Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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**FORM 10-Q**

** **

**(Mark one)**

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

 

**For the quarterly period ended February 28,2009**

 

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

 

**4201 Woodland Rd**

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

(Address of principal executive offices)

 

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

 

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

 

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

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

 

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

 

Asof April 14, 2009,  3,754,597 sharesof common stock of the registrant were outstanding. .

 

 

 

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**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**FORM 10-Q**

**February 28, 2009**

 

**TABLE OF CONTENTS**

 
| **Description**    |                                                                                                                                     | **Page** |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|----------|
|               |                                                                                                                                     |     |
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                                                |     |
|               |                                                                                                                                     |     |
| Item 1.            | Financial Statements                                                                                                                     |     |
|               |                                                                                                                                     |     |
|               | Consolidated Balance Sheets as of February 28,  2009 (unaudited) and August 31, 2008                                           | 3        |
|               |                                                                                                                                     |     |
|               | Consolidated Statements of Operations (unaudited) for  the Three and Six Months Ended  February 28, 2009 and February 29, 2008 | 4        |
|               |                                                                                                                                     |     |
|               | Consolidated Statements of Cash Flows (unaudited) for  the Six Months Ended  February 28, 2009 and February 29, 2008           | 5        |
|               |                                                                                                                                     |     |
|               | Notes to Consolidated Financial Statements (unaudited)                                                                                   | 6-11     |
|               |                                                                                                                                     |     |
| Item 2.            | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                              | 12       |
|               |                                                                                                                                     |     |
| Item 3.            | Quantitative  and Qualitative Disclosures About Market Risk                                                                              | 22       |
|               |                                                                                                                                     |     |
| Item 4.            | Controls and  Procedures                                                                                                                 | 22       |
|               |                                                                                                                                     |     |
| **PART II.**  | **OTHER INFORMATION**                                                                                                                    |     |
|               |                                                                                                                                     |     |
| Item 1.            | Legal Proceedings                                                                                                                        | 22       |
|               |                                                                                                                                     |     |
| Item 1A.           | Risk Factors                                                                                                                             | 22       |
|               |                                                                                                                                     |     |
| Item 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                             | 23       |
|               |                                                                                                                                     |     |
| Item 3.            | Defaults Upon  Senior Securities                                                                                                         | 23       |
|               |                                                                                                                                     |     |
| Item 4.            | Submission of  Matters to a Vote of Security Holders                                                                                     | 23       |
|               |                                                                                                                                     |     |
| Item 5.            | Other Information                                                                                                                        | 23       |
|               |                                                                                                                                     |     |
| Item 6.            | Exhibits                                                                                                                                 | 24       |
|               | ** **                                                                                                                               |     |
| **SIGNATURE PAGE** | 25                                                                                                                                       |
|               | ** **                                                                                                                               |     |
| **EXHIBIT INDEX**  | 26                                                                                                                                       |

* *

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

 

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

 

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

 

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** **

**PART I - FINANCIAL INFORMATION**

 

## **ITEM 1.           FINANCIALSTATEMENTS**

## ** **

**NORTHERNTECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY28, 2009 (UNAUDITED) AND AUGUST 31, 2008 (AUDITED)**

 
| ** **                                                                                                                                                | ** ** | **February 28,  2009** | ** ** | **August 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                                |       |                        |       |                      |       |
| CURRENT ASSETS:                                                                                                                                           |       |                        |       |                      |       |
| Cash and cash equivalents                                                                                                                                 |       | $                           | 244,245    |                      | $          | 260,460 |   |
| Receivables:                                                                                                                                              |       |                        |       |                      |       |
| Trade excluding corporate joint ventures, less allowance for doubtful  accounts of $30,000 at February 28, 2009 and $10,000 at August 31,  2008 |       | 1,167,209                   |       | 1,962,222                 |       |
| Trade corporate joint ventures                                                                                                                            |       | 1,164,817                   |       | 530,609                   |       |
| Technical and other services, corporate joint ventures                                                                                                    |       | 1,886,516                   |       | 3,065,738                 |       |
| Income taxes                                                                                                                                              |       | 676,887                     |       | 28,961                    |       |
| Inventories                                                                                                                                               |       | 2,461,722                   |       | 2,725,466                 |       |
| Prepaid expenses                                                                                                                                          |       | 273,017                     |       | 179,766                   |       |
| Deferred income taxes                                                                                                                                     |       | 183,300                     |       | 183,300                   |       |
| Total current assets                                                                                                                                      |       | 8,057,713                   |       | 8,936,522                 |       |
|                                                                                                                                                      |       |                        |       |                      |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                               |       | 3,730,474                   |       | 3,754,565                 |       |
|                                                                                                                                                      |       |                        |       |                      |       |
| OTHER ASSETS:                                                                                                                                             |       |                        |       |                      |       |
| Investments in corporate joint ventures:                                                                                                                  |       |                        |       |                      |       |
| Industrial chemical                                                                                                                                       |       | 12,436,328                  |       | 15,676,876                |       |
| Industrial non-chemical                                                                                                                                   |       | 273,010                     |       | 339,471                   |       |
| Deferred income taxes                                                                                                                                     |       | 837,300                     |       | 837,300                   |       |
| Notes receivable                                                                                                                                          |       | 140,000                     |       | 140,000                   |       |
| Industrial patents and trademarks, net                                                                                                                    |       | 925,530                     |       | 1,015,321                 |       |
| Goodwill                                                                                                                                                  |       | —                      |       | 304,000                   |       |
| Other                                                                                                                                                     |       | 55,139                      |       | 325,557                   |       |
|                                                                                                                                                      |       | 14,667,307                  |       | 18,638,525                |       |
|                                                                                                                                                      |       | $                           | 26,455,494 |                      | $          | 31,329,612 |   |
|                                                                                                                                                      |       |                        |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                             |       |                        |       |                      |       |
| CURRENT LIABILITIES:                                                                                                                                      |       |                        |       |                      |       |
| Bank overdrafts                                                                                                                                           |       | $                           | —     |                      | $          | 1,039,757 |   |
| Borrowings made on line of credit                                                                                                                         |       | 599,000                     |       | 86,000                    |       |
| Current portion of note payable                                                                                                                           |       | 33,678                      |       | 31,556                    |       |
| Accounts payable                                                                                                                                          |       | 627,205                     |       | 1,251,522                 |       |
| Accrued liabilities:                                                                                                                                      |       |                        |       |                      |       |
| Payroll and related benefits                                                                                                                              |       | 320,378                     |       | 1,102,992                 |       |
| Deferred joint venture royalties                                                                                                                          |       | 288,000                     |       | 288,000                   |       |
| Other                                                                                                                                                     |       | 284,239                     |       | 195,324                   |       |
| Total current liabilities                                                                                                                                 |       | 2,152,500                   |       | 3,995,151                 |       |
|                                                                                                                                                      |       |                        |       |                      |       |
| NOTE PAYABLE, NET OF CURRENT PORTION                                                                                                                      |       | 1,162,807                   |       | 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 3,750,970 and 3,729,457, respectively                      |       | 74,986                      |       | 74,556                    |       |
| Additional paid-in capital                                                                                                                                |       | 5,547,948                   |       | 5,271,417                 |       |
| Retained earnings                                                                                                                                         |       | 17,172,133                  |       | 18,672,938                |       |
| Accumulated other comprehensive income                                                                                                                    |       | 345,120                     |       | 2,132,180                 |       |
| Total stockholders’ equity                                                                                                                           |       | 23,140,187                  |       | 26,151,091                |       |
|                                                                                                                                                      |       | $                           | 26,455,494 |                      | $          | 31,329,612 |   |

 

Seenotes to consolidated financial statements.

 

