**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-QSB**

** **

**(Mark one)**

** **

**x****                    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended**

 

**February 29, 2008**

 

**o****                       TRANSITION REPORT UNDER SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                                to                                     .**

 

**Commission file number  1-11038**

** **

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** **

**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION**

(Name of small business issuer in its charter)

 
| **Delaware**

(State or other  jurisdiction of incorporation or organization)                  |   | **41-0857886**

(I.R.S. Employer  Identification No.) |
|------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|
|                                                                                           |   |                                                  |
| **4201  Woodland Rd**

**Circle  Pines, Minnesota**

(Address of principal  executive offices) |   | **55014**

(Zip Code)                                 |

 

**(763) 225-6600******(Issuer’s telephone number, including area code)

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the past 12 months(or for such shorter period that the issuer was required to file such reports)and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  x  No  o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2)of the Exchange Act).

 

Yes  o No  x

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practicable date.

 
| **Class**                      | ** ** | **Outstanding as of April 11, 2008** |
|--------------------------------|------------|-------------------------------------------|
| Common Stock,  $0.02 par value |       | 3,723,166                                 |

 

Transitional SmallBusiness Disclosure Format (check one): Yes  o  No  x

** **

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** **

**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**FORM 10-QSB**

**February 29, 2008**

 

**TABLE OF CONTENTS**

 
| **Description**    | ** **                                                                                                                               | ** ** | ** ** | **Page** |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|----------|
|               |
| **PART I.**   | **FINANCIAL  INFORMATION**                                                                                                               | ** ** | ** ** |
|               |
| Item 1.            | Financial Statements                                                                                                                     |       |
|               |                                                                                                                                     |       |
|               | Consolidated Balance Sheets  as of February 29, 2008 (unaudited) and August 31, 2007 (audited)                                 | 3          |
|               |                                                                                                                                     |       |
|               | Consolidated  Statements of Operations (unaudited) for the Three and Six Months Ended  February 29, 2008 and February 28, 2007 | 4          |
|               |                                                                                                                                     |       |
|               | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended  February 29, 2008 and February 28, 2007           | 5          |
|               |                                                                                                                                     |       |
|               | Notes to  Consolidated Financial Statements                                                                                              | 6-11       |
|               |
| Item 2.            | Management’s  Discussion and Analysis or Plan of Operation                                                                          | 11-29      |
|               |                                                                                                                                     |       |
| Item 3.            | Controls and  Procedures                                                                                                                 | 29         |
|               |                                                                                                                                     |       |
| **PART II.**  | **OTHER INFORMATION**                                                                                                                    |       |
|               |                                                                                                                                     |       |
| Item 1.            | Legal Proceedings                                                                                                                        | 30         |
|               |                                                                                                                                     |       |
| Item 2.            | Unregistered  Sales of Equity Securities, Use of Proceeds and Small Business Issuer  Purchases of Equity Securities                      | 30         |
|               |                                                                                                                                     |       |
| Item 4.            | Submission of  Matters to a Vote of Security Holders                                                                                     | 30         |
|               |                                                                                                                                     |       |
| Item 5.            | Other Information                                                                                                                        | 30         |
|               |                                                                                                                                     |       |
| Item 6.            | Exhibits                                                                                                                                 | 31         |
|               |                                                                                                                                     |       |
| **SIGNATURE PAGE** | 32                                                                                                                                       |
|               |                                                                                                                                     |       |
| **EXHIBIT INDEX**  | 33                                                                                                                                       |

 

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*ThisQuarterly Report on Form 10-QSB contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, and are subject to the safe harbor created by those sections. Formore information, see “Part I. Financial Information — Item 2. Management’s Discussion and Analysis or Plan of Operation  — Forward-Looking Statements.”*

 

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

 

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

 

2

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**PART I - FINANCIAL INFORMATION**

** **

**ITEM 1.           FINANCIALSTATEMENTS**

 

**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**AND SUBSIDIARIES —**CONSOLIDATED BALANCESHEETS as of

**February 29, 2008 (Unaudited) and August 31, 2007(Audited)**

** **
| ** **                                                                                                                                                 | ** ** | **February 29****,    2008** | ** ** | **August 31,   2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                 | ** ** | ** **                        | ** ** | ** **                 | ** ** |
| CURRENT ASSETS:                                                                                                                                            |       |                              |       |                       |       |
| Cash and cash equivalents                                                                                                                                  |       | $                                 | 461,161    |                       | $          | 244,499 |   |
| Receivables:                                                                                                                                               |       |                              |       |                       |       |
| Trade excluding corporate joint ventures, less allowance for doubtful  accounts of $20,000 and $30,000 at February 29, 2008 and August 31,  2007 |       | 1,615,376                         |       | 1,622,420                  |       |
| Trade corporate joint ventures                                                                                                                             |       | 499,731                           |       | 642,518                    |       |
| Technical and other services, corporate joint ventures                                                                                                     |       | 2,104,250                         |       | 1,514,139                  |       |
| Income taxes                                                                                                                                               |       | —                            |       | 29,755                     |       |
| Inventories                                                                                                                                                |       | 1,776,352                         |       | 1,636,073                  |       |
| Prepaid expenses                                                                                                                                           |       | 310,568                           |       | 184,407                    |       |
| Deferred income taxes                                                                                                                                      |       | 562,000                           |       | 562,000                    |       |
| Total current assets                                                                                                                                       |       | 7,329,438                         |       | 6,435,811                  |       |
|                                                                                                                                                       |       |                              |       |                       |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                                |       | 3,794,127                         |       | 3,792,461                  |       |
|                                                                                                                                                       |       |                              |       |                       |       |
| OTHER ASSETS:                                                                                                                                              |       |                              |       |                       |       |
| Investments in corporate joint ventures:                                                                                                                   |       |                              |       |                       |       |
| Industrial chemical                                                                                                                                        |       | 14,828,401                        |       | 13,180,576                 |       |
| Industrial non-chemical                                                                                                                                    |       | 381,305                           |       | 422,266                    |       |
| Deferred income taxes                                                                                                                                      |       | 779,500                           |       | 779,500                    |       |
| Notes receivable                                                                                                                                           |       | 163,356                           |       | 32,187                     |       |
| Industrial patents and trademarks, net                                                                                                                     |       | 976,949                           |       | 983,206                    |       |
| Goodwill                                                                                                                                                   |       | 304,000                           |       | 304,000                    |       |
| Other                                                                                                                                                      |       | 359,315                           |       | 366,749                    |       |
|                                                                                                                                                       |       | 17,692,826                        |       | 16,068,484                 |       |
|                                                                                                                                                       |       | $                                 | 28,916,391 |                       | $          | 26,296,756 |   |
|                                                                                                                                                       |       |                              |       |                       |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                             | ** ** | ** **                        | ** ** | ** **                 | ** ** |
| CURRENT LIABILITIES:                                                                                                                                       |       |                              |       |                       |       |
| Current portion of note payable                                                                                                                            |       | $                                 | 30,362     |                       | $          | 29,319 |   |
| Accounts payable                                                                                                                                           |       | 879,079                           |       | 1,337,443                  |       |
| Accrued liabilities:                                                                                                                                       |       |                              |       |                       |       |
| Payroll and related benefits                                                                                                                               |       | 918,829                           |       | 1,025,858                  |       |
| Income taxes payable                                                                                                                                       |       | 31,386                            |       | —                     |       |
| Deferred joint venture royalties                                                                                                                           |       | 240,000                           |       | 192,000                    |       |
| Other                                                                                                                                                      |       | 146,227                           |       | 62,414                     |       |
| Total current liabilities                                                                                                                                  |       | 2,245,883                         |       | 2,647,034                  |       |
|                                                                                                                                                       |       |                              |       |                       |       |
| NOTE PAYABLE, NET OF CURRENT PORTION                                                                                                                       |       | 1,196,402                         |       | 1,211,528                  |       |
| MINORITY INTEREST                                                                                                                                          |       | 13,988                            |       | 36,133                     |       |
|                                                                                                                                                       |       |                              |       |                       |       |
| 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 3,723,166 and 3,683,016, respectively                       |       | 74,463                            |       | 73,660                     |       |
| Additional paid-in capital                                                                                                                                 |       | 5,181,715                         |       | 4,755,146                  |       |
| Retained earnings                                                                                                                                          |       | 17,436,868                        |       | 16,118,982                 |       |
| Accumulated other comprehensive income                                                                                                                     |       | 2,767,072                         |       | 1,454,273                  |       |
| Total stockholders’ equity                                                                                                                            |       | 25,460,118                        |       | 22,402,061                 |       |
|                                                                                                                                                       |       | $                                 | 28,916,391 |                       | $          | 26,296,756 |   |

 

See notes toconsolidated financial statements.

 

3

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**** **—******CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**

**THREE AND SIX MONTHS ENDED FEBRUARY 29, 2008 ANDFEBRUARY 28, 2007**

 
| ** **                                                                                         | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                         | ** ** | **February 29,  2008** | ** ** | **February 28,  2007** | ** ** | **February 29,  2008** | ** ** | **February 28,  2007** | ** ** |
| NORTH AMERICAN OPERATIONS:                                                                         |       |                        |       |                        |       |   |   |   |   |
| Sales                                                                                              |       | $                           | 2,762,856  |                        | $          | 3,884,895 |   | $ | 6,248,441 |   | $ | 8,502,269 |   |
| Cost of goods sold                                                                                 |       | 1,609,954                   |       | 2,459,064                   |       | 3,703,645 |   | 5,404,119 |   |
| Gross profit                                                                                       |       | 1,152,902                   |       | 1,425,831                   |       | 2,544,796 |   | 3,098,150 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| Operating expenses:                                                                                |       |                        |       |                        |       |   |   |   |   |
| Selling                                                                                            |       | 754,302                     |       | 810,165                     |       | 1,613,946 |   | 1,579,204 |   |
| General and administrative                                                                         |       | 894,525                     |       | 804,289                     |       | 1,842,822 |   | 1,627,172 |   |
| Lab and technical support                                                                          |       | 53,616                      |       | 45,335                      |       | 110,744 |   | 130,375 |   |
|                                                                                               |       | 1,702,443                   |       | 1,659,789                   |       | 3,567,512 |   | 3,336,751 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| NORTH AMERICAN OPERATING  LOSS                                                                     |       | (549,541                    | )          | (233,958                    | )          | (1,022,716 | ) | (238,601 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| CORPORATE JOINT VENTURES AND HOLDING COMPANIES:                                                    |       |                        |       |                        |       |   |   |   |   |
| Equity in income of industrial chemical corporate joint ventures and  holding companies            |       | 880,777                     |       | 1,002,944                   |       | 1,953,811 |   | 1,595,934 |   |
| Equity in (loss) income of industrial non-chemical corporate joint  ventures and holding companies |       | (67,603                     | )          | (8,429                      | )          | (85,955 | ) | 33,800 |   |
| 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                |       | 1,626,632                   |       | 1,213,162                   |       | 3,020,427 |   | 2,346,003 |   |
| Expenses incurred in support of corporate joint ventures                                           |       | (1,185,509                  | )          | (1,341,052                  | )          | (2,424,684 | ) | (2,657,301 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INCOME FROM ALL CORPORATE JOINT VENTURES AND HOLDING COMPANIES                                     |       | 1,427,064                   |       | 866,625                     |       | 2,636,366 |   | 1,318,436 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INTEREST INCOME                                                                                    |       | 424                         |       | 766                         |       | 919 |   | 1,701 |   |
| INTEREST EXPENSE                                                                                   |       | (40,592                     | )          | (47,483                     | )          | (72,115 | ) | (90,364 | ) |
| OTHER INCOME                                                                                       |       | 6,825                       |       | 6,281                       |       | 14,757 |   | 8,374 |   |
| GAIN ON SALE OF ASSETS                                                                             |       | 4,001                       |       | 1,700                       |       | 5,530 |   | 726,195 |   |
| MINORITY INTEREST                                                                                  |       | 507                         |       | 2,272                       |       | 22,145 |   | (7,314 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INCOME BEFORE INCOME TAX  EXPENSE                                                                  |       | 848,690                     |       | 596,203                     |       | 1,584,886 |   | 1,718,427 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INCOME TAX EXPENSE                                                                                 |       | 189,000                     |       | 148,000                     |       | 267,000 |   | 280,000 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| NET INCOME                                                                                         |       | $                           | 659,690    |                        | $          | 448,203 |   | $ | 1,317,886 |   | $ | 1,438,427 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| NET INCOME PER COMMON  SHARE:                                                                      |       |                        |       |                        |       |   |   |   |   |
| Basic                                                                                              |       | $                           | 0.18       |                        | $          | 0.12 |   | $ | 0.36 |   | $ | 0.40 |   |
| Diluted                                                                                            |       | $                           | 0.18       |                        | $          | 0.12 |   | $ | 0.35 |   | $ | 0.39 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:                                                |       |                        |       |                        |       |   |   |   |   |
| Basic                                                                                              |       | 3,720,522                   |       | 3,664,248                   |       | 3,694,588 |   | 3,644,126 |   |
| Diluted                                                                                            |       | 3,753,747                   |       | 3,690,260                   |       | 3,732,175 |   | 3,679,023 |   |

 

Seenotes to consolidated financial statements.

