**Table of Contents**

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND 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 SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended November 30,2008**

** **
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES 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 RdCircle Pines, Minnesota****55014**(Addressof principal executive offices)

 

**(763) 225-6600******(Registrant’stelephone number including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES  x  NO  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  YES  o  NO  x

 

Asof January 14, 2009, 3,750,970 shares of common stock of the registrantwere outstanding.

 

 

 

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**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**FORM 10-Q**

**November 30, 2008**

 

**TABLE OF CONTENTS**

 
| **Description**     | ** ** | ** **                                                                                                | **Page**   |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
|                |       |                                                                                                      |       |
| **PART I.**         | ** ** | **FINANCIAL INFORMATION**                                                                                 | ** ** |
|                |       |                                                                                                      |       |
| Item 1.             |       | Financial Statements                                                                                      |       |
|                |       |                                                                                                      |       |
|                |       | Consolidated  Balance Sheets as of November 30, 2008 (unaudited) and August 31, 2008                      | 3          |
|                |       |                                                                                                      |       |
|                |       | Consolidated  Statements of Operations (unaudited) for the Three Months Ended November 30,  2008 and 2007 | 4          |
|                |       |                                                                                                      |       |
|                |       | Consolidated  Statements of Cash Flows (unaudited) for the Three Months Ended November 30,  2008 and 2007 | 5          |
|                |       |                                                                                                      |       |
|                |       | Notes to Consolidated Financial Statements (unaudited)                                                    | 6-11       |
|                |       |                                                                                                      |       |
| Item 2.             |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               | 12         |
|                |       |                                                                                                      |       |
| Item 3.             |       | Quantitative  and Qualitative Disclosures About Market Risk                                               | 21         |
|                |       |                                                                                                      |       |
| Item 4.             |       | Controls and  Procedures                                                                                  | 21         |
|                |       |                                                                                                      |       |
| **PART II.**        | ** ** | **OTHER INFORMATION**                                                                                     | ** ** |
| ** **          | ** ** | ** **                                                                                                | ** ** |
| Item 1.             |       | Legal Proceedings                                                                                         | 21         |
|                |       |                                                                                                      |       |
| Item 1A.            |       | Risk Factors                                                                                              | 21         |
|                |       |                                                                                                      |       |
| Item 2.             |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                              | 22         |
|                |       |                                                                                                      |       |
| Item 3.             |       | Defaults  Upon Senior Securities                                                                          | 22         |
|                |       |                                                                                                      |       |
| Item 4.             |       | Submission  of Matters to a Vote of Security Holders                                                      | 22         |
|                |       |                                                                                                      |       |
| Item 5.             |       | Other Information                                                                                         | 22         |
|                |       |                                                                                                      |       |
| Item 6.             |       | Exhibits                                                                                                  | 22         |
|                |       |                                                                                                      |
| **SIGNATURE  PAGE** | 23         |
|                |       |
| **EXHIBIT  INDEX**  | 24         |
|                     |            |                                                                                                           |            |  |  |

 

*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 Discussion and Analysis of Financial Condition andResults of Operation— Forward-Looking Statements.”*

* *

*As usedin this**report**,references**to “NTIC,” the “Company,” “we,” “our” or “us,” unless the context otherwiserequires, refer to Northern Technologies International Corporation, its whollyowned subsidiaries — NTI Facilities, Inc. and Northern TechnologiesHolding Company, LLC, and its majority-owned subsidiary — React-NTI, LLC, allof which are consolidated 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 - FINANCIALINFORMATION**

 

## **ITEM 1.           FINANCIALSTATEMENTS**

 

**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASOF NOVEMBER 30, 2008 (UNAUDITED) AND AUGUST 31, 2008**

 
| ** **                                                                                                                                     | ** ** | **November ****3****0****,  2008** | ** ** | **August 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                     |       |                                    |       |                      |       |
| CURRENT ASSETS:                                                                                                                                |       |                                    |       |                      |       |
| Cash and cash equivalents                                                                                                                      |       | $                                       | 456,505    |                      | $          | 260,460 |   |
| Receivables:                                                                                                                                   |       |                                    |       |                      |       |
| Trade excluding corporate joint ventures,  less allowance for doubtful accounts of $10,000 at November 30, 2008 and  August 31, 2008 |       | 1,987,691                               |       | 1,962,222                 |       |
| Trade corporate joint ventures                                                                                                                 |       | 918,010                                 |       | 530,609                   |       |
| Technical and other services, corporate  joint ventures                                                                                        |       | 2,161,149                               |       | 3,065,738                 |       |
| Income taxes                                                                                                                                   |       | 133,405                                 |       | 28,961                    |       |
| Inventories                                                                                                                                    |       | 2,429,244                               |       | 2,725,466                 |       |
| Prepaid expenses                                                                                                                               |       | 365,175                                 |       | 179,766                   |       |
| Deferred income taxes                                                                                                                          |       | 183,300                                 |       | 183,300                   |       |
| Total current assets                                                                                                                           |       | 8,634,479                               |       | 8,936,522                 |       |
|                                                                                                                                           |       |                                    |       |                      |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                    |       | 3,737,362                               |       | 3,754,565                 |       |
|                                                                                                                                           |       |                                    |       |                      |       |
| OTHER ASSETS:                                                                                                                                  |       |                                    |       |                      |       |
| Investments in corporate joint ventures:                                                                                                       |       |                                    |       |                      |       |
| Industrial chemical                                                                                                                            |       | 12,743,214                              |       | 15,676,876                |       |
| Industrial non-chemical                                                                                                                        |       | 296,630                                 |       | 339,471                   |       |
| Deferred income taxes                                                                                                                          |       | 837,300                                 |       | 837,300                   |       |
| Notes receivable                                                                                                                               |       | 140,000                                 |       | 140,000                   |       |
| Industrial patents and trademarks, net                                                                                                         |       | 997,355                                 |       | 1,015,321                 |       |
| Goodwill                                                                                                                                       |       | 304,000                                 |       | 304,000                   |       |
| Other                                                                                                                                          |       | 320,886                                 |       | 325,557                   |       |
|                                                                                                                                           |       | 15,639,385                              |       | 18,638,525                |       |
|                                                                                                                                           |       | $                                       | 28,011,226 |                      | $          | 31,329,612 |   |
|                                                                                                                                           |       |                                    |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                  |       |                                    |       |                      |       |
| CURRENT LIABILITIES:                                                                                                                           |       |                                    |       |                      |       |
| Bank overdrafts                                                                                                                                |       | $                                       | —     |                      | $          | 1,039,757 |   |
| Borrowings made on line of credit                                                                                                              |       | —                                  |       | 86,000                    |       |
| Current portion of note payable                                                                                                                |       | 33,015                                  |       | 31,556                    |       |
| Accounts payable                                                                                                                               |       | 1,263,602                               |       | 1,251,522                 |       |
| Accrued liabilities:                                                                                                                           |       |                                    |       |                      |       |
| Payroll and related benefits                                                                                                                   |       | 266,731                                 |       | 1,102,992                 |       |
| Deferred joint venture royalties                                                                                                               |       | 288,000                                 |       | 288,000                   |       |
| Other                                                                                                                                          |       | 157,188                                 |       | 195,324                   |       |
| Total current liabilities                                                                                                                      |       | 2,008,536                               |       | 3,995,151                 |       |
|                                                                                                                                           |       |                                    |       |                      |       |
| NOTE PAYABLE, NET OF CURRENT PORTION                                                                                                           |       | 1,171,472                               |       | 1,179,972                 |       |
| MINORITY INTEREST                                                                                                                              |       | (5,762                                  | )          | 3,398                     |       |
|                                                                                                                                           |       |                                    |       |                      |       |
| 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 3,750,970 and 3,729,457,  respectively          |       | 74,986                                  |       | 74,556                    |       |
| Additional paid-in capital                                                                                                                     |       | 5,522,948                               |       | 5,271,417                 |       |
| Retained earnings                                                                                                                              |       | 18,685,824                              |       | 18,672,938                |       |
| Accumulated other comprehensive income                                                                                                         |       | 553,222                                 |       | 2,132,180                 |       |
| Total stockholders’ equity                                                                                                                |       | 24,836,980                              |       | 26,151,091                |       |
|                                                                                                                                           |       | $                                       | 28,011,226 |                      | $          | 31,329,612 |   |

 

See notes to consolidatedfinancial statements.