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

**THREE AND SIX MONTHS ENDED FEBRUARY 28, 2009 ANDFEBRUARY 29, 2008**

** **
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **February 28,  2009**      | ** ** | **February 29,  2008**    | ** ** | **February 28,  2009** | ** ** | **February 29,  2008** | ** ** |
| NORTH AMERICAN OPERATIONS:                                                                |       |                             |       |                           |       |   |   |   |   |
| Sales                                                                                     |       | $                                | 1,734,170  |                           | $          | 2,762,856 |   | $ | 5,005,114 |   | $ | 6,248,441 |   |
| Cost of goods sold                                                                        |       | 1,155,436                        |       | 1,609,954                      |       | 3,448,403 |   | 3,703,645 |   |
| Gross profit                                                                              |       | 578,734                          |       | 1,152,902                      |       | 1,556,711 |   | 2,544,796 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Operating expenses:                                                                       |       |                             |       |                           |       |   |   |   |   |
| Selling                                                                                   |       | 575,796                          |       | 754,302                        |       | 1,346,366 |   | 1,613,946 |   |
| General and administrative                                                                |       | 644,524                          |       | 894,525                        |       | 1,585,962 |   | 1,842,822 |   |
| Lab and technical support                                                                 |       | 31,395                           |       | 53,616                         |       | 37,462 |   | 110,744 |   |
| Loss on impairment                                                                        |       | 554,000                          |       | 0                              |       | 554,000 |   | 0 |   |
|                                                                                      |       | 1,805,715                        |       | 1,702,443                      |       | 3,523,790 |   | 3,567,512 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| NORTH AMERICAN OPERATING LOSS                                                             |       | (1,226,981                       | )          | (549,541                       | )          | (1,967,079 | ) | (1,022,716 | ) |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| CORPORATE JOINT VENTURES AND HOLDING COMPANIES:                                           |       |                             |       |                           |       |   |   |   |   |
| Equity in income of industrial chemical corporate joint ventures and  holding companies   |       | 23,026                           |       | 880,777                        |       | 678,558 |   | 1,953,811 |   |
| Equity in loss of industrial non-chemical corporate joint ventures  and holding companies |       | (24,054                          | )          | (67,603                        | )          | (20,820 | ) | (85,955 | ) |
| Gain on sale of industrial chemical corporate joint venture                               |       | —                           |       | 172,767                        |       | — |   | 172,767 |   |
| Fees for technical support and other services provided to corporate  joint ventures       |       | 617,850                          |       | 1,626,632                      |       | 1,938,569 |   | 3,020,427 |   |
| Expenses incurred in support of corporate joint ventures and new  technologies            |       | (1,317,028                       | )          | (1,185,509                     | )          | (2,495,062 | ) | (2,424,684 | ) |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| (LOSS) INCOME FROM ALL CORPORATE JOINT VENTURES AND HOLDING COMPANIES                     |       | (700,206                         | )          | 1,427,064                      |       | 101,245 |   | 2,636,366 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| INTEREST INCOME                                                                           |       | 874                              |       | 424                            |       | 1,319 |   | 919 |   |
| INTEREST EXPENSE                                                                          |       | (42,440                          | )          | (40,592                        | )          | (74,338 | ) | (72,115 | ) |
| OTHER INCOME                                                                              |       | 6,824                            |       | 6,825                          |       | 13,650 |   | 14,757 |   |
| GAIN ON SALE OF ASSETS                                                                    |       | 0                                |       | 4,001                          |       | 0 |   | 5,530 |   |
| MINORITY INTEREST                                                                         |       | (5,772                           | )          | 507                            |       | 3,398 |   | 22,145 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| (LOSS) INCOME BEFORE INCOME TAX EXPENSE                                                   |       | (1,967,691                       | )          | 848,690                        |       | (1,921,805 | ) | 1,584,886 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| INCOME TAX (BENEFIT) EXPENSE                                                              |       | (454,000                         | )          | 189,000                        |       | (421,000 | ) | 267,000 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| NET (LOSS) INCOME                                                                         |       | $                                | (1,513,691 | )                              | $          | 659,690 |   | $ | (1,500,805 | ) | $ | 1,317,886 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| NET (LOSS) INCOME PER COMMON SHARE:                                                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                     |       | $                                | (0.41      | )                              | $          | 0.18 |   | $ | (0.40 | ) | $ | 0.36 |   |
| Diluted                                                                                   |       | $                                | (0.41      | )                              | $          | 0.18 |   | $ | (0.40 | ) | $ | 0.35 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:                                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                     |       | 3,750,970                        |       | 3,720,522                      |       | 3,743,124 |   | 3,694,588 |   |
| Diluted                                                                                   |       | 3,750,970                        |       | 3,753,747                      |       | 3,743,124 |   | 3,732,175 |   |

 

Seenotes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES- CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)  **

**SIX MONTHS ENDED FEBRUARY 28, 2009 and FEBRUARY 29,2008**

** **
| ** **                                                                                          | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                          | ** ** | **February 28,  2009**    | ** ** | **February 29,  2008** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                           |       |   |   |
| Net (loss) income                                                                                   |       | $                              | (1,500,805 | ) | $ | 1,317,886 |   |
| Adjustments to reconcile net (loss) income to net cash (used in)  provided by operating activities: |       |                           |       |   |   |
| Expensing of fair value of stock options vested                                                     |       | 50,000                         |       | 47,602 |   |
| Change in allowance for doubtful accounts                                                           |       | 20,000                         |       | — |   |
| Depreciation expense                                                                                |       | 193,295                        |       | 162,369 |   |
| Amortization expense                                                                                |       | 73,101                         |       | 72,468 |   |
| Loss on asset impairment                                                                            |       | 554,000                        |       | — |   |
| Loss (gain) on disposal of  assets                                                                  |       | 46,302                         |       | (5,530 | ) |
| Minority interest expense                                                                           |       | (3,398                         | )          | (22,145 | ) |
| Equity in income from corporate joint ventures:                                                     |       |                           |       |   |   |
| Industrial chemical                                                                                 |       | (678,558                       | )          | (1,953,811 | ) |
| Industrial non-chemical                                                                             |       | 20,820                         |       | 85,955 |   |
| Gain on sale of industrial chemical corporate joint venture                                         |       | —                         |       | (172,767 | ) |
| Deferred joint venture royalties                                                                    |       | —                         |       | 48,000 |   |
| Change in current assets and liabilities:                                                           |       |                           |       |   |   |
| Receivables:                                                                                        |       |                           |       |   |   |
| Trade excluding corporate joint ventures                                                            |       | 775,013                        |       | 7,044 |   |
| Trade corporate joint ventures                                                                      |       | (634,208                       | )          | 142,787 |   |
| Technical and other services receivables, corporate joint ventures                                  |       | 1,179,222                      |       | (590,111 | ) |
| Income taxes                                                                                        |       | (647,926                       | )          | 29,755 |   |
| Inventories                                                                                         |       | 263,744                        |       | (140,279 | ) |
| Prepaid expenses and other assets                                                                   |       | (82,251                        | )          | (118,727 | ) |
| Income taxes payable                                                                                |       | —                         |       | 31,386 |   |
| Accounts payable                                                                                    |       | (624,317                       | )          | (458,364 | ) |
| Accrued liabilities                                                                                 |       | (466,738                       | )          | 311,054 |   |
| Net cash used in operating activities                                                               |       | (1,462,704                     | )          | (1,205,428 | ) |
|                                                                                                |       |                           |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                           |       |   |   |
| Proceeds from the sale of assets                                                                    |       | —                         |       | 6,201 |   |
| Investment in corporate joint ventures                                                              |       | —                         |       | (87,950 | ) |
| Dividends received from corporate joint ventures                                                    |       | 2,177,687                      |       | 1,470,508 |   |
| Proceeds from sale of industrial chemical corporate joint ventures                                  |       | —                         |       | 364,000 |   |
| Loans made                                                                                          |       | —                         |       | (140,000 | ) |
| Additions to property and equipment                                                                 |       | (169,204                       | )          | (164,704 | ) |
| Additions to industrial patents                                                                     |       | (20,194                        | )          | (57,382 | ) |
| Net cash provided by investing activities                                                           |       | 1,988,289                      |       | 1,390,673 |   |
|                                                                                                |       |                           |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |       |                           |       |   |   |
| Bank overdrafts                                                                                     |       | (1,039,757                     | )          | — |   |
| Net borrowings made on line of credit                                                               |       | 513,000                        |       | — |   |
| Repayment of note payable                                                                           |       | (15,043                        | )          | (14,083 | ) |
| Proceeds from employee stock purchase plan                                                          |       | —                         |       | 45,500 |   |
| Net cash (used in) provided by financing activities                                                 |       | (541,800                       | )          | 31,417 |   |
|                                                                                                |       |                           |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                           |       | (16,215                        | )          | 216,662 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                    |       | 260,460                        |       | 244,499 |   |
|                                                                                                |       |                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                          |       | $                              | 244,245    |   | $ | 461,161 |   |

 

See notes to consolidated financialstatements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION AND SUBSIDIARIES**

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

 

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

 

In the opinion of management, the accompanyingunaudited consolidated financial statements contain all necessary adjustments,which are of a normal recurring nature, and present fairly the consolidatedfinancial position of Northern Technologies International Corporation and itssubsidiaries (the “Company”) as of February 28, 2009 and the results oftheir operations for the three and six months ended February 28, 2009 and February 29,2008 and their cash flows for the six months ended February 28, 2009 and February 29,2008, in conformity with accounting principles generally accepted in the UnitedStates of America (“US GAAP”).

 

These consolidated financial statements should beread in conjunction with the consolidated financial statements and relatednotes contained in the Company’s annual report on Form 10-K for the fiscalyear ended August 31, 2008 and with the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section appearing inthis report.  Operating results for thethree and six months ended February 28, 2009 are not necessarilyindicative of the results that may be expected for the full fiscal year ending August 31,2009.

 

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

 

Inventories consisted of the following:

 
| ** **           | ** ** | **February 28,  2009** | ** ** | **August 31,  2008** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------|------------|
| Production materials |       | $                           | 973,936    |                      | $          | 1,039,549 |   |
| Finished goods       |       | 1,487,786                   |       | 1,685,917                 |       |
|                 |       | $                           | 2,461,722  |                      | $          | 2,725,466 |   |

 

**3.****                           ****PROPERTY AND EQUIPMENT**

 

Property and equipment consisted of the following:

 
| ** **                    | ** ** | **February 28,   2009** | ** ** | **August 31,  2008** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|---------------------------|------------|
| Land                          |       | $                                 | 310,365    |                      | $          | 310,365 |   |
| Buildings and improvements    |       | 3,081,903                         |       | 3,031,103                 |       |
| Machinery and equipment       |       | 1,726,974                         |       | 1,608,570                 |       |
|                          |       | 5,119,242                         |       | 4,950,038                 |       |
| Less accumulated depreciation |       | (1,388,768                        | )          | (1,195,473                | )          |
|                          |       | $                                 | 3,730,474  |                      | $          | 3,754,565 |   |

 

**3.****                           ****INDUSTRIAL PATENTS ANDTRADEMARKS, NET**

 

Industrial patents and trademarks consisted of thefollowing:

 
| ** **                    | ** ** | **February 28,  2009** | ** ** | **August 31,  2008** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Patents and trademarks        |       | $                           | 1,410,887  |                      | $          | 1,580,172 |   |
| Less accumulated amortization |       | (485,357                    | )          | (564,851                  | )          |
|                          |       | $                           | 925,530    |                      | $          | 1,015,321 |   |

 

Patent and trademark costs are amortized over sevenyears once a patent or trademark is filed and approved.  Amortizationexpense related to patents and trademarks was $29,721 and $41,464 for the threemonths ended February 28, 2009 and February 29, 2008, respectivelyand $63,683 and $72,468 for the six months ended February 28, 2009 and February 29,2008, respectively.

