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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Markone)**

 
| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended May 31, 2010**

 
| **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 INTERNATIONAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

**4201 Woodland Rd**

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

(Address of principal executive offices) (Zip code)

 

**(763) 225-6600**(Registrant’s telephone 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 of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES x  NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during the preceding12 months (or for such shorter period that the registrant was required tosubmit and post such files). YES o  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 o                       |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                        |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). YES o  NO x

 

Asof July 15, 2010, 4,253,321 shares of common stock of the registrant wereoutstanding.

 

 

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION**

**FORM 10-Q**

**May 31, 2010**

 

**TABLE OFCONTENTS**

 
| **Description**     | ** ** | ** **                                                                                                    | ** ** | **Page** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|----------|
|                |       |                                                                                                          |       |     |
| **PART I.**         |       | **FINANCIAL INFORMATION**                                                                                     |       |     |
|                |       |                                                                                                          |       |     |
| Item 1.             |       | Financial Statements                                                                                          |       |     |
|                |       |                                                                                                          |       |     |
|                |       | Consolidated  Balance Sheets as of May 31, 2010 (unaudited) and August 31, 2009                               |       | 2        |
|                |       |                                                                                                          |       |     |
|                |       | Consolidated  Statements of Operations (unaudited) for the Three and Nine Months Ended May  31, 2010 and 2009 |       | 3        |
|                |       |                                                                                                          |       |     |
|                |       | Consolidated  Statements of Cash Flows (unaudited) for the Nine Months Ended May 31, 2010  and 2009           |       | 4        |
|                |       |                                                                                                          |       |     |
|                |       | Notes to Consolidated Financial Statements (unaudited)                                                        |       | 5-13     |
|                |       |                                                                                                          |       |     |
| Item 2.             |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |       | 14-28    |
|                |       |                                                                                                          |       |     |
| Item 3.             |       | Quantitative  and Qualitative Disclosures about Market Risk                                                   |       | 28       |
|                |       |                                                                                                          |       |     |
| Item 4.             |       | Controls and  Procedures                                                                                      |       | 28       |
|                |       |                                                                                                          |       |     |
| **PART II.**        |       | **OTHER INFORMATION**                                                                                         |       |     |
|                |       |                                                                                                          |       |     |
| Item 1.             |       | Legal Proceedings                                                                                             |       | 28       |
|                |       |                                                                                                          |       |     |
| Item 1A.            |       | Risk Factors                                                                                                  |       | 28       |
|                |       |                                                                                                          |       |     |
| Item 2.             |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                  |       | 29       |
|                |       |                                                                                                          |       |     |
| Item 3.             |       | Defaults  Upon Senior Securities                                                                              |       | 29       |
|                |       |                                                                                                          |       |     |
| Item 4.             |       | [Removed and  Reserved]                                                                                       |       | 29       |
|                |       |                                                                                                          |       |     |
| Item 5.             |       | Other Information                                                                                             |       | 29       |
|                |       |                                                                                                          |       |     |
| Item 6.             |       | Exhibits                                                                                                      |       | 29       |
|                |       |                                                                                                          |       |     |
| **SIGNATURE  PAGE** |       | 30                                                                                                            |
|                |       |                                                                                                          |       |     |
| **EXHIBIT  INDEX**  |       | 31                                                                                                            |

 

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*This quarterly report on Form 10-Q contains certainforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended, and are subject to the safe harbor created by thosesections.  For more information, see “PartI. Financial Information — Item 2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations— Forward-Looking Statements.”*

 

*As usedin this**report**,references to “NTIC,” the “Company,” “we,” “our” or “us,” unless the contextotherwise requires, refer to Northern Technologies International Corporation,its wholly owned subsidiaries — NTI Facilities, Inc., Northern TechnologiesHolding Company, LLC and React-NTI, LLC, all of which are consolidated on NTIC’sfinancial statements.*

 

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

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.****                            ****FINANCIAL STATEMENTS**

 

**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETSAS OF MAY 31, 2010 (UNAUDITED)**

**AND AUGUST 31, 2009 (AUDITED)**

 
| ** **                                                                                                                            | ** ** | **May 31,********2010** | ** **       | **August 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------------|----------------------|------------|
| **ASSETS**                                                                                                                            |       |                    |             |                 |       |
| CURRENT ASSETS:                                                                                                                       |       |                    |             |                 |       |
| Cash and cash equivalents                                                                                                             |       | $                       |  1,103,620  |                 | $          |  138,885 |   |
| Receivables:                                                                                                                          |       |                    |             |                 |       |
| Trade excluding joint ventures, less allowance for  doubtful accounts of $79,000 at May 31, 2010 and August 31, 2009                  |       | 1,731,936               |             | 1,373,802            |       |
| Trade joint ventures                                                                                                                  |       | 1,350,696               |             | 662,954              |       |
| Fees for services provided to joint ventures                                                                                          |       | 1,311,939               |             | 1,760,602            |       |
| Income taxes                                                                                                                          |       | 401,992                 |             | 173,038              |       |
| Inventories                                                                                                                           |       | 2,955,044               |             | 2,002,622            |       |
| Prepaid expenses                                                                                                                      |       | 186,428                 |             | 138,086              |       |
| Deferred income taxes                                                                                                                 |       | 218,900                 |             | 218,900              |       |
| Total current assets                                                                                                                  |       | 9,260,555               |             | 6,468,889            |       |
|                                                                                                                                  |       |                    |             |                 |       |
| PROPERTY AND EQUIPMENT, net                                                                                                           |       | 3,484,050               |             | 3,542,169            |       |
|                                                                                                                                  |       |                    |             |                 |       |
| OTHER ASSETS:                                                                                                                         |       |                    |             |                 |       |
| Investments in joint ventures                                                                                                         |       | 14,960,391              |             | 14,064,122           |       |
| Deferred income taxes                                                                                                                 |       | 1,336,700               |             | 1,336,700            |       |
| Notes receivable                                                                                                                      |       | 140,000                 |             | 140,000              |       |
| Industrial patents and trademarks, net                                                                                                |       | 932,424                 |             | 888,065              |       |
| Other                                                                                                                                 |       | 40,619                  |             | 42,975               |       |
|                                                                                                                                  |       | 17,410,134              |             | 16,471,862           |       |
|                                                                                                                                  |       | $                       |  30,154,739 |                 | $          |  26,482,920 |   |
|                                                                                                                                  |       |                    |             |                 |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                        |       |                    |             |                 |       |
| CURRENT LIABILITIES:                                                                                                                  |       |                    |             |                 |       |
| Borrowings made on line of credit                                                                                                     |       | $                       |  —     |                 | $          |  1,077,000 |   |
| Current portion of note payable (Note 6)                                                                                              |       | 1,153,953               |             | 1,179,973            |       |
| Accounts payable                                                                                                                      |       | 1,089,952               |             | 630,363              |       |
| Accrued liabilities:                                                                                                                  |       |                    |             |                 |       |
| Payroll and related benefits                                                                                                          |       | 841,378                 |             | 261,579              |       |
| Deferred joint venture royalties                                                                                                      |       | 288,000                 |             | 288,000              |       |
| Other                                                                                                                                 |       | 351,185                 |             | 304,202              |       |
| Total current liabilities                                                                                                             |       | 3,724,468               |             | 3,741,117            |       |
|                                                                                                                                  |       |                    |             |                 |       |
| COMMITMENTS AND CONTINGENCIES (Note 13)                                                                                               |       |                    |             |                 |       |
|                                                                                                                                  |       |                    |             |                 |       |
| STOCKHOLDERS’ EQUITY:                                                                                                            |       |                    |             |                 |       |
| Preferred stock, no par value; authorized 10,000  shares; none issued and outstanding                                                 |       | —                  |             | —               |       |
| Common stock, $0.02 par value per share;  authorized 10,000,000 shares; issued and outstanding 4,253,321 and 3,756,596,  respectively |       | 85,066                  |             | 75,132               |       |
| Additional paid-in capital                                                                                                            |       | 9,059,451               |             | 5,631,767            |       |
| Retained earnings                                                                                                                     |       | 17,062,278              |             | 15,327,962           |       |
| Accumulated other comprehensive income                                                                                                |       | 223,476                 |             | 1,706,942            |       |
| Total stockholders’ equity                                                                                                       |       | 26,430,271              |             | 22,741,803           |       |
|                                                                                                                                  |       | $                       |  30,154,739 |                 | $          |  26,482,920 |   |

 

See notes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS (UNAUDITED)**

**FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2010 AND2009**

 
| ** **                                           | ** **   | **Three Months Ended** | ** **   | **Nine Months Ended** | ** **   |
|------------------------------------------------------|--------------|------------------------|--------------|-----------------------|--------------|
| ** **                                           | ** **   | **May 31, 2010**       | ** **   | **May 31, 2009**      | ** **   | **May 31, 2010** | ** ** | **May 31, 2009** | ** ** |
| NORTH AMERICAN OPERATIONS:                           |         |                   |         |                  |         |   |   |   |   |
| Net sales, excluding joint ventures                  |         | $                      | 2,559,467    |                  | $            | 1,555,065 |   | $ | 7,164,784 |   | $ | 5,855,536 |   |
| Net sales, to joint ventures                         |         | 677,731                |         | 118,569               |         | 1,660,294 |   | 823,212 |   |
|                                                 |         | 3,237,198              |         | 1,673,634             |         | 8,825,078 |   | 6,678,748 |   |
| Cost of goods sold                                   |         | 2,172,902              |         | 995,672               |         | 5,771,045 |   | 4,444,075 |   |
| Gross profit                                         |         | 1,064,296              |         | 677,962               |         | 3,054,033 |   | 2,234,673 |   |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| JOINT VENTURE OPERATIONS:                            |         |                   |         |                  |         |   |   |   |   |
| Equity in income (loss) of joint ventures            |         | 1,511,534              |         | (6,838                | )            | 2,909,120 |   | 650,900 |   |
| Fees for services provided to joint ventures         |         | 1,140,295              |         | 821,810               |         | 3,441,563 |   | 2,760,379 |   |
|                                                 |         | 2,651,829              |         | 814,972               |         | 6,350,683 |   | 3,411,279 |   |
| *** ***                                         | *** *** | *** ***           | *** *** | *** ***          | *** *** | *** *** | *** *** | *** *** | *** *** |
| OPERATING EXPENSES:                                  |         |                   |         |                  |         |   |   |   |   |
| Selling                                              |         | 819,572                |         | 591,559               |         | 2,004,094 |   | 1,975,387 |   |
| General and administrative                           |         | 869,183                |         | 599,012               |         | 2,628,447 |   | 2,184,974 |   |
| Expenses incurred in support of joint ventures       |         | 208,444                |         | 224,887               |         | 682,828 |   | 1,152,654 |   |
| Research and development                             |         | 960,780                |         | 655,281               |         | 2,526,478 |   | 2,222,576 |   |
| Loss on impairment                                   |         | —                 |         | —                |         | — |   | 554,000 |   |
|                                                 |         | 2,857,979              |         | 2,070,739             |         | 7,841,847 |   | 8,089,591 |   |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| OPERATING INCOME (LOSS)                              |         | 858,146                |         | (577,805              | )            | 1,562,869 |   | (2,443,639 | ) |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| INTEREST INCOME                                      |         | 864                    |         | 6,509                 |         | 5,607 |   | 7,828 |   |
| INTEREST EXPENSE                                     |         | (23,867                | )            | (27,933               | )            | (73,637 | ) | (102,271 | ) |
| OTHER INCOME                                         |         | 6,825                  |         | 4,550                 |         | 20,475 |   | 18,200 |   |
| MINORITY INTEREST                                    |         | —                 |         | —                |         | — |   | 3,398 |   |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAX EXPENSE              |         | 841,968                |         | (594,679              | )            | 1,515,314 |   | (2,516,484 | ) |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| INCOME TAX (BENEFIT) EXPENSE                         |         | (110,000               | )            | 44,000                |         | (219,000 | ) | (377,000 | ) |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| NET INCOME (LOSS)                                    |         | $                      | 951,698      |                  | $            | (638,679 | ) | $ | 1,734,314 |   | $ | (2,139,484 | ) |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| NET INCOME (LOSS) PER COMMON SHARE:                  |         |                   |         |                  |         |   |   |   |   |
| Basic                                                |         | $                      | 0.23         |                  | $            | (0.17 | ) | $ | 0.41 |   | $ | (0.57 | ) |
| Diluted                                              |         | $                      | 0.22         |                  | $            | (0.17 | ) | $ | 0.41 |   | $ | (0.57 | ) |
|                                                 |         |                   |         |                  |         |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED  OUTSTANDING: |         |                   |         |                  |         |   |   |   |   |
| Basic                                                |         | 4,244,086              |         | 3,754,596             |         | 4,213,465 |   | 3,746,977 |   |
| Diluted                                              |         | 4,299,855              |         | 3,754,596             |         | 4,252,735 |   | 3,746,977 |   |

