Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

** **
| **x**                                                 | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                  |       |                                                                                                    |
| **For the quarterly period ended  May 31, 2009** |
|                                                  |       |                                                                                                    |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                 to                 **.

 

**Commission File Number:  001-11038**

 

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                   | ** ** | **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)

 

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

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand 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  (Do not check if a smaller reporting company) o |   | Smaller reporting company x |

 

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

 

Asof July 14, 2009, 3,754,597 shares of common stock of the registrant wereoutstanding.

 

 

 

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**Table of Contents**

** **

**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**FORM 10-Q**

**May 31, 2009**

 

**TABLE OF CONTENTS**

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

 

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

 

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

 

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

 

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Table ofContents

 

**PART I - FINANCIAL INFORMATION**

 

## **ITEM1.           FINANCIAL STATEMENTS**

 

**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS AS OF MAY 31, 2009 (UNAUDITED) AND AUGUST 31, 2008(AUDITED)**

 
| ** **                                                                                                                                           | ** ** | **May 31,  2009** | ** ** | **August 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                           |       |                   |       |                      |       |
| CURRENT ASSETS:                                                                                                                                      |       |                   |       |                      |       |
| Cash and cash equivalents                                                                                                                            |       | $                      | 141,639    |                      | $          | 260,460 |   |
| Receivables:                                                                                                                                         |       |                   |       |                      |       |
| Trade excluding corporate joint ventures, less  allowance for doubtful accounts of $30,000 at May 31, 2009 and $10,000  at August 31, 2008 |       | 1,172,454              |       | 1,962,222                 |       |
| Trade corporate joint ventures                                                                                                                       |       | 658,559                |       | 530,609                   |       |
| Technical and other services, corporate joint  ventures                                                                                              |       | 1,621,489              |       | 3,065,738                 |       |
| Income taxes                                                                                                                                         |       | 734,505                |       | 28,961                    |       |
| Inventories                                                                                                                                          |       | 2,294,229              |       | 2,725,466                 |       |
| Prepaid expenses                                                                                                                                     |       | 198,179                |       | 179,766                   |       |
| Deferred income taxes                                                                                                                                |       | 183,300                |       | 183,300                   |       |
| Total current assets                                                                                                                                 |       | 7,004,354              |       | 8,936,522                 |       |
|                                                                                                                                                 |       |                   |       |                      |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                          |       | 3,637,944              |       | 3,754,565                 |       |
|                                                                                                                                                 |       |                   |       |                      |       |
| OTHER ASSETS:                                                                                                                                        |       |                   |       |                      |       |
| Investments in corporate joint ventures:                                                                                                             |       |                   |       |                      |       |
| Industrial chemical                                                                                                                                  |       | 14,146,452             |       | 15,676,876                |       |
| Industrial non-chemical                                                                                                                              |       | 312,913                |       | 339,471                   |       |
| Deferred income taxes                                                                                                                                |       | 837,300                |       | 837,300                   |       |
| Notes receivable                                                                                                                                     |       | 140,000                |       | 140,000                   |       |
| Industrial patents and trademarks, net                                                                                                               |       | 903,393                |       | 1,015,321                 |       |
| Goodwill                                                                                                                                             |       | —                 |       | 304,000                   |       |
| Other                                                                                                                                                |       | 13,193                 |       | 325,557                   |       |
|                                                                                                                                                 |       | 16,353,251             |       | 18,638,525                |       |
|                                                                                                                                                 |       | $                      | 26,995,549 |                      | $          | 31,329,612 |   |
|                                                                                                                                                 |       |                   |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                       |       |                   |       |                      |       |
| CURRENT LIABILITIES:                                                                                                                                 |       |                   |       |                      |       |
| Bank overdrafts                                                                                                                                      |       | $                      | 187,473    |                      | $          | 1,039,757 |   |
| Borrowings made on line of credit                                                                                                                    |       | 963,000                |       | 86,000                    |       |
| Current portion of note payable                                                                                                                      |       | 33,562                 |       | 31,556                    |       |
| Accounts payable                                                                                                                                     |       | 289,423                |       | 1,251,522                 |       |
| Accrued liabilities:                                                                                                                                 |       |                   |       |                      |       |
| Payroll and related benefits                                                                                                                         |       | 210,304                |       | 1,102,992                 |       |
| Deferred joint venture royalties                                                                                                                     |       | 288,000                |       | 288,000                   |       |
| Other                                                                                                                                                |       | 117,452                |       | 195,324                   |       |
| Total current liabilities                                                                                                                            |       | 2,089,214              |       | 3,995,151                 |       |
|                                                                                                                                                 |       |                   |       |                      |       |
| NOTE PAYABLE, NET OF CURRENT PORTION                                                                                                                 |       | 1,153,959              |       | 1,179,972                 |       |
| MINORITY INTEREST                                                                                                                                    |       | —                 |       | 3,398                     |       |
|                                                                                                                                                 |       |                   |       |                      |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                           |       |                   |       |                      |       |
| Preferred stock, no par value; authorized 10,000  shares; none issued and outstanding                                                                |       | —                 |       | —                    |       |
| Common stock, $0.02 par value per share; authorized  10,000,000 shares; issued and outstanding 3,754,597 and 3,729,457,  respectively                |       | 75,092                 |       | 74,556                    |       |
| Additional paid-in capital                                                                                                                           |       | 5,596,307              |       | 5,271,417                 |       |
| Retained earnings                                                                                                                                    |       | 16,533,454             |       | 18,672,938                |       |
| Accumulated other comprehensive income                                                                                                               |       | 1,547,523              |       | 2,132,180                 |       |
| Total stockholders’ equity                                                                                                                      |       | 23,752,376             |       | 26,151,091                |       |
|                                                                                                                                                 |       | $                      | 26,995,549 |                      | $          | 31,329,612 |   |
|                                                                                                                                                 |       |                   |       |                      |       |
| See notes to consolidated financial statements.                                                                                                      |       |                   |       |                      |       |

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES -********CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

**THREE AND NINE MONTHS ENDED MAY 31, 2009 AND 2008**

 
| ** **                                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                         | ** ** | **May 31, 2009**  | ** ** | **May 31, 2008** | ** ** | **May 31, 2009** | ** ** | **May 31, 2008** | ** ** |
| NORTH AMERICAN OPERATIONS:                                                                         |       |                   |       |                  |       |   |   |   |   |
| Sales                                                                                              |       | $                      | 1,673,634  |                  | $          | 3,269,721 |   | $ | 6,678,748 |   | $ | 9,518,162 |   |
| Cost of goods sold                                                                                 |       | 995,672                |       | 2,059,855             |       | 4,444,075 |   | 5,763,500 |   |
| Gross profit                                                                                       |       | 677,962                |       | 1,209,866             |       | 2,234,673 |   | 3,754.662 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| Operating expenses:                                                                                |       |                   |       |                  |       |   |   |   |   |
| Selling                                                                                            |       | 577,736                |       | 799,949               |       | 1,924,102 |   | 2,413,895 |   |
| General and administrative                                                                         |       | 599,012                |       | 702,592               |       | 2,184,974 |   | 2,545,414 |   |
| Lab and technical support                                                                          |       | 13,823                 |       | 32,631                |       | 51,285 |   | 143,375 |   |
| Loss on impairment                                                                                 |       | —                 |       | —                |       | 554,000 |   | — |   |
|                                                                                               |       | 1,190,571              |       | 1,535,172             |       | 4,714,361 |   | 5,102,684 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| NORTH AMERICAN OPERATING LOSS                                                                      |       | (512,609               | )          | (325,306              | )          | (2,479,688 | ) | (1,348,022 | ) |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| CORPORATE JOINT VENTURES AND HOLDING COMPANIES:                                                    |       |                   |       |                  |       |   |   |   |   |
| Equity in income of industrial chemical corporate  joint ventures and holding companies            |       | (14,824                | )          | 1,155,282             |       | 663,734 |   | 3,109,093 |   |
| Equity in income (loss) of industrial non-chemical  corporate joint ventures and holding companies |       | 7,986                  |       | (16,142               | )          | (12,834 | ) | (102,097 | ) |
| Gain on sale of industrial chemical corporate joint  venture                                       |       | —                 |       | —                |       | — |   | 172,767 |   |
| Fees for technical support and other services  provided to corporate joint ventures                |       | 821,810                |       | 1,517,428             |       | 2,760,379 |   | 4,537,855 |   |
| Expenses incurred in support of corporate joint  ventures and new technologies                     |       | (880,168               | )          | (1,412,582            | )          | (3,375,230 | ) | (3,837,266 | ) |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| (LOSS) INCOME FROM ALL CORPORATE JOINT VENTURES AND  HOLDING COMPANIES                             |       | (65,196                | )          | 1,243,986             |       | 36,049 |   | 3,880,352 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| INTEREST INCOME                                                                                    |       | 6,509                  |       | 22,277                |       | 7,828 |   | 23,196 |   |
| INTEREST EXPENSE                                                                                   |       | (27,933                | )          | (21,757               | )          | (102,271 | ) | (93,872 | ) |
| OTHER INCOME                                                                                       |       | 4,550                  |       | 6,825                 |       | 18,200 |   | 21,582 |   |
| GAIN ON SALE OF ASSETS                                                                             |       | —                 |       | —                |       | — |   | 5,529 |   |
| MINORITY INTEREST                                                                                  |       | —                 |       | 10,123                |       | 3,398 |   | 32,269 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| (LOSS) INCOME BEFORE INCOME TAX EXPENSE                                                            |       | (594,679               | )          | 936,148               |       | (2,516,484 | ) | 2,521,034 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| INCOME TAX EXPENSE (BENEFIT)                                                                       |       | 44,000                 |       | 148,000               |       | (377,000 | ) | 415,000 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| NET (LOSS) INCOME                                                                                  |       | $                      | (638,679   | )                     | $          | 788,148 |   | $ | (2,139,484 | ) | $ | 2,106,034 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| NET (LOSS) INCOME PER COMMON SHARE:                                                                |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                              |       | $                      | (0.17      | )                     | $          | 0.21 |   | $ | (0.57 | ) | $ | 0.57 |   |
| Diluted                                                                                            |       | $                      | (0.17      | )                     | $          | 0.21 |   | $ | (0.57 | ) | $ | 0.56 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:                                                |       |                   |       |                  |       |   |   |   |   |
| Basic                                                                                              |       | 3,754,596              |       | 3,723,166             |       | 3,746,977 |   | 3,704,673 |   |
| Diluted                                                                                            |       | 3,754,596              |       | 3,758,646             |       | 3,746,977 |   | 3,741,558 |   |
|                                                                                               |       |                   |       |                  |       |   |   |   |   |
| See notes to consolidated financial statements.                                                    |       |                   |       |                  |       |   |   |   |   |