 

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

 

As previously disclosed, almost all historical sales byReact-NTI included in the Company’s consolidated statement of operations werederived from sales by React Inc., a 100% owned subsidiary of React-NTI, ofproprietary ink additives to one customer. During fourth quarter of fiscal2007, this customer notified React Inc. that no future orderswould be placed after current orders were received. As a result, the Companyanticipates no additional sales of proprietary ink additives. Concurrent to the decline of its ink additive sales, React-NTI continued todevelop and pursue additional sales through a patented sintered metal moldrelease agent sold under the brand name SERAVATTM and renewableresource-based personal care chemical additive under the brandname FaronaTM.  In fiscal 2009, the Company 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 determined that the fairvalue of the React-NTI reporting unit was less than the carrying value.  As a result, a loss on impairment of goodwilland intangible assets of $554,000 was recorded for the three months ended February 28,2009 to appropriately reflect the fair value of suchassets.  In addition, during the three months ended February 28,2009, 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 February 28, 2009,the remaining net book value of the assets and liabilities of React-NTIand its subsidiaries approximates $0.

 

**6.****                           ****GOODWILL**

 

The Company appliesStatement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland Other Intangible Assets,” which sets forth financial and reportingstandards for the acquisition of intangible assets, other than those acquiredin a business combination, and for goodwill and other intangible assetssubsequent to their acquisition. This accounting standard requires thatgoodwill no longer be amortized but tested for impairment on a periodic basis.

 

The changes in thecarrying amount of the Company’s goodwill for the periods presented are asfollows:

 
| Carrying amount at August 31, 2008:   |   | $ | 304,000  |   |
|--------------------------------------------|--------|---|----------|--------|
| Impairment charge (see Note 5):       |   | $ | (304,000 | )      |
| Carrying amount at February 28, 2009: |   | $ | 0        |   |

 

**7.****                           ****INVESTMENTS IN CORPORATEJOINT VENTURES**

 

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

 
| ** **                                                                                             | ** ** | **February 28,  2009** | ** ** | **August 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Current assets                                                                                         |       | $                           | 39,183,863 |                      | $          | 51,847,643 |   |
| Total assets                                                                                           |       | 45,916,089                  |       | 58,958,102                |       |
| Current liabilities                                                                                    |       | 14,057,899                  |       | 20,424,810                |       |
| Noncurrent liabilities                                                                                 |       | 4,578,635                   |       | 4,756,650                 |       |
| Joint ventures’ equity                                                                            |       | 27,279,555                  |       | 33,776,642                |       |
| Northern Technologies International  Corporation’s share of corporate joint ventures’ equity |       | $                           | 12,709,338 |                      | $          | 16,016,347 |   |

 

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| ** **                                                                                                    | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                    | ** ** | **February 28,  2009**    | ** ** | **February 29,  2008** | ** ** |
| Net sales                                                                                                     |       | $                              | 32,476,685 |   | $ | 49,091,121 |   |
| Gross profit                                                                                                  |       | 15,006,248                     |       | 22,542,934 |   |
| Net income                                                                                                    |       | 1,065,614                      |       | 3,259,635 |   |
| Northern Technologies International  Corporation’s share of equity in income of corporate joint ventures |       | $                              | 657,732    |   | $ | 1,867,856 |   |

 

The financial statements of the Company’sforeign joint ventures are prepared using accounting principles accepted in thejoint ventures’ countries of domicile. Amounts related to foreign joint ventures reported in the above tablesand the accompanying financial statements have been adjusted to approximate USGAAP in all material respects.

 

During the six months ended February 29,2008, the Company invested $87,950 in a non-industrial chemical joint venturein Thailand in addition to $143,000 previously invested in December 2006.  The Company has a 50% ownership interest inthe 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 February 29, 2008. No additionalcontributions have been made to the joint venture as of February 28, 2009.

 

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

 

During the six months ended February 28,2009, 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 six months ended February 28, 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 six months ended February 29,2008, 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 six months ended February 29, 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.

 

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

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **February  29, 2008**           | ** ** | **February  29, 2008**         | ** ** | **February  29, 2008** | ** ** | **February 29,  2008** | ** ** |
| Net (loss) income                                                                 |       | $                                | (1,513,691 | )                              | $          | 659,690 |   | $ | (1,500,805 | ) | $ | 1,317,886 |   |
| Other comprehensive (loss) income — foreign  currency translation adjustment |       | (208,102                         | )          | 431,014                        |       | (1,787,060 | ) | 1,312,799 |   |
| Total comprehensive (loss) income                                                 |       | $                                | (1,721,793 | )                              | $          | 1,090,704 |   | $ | (3,287,865 | ) | $ | 2,630,685 |   |

 

**9.****                           ****NET (LOSS) INCOME PER COMMONSHARE**

 

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

 

Options to purchase shares of common stock of 149,472 and 0 wereexcluded from the computation of common share equivalents as of February 28,2009 and February 29, 2008, respectively, as the Company reported lossesfor the three and six months ended February 28, 2009.

 

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

 

The Northern Technologies InternationalCorporation 2007 Stock Incentive Plan (the “2007 Plan”) provides for the grantof incentive stock options, non-statutory stock options, stock appreciationrights, restricted stock, stock unit awards, performance awards and stockbonuses to eligible recipients to enable the Company and its subsidiaries toattract and retain qualified individuals through opportunities for equityparticipation in the Company, and to reward those individuals who contribute tothe achievement of the Company’s economic objectives.  Up to a total of 400,000 shares of theCompany’s common stock has been reserved for issuance under the 2007 Plan,subject to adjustment as provided in the 2007 Plan.  Options granted under the 2007 Plan generallyhave a term of five years and become exercisable over a three- or four-yearperiod beginning on the one-year anniversary 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 InternationalCorporation Employee Stock Purchase Plan (the “ESPP”) allows eligible employeesof the Company to acquire shares of the Company’s common stock on favorableterms through payroll deductions.  Themaximum number of shares of common stock of the Company available for issuanceunder the ESPP is 100,000 shares, subject to adjustment as provided in theESPP.  The ESPP provides for six-monthoffering periods beginning on September 1 and March 1 of eachyear.  The purchase price of the sharesis 90% of the lower of the fair market value of common stock at the beginningor end of the offering period.  Thisdiscount may not exceed the maximum discount rate permitted for plans of thistype under Section 423 of the Internal Revenue Code of 1986, asamended.  The ESPP is compensatory forfinancial reporting purposes.

 

The Company granted options to purchase 30,000 and 37,140 shares of itscommon stock during the six months ended February 28, 2009 and February 29,2008, respectively.  The fair value ofoption grants is determined at date of grant, using the Black-Scholes optionpricing model with the assumptions listed below.  Based on thesevaluations, the Company recognized compensation expense of $50,000 and $47,602during the six months ended February 28, 2009 and February 29, 2008,respectively, related to the options that vested during such time period.  The stock-based expense recorded reducedafter-tax net income per share by $0.01 for the six months ended February 28,2009 and February 29, 2008.  As of February 28,2009, the total compensation cost for non-vested options not yet recognized inthe Company’s statements of operations was $188,592, net of estimated forfeitures.  Additional stock-based compensation expenseof $50,248 is expected through the remainder of fiscal year 2009, and expenseof $90,424 and $47,837 is expected to be recognized during fiscal 2010 and2011, respectively.  Future option grantswill impact the compensation expense recognized.

 

The fair value of each option grant is estimated on the grant dateusing the Black-Scholes option-pricing model with the following assumptions andresults for the grants:

 
| ** **                      | ** ** | **February 28,  2009** | ** ** | **February 29,  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                        | %          | 3.84                        | %          |

 

The weighted average fair value of optionsgranted during the three and six months ended February 28, 2009 and February 29,2008 was $4.78 and $3.84, respectively.