 

4

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND**

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

**SIX MONTHS ENDED FEBRUARY 29, 2008 and FEBRUARY 28,2007**

** **
| ** **                                                                                   | ** ** | **Six Months Ended**       | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                   | ** ** | **February 29, 2008** | ** ** | **February 28, 2007** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                       |       |                       |       |   |   |
| Net income                                                                                   |       | $                          | 1,317,886  |   | $ | 1,438,427 |   |
| Adjustments to reconcile net income to net cash (used in) provided by  operating activities: |       |                       |       |   |   |
| Expensing of fair value of stock options vested                                              |       | 47,602                     |       | 60,786 |   |
| Depreciation expense                                                                         |       | 162,369                    |       | 153,996 |   |
| Amortization expense                                                                         |       | 72,468                     |       | 91,696 |   |
| Gain on sale of assets                                                                       |       | (5,530                     | )          | (726,195 | ) |
| Minority interest expense                                                                    |       | (22,145                    | )          | 7,314 |   |
| Equity in income from corporate joint ventures:                                              |       |                       |       |   |   |
| Industrial chemical                                                                          |       | (1,953,811                 | )          | (1,595,934 | ) |
| Industrial non-chemical                                                                      |       | 85,955                     |       | (33,800 | ) |
| Gain on sale of industrial chemical corporate joint venture                                  |       | (172,767                   | )          | — |   |
| Deferred joint venture royalties                                                             |       | 48,000                     |       | 48,000 |   |
| Change in current assets and liabilities:                                                    |       |                       |       |   |   |
| Receivables:                                                                                 |       |                       |       |   |   |
| Trade excluding corporate joint ventures                                                     |       | 7,044                      |       | 228,975 |   |
| Trade corporate joint ventures                                                               |       | 142,787                    |       | (14,251 | ) |
| Technical and other services receivables, corporate joint ventures                           |       | (590,111                   | )          | (86,953 | ) |
| Income taxes                                                                                 |       | 29,755                     |       | 38,983 |   |
| Inventories                                                                                  |       | (140,279                   | )          | (151,637 | ) |
| Prepaid expenses and other                                                                   |       | (126,161                   | )          | (63,520 | ) |
| Income taxes payable                                                                         |       | 31,386                     |       | — |   |
| Accounts payable                                                                             |       | (458,364                   | )          | (711,293 | ) |
| Accrued liabilities                                                                          |       | 311,054                    |       | (56,217 | ) |
| Net cash used in operating activities                                                        |       | (1,212,862                 | )          | (1,371,623 | ) |
|                                                                                         |       |                       |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                       |       |                       |       |   |   |
| Proceeds from the sale of assets                                                             |       | 6,201                      |       | 850,367 |   |
| Investment in corporate joint ventures                                                       |       | (87,950                    | )          | (538,104 | ) |
| Dividends received from corporate joint ventures                                             |       | 1,470,508                  |       | 1,222,312 |   |
| Proceeds from sale of industrial chemical corporate joint ventures                           |       | 364,000                    |       | — |   |
| Loans made                                                                                   |       | (140,000                   | )          | — |   |
| Cash received from notes receivable                                                          |       | —                     |       | 445,469 |   |
| Additions to property and equipment                                                          |       | (164,704                   | )          | (692,347 | ) |
| (Increase) decrease in other assets                                                          |       | 7,434                      |       | (27,772 | ) |
| Additions to industrial patents                                                              |       | (57,382                    | )          | (58,535 | ) |
| Net cash provided by investing activities                                                    |       | 1,398,107                  |       | 1,201,390 |   |
|                                                                                         |       |                       |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                       |       |                       |       |   |   |
| Net borrowings made on line of credit (repayments)                                           |       | —                     |       | 178,000 |   |
| Repayment of note payable                                                                    |       | (14,083                    | )          | (12,955 | ) |
| Proceeds from exercise of stock options                                                      |       | —                     |       | 104,772 |   |
| Proceeds from employee stock purchase plan                                                   |       | 45,500                     |       | — |   |
| Bank overdrafts                                                                              |       | —                     |       | (158,147 | ) |
| Net cash provided by financing activities                                                    |       | 31,417                     |       | 111,670 |   |
|                                                                                         |       |                       |       |   |   |
| NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                        |       | 216,662                    |       | (58,563 | ) |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF PERIOD                                            |       | 244,499                    |       | 299,117 |   |
|                                                                                         |       |                       |       |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                                  |       | $                          | 461,161    |   | $ | 240,554 |   |

 

See notes to consolidated financial statements.

 

5

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

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

 

In the opinion of management,the accompanying unaudited consolidated financial statements contain allnecessary adjustments, which are of a normal recurring nature, and presentfairly the consolidated financial position of Northern TechnologiesInternational Corporation and its subsidiaries (the Company) as of February 29,2008 and the results of their operations for the three and six months ended February 29,2008 and February 28, 2007 and their cash flows for the six months ended February 29,2008 and February 28, 2007, in conformity with accounting principlesgenerally accepted in the United States of America.

 

These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes contained in the Company’s annual report on Form 10-KSBfor the fiscal year ended August 31, 2007 and with the Management’sDiscussion and Analysis or Plan of Operation section appearing in thisquarterly report.  Operating results forthe three and six months ended February 29, 2008 are not necessarilyindicative of the results that may be expected for the full fiscal year ending August 31,2008.

 

**2.****                           ****RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

Effective September 1,2007, we adopted the provisions of the FASB Interpretation 48, “*Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement 109*” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS No. 109and prescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken in a taxreturn.  Under FIN 48, the impact of anuncertain tax position on the income tax return must be recognized at thelargest amount that is more-likely-than-not to be sustained upon audit by therelevant taxing authority.  An uncertainincome tax position will not be recognized if it has less than a 50% likelihoodof being sustained.  Additionally, FIN 48provides guidance on subsequent derecognition of tax positions, financialstatement classification, recognition of interest and penalties, accounting ininterim periods and disclosure and transition rules.  The adoption of FIN 48 did not have amaterial impact on our financial condition, results of operations or cash flows.

 

As of August 31, 2007, wehad $75,000 of unrecognized tax benefits. If recognized, $75,000 would have an impact on our effective taxrate.  During the six months ended February 29,2008, the unrecognized tax benefits have not increased or decreasedmaterially.  It is expected that the amountof unrecognized tax benefits will change in the next 12 months; however wecannot reasonably estimate that change.

 

We recognize interest andpenalties related to unrecognized tax benefits as a component of our income taxprovision.  This policy will not changeas a result of the adoption of FIN 48. As of September 1, 2007, we recorded a liability of $11,300 forinterest and penalties.  The liabilityfor the payment of interest and penalties did not materially change during thesix months ended February 29, 2008.

 

We operate in multiple taxjurisdictions, both within the United States and outside the UnitedStates.  With certain exceptions, we areno longer subject to examination for tax years prior to 2004.  Our tax filings for the years August 31,2004 and August 31, 2005 were examined by the Internal RevenueService.  The examination has beenconcluded with the exception of the payroll tax issue discussed within Note 9to these consolidated financial statements entitled “Commitments andContingencies.”

 

In March 2008, theFinancial Accounting Standards Board (FASB) issued Statement No. 161, *Disclosures about Derivative Instruments and Hedging Activities*.  SFAS 161 requires additional disclosuresrelated to the use of derivative instruments, the accounting for derivativesand how derivatives impact financial statements.  

 

6

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SFAS No. 161 is effectivefor fiscal years and interim periods beginning after November 15, 2008.The Company does not expect the adoption of SFAS 161 to have a material effecton the consolidated financial statements.

 

**3.         INVENTORIES**

 

Inventories consisted of the following:

 

| ** **           | ** ** | **February 29,   2008** | ** ** | **August 31,   2007** | ** ** |
|----------------------|------------|------------------------------|------------|----------------------------|------------|
| Production materials |       | $                            | 352,128    |                       | $          | 183,658 |   |
| Finished goods       |       | 1,424,224                    |       | 1,452,415                  |       |
|                 |       | $                            | 1,776,352  |                       | $          | 1,636,073 |   |

 

**4.         INVESTMENTSIN CORPORATE JOINT VENTURES**

 

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

 
| ** **                                                                                             | ** ** | **February 29,   2008** | ** ** | **August 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|
| Current assets                                                                                         |       | $                            | 46,506,829 |                      | $          | 42,767,569 |   |
| Total assets                                                                                           |       | 54,161,591                   |       | 49,312,491                |       |
| Current liabilities                                                                                    |       | 17,160,559                   |       | 14,939,496                |       |
| Noncurrent liabilities                                                                                 |       | 4,890,820                    |       | 4,971,199                 |       |
| Joint ventures’ equity                                                                            |       | 32,110,212                   |       | 29,401,796                |       |
| Northern Technologies International Corporation’s share of Corporate  Joint Ventures’ equity |       | $                            | 15,209,786 |                      | $          | 13,602,842 |   |

 
| ** **                                                                                                    | ** ** | **February 29,   2008** | ** ** | **February 28,   2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Net sales                                                                                                     |       | $                            | 49,091,121 |                         | $          | 39,272,049 |   |
| Gross profit                                                                                                  |       | 22,542,934                   |       | 18,925,025                   |       |
| Net income                                                                                                    |       | 3,259,635                    |       | 3,133,779                    |       |
| Northern Technologies International Corporation’s share of equity in  income of Corporate Joint Ventures |       | $                            | 1,867,856  |                         | $          | 1,629,734 |   |

 

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

 

Duringthe six months ended February 29, 2008, the Company invested $87,950 in anon-industrial chemical joint venture in Thailand in addition to $143,000previously invested in December 2006. The Company has a 50% ownershipinterest in the joint venture entity. The joint venture entity had no operations prior to the Company’sinvestment in December 2006.   Thetotal contributions made by both owners of the joint venture were $461,900 asof February 29, 2008.

 

Duringthe six months ended February 29, 2008, the Company sold its 50% interestin its industrial chemical joint venture in Austria for $364,000.  The Company’s industrial chemical jointventure in Germany 

 

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purchasedthe joint venture and has consolidated it into its existing business.  The Company recorded a gain on the sale of$172,767, as the Company has determined its interest in the entity wasnon-controlling under EITP 02-05.

 

**5.****                           ****STOCKHOLDERS’EQUITY**

 

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 stock bonuses under the Northern TechnologiesInternational Corporation 2007 Stock Incentive Plan for an aggregate of 33,595shares of its common stock to various employees during the six months ended February 29,2008.  The fair value of the shares ofthe Company’s common stock as of the date of grant of the stock bonuses was $334,270,based on the closing sale price of a share of the Company’s common stock onthat date.

 

During the six months ended February 28,2007, the Company did not purchase or retire any shares of its common stock andno stock options were exercised.  The Companygranted stock bonuses under the Northern Technologies International Corporation2000 Stock Incentive Plan for an aggregate of 37,245 shares of its common stockto various employees during the six months ended February 28, 2007.  The fair value of the shares of the Company’scommon stock as of the date of grant of the stock bonuses was $298,330, basedon the closing sale price of a share of the Company’s common stock on thatdate.

 

**6.****                           ****TOTAL****COMPREHENSIVE INCOME**

 

The Company’s total comprehensive income was asfollows:

 
| ** **                                                                        | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                        | ** ** | **February 29,  2008** | ** ** | **February 28,  2007** | ** ** | **February 29,  2008** | ** ** | **February 28,  2007** | ** ** |
| Net income                                                                        |       | $                           | 659,690    |                        | $          | 448,203 |   | $ | 1,317,886 |   | $ | 1,438,427 |   |
| Other comprehensive (loss) income — foreign currency translation  adjustment |       | 431,014                     |       | (67,645                     | )          | 1,312,799 |   | 303,805 |   |
| Total comprehensive income                                                        |       | $                           | 1,090,704  |                        | $          | 380,558 |   | $ | 2,630,685 |   | $ | 1,742,232 |   |

 

**7.****                           ****NET INCOMEPER COMMON SHARE**

 

Basic net income per commonshare is computed by dividing net income by the weighted average number ofcommon shares outstanding.  Diluted netincome per share assumes the exercise of stock options using the treasury stockmethod, if dilutive.

 

For the six month periodending February 29, 2008, 35,140 options to purchase shares were excludedfrom common share equivalents due to exercise prices exceeding average marketprices.  No options to purchase shares ofcommon stock were excluded from the computation of common share equivalents asof February 28, 2007, as all stock option exercise prices were less thanthe average market price of a share of common stock.

 

**8.****                           ****STOCK****BASED COMPENSATION**

 

The company accounts forstock-based compensation awards in accordance with the provisions of Statementof Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-BasedPayment.” During the six months ended February 29, 2008, options weregranted with an exercise price equal to the market price of the company’scommon stock on the date of grant.  Theoptions vest equally over a three year period and have a five year term.Compensation expense equal to the grant date fair value is recognized for theseawards over the vesting period. Total compensation expense for options was$47,602 and 60,786 for the six months ended ended February 29, 2008 and February 28,2007.

