Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

** **

**(Mark one)**

 

**x****     ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the quarterly period ended February 28,2010**

 

**o****        ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**For the transition period from                    to                    .**

 

**Commission File Number:  001-11038**

** **

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** **

**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION**

(Exact name of registrant as specified in itscharter)

 

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

 

**4201 Woodland Rd**

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

(Address of principal executive offices)

** **

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  YES  x  NO  o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files).  YES  o NO  o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  YES  o  NO  x

 

As of April 13,2010, 4,240,679 shares of common stock of the registrant were outstanding.

 

 

 

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**Table of Contents**

** **

**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**FORM 10-Q**

**February 28, 2010**

 

**TABLE OF CONTENTS**

 
| **Description**     | ** **                                                                                                             | **Page** |
|---------------------|------------------------------------------------------------------------------------------------------------------------|----------|
|                |                                                                                                                   |     |
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                              |     |
|                |                                                                                                                   |     |
| Item 1.             | Financial Statements                                                                                                   |     |
|                |                                                                                                                   |     |
|                | Consolidated  Balance Sheets as of February 28, 2010 (unaudited) and August 31,  2009                        | 3        |
|                |                                                                                                                   |     |
|                | Consolidated  Statements of Operations (unaudited) for the Three and Six Months Ended  February 28, 2010 and 2009 | 4        |
|                |                                                                                                                   |     |
|                | Consolidated  Statements of Cash Flows (unaudited) for the Six Months Ended  February 28, 2010 and 2009           | 5        |
|                |                                                                                                                   |     |
|                | Notes  to Consolidated Financial Statements (unaudited)                                                                | 6-13     |
|                |                                                                                                                   |     |
| Item 2.             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                            | 14-25    |
|                |                                                                                                                   |     |
| Item 3.             | Quantitative  and Qualitative Disclosures about Market Risk                                                            | 26       |
|                |                                                                                                                   |     |
| Item 4.             | Controls and Procedures                                                                                                | 26       |
|                |                                                                                                                   |     |
| **PART II.**   | **OTHER INFORMATION**                                                                                                  |     |
|                |                                                                                                                   |     |
| Item 1.             | Legal Proceedings                                                                                                      | 26       |
|                |                                                                                                                   |     |
| Item 1A.            | Risk Factors                                                                                                           | 26       |
|                |                                                                                                                   |     |
| Item 2.             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                           | 26       |
|                |                                                                                                                   |     |
| Item 3.             | Defaults  Upon Senior Securities                                                                                       | 27       |
|                |                                                                                                                   |     |
| Item 4.             | Reserved                                                                                                               | 27       |
|                |                                                                                                                   |     |
| Item 5.             | Other Information                                                                                                      | 27       |
|                |                                                                                                                   |     |
| Item 6.             | Exhibits                                                                                                               | 28       |
|                |                                                                                                                   |     |
| **SIGNATURE  PAGE** | 29                                                                                                                     |
|                |                                                                                                                   |     |
| **EXHIBIT  INDEX**  | 30                                                                                                                     |

 

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

 

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

 

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

 

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# **Table of Contents**

 

# **PART I -FINANCIAL INFORMATION**

# ** **

## **ITEM 1.           FINANCIALSTATEMENTS**

## ** **

**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 2010(UNAUDITED) AND AUGUST 31, 2009**

 
| ** **                                                                                                                                     | ** ** | **February 28,  2010** | ** ** | **August 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                     |       |                        |       |                      |       |
| CURRENT ASSETS:                                                                                                                                |       |                        |       |                      |       |
| Cash and cash equivalents                                                                                                                      |       | $                           | 1,334,389  |                      | $          | 138,885 |   |
| Receivables:                                                                                                                                   |       |                        |       |                      |       |
| Trade excluding corporate joint ventures, less  allowance for doubtful accounts of $79,000 at February 28, 2010 and  August 31, 2009 |       | 1,971,099                   |       | 1,373,802                 |       |
| Trade corporate joint ventures                                                                                                                 |       | 1,218,252                   |       | 662,954                   |       |
| Technical and other services, corporate joint  ventures                                                                                        |       | 1,646,138                   |       | 1,760,602                 |       |
| Income taxes                                                                                                                                   |       | 269,935                     |       | 173,038                   |       |
| Inventories                                                                                                                                    |       | 2,482,006                   |       | 2,002,622                 |       |
| Prepaid expenses                                                                                                                               |       | 216,168                     |       | 138,086                   |       |
| Deferred income taxes                                                                                                                          |       | 218,900                     |       | 218,900                   |       |
| Total current assets                                                                                                                           |       | 9,356,887                   |       | 6,468,889                 |       |
|                                                                                                                                           |       |                        |       |                      |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                    |       | 3,487,272                   |       | 3,542,169                 |       |
|                                                                                                                                           |       |                        |       |                      |       |
| OTHER ASSETS:                                                                                                                                  |       |                        |       |                      |       |
| Investments in corporate joint ventures:                                                                                                       |       |                        |       |                      |       |
| Industrial chemical                                                                                                                            |       | 14,647,708                  |       | 13,727,097                |       |
| Industrial non-chemical                                                                                                                        |       | 322,344                     |       | 337,025                   |       |
| Deferred income taxes                                                                                                                          |       | 1,336,700                   |       | 1,336,700                 |       |
| Notes receivable                                                                                                                               |       | 140,000                     |       | 140,000                   |       |
| Industrial patents and trademarks, net                                                                                                         |       | 948,525                     |       | 888,065                   |       |
| Other                                                                                                                                          |       | 36,007                      |       | 42,975                    |       |
|                                                                                                                                           |       | 17,431,284                  |       | 16,471,862                |       |
|                                                                                                                                           |       | $                           | 30,275,443 |                      | $          | 26,482,920 |   |
|                                                                                                                                           |       |                        |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                 |       |                        |       |                      |       |
| CURRENT LIABILITIES:                                                                                                                           |       |                        |       |                      |       |
| Borrowings made on line of credit                                                                                                              |       | $                           | —     |                      | $          | 1,077,000 |   |
| Current portion of note payable (Note 6)                                                                                                       |       | 1,162,807                   |       | 1,179,973                 |       |
| Accounts payable                                                                                                                               |       | 1,191,754                   |       | 630,363                   |       |
| Accrued liabilities:                                                                                                                           |       |                        |       |                      |       |
| Payroll and related benefits                                                                                                                   |       | 595,871                     |       | 261,579                   |       |
| Deferred joint venture royalties                                                                                                               |       | 288,000                     |       | 288,000                   |       |
| Other                                                                                                                                          |       | 301,040                     |       | 304,202                   |       |
| Total current liabilities                                                                                                                      |       | 3,539,472                   |       | 3,741,117                 |       |
|                                                                                                                                           |       |                        |       |                      |       |
| COMMITMENTS AND CONTINGENCIES (Note 13)                                                                                                        |       |                        |       |                      |       |
|                                                                                                                                           |       |                        |       |                      |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                     |       |                        |       |                      |       |
| Preferred stock, no par value; authorized 10,000  shares; none issued and outstanding                                                          |       | —                      |       | —                    |       |
| Common stock, $0.02 par value per share; authorized  10,000,000 shares; issued and outstanding 4,240,679 and 3,756,596,  respectively          |       | 84,814                      |       | 75,132                    |       |
| Additional paid-in capital                                                                                                                     |       | 8,937,843                   |       | 5,631,767                 |       |
| Retained earnings                                                                                                                              |       | 16,110,308                  |       | 15,327,962                |       |
| Accumulated other comprehensive income                                                                                                         |       | 1,603,006                   |       | 1,706,942                 |       |
| Total stockholders’ equity                                                                                                                |       | 26,735,971                  |       | 22,741,803                |       |
|                                                                                                                                           |       | $                           | 30,275,443 |                      | $          | 26,482,920 |   |

 

See notes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**

**THREE AND SIX MONTHS ENDED FEBRUARY 28, 2010 AND 2009**

 
| ** **                                                                                         | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                         | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** |
| NORTH AMERICAN OPERATIONS:                                                                         |       |                        |       |                        |       |   |   |   |   |
| Net sales                                                                                          |       | $                           | 2,876,478  |                        | $          | 1,734,170 |   | $ | 5,587,880 |   | $ | 5,005,114 |   |
| Cost of goods sold                                                                                 |       | 1,840,647                   |       | 1,155,436                   |       | 3,598,143 |   | 3,448,403 |   |
| Gross profit                                                                                       |       | 1,035,831                   |       | 578,734                     |       | 1,989,737 |   | 1,556,711 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| Operating expenses:                                                                                |       |                        |       |                        |       |   |   |   |   |
| Selling                                                                                            |       | 555,270                     |       | 575,796                     |       | 1,116,922 |   | 1,346,366 |   |
| General and administrative                                                                         |       | 839,235                     |       | 644,524                     |       | 1,759,264 |   | 1,585,962 |   |
| Lab and technical support                                                                          |       | 32,483                      |       | 31,395                      |       | 67,600 |   | 37,462 |   |
| Loss on impairment                                                                                 |       | —                      |       | 554,000                     |       | — |   | 554,000 |   |
|                                                                                               |       | 1,426,988                   |       | 1,805,715                   |       | 2,943,786 |   | 3,523,790 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| NORTH AMERICAN OPERATING LOSS                                                                      |       | (391,157                    | )          | (1,226,981                  | )          | (954,049 | ) | (1,967,079 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| CORPORATE JOINT VENTURES AND HOLDING COMPANIES:                                                    |       |                        |       |                        |       |   |   |   |   |
| Equity in income of industrial chemical corporate  joint ventures and holding companies            |       | 677,882                     |       | 23,026                      |       | 1,402,338 |   | 678,558 |   |
| Equity in income (loss) of industrial non-chemical  corporate joint ventures and holding companies |       | 13,805                      |       | (24,054                     | )          | (4,752 | ) | (20,820 | ) |
| Fees for technical support and other services  provided to corporate joint ventures                |       | 1,149,338                   |       | 617,850                     |       | 2,301,268 |   | 1,938,569 |   |
| Expenses incurred in support of corporate joint ventures  and new technologies                     |       | (1,183,516                  | )          | (1,317,028                  | )          | (2,040,082 | ) | (2,495,062 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INCOME (LOSS) FROM ALL CORPORATE JOINT VENTURES AND  HOLDING COMPANIES                             |       | 657,509                     |       | (700,206                    | )          | 1,658,772 |   | 101,245 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INTEREST INCOME                                                                                    |       | 3,247                       |       | 874                         |       | 4,743 |   | 1,319 |   |
| INTEREST EXPENSE                                                                                   |       | (23,783                     | )          | (42,440                     | )          | (49,770 | ) | (74,338 | ) |
| OTHER INCOME                                                                                       |       | 6,825                       |       | 6,824                       |       | 13,650 |   | 13,650 |   |
| MINORITY INTEREST                                                                                  |       | —                      |       | (5,772                      | )          | — |   | 3,398 |   |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAX EXPENSE                                                            |       | 252,641                     |       | (1,967,691                  | )          | 673,346 |   | (1,921,805 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| INCOME TAX BENEFIT                                                                                 |       | (94,000                     | )          | (454,000                    | )          | (109,000 | ) | (421,000 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| NET INCOME (LOSS)                                                                                  |       | $                           | 346,641    |                        | $          | (1,513,691 | ) | $ | 782,346 |   | $ | (1,500,805 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| NET INCOME (LOSS) PER COMMON SHARE:                                                                |       |                        |       |                        |       |   |   |   |   |
| Basic                                                                                              |       | $                           | 0.08       |                        | $          | (0.41 | ) | $ | 0.19 |   | $ | (0.40 | ) |
| Diluted                                                                                            |       | $                           | 0.08       |                        | $          | (0.41 | ) | $ | 0.19 |   | $ | (0.40 | ) |
|                                                                                               |       |                        |       |                        |       |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:                                                |       |                        |       |                        |       |   |   |   |   |
| Basic                                                                                              |       | 4,240,679                   |       | 3,750,970                   |       | 4,194,887 |   | 3,743,124 |   |
| Diluted                                                                                            |       | 4,286,372                   |       | 3,750,970                   |       | 4,225,907 |   | 3,743,124 |   |