 

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

 

Net sales by geographic location as apercentage of total consolidated net sales for the three and six months ended February 28,2009 and February 29, 2008 were as follows:

 
| ** **                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **February 28,  2009**      | ** ** | **February 29,  2008**    | ** ** | **February 28,  2009** | ** ** | **February 29,  2008** | ** ** |
| Inside the U.S.A. to unaffiliated customers                                             |       | 74.0                             | %          | 75.9                           | %          | 81.7 | % | 75.9 | % |
| Outside the U.S.A. to:                                                                  |       |                             |       |                           |       |   |   |   |   |
| Corporate joint ventures in which the  Company is a shareholder directly and indirectly |       | 21.2                             |       | 13.5                           |       | 14.2 |   | 14.7 |   |
| Unaffiliated customers                                                                  |       | 4.8                              |       | 10.6                           |       | 4.1 |   | 9.4 |   |
|                                                                                    |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |

 

The following table sets forth the Company’snet sales for the three and six months ended February 28, 2009 and February 29,2008 by segment:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **February 28,  2009**      | ** ** | **February 29,  2008**    | ** ** | **February 28,  2009** | ** ** | **February 29,  2008** | ** ** |
| ZERUST® sales             |       | $                                | 1,727,845  |                           | $          | 2,694,850 |   | $ | 4,512,380 |   | $ | 5,860,290 |   |
| Natur-TecTM sales          |       | 2,692                            |       | 39,024                         |       | 485,009 |   | 102,708 |   |
| React-NTI sales                |       | 3,633                            |       | 28,982                         |       | 7,725 |   | 37,284 |   |
| React Inc. sales               |       | —                           |       | —                         |       | — |   | 248,160 |   |
| Total North American net sales |       | $                                | 1,734,170  |                           | $          | 2,762,856 |   | $ | 5,005,114 |   | $ | 6,248,441 |   |

 

The following table sets forth the Company’sdirect cost of sales for the three and six months ended February 28, 2009and February 29, 2008 by segment:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**      | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **February  28, 2009**      | ** ** | **% of  Cost of  Sales*** | ** ** | **February 29,  2008** | ** ** | **% of  Cost of  Sales*** | ** ** | **February 28,  2009** | ** ** | **% of  Cost of  Sales*** | ** ** | **February 29,  2008** | ** ** | **% of  Cost of  Sales*** | ** ** |
| Direct cost of  sales                   |       |                             |       |                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ZERUST® cost of  sales             |       | $                                | 918,107    |                                | 53.1       | % | $ | 1,337,494 |   | 49.6 | % | $ | 2,512,303 |   | 55.7 | % | $ | 2,886,049 |   | 49.6 | % |
| Natur-TecTM cost  of sales          |       | 1,977                            |       | 73.4                                | %          | 35,880 |   | 91.9 | % | 401,165 |   | 82.7 | % | 86,354 |   | 84.1 | % |
| React-NTI cost of  sales                |       | 1,733                            |       | 47.7                                | %          | 14,115 |   | 48.7 | % | 4,120 |   | 53.3 | % | 18,953 |   | 50.8 | % |
| React Inc. cost  of sales               |       | —                           |       | —                              |       | — |   | — |   | — |   | — |   | 209,880 |   | 84.6 | % |
| Indirect cost of  sales                 |       | 233,619                          |       | —                              |       | 222,465 |   | — |   | 530,815 |   | — |   | 502,409 |   | — |   |
| Total North  American net cost of sales |       | $                                | 1,155,436  |                                |       |   | $ | 1,609,954 |   |   |   | $ | 3,448, 403 |   |   |   | $ | 3,703,645 |   |   |   |

 

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

 

The Company’s managementutilizes product net sales and direct cost of sales for each product inreviewing the financial performance of a product type.  Further allocation of Company expenses orassets, aside from amounts presented in the tables above, is not utilized inevaluating product performance, nor does such allocation occur for internalfinancial reporting.

 

**12.****                    ****COMMITMENTS ANDCONTINGENCIES**

 

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

 

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

 

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

 

·                  The payment of bonuses under the planwill be purely discretionary and will be paid to executive officer participantsin both cash and stock, the exact amount and percentages of which will bedetermined by NTIC’s Board of Directors, upon recommendation of theCompensation Committee.

 

No management bonus was made oraccrued as of February 28, 2009. There was a $554,173 management bonus accrual as of February 29,2008.

 

In April 2007,REACT-NTI, LLC (“React LLC”), an entity that is 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 license agreement between React LLC andShamrock.  The complaint alleged breach of the license agreement by ReactLLC and sought damages in an unspecified amount for such breach as well asdamages of approximately $300,000 for the alleged failure of React LLC topurchase from Shamrock certain inventory manufactured for sale to acustomer.  Shamrock further claimed lost profits with respect to salesmade by REACT LLC that were manufactured by parties other than Shamrock. React LLC denied all of the claims of breach of the license agreement by it andbelieved that damages caused by Shamrock’s breach of the license agreement andtortious conduct exceeded any amounts owing to Shamrock.  React LLCformally responded to the complaint after removal by moving to dismiss or staybecause of Shamrock’s failure to comply with alternative dispute resolutionprocedures contained in the license agreement.  By court order, thematter was stayed so that the parties could attempt mediation.  Theparties mediated for one day and were unsuccessful in resolving thematter.  The parties proceeded with discovery, exchanging answers to interrogatoriesand documents, 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.  Themediator ultimately determined that the parties were at an impasse, and theparties have had no further 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 otherlegal actions 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 RevenueService concluded its audit of the Company’s U.S. federal income tax returnsfor fiscal 2004 and 2005.  During the course of such audit, the IRStook the position that the Company failed to withhold and assessed against theCompany approximately $505,000 of payroll taxes and individual income taxeson travel and other expense reimbursements made to Philip M. Lynch, theCompany’s former Chairman of the Board and Chief Executive Officer, andcommissions payments made to Inter Alia Holding Co. under that certain formerManufacturer’s Representative Agreement between the Company and Inter Alia,which agreement has since been terminated.  Inter Alia beneficially ownsapproximately 22.7% of the Company’s outstanding common stock.  G. Patrick Lynch, the Company’s currentPresident and Chief Executive Officer, and three other members of the Lynchfamily, are shareholders of Inter Alia.  The Company disagreed with theIRS’ position and appealed the matter.  In February 2009, the IRSreversed its position and concluded its audit of the Company’s U.S. federalincome tax returns for fiscal 2004 and 2005.

 

**13.****                    ****STATEMENTS OF CASH FLOWS**

 

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

 

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The Company issued 21,513 and 33,595 shares ofcommon stock as stock bonuses under its stock incentive plans to variousemployees to satisfy $226,961 and $334,270 of accrued payroll liability duringthe six months ended February 28, 2009 and February 29, 2008,respectively.

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

##  

##  

This Management’s Discussion andAnalysis provides material historical and prospective disclosures intended toenable investors and other users to assess NTIC’s financial condition andresults of operations.  Statements thatare not historical are forward-looking and involve risks and uncertaintiesdiscussed under the headings “Forward-Looking Statements” and “Risk Factors”appearing elsewhere in this report.  Thefollowing discussion of the results of the operations and financial conditionof NTIC should be read in conjunction with NTIC’s consolidated financialstatements and the related notes thereto included under Part I, Item 1entitled “Financial Statements” of this report.

 

**General Overview**

 

Northern Technologies InternationalCorporation develops and markets proprietary environmentally beneficialproducts and technical services either directly or via a network of jointventures and independent distributors in over 50 countries.  NTIC’s primary business is corrosionprevention.  However, NTIC has threeemerging businesses that have all generated revenue or are expected to generaterevenues in the near future (1) a product line of compounds and finishedproducts based on a portfolio of proprietary bio-plastic technologies marketedunder the Natur-TecTM brand; (2) technology and equipment that convertplastic waste into diesel, gasoline and heavy fractions, which is exclusivelylicensed from Zbigniew Tokarz, the inventor of the technology and sold throughits joint venture Polymer Energy, LLC in North America and Asia; and (3) corrosionprevention technology used in the oil and gas industry, which NTIC sells bothdirectly and through joint ventures.

 

NTIC participates, either directly orindirectly through holding companies, in 29 corporate joint venturearrangements in North America, South America, Europe, Asia and the MiddleEast.  Each of these joint venturesgenerally manufactures and markets finishedproducts in the geographic territory to which it is assigned.  While most of NTIC’s joint ventures currentlysell rust and corrosion inhibiting products and custom packaging systems, NTICalso has joint ventures that manufacture, market and sell NTIC’s Natur-TecTMproducts, the Polymer Energy technology and equipment that converts plastic waste into diesel, gasoline,and heavy fractions, and its corrosionprevention technology used in the oil and gas industry.  NTIC categorizes its jointventures into two principal areas: industrial chemical and non-industrialchemical.  The profits of NTIC’scorporate joint ventures are shared by the respective corporate joint ventureowners in accordance with their respective ownership percentages.  NTIC typically owns 50% of its joint ventureentities and thus does not control the decisions of these entities regardingwhether to pay dividends or how much to pay in dividends in any given year.

 

NTIC has been selling its proprietary ZERUST® and EXCOR® rust and corrosioninhibiting products and services to the automotive, electronics, electrical,mechanical, military and retail consumer markets for over 30 years.  NTIC also offers worldwide on-site technicalconsulting 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 addition to ZERUST® products and services, NTIC develops and inthe beginning of fiscal 2008 launched a portfolio of bio-based and/ orbiodegradable (compostable) polymer resin compounds and finished products underthe Natur-TecTM brand.  These products areintended to reduce NTIC’s customers’ carbon footprint and provideenvironmentally sound disposal options. In recent years, a combination of market drivers, such as higherpetroleum prices, a desire to reduce dependence on foreign oil, increasedenvironmental awareness at the consumer level and regulations banning the useof traditional, petroleum-based plastics, have led to interest in sustainable,renewable resource-based and compostable alternatives to traditionalplastics.  Natur-TecTM bio-based and/ orbiodegradable plastics are manufactured using NTIC’s patented and/orproprietary technologies and are intended to replace conventionalpetroleum-based plastics.  The Natur-TecTMbioplastics portfolio includes flexible film, foam, rigid injection moldedmaterials and engineered plastics. Natur-TecTM biodegradable and compostable finished products

 

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include shopping and grocery bags, lawn andleaf bags, can liners, pet waste collection bags, cutlery, packaging foam andcoated paper products and are engineered to be fully biodegradable in acomposting environment.  Unlike competingplastic products claiming to be “degradable” or “oxo-degradable” that onlybreak down into smaller plastic fragments, Natur-TecTM products are designed tocompletely biodegrade within 180 days in accordance with the ASTM D6400standard for compostable plastics and are certified 100 percent biodegradableand compostable by the Biodegradable Products Institute.

