Américo Miguez de Mello Research &Development Center (CENPES) pursuant to which the parties will undertake a20-month Petrobras funded effort to explore, understand and

 

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resolve bottom plate corrosionissues in aboveground storage tanks.  Asecond 12-month Petrobras sponsored project also has started aimed at field trialsof certain pipeline protection technologies. These initiatives are designed to help mitigate corrosion for criticaloil and gas industry infrastructure. NTIC also is pursuing opportunities to market its ZERUST® corrosionprevention technology to other potential customers in the oil and gas industryacross several countries through NTIC’s joint venture partners and otherstrategic partners.  NTIC believes thesale of its ZERUST® products to customers in the oil and gas industry willinvolve a long sales cycle, likely including a one- to two-year trial periodwith each customer and a slow integration process thereafter.

 

In addition to ZERUST® productsand services, NTIC develops and markets a portfolio of bio-based and/orbiodegradable (compostable) polymer resin compounds and finished products underthe Natur-Tec® brand.  These products areintended to reduce NTIC’s customers’ carbon footprint and provideenvironmentally sound disposal options. Natur-Tec® bio-based and biodegradable plastics are manufactured usingNTIC’s patented and/or proprietary technologies and are intended to replaceconventional petroleum-based plastics. The Natur-Tec® bioplastics portfolio includes flexible film, foam, rigidinjection molded materials and engineered plastics. Natur-Tec® biodegradableand compostable finished products include shopping and grocery bags, lawn andleaf bags, can liners, pet waste collection bags, cutlery, packaging foam andcoated paper products and are engineered to be fully biodegradable in a compostingenvironment.

 

NTIC’s Polymer Energy LLC jointventure markets and sells a system that uses catalytic pyrolysis to convertplastic waste (primarily polyolefins) into hydrocarbons (primarily a mix ofdiesels, gasoline and heavy fractions) resulting in an economically viable andenvironmentally responsible alternative to current methods of recycling anddisposal of plastic waste.  Each unit canprocess up to ten tons of plastic waste per day, and the modular design allowsfor easily scalable capacity.  ThePolymer EnergyTM process can handle plastic that is contaminated with othertypes of waste such as metals, glass, dirt and water and the system cantolerate up to 25% of other waste in the input waste stream.  The output crude oil mix is high-grade andcan be further processed in a refinery or used as an input for co-generation ofelectricity.

 

**Financial Overview**

 

NTIC’s consolidated net salesdecreased 17.1% during the three months ended November 30, 2009 ascompared to the three months ended November 30, 2008 primarily as a resultof decreased sales of its new Natur-Tec® products.  Net sales,however, increased 43.0% during the three months ended November 30, 2009compared to the three months ended August 31, 2009.

 

Net sales of ZERUST® products decreased slightly by 5.8% to $2,627,555during the three months ended November 30, 2009 compared to$2,788,628during the three months ended November 30, 2008 primarily as aresult of decreased demand.  Net sales ofZERUST® products, however,increased 41.9% during the three months ended November 30, 2009 comparedto the three months ended August 31, 2009.

 

During the three months ended November 30,2009, 3.1% of NTIC’s consolidated net sales were derived from the sales of itsNatur-Tec® products compared to 14.7% during the three months ended November 30,2008.  Net sales of Natur-Tec® products decreased by 82.6% to $83,846during the three months ended November 30, 2009 compared to $482,316during the three months ended November 30, 2008.  This decreasewas primarily due to several large stocking orders of Natur-Tec® products during the three monthsended November 30, 2008.  Net salesof Natur-Tec® products increased 112.2% during the three months ended November 30, 2009compared to the three months ended August 31, 2009.

 

Cost of goods sold as a percentageof net sales decreased to 64.8% for the three months ended November 30,2009 compared to 70.1% for the three months ended November 30, 2008primarily as a result of decreased raw material costs for ZERUST® products.

 

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Total net sales of all of NTIC’sjoint ventures decreased 7.7% to $19,480,538 during the three months ended November 30,2009 compared to $21,109,585 during the three months ended November 30,2008 primarily as a result of decreaseddemand for ZERUST® products due to the global economic slowdown.  NTIC recognized a 12.8% decreasein fee income for technical and support services as a result of the decrease intotal net sales of the joint ventures, but also incurred a 27.3% decrease indirect joint venture expense. NTIC’s equity in income of corporate jointventures and holding companies increased 7.2% to $705,899 during the threemonths ended November 30, 2009 compared to $658,766 during the threemonths ended November 30, 2008. NTIC’s total income from its corporate joint ventures and holdingcompanies increased 24.9% to $1,001,263 for the three months ended November 30,2009 compared to $801,451 for the three months ended November 30, 2008.