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND**

**SUBSIDIARIES - CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

**NINE MONTHS ENDED May 31, 2009 and 2008**

 
| ** **                                                                            | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **May 31, 2009** | ** ** | **May 31, 2008** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                  |       |   |   |
| Net (loss) income                                                                     |       | $                     | (2,139,484 | ) | $ | 2,106,034 |   |
| Adjustments to reconcile net (loss) income to net  cash used in operating activities: |       |                  |       |   |   |
| Expensing of fair value of stock options vested                                       |       | 75,000                |       | 71,403 |   |
| Change in allowance for  doubtful accounts                                            |       | 20,000                |       | — |   |
| Depreciation expense                                                                  |       | 294,852               |       | 262,808 |   |
| Amortization expense                                                                  |       | 106,391               |       | 116,196 |   |
| Loss on asset impairment                                                              |       | 554,000               |       | — |   |
| Loss (gain) on  disposal of assets                                                    |       | 46,302                |       | (5,529 | ) |
| Minority interest expense                                                             |       | (3,398                | )          | (32,269 | ) |
| Equity in income (loss) from corporate joint  ventures:                               |       |                  |       |   |   |
| Industrial chemical                                                                   |       | (663,734              | )          | (3,109,093 | ) |
| Industrial non-chemical                                                               |       | 12,834                |       | 102,097 |   |
| Gain on sale of industrial chemical corporate joint  venture                          |       | —                |       | (172,767 | ) |
| Deferred income taxes                                                                 |       | —                |       | 413,000 |   |
| Deferred joint venture royalties                                                      |       | —                |       | 72,000 |   |
| Change in current assets and liabilities:                                             |       |                  |       |   |   |
| Receivables:                                                                          |       |                  |       |   |   |
| Trade excluding corporate joint ventures                                              |       | 769,768               |       | (443,078 | ) |
| Trade corporate joint ventures                                                        |       | (127,950              | )          | 121,062 |   |
| Technical and other services receivables, corporate  joint ventures                   |       | 1,444,249             |       | (1,106,084 | ) |
| Income taxes                                                                          |       | (705,544              | )          | 29,755 |   |
| Inventories                                                                           |       | 431,237               |       | (227,709 | ) |
| Prepaid expenses and other assets                                                     |       | 29,708                |       | (93,622 | ) |
| Income taxes payable                                                                  |       | —                |       | 168,145 |   |
| Accounts payable                                                                      |       | (962,099              | )          | (483,276 | ) |
| Accrued liabilities                                                                   |       | (743,599              | )          | 614,972 |   |
| Net cash used in operating activities                                                 |       | (1,561,467            | )          | (1,595,955 | ) |
|                                                                                  |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                  |       |   |   |
| Proceeds from the sale of assets                                                      |       | —                |       | 6,201 |   |
| Investment in corporate joint ventures                                                |       | (666,663              | )          | (117,950 | ) |
| Dividends received from corporate joint ventures                                      |       | 2,289,888             |       | 1,805,411 |   |
| Proceeds from sale of industrial chemical corporate  joint ventures                   |       | —                |       | 364,000 |   |
| Loans made                                                                            |       |                  |       | (140,000 | ) |
| Additions to property and equipment                                                   |       | (178,231              | )          | (266,192 | ) |
| Additions to industrial patents                                                       |       | (26,522               | )          | (141,105 | ) |
| Net cash provided by investing activities                                             |       | 1,418,472             |       | 1,510,365 |   |
|                                                                                  |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |                  |       |   |   |
| Bank overdrafts                                                                       |       | (852,284              | )          | 236,480 |   |
| Net borrowings made on line of credit                                                 |       | 877,000               |       | — |   |
| Repayment of note payable                                                             |       | (24,007               | )          | (21,895 | ) |
| Proceeds from employee stock purchase plan                                            |       | 23,465                |       | 45,500 |   |
| Net cash provided by financing activities                                             |       | 24,174                |       | 260,085 |   |
|                                                                                  |       |                  |       |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH  EQUIVALENTS                                 |       | (118,821              | )          | 174,495 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |       | 260,460               |       | 244,499 |   |
|                                                                                  |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |       | $                     | 141,639    |   | $ | 418,994 |   |

 

See notes to consolidated financial statements.

 

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Tableof Contents

 

**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)**

 

**1.         INTERIM FINANCIALINFORMATION**

 

In the opinion of management,the accompanying unaudited consolidated financial statements contain allnecessary adjustments, which are of a normal recurring nature, and presentfairly the consolidated financial position of Northern TechnologiesInternational Corporation and its subsidiaries (the “Company”) as of May 31,2009 and the results of their operations for the three and nine months ended May 31,2009 and 2008 and their cash flows for the nine months ended May 31, 2009and 2008, in conformity with accounting principles generally accepted in theUnited States of America (“US GAAP”).

 

These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes contained in the Company’s annual report on Form 10-Kfor the fiscal year ended August 31, 2008 and with the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section appearing in this report. Operating results for the three and nine months ended May 31, 2009are not necessarily indicative of the results that may be expected for the fullfiscal year ending August 31, 2009.

 

**2.        ****RECENTLY****ISSUED FINANCIAL PRONOUNCEMENTS**

 

In June 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 168,“The FASB Accounting Standards CodificationTM and the Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 162”.  This Statement identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles in theUnited States.  The objective of thisStatement is to replace Statement 162 and to establish the FASB AccountingStandards Codification TM (Codification) as the source of authoritativeaccounting principles recognized by the FASB to be applied by nongovernmentalentities in the preparation of financial statements in conformity with GAAP. Rules andinterpretive releases of the Securities and Exchange Commission (SEC) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants.  The Company does notbelieve that the adoption of SFAS 168 will have a material effect on itsresults of operations, financial position or cash flows.

 

In June 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 167,“Amendments to FASB Interpretation No. 46(R)”, which amends theconsolidation guidance applicable to variable interest entities. The amendmentswill significantly affect the overall consolidation analysis under FASBInterpretation No. 46(R). This statement is effective as of the beginningof the first fiscal year that begins after November 15, 2009. Thisstatement will be effective for the Company beginning in fiscal 2011. TheCompany is assessing the potential impact of adoption.

 

In June 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 166,Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140(“SFAS 166”).  SFAS 166 is intended toimprove the relevance, representational faithfulness, and comparability of theinformation that a reporting entity provides in its financial statements abouta transfer of financial assets; the effects of a transfer on its financialposition, financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets.   SFAS 166 must beapplied as of the beginning of each reporting entity’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period and for interim and annual reporting periodsthereafter. Earlier application is prohibited.   This Statement must beapplied to transfers occurring on or after the effective date.

 

Additionally, on and after theeffective date, the concept of a qualifying special-purpose entity is no longerrelevant for accounting purposes.  Therefore, formerly qualifying special-purposeentities (as defined under previous accounting standards) should be evaluatedfor consolidation by reporting entities on and after the effective date inaccordance with the applicable consolidation guidance.  If the evaluation on the effective dateresults in consolidation, the reporting entity should apply the transitionguidance provided in the pronouncement that requires consolidation. Additionally, the disclosure provisions of this Statement should beapplied to transfers that occurred both before and after the effective date ofthis Statement.   The Company is assessing the potential impact ofadoption.

 

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In May 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 165,Subsequent Events (“SFAS 165”).  SFAS 165is intended to establish general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued.  It requires the disclosure ofthe date through which an entity has evaluated subsequent events and the basisfor that date—that is, whether that date represents the date the financialstatements were issued or were available to be issued.  This disclosureshould alert all users of financial statements that an entity has not evaluatedsubsequent events after that date in the set of financial statements being presented.  SFAS 165 is effective for interim and annualperiods ending after June 15, 2009. The Company is currently assessing the effect that SFAS 165 will have onits results of operations, financial position and cash flows.

 

**3.             INVENTORIES**

 

Inventories consisted of the following:

 
| ** **           | ** ** | **May 31,********2009** | ** ** | **August 31,********2008** | ** ** |
|----------------------|------------|------------------------------|------------|---------------------------------|------------|
| Production materials |       | $                            | 977,080    |                            | $          | 1,039,549 |   |
| Finished goods       |       | 1,317,149                    |       | 1,685,917                       |       |
|                 |       | $                            | 2,294,229  |                            | $          | 2,725,466 |   |

 

**4.             PROPERTY AND EQUIPMENT, NET**

 

Property and equipmentconsisted of the following:

** **

**INDUSTRIAL PATENTS AND TRADEMARKS, NET**

 
| ** **                    | ** ** | **May 31,********2009** | ** ** | **August 31,  2008** | ** ** |
|-------------------------------|------------|------------------------------|------------|---------------------------|------------|
| Land                          |       | $                            | 310,365    |                      | $          | 310,365 |   |
| Buildings and improvements    |       | 3,085,098                    |       | 3,031,103                 |       |
| Machinery and equipment       |       | 1,732,806                    |       | 1,608,570                 |       |
|                          |       | 5,128,269                    |       | 4,950,038                 |       |
| Less accumulated depreciation |       | (1,490,325                   | )          | (1,195,473                | )          |
|                          |       | $                            | 3,637,944  |                      | $          | 3,754,565 |   |

 

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

 

Industrial patents andtrademarks consisted of the following:

 
| ** **                     | ** ** | **May 31,********2009** | ** ** | **August 31,  2008** | ** ** |
|--------------------------------|------------|------------------------------|------------|---------------------------|------------|
| Patents and trademarks         |       | $                            | 1,417,215  |                      | $          | 1,580,172 |   |
| Less accumulated  amortization |       | (513,822                     | )          | (564,851                  | )          |
|                           |       | $                            | 903,393    |                      | $          | 1,015,321 |   |

 

Patent and trademark costsare amortized over seven years once a patent or trademark is filed andapproved.  Amortization expense related to patents and trademarks was$28,466 and $39,207 for the three months ended May 31, 2009 and 2008,respectively and $92,149 and $102,844 for the nine months ended May 31,2009 and 2008, respectively.

 

**6.****DISSOLUTION OF REACT, INC. BUSINESS**

 

As previouslydisclosed, almost all historical sales by React-NTI included in theCompany’s consolidated statement of operations were derivedfrom sales by React Inc., a 100% owned subsidiary of React-NTI, ofproprietary ink additives to one customer.  During fourth quarter offiscal 2007, this customer notified React Inc. that no futureorders would be placed after current orders were received.  As a result, the Company anticipates noadditional sales of proprietary ink additives.  Concurrent withthe decline of its ink additive sales, React-NTI continued to develop andpursue additional sales through a patented sintered metal mold releaseagent sold under the brand name SERAVATTM and renewable resource-basedpersonal care chemical additive under the brandname FaronaTM.  In fiscal 2009, the Company 

 

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implemented severalcost control and cash preservation measures.  These measures includedelimination of further product and market development related to theseproducts.