 

NTIC’s Polymer Energy LLC joint venturelicenses the technology from Zbigniew Tokarz, the inventor of the technologyand markets and sells a system that uses catalytic pyrolysis to efficientlyconvert plastic waste (primarily polyolefins) into hydrocarbons (primarily amix of diesel, gasoline, and heavy fractions,). Each unit can process up to tentons of plastic waste per day, and the modular design allows for easilyscalable capacity. The Polymer EnergyTM process can handle plastic that iscontaminated with other types of waste such as metals, glass, dirt and waterand the system can tolerate up to 25% of other waste in the input waste stream.The output crude oil mix is high-grade and can be further processed in arefinery or used as an input for co-generation of electricity. NTIC, throughPolymer Energy LLC, a joint venture in which NTIC has a 62.5% interest has anexclusive license to market the technology in countries in Asia and NorthAmerica as per the current JV agreement.

 

In January 2009, NTIC announced thesigning of a multi-year contract between NTIC’s Brazilian joint venture (ZerustPrevencao de Corrosao S.A.) and Petroleo Brasileiro S.A. (Petrobras) to installand service proprietary corrosion protection technologies on the roofs of aninitial set of aboveground oil storage tanks at the Petrobras REDUC refinery inRio de Janeiro, Brazil.  At the end of March 2009,NTIC announced that it has signed multiple research and development contractswith Petrobras’ research and development group at the Leopoldo Américo Miguezde Mello Research & Development Center (CENPES) pursuant to which theparties will undertake a 20-month Petrobras funded effort to explore,understand and resolve bottom plate corrosion issues in aboveground storagetanks. A second 12-month Petrobras sponsored project also has started aimed atfield trials of certain pipeline protection technologies. These initiatives aredesigned to help mitigate corrosion for critical oil and gas industryinfrastructure. The projects are directly between NTIC and Petrobras and willprimarily be supported by NTIC’s R&D facilities in Beachwood, Ohio. Any newintellectual property generated will be jointly owned by NTIC and Petrobraswith 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 partners.  NTIC believes thesale of its new ZERUST® products to customers in the oil and gas industry willinvolve a long sales cycle, likely including a one- to two-year trial periodwith each customer and a slow integration process thereafter.

 

**Financial Overview**

 

Like many companies, NTIC’s operating resultshave been adversely affected by worldwide economic conditions, particularlyadverse conditions affecting the worldwide automobile industry.  One of the primary markets for NTIC’s rustand corrosion inhibiting products has been the automotive industry.  While the automotive industry until recentlyhad been growing worldwide, it has in the short term been contractingsignificantly, and is not expected to improve in the short to medium term,especially in light of the current worldwide economic conditions affecting thatindustry.  In particular, the U.S. autoindustry furloughs in the beginning of calendar 2009 adversely affected salesof NTIC’s ZERUST® products during NTIC’s second fiscal quarter2009.  In response to such conditions,NTIC implemented several cost reduction measures, which had some effect on NTIC’soperating results for its second fiscal quarter 2009, but are expected to havea greater impact on NTIC’s results of operations going forward, beginning inits third fiscal quarter 2009.  WhileNTIC recognized a net loss during its three and six months ended February 28,2009, due in part to loss on impairment of $554,000 relating to the React-NTI,LLC business, NTIC believes its operating results from its ZERUST® business will improve during third fiscalquarter 2009.

 

NTIC’s North American consolidated net salesdecreased 19.9% during the six months ended February 28, 2009 compared tothe six months ended February 29, 2008 primarily as a result of decreased demand for NTIC’s ZERUST® products andthe elimination of the React Inc. sales, partially offset by sales of NTIC’snew Natur-TecTM products.  Duringthe six months ended February 28, 2009, 90.2% of NTIC’s consolidated netsales were derived from sales of ZERUST® and EXCOR® rust and corrosion inhibiting packagingproducts and services.  Net sales of ZERUST®

 

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products decreased 23.0% to $4,512,380 during the sixmonths ended February 28, 2009 compared to $5,860,290 during the sixmonths ended February 29, 2008.

 

During the six months ended February 28,2009, 9.7% of NTIC’s North American consolidated net sales were derived fromthe sales of Natur-TecTM products compared to 1.6% during the six months ended February 29,2008.  Net sales of Nature-TecTM products increased 372.2% to $485,009 during the six monthsended February 28, 2009 compared to $102,708 during the six months ended February 29,2008. NTIC believes that its Natur-TecTM business during second fiscalquarter 2009 was adversely affected by the U.S. economic recession which NTICbelieves adversely affected the ability of its principal Natur-TecTM distributorto purchase and distribute Natur-TecTM products from NTIC during second fiscal quarter2009.  NTIC believes that NTIC’s Natur-TecTM saleswill not increase significantly until the end of the third or beginning of NTIC’sfourth fiscal quarter 2009 primarily as a result of this significant customer.

 

As previously disclosed, almost all historicalsales by React-NTI included in NTIC’s consolidated statement ofoperations were derived from sales by React Inc., a 100% ownedsubsidiary of React-NTI, of proprietary ink additives to one customer. During fourth quarter of fiscal 2007, this customer notified ReactInc. that no future orders would be placed after current orders werereceived.  As a result, NTIC anticipates no additionalsales of proprietary ink additives.  Concurrent with the declineof its ink additive sales, React-NTI continued to develop and pursue additionalsales through a patented sintered metal mold release agent sold under thebrand name SERAVATTM and renewable resource-based personal care chemicaladditive under the brand name FaronaTM.  In fiscal 2009, NTICimplemented several cost control and cash preservationmeasures.  These measures included elimination of further product andmarket development related to these products.

 

 As a result of these changes, managementdetermined that the fair value of the React-NTI reporting unit was less thanthe carrying value.  As a result, a loss on impairment of goodwill andlong-lived assets of $554,000 was recorded for the three months ended February 28,2009 to appropriately reflect the fair value of suchassets.  Inaddition, during the three months ended February 28, 2009, NTICderecognized previously recorded trade payables of $320,000 as a result ofnegotiations between NTIC and its vendor. This amount is recorded in general and administrative expenses in NTIC’sconsolidated statement of operations.  At February 28, 2009, the remaining net bookvalue of the assets and liabilities of React-NTI and its subsidiariesapproximates $0.

 

Cost of goods sold as a percentage of net salesincreased to 68.9% in the six months ended February 28, 2009 as comparedto 59.3% for the six months ended February 29, 2008 primarily as a resultof the significant increase ofNatur-TecTM products sales as a percentage of total sales during the six months ended February 28,2009 compared to the six months ended February 29, 2008, which sales aresold at lower margins than NTIC’s ZERUST® products.

 

In December 2008 and January 2009,NTIC implemented a number of cost cutting measures to help counter the negativeimpact of the current worldwide economic crisis, especially with respect to itseffect on the worldwide automotive industry.  NTIC reduced the basesalaries of its executive and other officers by approximately 15% on average,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.  Beginning in March 2009, NTIC expects torealize an approximate 30% reduction in its overall expenses as a result ofthese cost cutting measures.

 

Total net sales of all of NTIC’s joint venturesdecreased 33.9% to $32,476,685 during the six months ended February 28,2009 compared to $49,091,121 during the six months ended February 29, 2008primarily as a result of decreaseddemand for ZERUST® products due to the global economic slowdownand, to a lesser extent, theforeign currency exchange rate of the U.S. dollar compared to other currenciesin which NTIC’s joint ventures conduct business.  As a result of the decrease intotal net sales of NTIC’s joint ventures, NTIC recognized a 35.8% decrease infee income for technical and support services and its equity in income ofcorporate joint ventures and holding companies decreased 64.8% to $657,732during the six months ended February 28, 2009 compared to $1,867,856during the six months ended February 29, 2008.  NTIC incurs direct expenses related to itscorporate joint ventures and holding companies. Such expenses include product and business development, consulting,travel, technical and marketing services to existing joint ventures, legal feesincurred in the establishment of new joint ventures, registration and promotionand

 

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legal defense of worldwide trademarks, and legal feesincurred in connection with the filing of patent applications.  NTIC incurred $2,495,062 in direct jointventure expenses during the six months ended February 28, 2009 compared to$2,424,684 during the six months ended February 29, 2008, an increase of2.9%.  NTIC’s total income from itscorporate joint ventures and holding companies decreased 96.2% to $101,245 forthe six months ended February 28, 2009 compared to income of $2,636,366for the six months ended February 29, 2008 primarily as a result of theadverse worldwide economic situation.

 

NTIC spent $1,417,295 in the six months ended February 28,2009 and $1,201,361 in the six months ended February 29, 2008 inconnection with its research and development activities.  NTIC anticipates that it will spend between $2,800,000and $3,000,000 in total during fiscal 2009 on research and developmentactivities related to its new technologies. These expenses are accounted for in the “Expenses incurred in support ofcorporate joint ventures” section of NTIC’s consolidated statements ofoperations.