 

During the year ended August 31,2009, the Company was awarded multiple research and developmentcontracts.  The Company accrues proceeds received under the grants and offsetsresearch and development expenses incurred in equal installments over thetimelines associated with completion of the grants specific objectives andmilestones. At November 30 and August 31, 2009, the Company deferredamounts received of $181,953 and $145,562 in other accrued liabilities, as theCompany had not yet performed under the obligations of the contracts.

 

The Company expenses all costsrelated to product research and development as incurred.  The Companyincurred $797,785 and $722,078 during the three months ended November 30,2009 and 2008, respectively, in connection with its research and developmentactivities.  These amounts are reduced by reimbursements of $109,172 and$0 for the three months ended November 30, 2009 and 2008, respectively. NTIC anticipates that it will spend between $3,000,000 and $3,500,000 in totalduring fiscal 2010 on research and development activities related to its newtechnologies. The net fees are accounted for in the “Expenses incurred insupport of corporate joint ventures” section of statements of operations.

 

Net income increased 3281% to$435,705, or $0.10 per diluted common share, for the three months ended November 30,2009 compared to $12,885, or $0.00 per diluted common share, for the threemonths ended November 30, 2008. This increase was primarily the result of the cost control initiativesthat NTIC initiated during second quarter of fiscal 2009 and remained in placethrough first quarter of fiscal 2010 and the increased income from its corporate joint ventures and holding companies.

 

NTIC’s working capital was$5,922,549 at November 30, 2009, including $2,341,999 in cash and cashequivalents.  As of November 30,2009, NTIC had no borrowings under its $2,300,000 demand line of credit.  In September 2009, NTIC completed a$3,552,000 registered direct offering in which it sold an aggregate of 480,000shares of its common stock to institutional investors at a purchase price of$7.40 per share, resulting in net proceeds of $3,195,613, after deducting placement agent fees and expenses and NTIC’s offeringexpenses.

 

NTIC expects to meet its futureliquidity requirements during at least the next 12 months by using its existingcash and cash equivalents, forecasted cash flows from future operations,distributions of earnings and technical assistance fees to NTIC from its jointventures and holding companies and funds available through existing oranticipated financing arrangements.  NTICalso may raise additional financing to help fund its new businesses through theissuance of debt or equity securities.

 

**Results of Operations**

 

The following table sets forth NTIC’s results ofoperations for the three months ended November 30, 2009 and 2008.  These results of operations exclude theimpact of NTIC’s activities with its joint ventures and holding companies,other than its former joint venture React-NTIC LLC.  As explained in more detail in Note 1 to NTIC’sconsolidated financial statements containedin NTIC’s annual report on Form 10-K for the fiscal year ended August 31,2009, the results of React-NTIC LLC are included in NTIC’s consolidatedresults of operations and 

 

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thus included in the table below.  NTIC does not consolidate the results of itsother joint ventures or holding companies.

 
| ** **                           | ** ** | **November 30,  2009** | ** ** | **% of Net  Sales** | ** ** | **November 30,  2008** | ** ** | **% of Net  Sales** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|---------------------|------------|-----------------------------|------------|---------------------|------------|-------------------|------------|--------------|------------|
| Net  sales                           |       | $                           | 2,711,402  |                | 100        | %                           | $          | 3,270,944           |       | 100.0             | %          | $            | (559,542   | ) | (17.1 | )% |
| Cost  of goods sold                  |       | 1,757,496                   |       | 64.8                | %          | 2,292,967                   |       | 70.1                | %          | (535,471          | )          | (23.4        | )%         |
| Selling  expenses                    |       | 561,652                     |       | 20.7                | %          | 770,570                     |       | 23.6                | %          | (208,918          | )          | (27.1        | )%         |
| General  and administrative expenses |       | 920,029                     |       | 33.9                | %          | 941,438                     |       | 28.8                | %          | (21,409           | )          | (2.3         | )%         |
| Lab  and technical support expenses  |       | 35,117                      |       | 1.3                 | %          | 6,067                       |       | 0.2                 | %          | 29,050            |       | 478.8        | %          |
|                                      |            |                             |            |                     |            |                             |            |                     |            |                   |            |              |            |  |  |  |

 

*Net Sales*. NTIC’s net sales originating in the United States decreased 17.1% duringthe three months ended November 30, 2009 compared to the three monthsended November 30, 2008 primarily as a result of a decrease in sales of Natur-Tec® products which decreased by 82.6% to $83,846during the three months ended November 30, 2009 compared to $482,316during the three months ended November 30, 2008.  The decreasein sales of Natur-Tec® products was primarily due to several large stocking orders of Natur-Tec® products during the three monthsended November 30, 2008 that were one time sales of product.  Net sales of Natur-Tec®products increased112.2% during the three months ended November 30, 2009 compared to $39,505during the three months ended August 31, 2009.