 

Seenotes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

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

**SIX MONTHS ENDED FEBRUARY 28, 2010 AND 2009**

** **
| ** **                                                                            | ** ** | **Six Months Ended**        | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                            | ** ** | **February 28,  2010** | ** ** | **February 28,   2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                        |       |   |   |
| Net income (loss)                                                                     |       | $                           | 782,346    |   | $ | (1,500,805 | ) |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                        |       |   |   |
| Expensing of fair value of stock options vested                                       |       | 94,210                      |       | 50,000 |   |
| Change in allowance for  doubtful accounts                                            |       | —                      |       | 20,000 |   |
| Depreciation expense                                                                  |       | 189,072                     |       | 193,295 |   |
| Amortization expense                                                                  |       | 77,144                      |       | 73,101 |   |
| Loss on asset impairment                                                              |       | —                      |       | 554,000 |   |
| Loss on disposal  of assets                                                           |       | —                      |       | 46,302 |   |
| Minority interest expense                                                             |       | —                      |       | (3,398 | ) |
| Equity in income from corporate joint ventures:                                       |       |                        |       |   |   |
| Industrial chemical                                                                   |       | (1,402,338                  | )          | (678,558 | ) |
| Industrial non-chemical                                                               |       | 4,752                       |       | 20,820 |   |
| Change in current assets and liabilities:                                             |       |                        |       |   |   |
| Receivables:                                                                          |       |                        |       |   |   |
| Trade excluding corporate joint ventures                                              |       | (479,378                    | )          | 775,013 |   |
| Trade corporate joint ventures                                                        |       | (555,298                    | )          | (634,208 | ) |
| Technical and other services receivables, corporate  joint ventures                   |       | 114,464                     |       | 1,179,222 |   |
| Income taxes                                                                          |       | (96,897                     | )          | (647,926 | ) |
| Inventories                                                                           |       | (479,384                    | )          | 263,744 |   |
| Prepaid expenses and other assets                                                     |       | (71,114                     | )          | (82,251 | ) |
| Income taxes payable                                                                  |       | —                      |       | — |   |
| Accounts payable                                                                      |       | 561,391                     |       | (624,317 | ) |
| Accrued liabilities                                                                   |       | (25,257                     | )          | (466,738 | ) |
| Net cash used in operating activities                                                 |       | (1,286,287                  | )          | (1,462,704 | ) |
|                                                                                  |       |                        |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                        |       |   |   |
| Dividends received from corporate joint ventures                                      |       | 269,801                     |       | 2,177,687 |   |
| Additions to property and equipment                                                   |       | (134,175                    | )          | (169,204 | ) |
| Additions to industrial patents                                                       |       | (137,604                    | )          | (20,194 | ) |
| Net cash (used in) provided by investing activities                                   |       | (1,978                      | )          | 1,988,289 |   |
|                                                                                  |       |                        |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |                        |       |   |   |
| Bank overdrafts                                                                       |       | —                      |       | (1,039,757 | ) |
| Net borrowings(repayments) made on line of credit                                     |       | (1,077,000                  | )          | 513,000 |   |
| Repayment of note payable                                                             |       | (17,166                     | )          | (15,043 | ) |
| Proceeds from the issuance of common stock                                            |       | 3,552,000                   |       | — |   |
| Stock options exercised                                                               |       | 9,225                       |       | — |   |
| Proceeds from employee stock purchase plan                                            |       | 16,710                      |       | — |   |
| Net cash provided by (used in) financing activities                                   |       | 2,483,769                   |       | (541,800 | ) |
|                                                                                  |       |                        |       |   |   |
| NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS                                 |       | 1,195,504                   |       | (16,215 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |       | 138,885                     |       | 260,460 |   |
|                                                                                  |       |                        |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |       | $                           | 1,334,389  |   | $ | 244,245 |   |

 

Seenotes to consolidated financial statements.

 

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**NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION ANDSUBSIDIARIES**

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

 

**1.         INTERIM FINANCIALINFORMATION**

 

In the opinion of management,the accompanying unaudited consolidated financial statements contain allnecessary adjustments, which are of a normal recurring nature, and presentfairly the consolidated financial position of Northern TechnologiesInternational Corporation and its subsidiaries (the “Company”) as of February 28,2010 and the results of their operations for the three and six months ended February 28,2010 and February 28, 2009 and their cash flows for the six months ended February 28,2010 and February 28, 2009, in conformity with accounting principlesgenerally accepted in the United States of America (“U.S. GAAP”).

 

These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes contained in the Company’s annual report on Form 10-Kfor the fiscal year ended August 31, 2009 and with the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section appearing in this report. Operating results for the three and six months ended February 28,2010 are not necessarily indicative of the results that may be expected for thefull fiscal year ending August 31, 2010.

 

The Company has evaluatedsubsequent events occurring through April 13, 2010, the date on which thisquarterly report on Form 10-Q was issued.

 

**2.         INVENTORIES**

 

Inventoriesconsisted of the following:

 
| ** **           | ** ** | **February 28,  2010** | ** ** | **August 31,********2009** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Production materials |       | $                           | 1,095,278  |                            | $          | 947,677 |   |
| Finished goods       |       | 1,386,728                   |       | 1,054,945                       |       |
|                 |       | $                           | 2,482,006  |                            | $          | 2,002,622 |   |

 

**3.         PROPERTY AND EQUIPMENT**

 

Property and equipmentconsisted of the following:

 
| ** **                    | ** ** | **February 28,  2010** | ** ** | **August 31,  2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Land                          |       | $                           | 310,365    |                      | $          | 310,365 |   |
| Buildings and improvements    |       | 3,083,599                   |       | 3,083,598                 |       |
| Machinery and equipment       |       | 1,720,215                   |       | 1,641,878                 |       |
|                          |       | 5,114,179                   |       | 5,035,841                 |       |
| Less accumulated depreciation |       | (1,626,907                  | )          | (1,493,672                | )          |
|                          |       | $                           | 3,487,272  |                      | $          | 3,542,169 |   |

 

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

 

Industrial patents andtrademarks consisted of the following:

 
| ** **                    | ** ** | **February 28,  2010** | ** ** | **August 31,  2009** | ** ** |
|-------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Patents and trademarks        |       | $                           | 1,567,956  |                      | $          | 1,430,352 |   |
| Less accumulated amortization |       | (619,431                    | )          | (542,287                  | )          |
|                          |       | $                           | 948,525    |                      | $          | 888,065 |   |

 

Patent and trademark costsare amortized over seven years once a patent or trademark is filed andapproved.  Amortization expense related to patents and trademarks was$38,669 and $29,721 for the three months ended February 28, 2010 and 2009,respectively, and $77,144 and $63,683 for the six months ended February 28,2010 and February 28, 2009, respectively. Amortization expense is estimated to approximate $160,000 in each of thenext five fiscal years.

 

**5.             INVESTMENTS IN CORPORATE JOINT VENTURES**

 

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

 
| ** **                                                                                             | ** ** | **February 28,  2010** | ** ** | **August 31,********2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Current assets                                                                                         |       | $                           | 47,413,069 |                            | $          | 43,863,290 |   |
| Total assets                                                                                           |       | 53,734,114                  |       | 50,224,882                      |       |
| Current liabilities                                                                                    |       | 16,237,522                  |       | 17,260,943                      |       |
| Noncurrent liabilities                                                                                 |       | 4,372,544                   |       | 2,325,943                       |       |
| Joint ventures’ equity                                                                            |       | 33,124,048                  |       | 30,637,996                      |       |
| Northern Technologies International Corporation’s share of corporate  joint ventures’ equity |       | $                           | 14,970,052 |                            | $          | 14,064,122 |   |

 
| ** **                                                                                                    | ** ** | **Six Months Ended**              | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                    | ** ** | **February 28,********2010** | ** ** | **February 28,  2009** | ** ** |
| Net sales                                                                                                     |       | $                                 | 39,854,071 |   | $ | 32,476,685 |   |
| Gross profit                                                                                                  |       | 19,676,755                        |       | 15,006,248 |   |
| Net income                                                                                                    |       | 2,924,795                         |       | 1,065,614 |   |
| Northern Technologies International Corporation’s  share of equity in income of corporate joint ventures |       | $                                 | 1,397,586  |   | $ | 657,732 |   |

 

The financial statements of the Company’s foreignjoint ventures are prepared using accounting principles accepted in the jointventures’ respective countries of domicile. Amounts related to foreign joint ventures reported in the above tablesand the accompanying financial statements have been adjusted to approximateU.S. GAAP in all material respects.  Allmaterial profits recorded on sales from the Company to its joint ventures havebeen eliminated for financial reporting purposes.

