# To the Stockholders of Northern Technologies International Corporation

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NASDAQ_NTIC_2022/NASDAQ_NTIC_2022.mmd` · pages 2-8_

---

To the Stockholders of Northern Technologies International Corporation (NTIC),

The continuing recovery of many global markets from COVID-19, allowed NTIC to achieve record sales in fiscal 2022. Key contributors were the robust demand for ZERUST \( ^{®} \)  Industrial products and services in North America, the rebound of monthly Natur-Tec \( ^{®} \)  sales volumes past pre-pandemic levels, as well as record orders for our ZERUST \( ^{®} \)  Oil & Gas solutions. Fiscal 2022 sales also benefitted significantly from NTIC's buyout of our Indian joint venture partner at the start of the fiscal year.

The annual consolidated net sales increase of 31.3%, year-over-year to a record \(74.2 million sales, we achieved during fiscal 2022, is especially encouraging when considering the complex business environment, including supply chain and shipping issues, persistent inflation, significant raw material cost increases, geopolitical conflicts in Europe, and the lingering effects of the COVID-19 pandemic in Asia.

Overall, record fiscal 2022 sales reflect our continued investment in our business, the success of our long-term growth plans, and the support of our customers, employees, joint venture partners and suppliers. In fact, since fiscal 2017, NTIC's annual sales have increased over 87%, representing a five-year compound annual growth rate of 13.4%. We remain focused on developing innovative solutions, which our global distribution network sells to increasingly diverse worldwide markets. Our global footprint and technical service approach is extremely valuable to the multinational companies we serve and helps differentiate NTIC from competitors.

At the same time sales were growing across many parts of our business, profitability was being impaired by significant inflation to our raw materials and labor costs, as well as intense friction across our global supply chains lingering from COVID. Consequently, we implemented a series of countermeasures and adjusted our pricing, which had profitability recovering during the second half of the fiscal year. Unfortunately, it has taken our joint ventures longer to implement meaningful changes, especially in Europe, which continued to affect profitability throughout the second half of the fiscal year.

We continued to expand and strengthen our global infrastructure of operating subsidiaries and joint venture partners. As previously announced, in September 2021, we acquired the remaining 50% ownership interest in ZERUST \( ^{®} \)  India for 6.25 million in cash. Given that many of our multinational customers either have their own operations in India or have suppliers based there, it is one of our strongest international markets. As a result, we are well positioned to further enhance our presence in India.

Additionally, during fiscal 2022, we moved into our new facility in Shanghai, China. This new office supports our R&D, production, sales, marketing, and training efforts throughout the region. We continue to believe this will become one of, if not the largest of our geographic markets in the coming years because of the region's large metal components manufacturing base and growing interest in compostable plastics.

Our financial position remains strong and reflects the recent investments we have made to purchase the remaining 50% ownership interest in ZERUST \( ^{®} \)  India, and our new facility in Shanghai, China, as well as investments in working capital to support sales growth. As a result, we ended fiscal 2022 with a 5.9 million balance under our revolving line of credit and 5.3 million in cash and cash equivalents. On August 31, 2022, we also had 21.8 million of investments in joint ventures, of which nearly 11.0 million is cash with the remaining balance mostly made up of working capital. Our asset light business model and strong financial position provides us with the flexibility to allocate needed capital to support our future growth initiatives while maintaining our quarterly dividend program. In addition, as our profitability continues to recover, we plan to use our free cash flow to pay down our revolving line of credit over the course of fiscal 2023.

During fiscal 2022, NTIC declared cash dividends of \(0.28 per share, a 43.6% increase over \)0.195 in cash dividends declared the prior fiscal year. We are closely watching our global markets as well as the capital needs

<--- Page Split --->

of our business and will adjust our dividend policy, as necessary, to maintain our strong financial position.

Looking at fiscal 2022 financial results in more detail, NTIC's consolidated net sales for fiscal 2022 were a record \(74.2 million. The 31.3% annual increase in net sales was a result of a 28.8% increase in total ZERUST \( ^{®} \)  sales driven by a rebound in global manufacturing, a 21.5% increase in ZERUST \( ^{®} \)  Oil & Gas net sales, and a 52.7% increase in annual Natur-Tec \( ^{®} \)  sales.

The performance of our joint ventures in fiscal 2022 was impacted by lower demand across the territories serviced by our global partners, primarily due to geopolitical conflict concerns as well as lingering COVID-19. In addition, it is important to point out that joint venture performance was also impacted materially because of our acquisition of Zerust India, which transforms that entity from an unconsolidated joint venture into a consolidated subsidiary within NTIC's financial statements. As a result, total net sales for fiscal 2022 by our joint ventures, which we do not consolidate in our financial statements, decreased 14.0% to \(104.1 million. Lower joint venture sales drove a 21.9% decline in joint venture operating income, which was \)10.5 million for fiscal 2022, compared to joint venture operating income of $13.4 million last fiscal year.

