# To the Stockholders of Northern Technologies International Corporation

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NASDAQ_NTIC_2020/NASDAQ_NTIC_2020.mmd` · pages 2-8_

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

Despite the ongoing COVID-19 pandemic, which had a material impact on our business for a significant portion of fiscal 2020, NTIC's fourth quarter and full year financial results illustrate the resiliency of our global business model and our ability to navigate unprecedented market conditions. I am extremely proud of our response to these challenges, and our commitment to safely providing uninterrupted service to our customers worldwide. Key to our success has been the members of our experienced management team, who are all veterans of multiple market cycles, including the Great Recession of 2008 – 2009. The lessons learned during these earlier periods of uncertainty helped to hone our tactics and operating strategies for successfully steering through the current crisis.

Our asset-light business model not only allows us to react quickly to changes in our end markets, but also produces strong free cash flow. We ended fiscal 2020 with no debt, \(6,403,000 in cash and cash equivalents and \)5,545,000 in available for sale securities. Given the cyclical nature of many of our end markets, we believe it is important to maintain a strong balance sheet. Out of an abundance of caution, we also suspended our \(0.065 per share quarterly cash dividend on April 23, 2020. Once the coronavirus is in full retreat and the path towards a sustained macroeconomic recovery becomes clearer, we hope to reinstate our quarterly cash dividend in fiscal 2021.

NTIC's consolidated net sales for fiscal 2020 were \(47,639,000. The 14.5% annual decrease was due to reduced demand across the Company's global customer base caused by the continued global manufacturing recession that was first initiated by various trade wars and then dramatically exacerbated by the pandemic. As a result, for fiscal 2020, Natur-Tec \( ^{\circledR} \)  sales declined 25.1%, ZERUST \( ^{\circledR} \)  sales to our joint ventures declined 24.3%, and ZERUST \( ^{\circledR} \)  industrial sales declined 9.5%. Partially offsetting these trends were slightly higher sales of ZERUST \( ^{\circledR} \)  Oil & Gas products.

Challenging global market conditions throughout fiscal 2020 also impacted the financial performance across many of our joint ventures. Lower joint venture sales had a material impact on our NTIC's joint venture operating income, which decreased 31.4% to \(8,883,000, compared to joint venture operating income of \)12,953,000 during the fiscal year ended August 31, 2019.

The \(4,070,000 year-over-year decline in annual joint venture operating income had a material impact on net income attributable to NTIC. Consequently, the Company reported a net loss attributable to NTIC of \)1,338,000, or \(0.15 per diluted share, compared to net income attributable to NTIC of \)5,210,000, or \(0.55 per diluted share, for the same period last fiscal year. The net loss attributable to NTIC for fiscal year 2020 included a one-time \)1.6 million non-cash adjustment to the Company's U.S. deferred tax asset, which was required to remove the net U.S. deferred tax asset from NTIC's balance sheet.

While we prudently reduced operating expenses in fiscal 2020 by 3.4% over the prior fiscal year, we continued to support our research and development (R&D) efforts and invested nearly \(4,000,000 during fiscal 2020. R&D efforts are focused on further expanding our leadership position within our large and global end markets. In addition, during fiscal 2020, we maintained our sales and marketing organization, which we believe will be to NTIC's advantage should, as we anticipate, our markets start rebounding towards pre-COVID levels in the coming quarters.

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

The negative impact of the worldwide COVID-19 crisis was clearly visible in ZERUST \( ^{®} \)  industrial sales throughout fiscal 2020 both in North America and across the territories served by our global joint ventures. Sales by our joint ventures decreased approximately 24.1% to 87,030,000 during the fiscal year ended August 31, 2020, compared to 114,635,000 for the fiscal year ended August 31, 2019.