 

**6.         CORPORATE DEBT**

 

The Company has a demand line of credit of$2,300,000 with National City Bank (the “Bank”).  Advances made under the demand line of creditare made at the sole discretion of the Bank and are due and payable ondemand.  Outstanding amounts under thedemand line of credit bear interest at an annual rate based on LIBOR plus2.25%.  

 

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As of February 28, 2010, the interest rate was3.08% and the weighted average rate was 3.36% for the six months ended February 28,2010.  As of February 28, 2009, theinterest rate was 4.23% and the weighted average rate was 5.10% for the sixmonths ended February 28, 2009. Interest is payable in arrears on the 15th day of each month and ondemand. There were no amounts outstanding under the demand line of credit andno amounts were committed under the line of credit to cover letters of creditas of February 28, 2010.  As of February 28, 2009, NTIC had $599,000 borrowings under its$2,300,000 demand line of credit and $600,000 was committed under the demandline of credit to cover a letter of credit.

 

In connection with the purchase of its corporateheadquarters, in September 2006, the Company obtained a term loan with aprincipal amount of $1,275,000 that matures on May 1, 2011, bears interestat a fixed rate of 8.01% and is payable in 59 monthly payments equal toapproximately $10,776 (inclusive of principal and interest).  All of the remaining unpaid principal andaccrued interest is due and payable on the maturity date, unless the Bank demands payment earlier due to a covenant breach bythe Company as discussed in more detail below.  The term loan is secured by a first lien onthe Company’s Circle Pines facility pursuant to a Mortgage dated as of May 3,2006 between Northern Technologies Holding Company LLC and the Bank and isguaranteed by the Company.

 

Under the note governing the term loan (the “Note”),the Company is subject to a minimum debt service coverage ratio of 1.0:1.0.  At August 31, 2009, November 30,2009 and February 28, 2010, the Company failed to meet this financialcovenant.  Although the Bank subsequentlywaived the covenant violation as of August 31, 2009, the Company has notsought and has not obtained a waiver of any subsequent covenant violations fromthe Bank.  As a result, an event ofdefault occurred under the Note and the Bank has the right in its discretion,by giving written notice to the Company, to declare the full amount outstandingunder the Note immediately due and payable in full. TheCompany has no intention to obtain a waiver for the event of default or desireto renegotiate or refinance the term loan. The Company has not received any notice from the Bank regarding the Bank’s intent to call the loan.  In the event the Bank declares the Noteimmediately due and payable, the Company intends to pay off the Note in fullwith the Company’s existing cash and cash equivalents. The Company hasclassified all amounts outstanding under the Note as a current liability on itsconsolidated balance sheets as of February 28, 2010 and August 31,2009.

 

**7.         STOCKHOLDERS’ EQUITY**

 

Duringthe six months ended February 28, 2010, the Company did not purchase orretire any shares of its common stock. The following stock options to purchase shares of common stock wereexercised during the six months ended February 28, 2010:

 

| **Options Exercised** | ** ** | **Exercise Price** | ** ** |
|-----------------------|------------|--------------------|------------|
| 1,500                 |       | $                  | 6.15       |   |
|                       |            |                    |            |  |

 

The Company granted stockoptions under the Northern Technologies International Corporation 2007 StockIncentive Plan to purchase an aggregate of 128,333 shares of its common stockto various employees during the six months ended February 28, 2010.  The weighted average per share exercise priceof the stock options is $7.76, which is equal to the fair market value of theCompany’s common stock on the date of grant.

 

The Company sold an aggregateof 2,583 shares of its common stock to various employees at a purchase price of$6.47 per share under the Northern Technologies International Corporation EmployeeStock Purchase Plan, resulting in gross proceeds to the Company of $16,710,during the six months ended February 28, 2010.

 

In September 2009, theCompany completed a $3,552,000 registered direct offering in which it sold anaggregate of 480,000 shares of its common stock to institutional investors at apurchase price of $7.40 per share, resulting in net proceeds of $3,195,613, after deducting placement agent fees and expenses and the Company’soffering expenses.

 

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During the six months ended February 28,2009, the Company did not purchase or retire any shares of its common stock andno stock options to purchase shares of the Company’s common stock wereexercised or granted.  The Companygranted stock bonuses under the Northern Technologies International Corporation2007 Stock Incentive Plan for an aggregate of 21,513 shares of its common stockto various employees during the six months ended February 28, 2009.  The fair value of the shares of the Company’scommon stock as of the date of grant of the stock bonuses was $226,961, basedon the closing sale price of a share of the Company’s common stock on thatdate.  The Company did not sell anyshares of its common stock to employees under the Northern TechnologiesInternational Corporation Employee Stock Purchase Plan during the six monthsended February 28, 2009.

 

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

 

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

 
| ** **                                                                        | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                        | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** |
| Net income (loss)                                                                 |       | $                           | 346,641    |                        | $          | (1,513,691 | ) | $ | 782,346 |   | $ | (1,500,805 | ) |
| Other comprehensive (loss) income — foreign currency translation  adjustment |       | (678,744                    | )          | (208,102                    | )          | (103,936 | ) | (1,787,060 | ) |
| Total comprehensive (loss) income                                                 |       | $                           | (332,103   | )                           | $          | (1,721,793 | ) | $ | 678,410 |   | $ | (3,287,865 | ) |

 

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

 

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

 

Options to purchase shares of common stock of 64,140and 149,472 were excluded from the computation of common share equivalents asof February 29, 2010 and 2009, respectively, as stock option exerciseprices were greater than market price of a share of common stock.

 

**10.       STOCK-BASED COMPENSATION**

 

In January 2007, the Company’s stockholdersapproved the Northern Technologies International Corporation 2007 StockIncentive Plan (the “2007 Plan”) and the Northern Technologies InternationalCorporation Employee Stock Purchase Plan (the “ESPP”).  The Compensation Committee of the Board ofDirectors administers both of the plans.

 

The 2007 Plan replaced the Northern TechnologiesInternational Corporation 2000 Stock Incentive Plan, which was terminated withrespect to future grants, but continues to govern grants outstanding under suchplan.  The 2007 Plan provides for thegrant of incentive stock options, non-statutory stock options, stockappreciation rights, restricted stock, stock unit awards, performance awardsand stock bonuses to eligible recipients to enable the Company and itssubsidiaries to attract and retain qualified individuals through opportunitiesfor equity participation in the Company, and to reward those individuals whocontribute to the achievement of the Company’s economic objectives.  Up to a total of 400,000 shares of theCompany’s common stock has been reserved for issuance under the 2007 Plan,subject to adjustment as provided in the 2007 Plan.  Options granted under the 2007 Plan generallyhave a term of five years and become exercisable over a three- or four-yearperiod beginning on the one-year anniversary of the date of grant.  Options are granted at per share exerciseprices equal to the market value of the Company’s common stock on the date ofgrant.  To date, only stock options andstock bonuses have been granted under the 2007 Plan.

 

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The maximum number of shares of common stock of theCompany available for issuance under the ESPP is 100,000 shares, subject toadjustment as provided in the ESPP.  TheESPP provides for six-month offering periods beginning on September 1 and March 1of each year.  The purchase price of theshares is 90% of the lower of the fair market value of common stock at thebeginning or end of the offering period. This discount may not exceed the maximum discount rate permitted forplans of this type under Section 423 of the Internal Revenue Code of 1986,as amended.  The ESPP is compensatory forfinancial reporting purposes.

 

The Company granted options to purchase 128,333 and30,000 shares of its common stock during the six months ended February 28,2010 and 2009, respectively.  The fairvalue of option grants is determined at date of grant, using the Black-Scholesoption pricing model with the assumptions listed below.  Based on thesevaluations, the Company recognized compensation expense of $94,210 and $50,000during the six months ended February 28, 2010 and 2009, respectively,related to the options that vested during such time period.  The stock-based expense recorded reducedafter-tax net income per share by $0.02 and $0.01 for the six months ended February 28,2010 and 2009, respectively.  As of February 28,2010, the total compensation cost for non-vested options not yet recognized inthe Company’s statements of income was $356,624, net of estimatedforfeitures.  Additional stock-basedcompensation expense of $94,210 is expected through the remainder of fiscalyear 2010, and expense of $150,820 and $111,594 is expected to be recognizedduring fiscal 2011 and 2012, respectively. Future option grants will impact the compensation expense recognized.

 

The Company currently estimates a ten percentforfeiture rate for stock options, but will continue to review this estimate infuture periods.

 

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

 
| ** **                      | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Dividend yield                  |       | 0                           | %          | 2.00                        | %          |
| Expected volatility             |       | 48.3                        | %          | 46.7                        | %          |
| Expected life of option         |       | 5 years                     |       | 5 years                     |       |
| Average risk-free interest rate |       | 2.34                        | %          | 2.88                        | %          |

 

The weighted average fair value of options grantedduring the three and six months ended February 28, 2010 and 2009 was $2.99and $4.78, respectively.

 

**11.       GEOGRAPHICAND SEGMENT INFORMATION**

 

Net sales by geographic location as a percentage oftotal consolidated net sales for the three and six months ended February 28,2010 and February 28, 2009 were as follows:

 
| ** **                                                                              | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                              | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** |
| Inside  the U.S.A. to unaffiliated customers                                            |       | 79.6                        | %          | 74.0                        | %          | 77.4 | % | 81.7 | % |
| Outside  the U.S.A. to:                                                                 |       |                        |       |                        |       |   |   |   |   |
| Corporate  joint ventures in which the Company is a shareholder directly and indirectly |       | 18.0                        | %          | 21.2                        |       | 18.7 |   | 14.2 |   |
| Unaffiliated  customers                                                                 |       | 2.4                         | %          | 4.8                         |       | 3.9 |   | 4.1 |   |
|                                                                                    |       | 100.0                       | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |

 

Net sales by geographic location are based on thelocation of the customer.