 

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**NORTHERNTECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES**** CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**

**THREE MONTHS ENDED NOVEMBER 30, 2008 AND 2007**

 
| ** **                                                                                         | ** ** | **November 30,  2008** | ** ** | **November 30,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| NORTH AMERICAN OPERATIONS:                                                                         |       |                        |       |                        |       |
| Net sales                                                                                          |       | $                           | 3,270,944  |                        | $          | 3,485,585 |   |
| Cost of sales                                                                                      |       | 2,292,967                   |       | 2,093,691                   |       |
| Gross profit                                                                                       |       | 977,977                     |       | 1,391,894                   |       |
|                                                                                               |       |                        |       |                        |       |
| Operating expenses:                                                                                |       |                        |       |                        |       |
| Selling                                                                                            |       | 770,570                     |       | 859,644                     |       |
| General and administrative                                                                         |       | 941,438                     |       | 948,297                     |       |
| Lab and technical support                                                                          |       | 6,067                       |       | 57,128                      |       |
|                                                                                               |       | 1,718,075                   |       | 1,865,069                   |       |
|                                                                                               |       |                        |       |                        |       |
| NORTH AMERICAN OPERATING LOSS                                                                      |       | (740,098                    | )          | (473,175                    | )          |
|                                                                                               |       |                        |       |                        |       |
| CORPORATE JOINT VENTURES AND HOLDING  COMPANIES:                                                   |       |                        |       |                        |       |
| Equity in income of industrial chemical  corporate joint ventures and holding companies            |       | 655,532                     |       | 1,073,034                   |       |
| Equity in income (loss) of industrial  non-chemical corporate joint ventures and holding companies |       | 3,234                       |       | (18,352                     | )          |
| Fees for technical support and other  services provided to corporate joint ventures                |       | 1,320,719                   |       | 1,393,795                   |       |
| Expenses incurred in support of corporate joint  ventures                                          |       | (1,178,034                  | )          | (1,239,175                  | )          |
|                                                                                               |       |                        |       |                        |       |
| INCOME FROM ALL CORPORATE JOINT VENTURES  AND HOLDING COMPANIES                                    |       | 801,451                     |       | 1,209,302                   |       |
|                                                                                               |       |                        |       |                        |       |
| INTEREST INCOME                                                                                    |       | 445                         |       | 495                         |       |
| INTEREST EXPENSE                                                                                   |       | (31,898                     | )          | (31,523                     | )          |
| OTHER INCOME                                                                                       |       | 6,826                       |       | 7,930                       |       |
| GAIN ON SALE OF ASSETS                                                                             |       | —                      |       | 1,529                       |       |
| MINORITY INTEREST                                                                                  |       | 9,160                       |       | 21,638                      |       |
|                                                                                               |       |                        |       |                        |       |
| INCOME BEFORE INCOME TAX EXPENSE                                                                   |       | 45,886                      |       | 736,196                     |       |
|                                                                                               |       |                        |       |                        |       |
| INCOME TAX EXPENSE                                                                                 |       | 33,000                      |       | 78,000                      |       |
|                                                                                               |       |                        |       |                        |       |
| NET INCOME                                                                                         |       | $                           | 12,886     |                        | $          | 658,196 |   |
|                                                                                               |       |                        |       |                        |       |
| NET INCOME PER COMMON SHARE:                                                                       |       |                        |       |                        |       |
| Basic                                                                                              |       | $                           | 0.00       |                        | $          | 0.18 |   |
| Diluted                                                                                            |       | $                           | 0.00       |                        | $          | 0.18 |   |
|                                                                                               |       |                        |       |                        |       |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED  OUTSTANDING:                                               |       |                        |       |                        |       |
| Basic                                                                                              |       | 3,735,433                   |       | 3,692,153                   |       |
| Diluted                                                                                            |       | 3,770,572                   |       | 3,734,102                   |       |

 

See notes to consolidatedfinancial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

**THREE MONTHS ENDED NOVEMBER 30, 2008 AND 2007**

 
| ** **                                                                                   | ** ** | **November 30,****2008** | ** ** | **November 30,****2007** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |       |                          |       |                          |       |
| Net income                                                                                   |       | $                             | 12,886     |                          | $          | 658,196 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |                          |       |                          |       |
| Expensing of fair value of stock options  vested                                             |       | 25,000                        |       | 24,680                        |       |
| Depreciation expense                                                                         |       | 97,818                        |       | 77,309                        |       |
| Amortization expense                                                                         |       | 38,633                        |       | 35,384                        |       |
| Gain on sale of assets                                                                       |       | —                        |       | (1,529                        | )          |
| Minority interest                                                                            |       | (9,160                        | )          | (21,637                       | )          |
| Equity in (income) loss from corporate  joint ventures:                                      |       |                          |       |                          |       |
| Industrial chemical                                                                          |       | (655,532                      | )          | (1,073,034                    | )          |
| Industrial non-chemical                                                                      |       | (3,234                        | )          | 18,352                        |       |
| Deferred joint venture royalties                                                             |       | —                        |       | 24,000                        |       |
| Change in current assets and liabilities:                                                    |       |                          |       |                          |       |
| Receivables:                                                                                 |       |                          |       |                          |       |
| Trade excluding corporate joint ventures                                                     |       | (25,469                       | )          | (218,870                      | )          |
| Trade corporate joint ventures                                                               |       | (387,401                      | )          | 114,767                       |       |
| Technical and other services receivables,  corporate joint ventures                          |       | 904,589                       |       | (236,096                      | )          |
| Income taxes                                                                                 |       | (104,444                      | )          | 15,990                        |       |
| Inventories                                                                                  |       | 296,222                       |       | 48,713                        |       |
| Prepaid expenses and other                                                                   |       | (185,409                      | )          | (199,017                      | )          |
| Accounts payable                                                                             |       | 12,080                        |       | (77,199                       | )          |
| Accrued liabilities                                                                          |       | (647,437                      | )          | (95,877                       | )          |
| Net cash used in operating activities                                                        |       | (630,858                      | )          | (905,868                      | )          |
|                                                                                         |       |                          |       |                          |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |       |                          |       |                          |       |
| Investment in corporate joint ventures:                                                      |       |                          |       |                          |       |
| Industrial chemical                                                                          |       | —                        |       | (87,950                       | )          |
| Proceeds from the sale of assets                                                             |       | —                        |       | 2,200                         |       |
| Dividends received from corporate joint  ventures                                            |       | 2,056,311                     |       | 336,285                       |       |
| Issuance of note receivable                                                                  |       | —                        |       | (140,000                      | )          |
| Additions to property and equipment                                                          |       | (80,615                       | )          | (70,219                       | )          |
| Decrease in other assets                                                                     |       | —                        |       | (9,697                        | )          |
| Additions to industrial patents                                                              |       | (15,996                       | )          | (51,038                       | )          |
| Net cash provided by (used in) investing  activities                                         |       | 1,959,700                     |       | (20,419                       | )          |
|                                                                                         |       |                          |       |                          |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |       |                          |       |                          |       |
| Bank overdraft                                                                               |       | (1,039,757                    | )          | 94,637                        |       |
| Repayment of note payable                                                                    |       | (7,041                        | )          | (6,969                        | )          |
| Net (repayments) borrowings made on line of  credit                                          |       | (86,000                       | )          | 693,000                       |       |
| Proceeds from employee stock purchase plan                                                   |       | —                        |       | 26,750                        |       |
| Net cash (used in) provided by financing  activities                                         |       | (1,132,798                    | )          | 807,418                       |       |
|                                                                                         |       |                          |       |                          |       |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                    |       | 196,045                       |       | (118,869                      | )          |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                            |       | 260,460                       |       | 244,499                       |       |
|                                                                                         |       |                          |       |                          |       |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                   |       | $                             | 456,505    |                          | $          | 125,630 |   |