 

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The fair value of eachshare-based option is estimated on the date of grant using a Black-Scholesvaluation method that uses the assumptions noted in the table below. Theexpected life is a significant assumption as it determines the period for whichthe risk-free interest rate, volatility, and dividend yield must be applied.The expected life is the average length of time over which the employee isexpected to exercise their options. Expected volatilities are based on themovement of the company’s common stock over the most recent historical periodequivalent to the expected life of the option. The risk-free interest rate forperiods within the contractual life of the option is based on the U.S. Treasuryrate over the expected life at the time of grant. Dividend yield is estimatedover the expected life based on the company’s dividend policy, historicaldividends paid, expected increase in future cash dividends, and expectedincrease in the company’s stock price. The following table illustrates theassumptions for options granted in the following fiscal periods.

 

| ** **                       | ** ** | **February 29,   2008** | ** ** | **February 28,   2007** | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Dividend yield                   |       | 2.00%                        |       | 2.00%                        |       |
| Expected volatility              |       | 42.2%                        |       | 42.9%                        |       |
| Expected life of option          |       | 5  years                     |       | 5  years                     |       |
| Average risk-free interest  rate |       | 3.62%                        |       | 4.67%                        |       |

 

The weighted-average fairvalue of options granted during the quarters ended February 29, 2008 and February 28,2007 was $3.84 per share and $2.95 per share, respectively.

 

**9.         COMMITMENTSAND CONTINGENCIES**

 

In April 2007, REACT-NTI,LLC (“React LLC”), a company that is 75% owned by the Company, was served witha summons and complaint that was filed by Shamrock Technologies, Inc. (“Shamrock”)in state court in New York.  This case hasbeen removed to the Federal District Court for the Southern District of NewYork.  The lawsuit seeks payment fromReact LLC of commissions in the approximate amount of $314,500 owed by ReactLLC under a license agreement between React LLC and Shamrock.  The complaint alleges breach of the licenseagreement by React LLC and seeks damages in an unspecified amount for suchbreach as well as damages of approximately $300,000 for the alleged failure ofReact LLC to purchase from Shamrock certain inventory manufactured for sale toa customer.  React LLC acknowledges thatReact LLC has not made payment for product in the approximate amount of$300,000 to Shamrock as the invoice for this was only received after Shamrockhad already filed its complaint, but denies all of the claims of breach of thelicense agreement by it and believes that damages caused by Shamrock’s breachof the License Agreement and tortious conduct exceed any amounts owing toShamrock.  React LLC formally responded to the complaint after removal bymoving to dismiss or stay because of Shamrock’s failure to comply withalternative dispute resolution procedures contained in the licenseagreement.  By court order, the matter is presently stayed so that theparties can attempt mediation.  The parties mediated for one day and wereunsuccessful in resolving the matter.  Itis unclear at this time whether the parties will attempt additional mediationefforts.  If mediation is unsuccessful,React LLC will both defend against Shamrock’s allegations and pursue counterclaimsagainst Shamrock for breach of the license agreement and for tortiousinterference.  Because this matter is inthe early stage, the Company cannot estimate the possible loss or range ofloss, if any, associated with its resolution. However, there can be no assurance that the ultimate resolutionof the matter will not result in a material adverse effect on the Company’sbusiness, financial condition or results of operations.

 

In February 2007, the Company was named asa defendant in a lawsuit brought by Evelyna Cantwell and Jack Cantwell,individually, and also doing business as the principals of Byrd-WalshInternational, LLC, in United States Federal District Court for theSouthern District of Florida against the Company and its former Chairman of theBoard and Chief Executive Officer and current Chairman Emeritus, Philip M.Lynch.  The lawsuit alleges causes of action for breach of contract,breach of implied contract, quasi contract, promissory estoppel, equitableestoppel, negligence, wrongful conversion, fraud, constructive fraud, 

 

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misappropriation and violation of the Uniform TradeSecrets Act. The suit seeks unspecified injunctive relief as well ascompensatory and punitive damages in an unspecified amount which,based on the allegations of the complaint, may be claimed by plaintiffs to bein an amount in excess of $45 million.  Based on the allegations inthe complaint and the Company’s understanding of relevant facts andcircumstances, the Company believes that the claims made by theCantwells and Byrd-Walsh in this lawsuit are withoutmerit and the Company intends to vigorously defend againstthem.   Because this matter is in the early stage, the Company cannotestimate the possible loss or range of loss, if any, associated with itsresolution.  The amounts claimed in this lawsuit are substantial, however,and, there can be no assurance that the ultimate resolution of the matter willnot result in a material adverse effect on the Company’s business, financialcondition or results of operations.

 

The Company is involved in a legal action in Finlandwhereby the Company sued a Finnish company for trademark infringement.  Upon initiation of legal action, the courtsseized the inventory of the Finnish company as contraband. The Company won theinitial case, but has subsequently lost on appeal.  The Company is currently appealing the latestcourt decision.  The outcome of theappeal is unknown and any potential loss cannot be estimated at this time;however, the potential judgment or any settlement resulting from the case couldhave a material impact on the financial position or results of operations ofthe Company due to claims against the Company related to expiration ofinventory seized from the Finnish company. The Company has obtained a $600,000 stand-by letter of credit topotentially fund the Company’s obligations related to the courts in Finlandagainst the defendant’s products that were seized as contraband.  Advances made under the demand letter ofcredit will be made at the sole discretion of National City Bank and will bedue and payable on demand.  Anyoutstanding unpaid principal balance under the demand letter of credit bearsinterest at an annual rate based on LIBOR plus 2.25%.  Interest is payable in arrears beginning on January 15,2007 and on the 15th day of each month thereafter and on demand.  Because the Company believes that it hasvalid legal grounds for appeal, it has determined that a loss is not probableat this time as defined by SFAS 5, “*Accounting forContingencies*.”  However, there can be no assurance thatthe ultimate resolution of the matter will not result in a material adverseeffect on the Company’s business, financial condition or results of operations.

 

TheCompany is involved in various other legal actions arising in the normal courseof business.  Management is of theopinion that any judgment or settlement resulting from these pending orthreatened actions would not have a material adverse effect on the Company’sbusiness, financial condition or results of operations.

 

In June 2007,the U.S. Internal Revenue Service concluded its audit of the Company’s U.S.federal income tax returns for fiscal 2004 and 2005.  As a result of suchaudit, the Company paid the IRS approximately $25,000 inadditional payroll taxes.  The Company also agreedin principle with the IRS to adjustments that will result in theadditional payment of approximately $60,000 in income tax and interest. As a result of the audit, the IRS has also taken the position that theCompany failed to withhold and has assessed against the Company approximately $505,000 of payroll taxes andindividual income taxes on travel and other expense reimbursements made toPhilip M. Lynch, the Company’s former Chairman of the Board and Chief ExecutiveOfficer and current Chairman Emeritus, and commissions payments made to InterAlia Holding Co. under that certain former Manufacturer’s RepresentativeAgreement dated as of October 1, 1976 and as subsequently amendedthereafter between the Company and Inter Alia, which agreement has since beenterminated.  Inter Alia beneficially owns approximately 24.9% of the Company’s outstanding common stock, andPhilip M. Lynch, the Company’s former Chairman of the Board and Chief ExecutiveOfficer and current Chairman Emeritus, and G. Patrick Lynch, the Company’scurrent President and Chief Executive Officer, are shareholders of InterAlia.   The Company disagrees with the IRS’ position on withholdingand is in the process of appealing the matter.  Because the Companybelieves that it has valid legal grounds for appeal, it has determined that aloss is not probable at this time as defined by SFAS 5, “*Accountingfor Contingencies*.”  However, there can be no assurance thatthe ultimate resolution of the matter will not result in a material adverseeffect on the Company’s business, financial condition or results of operations.

 

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On November 16, 2007, the Company’s Board ofDirectors, upon recommendation of the Compensation Committee, approved thematerial terms of an annual bonus plan for executive officers and certainemployees of the Company for fiscal year ending August 31, 2008, thepurpose of which is to align the interests of the Company and its subsidiaries,executive officers and stockholders by providing an incentive for theachievement of key corporate and individual performance measures that arecritical to the success of the Company and linking a significant portion of eachexecutive officer’s annual compensation to the achievement of suchmeasures.  The following is a briefsummary of the material terms approved by the Board:

 

·                  The totalamount available under the bonus plan will be up to 25% of the Company’searnings before interest, taxes and other income (EBITOI) for the fiscal yearending August 31, 2008;

 

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

 

·                  The payment ofbonuses under the plan will be made in both cash and shares of the Company’scommon stock, the exact amount and percentages of which will be determined bythe Board, upon recommendation of the Compensation Committee, within areasonable period of time after the completion of the Company’s financialstatements for the fiscal year ending August 31, 2008.

 

**10.       STATEMENTS OFCASH FLOWS**

 

TheCompany did not declare or pay any cash dividends during fiscal 2007 and as of April 11,2008, had not declared or paid any cash dividends during fiscal 2008.

 

The Company issued 33,595 and37,245 shares of common stock as stock bonuses under its stock incentive plansto various employees to satisfy $334,270 and $298,330 of accrued payrollliability during the quarter ended February 29, 2008 and February 28,2007, respectively.

 

**11.****                    ****SUBSEQUENTEVENT**

 

On April 10, 2008, the Company entered into a Promissory Note Modification Agreement with National CityBank pursuant to which the Company’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 and will terminate on January 31, 2009 unlessrenewed.  Outstanding amounts under thedemand line of credit bear interest at an annual rate based on LIBOR plus2.25%.  Interest is payable in arrears onthe 15th day of each month and on demand.

 

**ITEM 2.           MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

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.

 

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**Business Overview**

 

NTIC focuses on developing,marketing and selling proprietary environmentally responsible materials sciencebased products and technical services directly and via a network of independentdistributors, manufacturers’ representatives and joint ventures in over 50countries.  NTIC manufactures, marketsand sells primarily rust and corrosion inhibiting products and services forautomotive, electronics, electrical, mechanical and military applications, soldunder the brand names Zerust® and EXCOR®. NTIC also offers direct, worldwide on-site technical support on rust andcorrosion issues.  In North America, NTICmarkets its technical services and Zerust® products principally to industrialusers by a direct sales force and through a network of independent distributorsand sales representatives.  NTIC’stechnical service representatives work directly with the end users of NTIC’sproducts to analyze their specific needs and develop systems to meet theirtechnical requirements.

 

In addition to Zerust® productsand services, NTIC’s consolidated net sales in North America for the six monthsended February 29, 2008 included $102,707 in sales of NTIC’s Natur-TecTMproducts, which are part of NTIC’s new biodegradable and compostable plasticsline.  These were the first sales of thisnew product line, most of which were initial sales to new customers.  Beginning in fiscal 2008, NTIC began tomanufacture and sell a broad range of bio-based and biodegradable (compostable)polymer resin compounds and products under the Natur-TecTM brand. In recentyears, a combination of market drivers such as higher petroleum prices, adesire to reduce dependence on foreign oil, increased environmental awarenessat the consumer level, and favorable regulations banning the use of regularplastics, have led to widespread interest in sustainable, renewable resourcebased and compostable alternatives to traditional plastics.  Natur-TecTM biodegradable and compostable polymerresins and all products made of the resins meet all requirements ofinternational standards for compostable plastics such as ASTM D6400 (U.S.) andEN 13432 (Europe), and are certified as 100% compostable by the BiodegradableProducts Institute in the U.S. The finished products include totallybiodegradable compost and trash bags, agricultural film and other single-usedisposable products such as compostable cutlery, food and consumer goodspackaging.

 

NTIC participates, either directlyor indirectly through holding companies, in 29 corporate joint venturearrangements in North America, South America, Europe, Asia and the MiddleEast.  Each of these joint venturesgenerally manufactures, markets and sells finished products in the geographicterritory that it is assigned.  NTIC’sjoint venture partners are knowledgeable in the applicable environmental,labor, tax and other requisite regulations and laws of the respective foreigncountries in which they operate, as well as the local customs and businesspractices.  While most of NTIC’s joint venturescurrently sell rust and corrosion inhibiting products and custom packagingsystems, NTIC also has joint ventures that manufacture, market and sell orintend to manufacture, market or sell bio-based additives with both industrialand personal care applications, machinery that converts waste plastics intodiesel, gasoline and mid-distillates, and electronic sensing instruments. NTICcategorizes its joint ventures into two principal areas: industrial chemicaland non-industrial chemical.