 

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The following table sets forth the Company’s netsales for the three and six months ended February 28, 2010 and 2009 bysegment:

 
| ** **                      | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                      | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** |
| ZERUST®  sales             |       | $                           | 2,785,452  |                        | $          | 1,727,845 |   | $ | 5,413,009 |   | $ | 4,512,380 |   |
| Natur-TecTM sales           |       | 91,026                      |       | 2,692                       |       | 174,871 |   | 485,009 |   |
| React-NTI sales                 |       | —                      |       | 3,633                       |       | — |   | 7,725 |   |
| Total  North American net sales |       | $                           | 2,876,478  |                        | $          | 1,734,170 |   | $ | 5,587,880 |   | $ | 5,005,114 |   |

 

The following table sets forth the Company’s cost ofsales for the three and six months ended February 28, 2010 and 2009 bysegment:

 
| ** **                              | ** ** | ** **                  | ** ** | **Three  Months Ended**   | ** ** | ** **                  | ** ** | ** **                | ** ** | **Six  Months Ended**       | ** ** | ** **                | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                              | ** ** | **February 28,  2010** | ** ** | **% of  Product  Sales*** | ** ** | **February 28,  2009** | ** ** | **% of  Product  Sales*** | ** ** | **February 28,  2010** | ** ** | **% of  Product  Sales*** | ** ** | **February 28,  2009** | ** ** | **% of  Product********Sales*** | ** ** |
| Direct cost of sales                    | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **                  |       |                      |       |                        |       |                      |       |   |   |   |   |
| ZERUST® cost of sales              |       | $                           | 1,484,292  |                      | 53.3       | %                           | $          | 918,107                   |       | 53.1                        | %          | $                         | 2,902,261  |   | 53.6 | % | $ | 2,512,303 |   | 55.7 | % |
| Natur-TecTM cost of sales           |       | 59,929                      |       | 68.0                      | %          | 1,977                       |       | 73.4                      | %          | 118,947                     |       | 68.0                      | %          | 401,165 |   | 82.7 | % |
| React-NTI cost of sales                 |       | —                      |       | —                    |       | 1,733                       |       | 47.7                      | %          | —                      |       | —                    |       | 4,120 |   | 53.3 | % |
| Indirect cost of sales                  |       | 295,966                     |       | —                    |       | 233,619                     |       | —                    |       | 576,936                     |       | —                    |       | 530,815 |   | — |   |
| Total North American net  cost of sales |       | $                           | 1,840,647  | ** **                | ** ** |                        | $          | 1,155,436                 | ** ** | ** **                  |       | $                         | 3,598,143  | ** ** | ** ** |   | $ | 3,448, 403 | ** ** | ** ** | ** ** |

 

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*The percent of segment sales is calculated by dividing the direct cost of salesfor each individual segment category by the net sales for each segmentcategory.

 

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

 

Theforegoing geographic and segment information represents only sales by theCompany’s North American operations. Although sales to the Company’s corporate joint ventures are included,sales by the Company’s corporate joint ventures to other parties are notincluded.

 

**12.  RESEARCHAND DEVELOPMENT**

 

During the year ended August 31,2009, the Company was awarded multiple research and developmentcontracts.  The Company accrues proceeds received under the grants andoffsets research and development expenses incurred in equal installments overthe timelines associated with completion of the grants specific objectives andmilestones. At February 28, 2010 and August 31, 2009, the Companydeferred amounts received of $204,543 and $145,562, respectively, in otheraccrued liabilities, as the Company had not yet performed under the obligationsof the contracts.

 

The Company expenses all costsrelated to product research and development as incurred.  The Companyincurred $1,565,698 and $1,567,296 during the six months ended February 28,2010 and 2009, respectively, in connection with its research and developmentactivities.  These costs related to product research and development arethe net amount after being reduced by reimbursements related to the awarding ofthe multiple research and development contracts of $286,479 and $0 for the sixmonths ended February 28, 2010 and 2009, respectively.  The net feesare accounted for in the “Expenses incurred in support of corporate jointventures” section of statements of operations.

 

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** **

**13.       COMMITMENTSAND CONTINGENCIES**

 

On November 20, 2009, the Company’s Board ofDirectors, upon recommendation of the Compensation Committee, approved thematerial terms of an annual bonus plan for the Company’s executive officers andcertain employees for the fiscal year ending August 31, 2010, the purposeof which is to align the interests of the Company, its executive officers andstockholders by providing an incentive for the achievement of key corporate andindividual performance measures that are critical to the success of the Companyand linking a significant portion of each executive officer’s annualcompensation to the achievement of such measures.  The following is a brief summary of thematerial terms approved by the Board:

 

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

 

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

 

·                  The payment of bonuses under the plan will bepurely discretionary and will be paid to executive officer participants in bothcash and stock, the exact amount and percentages of which will be determined bythe Company’s Board of Directors, upon recommendation of the CompensationCommittee.

 

There was a $266,311management bonus accrued at February 28, 2010.  There was no management bonus accrued as of February 28,2009.

 

In fiscal 1999, a subsidiary of the Company, NTIFacilities, Inc., acquired a one-third ownership of Omni-Northern Ltd.,which owns and operates a rental property located at 23205 Mercantile Road,Beachwood, Ohio.  The property has anapproximate value of $2,205,000, based upon the cash-to-mortgage acquisitionprice of the property paid in fiscal 2000. The Company has guaranteed up to $329,082 of Omni-Northern Ltd.’s$1,903,571 mortgage obligation with National City Bank, Cleveland, Ohio.  The building is fully leased at present.

 

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 casehas been 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.  Shamrock further claims lostprofits with respect to sales made by Shamrock that were manufactured byparties other than React LLC.  React LLCacknowledges that React LLC has not made payment for product in the approximateamount of $300,000 to Shamrock as the invoice for this was only received afterShamrock had already filed its complaint, but denies all of the claims ofbreach of the license agreement by it and believes that damages caused byShamrock’s breach of the license agreement and tortious conduct exceed anyamounts owing to Shamrock.  React LLCformally responded to the complaint after removal by moving to dismiss or staybecause of Shamrock’s failure to comply with alternative dispute resolutionprocedures contained in the license agreement. By court order, the matter was stayed so that the parties could attemptmediation.  The parties mediated for oneday and were unsuccessful in resolving the matter. The parties proceeded withdiscovery, exchanging answers to interrogatories and documents, and the partiesalso obtained documents by subpoena from third parties.  With more complete information, the partiesdecided to dismiss their respective claims without prejudice and return to mediation.  A mediation session was held on December 4,2008, and the parties continued to negotiate through the mediator thereafterwithout any final agreement by either party. Because the mediation and negotiation process did not result in a finalsettlement, there can be no permanent assurance at the present time that thematter will not result in a material adverse effect on the Company’s business,financial condition or results of operations at some 

 

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point in the future, however,at this point in time the Company has not recorded any loss accruals related tothis matter.

 

From time to time, the Company is involved invarious legal actions arising in the normal course of business.  Management is of the opinion that anyjudgment or settlement resulting from any currently pending or threatenedactions would not have a material adverse effect on the Company’s financialposition or consolidated results of operations.

 

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

## ** **

This Management’s Discussion andAnalysis provides material historical and prospective disclosures intended toenable investors and other users to assess NTIC’s financial condition andresults of operations.  Statements thatare not historical are forward-looking and involve risks and uncertaintiesdiscussed under the heading “Part I. Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Forward-Looking Statements.” 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 the heading “Part I.Item 1.  Financial Statements.”

 

**General Overview**

 

NTIC develops and marketsproprietary environmentally beneficial products and technical services in over50 countries either directly or via a network of joint ventures and independentdistributors.  NTIC’s primary business iscorrosion prevention.  From this base,NTIC has expanded into three new business areas that have started recently togenerate revenue (1) corrosion prevention technologies specificallydesigned for the oil and gas industry, which NTIC sells both directly as wellas through joint ventures and independent agents; (2) a proprietaryportfolio of bio-plastic compounds and finished products marketed under theNatur-Tec® brand, which NTIC sells directly as well as through distributors andindependent agents; and (3) technology and machines that converts wasteplastic into diesel, gasoline and heavy fractions, which is exclusivelylicensed and sold in North America and Asia through NTIC’s joint venturePolymer Energy, LLC.

 

NTIC participates, either directlyor indirectly through holding companies, in 27 active corporate joint venturearrangements in North America, South America, Europe, Asia and the MiddleEast.  Each of these joint venturesgenerally manufactures and markets finished products in the geographicterritory to which it is assigned.  Whilemost of NTIC’s joint ventures currently sell rust and corrosion inhibitingproducts and custom packaging systems, NTIC also has joint ventures thatmanufacture, market and sell corrosion prevention technology for the oil andgas industry and the Polymer EnergyTM technology and equipment that convertswaste plastic into diesel, gasoline, and heavy fractions.  The profits of NTIC’s corporate jointventures are shared by the respective corporate joint venture owners inaccordance with their respective ownership percentages.  NTIC typically owns 50% of its joint ventureentities.  NTIC does not control thedecisions of its joint venture entities regarding whether to pay dividends orhow much to pay in dividends in any given year. NTIC funds its joint ventureinvestments with cash generated from operations.

 

NTIC has been selling itsproprietary ZERUST® and EXCOR® brand rust and corrosion inhibiting products andservices to the automotive, electronics, electrical, mechanical, military andretail consumer markets for over 30 years. NTIC also offers worldwide on-site technical consulting for rust andcorrosion prevention issues.  In NorthAmerica, NTIC markets its technical services and products principally toindustrial users by a direct sales force as well as a network of independentdistributors and agents.  NTIC’stechnical service consultants work directly with the end users of NTIC’sproducts to analyze their specific needs and develop systems to meet theirtechnical requirements.

 

NTIC has developed proprietarycorrosion inhibiting technologies for use in the mitigation of corrosion oncapital assets used in the petroleum and process chemical industry and isinitially targeting the sale of these new ZERUST® products to the oil and gasindustry sector.  During fiscal 2009,NTIC announced the signing of a multi-year contract between NTIC’s Brazilianjoint venture (Zerust Prevencao de Corrosao S.A.) and Petroleo Brasileiro S.A.(Petrobras) to install and service proprietary corrosion protectiontechnologies on the roofs of an initial set of aboveground oil storage tanks atthe Petrobras REDUC refinery in Rio de Janeiro, Brazil.  Also during fiscal 2009, NTIC signed multiplejoint research and development contracts with Petrobras’s research anddevelopment group at the Leopoldo Américo Miguez de Mello Research &Development Center (CENPES) pursuant to which the parties 

 

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will undertake a 20-monthPetrobras funded effort to explore, understand and resolve bottom platecorrosion issues in aboveground storage tanks. A second 12-month Petrobras sponsored project has also started aimed atfield trials of certain pipeline protection technologies.  NTIC also is pursuing opportunities to marketits ZERUST® corrosion prevention technology to other potential customers in theoil and gas industry across several countries through NTIC’s joint venturepartners and other strategic partners. NTIC believes the sale of its ZERUST® products to customers in the oiland gas industry will involve a long sales cycle, likely including a one- totwo-year trial period with each customer and a slow integration processthereafter.