 
| See notes to consolidated financial  statements. |   |   |   |   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|

 

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION AND SUBSIDIARIES**

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

 

**1.             INTERIM FINANCIALINFORMATION**

 

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 30,2008 and the results of their operations for the three months ended November 30,2008 and November 30, 2007 and their cash flows for the three months endedNovember 30, 2008 and November 30, 2007, in conformity withaccounting principles generally accepted in the United States of America (“USGAAP”).

 

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, 2008 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, 2008 arenot necessarily indicative of the results that may be expected for the fullfiscal year ending August 31, 2009.

** **

**2.             INVENTORIES**

 

Inventories consisted of the following:

 
| ** **           | ** ** | **November 30****,  2008** | ** ** | **August 31,  2008** | ** ** |
|----------------------|------------|---------------------------------|------------|---------------------------|------------|
| Production materials |       | $                               | 967,226    |                      | $          | 1,039,549 |   |
| Finished goods       |       | 1,462,018                       |       | 1,685,917                 |       |
|                 |       | $                               | 2,429,244  |                      | $          | 2,725,466 |   |

 

**3.             PROPERTY AND EQUIPMENT**

 

Property and equipmentconsisted of the following:

 
| ** **                    | ** ** | **November 30****,  2008** | ** ** | **August 31,  2008** | ** ** |
|-------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| Land                          |       | $                               | 310,365    |                      | $          | 310,365 |   |
| Buildings and improvements    |       | 3,081,903                       |       | 3,031,103                 |       |
| Machinery and equipment       |       | 1,638,385                       |       | 1,608,570                 |       |
|                          |       | 5,030,653                       |       | 4,950,038                 |       |
| Less accumulated depreciation |       | (1,293,291                      | )          | (1,195,473                | )          |
|                          |       | $                               | 3,737,362  |                      | $          | 3,754,565 |   |

 

**4.             INDUSTRIAL PATENTS AND TRADEMARKS,NET**

 

Industrial patents andtrademarks consisted of the following:

 
| ** **                    | ** ** | **November 30****,  2008** | ** ** | **August 31,  2008** | ** ** |
|-------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| Patents and trademarks        |       | $                               | 1,596,168  |                      | $          | 1,580,172 |   |
| Less accumulated amortization |       | (598,813                        | )          | (564,851                  | )          |
|                          |       | $                               | 997,355    |                      | $          | 1,015,321 |   |

 

Patent and trademark costsare amortized over seven years once a patent or trademark is filed andapproved.  Amortization expense related to patents and trademarks was$33,962 and $31,004 for the three months ended 

 

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November 30, 2008 and2007, respectively.  Amortization expense is estimated to approximate$136,000 in each of the next five fiscal years.

** **

**5.             INVESTMENTS IN CORPORATE JOINT VENTURES**

 

Composite financial information from the audited and unauditedfinancial statements of the Company’s joint ventures carried on the equitybasis is summarized as follows:

 
| ** **                                                                                             | ** ** | **November 30****,  2008** | ** ** | **August 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| Current assets                                                                                         |       | $                               | 43,501,183 |                      | $          | 51,847,643 |   |
| Total assets                                                                                           |       | 50,312,225                      |       | 58,958,102                |       |
| Current liabilities                                                                                    |       | 17,841,369                      |       | 20,424,810                |       |
| Noncurrent liabilities                                                                                 |       | 4,531,337                       |       | 4,756,650                 |       |
| Joint ventures’ equity                                                                            |       | 27,939,519                      |       | 33,776,642                |       |
| Northern Technologies International  Corporation’s share of Corporate Joint Ventures’ equity |       | $                               | 13,039,844 |                      | $          | 16,016,347 |   |

 
| ** **                                                                                                    | ** ** | **November 30****,  2008** | ** ** | **November 30,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
| Net sales                                                                                                     |       | $                               | 21,109,585 |                        | $          | 23,944,115 |   |
| Gross profit                                                                                                  |       | 9,466,704                       |       | 11,009,748                  |       |
| Net income                                                                                                    |       | 1,102,716                       |       | 1,697,769                   |       |
| Northern Technologies International  Corporation’s share of equity in income of Corporate Joint Ventures |       | $                               | 658,766    |                        | $          | 1,054,682 |   |

 

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 US GAAP inall material respects.

 

During the three months ended November 30,2007, the Company invested $87,950 in a non-industrial chemical joint venturein Thailand in addition to $143,000 previously invested in December 2006.  The Company has a 50% ownership interest inthe joint venture entity.  The jointventure entity had no operations prior to the Company’s investment in December 2006.  The total capitalization by both owners ofthe joint venture was $461,900 as of November 30, 2007. No additionalcontributions have been made to the joint venture as of November 30, 2008.

** **

**6.             STOCKHOLDERS’EQUITY**

 

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.  The Company granted stockbonuses under the Northern Technologies International Corporation 2007 StockIncentive Plan for an aggregate of 21,513 shares of its common stock to variousemployees 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.

 

During the three months ended November 30,2007, 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.  The Company granted stockbonuses under the Northern Technologies International Corporation 2007 StockIncentive Plan for an aggregate of 33,595 shares of its common stock to variousemployees during the three months ended 

 

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November 30, 2007.  The fair value of the shares of the Company’scommon stock as of the date of grant of the stock bonuses was $334,270, basedon the closing sale price of a share of the Company’s common stock on thatdate.

** **

**7.             TOTAL COMPREHENSIVEINCOME**

 

The Company’s total comprehensive income was asfollows:

 
| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **November 30,  2008**      | ** ** | **November 30,  2007** | ** ** |
| Net income                                                           |       | $                                | 12,886     |   | $ | 658,196 |   |
| Other comprehensive income: foreign  currency translation adjustment |       | (1,578,958                       | )          | 881,785 |   |
| Total comprehensive income (loss)                                    |       | $                                | (1,566,072 | ) | $ | 1,539,981 |   |

 

**8.             NET INCOME PERCOMMON 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 of 65,140and 0 were excluded from the computation of common share equivalents as of November 30,2008 and November 30, 2007, as stock option exercise prices were greaterthan market price of a share of common stock.