 

Net sales of ZERUST® products decreased 5.8% to $2,627,555 during thethree months ended November 30, 2009 compared to $2,788,628 during thethree months ended November 30, 2008. Net sales of ZERUST® products increased $775,511, or 41.9%,during the three months ended November 30, 2009 compared to $1,852,044during the three months ended August 31, 2009.

 

The following table sets forth additional detailregarding NTIC’s net sales by product category for the three months ended November 30,2009 and 2008:

 
| ** **                      | ** ** | **November 30,  2009** | ** ** | **November 30,  2008** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales              |       | $                           | 2,627,555  |                        | $          | 2,788,628     |       | $             | (161,073   | ) | (5.8 | )% |
| Natur-Tec® sales           |       | 83,846                      |       | 482,316                     |       | (398,470      | )          | (82.6         | )%         |
| Total  North American net sales |       | $                           | 2,711,402  |                        | $          | 3,270,944     |       | $             | (559,542   | ) | (17.1 | )% |

 

*Cost of Goods Sold*.  Cost of goods sold decreased 23.4% for thethree months ended November 30,2009 compared to the three months ended November 30,2008 primarily as a result of decreased netsales as described above.  Cost of salesas a percentage of net sales decreased to 64.8% for the three months ended November 30,2009 compared to 70.1% for the three months ended November 30, 2008primarily as a result of decreased raw material costs for ZERUST® products.

 

*Selling Expenses*.  NTIC’s selling expenses decreased 27.1% forthe three months ended November 30,2009 compared the three months ended November 30,2008 due to decreases in i) salaries of $66,000, ii) consulting expense of$31,000, iii) advertising and web development of $31,000, iv) commissions of$19,000 and v) travel expenses of $44,000. Selling expenses as a percentage of net sales decreased to 20.7% for thethree months ended November 30,2009 compared to 23.6% for the three months ended November 30, 2008 primarily due to the decrease in sellingexpenses described above.

 

*General and AdministrativeExpenses*.  NTIC’sgeneral and administrative expenses decreased 2.3% for the three months ended November 30,2009 compared to the three months ended November 30,2008.  As a percentage of 

 

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net sales, general and administrative expensesincreased to 33.9% for the three months ended November 30, 2009 comparedto 28.8% for the three months ended November 30, 2008 primarily as aresult of fixed general and administrative expenses spread over decreased netsales, partially offset by costs savings as a result of NTIC’s cost reductionefforts during second quarter of fiscal 2009.

 

NTIC includes expenses in general and administrativeexpenses that provide benefit to the various joint ventures in addition toproviding benefit to NTIC’s North American operations, including specifically,expenses associated with information technology, general insurance, executiveand non-executive salaries, bonuses and benefits, building expenses, audit andtax fees and expenses and directors fees and expenses.

 

*Lab and Technical Support Expenses*.  NTIC’s lab and technical support expensesincreased to $35,117 for the three months ended November 30, 2009 comparedto $6,067 for the three months ended November 30,2008.  This increase was primarily theresult of a change in the allocation of lab and technical support expenses tosales expense.  As a percentage of netsales, lab and technical support expenses increased by a negligible amount.

 

*InternationalCorporate Joint Ventures and Holding Companies*.  Net sales of NTIC’s corporate joint venturesand holding companies for the three months ended November 30, 2009 and2008 were as follows:

 
| ** **                                                                | ** ** | **Three  Months Ended**     | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                | ** ** | **November 30,  2009** | ** ** | **November 30,********2008** | ** ** |
| Industrial  chemical                                                      |       | $                           | 19,191,180 |   | $ | 20,842,816 |   |
| Non-industrial  chemical                                                  |       | 289,358                     |       | 266,769 |   |
| Total  international corporate joint ventures and holding companies sales |       | $                           | 19,480,538 |   | $ | 21,109,585 |   |

 

The decrease in net sales of NTIC’s corporate jointventures and holding companies in the three months ended November 30, 2009compared to the three months ended November 30, 2008 of 7.7% was primarilya result of decreased demand of ZERUST® and EXCOR® products as a result of the worldwide economic recession.

 

NTIC receives fees for technical and other supportservices it provides to its corporate joint ventures and holding companiesbased on the revenues of the individual corporate joint ventures and holdingcompanies.  NTIC recognized fee incomefor such support of $1,151,930 in the three months ended November 30, 2009compared to $1,320,719 during the three months ended November 30, 2008, adecrease of 12.8%.  The decrease in feesfor technical and other support to its corporate joint ventures was due to thedecrease in net sales of NTIC’s corporate joint ventures and holding companies.