 

In addition to ZERUST® productsand services, NTIC develops and markets a portfolio of bio-based and/orbiodegradable (compostable) polymer resin compounds and finished products underthe Natur-Tec® brand.  These products areintended to reduce NTIC’s customers’ carbon footprint and provide environmentallysound disposal options.  Natur-Tec®bio-based and biodegradable plastics are manufactured using NTIC’s patentedand/or proprietary technologies and are intended to replace conventionalpetroleum-based plastics.  The Natur-Tec®bioplastics portfolio includes flexible film, foam, rigid injection moldedmaterials and engineered plastics. Natur-Tec® biodegradable and compostablefinished products include shopping and grocery bags, lawn and leaf bags, canliners, pet waste collection bags, cutlery, packaging foam and coated paperproducts and are engineered to be fully biodegradable in a compostingenvironment.

 

NTIC’s Polymer Energy LLC jointventure markets and sells a system that uses catalytic pyrolysis to convertplastic waste (primarily polyolefins) into hydrocarbons (primarily a mix ofdiesels, gasoline and heavy fractions) resulting in an economically viable andenvironmentally responsible alternative to current methods of recycling anddisposal of plastic waste.  Each unit canprocess up to ten tons of plastic waste per day, and the modular design allowsfor easily scalable capacity.  The crudeoutput is high-grade and can be further processed in a refinery or used as aninput for co-generation of electricity.

 

**Financial Overview**

 

NTIC’s consolidated net salesincreased 65.9% and 11.6% during the three and six months ended February 28,2010 compared to the three and six months ended February 28, 2009,respectively.  The increase was primarilyas a result of increased sales of ZERUST® andEXCOR® rust and corrosion inhibiting packaging products and services.  During the six months ended February 28,2010, 96.9% of NTIC’s consolidated net sales were derived from sales of ZERUST®and EXCOR® rust and corrosion inhibiting packaging products and services.  Net salesof ZERUST® products increased 20.0% to$5,413,009 during the six months ended February 28, 2010 compared to$4,512,380 during the six months ended February 28, 2009 due to increaseddemand primarily as a result of the economic recovery of the domesticmanufacturing sector. NTIC experienced a significant decrease in sales ordersduring its second quarter of fiscal 2009 as compared to the prior year perioddue to the then economic recession. Although NTIC experienced decreased sales from its existing customersduring that time period, NTIC does not believe it lost any significantcustomers.   Due to an economic recoveryof the domestic manufacturing sector to some extent, NTIC experienced anincrease in sales orders from existing customers during the second quarter offiscal 2010 compared to the second quarter of fiscal 2009 and received salesorders from several new customers due in part to its efforts during the pastyear to expand further out of its traditional core automotive markets.  Additionally, NTIC has focused efforts todevelop new product offerings to its existing customer base in an effort toincrease sales to existing customers.

 

During the six months ended February 28,2010, 3.1% of NTIC’s consolidated net sales were derived from the sales of itsNatur-Tec® products compared to 9.7% during the six months ended February 28,2009.  Net sales of Natur-Tec® products decreased by 63.9% to $174,871during the six months ended February 28, 2010 compared to $485,009 duringthe six months ended February 28, 2009. This decrease was primarily due toseveral large stocking orders of Natur-Tec®products received during the three months ended November 30,2009.  Net sales of Natur-Tec® products increased $85,447 during the three months ended February 28, 2010 to$88,139 compared to $2,692 during the three months ended February 28,2009.

 

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Cost of goods sold as a percentageof net sales decreased to 64.4% for the six months ended February 28, 2010compared to 68.9% for the six months ended February 28, 2009 primarily asa result of decreased raw material costs for ZERUST® products and higher salesvolumes.

 

Total net sales of all of NTIC’sjoint ventures increased 22.7% to $39,854,071 during the six months ended February 28,2010 compared to $32,476,685 during the six months ended February 28, 2009primarily as a result of increased demand forZERUST® products due to the global economic recovery.  NTIC recognized an 18.7% increase in feeincome for technical and support services as a result of the increase in totalnet sales of the joint ventures, along with an 18.2% decrease in direct jointventure expense.  NTIC’s equity in incomeof corporate joint ventures and holding companies increased 112.5% to$1,397,586 during the six months ended February 28, 2010 compared to$657,732 during the six months ended February 28, 2009.  NTIC’s total income from its corporate jointventures and holding companies increased 1,538.4% to $1,658,772 for the sixmonths ended February 28, 2010 compared to $101,245 for the six monthsended February 28, 2009.

 

NTIC has been awarded multipleresearch and development contracts.  NTIC accrues proceeds received underthe grants and offsets research and development expenses incurred in equalinstallments over the timelines associated with completion of the grants’specific objectives and milestones.  At February 28,2010 and August 31, 2009, NTIC deferred amounts received of $286,479 and$145,562 in other accrued liabilities, as NTIC had not yet completed all of thenecessary performance under the obligations of the contracts.

 

NTIC expenses all costs related toproduct research and development as incurred.  NTIC incurred $1,565,698and $1,567,296 during the six months ended February 28, 2010 and 2009,respectively, in connection with its research and development activities. These costs related to product research and development are the net amountafter being reduced by reimbursements related to the awarding of the multipleresearch and development contracts of $286,479 and $0 for the six months ended February 28,2010 and 2009, respectively.   NTIC anticipates that it will spendbetween $3,000,000 and $3,500,000 in total during fiscal 2010 on research anddevelopment activities related to its new technologies.  The net fees are accounted for in the “Expensesincurred in support of corporate joint ventures” section of NTIC’s consolidatedstatements of operations.

 

Net income was $782,346, or $0.18per diluted common share, for the six months ended February 28, 2010compared to a loss of $(1,500,805), or a loss of $(0.40) per diluted commonshare, for the six months ended February 28, 2009.  This return to profitability was primarily theresult of the significant increase in sales from NTIC’s North Americanoperations and the significant increase in income from corporate jointventures.  Additionally, most of the costcontrol initiatives that NTIC initiated during second quarter of fiscal 2009remained in place through the first two quarters of fiscal 2010.  However, in January 2010,salary cuts that were made in January 2009 were reinstated and NTIC beganhiring employees to fill positions that were previously cut during the economicdownturn.  NTIC believes the hiring ofsuch additional personnel was necessary meet anticipated increased demand fromnew sales efforts being made in both NTIC’s ZERUST oil & gas businessand with Natur-Tec business.  Inaddition, $554,000 of the loss for the six months ended February 28, 2009was attributable to a loss on impairment relating to NTIC’s React-NTI jointventure.

 

NTIC’s working capital was$5,817,415 at February 28, 2010, including $1,334,389 in cash and cashequivalents.  As of February 28,2010, NTIC had no borrowings under its $2,300,000 demand line of credit.  NTIC expects to meet its future liquidityrequirements during at least the next 12 months by using its existing cash andcash equivalents, forecasted cash flows from future operations, distributionsof earnings and technical assistance fees to NTIC from its joint ventures andholding companies and funds available through existing or anticipated financingarrangements.  NTIC also may raise additionalfinancing to help fund its new businesses through the issuance of debt orequity securities.

 

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**Results of Operations**

 

NTIC’s results of operations exclude the impact ofits activities with its joint ventures and holding companies, other than itsformer joint venture React-NTIC LLC.  Asexplained in more detail in Note 1 to NTIC’s consolidated financial statements contained in NTIC’s annual report on Form 10-Kfor the fiscal year ended August 31, 2009, the results ofReact-NTIC LLC are included in NTIC’s consolidated results of operations andthus included in the table below.  NTICdoes not consolidate the results of its other joint ventures or holdingcompanies.

 

The following table sets forth NTIC’s results ofoperations for the three months ended February 28, 2010 and February 28,2009.

 
| ** **                          | ** ** | **February 28,  2010** | ** ** | **% of********Net Sales** | ** ** | **February 28,  2009** | ** ** | **% of********Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-----------------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                           | 2,876,478  |                      | 100.0      | %                           | $          | 1,734,170                 |       | 100.0         | %          | $             | 1,142,308  |   | 65.9 | % |
| Cost of goods sold                  |       | 1,840,647                   |       | 64.0                      | %          | 1,155,436                   |       | 66.6                      | %          | 685,211       |       | 59.3          | %          |
| Selling expenses                    |       | 555,270                     |       | 19.3                      | %          | 575,796                     |       | 33.2                      | %          | (20,526       | )          | 79.0          | %          |
| General and administrative expenses |       | 839,235                     |       | 29.2                      | %          | 644,524                     |       | 37.2                      | %          | 194,711       |       | 0.0           | %          |
| Lab and technical support expenses  |       | 32,483                      |       | 1.1                       | %          | 31,395                      |       | 1.8                       | %          | 1,088         |       | 0.0           | %          |
| Loss on impairment                  |       | —                      |       | —                    |       | 554,000                     |       | 32.0                      | %          | (554,000      | )          | (3.6          | )%         |
|                                     |            |                             |            |                           |            |                             |            |                           |            |               |            |               |            |  |  |  |

 

The following table sets forth NTIC’s results of operationsfor the six months ended February 28, 2010 and February 28, 2009.

 
| ** **                          | ** ** | **Six Months  Ended********February 28,  2010** | ** ** | **% of********Net Sales** | ** ** | **Six Months  Ended  February 28,  2009** | ** ** | **% of********Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|---------------------------|------------|------------------------------------------------|------------|---------------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                                                    | 5,587,880  |                      | 100.0      | %                                              | $          | 5,005,114                 |       | 100.0         | %          | $             | 582,766    |   | 11.6 | % |
| Cost of goods sold                  |       | 3,598,143                                            |       | 64.4                      | %          | 3,448,403                                      |       | 68.9                      | %          | 149,740       |       | 4.3           | %          |
| Selling expenses                    |       | 1,116,922                                            |       | 20.0                      | %          | 1,346,366                                      |       | 26.9                      | %          | (229,444      | )          | 27.8          | %          |
| General and administrative expenses |       | 1,759,264                                            |       | 31.5                      | %          | 1,585,962                                      |       | 31.7                      | %          | 173,302       |       | 0.0           | %          |
| Lab and technical support expenses  |       | 67,600                                               |       | 1.2                       | %          | 37,462                                         |       | 0.8                       | %          | 30,138        |       | 0.0           | %          |
| Loss on impairment                  |       | —                                               |       | —                    |       | 554,000                                        |       | 32.0                      | %          | (554,000      | )          | (17.0         | )%         |
|                                     |            |                                                      |            |                           |            |                                                |            |                           |            |               |            |               |            |  |  |  |