 

In an effort to increase netsales, NTIC is in the process of expanding the application of its corrosioninhibiting technology to include solutions targeted at the oil and gasindustry, and its product line to include biodegradable and compostableplastics, and machinery that converts waste plastics into diesel, gasoline andmid-distillates.  During fiscal 2008,NTIC expects to invest in aggregate between $2,800,000 and $3,100,000 inadditional research and development and marketing efforts and resources intothese emerging businesses, product lines and markets.  These fees are accounted for in the “Expensesincurred in support of corporate joint ventures” section of NTIC’s consolidatedstatements of income.  During the firstsix months of fiscal 2008, NTIC invested approximately $1,450,720 in additionalresearch and development and marketing efforts and resources into theseemerging businesses, product lines and markets. NTIC anticipates additional revenue from these new technologies infiscal year ending August 31, 2008. Although NTIC recognized $102,707 in sales of Natur-TecTM for the sixmonths ended February 29, 2008, no assurance can be provided that such newbusinesses will be successful or that NTIC will be successful in obtainingadditional revenue.

 

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**Financial Overview**

 

NTIC’s consolidated net sales inNorth America decreased 26.5% during the six months ended February 29,2008 compared to the six months ended February 28, 2007, primarily as aresult of the anticipated loss of its React-NTI, LLC subsidiary’s mostsignificant customer, partially offset by an increase in demand for NTIC’sZerust® products and sales of its new Natur-TecTM products.  As previously disclosed by NTIC, the sales ofReact-NTI included in NTIC’s consolidated net sales historically have consistedalmost entirely of sales by React Inc., a 100% owned subsidiary of React-NTI,of proprietary ink additives to one customer. During fourth quarter of fiscal 2007, this single customer notifiedReact Inc. of the customer’s intent to purchase React’s remaining inventory ofink additives, but that after such inventory was depleted, the customer wouldnot place any future orders with React Inc. React-NTI had consolidated sales of $285,444 in the six months ended February 29,2008 compared to sales of $2,785,667 in the six months ended February 28,2007.   The vast majority of such salesby React-NTI were from React Inc., which had sales of $248,160 during the sixmonths ended February 29, 2008 compared to sales of $2,750,050 during thesix months ended February 28, 2007. NTIC anticipates no additional sales for React Inc. after the six monthsended February 29, 2008.  Accordingly,the loss of React’s sole customer has had and is expected to continue to have amaterial adverse impact on NTIC’s consolidated net sales.  However, since the profit on React’s sales ofthe ink additives to this customer was extremely small, the effect on NTIC’snet income during the six months ended February 29, 2008 was not materialand NTIC does not expect that the anticipated continued decrease in net salesby React will have a material adverse effect on NTIC’s future consolidated netincome.

 

Despite the decrease in NTIC’sconsolidated net sales in North America, sales of NTIC’s rust and corrosioninhibiting products in North America increased during the six months ended February 29,2008 compared to the same period in fiscal 2007.  Net sales of NTIC’s Zerust® and Natur-TecTMproducts increased 4.3% or $246,395 to $5,962,997 during the six months ended February 29,2008 compared to $5,716,602 during the six months ended February 28, 2007.NTIC’s consolidated net sales in North America during the six months ended February 29,2008 included $102,707 from sales of NTIC’s Natur-TecTM products.

 

NTIC’s international business hasexpanded significantly during the past several fiscal years.  Total net sales of all of NTIC’s jointventures increased 25.0% to $49,091,121 during the six months ended February 29,2008 compared to $39,272,049 during the six months ended February 28,2007.  The profits of NTIC’s corporatejoint ventures are shared, however, by the respective corporate joint ventureowners in accordance with their respective ownership percentages.  In addition, NTIC’s receipt of funds as aresult of sales by its joint ventures is dependent upon NTIC’s receipt ofdividend distributions from the joint ventures and NTIC’s receipt of fees fortechnical and other support services that NTIC provides to its joint venturesbased on the revenues of the joint ventures. NTIC typically owns 50% or less of its joint venture entities and thusdoes not control the decisions of these entities regarding whether and how muchto pay dividends in dividends in any given year. NTIC’s income from itscorporate joint ventures and holding companies increased 100.0% to $2,636,366for the six months ended February 29, 2008 compared to $1,318,436 for thesix months ended February 28, 2007.

 

NTIC sold its 50% interest in itsindustrial chemical joint venture in Austria for a recorded $364,000.  The Company’s industrial chemical jointventure in Germany purchased the joint venture and has consolidated it into itsexisting business; the German joint venture will service the territory andcustomers of the former Austrian venture as well.  The Company recorded a gain on the sale of$172,767, as the Company has determined its interest in the entity wasnon-controlling.

 

Cost of sales as a percentage ofnet sales decreased to 59.3% for the six months ended February 29, 2008compared to 63.6% for the six months ended February 28, 2007 primarily asa result of the significant decrease of React Inc. sales during the six monthsended February 29, 2008 compared to the same period during fiscal 2007, whichsales were sold at lower margins than NTIC’sZerust® and Natur-TecTM products.

 

Net income decreased 8.4% to$1,317,886, or $0.35 per diluted common share, for the six months ended February 29,2008 compared to $1,438,427, or $0.39 per diluted common share, for the sixmonths ended 

 

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February 28, 2007, primarilyas a result of a one-time gain on sale of assets of $724,495 during the firstsix months of fiscal 2007.

 

NTIC’s working capital was$5,083,555 at February 29, 2008, including $461,161 in cash and cashequivalents.  As of February 29,2008, NTIC did not have any borrowings under its $1,500,000 revolving creditfacility.  Although the revolving creditfacility was recently renewed for another year, on April 10, 2008, therevolving credit facility was terminated and NTIC’s demand line of credit wasincreased to $2,300,000.

 

NTIC elected not to pay a cashdividend to its stockholders in fiscal 2007 or thus far in fiscal 2008 in orderto preserve cash and make investments in future operations.  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, anticipateddistributions of earnings and technical assistance fees to NTIC from its jointventure investments and funds available through existing or anticipatedfinancing arrangements.

 

**Results of Operations**

 

The following table sets forth NTIC’s results ofoperations for the three months ended February 29, 2008 and February 28,2007.

 
| ** **                          | ** ** | **February 29, 2008** | ** ** | **% of  Net Sales** | ** ** | **February 28, 2007** | ** ** | **% of  Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|----------------------------|------------|---------------------|------------|----------------------------|------------|---------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                          | 2,762,856  |                | 100.0%     |                       | $          | 3,884,895           |       | 100.0%        |       | $             | (1,122,039 | ) | (28.9)% |   |
| Cost of goods sold                  |       | 1,609,954                  |       | 58.3%               |       | 2,459,064                  |       | 63.3%               |       | (849,110      | )          | (34.5)%       |       |
| Selling expenses                    |       | 754,302                    |       | 27.3%               |       | 810,165                    |       | 20.9%               |       | (55,863       | )          | (6.9)%        |       |
| General and administrative expenses |       | 894,525                    |       | 32.4%               |       | 804,289                    |       | 20.7%               |       | 90,236        |       | 11.2%         |       |
| Lab and technical support expenses  |       | $                          | 53,616     |                | 1.9%       |                       | $          | 45,335              |       | 1.2%          |       | $             | 8,281      |   | 18.3% |   |

 

The following table sets forthNTIC’s results of operations for the six months ended February 29,2008 and February 28, 2007.

 
| ** **                          | ** ** | **Six Months Ended  February 29, 2008** | ** ** | **% of  Net Sales** | ** ** | **Six Months Ended February 28, 2007** | ** ** | **% of  Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|---------------------|------------|---------------------------------------------|------------|---------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                                            | 6,248,441  |                | 100.0%     |                                        | $          | 8,502,269           |       | 100.0%        |       | $             | (2,253,828 | ) | (26.5)% |   |
| Cost of goods sold                  |       | 3,703,645                                    |       | 59.3%               |       | 5,404,119                                   |       | 63.6%               |       | (1,700,474    | )          | (31.5)%       |       |
| Selling expenses                    |       | 1,613,946                                    |       | 25.8%               |       | 1,579,204                                   |       | 18.6%               |       | 34,742        |       | 2.2%          |       |
| General and administrative expenses |       | 1,842,822                                    |       | 29.5%               |       | 1,627,172                                   |       | 19.1%               |       | 215,650       |       | 13.3%         |       |
| Lab and technical support expenses  |       | $                                            | 110,744    |                | 1.8%       |                                        | $          | 130,375             |       | 1.5%          |       | $             | (19,631    | ) | (15.1)% |   |

 

*Net Sales*. NTIC’s netsales originating in the United States decreased during the three and sixmonths ended February 29, 2008 compared to the same respective periods infiscal 2007 primarily as a result of the loss of the principal customer ofReact Inc., partially offset by anincrease in demand for Zerust® products sold to existing and new customers andsales of Natur-TecTM products in the fiscal 2008periods.

 

*Cost of Goods Sold*.  Cost of goods sold decreased as a percentageof net sales for the three and six months ended February 29, 2008, compared to the same respective periods infiscal 2007 primarily as a result of thesignificant decrease in React Inc. saleswhich were sold at significantly lower margins than NTIC’s Zerust® products.

 

*Selling Expenses*.  NTIC’s selling expenses decreased for thethree months ended February 29, 2008 compared to the same period in fiscal2007 primarily as a result of decreases in travel and related expensesassociated with the discontinuation of sales by React Inc as noted above underthe heading “Part 1.  FinancialInformation.  Item 2.  Management’s Discussion and Analysis or Planof Operation.”. Selling expenses increased for the six months ended February 29, 2008 by a negligible amount, comparedtothe same period in 

 

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fiscal 2007. Selling expenses as a percentage of net sales for the three and sixmonth periods increased significantly compared to same respective periods infiscal 2007 due to the decrease in React Inc. sales.

 

*General and AdministrativeExpenses*.  NTIC’sgeneral and administrative expenses increased for the three and six monthsended February 29, 2008 compared to same respective periods in fiscal2007.  The increase for the six-monthperiod was primarily a result of increases in (i) audit and tax expense of$104,000 and (ii) salary and benefits expenses of $40,000, partiallyoffset by decreases in (i) insurance expense of $32,000.  The increase for thethree-month period was primarily the result of increases in the same typesof expenses associated with the six month period. As apercentage of net sales, general and administrative expenses increasedsignificantly compared to same respective periods in fiscal 2007 due to thedecrease in React Inc. net sales.

 

NTIC includes expenses in general and administrativeexpenses that provide benefit to the various joint ventures in addition toproviding benefit to NTIC’s North American operations, including specifically,expenses associated with information technology, general insurance, salary andbenefits, building expenses, audit and tax and directors fees.

 

*Lab and Technical Support Expenses*.  NTIC’s lab and technical support expensesincreased by a negligible amount for the three months ended February 29,2008 compared to the same period in fiscal 2007 and decreased for the sixmonths ended February 29, 2008 compared to the same period in fiscal 2007.  As apercentage of net sales, lab and technical support expenses increasedslightly during the three and six months ended February 29, 2008 comparedto same periods in fiscal 2007.

 

*International Corporate JointVentures and Holding Companies*.  Net sales of NTIC’s corporate joint venturesfor the three and six months ended February 29, 2008 and February 28,2007, excluding React-NTI LLC, were as follows:

 
| ** **              | ** ** | **Three Months Ended**     | ** ** | **Six Months Ended**       | ** ** |
|-------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **February 29, 2008** | ** ** | **February 28, 2007** | ** ** | **February 29, 2008** | ** ** | **February 28, 2007** | ** ** |
| Industrial chemical     |       | $                          | 24,850,908 |                       | $          | 20,082,233 |   | $ | 48,477,356 |   | $ | 38,402,886 |   |
| Non-industrial chemical |       | 296,098                    |       | 310,383                    |       | 613,765 |   | 869,163 |   |
| Total                   |       | $                          | 25,147,006 |                       | $          | 20,  392,616 |   | $ | 49,091,121 |   | $ | 39,272,049 |   |

 

NTIC had equity in income of corporate jointventures and holding companies of $813,174 and $1,867,856 for the three and sixmonths ended February 29, 2008, respectively, and $994,515 and $1,629,734for the three and six months ended February 28, 2007, respectively.  The increase in the six-month comparison wasdue to the increase in revenue and profitability due to the growth of corporatejoint ventures as a whole.

 

NTIC receives fees for technical and other supportto NTIC’s corporate joint ventures based on the revenues of the individualcorporate joint ventures.  NTIC recognizedfee income for such support in the amounts of $1,626,632 and $3,020,427 for thethree and six months ended February 29, 2008, respectively, and $1,213,162and $2,346,003 for the three and six months ended February 28, 2007,respectively.  These increasesin fees for technical and other support to its corporate joint ventures weredue to the increase in revenues and profitability from the corporate jointventures as a whole.

 

NTIC sold its 50% interest in its industrialchemical joint venture in Austria for a recorded $364,000.  The Company’s industrial chemical jointventure in Germany purchased the joint venture and has consolidated it into itsexisting business; the German joint venture will service the territory andcustomers of the former Austrian venture as well.  The Company recorded a gain on the sale of$172,767 related to the sale, as the Company has determined its interest in theentity was non-controlling.