 

NTIC sponsors a worldwide corporate joint ventureconference approximately every three to four years in which all of itscorporate joint ventures are invited to participate.  NTIC defers a portion of its technical andother support fees received from its corporate joint ventures in eachaccounting period leading up to the next conference, reflecting that NTIC hasnot fully earned the payments received during that period.  The next corporate joint venture conferenceis scheduled to be held in the summer of 2010 or 2011.  There was no deferred income recorded withinother accrued liabilities during the three months ended November 30, 2009related to this future conference; however, $288,000 has been accrued over thepast three fiscal years.  The costsassociated with these joint venture conferences are offset against the deferralas incurred, generally in the period in which the conference is held andimmediately before.

 

NTIC incurred direct expenses related to itscorporate joint ventures and the holding companies of $856,566 during the threemonths ended November 30, 2009 compared to $1,178,034 during the threemonths ended November 30, 2008, a decrease of 27.3%.  This decrease was attributable to $135,000 ofgrants and research and 

 

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development expense reimbursement received duringthe three months ended November 30, 2009. Additionally, the decrease was attributable to decreases in (i) salaryand benefit expense of $95,000, (ii) consulting expense of $41,000 andiii) legal expenses of $90,000, partially offset by increases in miscellaneousexpenses of $40,000.  As a percentage ofnet sales, direct expenses incurred relating to NTIC’s corporate joint venturesand holding companies increased by an immaterial amount for the three monthsended November 30, 2009 compared to the three months ended November 30,2008.

 

NTIC had equity in income ofcorporate joint ventures and holding companies of $705,899 during the threemonths ended November 30, 2009 compared to $658,766 during the threemonths ended November 30, 2008. The increase in equity inincome of 7.2% was due to increased profitability of NTIC’s corporate jointventures and holding companies primarily resulting from cost control measuresput in place during the last year.

 

*Interest Income*.  NTIC’s interest income decreased slightly to$1,496 during the three months ended November 30, 2009 compared to $445during the three months ended November 30, 2008 primarily due to theincreased cash balance earning interest during the three months ended November 30,2009.

 

*Interest Expense*.  NTIC’s interest expense decreased slightly to$25,987 during the three months ended November 30, 2009 compared to$31,898 during the three months ended November 30, 2008 primarily due tolower average outstanding debt levels during the three months ended November 30,2009.

 

*Income Before Income Tax Expense*.  Income before income tax expense increased to$420,705 for the three months ended November 30, 2009 compared to $45,886for the three months ended November 30, 2008.

 

*Income Tax (Benefit) Expense*. Income taxbenefit was $15,000 during the three months ended November 30, 2009compared to income tax expense of $33,000 during the three monthsended November 30, 2008. Income tax (benefit) expense was calculated based on management’sestimate of NTIC’s annual effective income tax rate.  NTIC’s annual effective income tax rateduring the three months ended November 30, 2009 and 2008 was lower thanthe statutory rate primarily due to NTIC’s equity in income of corporate jointventures being recognized based on after-tax earnings of these entities.  To the extent undistributed earnings of NTIC’sjoint ventures are distributed to NTIC, it is not expected to result in anymaterial additional income tax liability after the application of foreign taxcredits.

 

**Liquidity and Capital Resources**

 

*Sources of Cash and Working Capital*.  As of November 30, 2009, NTIC’s working capital was $5,922,549, including$2,341,999 in cash and cash equivalents, compared to working capital of$2,727,737 including $138,885 in cash and cash equivalents, as of August 31,2009.

 

In September 2009, NTIC completed a $3,552,000registered direct offering in which it sold an aggregate of 480,000 shares ofits common stock to institutional investors at a purchase price of $7.40 pershare, resulting in net proceeds of $3,195,613, after deducting placement agentfees and expenses and NTIC’s offering expenses. All of the shares were offered pursuant to an effective shelfregistration statement.

 

NTIC has a $2,300,000demand line of credit with National City Bank. Advances made under the demand line of credit are made at the solediscretion of National City Bank and are due and payable on demand.  Outstanding amounts under the demand line ofcredit bear interest at an annual rate based on LIBOR plus 2.25%.  As of November 30, 2009, the interestrate was 3.1%.  Interest is payable inarrears on the 15th day of each month and on demand.  As of November 30, 2009, NTIC had noborrowings under the demand line of credit.