 

*Net Sales*. NTIC’s consolidated net sales increased 65.9% and 11.6% during the threeand six months ended February 28, 2010 compared to the three and sixmonths ended February 28, 2009, respectively.  The increase was primarily as a result of increased sales of ZERUST® and EXCOR® rust and corrosion inhibitingpackaging products and services.  Duringboth the three and six months ended February 28, 2010, 96.9% of NTIC’sconsolidated net sales were derived from sales of ZERUST® and EXCOR® rust andcorrosion inhibiting packaging products and services.  Net salesof ZERUST® products increased 20.0% to$5,413,009 during the six months ended February 28, 2010 compared to$4,512,380 during the six months ended February 28, 2009 and 61.2% to$2,785,452 during the three months ended February 28, 2010 compared to$1,727,845 during the three months ended February 28, 2009.  Both increases were due to increased demandprimarily as a result of the economic recovery of the domestic manufacturingsector.  NTIC experienced a significantdecrease in sales orders during its second quarter of fiscal 2009 as comparedto the prior year period due to the then economic recession.  Although NTIC experienced decreased salesfrom its existing customers during that time period, NTIC does not believe itlost any significant customers.   Due tosome economic recovery of the domestic manufacturing sector, NTIC experiencedan increase in sales orders from existing customers during the second quarterof fiscal 2010 compared to the second quarter of fiscal 2009 and received salesorders from several new customers during the second quarter of fiscal 2010 duein part to its efforts during the past year to expand beyond its traditionalcore automotive markets.  Additionally,NTIC has focused efforts to develop new product offering to its existingcustomer base in an effort to increase sales to existing customers.

 

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During both the three and sixmonths ended February 28, 2010, 3.1% of NTIC’s consolidated net sales werederived from the sales of its Natur-Tec® products compared to 0.2% and 9.7%during the three and six months end February 28, 2009, respectively.  Net sales of Natur-Tec® products decreased by 63.9% to $174,871during the six months ended February 28, 2010 compared to $485,009 duringthe six months ended February 28, 2009. This decrease was primarily due toseveral large stocking orders of Natur-Tec®products during the three months ended November 30,2008.  Net sales of Natur-Tec® products increased $85,447 during the three months ended February 28, 2010 to$88,139 compared to $2,692 during the three months ended February 28,2009.

 

The following table sets forth additional detailregarding NTIC’s net sales by product category for the three months ended February 28,2010 and February 28, 2009:

 
| ** **                      | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales              |       | $                           | 2,785,452  |                        | $          | 1,727,845     |       | $             | 1,057,607  |   | 61.2 | % |
| Natur-Tec® sales           |       | 91,026                      |       | 2,692                       |       | 88,334        |       | 3,280.9       | %          |
| React-NTI sales                 |       | —                      |       | 3,633                       |       | (3,633        | )          | —        |       |
| Total  North American net sales |       | $                           | 2,876,478  |                        | $          | 1,734,170     |       | $             | 1,142,308  |   | 65.9 | % |

 

The following table setsforth additional detail regarding NTIC’s net sales by product category for thesix months ended February 28, 2010 and February 28, 2009:

 
| ** **                      | ** ** | **February 28,  2010** | ** ** | **February 28,  2009** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------|------------|---------------|------------|
| ZERUST® sales              |       | $                           | 5,413,009  |                        | $          | 4,512,380     |       | $             | 900,629    |   | 20.0 | % |
| Natur-Tec® sales           |       | 174,871                     |       | 485,009                     |       | (310,138      | )          | (63.9         | )%         |
| React-NTI sales                 |       | —                      |       | 7,725                       |       | (7,725        | )          | —        |       |
| Total  North American net sales |       | $                           | 5,587,880  |                        | $          | 5,005,114     |       | $             | 582,766    |   | 11.6 | % |

 

*Cost of Goods Sold*.  Cost of goods sold increased 59.3% and 4.3%for the three and six months ended February 28,2010, respectively, compared to the same respective periods in fiscal2009 primarily as a result of increased netsales as described above.  Cost of salesas a percentage of net sales decreased to 64.0% and 64.4% for the three and sixmonths ended February 28, 2010, respectively, compared to 66.6% and 68.9%in the same respective periods in fiscal 2009 primarily as a result of theincrease in net sales and decreases in raw material prices of theZERUST® products.

 

*Selling Expenses*.  NTIC’s selling expenses decreased 3.6% forthe three months ended February 28, 2010compared to the same period in fiscal 2009 due to decreases in (i) consultingexpense of $34,000, (iii) lab testing related expenses of $41,000 and (iii) insurance expense of $17,000,partially offset by increases of salary and benefits of $62,000.  NTIC’s selling expenses decreased 17.0% forthe six months ended February 28, 2010compared the same period in fiscal 2009 due to decreases in (i) consultingexpense of $65,000, (ii) advertising expense of $29,000, (iii) labtesting of $50,000 and (iv) sales and promotional expense of $30,000.  Selling expenses as a percentage of net salesdecreased to 19.3% and 20.0% during the three and six months ended February 28,2010, respectively, from 33.2% and 26.9% during the same respective periods infiscal 2009, due to the increase in net sales while holding costs stable ordown.

 

*General and AdministrativeExpenses*.  NTIC’sgeneral and administrative expenses increased 30.2% for the three months ended February 28,2010 compared to the same period in fiscal 2009 due to increases in (i) auditingand tax expense of $45,000, (ii) stock option expense of $44,000, (iii) salariesand related benefits of $75,000.  NTIC’sgeneral and administrative expenses increased 10.9% during the six months endedFebruary 28, 2010 compared to the same period in fiscal 2009 as a resultof the same general increases in expenses noted above during the three 

 

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months ended February 28, 2010.  As a percentage of net sales, general andadministrative expenses decreased to 29.2% and 31.5% for the three and sixmonths ended February 28, 2010, respectively, from 37.2% and 31.7% duringthe same respective periods in fiscal 2009, primarily as a result of fixedgeneral and administrative expenses spread over increased net sales and NTIC’scost reduction efforts during the second quarter of fiscal 2009, many of whichhad remained in place during the second quarter of fiscal 2010.

 

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, executiveand non-executive salaries, bonuses and benefits, building expenses, audit andtax fees and expenses and directors fees and expenses.

 

*Lab and Technical Support Expenses*.  NTIC’s lab and technical support expensesincreased 3.5% and 80.4% during the three and six months ended February 28,2010, respectively, compared to the same respective periods in fiscal2009.  These increases were immaterial aslab and technical support expenses represented 1.1% and 1.2% as a percentage ofnet sales for the three and six months ended February 28, 2010,respectively.  As a percentage of netsales, lab and technical support expenses increased by a negligible amountduring the three and six months ended February 28, 2010, respectively,compared to the same respective periods in fiscal 2009.

 

*InternationalCorporate Joint Ventures and Holding Companies*.  Net sales of NTIC’s corporate joint venturesand holding companies for the three and six months ended February 28, 2010and 2009 were as follows:

 
| ** **               | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**              | ** ** |
|--------------------------|------------|-----------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **February 28,  2010** | ** ** | **February 28,********2009** | ** ** | **February 28,********2010** | ** ** | **February 28,********2009** | ** ** |
| Industrial  chemical     |       | $                           | 18,518,547 |                              | $          | 11,147,616 |   | $ | 37,709,728 |   | $ | 31,990,432 |   |
| Non-industrial  chemical |       | 1,854,986                   |       | 219,483                           |       | 2,144,344 |   | 486,253 |   |
| Total                    |       | $                           | 20,373,533 |                              | $          | 11,367,099 |   | $ | 39,854,072 |   | $ | 32,476,685 |   |

 

The increase in net sales of NTIC’s corporate jointventures and holding companies in the three and six months ended February 28,2010 compared to the same respective periods in fiscal 2009 were primarily aresult of increased demand of ZERUST® and EXCOR® products as a result of the worldwide economic recovery.

 

NTIC receives fees for technical and other supportservices it provides to its corporate joint ventures and holding companiesbased on the revenues of the individual corporate joint ventures and holdingcompanies.  The support and services NTICprovide its corporate joint ventures include consulting, travel, technical andmarketing services to existing joint ventures, legal fees incurred in theestablishment of new joint ventures, registration and promotion and legaldefense of worldwide trademarks, and legal fees incurred in connection with thefiling of patent applications.  NTICrecognized fee income for such support of $1,149,338, and $2,301,268 in thethree and six months ended February 28, 2010, respectively, compared to$617,850 and $1,938,569 during the same respective periods in fiscal 2009, anincrease of 86.0% and 18.7%, respectively. The increase in fees for technical and other support to its corporate jointventures was due to the increase in net sales of NTIC’s corporate jointventures and holding companies.

 

NTIC sponsors a worldwide corporate joint ventureconference approximately every three to four years in which all of itscorporate joint ventures are invited to participate.  NTIC defers a portion of its technical andother support fees received from its corporate joint ventures in eachaccounting period leading up to the next conference, reflecting that NTIC hasnot fully earned the payments received during that period.  The next corporate joint venture conferenceis scheduled to be held in the fall of 2010 or spring of 2011.  There was no deferred income recorded withinother accrued liabilities during the three and six months ended February 28,2010 related to this future conference since $288,000 had been accrued over thepast three fiscal years, which represents the amount that NTIC expects to spendevery three years to hold the conference. This amount is based on the historical experience of NTIC, currentconditions and the intentions of NTIC’s management.  NTIC does not anticipate 

 

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deferring any additional technical and other supportfees until after the next conference. The costs associated with these joint venture conferences are offsetagainst the deferral as incurred, generally in the period in which the conferenceis held and immediately before**.**

 

NTIC incurred direct expenses related to itscorporate joint ventures and the holding companies of $1,183,516 and $2,040,082during the three and six months ended February 28, 2010, respectively,compared to $1,317,028 and $2,495,062 during the same respective periods infiscal 2009, a decrease of 10.1% and 18.2%, respectively.  These decreases during the six months ended February 28,2010 were attributable to $286,000 of grants and research and developmentexpense reimbursement received during the six months ended November 30,2009.  Additionally, the decrease wasattributable to decreases in (i) salary and benefit expense of $95,000, (ii) consultingexpense of $181,000 and (iii) legal expenses of $100,000, partially offsetby increases in miscellaneous expenses of $60,000.