** **

**9.             STOCK-BASEDCOMPENSATION**

 

The Northern Technologies International Corporation2007 Stock Incentive Plan (the “2007 Plan”) provides for the grant of incentivestock options, non-statutory stock options, stock appreciation rights,restricted stock, stock unit awards, performance awards and stock bonuses toeligible recipients to enable the Company and its subsidiaries to attract andretain qualified individuals through opportunities for equity participation inthe Company, and to reward those individuals who contribute to the achievementof the Company’s economic objectives.  Upto a total of 400,000 shares of the Company’s common stock has been reservedfor issuance under the 2007 Plan, subject to adjustment as provided in the 2007Plan.  Options granted under the 2007Plan generally have a term of five years and become exercisable over a three-or four-year period beginning on the one-year anniversary date of the grant.  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 Northern Technologies International CorporationEmployee Stock Purchase Plan (the “ESPP”) allows eligible employees of theCompany to acquire shares of the Company’s common stock on favorable termsthrough payroll deductions.  The maximumnumber of shares of common stock of the Company available for issuance underthe ESPP is 100,000 shares, subject to adjustment as provided in the ESPP.  The ESPP provides for six-month offeringperiods beginning on September 1 and March 1 of each year.  The purchase price of the shares is 90% ofthe lower of the fair market value of common stock at the beginning or end ofthe offering period.  This discount maynot exceed the maximum discount rate permitted for plans of this type under Section 423of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financialreporting purposes.

 

The Company granted options to purchase 30,000 and37,140 shares of its common stock during the three months ended November 30,2008 and 2007, 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 $25,000 and $24,680during the three months ended November 30, 2008 and 2007, 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 and $0.01 for the three months ended 

 

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November 30, 2008 and 2007, respectively.  As of November 30, 2008, the totalcompensation cost for non-vested options not yet recognized in the Company’sstatements of income was $213,592, net of estimated forfeitures.  Additional stock-based compensation expenseof $75,331 is expected through the remainder of fiscal year 2009, and expenseof $90,424 and $47,837 is expected to be recognized during fiscal 2010 and2011, respectively.  Future option grantswill impact the compensation expense recognized.

 

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,  2008** | ** ** | **November 30,  2007** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Dividend yield                  |       | 2.00                        | %          | 2.00                        | %          |
| Expected volatility             |       | 46.7                        | %          | 42.0                        | %          |
| Expected life of option         |       | 5 years                     |       | 5 years                     |       |
| Average risk-free interest rate |       | 2.88                        | %          | 3.84                        | %          |

 

The weighted average fair value of options grantedduring the three months ended November 30, 2008 and 2007 was $4.78 and$3.54, respectively.

 

**10.          GEOGRAPHICAND SEGMENT INFORMATION**

 

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

 
| ** **                                                                              | ** ** | **November 30,****2008** | ** ** | **November 30****,  2007** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------------|------------|
| Inside the U.S.A. to unaffiliated customers                                             |       | 89.3                          | %          | 75.9                            | %          |
| Outside the U.S.A. to:                                                                  |       |                          |       |                            |       |
| Corporate Joint Ventures in which the  Company is a shareholder directly and indirectly |       | 7.2                           |       | 15.9                            |       |
| Unaffiliated customers                                                                  |       | 3.5                           |       | 8.2                             |       |
|                                                                                    |       | 100.0                         | %          | 100.0                           | %          |

 

The following table sets forth NTIC’s net sales forthe three months ended November 30, 2008 and 2007 by segment:

 
| ** **                     | ** ** | **November 30,  2008** | ** ** | **November 30,  2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales             |       | $                           | 2,784,536  |                        | $          | 3,165,439     |       | $             | (380,903   | ) | (12.0 | )% |
| Natur-TecTM sales          |       | 482,316                     |       | 63,684                      |       | 418,632       |       | 657.4         | %          |
| React-NTI sales                |       | 4,092                       |       | 8,302                       |       | (4,210        | )          | (50.7         | )%         |
| React Inc. sales               |       | 0                           |       | 248,160                     |       | (248,160      | )          | 100.0         | %          |
| Total North American net sales |       | $                           | 3,270,944  |                        | $          | 3,485,585     |       | $             | (214,641   | ) | (6.2 | )% |

 

The following table sets forth NTIC’s cost of salesfor the three months ended November 30, 2008 and 2007 by segment:

 
| ** **                             | ** ** | **November  30, 2008** | ** ** | **% of Product  Sales*** | ** ** | **November  30, 2007** | ** ** | **% of Product  Sales*** | ** ** |
|----------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|------------------------------------|------------|
| Direct Cost of Sales                   |       |                   |       |                               |       |                   |       |                               |       |
| ZERUST® cost of sales             |       | $                      | 1,594,196  |                               | 57.3       | %                      | $          | 1,548,555                          |       | 48.9 | % |
| Natur-TecTM cost of  sales         |       | 399,188                |       | 82.8                               | %          | 50,474                 |       | 79.3                               | %          |
| React-NTI cost of sales                |       | 2,387                  |       | 58.3                               | %          | 4,838                  |       | 58.3                               | %          |
| React Inc. cost of sales               |       | 0                      |       | N/A                                |       | 209,880                |       | 84.6                               | %          |
| Indirect Cost of Sales                 |       | 297,196                |       | —                             |       | 279,943                |       | —                             |       |
| Total North American net cost of sales |       | $                      | 2,292,967  |                               | 70.1       | %                      | $          | 2,093,691                          |       | 60.1 | % |

 

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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 segmentcategory.

 

The Company’s management utilizes product net sales and direct andindirect cost of sales for each product in reviewing the financial performanceof a product type.  Further allocation ofCompany expenses or assets, aside from amounts presented in the tables above,is not utilized in evaluating product performance, nor does such allocationoccur for internal financial reporting.

 

**11.          COMMITMENTSAND CONTINGENCIES**

 

On July 25, 2008, 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, 2009, 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 briefsummary of the material terms approved by the Board:

 

·                  The total amount available under the bonusplan will be up to 25% of NTIC’s earnings before interest, taxes and otherincome (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

 

·                  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 byNTIC’s Board of Directors, upon recommendation of the Compensation Committee.

 

No management bonus was madeor accrued as of November 30, 2008. There was a $254,024 management bonus accrual as of November 30,2007.

 

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, which was subsequently removed to the FederalDistrict Court for the Southern District of New York.  The lawsuit seeks payment from React LLC ofcommissions in the approximate amount of $314,500 owed by React LLC under alicense 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 LLC formally responded to the complaintafter removal by moving to dismiss or stay because of Shamrock’s failure tocomply with alternative dispute resolution procedures contained in thelicense agreement.  By court order, the matter was stayed so that theparties could attempt mediation.  The parties mediated for one day andwere unsuccessful in resolving the matter. The parties proceeded with discovery, exchanging answers tointerrogatories and documents, and the parties also obtained documents bysubpoena from third parties.  With morecomplete information, the parties decided to dismiss their

 

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respective claims withoutprejudice and return to mediation.  Amediation session was held on December 4, 2008, and the parties continuedto negotiate through the mediator via telephone and email thereafter.  Because the mediation and negotiation processis continuing, there can be no assurance at the present time that the matterwill not result in a material adverse effect on the Company’s business,financial condition or results of operation.