Profitability was impacted by lower joint venture operating income, significant inflation, and friction across our global supply chains. Net income attributable to NTIC was \(6.3 million, or \)0.66 per diluted share, compared to \(6.3 million, or \)0.64 per diluted share, last fiscal year. Net income for fiscal 2022 included a $3.3 million net gain on the purchase of ZERUST \( ^{®} \)  India

## ZERUST \( ^{®} \)  Industrial Corrosion Prevention

ZERUST \( ^{®} \)  Industrial sales benefitted from strong demand in North America as well as the contribution of ZERUST \( ^{®} \)  India. Net sales at our wholly owned NTIC China subsidiary were impacted by continued, rolling COVID-19 lockdowns in that country, causing sales at this operation to decline by 9.2% during the year to $15.8 million.

Overall, ZERUST \( ^{®} \)  Industrial sales trends rebounded significantly during fiscal 2022 and have increased 28.8% on a year-over-year basis. Notably, on a two-year basis, comparing fiscal 2022 to fiscal 2020 results, ZERUST \( ^{®} \)  Industrial sales increased nearly 68%, reflecting strong underlying trends across our global ZERUST \( ^{®} \)  Industrial business. We are optimistic that the start of fiscal 2023 will show further ZERUST \( ^{®} \)  Industrial growth, led by demand in North America, and more gradual improvements across our remaining global markets – most notably our European and Asian markets.

## ZERUST \( ^{®} \)  in the Oil & Gas Industry

We believe that we are rapidly nearing an inflection point with our ZERUST \( ^{®} \)  Oil & Gas business given that we are currently seeing new orders coming in increasing size and frequency from ever more diverse geographies for a broader range of our solutions. This is being fueled, in part, by the greater recognition we have earned amongst key customers in this market by consistently proving the efficacy of our installations around the world over the last 10+ years. Our reputation was further augmented by the favorable technical report that was released last year by the American Petroleum Institute (API) detailing how VCI based technologies, like the ones offered by ZERUST \( ^{®} \)  Oil & Gas, provide effective corrosion protection for the bottoms of above-ground storage tanks. In combination, these factors validate our technology, and is helping NTIC's long-term sales efforts within the global oil & gas market.

As a result, we achieved record ZERUST \( ^{®} \)  Oil & Gas sales in fiscal 2022 of 4.6 million, representing an increase of 21.5% over the prior year. Favorable trends within our oil & gas business accelerated throughout the year and let us end fiscal 2022 with two consecutive quarters of ZERUST \( ^{®} \)  Oil & Gas sales over 1.5 million for the first time in our history. That demand remained strong as we started the first quarter of FY2023.

In September 2022, we announced a new contract with BP Exploration (Caspian Sea) Limited. Under this initial

<--- Page Split --->

agreement, NTIC will be supplying chemical corrosion protection services for 12 BP storage tanks over the next three years. This alone is expected to bring in over $2.5 million in revenue over the next three years and to date is the single largest contract we have ever received for our ZERUST \( ^{®} \)  Oil & Gas storage tank solutions. As you can see, positive momentum is underway across our ZERUST \( ^{®} \)  Oil & Gas business and we believe there are substantial opportunities to drive growth throughout fiscal 2023 and beyond.

## Natur-Tec \( ^{®} \)  Bioplastics

Demand patterns for our Natur-Tec \( ^{®} \)  business strengthened during fiscal 2022, reflecting recovering market dynamics. This, in turn, pushed sales back up to pre-COVID levels during the year. Sales would have been even stronger, but industry-wide supply chain and logistics challenges, as well as PLA supply shortages due to production problems and delays at several of our suppliers negatively impacted the second quarter of fiscal 2022. These trends eased during the third quarter, allowing accelerating growth throughout the remainder of our fiscal year, and fourth quarter Natur-Tec \( ^{®} \)  sales increased 68.2% compared to the prior fiscal year period.

We continue to see growing market demand for new applications of certified compostable plastic products and resin compounds, as well as increasing interest in commercial and municipal programs that use certified compostable plastics as alternatives to conventional plastics. As a result, we believe we are well positioned for long-term sustainable growth within our Natur-Tec \( ^{®} \)  Bioplastics business, and we expect to achieve record Natur-Tec \( ^{®} \)  sales in fiscal 2023.

## Closing

I am proud of the progress we made throughout fiscal 2022. Our employees, joint venture partners, friends and colleagues continue to work hard to help us profitably expand our business and navigate an extremely fluid business environment. As we start fiscal 2023, momentum remains strong across our North American ZERUST \( ^{®} \)  Industrial market, as well as global ZERUST \( ^{®} \)  Oil & Gas and Natur-Tec \( ^{®} \)  markets. We expect these favorable trends will help NTIC continue to offset near-term uncertainty within our European and Asian markets. In addition, we expect our annual profitability to improve in fiscal 2023 as we continue to focus on rebuilding our margins. As a result, we expect fiscal 2023 to be another good year for NTIC and our stockholders.

Sincerely,

![](images/4_0.jpg)

G. Patrick Lynch
President & CEO, NTIC

![](images/4_1.jpg)

G. Patrick Lynch