 

NTIC had equity in income (loss)of corporate joint ventures and holding companies of $691,687 and $1,397,586during the three and six months ended February 28, 2010, respectively,compared to $(1,028) and $657,738 in the same respective periods in fiscal2009.  The increase in equity inincome was due to increased profitability of NTIC’s corporate joint venturesand holding companies primarily resulting from increased sales and cost controlmeasures put in place during the last year, many of which remained in placeduring the most recent periods.

 

*Interest Income*.  NTIC’s interest income increased slightly to$3,247 and $4,743 during the three and six months ended February 28, 2010,respectively, compared to $874 and $1,319 during the same respective periods infiscal 2009 primarily due to the increased cash balances earning interestduring the most recent periods.

 

*Interest Expense*.  NTIC’s interest expense decreased slightly to$23,783 and $49,770 during the three and six months ended February 28,2010, respectively, compared to $42,440 and $74,338 during the same respectiveperiods in fiscal 2009 primarily due to lower average outstanding debt levelsduring the most recent periods.

 

*Income (Loss) Before Income TaxExpense*.  Income (loss) before incometax expense was $252,641 and $673,346 for the three and six months ended February 28,2010, respectively, compared to $(1,967,690) and $(1,921,805) for the samerespective periods in fiscal 2009.

 

*Income Tax Benefit*. Income taxbenefit was $94,000 and $109,000 during the three and six months ended February 28,2010, respectively, compared to income tax benefit of $454,000 and $421,000 inthe same respective periods in fiscal 2009. Income tax benefit was calculated based on management’s estimate of NTIC’sannual effective income tax rate.  NTIC’sannual effective income tax rate during the three and six months ended February 28,2010 and 2009 was lower than the statutory rate primarily due to NTIC’s equityin income of corporate joint ventures being recognized based on after-taxearnings of these entities.  To theextent undistributed earnings of NTIC’s joint ventures are distributed to NTIC,it is not expected to result in any material additional income tax liabilityafter the application of foreign tax credits. NTIC determined based on allavailable evidence, including historical data and projections of futureresults, that it is more likely than not that all of its deferred tax assets,except for its foreign tax credit carryforward and Minnesota state research anddevelopment credit carryforwards, will be fully realized and that NTIC’sdeferred tax asset related to foreign tax credit carryforwards will not berealized due to insufficient federal taxable income within the carryforward periodand the fact that for ordering purposes the foreign tax credit carryforwardsare not allowed to be used until after any current year foreign tax credits areutilized.

 

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**Liquidity and Capital Resources**

 

*Sources of Cash and Working Capital*.  As of February 28, 2010, NTIC’s working capital was $5,817,415, including$1,334,389 in cash and cash equivalents, compared to working capital of$2,727,737 including $138,885 in cash and cash equivalents, as of August 31,2009.

 

In September 2009, NTIC completed a $3,552,000registered direct offering in which NTIC sold an aggregate of 480,000 shares ofits common stock to institutional investors at a purchase price of $7.40 pershare, resulting in net proceeds of $3,195,613, after deducting placement agentfees and expenses and NTIC’s offering expenses. All of the shares were offered pursuant to an effective shelfregistration statement.

 

NTIC has a $2,300,000demand line of credit with National City Bank. Advances made under the demand line of credit are made at the solediscretion of National City Bank and are due and payable on demand.  Outstanding amounts under the demand line ofcredit bear interest at an annual rate based on LIBOR plus 2.25%.  As of February 28, 2010, the interestrate was 3.08%.  Interest is payable inarrears on the 15th day of each month and on demand.  As of February 28, 2010, NTIC had noborrowings under the demand line of credit.

 

In September 2006,NTIC purchased the real estate and 40,000 square feet building in which itscorporate headquarters is located pursuant to a like-kind exchange transactionwithin the meaning of Section 1031 of the Internal Revenue Code of 1986,as amended, for a purchase price of $1,475,000. To finance the transaction, NTIC obtained a secured term loan in theprincipal amount of $1,275,000.  The termloan matures on May 1, 2011, bears interest at a fixed rate of 8.01% andis payable in 59 monthly installments equal to approximately $10,776 (inclusiveof 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,unless the bank demands payment earlier due to a covenant breach by NTIC asdiscussed in more detail below.  The loanis secured by a first lien on the real estate and building.

 

Under the note governing the term, NTIC is subjectto a minimum debt service coverage ratio of 1.0:1.0.  At August 31, 2009, November 30,2009 and February 28, 2010, NTIC failed to meet this financialcovenant.  Although the bank hassubsequently waived the covenant violation as of August 31, 2009, NTIC hasnot sought or obtained a waiver of any subsequent covenant violations from thebank.  As a result, an event of defaultoccurred under the note and the bank has the right in its discretion, by givingwritten notice to NTIC, to declare the full amount outstanding under the noteimmediately due and payable in full. NTIC hasno intention to obtain a waiver for the event of default or desire torenegotiate or refinance the term loan. NTIC has not received any notice from the bank regarding the bank’s intent to call the loan.  In the event the bank declares the noteimmediately due and payable, NTIC intends to pay off the note in full withexisting cash and cash equivalents. NTIC has classified all amountsoutstanding under the note as a current liability on its consolidated balancesheets as of February 28, 2010 and August 31, 2009.

 

NTIC believes that acombination of its existing cash and cash equivalents, forecasted cash flowsfrom future operations, and anticipated distributions of earnings and technicalassistance fees to NTIC from its joint venture investments and funds availablethrough existing or anticipated financing arrangements, will be adequate tofund its existing operations, capital expenditures, debt repayments and anystock repurchases for at least the next 12 months.  During fiscal 2010, NTIC expects to continueto invest in research and development and in marketing efforts and resourcesinto its new businesses, product lines and markets, including in particular theapplication of its corrosion prevention technology into the oil and gasindustry.  In order to take advantage ofsuch new product and market opportunities to expand its business and increaseits revenues, NTIC may decide to finance such opportunities by borrowing underits line of credit or raising additional financing through the issuance of debtor equity securities.  There is noassurance that any financing transaction will be available on terms acceptableto NTIC or at all, or that any financing transaction will not be dilutive to NTIC’scurrent stockholders.

 

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NTIC traditionally hasutilized the cash generated from its North American operations anddistributions of earnings and technical assistance fees from its joint ventureinvestments to fund NTIC’s corporate joint ventures and new technologyinvestments.  NTIC’s corporate jointventures have traditionally operated with little or no debt and have been selffinanced with minimal initial capital investment.  Therefore, NTIC believes it is not likelythat there exists any exposure to debt by its corporate joint ventures thatcould materially impact their operations and/or liquidity.

 

*Uses of Cash and Cash Flows*.****Cash flows used in operations for the six months ended February 28,2010 was $1,286,287, which resulted principally from equity income of corporatejoint ventures, an increase in inventory and trade receivables includingcorporate joint ventures, offset by net income, depreciation and amortizationexpense, stock option expense, decrease in technical and other servicesreceivables from corporate joint ventures, and an increase in accounts payableand accrued liabilities.  Cash flows usedin operations for the six months ended February 28, 2009 was $1,462,704,which resulted principally from NTIC’s net loss, equity income of corporatejoint ventures, increases in joint venture trade receivables, income taxreceivables, prepaid expenses and decreases in accounts payable and accruedliabilities, partially offset by decreases in trade receivables excluding jointventures and inventories, the loss on the impairment of assets and depreciationexpense.

 

NTIC considers internal and external factors whenassessing the utilization of available working capital, specifically whendetermining inventory levels and the credit terms of customers.  Its internal considerations include existinginventory levels, stock reorder points, customer forecasts and customerrequested payment terms, and key external factors include the availability ofprimary raw materials and sub-contractor production lead times.  NTIC experienced an increase in inventory andreceivables for the six months ended February 28, 2010, specifically dueto the corresponding increase in sales and requests from customers to stockmore products to shorten lead times.

 

Net cash used ininvestingactivities for the six months ended February 28, 2010 was $1,978 which wascomprised of dividends received from corporate joint ventures, partially offsetby investments in patents and additions to property and equipment.  Net cash provided by investing activities forthe six months ended February 28, 2009 was $1,988,289, which was comprisedof dividends received from corporate joint ventures, decrease in other assetsand disposal of industrial patents, partially offset by additions to propertyand equipment and investments in patents.

 

Net cash provided by financing activities for thesix months ended February 28, 2010 was $2,483,769, which resultedprimarily from the issuance of common stock and, to a lesser extent, proceedsfrom NTIC’s employee stock purchase plan and option exercises, partially offsetby repayments to the demand line of credit and principal payments on the bankloan for NTIC’s corporate headquarters buildings.  Net cash used in financing activities for thesix months ended February 28, 2009 was $541,800, which resulted primarilyfrom bank overdrafts and principal payments on the bank loan for NTIC’scorporate headquarters building, partially offset by borrowings made under thedemand line of credit.

 

*Capital Expenditures and Commitments*.  NTIC had no material lease commitments as of February 28,2010, except a lease agreement entered into by NTI Facilities, Inc., asubsidiary of NTIC, for approximately 16,994 square feet of office,manufacturing, laboratory and warehouse space in Beachwood, Ohio, requiringmonthly payments of $17,500, which are adjusted annually according to theannual consumer price index, through November 2014.

 

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

 

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**Off-Balance Sheet Arrangements**

 

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

 

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

 

**Inflation and Seasonality**

 

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

 

**Market Risk**

 

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

 

Because the functional currency of NTIC’s foreignoperations and investments in its foreign corporate joint ventures and holdingcompanies is the applicable local currency, NTIC is exposed to foreign currencyexchange rate risk arising from transactions in the normal course ofbusiness.  NTIC’s principal exchange rateexposure is with the Euro, the Japanese yen, Indian Rupee, Chinese yuan, Koreanwon and the English pound against the U.S. dollar.  NTIC’s fees for technical support and otherservices and dividend distributions from these foreign entities are paid inforeign currencies and thus fluctuations in foreign currency exchange ratescould result in declines in NTIC’s reported net income.  Since NTIC’s investments in its corporatejoint ventures and holding companies are accounted for using the equity method,any changes in foreign currency exchange rates would be reflected as a foreigncurrency translation adjustment and would not change NTIC’s equity in income ofjoint ventures and holding companies reflected in its consolidated statementsof income.  NTIC does not hedge againstits foreign currency exchange rate risk.