 

In September 2006,NTIC purchased the real estate and 40,000 square feet building in which itscorporate headquarters is located pursuant to a like-kind exchange transactionwithin the meaning of Section 1031 of the

 

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Internal Revenue Code of1986, as amended, for a purchase price of $1,475,000.  To finance the transaction, NTIC obtained asecured term loan in the principal amount of $1,275,000.  The term loan matures on May 1, 2011,bears interest at a fixed rate of 8.01% and is payable in 59 monthlyinstallments equal to approximately $10,776 (inclusive of principal andinterest) commencing June 1, 2006. All of the remaining unpaid principal and accrued interest is due andpayable on the May 1, 2011 maturity date, unless the bank demands paymentearlier due to a covenant breach by NTIC as discussed in more detailbelow.  The loan is secured by a firstlien on the real estate and building.

 

Under the note governingthis term loan, NTIC is subject to a minimum debt service coverage ratio of1.0:1.0.  At November 30, 2009, NTICfailed to meet this financial covenant and no waiver from the bank was obtainedby NTIC for the covenant violation.  As aresult, an event of default occurred under the note and the bank has the rightin its discretion, by giving written notice to NTIC, to declare the amountoutstanding under the note immediately due and payable in full. As a result,NTIC classified all amounts outstanding with National City Bank as currentliabilities on its consolidated balance sheet.

 

NTIC believes that acombination of its existing cash and cash equivalents, forecasted cash flowsfrom future operations, anticipated distributions of earnings and technicalassistance fees to NTIC from its joint venture investments and funds availablethrough existing or anticipated financing arrangements, will be adequate tofund its existing operations, capital expenditures, debt repayments and anystock repurchases for at least the next 12 months.  During fiscal 2010, NTIC expects to continueto invest in research and development and in marketing efforts and resourcesinto its new businesses, product lines and markets, including in particular theapplication of its corrosion prevention technology into the oil and gasindustry.  In order to take advantage ofsuch new product and market opportunities to expand its business and increaseits revenues, NTIC may decide to finance such opportunities by borrowing underits line of credit or raising additional financing through the issuance of debtor equity securities.  There is noassurance that any financing transaction will be available on terms acceptableto NTIC or at all, or that any financing transaction will not be dilutive to NTIC’scurrent stockholders.

 

*Uses of Cash and Cash Flows*.  Cash flows used in operations for the threemonths ended November 30, 2009 was $227,823, which resulted principallyfrom equity income of corporate joint ventures, an increase in tradereceivables including corporate joint ventures, offset by net income,depreciation and amortization expense, stock option expense, decrease intechnical and other services receivables from corporate joint ventures, and anincrease in accounts payable and accrued liabilities.  Cash flows used in operations for the threemonths ended November 30, 2008 was $630,858, which resulted principallyfrom equity income of corporate joint ventures, increases in trade receivables,technical and income tax receivables, prepaid expenses and decreases in accruedliabilities, offset by net income, joint venture royalty receivables,inventory, depreciation and amortization expense and an increase in accountspayable.

 

Net cash used in investing activities for the threemonths ended November 30, 2009 was $61,497 which comprised of dividendsreceived from corporate joint ventures, partially offset by investments inpatents and additions to property and equipment.   Net cash used in investing activities forthe three months ended November 30, 2008 was $1,959,700, which comprisedof dividends received from corporate joint ventures, offset by additions toproperty and equipment and investments in patents.

 

Net cash provided by financing activities for thethree months ended November 30, 2009 was $2,492,434, which resultedprimarily from the issuance of common stock and, to a lesser extent, proceedsfrom NTIC’s employee stock purchase plan and option exercises, partially offsetby repayments to the demand line of credit and principal payments on the bankloan for NTIC’s corporate headquarters buildings.  Net cash used in financing activities for thethree months ended November 30, 2008 was $1,132,798, which resultedprimarily from bank overdrafts and repayments to the demand line of credit andprincipal payments on the bank loan for NTIC’s corporate headquarters building.

 

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*Capital Expenditures and Commitments*.  NTIC had no material lease commitments as of November 30,2009, except a lease agreement entered into by NTI Facilities, Inc., asubsidiary of NTIC, for approximately 16,994 square feet of office,manufacturing, laboratory and warehouse space in Beachwood, Ohio, requiringmonthly payments of $17,500, which are adjusted annually according to theannual consumer price index, through November 2014.

 

NTIC has no postretirement benefit plan and does notanticipate establishing any postretirement benefit program.

 

**Off-Balance Sheet Arrangements**

 

NTIC does not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet financialarrangements.  As such, NTIC is notmaterially exposed to any financing, liquidity, market or credit risk thatcould arise if NTIC had engaged in such arrangements.