 

NTIC’s net income amounted to aloss of ($1,500,805), or a loss of ($0.40) per diluted common share, for thesix months ended February 28, 2009 compared to income of $1,317,866, or$0.35 per diluted common share, for the six months ended February 29,2008.  This decrease was primarily theresult 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 $5,905,213 at February 28,2009, including $244,245 in cash and cash equivalents.  As of February 28, 2009, NTIC had$599,000 of borrowings under its $2,300,000 demand line of credit.  As of February 28, 2009, an additional$600,000 was committed under the demand line of credit to cover a letter ofcredit.

 

NTIC expects to meet its future liquidityrequirements during at least the next 12 months by using its existing cash andcash equivalents, forecasted cash flows from future operations, distributionsof earnings and technical assistance fees to NTIC from its joint ventureinvestments and funds available through existing or anticipated financingarrangements.  In order to take advantageof new product market opportunities to expand its business and increase itsrevenues, NTIC may decide to finance such opportunities by borrowing under itsline of credit or raising additional financing through the issuance of debt orequity securities.

 

**Results of Operations**

 

The following table sets forth NTIC’s resultsof operations for the three months ended February 28, 2009 and February 29,2008.

 
| ** **                          | ** ** | **February 28,  2009** | ** ** | **% of  Net Sales** | ** ** | **February 29,  2008** | ** ** | **% of  Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                           | 1,734,170  |                          | 100.0      | %                           | $          | 2,762,856                     |       | 100.0         | %          | $             | (1,028,686 | ) | (37.2 | )% |
| Cost of goods sold                  |       | 1,155,436                   |       | 66.6                          | %          | 1,609,954                   |       | 58.3                          | %          | (454,518      | )          | (28.2         | )%         |
| Selling expenses                    |       | 575,796                     |       | 33.2                          | %          | 754,302                     |       | 27.3                          | %          | (178,506      | )          | (23.7         | )%         |
| General and administrative expenses |       | 644,524                     |       | 37.2                          | %          | 894,525                     |       | 32.4                          | %          | (250,001      | )          | (27.9         | )%         |
| Lab and technical support expenses  |       | 31,395                      |       | 1.8                           | %          | 53,616                      |       | 1.9                           | %          | (22,221       | )          | (41.4         | )%         |
| Loss on impairment                  |       | $                           | 554,000    |                          | 32.0       | %                           | $          | 0                             |       | 0             | %          | $             | 554,000    |   | — |   |

 

The following table sets forth NTIC’s results of operations forthe six months ended February 28,2009 and February 29, 2008.

 
| ** **                          | ** ** | **Six Months Ended  February 28, 2009** | ** ** | **% of  Net Sales** | ** ** | **Six Months Ended  February 29, 2008** | ** ** | **% of  Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                                                           | 5,005,114  |                          | 100.0      | %                                                           | $          | 6,248,441                     |       | 100.0         | %          | $             | (1,243,327 | ) | (19.9 | )% |
| Cost of goods sold                  |       | 3,448,403                                                   |       | 68.9                          | %          | 3,703,645                                                   |       | 59.3                          | %          | (255,242      | )          | (6.9          | )%         |
| Selling expenses                    |       | 1,346,366                                                   |       | 26.9                          | %          | 1,613,946                                                   |       | 25.8                          | %          | (267,580      | )          | (16.6         | )%         |
| General and administrative expenses |       | 1,585,962                                                   |       | 31.7                          | %          | 1,842,822                                                   |       | 29.5                          | %          | (256,860      | )          | (13.9         | )%         |
| Lab and technical support expenses  |       | 37,462                                                      |       | 0.8                           | %          | 110,744                                                     |       | 1.8                           | %          | (73,282       | )          | (66.2         | )%         |
| Loss on impairment                  |       | $                                                           | 554,000    |                          | 32.0       | %                                                           | $          | 0                             |       | 0             | %          | $             | 554,000    |   | — |   |

 

*Net Sales*. NTIC’s net sales originating in the UnitedStates decreased 37.2% and 19.9% during the three and six months ended February 28,2009, respectively, compared to the same respective periods in fiscal 2008 primarily as a

 

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result of decreaseddemand for NTIC’s ZERUST® products as a result of the U.S. economicrecession and, to a lesser extent, theloss of the principal customer of React Inc., partially offset by sales of NTIC’s new Natur-TecTM products.

 

The following table sets forth NTIC’s netsales for the three months ended February 28, 2009 and February 29,2008 by segment:

 
| ** **                     | ** ** | **February 28,  2009** | ** ** | **February 29,  2008** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales             |       | $                           | 1,727,845  |                        | $          | 2,694,850     |       | $             | (967,005   | ) | (35.9 | )% |
| Natur-TecTM sales          |       | 2,692                       |       | 39,024                      |       | (36,331       | )          | (93.1         | )%         |
| React-NTI sales                |       | 3,633                       |       | 28,982                      |       | (25,349       | )          | (87.5         | )%         |
| React Inc. sales               |       | 0                           |       | 0                           |       | —        |       | —        |       |
| Total North American net sales |       | $                           | 1,734,170  |                        | $          | 2,762,856     |       | $             | (1,028,685 | ) | (37.2 | )% |

 

The following table sets forth NTIC’s netsales for the six months ended February 28, 2009 and February 29,2008 by segment:

 
| ** **                     | ** ** | **February 28,  2009** | ** ** | **February 29,  2008** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales             |       | $                           | 4,512,380  |                        | $          | 5,860,290     |       | $             | (1,347,909 | ) | (23.0 | )% |
| Natur-TecTM sales          |       | 485,009                     |       | 102,708                     |       | 382,301       |       | 372.2         | %          |
| React-NTI sales                |       | 7,725                       |       | 37,284                      |       | (29,559       | )          | (79.3         | )%         |
| React Inc. sales               |       | 0                           |       | 248,160                     |       | (248,160      | )          | (100          | )%         |
| Total North American net sales |       | $                           | 5,005,114  |                        | $          | 6,248,441     |       | $             | (1,243,327 | ) | (19.9 | )% |

 

*Cost of Goods Sold*.  Costof goods sold decreased 28.2% and 6.9% for the three months and six monthsended February 28, 2009, respectively,compared to the same respective periods in fiscal 2008 primarily as a result of the significant decrease in sales of NTIC’s ZERUST® products and the loss of the principal customer of ReactInc.  Cost of sales as a percentage ofnet sales increased to 66.6% and 68.9% for the three and six months ended February 28,2009, respectively, compared to 65.3% and 59.3% in the same respective periodsin fiscal 2008 primarily as a result of smaller profit margins realized bysales of NTIC’s Natur-TecTM productscompared to sales of NTIC’s ZERUST® products.

 

*Selling Expenses*.  NTIC’sselling expenses decreased 23.7% for the three months ended February 28, 2009 compared to the sameperiod in fiscal 2008 due to decreases in (i) salaries of $35,000, (ii) consultingexpense of $31,000, (iii) travel related expenses of $30,000 and (iv) commissionsof $39,000.  NTIC’s selling expensesdecreased 16.6% for the six months ended February 28,2009 compared the same period in fiscal 2008 due to decreases in (i) salariesof $100,000, (ii) consulting expense of $60,000, (iii) commissions of$55,000 and (iv) travel related expenses of $80,000.  Selling expenses as a percentage of net salesincreased to 33.2% and 26.9% during the three and six months ended February 28,2009, respectively, from 27.3% and 25.8% during the same respective periods infiscal 2008, due to the decrease in net sales.

 

*General and Administrative Expenses*.  NTIC’sgeneral and administrative expenses decreased by 27.9% during the three monthsended February 28, 2009 compared to the same period in fiscal 2008 due todecreases in (i) audit and tax expense of $40,000 and (ii) generalexpenses associated with React-NTI of $60,000. Additionally, during the three months ended February 28, 2009, NTICderecognized previously recorded trade payables of $320,000 as a result ofnegotiations between NTIC and its vendor. NTIC’s general and administrative expenses decreased by 6.2% during thesix months ended February 28, 2009 compared to the same period in fiscal2008 due to decreases in (i) audit and tax expense of $66,000 and (ii) generalexpenses associated with React-NTI of $60,000. As a percentage of net sales, general and administrative expensesincreased to 37.2% and 31.7% during the three and six months ended February 28,2009, respectively, from 32.4% and 29.5% during the same respective periods infiscal 2008, due to the decrease in net sales. NTIC includes expenses in general and administrative expenses thatprovide benefit to the various joint ventures in addition to providing benefitto NTIC’s North American operations, including specifically, expensesassociated with information technology, general insurance, executive andnon-executive salary, bonus and benefits, building expenses, audit and tax anddirectors fees.

 

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*Lab and Technical Support Expenses*.  NTIC’slab and technical support expenses decreased by 41.4% and 66.2% during thethree and six months ended February 28, 2009, respectively, compared tothe same respective periods in fiscal 2008 primarily as a result of a change inthe allocation of these expenses to sales activities.  As apercentage of net sales, lab and technical support expenses wererelatively immaterial during the three and six months ended February 28,2009 as well as during the same respective periods in fiscal 2008.