 

The Company was involved in a legal action inFinland whereby the Company sued a Finnish company for trademarkinfringement.  Upon initiation of legalaction, the courts seized the inventory of the Finnish company as contraband.  The Company won the initial case, butsubsequently lost on appeal.  On November 19, 2008, the Company enteredinto an agreement to settle the lawsuit. Under the terms of the settlement agreement, the Company agreed to seekan amendment to its trademark YELLOW and to pay the defendant a one-timepayment of 320,000 Euro.  The defendantagreed, among other things, not to challenge the amendment or the validity ofthe Company’s trademark and not to infringe upon the trademark, onceamended.  Each party released each otherof all claims in connection with the matter. As a result of the settlement, the Company recorded a $400,000litigation settlement accrual in its consolidated financial statements for thefiscal year ended August 31, 2008. This amount was paid in full during thethree months ended November 30, 2008.

 

The Company is involved in various other legalactions arising in the normal course of business.  Management is of the opinion that anyjudgment or settlement resulting from these pending or threatened actions wouldnot have a material adverse effect on the Company’s business, financialcondition or results of operations.

 

In June 2007,the U.S. Internal Revenue Service concluded its audit of the Company’s U.S.federal income tax returns for fiscal 2004 and 2005.  As a result of suchaudit, the Company paid the IRS approximately $25,000 inadditional payroll taxes.  The Company also agreedin principle with the IRS to adjustments that will result in theadditional payment of approximately $60,000 in income tax and interest. As a result of the audit, the IRS has also taken the position that theCompany failed to withhold and has assessed against the Company aapproximately $505,000 of payroll taxes and individual income taxeson travel and other expense reimbursements made to Philip M. Lynch, theCompany’s former Chairman of the Board and Chief Executive Officer, andcommissions payments made to Inter Alia Holding Co. under that certain formerManufacturer’s Representative Agreement dated as of October 1, 1976 and assubsequently amended thereafter between the Company and Inter Alia, whichagreement has since been terminated.  Inter Alia beneficially ownsapproximately 22.7%of the Company’s outstanding common stock. G. Patrick Lynch, the Company’s current President and Chief ExecutiveOfficer, and three other members of the Lynch family, are shareholders of InterAlia.   The Company disagrees with the IRS’ position on withholdingand is in the process of appealing the matter.  Because the Companybelieves that it has valid legal grounds for appeal, it has determined that aloss is not probable at this time as defined by SFAS 5, “*Accountingfor Contingencies*.”  However,there can be no assurance that the ultimate resolution of the matter will not resultin a material adverse effect on the Company’s business, financial condition orresults of operations.

** **

**12.          STATEMENTSOF CASH FLOWS**

 

The Company did not declare or pay any cashdividends during fiscal 2008 and as of January 14, 2009, had not declaredor paid any cash dividends during fiscal 2009.

 

The Company issued 21,513 and33,595 shares of common stock as stock bonuses under its stock incentive plansto various employees to satisfy $226,961 and $334,270 of accrued payrollliability during the quarter ended November 30, 2008 and 2007,respectively.

 

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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 headings “Forward-Looking Statements” and “Risk Factors”appearing elsewhere in this report.  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 Part I, Item 1entitled “Financial Statements” of this report.

** **

**General Overview**

 

Northern Technologies International Corporationdevelops and markets proprietary environmentally beneficial products andtechnical services either directly or via a network of joint ventures andindependent distributors in over 50 countries. NTIC’s primary business is corrosion prevention.  During fiscal 2008, NTIC launched a newproduct line of compounds and finished products based on a portfolio ofproprietary bio-plastic technologies and beginning in fiscal 2009 launched,through a joint venture, technology and equipment to convert plastic waste intocrude oil waste.  NTIC is also in variousstages of development with respect to several other emerging businesses,including the application of its corrosion prevention technology to the oil andgas industry.

 

NTIC has been selling its proprietary ZERUST® and EXCOR® rust andcorrosion inhibiting products and services to the automotive, electronics,electrical, mechanical, military and retail consumer markets, for over 25years.  NTIC also offers worldwideon-site technical consulting for rust and corrosion prevention issues.  In North America, NTIC markets its technicalservices and ZERUST® products principally to industrial users by adirect sales force and a network of independent distributors.  NTIC’s technical service consultants workdirectly with the end users of NTIC’s products to analyze their specific needsand develop systems to meet their technical requirements.  During the three months ended November 30,2008, 85.1% of NTIC’s consolidated net sales were derived from the sales ofZERUST® and EXCOR® rust andcorrosion inhibiting packaging products and services.  Sales of NTIC’s rust and corrosion inhibitingproducts in North America have decreased during the past several fiscalyears.  One of the main markets for NTIC’srust and corrosion inhibiting products has typically been the automotiveindustry.  While the automotive industryhad been growing worldwide, it has been stagnant or contracting recently, andsignificantly so in the United States, and is not expected to improve in theforeseeable future, especially in light of the current economic conditionsaffecting that industry.

 

In December 2008 and January 2009, NTICimplemented a number of countermeasures in order to address the negative impactof the current economic crisis, especially with respect to its effect on theworldwide automotive industry.  NTIC reduced the base salaries of itsexecutive and other officers by approximately 15% on average, by 10% for allother employees and suspended the NTIC’s matching of 401(k) contributions. NTIC also implemented a hiring freeze and laid off nine individuals or 16% ofits work force.  Furthermore, significant cost concessions were requestedand obtained from all of NTIC’s major vendors and service providers.  NTICenacted other expense control measures across all of its departments with theobjective to conserve cash and reduce expenses while protecting the essentialsales and marketing efforts of each business.  NTIC anticipatesrecognizing the benefit of these cost control measures immediately.

 

In addition to ZERUST® products andservices, NTIC develops and in the beginning of fiscal 2008 launched aportfolio of bio-based and biodegradable (compostable) polymer resin compoundsand finished products under the Natur-TecTM brand.  During the three months ended November 30,2008, 14.7% of NTIC’s consolidated net sales were derived from the sales of theNatur-TecTM products compared to 1.8% during the three months ended November 31,2007.  These products are intended toreduce NTIC’s customers’ carbon footprint and provide environmentally sounddisposal options.  In recent years, acombination of market drivers, such as higher petroleum prices, a desire toreduce dependence on foreign oil, increased environmental awareness at theconsumer level and regulations banning the use of traditional, petroleum-basedplastics, have led to interest in 

 

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sustainable, renewable resource-based andcompostable alternatives to traditional plastics.  Natur-TecTM bio-based and biodegradableplastics are manufactured using NTIC’s patented and/or proprietary technologiesand are intended to replace conventional petroleum-based plastics.  The Natur-TecTM bioplastics portfolio includesflexible film, foam, rigid injection molded materials and engineeredplastics.  Natur-TecTM biodegradable andcompostable finished products include shopping and grocery bags, lawn and leafbags, can liners, pet waste collection bags, cutlery, packaging foam and coatedpaper products and are engineered to be fully biodegradable in a compostingenvironment.  Unlike competing plasticproducts claiming to be “degradable” or “oxo-degradable” that only break downinto smaller plastic fragments, Natur-TecTM products are designed to completelybiodegrade within 180 days in accordance with the ASTM D6400 standard forcompostable plastics and are certified 100 percent biodegradable and compostableby the Biodegradable Products Institute.