 

NTIC sponsors a worldwide corporate joint ventureconference approximately every three to four years in which all of itscorporate joint ventures are invited to participate.  NTIC defers a portion of its technical and 

 

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other support fees received from its corporate jointventures in each accounting period leading up to the next conference,reflecting that NTIC has not fully earned the payments received during thatperiod.  The next corporate joint ventureconference is scheduled to be held in the summer of 2009.  There was $240,000 of deferred incomerecorded within other accrued liabilities at February 29, 2008 related tothis future conference.  The costsassociated with these joint venture conferences are offset against the deferralas incurred, generally in the period in which the conference is held andimmediately before.

 

NTIC incurred direct expenses related to itscorporate joint ventures and the holding companies of $1,164,432 and $2,403,607for the three and six months ended February 29, 2008 compared to$1,341,052 and $2,657,301 for the three and six months ended February 28,2007.  These expenses include:product and business development, consulting, travel, technical and marketingservices to existing joint ventures, legal fees regarding the establishment ofnew joint ventures, registration and promotion and legal defense of worldwidetrademarks and legal fees incurred in the filing of patent applications for newtechnologies to which NTIC acquired certain rights.  The decreases in direct expenses incurredrelating to NTIC’s corporate joint ventures and holding companies for the sixmonths ended February 29, 2008 compared to the same period in fiscal 2007were attributable to decreases of (i) lab testing and lab supplies of$31,000, (ii) consulting expense of $31,000, (iii) legal expense of$123,000, partially offset by increases in (i) expenses related toemployee wages of $79,000, (ii) travel and related expenses of $30,000,and (iv) miscellaneous expenses of $36,000.  The decrease for the threemonths ended February 28, 2007 compared to the same period in fiscal 2007was a result of decrease in the same types of expenses associated with thesix-month period. As a percentageof net sales, direct expenses incurred relating to NTIC’s corporatejoint ventures and holding companies increased significantly due to thedecrease in React Inc. net sales for the six months ended February 29,2008 compared to same period in fiscal 2007.

 

*Interest Income*.  NTIC’s interest income decreased to $424 forthe three months ended February 29, 2008 compared to $766 for the sameperiod in fiscal 2007 and decreased to $919 for the six months ended February 29,2008 compared to $1,701 for the same period in fiscal 2007 due to lower averageinvested cash balances during the fiscal 2008 periods.

 

*Interest Expense*.  NTIC’s interest expense decreased to $40,592for the three months ended February 29, 2008 compared to $47,483 for thesame period in fiscal 2007 and decreased to $72,115 for the six months ended February 29,2008 compared to $90,364 for the same period in fiscal 2007 due to loweraverage outstanding debt levels and decreases in interest rates during thefiscal 2008 periods.

 

*Gain on Sale of Assets*.  NTIC recognized a gain on sale of assets of$4,001 for the three months ended February 29, 2008 compared to a gain onsale of assets of $1,700 for the same period in fiscal 2007.  NTIC recognized a gain on sale of assets of$5,530 during the six months ended February 29, 2008 compared to a gain onsale of assets of $726,195 for the same period in fiscal 2007, $724,495 ofwhich was due to the sale of land, building and equipment that previouslyserved as NTIC’s corporate headquarters. This $724,495 in gain was the result of a one-time sale and noadditional gain was recognized or is anticipated to be recognized relating toNTIC’s former corporate headquarters in the future.

 

*Income Before Income Tax Expense*.  Income before income tax expense increased to$848,690 for the three months ended February 29, 2008 compared to $596,203for the same period in fiscal 2007. Income before income tax expense decreased $133,541 to $1,584,886 forthe six months ended February 29, 2008 compared to $1,718,427 for the sameperiod in fiscal 2007.

 

*Income Tax Expense*. Income tax expenseincreased to $189,000 for the three months ended February 29, 2008compared to $148,000 for the same period in fiscal 2007.  Income tax expense decreased to $267,000 forthe six months ended February 29, 2008 compared to $280,000 for the sameperiod in fiscal 2007.  Income taxexpense for the three and six months ended February 29, 2008 and February 28,2007, respectively, was calculated based on management’s estimate of NTIC’sannual effective income tax rate.  NTIC’sannual effective income tax rate during the six months ended February 29,2008 and February 28, 

 

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2007was lower than the statutory rate primarily due to NTIC’s equity in income ofcorporate joint ventures being recognized based on after-tax earnings of theseentities.  To the extent joint ventures’undistributed earnings are distributed to NTIC, it is not expected to result inany material additional income tax liability after the application of foreigntax credits.

 

**Liquidityand Capital Resources**

 

*Sources of Cash and Working Capital*.  As of February 29, 2008, NTIC’s working capital was $5,083,555, including$461,161 in cash and cash equivalents, compared to working capital of$3,788,777, including $244,499 in cash and cash equivalents, as of August 31,2007.

 

NTIC had a revolving credit facility of $1,500,000that was renewed on January 30, 2008. As described in more detail below,subsequent to the end of NTIC’s second fiscal quarter, NTIC terminated therevolving credit facility and increased the amount available under its demandline of credit with National City Bank to $2,300,000.  Outstanding amounts under the revolvingcredit facility bore interest at an annual rate based on LIBOR plus 2.25%.  As of February 29, 2008, the interestrate was 7.49% and the average interest rate over the six months ended February 29,2008 and February 28, 2007 was 7.43% and 7.58%, respectively. Amountsborrowed under the facility were collateralized by a lien on substantially allof NTIC’s assets, excluding its corporate joint venture interests, intellectualproperty rights and its Circle Pines headquarters.  The credit documents contained other terms and provisions (including representations,covenants and conditions) customary for transactions of this type. Significantfinancial covenants included the maintenance of a minimum fixed charge coverageratio of 1.0 to 1.0.  Other covenants included a prohibitionon any merger or consolidation without prior consent of the lender andrestrictions on future credit extensions and non-equity investments and theincurrence of additional indebtedness without the lender’s prior consent.During the six months ended February 29, 2008, NTIC was in compliance withall covenants under the revolving credit facility.  The facility containedcustomary events of default, including nonpayment of principal or other amountswhen due; breach of covenants; inaccuracy of representations and warranties;cross-default and/or cross-acceleration to other indebtedness; non-compliancewith laws; certain voluntary and involuntary bankruptcy events; judgmentsentered against NTIC; and a sale of material assets. If an event of defaultwere to occur and was continuing, the lender had the right, among other things,to terminate its obligations thereunder and require NTIC to repay all amountsthereunder.  As of February 29, 2008, there was no outstandingbalance under the facility.  The line ofcredit was subject to a borrowing base calculation and at February 29,2008, NTIC had $1,500,000 available.

 

NTIC also had a demand line ofcredit in the amount of $800,000 with National City Bank.  NTIC obtained the demand line of credit in December 2006to fund NTIC’s obligations related to a required deposit of $445,469 with thecourts in Finland in connection with NTIC’s legal action in Finland.  On April 10, 2008, NTICentered into a Promissory Note ModificationAgreement with National City Bank pursuant to which NTIC’s demand line ofcredit was increased to $2,300,000 and its $1,500,000 revolving credit facilitywas terminated.  Advances made under thedemand line of credit will be made at the sole discretion of National City Bankand will be due and payable on demand. Outstanding amounts under the demand line of credit bear interest at anannual rate based on LIBOR plus 2.25%. As of February 29, 2008, the interest rate was 7.49%.  Interest is payable in arrearson the 15th day of each month and on demand. There was no outstandingbalance under this facility as of February 29, 2008; however, $600,000 wascommitted from the demand line to cover a letter 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 itsoperations, capital expenditures, debt repayments and any stock repurchases forat least the next 12 months.  In aneffort to increase net sales, NTIC is in the process of expanding theapplication of its corrosion inhibiting technology into the oil and gasindustry and its product line to include biodegradable and compostable plasticsand machinery that converts waste plastics into diesel, gasoline andmid-distillates.

 

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During the remainder of fiscal 2008, NTICexpects to invest additional research and development and marketing efforts andresources into these emerging businesses, product lines and markets.  During the first six months of fiscal 2008,NTIC invested approximately $1,450,720 in additional research and developmentand marketing efforts and resources into these emerging businesses, productlines and markets.  In order to takeadvantage of such new product and market opportunities to expand its businessand increase its revenues, NTIC may decide to finance such opportunities byincreasing borrowings under its line of credit or raising additional financingthrough the issuance of debt or equity securities.  There is no assurance that any financingtransaction will be available on terms acceptable to NTIC or at all, or thatany financing transaction will not be dilutive to NTIC’s current stockholders.

 

*Uses of Cash and Cash Flows*.  Cash flows used in operations for the sixmonths ended February 29, 2008 was $1,212,862, which resulted principallyfrom the equity income of corporate joint ventures, increases in technical andother services receivables, inventories and prepaid expenses and decreases inaccounts payable being offset by net income, depreciation and amortizationexpense, decreases in trade receivables and increases in accruedliabilities.  Cash flows used inoperations for the six months ended February 28, 2007 were $1,371,623,which resulted principally from equity in income from corporate joint ventures,gain on sale of assets, decreases in accounts payable and accrued liabilitiesand increases in inventories and prepaid expenses, offset by net income,depreciation and amortization expense, and decreases in trade and income taxreceivables.

 

Net cash provided by investing activities for thesix months ended February 29, 2008 was $1,398,107 which was comprised ofdividends received from corporate joint ventures and the sale of a jointventure, offset by additions to property and equipment, loans made and investmentin joint ventures.   Net cash provided byinvesting activities for the six months ended February 28, 2007 was$1,201,390, which resulted from dividends received from corporate jointventures, proceeds from the sale of assets and cash received from loans anddeposits, offset by additions to property and equipment and investment in jointventures.

 

Net cash provided by financing activities for thesix months ended February 29, 2008 was $31,417, which resulted primarilyfrom proceeds from the employee stock purchase plan offset by principalpayments on the bank loan for NTIC’s corporate headquarter building.  Net cash provided by financing activities forthe six months ended February 28, 2007 was $111,670, which resultedprimarily from borrowings on NTIC’s line of credit and proceeds from theexercise of stock options, offset by bank overdrafts.

 

*Capital Expenditures and Commitments*.  NTIC had no material lease commitments as of February 29,2008, except a lease agreement entered into by NTI Facilities, Inc., asubsidiary of NTIC, for approximately 16,994 square feet of office,manufacturing, laboratory and warehouse space in Beachwood, Ohio, requiringmonthly payments of $17,500, which are adjusted annually according to theannual consumer price index, through November 2014.

 

NTIC moved its corporate headquarters in September 2006.  NTIC purchased the real estate and 40,000square feet building in which its new corporate headquarters is locatedpursuant to a like-kind exchange transaction within the meaning of Section 1031of the Internal Revenue Code of 1986, as amended, for a purchase price of$1,475,000. To finance the transaction, NTIC obtained a secured term loan inthe principal amount of $1,275,000.  Theterm loan matures on May 1, 2011, bears interest at a fixed rate of 8.01%and is payable in 59 monthly installments equal to approximately $10,776(inclusive of principal and interest) commencing June 1, 2006.  All of the remaining unpaid principal andaccrued interest is due and payable on the May 1, 2011 maturity date.  The loan is secured by a first lien on thereal estate and building.

 

NTIC sold the real property and building in whichNTIC’s former Lino Lakes corporate headquarters was located for a purchaseprice of $870,000 on September 8, 2006. The net book value of the building held for sale was $89,636 and theclosing costs and fees associated with the sale of the property was$46,571.  The gain on sale of the propertywas $724,495.

 

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NTIC has no post-retirement benefit plan and doesnot anticipate establishing any post-retirement benefit program.

 

**Off-Balance Sheet Arrangements**

** **

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

 

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 guaranteed up to $329,082 of Omni-NorthernLtd.’s $1,903,571 mortgage obligation with National City Bank, Cleveland,Ohio.  The building is fully leased at present.

 

**Inflation andSeasonality**

** **

Inflation in the U.S. and abroad historically hashad little effect on NTIC’s business, results of operations or financialcondition.  NTIC’s business has nothistorically been seasonal.

 

**Market Risk**

** **

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

 

NTIC is exposed to foreign currency exchange raterisk arising from its investments in its foreign corporate joint ventures andholding companies since NTIC’s fees for technical support and other servicesand dividend distributions from these foreign entities are paid in foreigncurrencies.  NTIC’s principal exchange rate exposure is with the Euro, theJapanese yen, Korean won and the English pound against the U.S. dollar. NTIC does not hedge against its foreign currency exchange rate risk. Since NTIC’s investments in its corporate joint ventures and holding companiesare accounted for using the equity method, any changes in foreign currencyexchange rates would be reflected as a foreign currency translation adjustmentand would not change the equity in income of joint ventures and holdingcompanies reflected in NTIC’s consolidated statement of income.

 

Some raw materials used in NTIC’s products areexposed to commodity price changes.  The primary commodity price exposuresare with a variety of plastic resins.

 

NTIC’s demand line of credit bears interest at arate based on LIBOR and thus may subject NTIC to some market risk on interestrates.  There was no outstanding balanceunder this facility as of February 29, 2008, however, $600,000 wascommitted from the demand line to cover a letter of credit.

 

**Related PartyTransactions**

** **

There we no new related party transactions to bedisclosed.