 

In fiscal 1999, a subsidiary of NTIC, NTI Facilities, Inc.,acquired a one-third ownership of Omni-Northern Ltd., which owns and operates arental property located at 23205 Mercantile Road, Beachwood, Ohio.  The property has an approximate value of$2,205,000, based upon the cash-to-mortgage acquisition price of the propertypaid in fiscal 2000.  NTIC has guaranteedup to $329,082 of Omni-Northern Ltd.’s $1,903,571 mortgage obligation withNational City Bank, Cleveland, Ohio.  Thebuilding is fully leased at present.

 

**Inflation and Seasonality**

 

Inflation in the U.S. and abroad historically hashad little effect on NTIC.  NTIC’sbusiness has not historically been seasonal.

 

**Market Risk**

 

NTIC is exposed to some market risk stemming fromchanges in foreign currency exchange rates, commodity prices and interestrates.

 

Because the functional currency of NTIC’s foreignoperations and investments in its foreign corporate joint ventures and holdingcompanies is the applicable local currency, NTIC is exposed to foreign currencyexchange rate risk arising from transactions in the normal course ofbusiness.  NTIC’s principal exchange rateexposure is with the Euro, the Japanese yen, Indian Rupee, Chinese yuan, Koreanwon and the English pound against the U.S. dollar.  NTIC’s fees for technical support and otherservices and dividend distributions from these foreign entities are paid inforeign currencies and thus fluctuations in foreign currency exchange ratescould result in declines in NTIC’s reported net income.  Since NTIC’s investments in its corporatejoint ventures and holding companies are accounted for using the equity method,any changes in foreign currency exchange rates would be reflected as a foreigncurrency translation adjustment and would not change NTIC’s equity in income ofjoint ventures and holding companies reflected in its consolidated statementsof income.  NTIC does not hedge againstits foreign currency exchange rate risk.

 

Some raw materials used in NTIC’s products areexposed to commodity price changes.  Theprimary commodity price exposures are with a variety of plastic resins.

 

NTIC’s demand line of credit bears interest at arate based on LIBOR and thus may subject NTIC to some market risk on interestrates.  As of November 30, 2009,NTIC had no borrowings under its $2,300,000 demand line of credit.

 

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** **

**Critical Accounting Policies**

 

There have been no material changes to NTIC’scritical accounting policies and estimates from the information provided in “Part II.Item 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Critical Accounting Policies”, included in NTIC’s annual reporton Form 10-K for the fiscal year ended August 31, 2009.

 

**Forward-Looking Statements**

 

This quarterly report on Form 10-Q contains notonly historical information, but also forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 and are subject to the safe harbor createdby those sections. In addition, NTIC or others on NTIC’s behalf may makeforward-looking statements from time to time in oral presentations, includingtelephone conferences and/or web casts open to the public, in press releases orreports, on NTIC’s Internet web site or otherwise. All statements other thanstatements of historical facts included in this report or expressed by NTICorally from time to time that address activities, events or developments thatNTIC expects, believes or anticipates will or may occur in the future areforward-looking statements including, in particular, the statements about NTIC’splans, objectives, strategies, the outcome of contingencies such as legalproceedings, and prospects regarding, among other things, NTIC’s financialcondition, results of operations and business. NTIC has identified some ofthese forward-looking statements in this report with words like “believe,” “may,”“could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,”“should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate”“outlook” or “continue” or the negative of these words or other words and termsof similar meaning.  Theseforward-looking statements may be contained in the notes to NTIC’s consolidatedfinancial statements and elsewhere in this report, including under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-looking statements are based on currentexpectations about future events affecting NTIC and are subject touncertainties and factors that affect all businesses operating in a globalmarket as well as matters specific to NTIC. These uncertainties and factors are difficult to predict and many ofthem are beyond NTIC’s control.  Thefollowing are some of the uncertainties and factors known to us that couldcause NTIC’s actual results to differ materially from what NTIC has anticipatedin its forward-looking statements:

 

·                  The effect of current worldwide economicconditions on NTIC’s business;

 

·                  The effect of the significant downturn in theU.S. automotive industry on NTIC’s business;

 

·                  NTIC’s dependence on the success of its jointventures and technical fees and dividend distributions that NTIC receives fromthem;

 

·                  NTIC’s relationships with its joint venturesand its ability to maintain those relationships;

 

·                  Risks associated with NTIC’s internationaloperations and exposure to fluctuations in foreign currency exchange rates;

 

·                  Fluctuations in the cost and availability ofraw materials, including resins and other commodities;

 

·                  NTIC’s investments in its new business andresearch and development efforts and its need for additional capital to supportsuch new business and research and development efforts;