 

As a result of these changes, management determinedthat the fair value of the React-NTI reporting unit was less than the carryingvalue.  As a result, a loss on impairmentof goodwill and intangible assets of $554,000 was recorded for the nine monthsended May 31, 2009 to appropriately reflect the fair valueof such assets.   In addition, during the nine months ended May 31,2009, the Company derecognized previously recorded trade payables of $320,000as a result of negotiations between the Company and its vendor.  This amount is recorded in general andadministrative expenses in the Company’s consolidated statement ofoperations.  At May 31, 2009, theremaining net book value of the assets and liabilities of React-NTI andits subsidiaries approximates $0.

 

**7.             GOODWILL**

 

TheCompany applies Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets,” which sets forth financial andreporting standards for the acquisition of intangible assets, other than thoseacquired in a business combination, and for goodwill and other intangibleassets subsequent to their acquisition. This accounting standard requires thatgoodwill no longer be amortized but tested for impairment on a periodic basis.

 

Thechanges in the carrying amount of the Company’s goodwill for the periodspresented are as follows:

 
| Carrying amount at  August 31, 2008: |   | $ | 304,000  |   |
|-------------------------------------------|--------|---|----------|--------|
| Impairment  charge (see Note 6):     |   | $ | (304,000 | )      |
| Carrying amount at  May 31, 2009:    |   | $ | 0        |   |

 

**8.             INVESTMENTS IN CORPORATE JOINTVENTURES**

 

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

 
| ** **                                                                                             | ** ** | **May 31,  2009** | ** ** | **August 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Current assets                                                                                         |       | $                      | 40,614,800 |                      | $          | 51,847,643 |   |
| Total assets                                                                                           |       | 48,282,708             |       | 58,958,102                |       |
| Current liabilities                                                                                    |       | 12,173,751             |       | 20,424,810                |       |
| Noncurrent liabilities                                                                                 |       | 5,300,670              |       | 4,756,650                 |       |
| Joint ventures’ equity                                                                            |       | 30,808,287             |       | 33,776,642                |       |
| Northern Technologies International Corporation’s  share of corporate joint ventures’ equity |       | $                      | 14,459,365 |                      | $          | 16,016,347 |   |

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                | ** ** | **May 31,  2009** | ** ** | **May 31,  2008** | ** ** | **May 31,  2009** | ** ** | **May 31,********2008** | ** ** |
| Net sales                                                                 |       | $                      | 14,151,960 |                   | $          | 30,802,632 |   | $ | 46,628,644 |   | $ | 79,893,753 |   |
| Gross profit                                                              |       | 6,545,492              |       | 13,840,622             |       | 21,551,740 |   | 36,383,556 |   |
| Net income (loss)                                                         |       | (55,923                | )          | 2,174,841              |       | 1,009,691 |   | 5,434,476 |   |
| NTIC’s share of equity in income (loss) of  corporate joint ventures |       | $                      | (6,838     | )                      | $          | 1,139,140 |   | $ | 650,900 |   | $ | 3,006,996 |   |

 

The financial statements of the Company’s foreignjoint ventures are prepared using accounting principles accepted in the jointventures’ countries of domicile.  Amountsrelated to foreign joint ventures reported in the above tables and theaccompanying financial statements have been adjusted to approximate US GAAP inall material respects.

 

During the nine months ended May 31, 2008, theCompany invested $87,950 in a non-industrial chemical joint venture in Thailandin addition to $143,000 previously invested in December 2006.  The Company has a 50% ownership interest inthe Thailand joint venture.  The entityhad no operations prior to the Company’s investment in December 2006.  The total capitalization by both owners ofthe joint venture was $461,900 as of May 31, 2008.

 

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During the three months ended May 31, 2009, theCompany invested $666,663 in its existing industrial chemical joint venture inIndia. The Company has a 50% ownership interest in the India jointventure.  The total increasedcapitalization by both owners of the joint venture was $1,333,326.  Additionally, at the same time that thecapital contributions were made by the owners, the joint venture in Indiaremitted past due royalty and service charge payments to the Company of$611,974.  The other 50% local partneralso received $611,974 for past due management fees.

 

No other additional contributions have been made tothe Company’s joint ventures during the nine months ended May 31, 2009.

 

**9.         STOCKHOLDERS’ EQUITY**

 

During the nine months ended May 31,2009, the Company did not purchase or retire any shares of its common stock andno stock options to purchase shares of the Company’s common stock wereexercised.  The Company granted stockbonuses under the Northern Technologies International Corporation 2007 StockIncentive Plan for an aggregate of 21,513 shares of its common stock to variousemployees during the nine months ended May 31, 2009.  The fair value of the shares of the Company’scommon stock as of the date of grant of the stock bonuses was $226,961, basedon the closing sale price of a share of the Company’s common stock on thatdate.

 

During the nine months ended May 31,2008, the Company did not purchase or retire any shares of its common stock andno stock options to purchase shares of the Company’s common stock wereexercised.  The Company granted stockbonuses under the Northern Technologies International Corporation 2007 StockIncentive Plan for an aggregate of 33,595 shares of its common stock to variousemployees during the nine months ended May 31, 2008.  The fair value of the shares of the Company’scommon stock as of the date of grant of the stock bonuses was $334,270, basedon the closing sale price of a share of the Company’s common stock on thatdate.

 

**10.       TOTAL COMPREHENSIVE(LOSS) INCOME**

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **May 31,  2009** | ** ** | **May 31,  2008** | ** ** | **May 31,  2009** | ** ** | **May 31,********2008** | ** ** |
| Net (loss) income                                                                 |       | $                      | (638,679   | )                      | $          | 788,148 |   | $ | (2,139,484 | ) | $ | 2,106,034 |   |
| Other comprehensive (loss) income — foreign  currency translation adjustment |       | 1,202,403              |       | 149,198                |       | (584,657 | ) | 1,461,997 |   |
| Total comprehensive (loss) income                                                 |       | $                      | 563,724    |                   | $          | 937,346 |   | $ | (2,724,141 | ) | $ | 3,568,031 |   |

 

**11.       NET (LOSS) INCOME PERCOMMON SHARE**

 

Basic net (loss) income per common share is computedby dividing net (loss) income by the weighted average number of common sharesoutstanding.  Diluted net (loss) incomeper share assumes the exercise of stock options using the treasury stockmethod, if dilutive.

 

All options to purchase shares of common stock wereexcluded from the computation of common share equivalents for the three andnine months ended May 31, 2009, respectively, as the Company reportedlosses for the three and nine months ended May 31, 2009.

 

**12.       STOCK-BASED COMPENSATION**

 

The Northern Technologies International Corporation2007 Stock Incentive Plan (the “2007 Plan”) provides for the grant of incentivestock options, non-statutory stock options, stock appreciation rights,restricted stock, stock unit awards, performance awards and stock bonuses toeligible recipients to enable the Company and its subsidiaries to attract andretain qualified individuals through opportunities for equity participation inthe Company, and to reward those individuals who contribute to the achievementof the Company’s economic objectives.  Upto a total of 400,000 shares of the Company’s common stock has been reservedfor issuance under the 2007 Plan, subject to adjustment as 

 

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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 date of the grant.  Options are granted at per share exerciseprices equal to the market value of the Company’s common stock on the date ofgrant.  To date, only stock options andstock bonuses have been granted under the 2007 Plan.

 

The Northern Technologies International CorporationEmployee Stock Purchase Plan (the “ESPP”) allows eligible employees of theCompany to acquire shares of the Company’s common stock on favorable termsthrough payroll deductions.  The maximumnumber of shares of common stock of the Company available for issuance underthe ESPP is 100,000 shares, subject to adjustment as provided in the ESPP.  The ESPP provides for nine-month offeringperiods beginning on September 1 and March 1 of each year.  The purchase price of the shares is 90% ofthe lower of the fair market value of common stock at the beginning or end of theoffering period.  This discount may notexceed the maximum discount rate permitted for plans of this type under Section 423of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financialreporting purposes.

 

The Company granted options to purchase 30,000 and37,140 shares of its common stock during the nine months ended May 31,2009 and 2008, respectively.  No optionswere granted during the three months ended May 31, 2009 and 2008.  The fair value of option grants is determinedat date of grant, using the Black-Scholes option pricing model with theassumptions listed below. The Company recognized compensation expense of$75,000 and $71,403 during the nine months ended May 31, 2009 and 2008,respectively, related to the value of the options that vested during such timeperiod.  The stock-based expense recordedreduced after-tax net income per share by $0.02 for the nine months ended May 31,2009 and 2008.  As of May 31, 2009,the total compensation cost for non-vested options not yet recognized in theCompany’s statements of operations was $165,509, net of estimatedforfeitures.  Additional stock-basedcompensation expense of $25,248 is expected through the remainder of fiscalyear 2009, and expense of $90,424 and $47,837 is expected to be recognizedduring fiscal 2010 and 2011, respectively. Future option grants will impact the compensation expense recognized.

 

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

 

| ** **                      | ** ** | **May 31, 2009** | ** ** | **May 31, 2008** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| Dividend yield                  |       | 2.00                  | %          | 2.00                  | %          |
| Expected volatility             |       | 46.7                  | %          | 42.0                  | %          |
| Expected life of option         |       | 5 years               |       | 5 years               |       |
| Average risk-free interest rate |       | 2.88                  | %          | 3.62                  | %          |

 

The weighted average fair value of options grantedduring the nine months ended May 31, 2009 and 2008 was $4.78 and $3.50,respectively.