 

**CriticalAccounting Policies**

** **

The preparation of NTIC’s consolidated financialstatements requires management to make estimates and judgments that affect thereported amount of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. The Securities and ExchangeCommission has defined a company’s most critical accounting policies as thosethat are most important to the portrayal of its financial condition and 

 

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results of operations, and which require the companyto make its most difficult and subjective judgments, often as a result of theneed to make estimates of matters that are inherently uncertain. Based on thisdefinition, NTIC has identified the following critical accounting policies.Although NTIC believes that its estimates and assumptions are reasonable, theyare based upon information available when they are made. Actual results may differsignificantly from these estimates under different assumptions or conditions.

 

***Investments in Corporate JointVentures***

 

NTIC’s investments in corporate joint ventures are accounted for usingthe equity method, except for React-NTI LLC which has been fully consolidated,due to the adoption of FIN 46R. Periodically, NTIC evaluates the investments for any impairment andassesses the future cash flow projections to determine if there are any goingconcern issues.  If an investment weredetermined to be impaired, then a reserve would be created to reflect theimpairment on the financial results of NTIC. NTIC’s evaluation of its investments in corporate joint venturesrequires NTIC to make assumptions about future cash flows of its corporatejoint ventures.  These assumptionsrequire significant judgment and actual results may differ from assumed orestimated amounts.  NTIC’s investments incorporate joint ventures were $15,209,705 and $13,602,842 as of February 29,2008 and August 31, 2007, respectively.

 

***Principles ofConsolidation***

 

NTIC’s consolidated financial statements include theaccounts of Northern Technologies International Corporation, its wholly ownedsubsidiaries, NTI Facilities, Inc. and Northern Technologies HoldingCompany, LLC, and its 75% owned subsidiary, React-NTI LLC.  All significant intercompany transactions andbalances have been eliminated in consolidation.

 

***Accounts andNotes Receivable***

 

NTIC values accounts and notes receivable, net of anallowance for doubtful accounts. Each quarter, NTIC prepares an analysis of itsability to collect outstanding receivables that provides a basis for anallowance estimate for doubtful accounts. In doing so, NTIC evaluates the age of its receivables, past collectionhistory, current financial conditions of key customers and economic conditions.Based on this evaluation, NTIC establishes a reserve for specific accounts andnotes receivable that it believes are uncollectible, as well as an estimate ofuncollectible receivables not specifically known.  Deterioration in the financial condition ofany key customer or a significant slowdown in the economy could have a materialnegative impact on NTIC’s ability to collect a portion or all of the accountsand notes receivable. NTIC believes that an analysis of historical trends andits current knowledge of potential collection problems provide NTIC withsufficient information to establish a reasonable estimate for an allowance fordoubtful accounts. However, since NTIC cannot predict with certainty future changesin the financial stability of its customers, NTIC’s actual future losses fromuncollectible accounts may differ from its estimates. In the event NTICdetermined that a smaller or larger uncollectible accounts reserve isappropriate, NTIC would record a credit or charge to selling expense in theperiod that it made such a determination. Accounts receivable have been reducedby an allowance for uncollectible accounts of $20,000 and $30,000 at February 29,2008 and August 31, 2007, respectively.

 

***Revenue Recognition***

 

In recognizing revenue, NTIC applies the provisionsof the Securities and Exchange Commission Staff Accounting Bulletin No. 104,Revenue Recognition.  NTIC recognizesrevenue from the sale of its products when persuasive evidence of an arrangementexists, the product has been delivered, the price is fixed and determinable andcollection of the resulting receivable is reasonably assured.  These criteria are met at the time ofshipment when risk of loss and title pass to the customer or distributor.

 

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***Foreign CurrencyTranslation (Accumulated Other Comprehensive Income)***

 

The functional currency of each internationalcorporate joint venture is the applicable local currency.  The translation of the applicable foreigncurrencies into U.S. dollars is performed for balance sheet accounts usingcurrent exchange rates in effect at the balance sheet date and for revenue andexpense accounts using an average monthly exchange rate.  Translation gains or losses are reported asan element of accumulated other comprehensive income.

 

NTIC conducts all foreigntransactions based on the U.S. dollar, except for its investments in variousforeign corporate joint ventures and holding companies.  The exchange rate differential relating toinvestments in foreign corporate joint ventures and holding companies isaccounted for under the requirements of SFAS No. 52, “*ForeignCurrency Translation*.”  SinceNTIC’s investments in its corporate joint ventures and holding companies areaccounted for using the equity method, any changes in foreign currency exchangerates would be reflected as a foreign currency translation adjustment and wouldnot change the equity in income of joint ventures and holding companiesreflected in NTIC’s consolidated statement of income.

 

***Stock-BasedCompensation***

 

In December 2004, FASB published FASB StatementNo. 123 (revised 2004), “*Share-Based Payment*.” FAS 123(R) requires that the compensation cost relating to share-basedpayment transactions, including grants of employee stock options, be recognizedin financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  FAS 123(R) coversa wide range of share-based compensation arrangements including stock options,restricted share plans, performance-based awards, share appreciation rights andemployee share purchase plans.  FAS 123(R) is a replacement of FASBStatement No. 123, “*Accounting for Stock-BasedCompensation*,” and supersedes APB Opinion No. 25, “*Accounting for Stock Issued to Employees*,” and its relatedinterpretive guidance.  The effect of FAS 123(R) is to requireentities to measure the cost of employee services received in exchange forstock options based on the grant-date fair value of the award, and to recognizethe cost over the period the employee is required to provide services for theaward.  FAS 123(R) permits entities to use any option-pricing modelthat meets the fair value objective in FAS 123(R).  NTIC implemented FAS123(R) on September 1, 2006, using the modified prospectivetransition method.

 

**Forward-LookingStatements**

 

This report contains not only historicalinformation, but also forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, and are subject to the safe harborcreated by those sections.  In addition,NTIC or others on its behalf may make forward-looking statements from time totime in oral presentations, including telephone conferences and/or web castsopen to the public, in press releases or reports, on NTIC’s Internet web sitesor otherwise.  All statements other thanstatements of historical facts included in this report that address activities,events or developments that NTIC expects, believes or anticipates will or mayoccur in the future are forward-looking statements including, in particular,the statements about NTIC’s plans, objectives, strategies and prospectsregarding, among other things, its financial condition, results of operationsand business.  NTIC has identified someof these forward-looking statements with words like “believe,” “may,” “could,” “might,”“forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,”“plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue” andother words and terms of similar meaning. These forward-looking statements may be contained in the notes to NTIC’sconsolidated financial statements and elsewhere in this report, including underthe heading “Part 1.  FinancialInformation.  Item 2.  Management’s Discussion and Analysis or Planof Operation.”

 

NTIC wishes to caution readers not to place unduereliance on any forward-looking statement that speaks only as of the date madeand to recognize that forward-looking statements are predictions of futureresults, which may not occur as anticipated. Actual results could differ materially from those anticipated in theforward-looking statements and from historical results, due to the risks anduncertainties described under the heading “Risk Factors” below, as well asothers that NTIC may consider immaterial or does not anticipate at 

 

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this time. Although NTIC believes that theexpectations reflected in its forward-looking statements are reasonable, NTICdoes not know whether its expectations will prove correct.  NTIC’s expectations reflected in itsforward-looking statements can be affected by inaccurate assumptions NTIC mightmake or by known or unknown risks and uncertainties, including those describedbelow under the heading “Risk Factors.” The risks and uncertainties described under the heading “Risk Factors”below are not exclusive and further information concerning NTIC and itsbusiness, including factors that potentially could materially affect itsfinancial results or condition, may emerge from time to time.  NTIC assumes no obligation to updateforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements.  NTIC advises you, however, to consult anyfurther disclosures it may make on related subjects in its Annual Reports on Form 10-KSB,Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K thatNTIC files with or furnishes to the Securities and Exchange Commission.

 

**Risk Factors**

 

The following are the most significant factors known to NTIC that couldmaterially adversely affect its business, financial condition or operatingresults.

 

***A significant portion of NTIC’s historical consolidated net sales weredependent upon a single React Inc. customer, which has indicated a desire notto purchase any future products from NTIC or its subsidiaries. As a result,NTIC’s fiscal 2008 have been materially harmed and NTIC’s future consolidatednet sales will continue to be materially harmed.***

 

A customer of NTIC’s React-NTI, LLC joint ventureaccounted for, in the aggregate, approximately 28.0% and 26.6% of NTIC’sconsolidated net sales for the fiscal year ended August 31, 2007 and2006.  As described in more detail underthe heading “Part I. Financial Information. Item 2.  Management’s Discussion and Analysis or Planof Operation—Financial Overview,” during fourth quarter of fiscal 2007, thiscustomer notified React that it would place future orders for React’s remaininginventory of ink additives, but that after such inventory was purchased, thecustomer would not place any future orders. The loss of this customer has had a material adverse impact on NTIC’sconsolidated net sales for fiscal 2008 and NTIC anticipates that the loss ofthis customer will continue to have a material adverse impact on NTIC’sconsolidated net sales thereafter. However, since the margins on React’s sales of the ink additives to thiscustomer were extremely small, the loss of this customer did not have amaterial adverse effect on NTIC’s consolidated net income for the first andsecond quarters of fiscal 2008 and NTIC does not expect that the anticipatedcontinued decrease in net sales by React will have a material adverse effect onNTIC’s future consolidated net income.****No assurancecan be provided, however, that the loss of this customer will not have amaterial adverse effect on NTIC’s future consolidated net income.

 

***The automotive industry in theUnited States has experienced contraction in recent years thus resulting indecreased demand for NTIC’s Zerust***®***products in the United States, which has adversely affected and may continue toadversely affect NTIC’s net sales from North American operations and netincome.***

 

During the fiscal year ended August 31, 2007and during the six months ended February 29, 2008, over 70% and 82.1%,respectively, of NTIC’s consolidated net sales were derived from the sales ofZerust® rust and corrosion inhibiting packaging products andservices.  Most of these products andservices were sold to customers in the automotive industry and to a lesserextent to customers in the electronics, electrical, mechanical, military andretail consumer markets.  The automotiveindustry in the United States has experienced contraction in recent years andis not expected to improve in the foreseeable future, which may result in acontinued adverse effect on NTIC’s net sales from North American operations andnet income.  While NTIC intends toincrease marketing efforts of its Zerust® products and services tocustomers in other target industries, no assurance can be provided that NTICwill be successful in doing so or will recognize increased sales from such newtarget markets.

 

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***NTIC intends to investadditional research and development and marketing efforts and resources toexpand its existing product lines and the distribution of its products into newtarget markets, such as the oil and gas industry.  No assurance can be provided, however, thatNTIC’s investments in such new products and markets will be successful andresult in additional revenue.***

 

In an effort to increase net sales, NTIC isexpanding its corrosion solution products into new markets, such as the oil andgas industry, and expanding its product lines to include other products, suchas biodegradable and compostable plastics, plastic recycling technology andcorrosion solutions in the oil and gas industry.  During fiscal 2008, NTIC expects to makeadditional research and development and marketing efforts and invest additionalresources into these new product lines and markets.  During thefirst six months of fiscal 2008, NTIC invested approximately $1,450,720 inadditional research and development and marketing efforts and resources intothese emerging businesses, product lines and markets.  NTIC anticipates additional revenue fromthese new technologies in fiscal year ending August 31, 2008.  Although NTIC recognized $102,707 in sales ofNatur-TecTM for the six months ended February 29, 2008, no assurance can beprovided that such new businesses will be successful or that NTIC will besuccessful in obtaining additional revenue.

 

***NTIC’s emerging newbusinesses are risky and may not prove to be successful, which could harm NTIC’soperating results and financial condition.***

 

NTIC is in the process of expanding its technologiesinto other applications and businesses. NTIC is undertaking these new businesses either directly or throughjoint ventures.  Such new businesses arerisky and subject to all of the risks inherent in the establishment of a newbusiness enterprise, including:

 

·                  the absence of an operatinghistory;

 

·                  the lack of commercializedproducts;

 

·                  insufficient capital andother resources;

 

·                  expected substantial andcontinual losses for such businesses for the foreseeable future;

 

·                  the lack of manufacturingexperience and limited marketing experience;

 

·                  an expected reliance onthird parties for the commercialization of some of the proposed products;

 

·                  a competitive environmentcharacterized by numerous, well-established and well-capitalized competitors;and

 

·                  reliance on key personnel.