 

NTIC participates, either directly or indirectlythrough holding companies, in 29 corporate joint venture arrangements in NorthAmerica, South America, Europe, Asia and the Middle East.  Each of these joint ventures generally manufactures and markets finished products in thegeographic territory that it is assigned. NTIC’s joint venture partners are knowledgeable in the applicableenvironmental, labor, tax and other requisite regulations and laws of therespective foreign countries in which they operate, as well as the localcustoms and business practices.  Whilemost of NTIC’s joint ventures currently sell rust and corrosion inhibitingproducts and custom packaging systems, NTIC also has joint ventures thatmanufacture, market and sell or intend to manufacture, market or sell bio-basedadditives with both industrial and personal care applications, machinery thatconverts waste plastics into diesel, gasoline and mid-distillates, andelectronic sensing instruments.  NTICcategorizes its joint ventures into two principal areas: industrial chemicaland non-industrial chemical.

 

The profits of NTIC’s corporatejoint ventures are shared by the respective corporate joint venture owners inaccordance with their respective ownership percentages.   NTIC typically owns 50% or less of its jointventure entities and thus does not control the decisions of these entitiesregarding whether to pay dividends and how much in dividends in any given year.

** **

**Financial Overview**

 

NTIC’s consolidated net salesdecreased 6.2% during the three months ended November 30, 2008 as comparedto the three months ended November 30, 2007 primarily as a result of decreased demand for NTIC’s ZERUST® products and elimination of the React Incsales, partially offset by sales of its new Natur-TecTM products.  Net salesof ZERUST® productsdecreased 12.0% to $2,784,536 during the three months ended November 30,2008 as compared to $3,165,439 during the three months ended November 30,2007.  Net sales of the React Incproducts were $0 during the three months ended November 30, 2008 comparedto $248,160 during the three months ended November 30, 2007.  Net sales of Nature-TecTM products increased 657.4% to $482,316 during thethree months ended November 30, 2008 as compared to $63,684 during thethree months ended November 30, 2007.

 

Cost of goods sold as a percentageof net sales increased to 70.1% in the three months ended November 30,2008 as compared to 60.0% for the three months ended November 30, 2007primarily as a result of the significant increase of Natur-TecTM products sales as a percentage of total sales during the three months ended November 30,2008 compared to the three months ended November 30, 2007, which saleswere sold at lower margins than NTIC’s ZERUST® products.

 

Total net sales of all of NTIC’sjoint ventures decreased 11.8% to $21,109,585 during the three months ended November 30,2008 as compared to $23,944,115 during the three months ended November 30,2007 primarily as a result of decreaseddemand for ZERUST® products due to the global economic slowdownand to a lesser extent, the foreign currency exchange rate of the U.S.dollar compared to other currencies in which NTIC’s joint ventures conductbusiness. NTIC also recognized a 5.2% decrease in fee income for technical andsupport services as a result of the decrease in total net sales of the jointventures.  Such fees decreased to$1,320,719 during the three months ended November 30, 2008 as compared to$1,393,795 during the three months ended November 30, 2007.  NTIC’s equity in income of corporate jointventures and holding companies decreased 37.5% to $658,766 during the threemonths ended November 30, 2008 as compared to $1,054,682 during the threemonths ended November 

 

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30, 2007.  NTIC incurs direct expenses related to itscorporate joint ventures and holding companies. Such expenses include product and business development, consulting,travel, technical and marketing services to existing joint ventures, legal feesincurred in the establishment of new joint ventures, registration and promotionand legal defense of worldwide trademarks, and legal fees incurred inconnection with the filing of patent applications.  NTIC incurred $1,178,034 in direct jointventure expenses during the three months ended November 30, 2008 ascompared to $1,239,175 during the three months ended November 30, 2007, adecrease of 4.9%.  NTIC’s total incomefrom its corporate joint ventures and holding companies decreased 33.7% to$801,451 for the three months ended November 30, 2008 compared to$1,209,302 for the three months ended November 30, 2007.

 

NTIC spent $722,078 in the threemonths ended November 30, 2008 and $715,564 in the three months ended November 30,2007 in connection with its research and development activities.  NTIC anticipates that it will spend between$2,800,000 and $3,200,000 in total during fiscal 2009 on research anddevelopment activities related to its new technologies.  These fees are accounted for in the “Expensesincurred in support of corporate joint ventures” section of NTIC’s consolidatedstatements of income.

 

Net income decreased 98.0% to$12,885, or $0.00 per diluted common share, for the three months ended November 30,2008 compared to $658,196, or $0.18 per diluted common share, for the threemonths ended November 30, 2007. This decrease was primarily the result of the decreased demand of NTIC’sZERUST® products inthe United States and internationally due to the global economic slowdown.

 

NTIC’s working capital was$6,625,943 at November 30, 2008, including $456,505 in cash and cashequivalents.  As of November 30,2008, NTIC had no borrowings under its $2,300,000 demand line of credit.  As of November 30, 2008, $600,000 wascommitted under the demand line of credit to cover a letter of credit.

 

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 jointventure investments and funds available through existing or anticipatedfinancing arrangements.  In order to takeadvantage of new product market opportunities to expand its business andincrease its revenues, NTIC may decide to finance such opportunities byborrowing under its line of credit or raising additional financing 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, 2008 and 2007.

 
| ** **                          | ** ** | **November 30,  2008** | ** ** | **% of Net  Sales** | ** ** | **November 30,  2007** | ** ** | **% of Net  Sales** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-------------------|------------|---------------|------------|
| Net sales                           |       | $                           | 3,270,944  |                          | 100.0      | %                           | $          | 3,485,585                     |       | 100.0             | %          | (214,641      | )          | (6.2 | )% |
| Cost of goods sold                  |       | 2,292,967                   |       | 70.1                          | %          | 2,093,691                   |       | 60.0                          | %          | 199,276           |       | 9.5           | %          |
| Selling expenses                    |       | 770,570                     |       | 23.6                          | %          | 859,644                     |       | 24.7                          | %          | (89,074           | )          | (10.4         | )%         |
| General and administrative expenses |       | 941,438                     |       | 28.8                          | %          | 948,297                     |       | 27.2                          | %          | (6,859            | )          | (0.7          | )%         |
| Lab and technical support expenses  |       | 6,067                       |       | 0.2                           | %          | 57,128                      |       | 1.6                           | %          | (51,061           | )          | (89.4         | )%         |
|                                     |            |                             |            |                               |            |                             |            |                               |            |                   |            |               |            |  |  |

 

*Net Sales*. NTIC’s netsales originating in the United States decreased 6.2% during the three monthsended November 30, 2008 compared tothe same period in fiscal 2008 primarily as aresult of decreased demand for NTIC’s ZERUST® products and to a lesser extent due to the loss of theprincipal customer of React Inc.,partially offset by sales of its new Natur-TecTM products.

 

The following table sets forth additional detailregarding NTIC’s net sales by product category for the three months ended November 30,2008 and 2007:

 

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| ** **                     | ** ** | **November 30,  2008** | ** ** | **November 30,  2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales             |       | $                           | 2,784,536  |                        | $          | 3,165,439     |       | $             | (380,903   | ) | (12.0 | )% |
| Natur-TecTM sales          |       | 482,316                     |       | 63,684                      |       | 418,632       |       | 657.4         | %          |
| React-NTI sales                |       | 4,092                       |       | 8,302                       |       | (4,210        | )          | (50.7         | )%         |
| React Inc. sales               |       | —                      |       | 248,160                     |       | (248,160      | )          | 100.0         | %          |
| Total North American net sales |       | $                           | 3,270,944  |                        | $          | 3,485,585     |       | $             | (214,641   | ) | (6.2 | )% |

 

*Cost of Goods Sold*.  Cost of goods sold increased 9.5% for thethree months ended November 30,2008 compared to the same period in November 2007 primarily as a result of the significant increase of Natur-TecTM products sales as a percentage of total sales during the three months ended November 30,2008 compared to the three months ended November 30, 2007, which saleswere sold at lower margins than NTIC’s ZERUST® products.  Cost of sales as a percentage of net salesalso increased to 70.1% for the three months ended November 30, 2008compared to 60.0% in the same period in November 2007 primarily as aresult of the difference in margins in the Natur-TecTM productscompared to ZERUST® products.