 

**13.       GEOGRAPHICAND SEGMENT INFORMATION**

 

Net sales by geographic location as a percentage oftotal consolidated net sales for the three and nine months ended May 31,2009 and 2008 were as follows:

 
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **May 31, 2009**  | ** ** | **May 31, 2008** | ** ** | **May 31, 2009** | ** ** | **May 31, 2008** | ** ** |
| Inside  the U.S.A. to unaffiliated customers                                            |       | 87.9                   | %          | 75.9                  | %          | 83.2 | % | 75.9 | % |
| Outside  the U.S.A. to:                                                                 |       |                   |       |                  |       |   |   |   |   |
| Corporate  joint ventures in which the Company is a shareholder directly and indirectly |       | 7.1                    |       | 13.5                  |       | 12.4 |   | 14.7 |   |
| Unaffiliated  customers                                                                 |       | 5.0                    |       | 10.6                  |       | 4.4 |   | 9.4 |   |
|                                                                                    |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |

 

The following table sets forth the Company’s netsales for the three and nine months ended May 31, 2009 and 2008 bysegment:

 

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| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **May 31, 2009**  | ** ** | **May 31, 2008** | ** ** | **May 31, 2009** | ** ** | **May 31, 2008** | ** ** |
| ZERUST®  sales             |       | $                      | 1,646,715  |                  | $          | 3,161,206 |   | $ | 6,159,096 |   | $ | 9,021,496 |   |
| Natur-TecTM sales           |       | 14,029                 |       | 102,290               |       | 499,037 |   | 204,998 |   |
| React-NTI  sales                |       | 12,890                 |       | 6,225                 |       | 20,615 |   | 43,508 |   |
| React  Inc. sales               |       | —                 |       | —                |       | — |   | 248,160 |   |
| Total  North American net sales |       | $                      | 1,673,634  |                  | $          | 3,269,721 |   | $ | 6,678,748 |   | $ | 9,518,162 |   |

 

The following table sets forth the Company’s directcost of sales for the three and nine months ended May 31, 2009 and 2008 bysegment:

 
| ** **                              | ** ** | ** **             | ** ** | **Three Months Ended**    | ** ** | ** **                   | ** ** | ** **                          | ** ** | **Nine Months Ended** | ** ** | ** **                          | ** ** |
|-----------------------------------------|------------|------------------------|------------|-------------------------------------|------------|------------------------------|------------|-------------------------------------|------------|---------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **May 31,  2009** | ** ** | **% of  Cost of  Sales*** | ** ** | **May 31,********2008** | ** ** | **% of  Cost of  Sales*** | ** ** | **May 31,********2009**    | ** ** | **% of  Cost of  Sales*** | ** ** | **May 31,********2008** | ** ** | **% of  Cost of  Sales*** | ** ** |
| Direct  cost of sales                   | ** ** |                   |       | ** **                          |       |                         |       |                                |       |                            |       |                                |       |   |   |   |   |   |   |   |   |
| ZERUST®  cost of sales             | ** ** | $                      | 828,933    | ** **                          | 50.3       | %                            | $          | 1,657,121                           |       | 52.4                            | %          | $                                   | 3,341,166  |   | 54.2 | % | $ | 4,543,170 |   | 50.4 | % |
| Natur-TecTM cost of sales           |       | 7,944                  |       | 56.6                                | %          | 99,556                       |       | 97.3                                | %          | 425,178                         |       | 85.2                                | %          | 185,911 |   | 90.7 | % |
| React-NTI  cost of sales                |       | 6,490                  |       | 50.3                                | %          | 2,932                        |       | 47.1                                | %          | 10,610                          |       | 51.5                                | %          | 21,885 |   | 50.3 | % |
| React  Inc. cost of sales               |       | —                 |       | —                              |       | —                       |       | —                              |       | —                          |       | —                              |       | 209,880 |   | 84.6 | % |
| Indirect  cost of sales                 |       | 152,305                |       | —                              |       | 300,246                      |       | —                              |       | 667,121                         |       | —                              |       | 802,654 |   | — |   |
| Total  North American net cost of sales |       | $                      | 995,672    | ** **                          | ** ** |                         | $          | 2,059,855                           | ** ** | ** **                      |       | $                                   | 4,444,075  | ** ** | ** ** |   | $ | 5,763,500 | ** ** | ** ** | ** ** |

 

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*The percent of cost of 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 cost of sales foreach product in reviewing the financial performance of a product type.  Further allocation of Company expenses or assets,aside from amounts presented in the tables above, is not utilized in evaluatingproduct performance, nor does such allocation occur for internal financialreporting.

 

**14.       COMMITMENTSAND CONTINGENCIES**

 

On July 25, 2008, the Company’s Board of Directors,upon recommendation of the Compensation Committee, approved the material termsof an annual bonus plan for the Company’s executive officers and certainemployees for the fiscal year ending August 31, 2009, the purpose of whichis to align the interests of the Company, its executive officers andstockholders by providing an incentive for the achievement of key corporate andindividual performance measures that are critical to the success of the Companyand linking a significant portion of each executive officer’s annualcompensation to the achievement of such measures. The following is a briefsummary of the material terms approved by the Board:

 

·                  The totalamount available under the bonus plan will be up to 25% of NTIC’s earningsbefore 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 NTIC’s Board of Directors, uponrecommendation of the Compensation Committee.

 

No management bonus for fiscal2009 was made or accrued as of May 31, 2009.  There was a $843,000 management bonus accrualas of May 31, 2008 for the Company’s fiscal 2008 bonus plan.

 

In April 2007,REACT-NTI, LLC (“React LLC”), an entity that was 75% owned by the Company, wasserved with a summons and complaint that was filed by Shamrock Technologies, Inc.(“Shamrock”) in state court in New York, which was subsequently removed to theFederal District Court for the Southern District of New York.  The lawsuitsought payment from React LLC of commissions in the approximate amount of$314,500 owed by React LLC under a 

 

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licenseagreement between React LLC and Shamrock.  The complaint alleged breach ofthe license agreement by React LLC and sought damages in an unspecified amountfor such breach as well as damages of approximately $300,000 for the allegedfailure of React LLC to purchase from Shamrock certain inventory manufacturedfor sale to a customer.  Shamrock further claimed lost profits withrespect to sales made by REACT LLC that were manufactured by parties other thanShamrock.  React LLC denied all of the claims of breach of the licenseagreement by it and believed that damages caused by Shamrock’s breach of thelicense agreement and tortious conduct exceeded any amounts owing toShamrock.  React LLC formally responded to the complaint after removal bymoving to dismiss or stay because of Shamrock’s failure to comply withalternative dispute resolution procedures contained in the licenseagreement.  By court order, the matterwas stayed so that the parties could attempt mediation.  The partiesmediated for one day and were unsuccessful in resolving the matter.  Theparties proceeded with discovery, exchanging answers to interrogatories anddocuments, and the parties also obtained documents by subpoena from thirdparties.  With more complete information, the parties decided to dismisstheir respective claims without prejudice and return to mediation.  Amediation session was held on December 4, 2008, and the parties continuedto negotiate through the mediator via telephone and email thereafter.  The mediator ultimatelydetermined that the parties were at an impasse, and the parties have had nofurther communication. Because the mediation and negotiation process did not result in a final settlement, therecan be no permanent assurance at the present time that the matter will notresult in a material adverse effect on the Company’s business, financialcondition or results of operations at some point in the future.

 

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

 

In June 2007, the U.S. Internal Revenue Serviceconcluded its audit of the Company’s U.S. federal income tax returns for fiscal2004 and 2005.  During the course of suchaudit, the IRS took the position that the Company failed to withhold andassessed against the Company approximately  $505,000 of payroll taxes andindividual income taxes on travel and other expense reimbursements made toPhilip M. Lynch, the Company’s former Chairman of the Board and Chief ExecutiveOfficer, and commissions payments made to Inter Alia Holding Co. under thatcertain former Manufacturer’s Representative Agreement between the Company andInter Alia, which agreement has since been terminated.  Inter Aliabeneficially owns approximately 22.7% of the Company’s outstanding commonstock.  G. Patrick Lynch, the Company’scurrent President and Chief Executive Officer, and three other members of theLynch family, are shareholders of Inter Alia.   The Company disagreedwith the IRS’ position and appealed the matter.  In February 2009,the IRS reversed its position and concluded its audit of the Company’s U.S.federal income tax returns for fiscal 2004 and 2005.

 

**15.       STATEMENTSOF CASH FLOWS**

 

The Company did not declare or pay any cashdividends during fiscal 2008 and as of July 14, 2009, had not declared orpaid any cash dividends during fiscal 2009.

 

The Company issued 21,513 and33,595 shares of common stock as stock bonuses under its stock incentive plansto various employees to satisfy $226,961 and $334,270 of accrued payrollliabilities during the nine months ended May 31, 2009 and 2008,respectively.  The accrued payrollliabilities related to the Company’s fiscal 2008 and 2007 bonus plans.

 

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

 

This Management’s Discussion andAnalysis provides material historical and prospective disclosures intended toenable investors and other users to assess NTIC’s financial condition andresults of operations.  Statements thatare not historical are forward-looking and involve risks and uncertaintiesdiscussed under the heading “Forward-Looking Statements” appearing elsewhere inthis report.  The following discussion ofthe results of the operations and financial condition of NTIC should be read inconjunction with NTIC’s consolidated financial statements and the related notesthereto included under Part I, Item 1 entitled “Financial Statements” of thisreport.

 

**General Overview**

 

Northern Technologies International Corporationdevelops and markets proprietary environmentally beneficial products andtechnical services either directly or via a network of joint ventures andindependent distributors in over 50 countries. NTIC’s primary business is corrosion prevention.  However, NTIC has three emerging businessesthat have all generated revenue or are expected to generate revenues in thenear future (1) corrosion prevention technology used in the oil and gasindustry, which NTIC sells both directly and through joint ventures; (2) aproduct line of compounds and finished products based on a portfolio ofproprietary bio-plastic technologies marketed under the Natur-TecTM brand; and (3) technologyand equipment that convert plastic waste into diesel, gasoline and heavyfractions, which is exclusively licensed from Zbigniew Tokarz, the inventor ofthe technology and sold through NTIC’s joint venture Polymer Energy, LLC inNorth America and Asia.

 

NTIC participates, either directly or indirectlythrough holding companies, in 29 corporate joint venture arrangements in NorthAmerica, South America, Europe, Asia and the Middle East.  Each of these joint ventures generally manufactures and markets finished products in thegeographic territory to which it is assigned. While most of NTIC’s joint ventures currently sell rust and corrosioninhibiting products and custom packaging systems, NTIC also has joint venturesthat manufacture, market and sell NTIC’s Natur-TecTM products, thePolymer Energy technology and equipment that convertsplastic waste into diesel, gasoline, and heavy fractions, and its corrosion prevention technology usedin the oil and gas industry.  NTIC categorizes its joint ventures into twoprincipal areas: industrial chemical and non-industrial chemical.  Theprofits of NTIC’s corporate joint ventures are shared by the respectivecorporate joint venture owners in accordance with their respective ownershippercentages.  NTIC typically owns 50% ofits joint venture entities and thus does not control the decisions of theseentities regarding whether to pay dividends or how much to pay in dividends inany given year.

 

NTIC has been selling its proprietary ZERUST® and EXCOR® rust andcorrosion inhibiting products and services to the automotive, electronics,electrical, mechanical, military and retail consumer markets for over 30years.  NTIC also offers worldwideon-site technical consulting for rust and corrosion prevention issues.  In North America, NTIC markets its technicalservices and ZERUST® products principally to industrial users by adirect sales force and a network of independent distributors.  NTIC’s technical service consultants workdirectly with the end users of NTIC’s products to analyze their specific needsand develop systems to meet their technical requirements.