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFCASH FLOWS (UNAUDITED)**

**NINE MONTHS ENDED MAY 31, 2010 AND 2009**

 
| ** **                                                                            | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **May 31, 2010**      | ** ** | **May 31, 2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                  |       |   |   |
| Net income (loss)                                                                     |       | $                     | 1,734,314  |   | $ | (2,139,484 | ) |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                  |       |   |   |
| Expensing of fair value of stock options vested                                       |       | 141,315               |       | 75,000 |   |
| Change in allowance for doubtful accounts                                             |       | —                |       | 20,000 |   |
| Depreciation expense                                                                  |       | 284,041               |       | 294,852 |   |
| Amortization expense                                                                  |       | 116,128               |       | 106,391 |   |
| Loss on asset impairment                                                              |       | —                |       | 554,000 |   |
| Loss on disposal of assets                                                            |       | —                |       | 46,302 |   |
| Minority interest expense                                                             |       | —                |       | (3,398 | ) |
| Equity in income (loss) from joint ventures                                           |       | (2,909,120            | )          | (650,900 | ) |
| Change in current assets and liabilities:                                             |       |                  |       |   |   |
| Receivables:                                                                          |       |                  |       |   |   |
| Trade excluding joint ventures                                                        |       | (358,134              | )          | 769,768 |   |
| Trade joint ventures                                                                  |       | (569,824              | )          | (127,950 | ) |
| Fees for services provided to joint ventures                                          |       | 448,663               |       | 1,444,249 |   |
| Income taxes                                                                          |       | (228,954              | )          | (705,544 | ) |
| Inventories                                                                           |       | (952,422              | )          | 431,237 |   |
| Prepaid expenses and other assets                                                     |       | (45,986               | )          | 29,708 |   |
| Accounts payable                                                                      |       | 459,589               |       | (962,099 | ) |
| Accrued liabilities                                                                   |       | 626,784               |       | (743,599 | ) |
| Net cash used in operating activities                                                 |       | (1,253,606            | )          | (1,561,467 | ) |
|                                                                                  |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                  |       |   |   |
| Investment in joint ventures                                                          |       | (30,101               | )          | (666,663 | ) |
| Dividends received from joint ventures                                                |       | 441,548               |       | 2,289,888 |   |
| Additions to property and equipment                                                   |       | (225,922              | )          | (178,231 | ) |
| Additions to industrial patents                                                       |       | (160,486              | )          | (26,522 | ) |
| Net cash provided by investing activities                                             |       | 25,059                |       | 1,418,472 |   |
|                                                                                  |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |                  |       |   |   |
| Bank overdrafts                                                                       |       | —                |       | (852,284 | ) |
| Net borrowings made on line of credit                                                 |       | (1,077,000            | )          | 877,000 |   |
| Repayment of note payable                                                             |       | (26,020               | )          | (24,007 | ) |
| Proceeds from the issuance of common stock                                            |       | 3,195,613             |       | — |   |
| Stock options exercised                                                               |       | 63,765                |       | — |   |
| Proceeds from employee stock purchase plan                                            |       | 36,925                |       | 23,465 |   |
| Net cash provided by financing activities                                             |       | 2,193,283             |       | 24,174 |   |
|                                                                                  |       |                  |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                  |       | 964,735               |       | (118,821 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |       | 138,885               |       | 260,460 |   |
|                                                                                  |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |       | $                     | 1,103,620  |   | $ | 141,639 |   |

 

See notes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

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

 

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

 

Inthe opinion of management, the accompanying unaudited consolidated financialstatements contain all necessary adjustments, which are of a normal recurringnature, and present fairly the consolidated financial position of NorthernTechnologies International Corporation and its subsidiaries (the “Company”) asof May 31, 2010 and the results of their operations for the three and ninemonths ended May 31, 2010 and May 31, 2009 and their cash flows forthe nine months ended May 31, 2010 and May 31, 2009, in conformitywith accounting principles generally accepted in the United States of America (“U.S.GAAP”).

 

Certainamounts reported in the consolidated financial statements for the previousreporting periods have been reclassified to conform to the current period presentation.  These reclassifications did not have amaterial impact on the Company’s previously reported consolidated balancesheets or statements of cash flows. The Company has reclassified various lineitems in the statements of operations to better provide the results of itsjoint ventures, as well as its North American operations.  These reclassifications changed the Company’soperating income (loss), but did not impact its net income (loss) or net income(loss) per common share.

 

Theseconsolidated financial statements should be read in conjunction with theconsolidated financial statements and related notes contained in the Company’sannual report on Form 10-K for the fiscal year ended August 31, 2009and the revised consolidated statements of operations for the fiscal year endedAugust 31, 2009 and 2008 contained in Exhibit 99.1 to thisreport.  These consolidated financialstatements also should be read in conjunction with the “Management’s Discussionand Analysis of Financial Condition and Results of Operations” sectionappearing in this report.

 

Operatingresults for the three and nine months ended May 31, 2010 are notnecessarily indicative of the results that may be expected for the full fiscalyear ending August 31, 2010.

 

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

 

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

 

Inventoriesconsisted of the following:

 
| ** **           | ** ** | **May 31, 2010** | ** ** | **August 31, 2009** | ** ** |
|----------------------|------------|-----------------------|------------|--------------------------|------------|
| Production materials |       | $                     | 1,325,966  |                     | $          | 947,677 |   |
| Finished goods       |       | 1,629,078             |       | 1,054,945                |       |
|                 |       | $                     | 2,955,044  |                     | $          | 2,002,622 |   |

 

**3.****            ****PROPERTYAND EQUIPMENT, NET**

 

Propertyand equipment, net consisted of the following:

 

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| ** **                    | ** ** | **May 31, 2010** | ** ** | **August 31, 2009** | ** ** |
|-------------------------------|------------|-----------------------|------------|--------------------------|------------|
| Land                          |       | $                     | 310,365    |                     | $          | 310,365 |   |
| Buildings and improvements    |       | 3,099,185             |       | 3,083,598                |       |
| Machinery and equipment       |       | 1,796,375             |       | 1,641,878                |       |
|                          |       | 5,205,925             |       | 5,035,841                |       |
| Less accumulated depreciation |       | (1,721,875            | )          | (1,493,672               | )          |
|                          |       | $                     | 3,484,050  |                     | $          | 3,542,169 |   |

 

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

 

Industrial patents and trademarks consisted of thefollowing:

 
| ** **                    | ** ** | **May 31, 2010** | ** ** | **August 31, 2009** | ** ** |
|-------------------------------|------------|-----------------------|------------|--------------------------|------------|
| Patents and trademarks        |       | $                     | 1,590,839  |                     | $          | 1,430,352 |   |
| Less accumulated amortization |       | (658,415              | )          | (542,287                 | )          |
|                          |       | $                     | 932,424    |                     | $          | 888,065 |   |

 

Patentand trademark costs are amortized over seven years once a patent or trademarkis filed and approved.  Amortization expense related to patents and trademarkswas $38,984 and $33,290 for the three months ended May 31, 2010 and 2009,respectively, and $116,128 and $106,391 for the nine months ended May 31,2010 and May 31, 2009, respectively. Amortization expense is estimated to approximate $160,000 in each of thenext five fiscal years.

 

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

 

Thefinancial statements of the Company’s foreign joint ventures are initiallyprepared using the accounting principles accepted in the respective jointventures’ countries of domicile.   Amounts related to foreign joint venturesreported in the below tables and the accompanying financial statements havesubsequently been adjusted to approximate U.S. GAAP in all material respects.  All material profits recorded on sales fromthe Company to its joint ventures have been eliminated for financial reportingpurposes.

 

Financialinformation from the audited and unaudited financial statements of the Company’sjoint venture in Germany, Excor Korrosionsschutz — Technologien und ProdukteGmbH (“Germany”), the Company’s joint venture holding company in theAssociation of Southeast Asian Nations, or ASEAN, region, NTI ASEAN, LLC (“ASEAN”),and all of the Company’s other joint ventures, are summarized as follows:

 
| ** **                                                                                   | ** ** | **May 31, 2010** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                   | ** ** | **TOTAL**             | ** ** | **Germany** | ** ** | **ASEAN** | ** ** | **All Other** | ** ** |
| Current assets                                                                               |       | $                     | 46,904,472 |   | $ | 13,730,225 |   | $ | 11,723,269 |   | $ | 21,450,978 |   |
| Total assets                                                                                 |       | 53,060,653            |       | 16,176,823 |   | 11,995,041 |   | 24,888,789 |   |
| Current liabilities                                                                          |       | 16,097,277            |       | 2,031,799 |   | 3,998,499 |   | 10,066,979 |   |
| Noncurrent liabilities                                                                       |       | 4,424,241             |       | — |   | 860,200 |   | 3,564,041 |   |
| Joint ventures’ equity                                                                  |       | 32,539,135            |       | 14,145,024 |   | 7,136,342 |   | 11,257,769 |   |
| Northern Technologies International Corporation’s  share of joint ventures’ equity |       | $                     | 14,960,391 |   | $ | 7,072,512 |   | $ | 2,518,180 |   | $ | 5,369,771 |   |

 

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| ** **                                                                                   | ** ** | **August 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                   | ** ** | **TOTAL**                | ** ** | **Germany** | ** ** | **ASEAN** | ** ** | **All Other** | ** ** |
| Current assets                                                                               |       | $                        | 43,863,290 |   | $ | 15,304,713 |   | $ | 9,619,391 |   | $ | 18,939,186 |   |
| Total assets                                                                                 |       | 50,224,882               |       | 18,291,291 |   | 9,752,084 |   | 22,181,507 |   |
| Current liabilities                                                                          |       | 17,260,943               |       | 4,614,540 |   | 3,458,446 |   | 9,187,957 |   |
| Noncurrent liabilities                                                                       |       | 2,325,943                |       | — |   | 97,433 |   | 2,228,510 |   |
| Joint ventures’ equity                                                                  |       | 30,637,996               |       | 13,676,750 |   | 6,196,206 |   | 10,765,040 |   |
| Northern Technologies International Corporation’s  share of joint ventures’ equity |       | $                        | 14,064,122 |   | $ | 6,838,375 |   | $ | 3,098,103 |   | $ | 4,127,644 |   |

 
| ** **                                                                                          | ** ** | **Nine Months Ended May 31, 2010** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                          | ** ** | **TOTAL**                               | ** ** | **Germany** | ** ** | **ASEAN** | ** ** | **All Other** | ** ** |
| Net sales                                                                                           |       | $                                       | 62,294,519 |   | $ | 18,042,624 |   | $ | 10,350,856 |   | $ | 33,901,039 |   |
| Gross profit                                                                                        |       | 30,852,120                              |       | 9,981,373 |   | 5,307,801 |   | 15,562,945 |   |
| Net income                                                                                          |       | 5,664,630                               |       | 3,029,361 |   | 1,113,340 |   | 1,521,928 |   |
| Northern Technologies International Corporation’s  share of equity in income of joint ventures |       | $                                       | 2,909,120  |   | $ | 1,505,024 |   | $ | 677,175 |   | $ | 726,921 |   |

 
| ** **                                                                                          | ** ** | **Nine Months Ended May 31, 2009** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                          | ** ** | **TOTAL**                               | ** ** | **Germany** | ** ** | **ASEAN** | ** ** | **All Other** | ** ** |
| Net sales                                                                                           |       | $                                       | 46,628,644 |   | $ | 14,824,466 |   | $ | 6,635,907 |   | $ | 25,168,271 |   |
| Gross profit                                                                                        |       | 21,551,740                              |       | 7,026,016 |   | 3,211,362 |   | 11,314,362 |   |
| Net income                                                                                          |       | 1,009,691                               |       | 753,462 |   | 584,842 |   | (328,613 | ) |
| Northern Technologies International Corporation’s  share of equity in income of joint ventures |       | $                                       | 650,900    |   | $ | 381,877 |   | $ | 264,763 |   | $ | 4,260 |   |

 

TheCompany records expenses that are directly attributable to the joint ventureson the statements of operation on the line “Expenses incurred in support ofjoint ventures”.  The expenses includeitems such as employee compensation and benefit expenses, travel expense andconsulting expense.