 

*International Corporate Joint Ventures and HoldingCompanies*.  Net sales of NTIC’s corporate joint venturesfor the three and six months ended February 28, 2009 and the samerespective periods in fiscal 2008, excluding React-NTI LLC, were as follows:

 
| ** **              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **              | ** ** | **February 28,  2009**      | ** ** | **February 29,  2008**    | ** ** | **February 28,  2009** | ** ** | **February 29,  2008** | ** ** |
| Industrial chemical     |       | $                                | 11,147,616 |                           | $          | 24,850,908 |   | $ | 31,990,432 |   | $ | 48,477,356 |   |
| Non-industrial chemical |       | 219,483                          |       | 296,098                        |       | 486,253 |   | 613,765 |   |
| Total                   |       | $                                | 11,367,099 |                           | $          | 25,147,006 |   | $ | 32,476,685 |   | $ | 49,091,121 |   |

 

NTIC receives fees for technical and other supportservices it provides to its corporate joint ventures based on the revenues ofthe individual corporate joint ventures. NTIC recognized fee income for such support of $617,850 and $1,938,569in the three and six months ended February 28, 2009, respectively,compared to $1,626,632 and $3,020,427 during the same respective periods infiscal 2008, a decrease of 62.0% and 35.8%, 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 the foreign currencyexchange rate of the U.S. dollar compared to other currencies in which NTIC’sjoint ventures conduct business.

 

NTIC sponsors a worldwide corporate jointventure conference approximately every three to four years in which all of itscorporate joint ventures are invited to participate.  NTIC defers a portion of its technical and othersupport fees received from its corporate joint ventures in each accountingperiod leading up to the next conference, reflecting that NTIC has not fullyearned 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 six months ended February 28, 2009 related to thisfuture conference; however, $288,000 has been accrued over the past threefiscal years.  The costs associated withthese joint 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 its corporate joint venturesand the holding companies and new technologies of $1,317,028 and $2,495,062during the three and six months ended February 28, 2009, respectively,compared to $1,185,509 and $2,424,684 during the same respective periods infiscal 2008, an increase of 41.9% and 18.0%, respectively.  These increases were primarily attributableto the $400,000 of impairment expenses associated with React-NTI and React Inc.that was recognized in the three months ended February 28, 2009.

 

NTIC had equity in (loss) income of corporate jointventures and holding companies of ($1,028) and $657,738 during the three andsix months ended February 28, 2009, respectively, compared to $813,174 and$1,867,856 during the same respective periods in fiscal 2008. These decreases were due primarily to thedecrease in sales from NTIC’s corporate joint ventures as a whole due to the global economic recession, as well as the foreign currency exchange rateof the U.S. dollar compared to other currencies in which NTIC’s joint venturesconduct business.

 

*Interest Income*.  NTIC’sinterest income increased slightly to $874 and $1,319 during the three and sixmonths ended February 28, 2009, respectively, compared to $424 and $919for the same respective periods in fiscal 2008 due to higher average investedcash balances during the most recent periods.

 

*Interest Expense*.  NTIC’sinterest expense increased slightly to $42,440 and $74,338 during the three andsix months ended February 28, 2009, respectively, compared to $40,952 and$72,115 for the same respective periods in fiscal 2008 due to higher averageoutstanding debt levels during the most recent periods.

 

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*(Loss) Income Before Income Tax Expense*. (Loss) income before income tax expense decreased to ($1,967,690) and($1,921,805) during the three and six months ended February 28, 2009,respectively, compared to $848,690 and $1,584,886 for the same respectiveperiods in fiscal 2008.

 

*Income Tax (Benefit) Expense*.Income tax (benefit) expense decreased to ($454,000) and ($421,000) during thethree and six months ended February 28, 2009, respectively, compared to$189,000 and $267,000 in the same respective periods in fiscal 2008.  Income tax (benefit) expense was calculatedbased on management’s estimate of NTIC’s annual effective income tax rate.  NTIC’s annual effective income tax rateduring the three and six months ended February 28, 2009 and February 29,2008 was lower than the statutory rate primarily due to NTIC’s equity in incomeof corporate joint ventures being recognized based on after-tax earnings ofthese entities.  To the extent jointventures’ undistributed earnings are distributed to NTIC, it is not expected toresult in any material additional income tax liability after the application offoreign tax credits.

 

**Liquidity and Capital Resources**

 

*Sources of Cash and Working Capital*.  As of February 28, 2009, NTIC’s working capital was $5,905,213, including$244,245 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 February 28,2009, the interest rate was 2.61%. Interest is payable in arrears on the 15th day of each month and ondemand.  As of February 28, 2009,NTIC had $599,000 in borrowings under its $2,300,000 demand line ofcredit.  As of February 28, 2009, anadditional $600,000 was committed under the demand line of credit to cover aletter of credit.

 

NTIC believes that a combination of itsexisting cash and cash equivalents, forecasted cash flows from futureoperations, anticipated distributions of earnings and technical assistance feesto NTIC from its joint venture investments and funds available through existingor anticipated 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 thatconverts plastic waste into diesel, gasoline and heavy fractions and theapplication of its corrosion inhibiting technology into the oil and gasindustry.  During 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*.  Cashflows used in operating activities for the six months ended February 28,2009 was $1,462,704, which resulted principally from NTIC’s net loss, equityincome of corporate joint ventures, increases in joint venture tradereceivables, income tax receivables, prepaid expenses and decreases in accountspayable and accrued liabilities, partially offset by decreases in tradereceivables excluding joint ventures and inventories, the loss on theimpairment of assets and depreciation expense. Cash flows used in operating activities for the six months ended February 29,2008 was $1,205,428, which resulted principally from the equity income ofcorporate joint ventures, increases in technical and other servicesreceivables, inventories and prepaid expenses and decreases in accounts payable,partially offset by net income, depreciation and amortization expense,decreases in trade receivables and increases in accrued liabilities.

 

Net cash provided by investing activities for the six months ended February 28,2009 was $1,988,289, which was comprised of dividends received from corporatejoint ventures, decrease in other assets and disposal of industrial

 

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patents, partially offset by additions to property and equipment andinvestments in patents.  Net cashprovided by investing activities for the six months ended February 29,2008 was $1,390,673, which was comprised of dividends received from corporatejoint ventures and the sale of a joint venture, partially offset by additionsto property and equipment, loans made and investment in joint ventures.

 

Net cash used in financing activities for the six months ended February 28,2009 was $541,800, which resulted primarily from bank overdrafts and principalpayments on the bank loan for NTIC’s corporate headquarters building, partiallyoffset by borrowings made under the demand line of credit.  Net cash provided by financing activities forthe six months ended February 29, 2008 was $31,417, which resultedprimarily from proceeds from the employee stock purchase plan, partially offsetby principal payments on the bank loan for NTIC’s corporate headquartersbuilding.

 

*Capital Expenditures and Commitments*.  NTIChad no material lease commitments as of February 28, 2009, except for alease agreement entered into by NTI Facilities, Inc., a subsidiary ofNTIC, for approximately 17,000 square feet of office, manufacturing, laboratoryand warehouse space in Beachwood, Ohio, requiring monthly payments of $17,500,which are adjusted annually according to the annual consumer price index,through November 2014.

 

To finance the purchase of the real estateand building 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 anddoes not anticipate establishing any postretirement benefit program.

 

**Off-Balance Sheet Arrangements**

 

NTIC does not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet financial arrangements.  As such, NTIC is not materially exposed toany financing, liquidity, market or credit risk that could arise if NTIC hadengaged in such arrangements.

 

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 has had little effect onNTIC.  NTIC’s business has nothistorically been seasonal.

 

**Market Risk**

 

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

 

Because the functional currency of NTIC’sforeign operations and investments in its foreign corporate joint ventures andholding companies is the applicable local currency, NTIC is exposed to foreigncurrency exchange 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

 

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currency exchange rates would be reflected asa foreign currency translation adjustment and would not change NTIC’s equity inincome of joint ventures and holding companies reflected in its consolidatedstatements of income.  NTIC does nothedge against its foreign currency exchange rate risk.

 

Some raw materials used in NTIC’s productsare exposed to commodity price changes. The primary commodity price exposures are with a variety of plasticresins.

 

NTIC’s demand line of credit bears interestat a rate based on LIBOR and thus may subject NTIC to some market risk oninterest rates.  As of February 28,2009, NTIC had $599,000 of borrowings under its $2,300,000 demand line ofcredit.  As of February 28, 2009, anadditional $600,000 was committed under the demand line of credit to cover aletter of credit.

 

**Critical Accounting Policies and Estimates**

 

There have been no material changes to NTIC’s critical accountingpolicies and estimates from the information provided in Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”,included in NTIC’s annual report on Form 10-K for the fiscal year ended August 31,2008.

 

**Recent Accounting Pronouncements**

 

See Note 2 NTIC’s annual report on Form 10-K forthe fiscal year ended August 31, 2008 for a discussion of recentaccounting pronouncements.