 

In January 2009, NTIC announced the signing ofa multi-year contract between NTIC’s Brazilian joint venture (Zerust Prevencaode Corrosao S.A.) and Petroleo Brasileiro S.A. (Petrobras) to install andservice proprietary corrosion protection technologies on the roofs of aninitial set of above ground oil storage tanks at the Petrobras REDUC refineryin Rio de Janeiro, Brazil.  At the end ofMarch 2009, NTIC announced that it has signed multiple research and developmentcontracts with Petrobras’ research and development group at the LeopoldoAmérico Miguez de Mello Research & Development Center (CENPES)pursuant to which the parties will undertake a 20-month Petrobras funded effortto explore, understand and resolve bottom plate corrosion issues in abovegroundstorage tanks. A second 12-month Petrobras sponsored project also has startedaimed at field trials of certain pipeline protection technologies. Theseinitiatives are designed to help mitigate corrosion for critical oil and gasindustry infrastructure. The projects are directly between NTIC and Petrobrasand will be supported primarily by NTIC’s R&D facilities in Beachwood,Ohio. Any new intellectual property generated will be jointly owned by NTIC andPetrobras with NTIC having access to commercialization rights.  In addition, NTIC is pursuing opportunitiesto market NTIC’s technology to other potential customers in the oil and gasindustry across several countries through its joint venture partners and otherstrategic 

 

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partners. NTIC believes the sale of its new ZERUST® products tocustomers in the oil and gas industry will involve a long sales cycle, likelyincluding a one- to two-year trial period with each customer and a slowintegration process thereafter.

 

In addition to ZERUST® products andservices, NTIC develops and in the beginning of fiscal 2008 launched aportfolio of bio-based and/ or biodegradable (compostable) polymer resincompounds and finished products under the Natur-TecTM brand.  These products are intended to reduce NTIC’scustomers’ carbon footprint and provide environmentally sound disposaloptions.  In recent years, a combinationof market drivers, such as higher petroleum prices, a desire to reducedependence on foreign oil, increased environmental awareness at the consumerlevel and regulations banning the use of traditional, petroleum-based plastics,have led to interest in sustainable, renewable resource-based and compostablealternatives to traditional plastics. Natur-TecTM bio-based and/ or biodegradable plastics are manufacturedusing NTIC’s patented and/or proprietary technologies and are intended toreplace conventional petroleum-based plastics. The Natur-TecTM bioplastics portfolio includes flexible film, foam, rigidinjection molded materials and engineered plastics.  Natur-TecTM biodegradable and compostablefinished products include shopping and grocery bags, lawn and leaf bags, canliners, pet waste collection bags, cutlery, packaging foam and coated paperproducts and are engineered to be fully biodegradable in a compostingenvironment.  Unlike competing plasticproducts claiming to be “degradable” or “oxo-degradable” that only break downinto smaller plastic fragments, Natur-TecTM products are designed to completelybiodegrade within 180 days in accordance with the ASTM D6400 standard forcompostable plastics and are certified 100 percent biodegradable andcompostable by the Biodegradable Products Institute.

 

NTIC’s Polymer Energy LLC joint venture markets andsells a system that uses catalytic pyrolysis to efficiently convert plasticwaste (primarily polyolefins) into hydrocarbons (primarily a mix of diesel,gasoline, and heavy fractions,). Each unit can process up to ten tons ofplastic waste per day, and the modular design allows for easily scalablecapacity. The Polymer EnergyTM process can handle plastic that is contaminatedwith other types of waste such as metals, glass, dirt and water and the systemcan tolerate up to 25% of other waste in the input waste stream. The output crudeoil mix is high-grade and can be further processed in a refinery or used as aninput for co-generation of electricity. NTIC, through Polymer Energy LLC, ajoint venture in which NTIC has a 62.5% interest has an exclusive license tomarket the technology in countries in Asia and North America as per the currentJV agreement.

 

**Financial Overview**

 

Like many companies, NTIC’s operating results havebeen adversely affected by worldwide economic conditions, particularly adverseconditions affecting the worldwide automobile industry.  One of the primary markets for NTIC’s rustand corrosion inhibiting products has been the automotive industry, which isnot expected to improve in the short to medium term, especially in light of thecurrent worldwide economic conditions affecting that industry.  In particular, the U.S. auto industryfurloughs in the beginning of calendar 2009 adversely affected sales of NTIC’sZERUST® products during NTIC’s second and third fiscalquarters 2009.

 

In response to such conditions, NTIC implemented in December 2008and January 2009 several cost reduction measures.  NTIC reduced thebase salaries of its executive and other officers by approximately 15% onaverage, by 10% for all other employees and suspended NTIC’s matching of 401(k) contributions. NTIC also implemented a hiring freeze and laid off 16% of its work force. Furthermore, significant cost concessions were requested and obtained from allof NTIC’s major vendors and service providers.  NTIC enacted other expensecontrol measures across all of its departments with the objective to conservecash and reduce expenses while protecting the essential sales and marketingefforts of each business.  For the threemonths ending May 31, 2009, NTIC has realized an a 28.5% and 19.4%reduction in its total overall operating expense and expenses incurred insupport of corporate joint ventures and new technologies as a result of thesecost cutting measures compared to the three months ended November 30, 2008and February 28, 2009, respectively.  NTIC may consider additional cost reductionmeasures during fourth quarter of fiscal 2009 or first quarter of fiscal 2010,if its net sales do not improve in the near future.

 

NTIC’s North American consolidatednet sales decreased 48.8% and 29.8% during the three and nine months ended May 31,2009, respectively, compared to the three and nine months ended May 31,2008 primarily as a result of decreaseddemand for NTIC’s ZERUST® products and the elimination of the React Inc.sales.  Although sales of NTIC’sNatur-TecTM products offset to some extent decreased demand for NTIC’s ZERUST® products during the nine 

 

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month period comparison, sales ofNTIC’s Natur-TecTM products decreased significantly during the three monthperiod comparisons.  During thethree and nine months ended May 31, 2009, over90% of NTIC’s consolidated net sales were derived from sales of ZERUST® and EXCOR® rust andcorrosion inhibiting packaging products and services.  Net salesof ZERUST® productsdecreased 47.9% and 31.7% during the three and nine months ended May 31,2009, respectively, compared to the three and nine months ended May 31,2008.

 

During the three and nine months ended May 31,2009, 0.8% and 7.5% of NTIC’s North American consolidated net sales,respectively, were derived from the sales of Natur-TecTM products compared to3.1% and 2.2% during the three and nine months ended May 31, 2008,respectively.  Net sales of Nature-TecTM products decreased 86.3% during the three months ended May 31, 2009and increased 143.4% during the nine months ended May 31, 2009 compared tothe three and nine months ended May 31, 2008. NTIC believes that itsNatur-TecTM business during second and third fiscal quarters 2009 were adverselyaffected by the U.S. economic recession, which NTIC believes adversely affectedthe ability of its principal Natur-TecTM distributorto purchase and distribute Natur-TecTM products fromNTIC during that time.  NTIC believesthat its Natur-TecTM sales will increase duringits fourth fiscal quarter 2009 as compared to the previous two fiscal quartersprimarily as a result of this significant customer.

 

As previouslydisclosed, almost all historical sales by React-NTI included in NTIC’sconsolidated statement of operations were derived from sales by ReactInc., a 100% owned subsidiary of React-NTI, of proprietary ink additives to onecustomer.  During fourth quarter of fiscal 2007,this customer notified React Inc. that no future orders would beplaced after current orders were received.  As a result, NTIC anticipatesno additional sales of proprietary ink additives.  Concurrentwith the decline of its ink additive sales, React-NTI continued to develop andpursue additional sales through a patented sintered metal mold release agentsold under the brand name SERAVATTM and renewable resource-based personalcare chemical additive under the brandname FaronaTM.   In fiscal 2009, NTICimplemented several cost control and cash preservation measures. These measures included elimination of further product andmarket development related to these products.  As previouslydisclosed, during the second quarter of fiscal 2009, management determined thatthe fair value of the React-NTI reporting unit was less than the carryingvalue.  As a result, a loss on impairment of goodwill and long-livedassets of $554,000 was recorded to appropriately reflectthe fair value of such assets.   In addition,during the nine months ended May 31, 2009, NTIC derecognized previouslyrecorded trade payables of $320,000 as a result of negotiations between NTICand its vendor.  This amount is recordedin general and administrative expenses in NTIC’s consolidated statement ofoperations.  At May 31, 2009, the remaining net book value of the assets andliabilities of React-NTI and its subsidiaries approximates $0.

 

Cost of goods sold as a percentageof net sales decreased to 59.5% in the three months ended May 31, 2009 ascompared to 63.0% for the three months ended May 31, 2008 primarily as aresult of the decrease in Natur-TecTM products sales as a percentage of totalsales during the three months ended May 31, 2009 compared to the threemonths ended May 31, 2008, which sales are sold at lower margins than NTIC’sZERUST® products. Cost of goods sold as a percentage of net sales increased to66.5% in the nine months ended May 31, 2009 as compared to 60.6% for thenine months ended May 31, 2008 primarily as a result of the increase of Natur-TecTM products sales as a percentage of total sales during the nine months ended May 31,2009 compared to the nine months ended May 31, 2008.

 

Total net sales of all of NTIC’sjoint ventures decreased 54.1% and 41.6% during the three and nine months endedMay 31, 2009, respectively, compared to the three and nine months ended May 31,2008 primarily as a result of decreaseddemand for ZERUST® products due to the global economic slowdownand, to a lesser extent, fluctuations in the foreign currencyexchange rate of the U.S. dollar compared to other currencies in which NTIC’sjoint ventures conduct business.  As a result of the decrease in total netsales of NTIC’s joint ventures, NTIC recognized a decrease in fee income fortechnical and support services of 45.8% and 39.2%, respectively, and a decreasein its equity in income of corporate joint ventures and holding companies of100.6% and 78.4%, respectively, during the three and nine months ended May 31,2009.  NTIC incurs direct expensesrelated to its corporate joint ventures and holding companies.  Such expenses include product and businessdevelopment, consulting, travel, technical and marketing services to existingjoint ventures, legal fees incurred in the establishment of new joint ventures,registration and promotion and legal defense of worldwide trademarks, and legalfees incurred in connection with the filing of patent applications.  NTIC’s direct joint venture expensesdecreased 37.7% and 12.0% during the three and nine months ended May 31,2009, respectively, compared to the three and nine months ended May 31,2008.  NTIC’s total income from itscorporate joint ventures and holding companies decreased 105.2% and 99.1%during the three and nine 

 

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months ended May 31, 2009,respectively, compared to the nine months ended May 31, 2008 primarily asa result of the adverse worldwide economic situation.