 

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

 

TheCompany has a demand line of credit of $2,300,000 with National City Bank (the “Bank”)with $0 and $963,000 outstanding as of May 31, 2010 and 2009,respectively.  Advances made under thedemand line of credit are made at the sole discretion of the Bank and are dueand payable on demand.  Outstandingamounts under the demand line of credit bear interest at an annual rate basedon LIBOR plus 2.25%.  As of May 31,2010, the interest rate was 3.33% and the weighted average rate was 3.31% forthe nine months ended May 31, 2010. As of May 31, 2009, the interest rate was 2.57% and the weightedaverage rate was 3.26% for the nine months ended May 31, 2009.  Interest is payable in arrears on the 15thday of each month and on demand.

 

Inconnection with the purchase of its corporate headquarters, in September 2006,the Company obtained a term loan with a principal amount of $1,275,000 thatmatures on May 1, 2011, bears interest at a fixed rate of 8.01% and ispayable in 59 monthly payments equal to approximately $10,776 (inclusive ofprincipal and interest).  All of theremaining unpaid principal and accrued interest is due and payable on thematurity date, unless the Bank demandspayment earlier due to a covenant breach by the Company as discussed in moredetail below.  The term loan issecured by a first lien on the Company’s Circle Pines facility pursuant to aMortgage dated as of May 3, 2006 between Northern Technologies HoldingCompany LLC and the Bank and is guaranteed by the Company.

 

Underthe note governing the term loan (the “Note”), the Company is subject to aminimum debt service coverage ratio of 1.0:1.0. At August 31, 2009, November 30, 2009, February 28, 2010and May 31, 2010, the Company 

 

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failedto meet this financial covenant. Although the Bank subsequently waived the covenant violation as of August 31,2009, the Company has not sought and has not obtained a waiver of anysubsequent covenant violations from the Bank. As a result, an event of default occurred under the Note and the Bankhas the right in its discretion, by giving written notice to the Company, todeclare the full amount outstanding under the Note immediately due and payablein full. The Company has no intentionto obtain a waiver for the event of default or desire to renegotiate orrefinance the term loan.  The Company hasnot received any notice from the Bank regarding the Bank’s intent to call the loan.  In the event the Bank declares the Noteimmediately due and payable, the Company intends to pay off the Note in fullwith the Company’s existing cash and cash equivalents. The Company hasclassified all amounts outstanding under the Note as a current liability on itsconsolidated balance sheets as of May 31, 2010 and August 31, 2009.

 

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

 

Duringthe nine months ended May 31, 2010, the Company did not purchase or retireany shares of its common stock.  Thefollowing stock options to purchase shares of common stock were exercisedduring the nine months ended May 31, 2010:

 
| **Options Exercised** | ** ** | **Exercise Price** | ** ** |
|-----------------------|------------|--------------------|------------|
| 1,500                 |       | $                  | 6.15       |   |
| 8,000                 |       | $                  | 5.38       |   |
| 2,000                 |       | $                  | 5.75       |   |

 

TheCompany granted stock options under the Northern Technologies InternationalCorporation 2007 Stock Incentive Plan to purchase an aggregate of 128,333shares of its common stock to various employees and directors during the ninemonths ended May 31, 2010.  Theweighted average per share exercise price of the stock options is $7.92, whichis equal to the fair market value of the Company’s common stock on the date ofgrant.

 

TheCompany sold an aggregate of 5,225 shares of its common stock to variousemployees at a weighted average purchase price of $7.07 per share under theNorthern Technologies International Corporation Employee Stock Purchase Plan,resulting in gross proceeds to the Company of $36,925, during the nine monthsended May 31, 2010.

 

InSeptember 2009, the Company completed a $3,552,000 registered directoffering in which it sold an aggregate of 480,000 shares of its common stock toinstitutional investors at a purchase price of $7.40 per share, resulting innet proceeds of $3,195,613, after deducting placement agent fees and expensesand the Company’s offering expenses.

 

Duringthe nine months ended May 31, 2009, the Company did not purchase or retireany shares of its common stock and no stock options to purchase shares of theCompany’s common stock were exercised or granted.  The Company granted stock bonuses under theNorthern Technologies International Corporation 2007 Stock Incentive Plan foran aggregate of 21,513 shares of its common stock to various employees duringthe nine months ended May 31, 2009. The fair value of the shares of the Company’s common stock as of thedate of grant of the stock bonuses was $226,961, based on the closing saleprice of a share of the Company’s common stock on that date.  The Company sold an aggregate of 3,626 sharesof its common stock to various employees at a weighted average purchase priceof $6.47 per share under the Northern Technologies International CorporationEmployee Stock Purchase Plan, resulting in gross proceeds to the Company of$23,465, during the nine months ended May 31, 2009.

 

**8.****            ****TOTALCOMPREHENSIVE INCOME (LOSS)**

 

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

 

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| ** **                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                        | ** ** | **May 31, 2010**  | ** ** | **May 31, 2009** | ** ** | **May 31, 2010** | ** ** | **May 31, 2009** | ** ** |
| Net income (loss)                                                                 |       | $                      | 951,968    |                  | $          | (638,679 | ) | $ | 1,734,314 |   | $ | (2,139,484 | ) |
| Other comprehensive (loss) income – foreign  currency translation adjustment |       | (1,379,530             | )          | 1,202,403             |       | (1,483,466 | ) | (584,657 | ) |
| Total comprehensive (loss) income                                                 |       | $                      | (427,562   | )                     | $          | 563,724 |   | $ | 250,848 |   | $ | (2,724,141 | ) |

 

**9.****            ****NETINCOME (LOSS) PER COMMON SHARE**

 

Basicnet income (loss) per common share is computed by dividing net income (loss) bythe weighted average number of common shares outstanding.  Diluted net income (loss) per share assumesthe exercise of stock options using the treasury stock method, if dilutive.

 

Optionsto purchase shares of common stock of 39,000 were excluded from the computationof common share equivalents for both the three and nine months ended May 31,2010, as stock option exercise prices were greater than market price of a shareof common stock. All outstanding options to purchase shares of common stockwere excluded from the computation of common share equivalents for the threeand nine months ended May 31, 2009, as the Company reported losses forthose periods.

 

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

 

InJanuary 2007, the Company’s stockholders approved the NorthernTechnologies International Corporation 2007 Stock Incentive Plan (the “2007Plan”) and the Northern Technologies International Corporation Employee StockPurchase Plan (the “ESPP”).  TheCompensation Committee of the Board of Directors administers both of the plans.

 

The2007 Plan replaced the Northern Technologies International Corporation 2000Stock Incentive Plan, which was terminated with respect to future grants, butcontinues to govern grants outstanding under such plan.  The 2007 Plan provides for the grant ofincentive stock options, non-statutory stock options, stock appreciationrights, restricted stock, stock unit awards, performance awards and stockbonuses to eligible recipients to enable the Company and its subsidiaries toattract and retain qualified individuals through opportunities for equityparticipation in the Company, and to reward those individuals who contribute tothe achievement of the Company’s economic objectives.  Up to a total of 400,000 shares of theCompany’s common stock has been reserved for issuance under the 2007 Plan,subject to adjustment as provided in the 2007 Plan.  Options granted under the 2007 Plan generallyhave a term of five years and become exercisable over a three- or four-yearperiod beginning on the one-year anniversary of the date of 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.

 

Themaximum number of shares of common stock of the Company available for issuanceunder the ESPP is 100,000 shares, subject to adjustment as provided in theESPP.  The ESPP provides for six-monthoffering periods beginning on September 1 and March 1 of eachyear.  The purchase price of the sharesis 90% of the lower of the fair market value of common stock at the beginningor end of the offering period.  Thisdiscount may not exceed the maximum discount rate permitted for plans of thistype under Section 423 of the Internal Revenue Code of 1986, asamended.  The ESPP is compensatory forfinancial reporting purposes.

 

TheCompany granted options to purchase 124,333 and 30,000 shares of its commonstock during the nine months ended May 31, 2010 and 2009,respectively.  The fair value of optiongrants is determined at date of grant, using the Black-Scholes option pricingmodel with the assumptions listed below.  Based on these valuations, theCompany recognized compensation expense of $141,315 and $75,000 during the ninemonths ended May 31, 2010 and 2009, respectively, related to the optionsthat vested during such time period.  Thestock-based expense recorded reduced after-tax net income per share by $0.03and $0.02 for the nine months ended May 31, 2010 and 2009,respectively.  

 

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Asof May 31, 2010, the total compensation cost for non-vested options notyet recognized in the Company’s statements of operations was $309,519 net ofestimated forfeitures.  Additionalstock-based compensation expense of $47,105 is expected through the remainderof fiscal year 2010, and expense of $150,820 and $111,594 is expected to berecognized during fiscal 2011 and 2012, respectively.  Future option grants will impact the compensationexpense recognized.

 

TheCompany currently estimates a ten percent forfeiture rate for stock options,but will continue to review this estimate in future periods.

 

Thefair value of each option grant is estimated on the grant date using the Black-Scholesoption-pricing model with the following assumptions and results for the grants:

 
| ** **                      | ** ** | **May 31, 2010** | ** ** | **May 31, 2009** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Dividend yield                  |       | 0.00                  | %          | 2.00                  | %          |
| Expected volatility             |       | 48.3                  | %          | 46.7                  | %          |
| Expected life of option         |       | 5 years               |       | 5 years               |       |
| Average risk-free interest rate |       | 2.34                  |       | 2.88                  | %          |

 

Theweighted average fair value of options granted during the nine months ended May 31,2010 and 2009 was $2.99 and $4.78, respectively.

 

**11.****         ****GEOGRAPHIC AND SEGMENTINFORMATION**

 

Netsales by geographic location as a percentage of total consolidated net salesfor the three and nine months ended May 31, 2010 and May 31, 2009were as follows:

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **May 31, 2010**  | ** ** | **May 31, 2009** | ** ** | **May 31, 2010** | ** ** | **May 31, 2009** | ** ** |
| Inside the U.S.A. to unaffiliated customers                                   |       | 71.6                   | %          | 87.9                  | %          | 73.4 | % | 83.2 | % |
| Outside the U.S.A. to:                                                        |       |                   |       |                  |       |   |   |   |   |
| Joint ventures in which the Company is a  shareholder directly and indirectly |       | 20.6                   |       | 7.1                   |       | 18.8 |   | 12.4 |   |
| Unaffiliated customers                                                        |       | 7.8                    |       | 5.0                   |       | 6.9 |   | 4.4 |   |
|                                                                          |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |

 

Netsales by geographic location are based on the location of the customer.

 

Feesfor services provided to joint ventures by geographic location for the threeand nine months ended May 31, 2010 and May 31, 2009 were as follows:

 
| ** **     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------|------------|------------------------|------------|-----------------------|------------|
| ** **     | ** ** | **May 31, 2010**  | ** ** | **May 31, 2009** | ** ** | **May 31, 2010** | ** ** | **May 31, 2009** | ** ** |
| Germany        |       | $                      | 240,625    |                  | $          | 348,000 |   | $ | 761,723 |   | $ | 913,500 |   |
| Japan          |       | 219,783                |       | 129,725               |       | 662,195 |   | 516,944 |   |
| India          |       | 141,137                |       | 12,474                |       | 441,945 |   | 110,207 |   |
| France         |       | 126,702                |       | 83,934                |       | 363,095 |   | 262,789 |   |
| Finland        |       | 97,747                 |       | 109,702               |       | 299,905 |   | 373,213 |   |
| Sweden         |       | 102,437                |       | 8,306                 |       | 288,510 |   | 168,357 |   |
| United Kingdom |       | 72,736                 |       | 45,000                |       | 211,092 |   | 142,132 |   |
| Other          |       | 139,129                |       | 84,670                |       | 413,098 |   | 273,237 |   |
|           |       | $                      | 1,140,295  |                  | $          | 821,810 |   | $ | 3,441,563 |   | $ | 2,760,379 |   |

 

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Feesfor services provided to joint ventures by geographic location are based on thelocation of the joint venture.