 

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

 

NTIC’s demand line of credit bears interest at arate based on LIBOR and thus may subject NTIC to some market risk on interestrates.  As of February 28, 2010,NTIC had no borrowings under its $2,300,000 demand line of credit.

 

**Critical Accounting Policies**

 

There have been no material changes to NTIC’scritical accounting policies and estimates from the information provided in “Part II.Item 7, Management’s Discussion and Analysis of Financial Condition and Resultsof Operations—Critical Accounting Policies,” included in NTIC’s annual reporton Form 10-K for the fiscal year ended August 31, 2009.

 

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**Forward-Looking Statements**

 

This quarterly report on Form 10-Q contains notonly historical information, but also forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934 and are subject to the safe harborcreated by those sections. In addition, NTIC or others on NTIC’s behalf maymake forward-looking statements from time to time in oral presentations,including telephone conferences and/or web casts open to the public, in pressreleases or reports, on NTIC’s Internet web site or otherwise. All statementsother than statements of historical facts included in this report or expressedby NTIC orally from time to time that address activities, events ordevelopments that NTIC expects, believes or anticipates will or may occur inthe future are forward-looking statements including, in particular, thestatements about NTIC’s plans, objectives, strategies, the outcome ofcontingencies such as legal proceedings, and prospects regarding, among otherthings, NTIC’s financial condition, results of operations and business. NTIChas identified some of these forward-looking statements in this report withwords like “believe,” “may,” “could,” “would,” “might,” “forecast,” “possible,”“potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,”“anticipate,” “estimate,” “approximate” “outlook” or “continue” or the negativeof these words or other words and terms of similar meaning.  These forward-looking statements may becontained in the notes to NTIC’s consolidated financial statements andelsewhere in this report, including under the heading “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”

 

Forward-looking statements are based on currentexpectations about future events affecting NTIC and are subject touncertainties and factors that affect all businesses operating in a globalmarket as well as matters specific to NTIC. These uncertainties and factors are difficult to predict and many ofthem are beyond NTIC’s control.  Thefollowing are some of the uncertainties and factors known to us that couldcause NTIC’s actual results to differ materially from what NTIC has anticipatedin its forward-looking statements:

 

·                  The effect of current worldwide economicconditions on NTIC’s business;

 

·                  The effect of the significant downturn in theU.S. automotive industry on NTIC’s business;

 

·                  NTIC’s dependence on the success of its jointventures and technical fees and dividend distributions that NTIC receives fromthem;

 

·                  NTIC’s relationships with its joint venturesand its ability to maintain those relationships;

 

·                  Risks associated with NTIC’s internationaloperations and exposure to fluctuations in foreign currency exchange rates;

 

·                  Fluctuations in the cost and availability ofraw materials, including resins and other commodities;

 

·                  NTIC’s investments in its new business andresearch and development efforts and its need for additional capital to supportsuch new business and research and development efforts;

 

·                  The success of and risks associated with NTIC’semerging new businesses;

 

·                  Acceptance of NTIC’s existing and newproducts;

 

·                  Increased competition;

 

·                  NTIC’s reliance upon and its relationshipswith its distributors, independent sales representatives and corporate jointventures;

 

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·                  NTIC’s reliance upon suppliers;

 

·                  The costs and effects of complying withchanges in tax, fiscal, government and other regulatory policies, including rules relatingto environmental, health and safety matters;

 

·                  The costs and effects of currentlyoutstanding or threatened litigation;

 

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

 

·                  Loss of or changes in executive management orkey employees;

 

·                  Ability of management to manage aroundunplanned events;

 

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

 

·                  NTIC’s reliance upon its managementinformation systems.

 

For more information regarding these and otheruncertainties and factors that could cause NTIC’s actual results to differmaterially from what NTIC has anticipated in its forward-looking statements orotherwise could materially adversely affect its business, financial conditionor operating results, see NTIC’s annual report on Form 10-K for the fiscalyear ended August 31, 2009 under the heading “Part I. Item 1A. RiskFactors.”

 

All forward-looking statements included in thisreport are expressly qualified in their entirety by the foregoing cautionarystatements.  We wish to caution readersnot to place undue reliance on any forward-looking statement that speaks onlyas of the date made and to recognize that forward-looking statements arepredictions of future results, which may not occur as anticipated.  Actual results could differ materially fromthose anticipated in the forward-looking statements and from historicalresults, due to the uncertainties and factors described above, as well asothers that we may consider immaterial or do not anticipate at this time.  Although we believe that the expectationsreflected in our forward-looking statements are reasonable, we do not knowwhether our expectations will prove correct. Our expectations reflected in our forward-looking statements can beaffected by inaccurate assumptions we might make or by known or unknownuncertainties and factors, including those described above.  The risks and uncertainties described aboveare not exclusive and further information concerning us and our business,including factors that potentially could materially affect our financialresults or condition, may emerge from time to time.  We assume no obligation to update, amend orclarify forward-looking statements to reflect actual results or changes infactors or assumptions affecting such forward-looking statements.  We advise you, however, to consult anyfurther disclosures we make on related subjects in our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K wefile with or furnish to the Securities and Exchange Commission.

 

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

## ** **

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

 

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

## ** **

**Evaluation of Disclosure Controls and Procedures**

 

NTIC maintains disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended) that are designed to providereasonable assurance that information required to be disclosed by NTIC in thereports it files or submits under the Securities Exchange Act of 1934, as amended,is recorded, processed, summarized and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms andthat such information is accumulated and communicated to NTIC’s management,including NTIC’s principal executive officer and principal financial officer,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure. NTIC’s management evaluated, with the participation of its ChiefExecutive Officer and its Chief Financial Officer, the effectiveness of thedesign and operation of NTIC’s disclosure controls and procedures as of the endof the period covered in this report. Based on that evaluation, NTIC’s Chief Executive Officer and ChiefFinancial Officer concluded that NTIC’s disclosure controls and procedures wereeffective as of the end of such period to provide reasonable assurance thatinformation required to be disclosed in the reports that NTIC files or submitsunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and that suchinformation is accumulated and communicated to NTIC’s management, includingNTIC’s Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.

 

**Changes in Internal Control over Financial Reporting**

 

There was no change in NTIC’s internal control over financial reportingthat occurred during the quarter ended February 28, 2010 that hasmaterially affected, or is reasonably likely to materially affect NTIC’sinternal control over financial reporting.

 

# **PART II          OTHER INFORMATION**

# ** **

## **ITEM 1.           LEGALPROCEEDINGS**

## ** **

A description of NTIC’s legalproceedings in Note 13 of its consolidated financial statements included withinthis report is incorporated herein by reference.

 

## **ITEM 1A.        RISKFACTORS**

## ** **

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

 

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

## ** **

**Recent Sales of Unregistered Equity Securities**

 

During the three months ended February 28,2010, NTIC did not issue any shares of its common stock or other equitysecurities of NTIC that were not registered under the Securities Act of 1933,as amended.

 

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**Issuer Purchases of Equity Securities**

 

During the three months ended February 28,2010, NTIC did not purchase any shares of its common stock or other equitysecurities of NTIC.

 

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

 

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

## ** **

Not applicable.

 

## **ITEM 4.           RESERVED**

## ** **

## **ITEM 5.           OTHERINFORMATION**

## ** **

(a)        The Annual Meeting of Stockholders ofNTIC was held on January 28, 2010.

 

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

 
| ** **                                                                                                              | ** ** | **For**   | ** ** | **Against/********Withheld** | ** ** | **Abstain** | ** ** | **Broker********Non-Vote** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------------------------|------------|-------------|------------|----------------------------|------------|
| **1. Election of Directors**                                                                                            |       |      |       |                         |       |        |       |                       |       |
| Pierre  Chenu                                                                                                           |       | 898,089   |       | 7,300                        |       |        |       | 1,972,900                  |       |
| Tilman B. Frank, M.D.                                                                                                   |       | 898,089   |       | 7,300                        |       |        |       | 1,972,900                  |       |
| Soo-Keong  Koh                                                                                                          |       | 898,089   |       | 7,300                        |       |        |       | 1,972,900                  |       |
| Donald A. Kubik, Ph.D.                                                                                                  |       | 876,376   |       | 29,013                       |       |        |       | 1,972,900                  |       |
| Sunggyu  Lee, Ph.D.                                                                                                     |       | 866,214   |       | 39,175                       |       |        |       | 1,972,900                  |       |
| G.  Patrick Lynch                                                                                                       |       | 876,464   |       | 28,925                       |       |        |       | 1,972,900                  |       |
| Ramani  Narayan, Ph.D.                                                                                                  |       | 865,714   |       | 39,675                       |       |        |       | 1,972,900                  |       |
| Mark  J. Stone                                                                                                          |       | 898,089   |       | 7,300                        |       |        |       | 1,972,900                  |       |
| ** **                                                                                                              |       |      |       |                         |       |        |       |                       |       |
| **2. Ratification of Appointment of  Baker Tilly Virchow Krause LLP as Independent Registered Public Accounting  Firm** |       | 2,877,296 |       | 805                          |       | 187         |       | N/A                        |       |

 

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## **ITEM 6.           EXHIBITS**

## ** **

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

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                     |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (filed herewith)                                                          |
|                 |       |                                                                                                                                                                                |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (filed herewith)                                                          |
|                 |       |                                                                                                                                                                                |
| 32.1                 |       | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith) |
|                 |       |                                                                                                                                                                                |
| 32.2                 |       | Certification of Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished  herewith) |

 

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# **SIGNATURES**

# ** **

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

 

**NORTHERNTECHNOLOGIES INTERNATIONAL CORPORATION**

 
|                      |                                                                                                       |
|---------------------------|-------------------------------------------------------------------------------------------------------|
| Date: April 13, 2010 | Matthew C. Wolsfeld, CPA                                                                              |
|                      | Chief Financial Officer                                                                               |
|                      | (Principal Financial and Accounting Officer and Duly  Authorized to Sign on Behalf of the Registrant) |

 

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

** **

# **EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                               | ** ** | **Method of Filing** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|
| 31.1             |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                     |       | Filed herewith       |
| 31.2             |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                     |       | Filed herewith       |
| 32.1             |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith   |
| 32.2             |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith   |

 

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