* *

*Selling Expenses*.  NTIC’s selling expenses decreased 10.4% forthe three months ended November 30,2008 compared the same period in fiscal 2008 due to decreases in i) consultingexpense of $31,000 ii) HR hiring fees of $35,000 and iii) commissions of$39,000.  Selling expenses as apercentage of net sales decreased by a negligible amount.

* *

*General and AdministrativeExpenses*.  NTIC’sgeneral and administrative expenses decreased by a negligible amount for thethree months ended November 30, 2008 compared to same period in fiscal2008.  As a percentage of net sales,general and administrative expenses increased by a negligible amount. NTICincludes expenses in general and administrative expenses that provide benefit tothe various joint ventures in addition to providing benefit to NTIC’s NorthAmerican operations, including specifically, expenses associated withinformation technology, general insurance, executive and non-executive salary,bonus and benefits, building expenses, audit and tax and directors fees.

* *

*Lab and Technical Support Expenses*.  NTIC’s lab and technical support expensesdecreased 89.4% for the three months ended November 30, 2008 compared tothe same period in fiscal 2008 primarily as a result of a change in theallocation of these expenses to sales activities.  As apercentage of net sales, lab and technical support expenses decreased to0.2% for the three months ended November 30, 2008 compared to same periodin fiscal 2008.

* *

*International Corporate JointVentures and Holding Companies*.  Net sales of NTIC’s corporate joint venturesin for the three months ended November 30, 2008 and the same period infiscal 2008, excluding React-NTI LLC, were as follows:

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **November 30,  2008**      | ** ** | **November 30,  2007** | ** ** |
| Industrial chemical                                                       |       | $                                | 20,842,816 |   | $ | 23,626,448 |   |
| Non-industrial chemical                                                   |       | 266,769                          |       | 317,667 |   |
| Total International Corporate Joint  Ventures and Holding Companies Sales |       | $                                | 21,109,585 |   | $ | 23,944,115 |   |

 

NTIC receives fees for technical and other supportservices it provides to its corporate joint ventures based on the revenues ofthe individual corporate joint ventures. NTIC recognized fee income for such support of $1,320,719 in the threemonths ended November 30, 2008 compared to $1,393,795 during the sameperiod in fiscal 2008, a decrease of 5.2%. The decrease in fees for technical and other support to its corporatejoint ventures was due to 

 

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the decrease in revenues from the corporate jointventures as a whole, as well as the foreign currency exchange rate of the U.S.dollar compared to other currencies in which NTIC’s joint ventures conductbusiness.

 

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 2009 or 2010.  There was no deferred income recorded withinother accrued liabilities during the three months ended November 30, 2008related 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 $1,178,034 during thethree months ended November 30, 2008 compared to $1,239,175 in the sameperiod in fiscal 2008, a decrease of 4.9%. The decrease in direct expenses incurred relating to NTIC’s corporatejoint ventures and holding companies during the three months ended November 30,2008 compared to the three months ended November 30, 2007 was attributableto decreases of (i) consulting expense of $46,000, (ii) miscellaneousexpense of $54,000, partially offset by increases in (i) expenses relatedto employee wages of $30,000.  As apercentage of net sales, direct expenses incurred relating to NTIC’s corporatejoint ventures and holding companies increased by an immaterial amount for theperiod ended November 30, 2008 compared to November 30, 2007.

 

NTIC had equity in income ofcorporate joint ventures and holding companies of $658,766 during the threemonths ended November 30, 2008 as compared to $1,054,682 during the threemonths ended November 30, 2007. The decrease in equity in incomewas due to the decrease in sales from the corporate joint ventures as a wholedue to the global economic slowdown as well as theforeign currency exchange rate of the U.S. dollar compared to other currenciesin which NTIC’s joint ventures conduct business.

* *

*Interest Income*.  NTIC’s interest income decreased slightly to$445 during the three months ended November 30, 2008 compared to $495 forthe same period in fiscal 2008 due to lower average invested cash balancesduring the most recent period.

* *

*Interest Expense*.  NTIC’s interest expense increased slightly to$31,898 during the three months ended November 30, 2008 compared to$31,523 for the same period in fiscal 2008 due to higher average outstandingdebt during the most recent period.

* *

*Income Before Income Tax Expense*.  Income before income tax expense decreased to$45,886 during the three months ended November 30, 2008 compared to$736,196 for the same period in fiscal 2008.

* *

*Income Tax Expense*. Income taxexpense decreased to $33,000 during the three months ended November 30,2008 compared to $78,000 in the same period in fiscal 2008.  Income tax expense was calculated based onmanagement’s estimate of NTIC’s annual effective income tax rate.  NTIC’s annual effective income tax rateduring the three months ended November 30, 2008 and 2007 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 joint ventures’ undistributedearnings are distributed to NTIC, it is not expected to result in any materialadditional income tax liability after the application of foreign tax credits.

 

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**Liquidity and Capital Resources**

* *

*Sources of Cash and Working Capital*.  As of November 30, 2008, NTIC’s working capital was $6,625,943, including$456,505 in cash and cash equivalents, compared to working capital of$4,941,371 including $260,460 in cash and cash equivalents, as of August 31,2008.

 

On April 10, 2008, NTIC entered into aPromissory Note Modification Agreement with National City Bank pursuant towhich NTIC’s demand line of credit was increased to $2,300,000 and its$1,500,000 revolving credit facility was terminated.  Advances made under the demand line of creditwill be made at the sole discretion of National City Bank and will be due andpayable on demand.  Outstanding amountsunder the demand line of credit bear interest at an annual rate based on LIBORplus 2.25%.  As of November 30,2008, the interest rate was 3.41%. Interest is payable in arrears on the 15th day of each month and ondemand.  As of November 30, 2008,NTIC had no borrowings under its $2,300,000 demand line of credit.  As of November 30, 2008, $600,000 wascommitted under the demand line of credit to cover a letter of credit.

 

NTIC believes that a combination of its existingcash and cash equivalents, forecasted cash flows from future operations,anticipated distributions of earnings and technical assistance fees to NTICfrom its joint venture investments and funds available through existing oranticipated financing arrangements, will continue to be adequate to fund itsexisting operations, capital expenditures, debt repayments and any stockrepurchases for at least the next 12 months. In an effort to increase net sales, NTIC is in the process of expandingits product line to include additional biodegradable and compostable plasticsproducts and process technology and machinery that converts plastic waste intocrude oil and the application of its corrosion inhibiting technology into theoil and gas industry.  During fiscal2009, NTIC expects to invest additional research and development and marketingefforts and resources into these emerging businesses, product lines andmarkets.  In order to take advantage of such new product and marketopportunities to expand its business and increase its revenues, NTIC may decideto finance such opportunities by borrowing under its line of credit or raisingadditional financing through the issuance of debt or equity securities.  There is no assurance that any financingtransaction will be available on terms acceptable to NTIC or at all, or thatany financing transaction will not be dilutive to NTIC’s current stockholders.