 

Thefollowing table sets forth the Company’s net sales for the three and ninemonths ended May 31, 2010 and 2009 by segment:

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **May 31, 2010**  | ** ** | **May 31, 2009** | ** ** | **May 31, 2010** | ** ** | **May 31, 2009** | ** ** |
| ZERUST® net sales    |       | $                      | 3,072,038  |                  | $          | 1,646,715 |   | $ | 8,485,046 |   | $ | 6,159,096 |   |
| Natur-TecTM net sales |       | 165,160                |       | 14,029                |       | 340,032 |   | 499,037 |   |
| React-NTI net sales       |       | —                 |       | 12,890                |       | — |   | 20,615 |   |
|                      |       | $                      | 3,237,198  |                  | $          | 1,673,634 |   | $ | 8,825,078 |   | $ | 6,678,748 |   |

 

Thefollowing table sets forth the Company’s cost of goods sold for the three andnine months ended May 31, 2010 and 2009 by segment:

 
| ** **                   | ** ** | **Three  Months Ended** | ** ** | **Nine  Months Ended**    | ** ** |
|------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                   | ** ** | **May 31,  2010**  | ** ** | **% of  Product  Sales*** | ** ** | **May 31,  2009** | ** ** | **% of  Product  Sales*** | ** ** | **May 31,  2010** | ** ** | **% of  Product  Sales*** | ** ** | **May 31,  2009** | ** ** | **% of  Product  Sales*** | ** ** |
| Direct  cost of goods sold   | ** ** | ** **              |       |                      | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |   |
| ZERUST®                 |       | $                       | 1,682,795  |                      | 54.8       | % | $ | 828,933 |   | 50.3 | % | $ | 4,585,073 |   | 54.0 | % | $ | 3,341,166 |   | 54.2 | % |
| Natur-TecTM              |       | 111,541                 |       | 67.5                      | %          | 7,944 |   | 56.5 | % | 230,488 |   | 67.8 | % | 425,178 |   | 85.2 | % |
| React-NTI                    |       | —                  |       | —                    |       | 6,490 |   | 50.3 | % | — |   | — |   | 10,610 |   | 51.5 | % |
| Indirect  cost of goods sold |       | 378,566                 |       | —                    |       | 152,305 |   | — |   | 955,484 |   | — |   | 667,121 |   | — |   |
|                         |       | $                       | 2,172,902  | ** **                | ** ** |   | $ | 995,672 | ** ** | ** ** |   | $ | 5,771,045 | ** ** | ** ** |   | $ | 4,444,075 | ** ** | ** ** | ** ** |

 

----

*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.

 

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

 

Salesto the Company’s joint ventures are included in the foregoing geographic andsegment information, however, sales by the Company’s joint ventures to otherparties are not included.  The foregoinggeographic and segment information represents only sales and cost of goods soldrecognized directly by the Company.

 

**12.****         ****RESEARCH AND DEVELOPMENT**

 

Duringthe year ended August 31, 2009, the Company was awarded multiple researchand development contracts.  The Company accrues proceeds received underthe grants and offsets research and development expenses incurred in equalinstallments over the timelines associated with completion of the grantsspecific objectives and milestones. At May 31, 2010 and August 31,2009, the Company deferred amounts received of $186,365 and $145,562,respectively, in other accrued liabilities, as the Company had not yetperformed under the obligations of the contracts.

 

TheCompany expenses all costs related to product research and development asincurred.  The Company incurred$2,526,478 and $2,222,576 of expense during the nine months ended May 31,2010 and 2009, respectively, in connection with its research and developmentactivities.  These costs related toproduct research and development are the net amount after being reduced byreimbursements related to the awarding of the multiple research and developmentcontracts of $400,094 and $0 for the nine months ended May 31, 2010 and2009, respectively.  The 

 

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netfees are accounted for in the “Research and Development Expenses” section ofthe consolidated statements of operations.

 

**13.****         ****COMMITMENTS ANDCONTINGENCIES**

 

OnNovember 20, 2009, the Company’s Board of Directors, upon recommendationof the Compensation Committee, approved the material terms of an annual bonusplan for the Company’s executive officers and certain employees for the fiscalyear ending August 31, 2010, the purpose of which is to align theinterests of the Company, its executive officers and stockholders by providingan incentive for the achievement of key corporate and individual performancemeasures that are critical to the success of the Company and linking asignificant portion of each executive officer’s annual compensation to theachievement of such measures.  Thefollowing is a brief summary of the material terms approved by the Board:

 

·      The totalamount available under the bonus plan will be up to 25% of the Company’searnings before interest, taxes and other income (EBITOI);

 

·      The totalamount available under the bonus plan will be $0 if EBITOI, as adjusted to takeinto account amounts to be paid under the bonus plan, fall below 70% of targetEBITOI; and

 

·      The payment ofbonuses under the plan will be purely discretionary and will be paid toexecutive officer participants in both cash and stock, the exact amount andpercentages of which will be determined by the Company’s Board of Directors,upon recommendation of the Compensation Committee.

 

Therewas $571,044 for management bonuses for fiscal 2010 accrued at May 31,2010.  There was no management bonusesfor fiscal 2009 accrued as of May 31, 2009.

 

Infiscal 1999, a subsidiary of the Company, NTI Facilities, Inc., acquired aone-third ownership of Omni-Northern Ltd., which owns and operates a rentalproperty 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.  The Company hasguaranteed up to $329,082 of Omni-Northern Ltd.’s $1,903,571 mortgageobligation with National City Bank, Cleveland, Ohio.  The building is fully leased at present.

 

InApril 2007, REACT-NTI, LLC (“React LLC”), a company that is 75% owned bythe Company, was served with a summons and complaint that was filed by ShamrockTechnologies, Inc. (“Shamrock”) in state court in New York.  This case has been 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 LLCformally responded to the complaint after removal by moving to dismiss or staybecause of Shamrock’s failure to comply with alternative dispute resolution procedurescontained in the license agreement.  Bycourt order, the matter was stayed so that the parties could attemptmediation.  The parties mediated for oneday and were unsuccessful in resolving the matter. The parties proceeded withdiscovery, exchanging answers to interrogatories and documents, and the partiesalso obtained documents by subpoena from third parties.  With more complete information, the partiesdecided to dismiss their respective claims without prejudice and return to 

 

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mediation.  A mediation session was held on December 4,2008, and the parties continued to negotiate through the mediator thereafterwithout any final agreement by either party. Because the mediation and negotiation process did not result in a finalsettlement, there can be no permanent assurance at the present time that thematter will not result in a material adverse effect on the Company’s business,financial condition or results of operations at some point in the future,however, at this point in time the Company has not recorded any loss accrualsrelated to this matter.

 

Fromtime to time, the Company is involved in various legal actions arising in thenormal course of business.  Management isof the opinion that any judgment or settlement resulting from any currentlypending or threatened actions would not have a material adverse effect on theCompany’s financial position or consolidated results of operations.

 

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

 

ThisManagement’s Discussion and Analysis provides material historical andprospective disclosures intended to enable investors and other users to assessNTIC’s financial condition and results of operations.  Statements that are not historical areforward-looking and involve risks and uncertainties discussed under the heading“Part I. Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Forward-Looking Statements.” The following discussion of the resultsof the operations and financial condition of NTIC should be read in conjunctionwith NTIC’s consolidated financial statements and the related notes theretoincluded under the heading “Part I. Item 1.  Financial Statements.”

 

**General Overview**

 

NTICdevelops and markets proprietary environmentally beneficial products andtechnical services in over 55 countries either directly or via a network ofjoint ventures and independent distributors. NTIC’s primary business is corrosion prevention.  From this base, NTIC has expanded into threenew business areas that have started recently to generate revenue (1) corrosionprevention technologies specifically designed for the oil and gas industry,which NTIC sells both directly as well as through joint ventures andindependent agents; (2) a proprietary portfolio of bio-plastic compoundsand finished products marketed under the Natur-Tec® brand, which NTIC sellsdirectly as well as through distributors and independent agents; and (3) technologyand equipment that converts waste plastic into diesel, gasoline and heavyfractions, which is exclusively licensed and sold in North America and Asiathrough NTIC’s joint venture Polymer Energy, LLC.

 

NTIChas been selling its proprietary ZERUST® brand rust and corrosion inhibitingproducts and services to the automotive, electronics, electrical, mechanical,military and retail consumer markets for over 35 years.  NTIC also offers worldwide on-site technicalconsulting for rust and corrosion prevention issues.  In North America, NTIC markets its technicalservices and products principally to industrial users by a direct sales forceas well as a network of independent distributors and agents.  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.

 

NTIChas developed proprietary corrosion inhibiting technologies for use in themitigation of corrosion on capital assets used in the petroleum and processchemical industry and is initially targeting the sale of these new ZERUST®products to the oil and gas industry sector. During fiscal 2009, NTIC announced the signing of a multi-year contractbetween NTIC’s Brazilian joint venture (Zerust Prevencao de Corrosao S.A.) andPetroleo Brasileiro S.A. (Petrobras) to install and service proprietary corrosionprotection technologies on the roofs of an initial set of aboveground oilstorage tanks at the Petrobras REDUC refinery in Rio de Janeiro, Brazil.  Also during fiscal 2009, NTIC signed multiplejoint research and development contracts with Petrobras’s research anddevelopment group at the Leopoldo Américo Miguez de Mello Research &Development Center (CENPES) pursuant to which the parties will undertake a20-month Petrobras funded effort to explore, understand and resolve bottomplate corrosion issues in aboveground storage tanks.  A second 12-month Petrobras sponsored projecthas also started aimed at field trials of certain pipeline protectiontechnologies.  NTIC also is pursuingopportunities to market its ZERUST® corrosion prevention technology to otherpotential customers in the oil and gas industry across several countriesthrough NTIC’s joint venture partners and other strategic partners.  NTIC believes the sale of its ZERUST®products to customers in the oil and gas industry will involve a long salescycle, likely including a one- to two-year trial period with each customer anda slow integration process thereafter.

 

Inaddition to ZERUST® products and services, NTIC develops and markets aportfolio of bio-based and/or biodegradable (compostable) polymer resincompounds and finished products under the Natur-Tec® brand.  These products are intended to reduce NTIC’scustomers’ carbon footprint and provide environmentally sound disposaloptions.  Natur-Tec® bio-based andbiodegradable plastics are manufactured using NTIC’s patented and/orproprietary technologies and are intended to replace conventionalpetroleum-based plastics.  The Natur-Tec®

 

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bioplasticsportfolio includes flexible film, foam, rigid injection molded materials andengineered plastics. Natur-Tec® biodegradable and compostable finished productsinclude shopping and grocery bags, lawn and leaf bags, can liners, pet wastecollection bags, cutlery, packaging foam and coated paper products and areengineered to be fully biodegradable in a composting environment.

 

NTIC’sPolymer Energy LLC joint venture markets and sells a system that uses catalyticpyrolysis to convert waste plastic (primarily polyolefins) into hydrocarbons(primarily a mix of diesels, gasoline and heavy fractions) resulting in aneconomically viable and environmentally responsible alternative to currentmethods of recycling and disposal of waste plastic.  Each unit can process up to ten tons of wasteplastic per day, and the modular design allows for easily scalablecapacity.  The crude output is high-gradeand can be further processed in a refinery or used as an input for co-generationof electricity.

 

NTICparticipates in 27 active joint venture arrangements in North America, SouthAmerica, Europe, Asia and the Middle East.  Each of these joint ventures generally manufactures and markets finishedproducts in the geographic territory to which it is assigned.  While most of NTIC’s joint ventures currentlyexclusively sell rust and corrosion inhibiting packaging and products toindustrial customers, NTIC also has joint ventures that manufacture, market andsell corrosion prevention solutions for the oil and gas industry and PolymerEnergyTM equipment that converts waste plastic into diesel, gasoline and heavyfractions.  The profits of NTIC’s jointventures are shared by the respective joint venture owners in accordance withtheir respective ownership percentages. NTIC typically owns 50% of its joint venture entities.  NTIC does not control the decisions of itsjoint venture entities regarding whether to pay dividends or how much to pay individends in any given year. NTIC funds its joint venture investments with cashgenerated from operations.  NTIC does notconsolidate the results of its joint ventures, other than its former jointventure React-NTIC LLC.  Nonetheless,NTIC considers its German joint venture and ASEAN joint venture holding companyto be individually significant to NTIC’s consolidated assets and income; andtherefore, provides certain additional information regarding these jointventures in the notes to NTIC’s consolidated financial statements and in thissection of this report.