 

NTIC spent $2,222,575 in the ninemonths ended May 31, 2009 and $1,847,547 in the nine months ended May 31,2008 in connection with its research and development activities.  NTIC anticipates that it will spend between$2,800,000 and $3,000,000 in total during fiscal 2009 on research anddevelopment activities related to its new technologies.  These expenses are accounted for in the “Expensesincurred in support of corporate joint ventures” section of NTIC’s consolidatedstatements of operations.

 

NTIC incurred a net loss of($638,679), or ($0.17) per diluted common share, during the three months ended May 31,2009 compared to net income of $788,148 or $0.21 per diluted common share, forthe three months ended May 31, 2008. NTIC incurred a net loss of ($2,139,484), or (0.57) per diluted commonshare, during the nine months ended May 31, 2009 compared to net income of$2,106,034 or $0.56 per diluted common share, for the nine months ended May 31,2008.  These significant decreases wereprimarily the result of the decreased demand of NTIC’s ZERUST® products inthe United States and internationally due to the global economic recession, andto a lesser extent, the $554,000 loss on impairment relating to React-NTI.

 

NTIC’s working capital was$4,915,140 at May 31, 2009, including $141,639 in cash and cashequivalents.  As of May 31, 2009,NTIC had $963,000 of borrowings under its $2,300,000 demand line of credit.

 

NTIC expects to meet its futureliquidity requirements during at least the next 12 months by using its existingcash and cash equivalents, forecasted cash flows from future operations,distributions of earnings and technical assistance fees to NTIC from its jointventure investments and funds available through existing or anticipatedfinancing arrangements.  In order to takeadvantage of new product market opportunities to expand its business and increaseits revenues, NTIC may decide to finance such opportunities by borrowing underits line of credit or raising additional financing through the issuance of debtor equity securities.

 

**Results of Operations**

 

The following table sets forth NTIC’s results ofoperations for the three months ended May 31, 2009 and May 31,2008.

 
| ** **                          | ** ** | **May 31,********2009** | ** ** | **% of********Net Sales** | ** ** | **May 31,********2008** | ** ** | **% of********Net Sales** | ** ** | **$  Change** | ** ** | **%********Change** | ** ** |
|-------------------------------------|------------|------------------------------|------------|---------------------------|------------|------------------------------|------------|---------------------------|------------|---------------|------------|---------------------|------------|
|                                |       |                         |       |                      |       |                         |       |                      |       |          |       |                |       |
| Net sales                           |       | $                            | 1,673,634  |                      | 100.0      | %                            | $          | 3,269,721                 |       | 100.0         | %          | $                   | (1,596,087 | ) | -48.8 | % |
|                                |       |                         |       |                      |       |                         |       |                      |       |          |       |                |       |
| Cost of goods sold                  |       | 995,672                      |       | 59.5                      | %          | 2,059,855                    |       | 63.0                      | %          | (1,064,183    | )          | -51.7               | %          |
|                                |       |                         |       |                      |       |                         |       |                      |       |          |       |                |       |
| Selling expenses                    |       | 577,736                      |       | 34.5                      | %          | 799,949                      |       | 24.5                      | %          | (222,213      | )          | -27.8               | %          |
|                                |       |                         |       |                      |       |                         |       |                      |       |          |       |                |       |
| General and administrative expenses |       | 599,012                      |       | 35.8                      | %          | 702,592                      |       | 21.5                      | %          | (103,580      | )          | -14.7               | %          |
|                                |       |                         |       |                      |       |                         |       |                      |       |          |       |                |       |
| Lab and technical support expenses  |       | 13,823                       |       | 0.8                       | %          | 32,631                       |       | 1.0                       | %          | (18,808       | )          | -57.6               | %          |
|                                     |            |                              |            |                           |            |                              |            |                           |            |               |            |                     |            |  |  |  |

 

The following table sets forthNTIC’s results of operations for the nine months ended May 31,2009 and May 31, 2008.

 
| ** **                          | ** ** | **Nine Months Ended********May 31, 2009** | ** ** | **% of********Net********Sales** | ** ** | **Nine Months  Ended May 31,  2008** | ** ** | **% of********Net********Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|----------------------------------|------------|---------------|------------|---------------|------------|
|                                |       |                                           |       |                             |       |                                      |       |                             |       |          |       |          |       |
| Net sales                           |       | $                                              | 6,678,748  |                             | 100.0      | %                                         | $          | 9,518,162                        |       | 100.0         | %          | $             | (2,839,414 | ) | -29.8 | % |
|                                |       |                                           |       |                             |       |                                      |       |                             |       |          |       |          |       |
| Cost of goods sold                  |       | 4,444,075                                      |       | 66.5                             | %          | 5,763,500                                 |       | 60.6                             | %          | (1,319,425    | )          | -22.9         | %          |
|                                |       |                                           |       |                             |       |                                      |       |                             |       |          |       |          |       |
| Selling expenses                    |       | 1,924,102                                      |       | 28.8                             | %          | 2,413,895                                 |       | 25.4                             | %          | (489,793      | )          | -20.3         | %          |
|                                |       |                                           |       |                             |       |                                      |       |                             |       |          |       |          |       |
| General and administrative expenses |       | 2,184,974                                      |       | 32.7                             | %          | 2,545,414                                 |       | 26.7                             | %          | (360,440      | )          | -14.2         | %          |
|                                |       |                                           |       |                             |       |                                      |       |                             |       |          |       |          |       |
| Lab and technical support expenses  |       | 51,285                                         |       | 0.8                              | %          | 143,375                                   |       | 1.5                              | %          | (92,090       | )          | -64.2         | %          |
|                                |       |                                           |       |                             |       |                                      |       |                             |       |          |       |          |       |
| Loss on impairment                  |       | 554,000                                        |       | 8.3                              | %          | —                                    |       | 0.0                              | %          | 554,000       |       | 0.0           | %          |
|                                     |            |                                                |            |                                  |            |                                           |            |                                  |            |               |            |               |            |  |  |  |

 

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*Net Sales*. NTIC’s netsales originating in the United States decreased 48.8% and 29.8% during thethree and nine months ended May 31, 2009, respectively, compared to thesame respective periods in fiscal 2008 primarilyas a result of decreased demand for NTIC’s ZERUST® products as a result of the U.S. economicrecession and, to a lesser extent, the loss of the principalcustomer of React Inc. and decreased sales of NTIC’sNatur-TecTM products.

 

The following table sets forth NTIC’s net sales forthe three months ended May 31, 2009 and May 31, 2008 by segment:

 
| ** **                      | ** ** | **May 31,********2009** | ** ** | **May 31,********2008** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|---------------|------------|---------------|------------|
|                            |       |                         |       |                         |       |          |       |          |       |
| ZERUST®  sales             |       | $                            | 1,646,715  |                         | $          | 3,161,206     |       | $             | (1,514,491 | ) | -47.9 | % |
| Natur-TecTM sales           |       | 14,029                       |       | 102,290                      |       | (88,261       | )          | -86.3         | %          |
| React-NTI  sales                |       | 12,890                       |       | 6,225                        |       | 6,665         |       | 107.1         | %          |
| React  Inc. sales               |       | —                       |       | —                       |       | —        |       | —        |       |
| Total  North American net sales |       | $                            | 1,673,634  |                         | $          | 3,269,721     |       | $             | (1,596,123 | ) | -48.8 | % |

 

The following table sets forth NTIC’s net sales forthe nine months ended May 31, 2009 and May 31, 2008 by segment:

 
| ** **                      | ** ** | **May 31,********2009** | ** ** | **May 31,********2008** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------|------------|------------------------------|------------|------------------------------|------------|---------------|------------|---------------|------------|
| ZERUST®  sales             |       | $                            | 6,159,096  |                         | $          | 9,021,496     |       | $             | (2,862,436 | ) | -31.7 | % |
| Natur-TecTM sales           |       | 499,037                      |       | 204,998                      |       | 294,039       |       | 143.4         | %          |
| React-NTI  sales                |       | 20,615                       |       | 43,508                       |       | (22,893       | )          | -52.6         | %          |
| React  Inc. sales               |       | —                       |       | 248,160                      |       | (248,160      | )          | -100.0        | %          |
| Total  North American net sales |       | $                            | 6,678,748  |                         | $          | 9,518,162     |       | $             | (2,839,450 | ) | -29.8 | % |

 

*Cost of Goods Sold*.  Cost of goods sold decreased 51.7% and 22.9% forthe three months and nine months ended May 31,2009, respectively, compared to the same respective periods in fiscal2008 primarily as a result of the significantdecrease in sales of NTIC’s ZERUST® products and theloss of the principal customer of React Inc. Cost of goods sold as a percentage of net sales changed to 59.5% and66.5% for the three and nine months ended May 31, 2009, respectively,compared to 63.0% and 60.1% in the same respective periods in fiscal 2008primarily as a result of reductions in the raw material costs, offset partiallyby smaller profit margins realized by sales of NTIC’s Natur-TecTM products compared to sales of NTIC’s ZERUST®products.

 

*Selling Expenses*.  NTIC’s selling expenses decreased 27.8% forthe three months ended May 31, 2009compared to the same period in fiscal 2008 due to decreases in (i) salariesof $58,000, (ii) consulting expense of $23,000, (iii) travel relatedexpenses of $35,000 and (iv) commissions of $65,000.  NTIC’s selling expenses decreased 20.3% forthe nine months ended May 31, 2009compared the same period in fiscal 2008 due to decreases in (i) salariesof $110,000, (ii) consulting expense of $61,000, (iii) commissions of$55,000 and (iv) travel related expenses of $89,000.  Selling expenses as a percentage of net salesincreased to 34.5% and 28.8% during the three and nine months ended May 31,2009, respectively, from 24.5% and 25.4% during the same respective periods infiscal 2008, due to the decrease in net sales.

 

*General and AdministrativeExpenses*.  NTIC’sgeneral and administrative expenses decreased by 14.7% during the three monthsended May 31, 2009 compared to the same period in fiscal 2008 due todecreases in (i) audit and tax expense of $19,000 (ii) generalexpenses associated with React-NTI of $60,000 (iii) travel relatedexpenses of $20,000 and (iv) salaries of $45,000.  Additionally, during the three months ended May 31,2009, NTIC derecognized previously recorded trade payables of $320,000 as aresult of negotiations between NTIC and its vendor.  NTIC’s general and administrative expensesdecreased by 14.2% during the nine months ended May 31, 2009 compared tothe same period in fiscal 2008 due to decreases in (i) audit and taxexpense of $74,000 (ii) general expenses associated 

 

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with React-NTI of $70,000 (iii) travel relatedexpenses of $15,000 and (iv) salaries of $73,000.  As a percentage of net sales, general andadministrative expenses increased to 35.8% and 32.7% during the three and ninemonths ended May 31, 2009, respectively, from 21.5% and 26.7% during thesame respective periods in fiscal 2008, due to the decrease in net sales.  NTIC includes expenses in general andadministrative expenses that provide benefit to the various joint ventures in additionto providing benefit to NTIC’s North American operations, includingspecifically, expenses associated with information technology, generalinsurance, executive and non-executive salary, bonus and benefits, buildingexpenses, audit and tax and directors fees.