 

***A significant portion of NTIC’sconsolidated net sales, including corporate joint venture sales, are generatedoutside of the U.S. and NTIC intends to continue to expand its internationaloperations.  NTIC’s internationaloperations require management attention and financial resources and expose NTICto difficulties and risks presented by international economic, political,legal, accounting and business factors.***

* *

NTICoffers direct on-site technical support on rust and corrosion issues in over 50countries, and operates a marketing, distribution, and technical networkthrough joint ventures in North America, South America, Europe, Asia and theMiddle East.  NTIC’s consolidated netsales, including the corporate joint venture sales, outside the United Stateswere 25.8% and 20.8% of its total consolidated net sales for the six monthsended February 29, 2008 and for the fiscal year ended August 31,2007, respectively.  One of NTIC’sstrategic objectives is to expand its international operations.  NTIC has recently entered into joint venturesin Indonesia, the Ukraine, Thailand and the United Arab Emirates.  The expansion of NTIC’s existinginternational operations and entry into additional international marketsrequires management attention and financial resources. Many of the countries inwhich NTIC sells its products directly or indirectly through its corporatejoint ventures, are, to some degree, subject to political, economic and/orsocial instability.  NTIC’s internationaloperations expose NTIC and its joint venture partners, representatives, agentsand distributors to risks inherent in operating in foreign jurisdictions.  These risks include:

 

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·                  difficulties in managing andstaffing international operations and the required infrastructure costsincluding legal, tax, accounting, information technology;

 

·                  the imposition of additionalU.S. and foreign governmental controls or regulations, new trade restrictionsand restrictions on the activities of foreign agents, representatives anddistributors, the imposition of costly and lengthy export licensingrequirements and changes in duties and tariffs, license obligations and othernon-tariff barriers to trade;

 

·                  the imposition of U.S.and/or international sanctions against a country, company, person or entitywith whom NTIC does business that would restrict or prohibit continued businesswith the sanctioned country, company, person or entity;

 

·                  pricing pressure that NTICor its corporate joint ventures may experience internationally;

 

·                  laws and business practicesfavoring local companies;

 

·                  currency exchange ratefluctuations;

 

·                  longer payment cycles anddifficulties in enforcing agreements and collecting receivables through certainforeign legal systems;

 

·                  difficulties in enforcing ordefending intellectual property rights; and

 

·                  multiple, changing and ofteninconsistent enforcement of laws and regulations.

 

NTICcannot assure you that one or more of the factors listed above will not harmits business.  Any material decrease inNTIC’s international sales could adversely affect NTIC’s operating results.

 

***NTIC’s liquidityand financial position rely on dividend distributions from its corporate jointventures, which if such dividends cease or are reduced could adversely affectNTIC’s liquidity and financial position.***

 

NTIC’s liquidity and financial position rely ondividend distributions from its corporate joint ventures.  During the six months ended February 29,2008 and the fiscal year ended August 31, 2007, NTIC receivedapproximately $1,470,508 and $1,643,000, respectively, in dividends from itscorporate joint ventures.  Because NTICtypically owns only 50% or less of its joint venture entities, NTIC does notcontrol the decisions of these entities regarding whether to pay dividends andhow much in dividends should be paid in any given year.  Thus, NTIC cannot guarantee that any of itsjoint ventures will pay dividends in any given year.  The failure of NTIC’s joint ventures todeclare dividends in amounts typically expected by NTIC could adversely affectNTIC’s liquidity and financial position.

 

***Fluctuations inforeign currency exchange rates could result in declines in NTIC’s reportedconsolidated net sales and net income.***

 

Because the functionalcurrency of NTIC’s foreign operations and investments in its foreign corporatejoint ventures and holding companies is the applicable local currency, NTIC isexposed to foreign currency exchange rate risk arising from transactions in thenormal course of business since NTIC’s fees for technical support and otherservices and dividend distributions from these foreign entities are paid inforeign currencies.  NTIC’s reportedconsolidated net sales and net income are subject to fluctuations in foreign exchangerates.  NTIC’s principal exchange rateexposure is with the Euro, the Japanese yen, Korean won and the English poundagainst the U.S. dollar.  NTIC does not hedge against its foreign currencyexchange rate risk.  Since NTIC’s investments in its corporate jointventures and holding companies are accounted for using the equity method, anychanges in foreign currency exchange rates would be reflected as a foreigncurrency translation adjustment and would not change the equity in income ofjoint ventures and holding companies reflected in NTIC’s consolidatedstatements of income.

 

***NTIC’s compliance with U.S. generallyaccepted accounting principles and any changes in such principles mightadversely affect NTIC’s operating results and financial condition.  Any requirement to consolidate NTIC’scorporate joint ventures or subject them to compliance with the internalcontrol provisions of the Sarbanes-Oxley Act of 2002 could adversely affectNTIC’s operating results and financial condition.***

 

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NTICadopted accounting policy FASB Interpretation No. 46R (FIN 46R), “*Consolidation of Variable Interest Entities*,*a revision of FIN 46”* effectiveas of February 28, 2005.  As aresult of FIN 46R, NTIC consolidated React-NTI LLC, one of its corporate jointventures that is 75% owned by NTIC.  If the interpretation of FIN 46R wereto change and NTIC were required to fully consolidate the remaining 28 of itscorporate joint ventures or if NTIC’s corporate joint ventures otherwise wouldbe required to be in compliance with the internal control provisions of theSarbanes-Oxley Act of 2002, NTIC would incur significant additional costs. NTIC estimates that the costs for each of its corporate joint ventures tobecome Sarbanes-Oxley compliant would range between $150,000 to $500,000 andthat annual maintenance expenses would range from $50,000 to $100,000 per yearper corporate joint venture thereafter.  In addition, other accountingpronouncements issued in the future could have a material cost associated withNTIC’s implementation of such new accounting pronouncements.

 

***One of NTIC’sprincipal stockholders beneficially owns 24.9% of NTIC’s outstanding commonstock and is affiliated with NTIC’s President and Chief Executive Officer andthus may be able influence matters requiring stockholder approval, includingthe election of directors, and could discourage or otherwise impede atransaction in which a third party wishes to purchase NTIC’s outstanding sharesat a premium.***

 

As of April 10, 2007, Inter Alia HoldingCompany beneficially owned approximately 24.5% of NTIC’s outstanding commonstock.  Inter Alia is an entity owned by,among others, G. Patrick Lynch, NTIC’s President and Chief Executive Officerand a director, and Philip M. Lynch, NTIC’s former Chairman of the Board andChief Executive Officer and current Chairman Emeritus.  G. Patrick Lynch is the son of Philip M.Lynch.  Messrs. G.P. Lynch and P.M.Lynch share voting and dispositive power of shares of NTIC’s common stock heldby Inter Alia Holding Company.  As aresult of his share ownership through Inter Alia and his position as Presidentand Chief Executive Officer and a director of NTIC, Mr. G.P. Lynch may beable to influence the affairs and actions of NTIC, including matters requiringstockholder approval, such as the election of directors and approval ofsignificant corporate transactions.  Theinterests of Inter Alia may differ from the interests of NTIC’s otherstockholders.  This concentration ofownership may have the effect of delaying, preventing or deterring a change incontrol of NTIC, could deprive NTIC’s stockholders of an opportunity to receivea premium for their common stock as part of a sale or merger of NTIC and maynegatively affect the market price of NTIC’s common stock.  Transactions that could be affected by thisconcentration of ownership include proxy contests, tender offers, mergers orother purchases of common stock that could give stockholders the opportunity torealize a premium over the then-prevailing market price for shares of NTIC’scommon stock.

 

***NTIC is currently involved inlitigation over its trademark on the use of the color Yellow in corrosioninhibiting packaging, the loss of which could adversely affect NTIC’s business.***

* *

One of NTIC’s important trademarks for its businessis the trademark for the color Yellow. NTIC is currently involved in litigation against a competitor over thistrademark.  NTIC has also in the pastsuccessfully prosecuted infringement claims against other competitors and thirdparties for their use of the color Yellow. If NTIC were to lose this current or any future litigation over itstrademark for the color Yellow, NTIC could be in a more difficult position toenforce its rights to this trademark in other countries and against other thirdparties.  NTIC believes that the loss ofits trademark for the color Yellow could have an adverse effect on NTIC’sbusiness.

 

***NTIC’s business, properties and products are subject to governmentalregulation and taxes with which compliance may require NTIC to incur expensesor modify its products or operations and may expose NTIC to penalties fornon-compliance. Governmental regulation may also adversely affect the demandfor some of NTIC’s products and NTIC’s operating results.***

 

NTIC’s business, propertiesand products are subject to a wide variety of international, federal, state andlocal laws, rules, taxes and regulations relating to the protection of theenvironment, natural resources, and worker health and safety and the use,management, storage, and disposal of hazardous substances, wastes and 

 

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other regulated materials.These laws, rules and regulations may affect the way NTIC conducts itsoperations, and the failure to comply with these regulations could lead tofines and other penalties. Because NTIC owns and operates real property,various environmental laws also may impose liability on NTIC for the costs ofcleaning up and responding to hazardous substances that may have been releasedon NTIC’s property, including releases unknown to NTIC. These environmentallaws and regulations also could require NTIC to pay for environmentalremediation and response costs at third-party locations where NTIC disposed ofor recycled hazardous substances. NTIC’s future costs of complying with thevarious environmental requirements, as they now exist or may be altered in thefuture, could adversely affect NTIC’s financial condition and operatingresults. NTIC is also subject to other international, federal and state laws, rules andregulations, the future non-compliance of which may harm NTIC’s business or mayadversely affect the demand for some of its products.  Changes in laws and regulations, includingchanges in accounting standards and taxation changes, including tax ratechanges, new tax laws, revised tax law interpretations, also may adverselyaffect NTIC’s operating results.

 

***NTIC intends to grow itsbusiness through additional joint ventures, alliances and acquisitions, whichcould be risky and harm its business.***

* *

Oneof NTIC’s growth strategies is to expand its business by entering intoadditional joint ventures and alliances and acquiring businesses, technologiesand products that complement or augment NTIC’s existing products.  The benefits of a joint venture, alliance oracquisition may take more time than expected to develop, and NTIC cannotguarantee that any future joint ventures, alliances or acquisitions will infact produce the intended benefits. In addition, joint ventures, alliances andacquisitions involve a number of risks, including:

 

·                  diversion of management’s attention;

 

·                  difficulties in assimilating theoperations and products of an acquired business or in realizing projectedefficiencies, cost savings and revenue synergies;

 

·                  potential loss of key employees orcustomers of the acquired businesses or adverse effects on existing businessrelationships with suppliers and customers;

 

·                  adverse impact on overall profitability if acquiredbusinesses do not achieve the financial results projected in NTIC’s valuationmodels;

 

·                  reallocation of amounts of capital fromother operating initiatives and/or an increase in NTIC’s leverage and debtservice requirements to pay the acquisition purchase prices, which could inturn restrict NTIC’s ability to access additional capital when needed or topursue other important elements of NTIC’s business strategy;

 

·                  inaccurate assessment of undisclosed,contingent or other liabilities or problems and unanticipated costs associatedwith the acquisition; and

 

·                  incorrect estimates made in theaccounting for acquisitions, incurrence of non-recurring charges and write-offof significant amounts of goodwill that could adversely affect NTIC’s operating results.

 

NTIC’sability to grow through joint ventures, alliances and acquisitions will depend,in part, on the availability of suitable opportunities at an acceptable cost,NTIC’s ability to compete effectively for these opportunities and theavailability of capital to complete such transactions.

 

***NTIC relies onits independent distributors, manufacturer’s sales representatives andcorporate joint ventures to market and sell its products.***

 

In addition to its direct sales force, NTIC relieson its independent distributors, manufacturer’s sales representatives andcorporate joint ventures to market and sell its products in the United Statesand internationally.  NTIC’s independentdistributors, manufacturer’s sales representatives and joint venture partnersmight terminate their relationship with NTIC, or devote insufficient salesefforts to NTIC’s products.  NTIC doesnot control its independent distributors, manufacturer’s sales representativesand joint ventures and they may not be successful in implementing NTIC’smarketing plans. NTIC’s failure to 

 

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maintain its existing relationships with itsindependent distributors, manufacturer’s sales representatives and jointventures, or its failure to recruit and retain additional skilled independent distributors,manufacturer’s sales representatives and joint venture partners could have anadverse effect on NTIC’s operations.

 

***NTIC has very limited staffing andwill continue to be dependent upon key employees.***

 

NTIC’s success is dependent upon the efforts of asmall management team and staff.  NTIC’sfuture success will also depend in large part on its ability to retain theseindividuals and identify, attract and retain other highly qualified managerial,technical, sales and marketing and customer service personnel. Competition forthese individuals is intense, especially in the markets in which NTICoperates.  NTIC may not succeed inidentifying, attracting and retaining these personnel.  The current management, other than thePresident and Chief Executive Officer, do not have any material stock ownershipin NTIC or any contractual obligation to maintain their employment withus.  The loss or interruption of servicesof any of NTIC’s key personnel, the inability to identify, attract or retainqualified personnel in the future, delays in hiring qualified personnel, or anyemployee slowdowns, strikes or similar actions could make it difficult for NTICto manage its business and meet key objectives, which could harm NTIC’sbusiness, financial condition and operating results.