 

**Financial Overview**

 

NTIC’s consolidated netsales increased 93.4% and 32.1% during the three and nine months ended May 31,2010 compared to the three and nine months ended May 31, 2009,respectively.  These increases wereprimarily a result of increased sales of ZERUST® rust and corrosion inhibitingpackaging products and services to customers in North America and sales to NTIC’sjoint ventures.  During the nine monthsended May 31, 2010, 96.1% of NTIC’s consolidated net sales were derivedfrom sales of ZERUST® products and services, which increased 37.8% to$8,485,046 during the nine months ended May 31, 2010 compared to$6,159,096 during the nine months ended May 31, 2009 due to increaseddemand primarily as a result of the economic recovery of the domesticmanufacturing sector and the addition of new customers. NTIC has focused itssales efforts of ZERUST® products and services by strategically targetingcustomers with specific corrosion issues in new market areas, including oil andgas industry and other industrial sectors that offer sizable growthopportunities.  Overall demand forZERUST® products and services depends heavily on the overall health of themarkets in which it sells its products.

 

During the nine months endedMay 31, 2010, $340,033, or 3.9%, of NTIC’s consolidated net sales werederived from sales of Natur-Tec® products compared to 7.5% during the ninemonths ended May 31, 2009.  Netsales of Natur-Tec® products increased 1077.3% and decreased 31.9% during thethree and nine months ended May 31, 2010 compared to the three and ninemonths ended May 31, 2009, respectively. The increase in the three-month comparison was primarily due to theaddition of new Natur-Tec® distributors on the West Coast of the United Statesand the decrease in the nine-month comparison was due to several large stockingorders of Natur-Tec® products that occurred early in 2009 that were not repeatorders.  NTIC is continuing to fortifyand expand its West Coast distribution network in California, while expandingits industrial distribution reach to geographical “green” hotspots such asOregon, Washington, Minnesota and New England. Additionally, NTIC is targeting key national

 

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and regional retailersutilizing independent sales agents. Demand for the Natur-Tec® products depends primarily on the marketacceptance and the extent of NTIC’s distribution network.

 

Costof goods sold as a percentage of net sales decreased to 65.4% for the ninemonths ended May 31, 2010 compared to 66.5% for the nine months ended May 31,2009 primarily as a result of decreased raw material costs for ZERUST® productsand higher sales volumes during the most recent period.

 

NTICrecognized a 24.7% increase in fees for services provided to joint venturesduring the nine months ended May 31, 2010. NTIC’s equity in income of joint ventures increased 346.9% to $2,909,120during the nine months ended May 31, 2010 compared to $650,900 during thenine months ended May 31, 2009. Both of these increases were primarily a result of a 33.6% increase intotal net sales of NTIC’s joint ventures during the nine months ended May 31,2010 compared to the same prior year period. The increase in total net sales of NTIC’s joint ventures was primarily aresult of the economic recovery of the international manufacturing sector thatthe NTIC joint venture network serves.

 

NTIC’stotal operating expenses increased 38.0% during the three months ended May 31,2010 compared to the three months ended May 31, 2009 primarily as a resultof increased sales efforts in both the ZERUST® and the Natur-Tec® markets andincreased general and administrative costs due to increased employee count topre-recession levels.

 

NTICexpenses all costs related to product research and development as incurred. NTIC incurred $2,526,478 and $2,222,576 of expense during the nine monthsended May 31, 2010 and 2009, respectively, in connection with its researchand development activities.  These costs related to product research anddevelopment and represent the net amount after being reduced by reimbursementsrelated to the awarding of the multiple research and development contracts of$400,094 and $0 for the nine months ended May 31, 2010 and 2009,respectively.   NTIC anticipates that it will spend between$3,000,000 and $3,500,000 in total during fiscal 2010 on research anddevelopment activities related to its new technologies.  The net fees are accounted for in the “Expensesincurred in support of joint ventures” section of NTIC’s consolidatedstatements of operations.

 

Netincome was $1,734,314, or $0.41 per diluted common share, for the nine monthsended May 31, 2010 compared to a net loss of $(2,139,484), or $(0.57) perdiluted common share, for the nine months ended May 31, 2009.  The net loss for the nine months ended May 31,2009 included a $554,000 loss on impairment relating to NTIC’s React-NTI jointventure.

 

NTIC’sworking capital was $5,536,087 at May 31, 2010, including $1,103,620 incash and cash equivalents.

 

**Results of Operations**

 

NTICdoes not consolidate the results of its joint ventures, other than its formerjoint venture React-NTIC LLC.  Thefollowing table sets forth NTIC’s results of operations for the three monthsended May 31, 2010 and May 31, 2009.

 
| ** **                                   | ** ** | **Three Months  Ended********May 31, 2010** | ** ** | **% of********Net Sales** | ** ** | **Three Months  Ended********May 31, 2009** | ** ** | **% of********Net Sales** | ** ** | **$  Change** | ** ** | **%********Change** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|---------------|------------|---------------------|------------|
| Net sales, excluding joint ventures          |       | $                                                | 2,559,467  |                      | 79.1       | %                                                | $          | 1,555,065                 |       | 92.9          | %          | $                   | 1,004,402  |   | 64.6 | % |
| Net sales, to joint ventures                 |       | 677,731                                          |       | 20.9                      | %          | 118,569                                          |       | 7.1                       | %          | 559,162       |       | 471.6               | %          |
| Cost of goods sold                           |       | 2,172,902                                        |       | 67.1                      | %          | 995,672                                          |       | 59.5                      | %          | 1,177,230     |       | 118.2               | %          |
| Equity in income of joint ventures           |       | 1,511,534                                        |       | —                    |       | (6,838                                           | )          | —                    |       | 1,518,372     |       | 22,205              | %          |
| Fees for services provided to joint ventures |       | 1,140,295                                        |       | —                    |       | 821,810                                          |       | —                    |       | 318,485       |       | 38.8                | %          |
| Selling expenses                             |       | 819,572                                          |       | 25.3                      | %          | 591,559                                          |       | 35.4                      | %          | 228,013       |       | 38.5                | %          |
| General and administrative expenses          |       | 869,183                                          |       | 26.9                      | %          | 599,012                                          |       | 35.8                      | %          | 270,171       |       | 45.1                | %          |
|                                              |            |                                                  |            |                           |            |                                                  |            |                           |            |               |            |                     |            |  |  |  |

 

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| ** **                                     | ** ** | **Three Months  Ended********May 31, 2010** | ** ** | **% of********Net Sales** | ** ** | **Three Months  Ended********May 31, 2009** | ** ** | **% of********Net Sales** | ** ** | **$  Change** | ** ** | **%********Change** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|--------------------------------------------------|------------|---------------------------|------------|---------------|------------|---------------------|------------|
| Expenses incurred in support of joint ventures |       | 208,444                                          |       | 6.5                       | %          | 224,887                                          |       | 13.4                      | %          | (16,443       | )          | (7.3                | )%         |
| Research and development expenses              |       | 960,780                                          |       | 29.7                      | %          | 655,281                                          |       | 39.2                      | %          | 305,499       |       | 46.6                | %          |

 

Thefollowing table sets forth NTIC’s results of operations for the nine monthsended May 31, 2010 and May 31, 2009.

 
| ** **                                     | ** ** | **Nine Months  Ended********May 31, 2010** | ** ** | **% of********Net Sales** | ** ** | **Nine Months  Ended********May 31, 2009** | ** ** | **% of********Net Sales** | ** ** | **$  Change** | ** ** | **%********Change** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|---------------------------|------------|-------------------------------------------------|------------|---------------------------|------------|---------------|------------|---------------------|------------|
| Net sales, excluding joint ventures            |       | $                                               | 7,164,784  |                      | 81.2       | %                                               | $          | 5,855,536                 |       | 87.7          | %          | $                   | 1,309,248  |   | 22.4 | % |
| Net sales, to joint ventures                   |       | 1,660,294                                       |       | 18.8                      | %          | 823,212                                         |       | 12.3                      | %          | 837,082       |       | 101.7               | %          |
| Cost of goods sold                             |       | 5,771,045                                       |       | 65.4                      | %          | 4,444,075                                       |       | 66.5                      | %          | 1,326,970     |       | 29.9                | %          |
| Equity in income of joint ventures             |       | 2,909,120                                       |       | —                    |       | 650,900                                         |       | —                    |       | 2,258,220     |       | 346.9               | %          |
| Fees for services provided to joint ventures   |       | 3,441,563                                       |       | —                    |       | 2,760,379                                       |       | —                    |       | 681,184       |       | 24.7                | %          |
| Selling expenses                               |       | 2,004,094                                       |       | 22.7                      | %          | 1,975,387                                       |       | 29.6                      | %          | 28,707        |       | 1.5                 | %          |
| General and administrative expenses            |       | 2,628,447                                       |       | 29.8                      | %          | 2,184,974                                       |       | 32.7                      | %          | 443,473       |       | 20.3                | %          |
| Expenses incurred in support of joint ventures |       | 682,828                                         |       | 7.7                       | %          | 1,152,654                                       |       | 17.3                      | %          | (469,826      | )          | (40.8               | )%         |
| Research and development expenses              |       | 2,526,478                                       |       | 28.6                      | %          | 2,222,576                                       |       | 33.3                      | %          | 303,902       |       | 13.7                | %          |
| Loss on impairment                             |       | —                                          |       | —                    |       | 554,000                                         |       | 8.3                       | %          | (554,000      | )          | (100.0              | )%         |
|                                                |            |                                                 |            |                           |            |                                                 |            |                           |            |               |            |                     |            |  |  |  |

 

*Net Sales*. NTIC’s consolidated netsales increased 93.4% and 32.1% to $3,237,198 and $8,825,078 during the threeand nine months ended May 31, 2010 compared to the three and nine monthsended May 31, 2009, respectively. NTIC’s consolidated net sales to unaffiliated customers excluding NTIC’sjoint ventures increased 64.6% and 22.4% to $2,559,467 and $7,164,784, duringthe three and nine months ended May 31, 2010 compared to the same prioryear periods. These increases were due to increases in demand primarily as aresult of the economic recovery of the domestic manufacturing sector and theaddition of new customers. Net sales to joint increased 471.6% and 101.7% to$677,731 and $1,660,294 during the three and nine months ended May 31,2010 compared to the three and nine months ended May 31, 2009,respectively.  These increases were dueto increases in demand primarily as a result of the economic recovery of theinternational manufacturing sector.

 

Thefollowing table sets forth additional detail regarding NTIC’s net sales byproduct category for the three months ended May 31, 2010 and May 31,2009:

 
| ** **                     | ** ** | **Three Months  Ended********May 31, 2010** | ** ** | **Three Months  Ended********May 31, 2009** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® net sales         |       | $                                                | 3,072,038  |                                             | $          | 1,646,715     |       | $             | 1,425,324  |   | 86.6 | % |
| Natur-Tec® net sales      |       | 165,160                                          |       | 14,029                                           |       | 151,131       |       | 1,077.3       | %          |
| React-NTI net sales            |       | —                                           |       | 12,890                                           |       | (12,890       | )          | (100.0        | )%         |
| Total North American net sales |       | $                                                | 3,237,198  |                                             | $          | 1,673,634     |       | $             | 1,563,564  |   | 93.4 | % |

 

Thefollowing table sets forth additional detail regarding NTIC’s net sales byproduct category for the nine months ended May 31, 2010 and May 31,2009:

 
| ** **                     | ** ** | **Nine Months  Ended********May 31, 2010** | ** ** | **Nine Months  Ended********May 31, 2009** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® net sales         |       | $                                               | 8,485,046  |                                            | $          | 6,159,096     |       | $             | 2,325,950  |   | 37.8 | % |
| Natur-Tec® net sales      |       | 340,033                                         |       | 499,037                                         |       | (159,004      | )          | (31.9         | )%         |
| React-NTI net sales            |       | —                                          |       | 20,615                                          |       | (20,615       | )          | (100.0        | )%         |
| Total North American net sales |       | $                                               | 8,825,078  |                                            | $          | 6,678,748     |       | $             | 2,146,330  |   | 32.1 | % |

 

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Netsales of ZERUST® products and services increased 86.6% and 37.8% to $3,072,039and $8,485,046 during the three and nine months ended May 31, 2010,respectively, compared to $1,646,715 and $6,159,096 during the three and ninemonths ended May 31, 2009.  Theseincreases were due to increased demand primarily as a result of the economicrecovery of the domestic manufacturing sector and the addition of newcustomers.