 

*Lab and Technical Support Expenses*.  NTIC’s lab and technical support expensesdecreased by 57.6% and 64.2% during the three and nine months ended May 31,2009, respectively, compared to the same respective periods in fiscal 2008primarily as a result of a change in the allocation of these expenses to salesactivities.  As a percentage of net sales, lab and technical support expenses wererelatively immaterial during the three and nine months ended May 31, 2009as well as during the same respective periods in fiscal 2008.

 

*International Corporate JointVentures and Holding Companies*.  Net sales of NTIC’s corporate joint venturesfor the three and nine months ended May 31, 2009 and the same respectiveperiods in fiscal 2008, excluding React-NTI LLC, were as follows:

 
| ** **               | ** ** | **Three Months Ended**       | ** ** | **Nine Months Ended**        | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **May 31,********2009** | ** ** | **May 31,********2008** | ** ** | **May 31,********2009** | ** ** | **May 31,********2008** | ** ** |
| Industrial  chemical     |       | $                            | 12,746,821 |                         | $          | 30,419,909 |   | $ | 44,737,253 |   | $ | 78,897,265 |   |
| Non-industrial  chemical |       | 1,405,139                    |       | 382,723                      |       | 1,891,391 |   | 996,488 |   |
| Total                    |       | $                            | 14,151,960 |                         | $          | 30,802,632 |   | $ | 46,628,644 |   | $ | 79,893,753 |   |

 

NTIC receives fees for technicaland other support services it provides to its corporate joint ventures based onthe revenues of the individual corporate joint ventures.  NTIC recognized fee income for such supportof $821,810 and $2,760,379 in the three and nine months ended May 31,2009, respectively, compared to $1,517,428 and $4,537,855 during the samerespective periods in fiscal 2008, a decrease of 45.8% and 39.2%, respectively.  The decrease in fees for technical and othersupport to its corporate joint ventures was due to the decrease in revenuesfrom the corporate joint ventures as a whole, as well as fluctuations in theforeign currency exchange rate of the U.S. dollar compared to other currenciesin which NTIC’s joint ventures conduct business.

 

NTIC sponsors a worldwide corporate joint ventureconference approximately every three to four years in which all of itscorporate joint ventures are invited to participate.  NTIC defers a portion of its technical andother support fees received from its corporate joint ventures in eachaccounting period leading up to the next conference, reflecting that NTIC hasnot fully earned the payments received during that period.  The next corporate joint venture conferenceis scheduled to be held in the summer of 2010. There was no deferred income recorded within other accrued liabilitiesduring the three and nine months ended May 31, 2009 related to this futureconference; however, $288,000 has been accrued over the past three fiscalyears.  The costs associated with thesejoint venture conferences are offset against the deferral as incurred,generally in the period in which the conference is held and immediately before.

 

NTIC incurred direct expenses related to itscorporate joint ventures and the holding companies and new technologies of$880,168 and $3,375,230 during the three and nine months ended May 31,2009, respectively, compared to $1,412,582 and $3,837,266 during the samerespective periods in fiscal 2008, a decrease of 37.7% and 12.0%,respectively.  These decreases wereprimarily attributable to the cost cutting measures that were put in place inthe third quarter of fiscal 2009.

 

NTIC had equity in (loss) incomeof corporate joint ventures and holding companies of ($6,838) and $650,900during the three and nine months ended May 31, 2009, respectively,compared to $1,139,140 and $3,006,996 during the same respective periods infiscal 2008. These decreases were due primarily to the decreasein sales from NTIC’s corporate joint ventures as a whole due to the global economic recession, as well as fluctuations inthe foreign currency exchange rate of the U.S. dollar compared to othercurrencies in which NTIC’s joint ventures conduct business.

 

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*Interest Income*.  NTIC’s interest income decreased to $6,508and $7,828 during the three and nine months ended May 31, 2009,respectively, compared to $22,227 and $23,196 for the same respective periodsin fiscal 2008 due to lower average invested cash balances during the mostrecent periods.

 

*Interest Expense*.  NTIC’s interest expense increased slightly to$27,933 and $102,271 during the three and nine months ended May 31, 2009,respectively, compared to $21,757 and $93,872 for the same respective periodsin fiscal 2008 due to higher average outstanding debt levels during the mostrecent periods.

 

*(Loss) Income Before Income TaxExpense*.  (Loss) income before incometax expense decreased to ($594,679) and ($2,516,484) during the three and ninemonths ended May 31, 2009, respectively, compared to $936,148 and$2,521,034 for the same respective periods in fiscal 2008.

 

*Income Tax Expense (Benefit)*. Income taxexpense (benefit) decreased to 44,000 and ($377,000) during the three and ninemonths ended May 31, 2009, respectively, compared to $148,000 and $415,000in the same respective periods in fiscal 2008. Income tax (benefit) expense was calculated based on management’sestimate of NTIC’s annual effective income tax rate.  NTIC’s annual effective income tax rateduring the three and nine months ended May 31, 2009 and May 31, 2008was lower than the statutory rate primarily due to NTIC’s equity in income ofcorporate joint ventures being recognized based on after-tax earnings of theseentities.  To the extent joint ventures’undistributed earnings are distributed to NTIC, it is not expected to result inany material additional income tax liability after the application of foreigntax credits.

 

**Liquidity and Capital Resources**

 

*Sources of Cash and WorkingCapital*.  As of May 31, 2009, NTIC’s working capital was $4,915,140, including$141,639 in cash and cash equivalents, compared to working capital of$4,941,371, including $260,460 in cash and cash equivalents, as of August 31,2008.

 

On April 10, 2008, NTIC entered into aPromissory Note Modification Agreement with National City Bank pursuant towhich NTIC’s demand line of credit was increased to $2,300,000 and its$1,500,000 revolving credit facility was terminated.  Advances made under the demand line of creditwill be made at the sole discretion of National City Bank and will be due andpayable on demand.  Outstanding amountsunder the demand line of credit bear interest at an annual rate based on LIBORplus 2.25%.  As of May 31, 2009, theinterest rate was 2.57%.  Interest ispayable in arrears on the 15th day of each month and on demand.  As of May 31, 2009, NTIC had $963,000 inborrowings under its $2,300,000 demand line of credit.

 

NTIC believes that a combination of its existingcash and cash equivalents, forecasted cash flows from future operations,anticipated distributions of earnings and technical assistance fees to NTICfrom its joint venture investments and funds available through existing oranticipated financing arrangements, will continue to be adequate to fund itsexisting operations, capital expenditures, debt repayments and any stockrepurchases for at least the next 12 months. In an effort to increase net sales, NTIC continues to spend resources infurtherance of its emerging businesses — its biodegradable and compostableplastics products marketed under the Natur-TecTM brand, its technology and machinery that converts plastic wasteinto diesel, gasoline and heavy fractions and the application of its corrosioninhibiting technology into the oil and gas industry.  During the remainder of fiscal 2009, NTICexpects to invest additional research and development and marketing efforts andresources into these emerging businesses, product lines and markets.  Inorder to take advantage of such new product and market opportunities to expandits business and increase its revenues, NTIC may decide to finance suchopportunities by borrowing under its line of credit or raising additionalfinancing through the issuance of debt or equity securities.  There is no assurance that any financingtransaction will be available on terms acceptable to NTIC or at all, or thatany financing transaction will not be dilutive to NTIC’s current stockholders.

 

*Uses of Cash and Cash Flows*.  Cash flows used in operating activities forthe nine months ended May 31, 2009 was $1,561,466, which resulted principallyfrom NTIC’s net loss, equity income of corporate joint ventures, increases injoint venture trade receivables, income tax receivables, prepaid expenses anddecreases in accounts payable and accrued liabilities, partially offset bydecreases in trade receivables excluding joint ventures and inventories, theloss on the impairment of assets and depreciation expense.  Cash flows used in operations for the ninemonths ended May 

 

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31, 2008 was $1,587,352, which resulted principallyfrom the equity income of corporate joint ventures, increases in technical andother services receivables, inventories and prepaid expenses and decreases inaccounts payable being offset by net income, depreciation and amortizationexpense, decreases in trade receivables and increases in accrued liabilities.

 

Net cash provided by investing activities for thenine months ended May 31, 2009 was $1,418,472, which was comprised ofdividends received from corporate joint ventures, decrease in other assets,partially offset by additions to property and equipment and investments inpatents.  Net cash provided by investingactivities for the nine months ended May 31, 2008 was $1,501,762 which wascomprised of dividends received from corporate joint ventures and the sale of ajoint venture, offset by additions to property and equipment, loans made andinvestment in joint ventures.

 

Net cash provided by financing activities for thenine months ended May 31, 2009 was $24,147, which resulted primarily frombank overdrafts and principal payments on the bank loan for NTIC’s corporateheadquarters building, offset by borrowings made under the demand line ofcredit.  Net cash provided by financingactivities for the nine months ended May 31, 2008 was $260,085, whichresulted primarily from proceeds from NTIC’s employee stock purchase plan andbank overdrafts, offset by principal payments on the bank loan for NTIC’scorporate headquarters building.

 

*Capital Expenditures and Commitments*.  NTIC had no material lease commitments as of May 31,2009, except for a lease agreement entered into by NTI Facilities, Inc., asubsidiary of NTIC, for approximately 17,000 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.

 

To finance the purchase of the real estate andbuilding for NTIC’s current corporate headquarters, in September 2006,NTIC obtained a secured term loan in the principal amount of $1,275,000.  The term loan matures on May 1, 2011,bears interest at a fixed rate of 8.01% and is payable in 59 monthlyinstallments equal to approximately $10,776 (inclusive of principal andinterest) commencing June 1, 2006. All of the remaining unpaid principal and accrued interest is due andpayable on the May 1, 2011 maturity date. The loan is secured by a first lien on the real estate and building.

 

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

 

**Off-Balance Sheet Arrangements**

 

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

 

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

 

**Inflation and Seasonality**

 

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

 

**Market Risk**

 

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

 

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Because the functional currency of NTIC’s foreignoperations and investments in its foreign corporate joint ventures and holdingcompanies is the applicable local currency, NTIC is exposed to foreign currencyexchange rate risk arising from transactions in the normal course ofbusiness.  NTIC’s principal exchange rateexposure is with the Euro, the Japanese yen, Korean won and the English poundagainst the U.S. dollar.  NTIC’s fees fortechnical support and other services and dividend distributions from theseforeign entities are paid in foreign currencies and thus fluctuations inforeign currency exchange rates could result in declines in NTIC’s reported netincome.  Since NTIC’s investments in itscorporate joint ventures and holding companies are accounted for using theequity method, any changes in foreign currency exchange rates would bereflected as a foreign currency translation adjustment and would not changeNTIC’s equity in income of joint ventures and holding companies reflected inits consolidated statements of income. NTIC does not hedge against its foreign currency exchange rate risk.