 

***NTIC relies on its managementinformation systems for inventory management, distribution and otherfunctions.  If these information systemsfail to adequately perform these functions or if NTIC experiences an interruptionin their operation, NTIC’s business and operating results could be adverselyaffected.***

 

The efficient operation of NTIC’s business isdependent on its management information systems.  NTIC relies on its management informationsystems to effectively manage accounting and financial functions; manage orderentry, order fulfillment and inventory replenishment processes; and to maintainits research and development data.  Thefailure of management information systems to perform as anticipated coulddisrupt NTIC’s business and product development and could result in decreasedsales, causing NTIC’s business and operating results to suffer.  In addition, NTIC’s management informationsystems are vulnerable to damage or interruption from natural or man-madedisasters, terrorist attacks and attacks by computer viruses or hackers, orpower loss or computer systems, Internet, telecommunications or data networkfailure.  Any such interruption couldadversely affect NTIC’s business and operating results.

 

***NTIC’s relianceupon patents, trademark laws, trade secrets and contractual provisions toprotect its proprietary rights may not be sufficient to protect itsintellectual property from others who may sell similar products.***

 

NTIC holds patents relating to various aspects ofits products and believes that proprietary technical know-how is critical tomany of its products.  Proprietary rights relating to NTIC’s products areprotected from unauthorized use by third parties only to the extent that theyare covered by valid and enforceable patents or are maintained in confidence astrade secrets.  NTIC cannot be certain that it will be issued any patentsfrom any pending or future patent applications owned by or licensed to NTIC orthat the claims allowed under any issued patents will be sufficiently broad toprotect its technology.  In the absence of patent protection, NTIC may bevulnerable to competitors who attempt to copy NTIC’s products or gain access toits trade secrets and know-how.  NTIC’s competitors may initiatelitigation to challenge the validity of NTIC’s patents, or they may use theirresources to design comparable products that do not infringe NTIC’spatents.  NTIC may incur substantial costs if its competitors initiatelitigation to challenge the validity of its patents or if it initiates anyproceedings to protect its proprietary rights and if the outcome of any suchlitigation is unfavorable to NTIC, its business and operating results could bematerially adversely affected.

 

In addition, NTIC relies on trade secrets andproprietary know-how that it seeks to protect, in part, by confidentialityagreements with its employees, and consultants.  These agreements may bebreached and NTIC may not have adequate remedies for any such breach.  Evenif these confidentiality agreements are not breached, NTIC’s trade secrets mayotherwise become known or be independently developed by competitors.

 

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***If NTIC is unableto continue to enhance existing products and develop and market new productsthat respond to customer needs and achieve market acceptance, NTIC mayexperience a decrease in demand for its products, and its business couldsuffer.***

 

One of NTIC’s strategies is to enhance its existingproducts and develop and market new products that respond to customerneeds.  NTIC may not be able to competeeffectively with its competitors unless NTIC can keep up with existing or newproducts in the markets in which it competes. Product development requires significant financial and other resources.Although in the past NTIC has implemented lean manufacturing and otherproductivity improvement initiatives to provide investment funding for newproducts, NTIC cannot assure you that it will be able to continue to do so inthe future.  Product improvements and newproduct introductions also require significant planning, design, developmentand testing at the technological, product, and manufacturing process levels andNTIC may not be able to timely develop product improvements or newproducts.  NTIC’s competitors’ new products may beat NTIC’s products tomarket, may be more effective or less expensive than NTIC’s products or renderNTIC’s products obsolete.  Any newproducts that NTIC may develop may not receive market acceptance or otherwisegenerate any meaningful net sales or profits for NTIC relative to itsexpectations, based on, among other things, existing and anticipatedinvestments in manufacturing capacity and commitments to fund advertising,marketing, promotional programs, and research and development.

 

***NTIC facesintense competition in almost all of its product lines, including fromcompetitors that have substantially greater resources than NTIC does.  NTIC cannot assure you it will be able tocompete effectively, which would harm its business and operating results.***

 

NTIC’s products are sold inhighly competitive markets throughout the world.  The principal competitive factors in NTIC’smarkets are pricing, product innovation, quality and reliability, productsupport and customer service and reputation. NTIC often competes with numerous manufacturers, many of who havesubstantially greater financial, marketing, and other resources than NTIC does.As a result, they may be able to adapt more quickly to new or emergingtechnologies and changes in customer requirements, or to devote greaterresources to the promotion and sale of their products than NTIC can.  Inaddition, competition could increase if new companies enter the market or ifexisting competitors expand their product lines or intensify efforts withinexisting product lines.  NTIC’s current products, products underdevelopment and its ability to develop new and improved products may beinsufficient to enable NTIC to compete effectively with its competitors. NTICcannot assure you that it will be able to compete effectively, which would harmits business and operating results.

 

***NTIC is currently involved inseveral litigation matters and an audit matter with the U.S. Internal RevenueService, which are costly to defend and the resolution of which could have amaterial adverse effect on NTIC’s operating results and financial position.***

* *

NTIC is party to several litigation matters and anaudit matter with the U.S. Internal Revenue Service as described in more detailin Note 9 to NTIC’s consolidated financial statements.  Such litigation and audit matter are costlyand may adversely affect NTIC’s operating results and financial condition.  In addition, the resolution of such mattersmay also have a material adverse effect on NTIC’s operating results andfinancial condition.

 

***NTIC is exposedto risks relating to its evaluation of its internal control over financialreporting as required by Section 404 of the Sarbanes-Oxley Act.***

 

Changing laws, regulationsand standards relating to corporate governance and public disclosure, includingthe Sarbanes-Oxley Act of 2002 and related and other recent regulationsimplemented by the SEC and The American Stock Exchange, are creatinguncertainty for public companies, increasing legal and financial compliancecosts and making some activities more time consuming.  NTIC will be evaluating its internal controlssystems to allow management to report on, and its independent registered publicaccounting firm to 

 

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attest to, NTIC’s internalcontrol over financial reporting.  NTICwill be performing the system and process evaluation and testing (and anynecessary remediation) required to comply with the management certification andauditor attestation requirements of Section 404 of the Sarbanes-OxleyAct.  NTIC cannot be certain as to thetiming of completion of its evaluation, testing and remediation actions or theimpact of the same on its operations since there is presently no precedentavailable by which to measure compliance adequacy.  If NTIC is not able to implement therequirements of Section 404 in a timely manner or with adequatecompliance, NTIC may be subject to sanctions or investigation by regulatoryauthorities, including the SEC or The American Stock Exchange.  This type of action could adversely affectNTIC’s financial results or investors’ confidence in NTIC, and could cause NTIC’sstock price to decline.  In addition, thecontrols and procedures that NTIC may implement may not comply with all of therelevant rules and regulations of the SEC and The American StockExchange.  If NTIC fails to develop andmaintain effective controls and procedures, it may be unable to provide therequired financial information in a timely and reliable manner.  In addition, NTIC’s efforts to comply with Section 404of the Sarbanes-Oxley Act of 2002 and the related regulations regarding itsassessment of its internal control over financial reporting and its independentregistered public accounting firm’s report on that assessment will require thecommitment of significant financial and managerial resources.

 

**ITEM 3.           CONTROLS ANDPROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

NTIC maintains disclosurecontrols and procedures (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’smanagement is aware, however, that there is a lack of segregation of duties dueto the small number of employees of NTIC dealing with general administrativeand financial matters. However, NTIC’s management has decided that consideringthe employees involved and the control procedures in place, risks associatedwith such lack of segregation are minimal and the potential benefits of addingemployees to clearly segregate duties do not at this time justify the expensesassociated with such increases.

 

**Changes inInternal Control over Financial Reporting**

** **

Therewas no change in NTIC’s internal control over financial reporting that occurredduring the quarter ended February 29, 2008 that has materially affected,or is reasonably likely to materially affect NTIC’s internal control overfinancial reporting.

 

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**PART II - OTHER INFORMATION**

** **

**ITEM 1.           LEGALPROCEEDINGS**

 

Adescription of NTIC’s legal proceedings in Note 9 of NTIC’s consolidatedfinancial statements included within this report is incorporated herein byreference.

 

**ITEM 2.           UNREGISTEREDSALES OF EQUITY SECURITIES, USE OF PROCEEDS AND SMALL BUSINESS ISSUER PURCHASESOF EQUITY SECURITIES**

 

**Recent Sales of Unregistered EquitySecurities**

 

During the three monthsended February 29, 2008, NTIC did not issue any shares of its common stockor other equity securities of NTIC that were not registered under theSecurities Act of 1933.

 

**Small Business Issuer Purchases ofEquity Securities**

 

Duringthe three months ended February 29, 2008, NTIC did not purchase any sharesof its common stock or other equity securities of NTIC.

 

OnNovember 13, 2003, the Board of Directors of NTIC authorized MatthewWolsfeld, Chief Financial Officer of NTIC, to repurchase on behalf of NTIC, upto 100,000 shares of NTIC’s common stock from time to time in accordance withapplicable rules governing issuer stock repurchases.  Since being authorized, NTIC has repurchasedand retired an aggregate of 44,200 shares of its common stock.

 

**ITEM 4.           SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

(a)        The Annual Meeting of Stockholders ofNTIC was held on January 24, 2008.

 

(b)        The results of the stockholder voteswere as follows:

 
| ** **                                                                           | ** ** | **For**    | ** ** | **Against/  Withheld** | ** ** | **Abstain** | ** ** | **Broker  Non-Vote** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|-------------|------------|----------------------|------------|
| **1. Election of Directors**                                                         | ** ** | ** ** | ** ** | ** **             | ** ** | ** **  | ** ** | ** **           | ** ** |
| Pierre Chenu                                                                         |       | 3,044,307  |       | 8,050                  |       | 0           |       | 0                    |       |
| G. Patrick Lynch                                                                     |       | 3,048,857  |       | 3,500                  |       | 0           |       | 0                    |       |
| Dr. Donald A. Kubik                                                             |       | 3,042,969  |       | 9,388                  |       | 0           |       | 0                    |       |
| Mark J. Stone                                                                        |       | 3,049,057  |       | 3,300                  |       | 0           |       | 0                    |       |
| Dr. Sunggyu Lee                                                                 |       | 3,043,057  |       | 9,300                  |       | 0           |       | 0                    |       |
| Dr. Ramani Narayan                                                              |       | 3,043,057  |       | 9,300                  |       | 0           |       | 0                    |       |
| Mark M. Mayers                                                                       |       | 2,062,015  |       | 990,342                |       | 0           |       | 0                    |       |
| ** **                                                                           | ** ** | ** ** | ** ** | ** **             | ** ** | ** **  | ** ** | ** **           | ** ** |
| **2. Ratification of Appointment of independent  Registered Public Accounting Firm** |       | 3,044,100  |       | 385                    |       | 7,871       |       | 0                    |       |

 

**ITEM 5.           OTHERINFORMATION**

 

On April 10, 2008, NTICentered into a Promissory Note Modification Agreement with National City Bankpursuant to which NTIC’s demand line of credit was increased to $2,300,000 andits $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%.  Interest is payable inarrears on the 15th day of each month and on demand.  As of April 10, 2008, no amounts hadbeen borrowed by NTIC under the demand line of credit.  A copy of the Promissory Note ModificationAgreement has been filed as Exhibit 10.3 to this report and isincorporated herein by this reference.

 

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**ITEM 6.           EXHIBITS**

 

The following exhibits arebeing filed or furnished with this quarterly report on Form 10-QSB:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                               | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 10.1                 |       | Promissory Note  Modification Agreement dated January 31, 2008 between Northern  Technologies International Corporation and National City Bank           |       |
|                 |       |                                                                                                                                                          |       |
| 10.2                 |       | Promissory Note  Modification Agreement dated January 31, 2008 between Northern  Technologies International Corporation and National City Bank           |       |
|                 |       |                                                                                                                                                          |       |
| 10.3                 |       | Promissory Note  Modification Agreement dated April 10, 2008 between Northern  Technologies International Corporation and National City Bank             |       |
|                 |       |                                                                                                                                                          |       |
| 31.1                 |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                     |       |
|                 |       |                                                                                                                                                          |       |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                     |       |
|                 |       |                                                                                                                                                          |       |
| 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 |       |
|                 |       |                                                                                                                                                          |       |
| 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 |       |

** **

**31**

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** **

**SIGNATURES**

** **

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

 
| ** **                 | **NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION**                                                   |
|----------------------------|-------------------------------------------------------------------------------------------------------|
|                       |
|                       |                                                                                                       |
| Date:  April 14, 2008 | 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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**NORTHERNTECHNOLOGIES INTERNATIONAL CORPORATIONQUARTERLY REPORT ON FORM 10-QSBEXHIBIT INDEX**

 
| **Exhibit   No.** | ** ** | **Description**                                                                                                                                               | ** ** | **Method of Filing** |
|------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| 10.1                   |       | Promissory  Note Modification Agreement dated January 31, 2008 between Northern  Technologies International Corporation and National City Bank           |       | Filed herewith       |
|                   |       |                                                                                                                                                          |       |                 |
| 10.2                   |       | Promissory  Note Modification Agreement dated January 31, 2008 between Northern  Technologies International Corporation and National City Bank           |       | Filed herewith       |
|                   |       |                                                                                                                                                          |       |                 |
| 10.3                   |       | Promissory  Note Modification Agreement dated April 10, 2008 between Northern  Technologies International Corporation and National City Bank             |       | 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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