 

Netsales of Natur-Tec® products and services increased 1077% to $165,160 duringthe three months ended May 31, 2010, compared to $14,029 during the threemonths ended May 31, 2009. Net sales of Natur-Tec® products and servicesdecreased 31.9% to $340,033 during the nine months ended May 31, 2010compared to $499,037 during the nine months ended May 31, 2009.  The increase in the three-month comparisonwas primarily due to the addition of new distributors on the West Coast.  The decrease in the nine-month comparison wasdue to several large stocking orders of Natur-Tec® products that occurred earlyin 2009 that were not repeat orders.

 

*Cost of Goods Sold*.  Cost of goods sold increased 118.2% and 29.9%for the three and nine months ended May 31, 2010, respectively, comparedto the same respective periods in fiscal 2009 primarily as a result ofincreased net sales as described above. Cost of sales as a percentage of net sales increased to 67.1% for thethree months ended May 31, 2010 compared to 59.5% for the three monthsended May 31, 2009 as a result of the fluctuations in raw material pricesof the ZERUST® products.  Cost of salesas a percentage of net sales decreased slightly to 65.4% for the three monthsended May 31, 2010 compared to 66.5% for the three months ended May 31,2009.

 

*Joint Ventures*.  NTIC receives fees for services provided tojoint ventures based primarily on the net sales of the individual jointventures.  The fees for services providedto joint ventures are determined based on either a flat fee or a percentage ofsales depending on local laws and tax regulations.  With respect to its German joint venture,NTIC recognizes an agreed upon quarterly fee for such services.  With respect to its ASEAN joint ventureholding company, NTIC does not receive a fee for such services, but ratherreceives a bi-annual dividend based on available cash.  NITC recognizes equity income from its jointventures based on the overall profitability of the entity.  Traditionally, a portion of the equity incomerecorded in a given fiscal year is paid to the owners of the entity during thefollowing fiscal year.  The payment of adividend by a entity is determined by a joint vote of the owners and is not atthe sole discretion of NTIC.

 

NTIChad equity in income (loss) of joint ventures of $1,511,534 and $2,909,120during the three and nine months ended May 31, 2010, respectively,compared to equity in (loss) income of joint ventures of $(6,838) and $650,900during the three and nine months ended May 31, 2009, respectively.  The increases in equity in income were due toincreased profitability of NTIC’s joint ventures primarily resulting fromincreased sales and cost control measures put in place during the last fiscalyear, many of which remained in place during the most recent periods. Of thetotal equity in income (loss) of joint ventures, NTIC had equity in income ofjoint ventures of $773,572 and $1,505,024 attributable to its joint venture inGermany and $257,851 and $677,175 attributable to its ASEAN joint ventureholding company during the three and nine months ended May 31, 2010,respectively. NTIC had equity in income of all other joint ventures of $480,111and $726,921 during the three and nine months ended May 31, 2010,respectively.

 

NTICrecognized fees for services provided to joint ventures of $1,140,295 and$3,441,563 during the three and nine months ended May 31, 2010,respectively, compared to $821,810 and $2,760,379 during the three and ninemonths ended May 31, 2009, respectively, representing an increase of 38.8%and 24.7%, respectively.  The increase infees for services provided to joint ventures was due primarily to the increasein net sales of NTIC’s joint ventures to $22,440,448 and $62,214,519 in thethree and nine months ended May 31, 2010, respectively, compared to $14,151,960and $46,628,644 in the three and nine months ended May 31, 2009,respectively, representing an increase of 58.6% and 33.6%, respectively. Salesof NTIC’s joint ventures are not included in NTIC’s product sales

 

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andare not combined with NTIC’s sales in NTIC’s consolidated financial statementsor in any description of NTIC’s products sales.

 

*Selling Expenses*.  NTIC’s selling expenses increased 38.5% forthe three months ended May 31, 2010 compared to the same period in fiscal2009 due to increases in (i) salary and benefits of $98,000; (ii) labtesting related expenses of $38,000 and (iii) travel expenses of $28,000,partially offset by a decrease in consulting expenses of $19,000.  NTIC’s selling expenses increased 1.5% forthe nine months ended May 31, 2010 compared the same period in fiscal2009.  Selling expenses as a percentageof net sales decreased to 25.3% and 22.7% during the three and nine monthsended May 31, 2010, respectively, from 34.5% and 28.8% during the samerespective periods in fiscal 2009, due to the increase in net sales.

 

*General and Administrative Expenses*.  NTIC’s general and administrative expensesincreased 45.1% for the three months ended May 31, 2010 compared to thesame period in fiscal 2009 due to increases in (i) auditing and taxexpense of $45,000; (ii) stock option expense of $15,000; and (iii) salariesand related benefits of $140,000.  NTIC’sgeneral and administrative expenses increased 20.3% for the nine months ended May 31,2010 compared to the same period in fiscal 2009 due to increases in (i) auditingand tax expense of $55,000; (ii) stock option expense of $40,000; and (iii) salariesand related benefits of $250,000.  As apercentage of net sales, general and administrative expenses decreased to 26.9%and 29.8% for the three and nine months ended May 31, 2010, respectively,from 35.8% and 32.7% for the same respective periods in fiscal 2009, primarilyas a result of fixed general and administrative expenses spread over increasednet sales and NTIC’s cost reduction efforts during the third quarter of fiscal2009, many of which had remained in place during the third quarter of fiscal2010.

 

*ExpensesIncurred in Support of Joint Ventures. *The support andservices that NTIC provides to its joint ventures include 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 expenses insupport of its joint ventures of $208,444 and $682,828 during the three andnine months ended May 31, 2010, respectively, compared to $224,887 and$1,152,654 during the three and nine months ended May 31, 2009,respectively, representing a decrease of 7.3% and 40.8%, respectively.  The decrease for the three-month comparisonwas due to a decrease in lab supplies and testing of $24,000.  The decrease for the nine-month comparisonwas due to decreases in (i) consulting expenses of $197,000; (ii) legalexpenses of $120,000; and (iii) lab supplies and testing of $87,000.

 

NTICsponsors a worldwide joint venture conference approximately every three to fouryears in which all of NTIC’s joint ventures are invited to participate.  NTIC defers a portion of its fees forservices provided to joint ventures in each accounting period leading up to thenext conference, reflecting that NTIC has not fully earned the paymentsreceived during that period.  The nextjoint venture conference is scheduled to be held in the spring or fall of 2011.  There was no additional deferred incomerecorded within other accrued liabilities during the three and nine monthsended May 31, 2010 related to this future conference since $288,000 hadbeen accrued over the past three fiscal years, which represents the amount thatNTIC expects to spend every three years to hold the conference.  This amount is based on the historicalexperience of NTIC, current conditions and the intentions of NTIC’smanagement.  NTIC does not anticipatedeferring any additional fees for services provided to joint ventures untilafter the next conference.  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**.**

 

*Research and Development Expense*.  NTIC’s research and development expensesincreased 46.6% for the three months ended May 31, 2010 compared to thesame period in fiscal 2009 due to increases in (i) salary and benefits of$175,000; (ii) lab testing related expenses of $59,000; (iii) consultingexpenses of $58,000; and (iv) travel expenses of $24,000, partially offsetby grants received of $130,000.  NTIC’sresearch and development expenses increased 13.7% for the nine months ended May 31,2010 compared the same period in fiscal 2009 due to increases

 

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in(i) salary and benefits of $405,000; (ii) lab testing relatedexpenses of $159,000; (iii) consulting expenses of $138,000; and (iv) travelexpenses of $54,000, partially offset by grants received of $400,000.

 

*Loss on Impairment*.  NTIC’s incurred a loss on impairment of$554,000 during the nine ended May 31, 2009 relating to React-NTI.

 

*Interest Income*.  NTIC’s interest income decreased to $864 and$5,607 during the three and nine months ended May 31, 2010, respectively,compared to $6,509 and $7,828 during the same respective periods in fiscal 2009primarily due to the decreased cash balances earning interest during the mostrecent periods.

 

*Interest Expense*.  NTIC’s interest expense decreased to $23,867and $73,637 during the three and nine months ended May 31, 2010,respectively, compared to $27,933 and $102,271 during the same respectiveperiods in fiscal 2009 primarily due to lower average outstanding debt levelsduring the most recent periods.

 

*Income (Loss) Before Income Tax Expense*.  Income before income tax expense was $841,968and $1,515,314 for the three and nine months ended May 31, 2010, respectively,compared loss before income tax expense of $(594,679) and $(2,516,484) for thesame respective periods in fiscal 2009.

 

*Income Tax Expense (Benefit)*.  Income tax benefit was $(110,000) and$(219,000) during the three and nine months ended May 31, 2010,respectively, compared to income tax expense of $44,000 and income tax benefitof $(377,000) in the same respective periods in fiscal 2009.  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 and nine months ended May 31, 2010 and 2009 was lowerthan the statutory rate primarily due to NTIC’s equity in income of jointventures being recognized based on after-tax earnings of these entities.  To the extent undistributed earnings of NTIC’sjoint ventures are distributed to NTIC, it is not expected to result in anymaterial additional income tax liability after the application of foreign taxcredits. NTIC determined based on all available evidence, including historicaldata and projections of future results, that it is more likely than not thatall of its deferred tax assets, except for its foreign tax credit carryforwardand Minnesota state research and development credit carryforwards, will befully realized and that NTIC’s deferred tax asset related to foreign tax creditcarryforwards will not be realized due to insufficient federal taxable incomewithin the carryforward period and the fact that for ordering purposes theforeign tax credit carryforwards are not allowed to be used until after anycurrent year foreign tax credits are utilized.

 

**Liquidityand Capital Resources**

 

*Sources of Cash and Working Capital*.  As of May 31, 2010, NTIC’s workingcapital was $5,536,087, including $1,103,620 in cash and cash equivalents,compared to working capital of $2,727,737, including $138,885 in cash and cashequivalents, as of August 31, 2009.

 

InSeptember 2009, NTIC completed a $3,552,000 registered direct offering inwhich NTIC sold an aggregate of 480,000 shares of its common stock toinstitutional investors at a purchase price of $7.40 per share, resulting innet proceeds of $3,195,613, after deducting placement agent fees and expensesand NTIC’s offering expenses.  All of theshares were offered pursuant to an effective shelf registration statement.

 

NTIC has a $2,300,000 demand line of credit withNational City Bank, with no amounts outstanding as of May 31, 2010.  Advances made under the demand line of creditare made at the sole discretion of National City Bank and are due and payableon demand.  Outstanding amounts under thedemand line of credit bear interest at an annual rate based on LIBOR plus2.25%.  As of May 31, 2010, theinterest rate was 3.33%.  Interest ispayable in arrears on the 15th day of each month and on demand.

 

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In September 2006, NTIC purchased the realestate and 40,000 square feet building in which its corporate headquarters islocated pursuant to a like-kind exchange transaction within the meaning of Section 1031of the Internal Revenue Code of 1986, as amended, for a purchase price of$1,475,000.  To finance the transaction,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, unless the bank demands paymentearlier due to a covenant breach by NTIC as discussed in more detailbelow.  The loan is secured by a firstlien on the real estate and building.

 

Underthe note governing the term loan, NTIC is subject to a minimum debt servicecoverage ratio of 1.0:1.0.  At August 31,2009, November 30, 2009, February 28, 2010 and May 31, 2010,NTIC failed to meet this financial covenant. Although the bank subsequently waived the covenant violation as of August 31,2009, NTIC has not sought or obtained a waiver of any subsequent covenantviolations from the bank.  As a result,an event of default occurred under the note and the bank has the right in itsdiscretion, by giving written notice to NTIC, to declare the full amountoutstanding under the note immediately due and payable in full. NTIC has no intention to obtain a waiver for theevent of default or desire to renegotiate or refinance the term loan.  NTIC has not received any notice from thebank regarding the bank’s intent tocall the loan.  In the event the bankdeclares the note immediately due and payable, NTIC intends to pay off the notein full with existing cash and cash equivalents. NTIC has classified allamounts outstanding under the note as a current liability on its consolidatedbalance sheets as of May 31, 2010 and August 31, 2009.