 

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

 

NTIC’s demand line of credit bears interest at arate based on LIBOR and thus may subject NTIC to some market risk on interestrates.  As of May 28, 2009, NTIC had$963,000 of borrowings under its $2,300,000 demand line of credit.

 

**Critical Accounting Policies and Estimates**

 

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

 

**Recent Accounting Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 168,“The FASB Accounting Standards CodificationTM and the Hierarchy of GenerallyAccepted Accounting Principles, a replacement of FASB Statement No. 162”.  This Statement identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles in theUnited States.  The objective of thisStatement is to replace Statement 162 and to establish the FASB AccountingStandards Codification TM (Codification) as the source of authoritativeaccounting principles recognized by the FASB to be applied by nongovernmentalentities in the preparation of financial statements in conformity with GAAP. Rules andinterpretive releases of the Securities and Exchange Commission (SEC) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants.  The Company does notbelieve that the adoption of SFAS 168 will have a material effect on itsresults of operations, financial position or cash flows.

 

In June 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 167,“Amendments to FASB Interpretation No. 46(R)”, which amends theconsolidation guidance applicable to variable interest entities. The amendmentswill significantly affect the overall consolidation analysis under FASBInterpretation No. 46(R). This statement is effective as of the beginningof the first fiscal year that begins after November 15, 2009. Thisstatement will be effective for the Company beginning in fiscal 2011. TheCompany is assessing the potential impact of adoption.

 

In June 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 166,Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140(“SFAS 166”).  SFAS 166 is intended toimprove the relevance, representational faithfulness, and comparability of theinformation that a reporting entity provides in its financial statements abouta transfer of financial assets; the effects of a transfer on its financialposition, financial performance, and cash flows; and a transferor’s continuinginvolvement, if any, in transferred financial assets.   SFAS 166 must beapplied as of the beginning of each reporting entity’s first annual reportingperiod that begins after November 15, 2009, for interim periods withinthat first annual reporting period and for interim and annual reporting periodsthereafter. Earlier application is prohibited.   This Statement must beapplied to transfers occurring on or after the effective date.

 

Additionally, on and after theeffective date, the concept of a qualifying special-purpose entity is no longerrelevant for accounting purposes.   Therefore, formerly qualifyingspecial-purpose entities (as defined under previous accounting 

 

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standards) should be evaluatedfor consolidation by reporting entities on and after the effective date inaccordance with the applicable consolidation guidance.   If the evaluationon the effective date results in consolidation, the reporting entity shouldapply the transition guidance provided in the pronouncement that requiresconsolidation.  Additionally, the disclosure provisions of this Statementshould be applied to transfers that occurred both before and after theeffective date of this Statement.   The Company is assessing the potentialimpact of adoption.

 

In May 2009, theFinancial Accounting Standards Board (FASB) issued FASB Statement No. 165,Subsequent Events (“SFAS 165”).  SFAS 165is intended to establish general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued.  It requires the disclosure ofthe date through which an entity has evaluated subsequent events and the basisfor that date—that is, whether that date represents the date the financialstatements were issued or were available to be issued.  This disclosureshould alert all users of financial statements that an entity has not evaluatedsubsequent events after that date in the set of financial statements beingpresented.  SFAS 165 is effective forinterim and annual periods ending after June 15, 2009.  The Company is currently assessing the effectthat SFAS 165 will have on its results of operations, financial position andcash flows.

 

**Forward-Looking Statements**

 

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

 

Forward-looking statements are based on currentexpectations about future events affecting NTIC and are subject touncertainties and factors that affect all businesses operating in a globalmarket as well as matters specific to NTIC. These uncertainties and factors aredifficult to predict and many of them are beyond NTIC’s control. The followingare some of the uncertainties and factors known to us that could cause NTIC’sactual results to differ materially from what NTIC has anticipated in itsforward-looking statements:

 

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

 

·                  The effect ofthe significant downturn in the U.S. and worldwide automotive industry on NTIC’sbusiness;

 

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

 

·                  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;

 

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·                  NTIC’sinvestments in research and development efforts and its need for additionalcapital to support such efforts;

 

·                  Acceptance ofNTIC’s existing and new products;

 

·                  Increasedcompetition;

 

·                  The economicsuccess of NTIC’s three emerging new businesses;

 

·                  NTIC’s relianceupon and its relationships with its distributors, independent salesrepresentatives and corporate 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 outstanding 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.

 

For more information regarding these and otheruncertainties and factors that could cause NTIC’s actual results to differmaterially from what NTIC has anticipated in its forward-looking statements orotherwise could materially adversely affect its business, financial conditionor operating results, see NTIC’s annual report on Form 10-K for the fiscalyear ended August 31, 2008 under the heading “Part I — Item 1A. RiskFactors.”

 

All forward-looking statements included in thisreport are expressly qualified in their entirety by the foregoing cautionarystatements. We wish to caution readers not to place undue reliance on anyforward-looking statement that speaks only as of the date made and to recognizethat forward-looking statements are predictions of future results, which maynot occur as anticipated. Actual results could differ materially from thoseanticipated in the forward-looking statements and from historical results, dueto the uncertainties and factors described above, as well as others that we mayconsider immaterial or do not anticipate at this time. Although we believe thatthe expectations reflected in our forward-looking statements are reasonable, wedo not know whether our expectations will prove correct. Our expectationsreflected in our forward-looking statements can be affected by inaccurateassumptions we might make or by known or unknown uncertainties and factors,including those described above. The risks and uncertainties described aboveare not exclusive and further information concerning us and our business,including factors that potentially could materially affect our financialresults or condition, may emerge from time to time. We assume no obligation toupdate, amend or clarify forward-looking statements to reflect actual resultsor changes in factors or assumptions affecting such forward-looking statements.We advise you, however, to consult any further disclosures we make on related subjectsin our annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K we file with or furnish to the Securitiesand Exchange Commission.

 

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

## ** **

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

 

## **ITEM4.  CONTROLS AND PROCEDURES**

## ** **

**Evaluation of Disclosure Controls and Procedures**

 

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

 

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

 

**Changes in Internal Control over Financial Reporting**

 

There was no change in NTIC’s internal control overfinancial reporting that occurred during the quarter ended May 31, 2009that has materially affected, or is reasonably likely to materially affect NTIC’sinternal control over financial reporting.

 

# **PART II          OTHERINFORMATION**

# ** **

## **ITEM1.           LEGAL PROCEEDINGS**

## ** **

A description of NTIC’s legalproceedings in Note 12 of its unaudited consolidated financial statementsincluded within this report is incorporated herein by reference.

 

## **ITEM1A.        RISK FACTORS**

## ** **

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

 

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

## ** **

**Recent Sales of Unregistered Equity Securities**

 

During the three months ended May 31, 2009,NTIC did not issue any shares of its common stock or other equity securities ofNTIC that were not registered under the Securities Act of 1933, as amended.

 

**Issuer Purchases of Equity Securities**

 

During the three months ended May 31, 2009, NTICdid not purchase any shares of its common stock or other equity securities ofNTIC.

 

On November 13, 2003,the Board of Directors of NTIC authorized Matthew Wolsfeld, Chief FinancialOfficer of NTIC, to repurchase on behalf of NTIC, up to 100,000 shares of NTIC’scommon stock from time to time in accordance with applicable rules governingissuer stock repurchases.  Since beingauthorized, NTIC has not repurchased and retired any shares of its commonstock.

 

## **ITEM3.           DEFAULTS UPON SENIORSECURITIES**

## ** **

Not applicable.

 

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

## ** **

Notapplicable.

 

## **ITEM5.           OTHER INFORMATION**

## ** **

Not applicable.

 

## **ITEM6.           EXHIBITS**

## ** **

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                 |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Agreement  dated as of May 5, 2009 between Northern Technologies International  Corporation and DAK Engineering, LLC (Incorporated by reference to  Exhibit 10.1 to NTIC’s Current Report on Form 8-K as filed with the  Securities and Exchange Commission on May 7, 2009 (File  No. 001-11038)) |
|                 |       |                                                                                                                                                                                                                                                                                                                            |
| 10.2                 |       | Agreement  dated as of May 25, 2009 between Northern Technologies International  Corporation and Sunggyu Lee, Ph.D. (Filed herewith)                                                                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                            |
| 31.1                 |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (filed herewith)                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                            |
| 31.2                 |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 (filed herewith)                                                                                                                                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                                                            |
| 32.1                 |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith)                                                                                                                                             |
|                 |       |                                                                                                                                                                                                                                                                                                                            |
| 32.2                 |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (furnished herewith)                                                                                                                                             |

 

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# **SIGNATURES**

# ** **

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

 

 
| **NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION** |
|-----------------------------------------------------|
|                                                |   |
|                                                |  |
| Date: July 14, 2009                            | Matthew C. Wolsfeld, CPA |
|                                                | Chief Financial Officer |
|                                                | (Principal Financial and Accounting Officer and Duly  Authorized to Sign on Behalf of the Registrant) |

 

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

** **

# **EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | ******Description**                                                                                                                                           | ** ** | ******Method of Filing**                                                                                                                                                                           |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | Agreement  dated as of May 5, 2009 between Northern Technologies International  Corporation and DAK Engineering, LLC                                     |       | Incorporated by reference to Exhibit 10.1 to NTIC’s Current  Report on Form 8-K as filed with the Securities and Exchange Commission  on May 7, 2009 (File No. 001-11038) |
|             |       |                                                                                                                                                          |       |                                                                                                                                                                                               |
| 10.2             |       | Agreement  dated as of May 25, 2009 between Northern Technologies International  Corporation and Sunggyu Lee, Ph.D.                                      |       | Filed herewith                                                                                                                                                                                     |
|             |       |                                                                                                                                                          |       |                                                                                                                                                                                               |
| 31.1             |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                     |       | Filed herewith                                                                                                                                                                                     |
|             |       |                                                                                                                                                          |       |                                                                                                                                                                                               |
| 31.2             |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                     |       | Filed herewith                                                                                                                                                                                     |
|             |       |                                                                                                                                                          |       |                                                                                                                                                                                               |
| 32.1             |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith                                                                                                                                                                                 |
|             |       |                                                                                                                                                          |       |                                                                                                                                                                                               |
| 32.2             |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith                                                                                                                                                                                 |

 

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