 

·                  The success of and risks associated with NTIC’semerging new businesses;

 

·                  Acceptance of NTIC’s existing and newproducts;

 

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·                  Increased competition;

 

·                  NTIC’s reliance upon and its relationshipswith its distributors, independent sales representatives and corporate jointventures;

 

·                  NTIC’s reliance upon suppliers;

 

·                  The costs and effects of complying withchanges in tax, fiscal, government and other regulatory policies, including rules relatingto environmental, health and safety matters;

 

·                  The costs and effects of currentlyoutstanding or threatened litigation;

 

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

 

·                  Loss of or changes in executive management orkey employees;

 

·                  Ability of management to manage aroundunplanned events;

 

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

 

·                  NTIC’s reliance upon its managementinformation systems.

 

For more information regarding these and otheruncertainties and factors that could cause NTIC’s actual results to differmaterially from what NTIC has anticipated in its forward-looking statements orotherwise could materially adversely affect its business, financial conditionor operating results, see NTIC’s annual report on Form 10-K for the fiscalyear ended August 31, 2009 under the heading “Part I. Item 1A. RiskFactors.”

 

All forward-looking statements included in thisreport are expressly qualified in their entirety by the foregoing cautionarystatements.  We wish to caution readersnot to place undue reliance on any forward-looking statement that speaks onlyas of the date made and to recognize that forward-looking statements arepredictions of future results, which may not occur as anticipated.  Actual results could differ materially from thoseanticipated in the forward-looking statements and from historical results, dueto the uncertainties and factors described above, as well as others that we mayconsider immaterial or do not anticipate at this time.  Although we believe that the expectationsreflected in our forward-looking statements are reasonable, we do not knowwhether our expectations will prove correct. Our expectations reflected in our forward-looking statements can beaffected by inaccurate assumptions we might make or by known or unknownuncertainties and factors, including those described above.  The risks and uncertainties described aboveare not exclusive and further information concerning us and our business,including factors that potentially could materially affect our financialresults or condition, may emerge from time to time.  We assume no obligation to update, amend orclarify forward-looking statements to reflect actual results or changes infactors or assumptions affecting such forward-looking statements.  We advise you, however, to consult anyfurther disclosures we make on related subjects in our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K wefile with or furnish to the Securities and Exchange Commission.

 

## **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

## ** **

This Item 3 is inapplicable to NTIC as a smallerreporting company and has been omitted pursuant to Item 305(e) of SECRegulation S-K.

 

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## **ITEM4.  CONTROLS AND PROCEDURES**

## ** **

**Evaluation of Disclosure Controls and Procedures**

 

NTIC maintains disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) that are designed to reasonablyensure that information required to be disclosed by NTIC in the reports itfiles or submits under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized, and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms andthat such information is accumulated and communicated to NTIC’s management,including NTIC’s principal executive and principal financial officers, orpersons performing similar functions, as appropriate to allow timely decisionsregarding required disclosure.  Indesigning and evaluating NTIC’s disclosure controls and procedures, NTICrecognizes that any controls and procedures, no matter how well designed andoperated can provide only reasonable assurance of achieving the desired controlobjectives and NTIC necessarily is required to apply its judgment in evaluatingthe cost-benefit relationship of possible controls and procedures.  NTIC’s management evaluated, with theparticipation of its Chief Executive Officer and its Chief Financial Officer,the effectiveness of the design and operation of NTIC’s disclosure controls andprocedures as of the end of the period covered in this report.  Based on that evaluation, NTIC’s ChiefExecutive Officer and Chief Financial Officer concluded that NTIC’s disclosurecontrols and procedures were effective as of the end of such period to providereasonable assurance that information required to be disclosed in NTIC’sExchange Act reports is recorded, processed, summarized, and reported withinthe time periods specified in the SEC’s rules and forms, and that materialinformation relating to NTIC and its consolidated subsidiaries is made known tomanagement, including NTIC’s Chief Executive Officer and Chief FinancialOfficer, particularly during the period when NTIC’s periodic reports are beingprepared.

 

NTIC’s management is aware, however, that there is alack of segregation of duties due to the small number of employees of NTICdealing with general administrative and financial matters.  However, NTIC’s management has decided thatconsidering the employees involved and the control procedures in place, risksassociated with such lack of segregation are insignificant and the potentialbenefits of adding employees to clearly segregate duties do not at this timejustify the expenses associated with such increases.

 

**Changes in Internal Control over Financial Reporting**

 

There was no change in NTIC’s internal control overfinancial reporting that occurred during the quarter ended November 30,2009 that has materially affected, or is reasonably likely to materially affectNTIC’s internal control over financial reporting.