 

NTIC believes that a combination of its existingcash and cash equivalents, forecasted cash flows from future operations,anticipated distributions of earnings, anticipated fees to NTIC for servicesprovided to its joint ventures, and funds available through existing oranticipated financing arrangements, will be adequate to fund its existingoperations, investments in new or existing joint ventures, capitalexpenditures, debt repayments and any stock repurchases for at least the next12 months.  During fiscal 2010, NTICexpects to continue to invest in research and development and in marketingefforts and resources into its new businesses, product lines and markets,including in particular the application of its corrosion prevention technologyinto the oil and gas industry.  In orderto take advantage of such new product and market opportunities to expand itsbusiness and increase its revenues, NTIC may decide to finance suchopportunities by borrowing under its demand 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.

 

NTIC traditionally has used the cash generated fromits North American operations, distributions of earnings and fees for servicesprovided to its joint ventures to fund NTIC’s new technology investments andcapital contributions to new and existing joint ventures.  NTIC’s joint ventures traditionally haveoperated with little or no debt and have been self-financed with minimalinitial capital investment and minimal additional capital investment from theirrespective owners.  Therefore, NTICbelieves it is not likely that there exists any exposure to debt by NTIC’sjoint ventures that could materially impact their respective operations and/orliquidity.

 

*Uses of Cash and Cash Flows*.****Netcash used in operating activities for the nine months ended May 31, 2010was $1,609,993, which resulted principally from NTIC’s equity in loss fromjoint ventures and decreases in inventories and trade receivables, partiallyoffset by NTIC’s net income, expensing of stock options vested, depreciationand amortization expense, and increases in fees for services provided to jointventures and accrued liabilities.  Netcash used in operating activities for the nine months ended May 31, 2009was $1,561,466, which resulted principally from NTIC’s net loss, equity in lossof joint ventures, increases in joint venture trade receivables, income taxreceivables, prepaid expenses and decreases in accounts payable and accruedliabilities, partially offset by decreases in trade receivables excluding jointventures and inventories, the loss on the impairment of assets and depreciationexpense.

 

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NTIC’scash flows from operations are impacted by significant changes in certaincomponents of NTIC’s working capital, including inventory turnover and changesin receivables.  NTIC considers internaland external factors when assessing the use of its available working capital,specifically when determining inventory levels and credit terms of customers.  Key internal factors include existinginventory levels, stock reorder points, customer forecasts and customerrequested payment terms, and key external factors include the availability ofprimary raw materials and sub-contractor production lead times.  NTIC’s typical contractual terms for tradereceivables excluding joint ventures is 30 days and for trade receivables fromits joint ventures is 90 days.  Beforeextending unsecured credit to customers, excluding NTIC’s joint ventures, NTICreviews customers’ credit histories and will establish an allowance for uncollectibleaccounts based upon factors surrounding the credit risk of specific customersand other information.  Accountsreceivable over 30 days are considered past due for most customers.  NTIC does not accrue interest on past dueaccounts receivable.  If accountsreceivable in excess of the provided allowance are determined uncollectible,they are charged to selling expense in the period that determination ismade.  Accounts receivable are deemeduncollectible based on NTIC exhausting reasonable efforts to collect. NTIC’stypical contractual terms for receivables for fees for services provided tojoint ventures is 90 days.  NTIC recordsreceivables for fees for services provided to joint ventures on an accrualbasis, unless circumstances exist that make the collection of the balanceuncertain in which case the fee income will be recorded on a cash basis untilthere is consistency in payments.  Thisdetermination is handled on a case by case basis.

 

NTICexperienced an increase in receivables and inventory as of May 31, 2010compared to August 31, 2009 due to the increase in net sales during themost recent period and requests from customers to stock more products toshorten lead times and meet customer demand. Trade receivables excluding joint ventures as of May 31, 2010increased $358,134 compared to August 31, 2009, primarily related to theincrease in NTIC’s net sales during the 90 days then ended as compared to theprior year 90 day period.  Outstandingtrade receivables excluding joint ventures balances as of May 31, 2010decreased 24 days to an average of 62 days from balances outstanding from thesecustomers as of August 31, 2009. Outstanding trade receivables from joint ventures as of May 31,2010 increased $687,742 compared to August 31, 2009, primarily due to thecorresponding increase in net sales, which also resulted in an increase ofoutstanding balances from trade receivables from joint ventures as of May 31,2010 of 41 days to an average of 183 days from balances outstanding from thesecustomers as of August 31, 2009. The significant average days outstanding of trade receivables from jointventures as of May 31, 2010 was primarily due to the current receivablebalance at NTIC’s joint venture in India. NTIC has made separate arrangements for payments on product that NTIC’sjoint venture in India has purchased from NTIC until the product is sold.  Outstanding fees for services provided tojoint ventures as of May 31, 2010 decreased $448,663 as compared to August 31,2009, primarily resulting from collections of past due fees.  This payment, in conjunction with higher feesfor the nine months ended May 31, 2010 compared to the nine months ended May 31,2009 resulted in a decrease of 156 days of fees receivable outstanding as of May 31,2010 to an average of 106 days as compared to August 31, 2009.

 

Netcash provided by investing activities for the nine months ended May 31,2010 was $25,059 which was comprised of dividends received from joint ventures,partially offset by investments in joint ventures, patents and additions toproperty and equipment.  Net cashprovided by investing activities for the nine months ended May 31, 2009was $1,418,472, which was comprised of dividends received from joint ventures,decrease in other assets, partially offset by additions to property andequipment and investments in patents.

 

Netcash provided by financing activities for the nine months ended May 31,2010 was $2,549,670, which resulted primarily from the issuance of common stockand, to a lesser extent, proceeds from NTIC’s employee stock purchase plan andoption exercises, partially offset by repayments to the demand line of creditand principal payments on the bank loan for NTIC’s corporate headquartersbuildings.  Net cash provided byfinancing activities for the nine months ended May 31, 2009 was $24,147,which resulted primarily from bank overdrafts and principal payments on thebank loan for NTIC’s corporate headquarters building, partially offset byborrowings made under the demand line of credit.

 

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*CapitalExpenditures and Commitments*.  NTIC had no material lease commitments as of May 31,2010, except a lease agreement entered into by NTI Facilities, Inc., asubsidiary of NTIC, for approximately 16,994 square feet of office,manufacturing, laboratory and warehouse space in Beachwood, Ohio, requiringmonthly payments of $17,500, which are adjusted annually according to theannual consumer price index, through November 2014.

 

NTIChas no postretirement benefit plan and does not anticipate establishing anypostretirement benefit program.

 

**Off-BalanceSheet Arrangements**

 

NTICdoes not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating off-balance sheet financial arrangements.  As such, NTIC is not materially exposed toany financing, liquidity, market or credit risk that could arise if NTIC hadengaged in such arrangements.

 

Infiscal 1999, a subsidiary of NTIC, NTI Facilities, Inc., acquired aone-third ownership of Omni-Northern Ltd., which owns and operates a rentalproperty 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.

 

**Inflationand Seasonality**

 

Inflationin the U.S. and abroad historically has had little effect on NTIC.  NTIC’s business has not historically beenseasonal.

 

**MarketRisk**

 

NTICis exposed to some market risk stemming from changes in foreign currencyexchange rates, commodity prices and interest rates.

 

Becausethe functional currency of NTIC’s foreign operations and investments in itsforeign joint ventures is the applicable local currency, NTIC is exposed toforeign currency exchange rate risk arising from transactions in the normalcourse of business.  NTIC’s principalexchange rate exposure is with the Euro, the Japanese yen, Indian Rupee,Chinese yuan, Korean won and the English pound against the U.S. dollar.  NTIC’s fees for services provided to jointventures and dividend distributions from these foreign entities are paid inforeign currencies and thus fluctuations in foreign currency exchange ratescould result in declines in NTIC’s reported net income.  Since NTIC’s investments in its jointventures are accounted for using the equity method, any changes in foreigncurrency exchange rates would be reflected as a foreign currency translationadjustment and would not change NTIC’s equity in income of joint venturesreflected in its consolidated statements of income.  NTIC does not hedge against its foreigncurrency exchange rate risk.

 

Someraw materials used in NTIC’s products are exposed to commodity pricechanges.  The primary commodity priceexposures are with a variety of plastic resins.

 

NTIC’sdemand line of credit bears interest at a rate based on LIBOR and thus maysubject NTIC to some market risk on interest rates.  As of May 31, 2010, NTIC had noborrowings under its $2,300,000 demand line of credit.

 

**CriticalAccounting Policies**

 

Thepreparation of NTIC’s consolidated financial statements requires management tomake estimates and judgments that affect the reported amount of assets,liabilities, revenues and expenses, and related disclosure of

 

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contingentassets and liabilities.  The Securitiesand Exchange Commission has defined a company’s most critical accountingpolicies as those that are most important to the portrayal of its financialcondition and results of operations, and which require the company to make itsmost difficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain.  Based on this definition, NTIC has identifiedthe following critical accounting policies. Although NTIC believes that its estimates and assumptions arereasonable, they are based upon information available when they are made.Actual results may differ significantly from these estimates under differentassumptions or conditions.

 

***Principles of Consolidation and Investments in Joint Ventures***

 

Theconsolidated financial statements include the accounts of Northern TechnologiesInternational Corporation, its wholly owned subsidiaries, NTI Facilities, Inc.,Northern Technologies Holding Company, LLC and React-NTI LLC.  NTIC’s consolidated financial statements donot include the accounts of any of its joint ventures.

 

NTIC’sinvestments in its joint ventures are accounted for using the equitymethod.  NTIC assesses its joint venturesfor impairment on an annual basis as of August 31 of each year as part ofits fiscal year end analysis.  Inaddition to the annual review for impairment, NTIC reviews the operatingresults of each joint venture on a quarterly basis in comparison to itshistorical operating results.  If theoperating results of a joint venture do not meet financial performanceexpectations, an additional evaluation is performed on the joint venture.  In addition to the annual assessments forimpairment, non-periodic assessments for impairment may occur if cashremittances are less than accrued balances, a joint venture’s managementrequests capital or other events occur suggesting a decline in value. If aninvestment were determined to be impaired, then a reserve would be created toreflect the impairment on the financial results of NTIC.  NTIC’s evaluation of its investments in jointventures requires NTIC to make assumptions about future cash flows of its jointventures.  These assumptions requiresignificant judgment and actual results may differ from assumed or estimatedamounts.  NTIC’s investments in jointventures were $14,960,391 as of May 31, 2010 and $14,329,122 as of August 31,2009, respectively.  NTIC’s investmentsin its joint venture in Germany and its ASEAN joint venture holding companywere $7,072,512 and $2,518,180, respectively, as of May 31, 2010 and$6,838,375 and $3,098,103, respectively, as of August 31, 2009.

 

***Revenue Recognition***

 

NTICrecognizes revenue from the sale of its products when persuasive evidence of anarrangement exists, the product has been delivered, the price is fixed anddeterminable and collection of the resulting receivable is reasonablyassured.  These criteria are met at thetime of shipment when risk of loss and title pass to the customer or distributor.

 

With respect to recording revenue related to fees forservices provided to joint ventures,NTIC recognizes revenue related to support of joint ventures when earned,amounts are determinable and collectability is reasonably assured.  The support and services NTIC provides itsjoint ventures include consulting, travel, technical and marketing services toexisting joint ventures, legal fees incurred in the establishment of new jointventures, registration and promotion and legal defense of worldwide trademarks,and legal fees incurred in connection with the filing of patentapplications.  Although this support andthese services are continuously occurring, contractual obligation of payment byNTIC’s joint ventures related to administrative services does not occur untilthe joint ventures ship product from their facilities, as noted above.  Under NTIC’s agreements with its jointventures, amounts are earned when product is shipped from joint venturefacilities.  NTIC reviews the financialsituation of each of its joint ventures to assist in the likelihood ofcollections on amounts earned.  NTICelects to account for these fees on a cash basis for certain joint ventureswhen uncertainty exists surrounding the collections of such fees.

 

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***Accounts and Notes Receivable***

 

Tradereceivables arise from sales of NTIC’s products and services to NTIC’s jointventures and to unaffiliated customers. Trade receivables from joint ventures arise from sales NTIC makes to itsjoint ventures of products and the essential additives required to make ZERUST®industrial corrosion inhibiting packaging products functional.  Receivables for fees for services provided tojoint ventures are contractually based on a percentage of the sales of thejoint ventures and are intended to compensate NTIC for services NTIC providesto its joint ventures as, including consulting, travel, technical and marketingservices to existing joint ventures, legal fees incurred in the establishmentof new joint ventures, registration and promotion and legal defense ofworldwide trademarks, and legal fees incurred in connection with the filing ofpatent applications.