 

**Forward-LookingStatements**

 

This quarterly report on Form 10-Q contains not only historicalinformation, but also forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934 and are subject to the safe harbor created by those sections. Inaddition, NTIC or others on NTIC’s behalf may make forward-looking statementsfrom time to time in oral presentations, including telephone conferences and/orweb casts open to the public, in press releases or reports, on NTIC’s Internetweb site or otherwise. All statements other than statements of historical factsincluded in this report or expressed by NTIC orally from time to time thataddress activities, events or developments that NTIC expects, believes oranticipates will or may occur in the future are forward-looking statementsincluding, in particular, the statements about NTIC’s plans, objectives,strategies, the outcome of contingencies such as legal proceedings, andprospects regarding, among other things, NTIC’s financial condition, results ofoperations and business. NTIC has identified some of these forward-looking statementsin 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” orthe negative of these words or other words and terms of similar meaning. Theseforward-looking statements may be contained in the notes to NTIC’s consolidatedfinancial statements and elsewhere in this report, including under the heading “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-looking statements are based on current expectations aboutfuture events affecting NTIC and are subject to uncertainties and factors thataffect all businesses operating in a global market as well as matters specificto NTIC. These uncertainties and factors are difficult to predict and many ofthem are beyond NTIC’s control. The following are some of the uncertainties andfactors known to us that could cause NTIC’s actual results to differ materiallyfrom what NTIC has anticipated in its forward-looking statements:

 

·                  The effect of current worldwideeconomic conditions on NTIC’s business;

 

·                  The effect of the significantdownturn in the U.S. and worldwide automotive industry on NTIC’s business;

 

·                  NTIC’s dependence on the success ofits joint ventures and technical fees and dividend distributions that NTICreceives from them;

 

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·                  NTIC’s relationships with its jointventures and its ability to maintain those relationships;

 

·                  Risks associated with NTIC’sinternational operations and exposure to fluctuations in foreign currencyexchange rates;

 

·                  Fluctuations in the cost andavailability of raw materials, including resins and other commodities;

 

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

 

·                  Acceptance of NTIC’s existing and newproducts;

 

·                  Increased competition;

 

·                  The economic success of NTIC’s threeemerging new businesses;

 

·                  NTIC’s reliance upon and itsrelationships with its distributors, independent sales representatives andcorporate joint ventures;

 

·                  NTIC’s reliance upon suppliers;

 

·                  The costs and effects of complyingwith changes in tax, fiscal, government and other regulatory policies,including rules relating to environmental, health and safety matters;

 

·                  The costs and effects of outstandinglitigation;

 

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

 

·                  Loss of or changes in executivemanagement or key employees;

 

·                  Ability of management to managearound unplanned events;

 

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

 

·                  NTIC’s reliance upon its managementinformation systems.

 

For more information regarding these and other uncertainties andfactors that could cause NTIC’s actual results to differ materially from whatNTIC has anticipated in its forward-looking statements or otherwise couldmaterially adversely affect its business, financial condition or operatingresults, see NTIC’s annual report on Form 10-K for the fiscal year ended August 31,2008 under the heading “Part I – Item 1A. Risk Factors.”

 

All forward-looking statements included in this report are expresslyqualified in their entirety by the foregoing cautionary statements. We wish tocaution readers not to place undue reliance on any forward-looking statementthat speaks only as of the date made and to recognize that forward-lookingstatements are predictions of future results, which may not occur asanticipated. Actual results could differ materially from those anticipated inthe forward-looking statements and from historical results, due to theuncertainties 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

 

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affecting such forward-looking statements. We advise you, however, toconsult any further disclosures we make on related subjects in our annualreports on Form 10-K, quarterly reports on Form 10-Q and currentreports on Form 8-K we file with or furnish to the Securities and ExchangeCommission.

 

## **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

##  

This Item 3 is inapplicable to NTIC as asmaller reporting company and has been omitted pursuant to Item 305(e) ofSEC Regulation S-K.

 

## **ITEM 4. CONTROLS AND PROCEDURES**

##  

**Evaluation of Disclosure Controls andProcedures**

 

NTIC maintains disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) that are designed toreasonably ensure that information required to be disclosed by NTIC in thereports it files or submits under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized, and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to NTIC’smanagement, including NTIC’s principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure. In designing and evaluating NTIC’s disclosure controls and procedures,NTIC recognizes that any controls and procedures, no matter how well designedand operated can provide only reasonable assurance of achieving the desiredcontrol objectives and NTIC necessarily is required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  NTIC’s management evaluated,with the participation of its Chief Executive Officer and its Chief FinancialOfficer, the effectiveness of the design and operation of NTIC’s disclosurecontrols and procedures as of the end of the period covered in thisreport.  Based on that evaluation, NTIC’sChief Executive Officer and Chief Financial Officer concluded that NTIC’sdisclosure controls and procedures were effective as of the end of such periodto provide reasonable assurance that information required to be disclosed inNTIC’s Exchange Act reports is recorded, processed, summarized, and reportedwithin the time periods specified in the SEC’s rules and forms, and thatmaterial information relating to NTIC and its consolidated subsidiaries is madeknown to management, including NTIC’s Chief Executive Officer and ChiefFinancial Officer, particularly during the period when NTIC’s periodic reportsare being prepared.

 

NTIC’s management is aware, however, thatthere is a lack of segregation of certain duties due to the small number ofemployees of NTIC dealing with general administrative and financialmatters.  However, NTIC’s management hasdecided that considering the employees involved and the control procedures inplace, risks associated with such lack of segregation are insignificant and thepotential benefits of adding employees to clearly segregate such duties do notat this time justify the expenses associated with such increases.

 

**Changes in Internal Control over FinancialReporting**

 

There was no change in NTIC’s internalcontrol over financial reporting that occurred during the quarter ended February 28,2009 that has materially affected, or is reasonably likely to materially affectNTIC’s internal control over financial reporting.

 

# **PART II          OTHER INFORMATION**

#  

## **ITEM 1.           LEGALPROCEEDINGS**

##  

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

 

## **ITEM 1A.        RISKFACTORS**

 

This Item 1A is inapplicable toNTIC as a smaller reporting company.

 

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## **ITEM 2.          UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

## ** **

**Recent Sales of Unregistered Equity Securities**

 

During the three months ended February 28, 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 February 28,2009, NTIC did not purchase any shares of its common stock or other equitysecurities of NTIC.

 

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

 

## **ITEM 3.          DEFAULTS UPON SENIOR SECURITIES**

## ** **

Not applicable.

 

## **ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

## ** **

(a)     TheAnnual Meeting of Stockholders of NTIC was held on January 29, 2009.

 

(b)     Theresults of the stockholder votes were as follows:

 
| ** **                                                                                                                                 | ** ** | **For**    | ** ** | **Against/****Withheld** | ** ** | **Abstain** | ** ** | **Broker****Non-Vote** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|-------------|------------|------------------------|
| **1.   Election  of Directors**                                                                                                  | ** ** | ** ** | ** ** | ** **               | ** ** | ** **  | ** ** | ** **             |
| Pierre Chenu                                                                                                                               |       | 3,067,231  |       | 26,305                   |       | 0           |       | 0                      |
| Tilman B. Frank, M.D.                                                                                                                      |       | 3,064,954  |       | 28,582                   |       | 0           |       | 0                      |
| Soo-Keong Koh                                                                                                                              |       | 3,064,940  |       | 28,596                   |       | 0           |       | 0                      |
| Donald A. Kubik, Ph.D.                                                                                                                     |       | 3,067,231  |       | 26,305                   |       | 0           |       | 0                      |
| Sunggyu Lee, Ph.D.                                                                                                                         |       | 3,066,217  |       | 27,319                   |       | 0           |       | 0                      |
| G. Patrick Lynch                                                                                                                           |       | 3,072,898  |       | 20,637                   |       | 0           |       | 0                      |
| Mark M. Mayers                                                                                                                             |       | 3,064,831  |       | 28,705                   |       | 0           |       | 0                      |
| Ramani Narayan, Ph.D.                                                                                                                      |       | 3,063,216  |       | 30,320                   |       | 0           |       | 0                      |
| Mark J. Stone                                                                                                                              |       | 3,062,939  |       | 30,597                   |       | 0           |       | 0                      |
| ** **                                                                                                                                 | ** ** | ** ** | ** ** | ** **               | ** ** | ** **  | ** ** | ** **             |
| **2.   Amend  Certificate of Incorporation to Eliminate Liability of Directors**                                                 |       | 2,963,847  |       | 119,054                  |       | 10,633      |       | 0                      |
| ** **                                                                                                                                 | ** ** | ** ** | ** ** | ** **               | ** ** | ** **  | ** ** | ** **             |
| **3.   Amend Certificate of Incorporation to  Create Blank Check Preferred Stock**                                               |       | 1,204,741  |       | 203,798                  |       | 1,380       |       | 1,683,617              |
| ** **                                                                                                                                 | ** ** | ** ** | ** ** | ** **               | ** ** | ** **  | ** ** | ** **             |
| **4.   Ratification of Appointment of Virchow  Krause & Company LLP as Independent Registered Public Accounting  Firm** |       | 3,069,182  |       | 12,338                   |       | 12,015      |       | 0                      |

 

## **ITEM 5.          OTHER INFORMATION**

## ** **

Not applicable.

 

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## **ITEM 6.          EXHIBITS**

## ** **

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                     |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Restated Certificate of  Incorporation of Northern Technologies International Corporation (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:  April 14, 2009 |                                                | Matthew  C. Wolsfeld, CPA |
|                       |                                                | Chief Financial Officer |
|                       |                                                | (Principal Financial and Accounting Officer and Duly  Authorized to Sign on Behalf of the Registrant) |
|                            |                                                     |  |  |

 

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

** **

# **EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                               | ** ** | **Method  of Filing** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| 3.1              |       | Restated  Certificate of Incorporation of Northern Technologies International  Corporation                                                                    |       | 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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