* *

*Uses of Cash and Cash Flows*.  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.  Cash flows used in operationsfor the three months ended November 30, 2007 was $905,868, which resultedprincipally from equity in income from corporate joint ventures, gainon sale of assets, decreases in accounts payable and accrued liabilities andincreases in inventories and prepaid expenses, offset by net income,depreciation and amortization expense, and decreases in trade and income taxreceivables.

 

Net cash provided by investing activities for thethree months ended November 30, 2008 was $1,959,700 which comprised ofdividends received from corporate joint ventures, offset by additions toproperty and equipment and investments in patents.   Net cash used in investing activities forthe three months ended November 30, 2007 was $20,419, which resulted fromloans made, investments in joint ventures and additions to property andequipment, offset by dividends received from corporate joint ventures and thesale of a joint venture.

 

Net cash used in financing activities for the threemonths ended November 30, 2008 was $1,132,798, which resulted primarilyfrom bank overdrafts and repayments to the demand line of credit and principalpayments on the bank loan for NTIC’s corporate headquarters building.  Net cash provided by financing activities forthe three months ended November 30, 2007 was $807,418, which resultedprimarily from borrowings under the demand line of credit, bank overdrafts andproceeds from NTIC’s employee stock purchase plan, offset by principal paymentson the bank loan for NTIC’s corporate headquarters building.

* *

*Capital Expenditures and Commitments*.  NTIC had no material lease commitments as of November 30,2008, except a lease agreement entered into by NTI Facilities, Inc., asubsidiary of NTIC, for approximately 16,994 

 

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square feet of office, manufacturing, laboratory andwarehouse space in Beachwood, Ohio, requiring monthly payments of $17,500,which are adjusted annually according to the annual consumer price index,through November 2014.

 

To finance the purchase of the real estate andbuilding for NTIC’s current corporate headquarters, in September 2006,NTIC obtained a secured 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. The loan is secured by a first lien on the real estate and building.

 

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 from changesin foreign currency exchange rates, commodity prices and interest rates.

 

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, Korean won and the English poundagainst the U.S. dollar.  NTIC’s fees fortechnical support and other services and dividend distributions from theseforeign entities are paid in foreign currencies and thus fluctuations inforeign currency exchange rates could result in declines in NTIC’s reported netincome.  Since NTIC’s investments in itscorporate joint ventures and holding companies are accounted for using theequity method, any changes in foreign currency exchange rates would bereflected as a foreign currency translation adjustment and would not changeNTIC’s equity in income of joint ventures and holding companies reflected inits consolidated statements of income. NTIC does not hedge against its 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, 2008,NTIC had no borrowings under its $2,300,000 demand line of 

 

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credit.  As ofNovember 30, 2008, $600,000 was committed under the demand line of creditto cover a letter of credit.

** **

**Critical Accounting Policies and Estimates**

 

There have been no material changes to NTIC’scritical accounting policies and estimates from the information provided inItem 7, “Management’s Discussion and Analysis of Financial Condition andResults of Operations”, included in NTIC’s annual report on Form 10-K forthe fiscal year ended August 31, 2008.

** **

**Recent Accounting Pronouncements**

 

See Note 2 to NTIC’s consolidated financialstatements for a discussion of recent accounting pronouncements.

** **

**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 harborcreated by those sections. In addition, NTIC or others on NTIC’s behalf maymake forward-looking statements from time to time in oral presentations,including telephone conferences and/or web casts open to the public, in pressreleases or reports, on NTIC’s Internet web site or otherwise. All statementsother than statements of historical facts included in this report or expressedby NTIC orally from time to time that address activities, events ordevelopments that NTIC expects, believes or anticipates will or may occur inthe future are forward-looking statements including, in particular, thestatements about NTIC’s plans, objectives, strategies, the outcome ofcontingencies such as legal proceedings, and prospects regarding, among otherthings, NTIC’s financial condition, results of operations and business. NTIChas identified some of these forward-looking statements in this report withwords like “believe,” “may,” “could,” “would,” “might,” “forecast,” “possible,”“potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,”“anticipate,” “estimate,” “approximate” “outlook” or “continue” or the negativeof these words or other words and terms of 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 aredifficult to predict and many of them are beyond NTIC’s control. The followingare some of the uncertainties and factors known to us that could cause NTIC’sactual results to differ materially from what NTIC has anticipated in itsforward-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;

 

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·                  NTIC’s investments in research anddevelopment efforts and its need for additional capital to support suchefforts;

 

·                  Acceptance of NTIC’s existing and newproducts;

 

·                  Increased competition;

 

·                  The success of NTIC emerging new businesses;

 

·                  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 outstandinglitigation;

 

·                  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, 2008 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 readers not to place undue reliance on anyforward-looking statement that speaks only as of the date made and to recognizethat forward-looking statements are predictions of future results, which maynot 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 thatthe expectations reflected in our forward-looking statements are reasonable, wedo not know whether our expectations will prove correct. Our expectationsreflected in our forward-looking statements can be affected by inaccurateassumptions we might make or by known or unknown uncertainties 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 toupdate, amend or clarify forward-looking statements to reflect actual resultsor changes in factors or assumptions affecting such forward-looking statements.We advise you, however, to consult any further disclosures we make on relatedsubjects in our annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K we file with or furnish to the Securitiesand Exchange Commission.

 

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## **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.

##  

## **ITEM 4. 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 certain duties due to the small number of employees ofNTIC dealing 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 such duties do not at thistime justify the expenses associated with such increases.

** **

**Changes in Internal Control over Financial Reporting**

 

There was no change in NTIC’s internal control over financial reportingthat occurred during the quarter ended November 30, 2008 that hasmaterially affected, or is reasonably likely to materially affect NTIC’sinternal control over financial reporting.

#  

# **PART II          OTHER INFORMATION**

##  

## **ITEM 1.           LEGALPROCEEDINGS**

 

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

##  

## **ITEM 1A.        RISKFACTORS**

 

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

 

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## **ITEM 2.           UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

** **

**Recent Sales of Unregistered Equity Securities**

 

During the three months ended November 30,2008, 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 30,2008, 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.

##  

## **ITEM 3.           DEFAULTSUPON SENIOR SECURITIES**

 

Not applicable.

##  

## **ITEM 4.           SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Not applicable.

##  

## **ITEM 5.           OTHERINFORMATION**

 

Not applicable.

##  

## **ITEM 6.           EXHIBITS**

 

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                             |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Amended and Restated  Bylaws of Northern Technologies International Corporation (Incorporated by  reference to Exhibit 3.1 to NTIC’s Current Report on Form 8-K as  filed with the Securities and Exchange Commission on November 24, 2008  (File No. 001-11038))                                                  |
| 10.1                 |       | Form of  Indemnification Agreement between Northern Technologies International  Corporation and its Directors and Officers (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 November 24, 2008 (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, 2009 | 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**                                                                                                                                                                           |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Amended  and Restated Bylaws of Northern Technologies International Corporation                                                                               |       | Incorporated by reference to Exhibit 3.1 to NTIC’s Current  Report on Form 8-K as filed with the Securities and Exchange Commission  on November 24, 2008 (File No. 001-11038)  |
| 10.1             |       | Form of Indemnification Agreement between Northern Technologies  International Corporation and its Directors and Officers                                |       | 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 November 24, 2008 (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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