 

Paymentterms for NTIC’s unaffiliated customers are determined based on credit risk andvary by customer.  NTIC typically offersstandard payments terms to unaffiliated customers of net 30 days.  Payment terms for NTIC’s joint ventures alsoare determined based on credit risk; however, additional consideration also isgiven to the individual joint venture due to the transportation time associatedwith ocean delivery of most products and certain other factors.  NTIC typically offers payment terms to jointventures of net 90 days. NTIC does not accrue interest on past due accountsreceivable.  NTIC reviews the credithistories of its customers, including its joint ventures, before extendingunsecured credit. NTIC values accounts and notes receivable, net of anallowance for doubtful accounts. Each quarter, NTIC prepares an analysis of itsability to collect outstanding receivables that provides a basis for anallowance estimate for doubtful accounts. In doing so, NTIC evaluates the age of its receivables, past collectionhistory, current financial conditions of key customers and its joint ventures,and economic conditions. Based on this evaluation, NTIC establishes a reservefor specific accounts and notes receivable that it believes are uncollectible,as well as an estimate of uncollectible receivables not specificallyknown.  Deterioration in the financialcondition of any key customer or joint venture or a significant slowdown in theeconomy could have a material negative impact on NTIC’s ability to collect aportion or all of the accounts and notes receivable. NTIC believes that ananalysis of historical trends and its current knowledge of potential collectionproblems provide NTIC with sufficient information to establish a reasonableestimate for an allowance for doubtful accounts.  However, since NTIC cannot predict withcertainty future changes in the financial stability of its customers or jointventures, NTIC’s actual future losses from uncollectible accounts may differfrom its estimates.  In the event NTICdetermined that a smaller or larger uncollectible accounts reserve isappropriate, NTIC would record a credit or charge to selling expense in theperiod that it made such a determination. Accounts receivable have been reducedby an allowance for uncollectible accounts of $79,000 at May 31, 2010 and August 31,2009.

 

***Recoverability of Long-Lived Assets***

 

NTICreviews its long-lived assets whenever events or changes in circumstancesindicate the carrying amount of the assets may not be recoverable anddetermines potential impairment by comparing the carrying value of the assetswith expected net cash flows expected to be provided by operating activities ofthe business or related products.  If thesum of the expected undiscounted future net cash flows were less than thecarrying value, NTIC would determine whether an impairment loss should berecognized.  An impairment loss would bemeasured by comparing the amount by which the carrying value exceeds the fairvalue of the asset.

 

***Recoverability of Investments in JointVentures***

 

NTICreviews the overall performance its joint ventures on an annual basis as of August 31as a part of its fiscal year end analysis. The quarterly operating results of each joint venture and a comparisonto historical operating results, accrual for fees for services provided tojoint ventures and impairment are evaluated upon receipt of quarterly operatingresults from the entity.  If operatingresults do not meet financial performance expectations, an additionalevaluation is performed on the joint venture. In addition, non-periodic assessments of impairment may occur betweenannual evaluation periods if cash remittances are less than accrued balances,joint venture management requests capital or other events occur suggesting another than temporary decline in value.

 

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***Foreign Currency Translation (AccumulatedOther Comprehensive Income)***

 

Thefunctional currency of each international joint venture is the applicable localcurrency.  The translation of theapplicable foreign currencies into U.S. dollars is performed for balance sheetaccounts using current exchange rates in effect at the balance sheet date andfor revenue and expense accounts using an average monthly exchange rate.  Translation gains or losses are reported asan element of accumulated other comprehensive income.

 

NTICconducts all foreign transactions based on the U.S. dollar, except for itsinvestments in various foreign joint ventures. Since NTIC’s investments in its joint ventures are accounted for usingthe equity method, any changes in foreign currency exchange rates would bereflected as a foreign currency translation adjustment and would not change theequity in income of joint ventures reflected in NTIC’s consolidated statementof income.

 

***Stock-Based Compensation***

 

NTICrecognizes compensation cost relating to share-based payment transactions,including grants of employee stock options in its financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.   NTIC measuresthe cost of employee services received in exchange for stock options based onthe grant-date fair value of the award, and recognizes the cost over the periodthe employee is required to provide services for the award.

 

**Forward-Looking Statements**

 

Thisquarterly report on Form 10-Q contains not only historical information,but also forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Actof 1934 and are subject to the safe harbor created by those sections. Inaddition, NTIC or others on NTIC’s behalf may make forward-looking statementsfrom time to time in oral presentations, including telephone conferences and/orweb casts open to the public, in press releases or reports, on NTIC’s Internetweb site or otherwise. All statements other than statements of historical factsincluded in this report or expressed by NTIC orally from time to time thataddress activities, events or developments that NTIC expects, believes oranticipates will or may occur in the future are forward-looking statementsincluding, in particular, the statements about NTIC’s plans, objectives,strategies, the outcome of contingencies such as legal proceedings, andprospects regarding, among other things, NTIC’s financial condition, results ofoperations and business. NTIC has identified some of these forward-lookingstatements in this report with words like “believe,” “may,” “could,” “would,” “might,”“forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,”“plan,” “predict,” “anticipate,” “estimate,” “approximate” “outlook” or “continue”or the negative of these words or other words and terms of similarmeaning.  These forward-lookingstatements may be contained in the notes to NTIC’s consolidated financialstatements and elsewhere in this report, including under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-lookingstatements are based on current expectations about future events affecting NTICand are subject to uncertainties and factors that affect all businessesoperating in a global market as well as matters specific to NTIC.  These uncertainties and factors are difficultto predict and many of them are beyond NTIC’s control.  The following are some of the uncertaintiesand factors known to us that could cause NTIC’s actual results to differmaterially from what NTIC has anticipated in its forward-looking statements:

 

·      The effect ofcurrent worldwide economic conditions on NTIC’s business;

 

·      The health ofthe U.S. automotive industry on NTIC’s business;

 

·      NTIC’sdependence on the success of its joint ventures and fees and dividenddistributions that NTIC receives from them;

 

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·      NTIC’srelationships with its joint ventures and its ability to maintain thoserelationships;

 

·      Risksassociated with NTIC’s international operations and exposure to fluctuations inforeign currency exchange rates;

 

·      Fluctuations inthe cost and availability of raw materials, including resins and othercommodities;

 

·      NTIC’sinvestments in its new business and research and development efforts and itsneed for additional capital to support such new business and research anddevelopment efforts;

 

·      The success ofand risks associated with NTIC’s emerging new businesses;

 

·      Acceptance ofNTIC’s existing and new products;

 

·      Increasedcompetition;

 

·      NTIC’s relianceupon and its relationships with its distributors, independent salesrepresentatives and joint ventures;

 

·      NTIC’s relianceupon suppliers;

 

·      The costs andeffects of complying with changes in tax, fiscal, government and otherregulatory policies, including rules relating to environmental, health andsafety matters;

 

·      The costs andeffects of currently outstanding or threatened litigation;

 

·      Unforeseenproduct quality or other problems in the development, production and usage ofnew and existing products;

 

·      Loss of orchanges in executive management or key employees;

 

·      Ability ofmanagement to manage around unplanned events;

 

·      NTIC’s relianceon its intellectual property rights and the absence of infringement of theintellectual property rights of others; and

 

·      NTIC’s relianceupon its management information systems.

 

Formore information regarding these and other uncertainties and factors that couldcause NTIC’s actual results to differ materially from what NTIC has anticipatedin its forward-looking statements or otherwise could materially adverselyaffect its business, financial condition or operating results, see NTIC’s annualreport on Form 10-K for the fiscal year ended August 31, 2009 underthe heading “Part I. Item 1A. Risk Factors.”

 

Allforward-looking statements included in this report are expressly qualified intheir entirety by the foregoing cautionary statements. We wish to cautionreaders not to place undue reliance on any forward-looking statement thatspeaks only as of the date made and to recognize that forward-lookingstatements are predictions of future results, which may not occur asanticipated.  Actual results could differmaterially from those anticipated in the forward-looking statements and fromhistorical results, due to the uncertainties and factors described above, aswell as others that we may consider immaterial or do not anticipate at thistime.  Although we believe that theexpectations reflected in our forward-looking statements are reasonable, we donot know whether our expectations will prove correct.  Our expectations reflected in ourforward-looking statements can be affected by inaccurate

 

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assumptionswe might make or by known or unknown uncertainties and factors, including thosedescribed above.  The risks anduncertainties described above are not exclusive and further informationconcerning us and our business, including factors that potentially couldmaterially affect our financial results or condition, may emerge from time totime.  We assume no obligation to update,amend or clarify forward-looking statements to reflect actual results orchanges in factors or assumptions affecting such forward-lookingstatements.  We advise you, however, toconsult any further disclosures we make on related subjects in our annualreports on Form 10-K, quarterly reports on Form 10-Q and currentreports on Form 8-K we file with or furnish to the Securities and ExchangeCommission.

 

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

 

ThisItem 3 is inapplicable to NTIC as a smaller reporting company and has beenomitted pursuant to Item 305(e) of SEC Regulation S-K.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

NTICmaintains disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) that aredesigned to provide reasonable assurance that information required to bedisclosed by NTIC in the reports it files or submits under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to NTIC’smanagement, including NTIC’s principal executive officer and principalfinancial officer, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.  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 the reportsthat NTIC files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to NTIC’smanagement, including NTIC’s Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

**Changesin Internal Control over Financial Reporting**

 

Therewas no change in NTIC’s internal control over financial reporting that occurredduring the quarter ended May 31, 2010 that has materially affected, or isreasonably likely to materially affect NTIC’s internal control over financialreporting.

 

**PART II****               ****OTHER INFORMATION**

 

**ITEM 1.****         ****LEGALPROCEEDINGS**

 

Adescription of NTIC’s legal proceedings in Note 13 of its consolidatedfinancial statements included within this report is incorporated herein byreference.

 

**ITEM 1A.****      ****RISKFACTORS**

 

ThisItem 1A is inapplicable to NTIC as a smaller reporting company.

 

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

 

**RecentSales of Unregistered Equity Securities**

 

Duringthe three months ended May 31, 2010, NTIC did not issue any shares of itscommon stock or other equity securities of NTIC that were not registered underthe Securities Act of 1933, as amended.

 

**IssuerPurchases of Equity Securities**

 

Duringthe three months ended May 31, 2010, NTIC did not purchase any shares of itscommon stock or other equity securities of NTIC.

 

OnNovember 13, 2003, the Board of Directors of NTIC authorized MatthewWolsfeld, Chief Financial Officer of NTIC, to repurchase on behalf of NTIC, upto 100,000 shares of NTIC’s common stock from time to time in accordance withapplicable rules governing issuer stock repurchases.  Since being authorized, NTIC has notrepurchased and retired any shares of its common stock.

 

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

 

Notapplicable.

 

**ITEM 4.****         ****[REMOVEDAND RESERVED]**

 

**ITEM 5.****         ****OTHERINFORMATION**

 

Notapplicable.

 

**ITEM 6.****               ****EXHIBITS**

 

Thefollowing exhibits are being filed or furnished with this quarterly report on Form 10-Q:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)            |
| 99.1                 |       | Revised  Consolidated Statements of Operations of Northern Technologies International  Corporation and Subsidiaries for the Fiscal Years ended August 31, 2009  and 2008 (filed herewith) |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
|   | **NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION** |
|--------|-----------------------------------------------------|

 
|                           |                                                                                                        |
|--------------------------------|--------------------------------------------------------------------------------------------------------|
| Date:  July 15, 2010 | Matthew  C. Wolsfeld, CPA                                                                              |
|                           | Chief  Financial Officer                                                                               |
|                           | (Principal  Financial and Accounting Officer and Duly Authorized to Sign on Behalf of the  Registrant) |

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATIONQUARTERLY REPORT ON FORM 10-Q**

 

**EXHIBIT INDEX**

** **
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                               | ** ** | **Method of Filing** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| 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   |
| 99.1             |       | Revised  Consolidated Statements of Operations of Northern Technologies International  Corporation and Subsidiaries for the Fiscal Years ended August 31, 2009  and 2008 |       | Filed herewith       |

 

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