 

# **PART II          OTHERINFORMATION**

# ** **

## **ITEM1.           LEGAL PROCEEDINGS**

## ** **

A description of NTIC’s legalproceedings in Note 12 of its consolidated financial statements included withinthis report is incorporated herein by reference.

 

## **ITEM1A.        RISK FACTORS**

## ** **

This Item 1A is inapplicableto NTIC as a smaller reporting company.

 

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## **ITEM2.           UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

## ** **

**Recent Sales of Unregistered Equity Securities**

 

During the three months ended November 30,2009, NTIC did not issue any shares of its common stock or other equitysecurities of NTIC that were not registered under the Securities Act of 1933,as amended.

 

**Issuer Purchases of Equity Securities**

 

During the three months ended November 30,2009, NTIC did not purchase any shares of its common stock or other equitysecurities of NTIC.

 

On November 13, 2003, the Board of Directors ofNTIC authorized Matthew Wolsfeld, Chief Financial Officer of NTIC, torepurchase on behalf of NTIC, up to 100,000 shares of NTIC’s common stock fromtime to time in accordance with applicable rules governing issuer stockrepurchases.  Since being authorized,NTIC has not repurchased and retired any shares of its common stock.

 

## **ITEM3.           DEFAULTS UPON SENIORSECURITIES**

## ** **

Not applicable.

 

## **ITEM4.           SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

## ** **

Not applicable.

 

## **ITEM5.           OTHER INFORMATION**

## ** **

Not applicable.

 

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## **ITEM6.           EXHIBITS**

## ** **

The following exhibits are being filed or furnishedwith this quarterly report on Form 10-Q:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 1.1                  |       | Placement Agency Agreement dated as of  September 18, 2009 between Northern Technologies International  Corporation and Next Generation Equity Research, LLC (incorporated by  reference to Exhibit 1.1 to NTIC’s Current Report on Form 8-K as  filed with the Securities and Exchange Commission on September 19, 2009  (File No. 001-11038))            |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Form of Subscription Agreement, dated as of  September 18, 2009 between Northern Technologies International  Corporation and each of the investors in the offering (incorporated by reference to Exhibit 10.1  to NTIC’s Current Report on Form 8-K as filed with the Securities and  Exchange Commission on September 19, 2009 (File No. 001-11038)) |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1                 |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (filed herewith)                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2                 |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (filed herewith)                                                                                                                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1                 |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith)                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2                 |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith)                                                                                                                                                                                                      |

 

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# **SIGNATURES**

# ** **

Pursuant to the requirements of the Securities andExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| **NORTHERN  TECHNOLOGIES INTERNATIONAL CORPORATION** |
|------------------------------------------------------|
|                                                 |   |
|                                                 |   |
|                                                 |  |
| Date:                                                | January 14, 2010 | Matthew C. Wolsfeld, CPA |
|                                                 | Chief Financial Officer |
|                                                 | (Principal Financial and Accounting Officer and Duly  Authorized to Sign on Behalf of the Registrant) |
|                                                      |  |  |

 

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**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATIONQUARTERLY REPORT ON FORM 10-Q**

** **

# **EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                              | ** ** | **Method of Filing**                                                                                                                                                                                      |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                         |       |                                                                                                                                                                                                      |
| 1.1                  |       | Placement Agency Agreement dated as of September 18,  2009 between Northern Technologies International Corporation and Next  Generation Equity Research, LLC            |       | Incorporated by reference to Exhibit 1.1  to NTIC’s Current Report on Form 8-K as filed with the Securities and  Exchange Commission on September 19, 2009 (File No. 001-11038)  |
|                 |       |                                                                                                                                                                         |       |                                                                                                                                                                                                      |
| 10.1                 |       | Form of Subscription Agreement, dated as of  September 18, 2009 between Northern Technologies International  Corporation and each of the investors in the offering |       | Incorporated by reference to Exhibit 10.1  to NTIC’s Current Report on Form 8-K as filed with the Securities and  Exchange Commission on September 19, 2009 (File No. 001-11038) |
|                 |       |                                                                                                                                                                         |       |                                                                                                                                                                                                      |
| 31.1                 |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                    |       | Filed herewith                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                         |       |                                                                                                                                                                                                      |
| 31.2                 |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                    |       | Filed herewith                                                                                                                                                                                            |
|                 |       |                                                                                                                                                                         |       |                                                                                                                                                                                                      |
| 32.1                 |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                |       | Furnished herewith                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                         |       |                                                                                                                                                                                                      |
| 32.2                 |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                |       | Furnished herewith                                                                                                                                                                                        |

 

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