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Net sales at our wholly owned NTIC China subsidiary rebounded quickly during the second half of fiscal 2020 and thereby, increased by 2.9% for the full year to an annual record of \(13,404,000, despite having endured COVID-19 shutdowns during the second quarter of fiscal 2020. In addition, NTIC China sales continued to demonstrate improving sales trends since bottoming in March 2020. We believe sales at NTIC China continued to benefit from new customer development efforts as well as our successful expansion into non-automotive markets. We estimate the percent of automotive sales at NTIC China declined from 80% in fiscal 2019 to under 70% in fiscal 2020. Overall, we have a strong and motivated team at NTIC China, and we believe we are well positioned to increase our scale within the large and growing China market.

Outside of NTIC China, ZERUST \( ^{®} \)  industrial sales trends have also started to rebound from the coronavirus. After ZERUST \( ^{®} \)  industrial sales bottomed during the fiscal 2020 third quarter, sales in the fiscal 2020 fourth quarter increased by 10.5%. We are optimistic that the start of fiscal 2021 will show continued positive trends, as all of our global markets reopen and transition from convalescence to new growth.

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

ZERUST \( ^{®} \)  Oil & Gas sales remain volatile, primarily due to the market's long sales cycle and overall challenging conditions. In addition, during the COVID-19 crisis, lockdowns and travel restrictions made implementations at client sites challenging. Despite these market disruptions, Oil & Gas sales for fiscal 2020 increased 2.0% over the prior fiscal year to 2,783,000.

The oil and gas industry remains an important component of our long-term growth plan as it is the largest corrosion market globally. Over the past ten years, NTIC has developed a portfolio of compelling corrosion prevention solutions that includes products that protect the asset integrity of aboveground storage tanks, pipelines, offshore rigs and platforms, mothballed equipment, spare parts, and retail gas stations. We are also installing our solutions at more customer sites globally including recent expansions to include customers in Africa and parts of the Middle East and Europe, where we have not been previously. As a result, NTIC oil and gas solutions have been implemented in over ten new countries in just the past five years.

While it has taken longer than expected, we believe ZERUST \( ^{®} \)  Oil & Gas is becoming a known brand throughout the oil and gas industry. As we have mentioned previously, we are working with both NACE International and the American Petroleum Institute (API) to get VCI based corrosion prevention technologies officially recognized and approved as standard solutions for oil storage tanks. The COVID-19 crisis has temporarily delayed this process, but the field data we are producing alongside our customers continues to validate that VCI technologies are reliable alternatives to more expensive and less effective traditional systems. As VCI solutions become a worldwide accepted standard, we expect our Oil & Gas sales to increase significantly.

## Natur-Tec \( ^{®} \)  Bioplastics

The COVID-19 pandemic has had a heavy impact on our Natur-Tec \( ^{®} \)  business, as the crisis has affected many high-volume users of compostable products including college campuses, stadiums, arenas, restaurants, and cafeterias in large corporate office complexes. These are expected to be some of the last businesses to reopen from the pandemic, and many of these institutions have still not announced their reopening plans. Furthermore, production across the apparel industry has declined sharply, thereby also decreasing demand for the Natur-Tec \( ^{®} \)  bioplastic bags many famous clothing brands ship their product in as part of the sustainability initiatives within this industry. As a result, Natur-Tec \( ^{®} \)  sales declined 25.1% to 13,164,000 for fiscal 2020, and third and fourth quarter sales were down 50.4% and 58.5%, respectively, compared to the same periods last fiscal year.

Over the near-term, we expect market conditions for our bioplastics solutions will remain soft. However, as the world recovers from the COVID-19 pandemic, we believe the bioplastics market will rebound in the coming quarters and long-term trends within this market are extremely encouraging. In addition, throughout fiscal 2020,

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Natur-Tec \( ^{®} \)  gained meaningful traction in the China market and saw an increasing number of new customers globally. In fact, during the second quarter of fiscal 2020, we began supplying our proprietary resin compounds to one of the world's largest manufacturers of cutlery within the food service industry. We also expect the pandemic may also push broader implementation, as hygiene considerations for food service applications support increased demand for our compostable products. We also believe societal and political trends globally continue to support growing demand for alternatives to single use plastics, and Natur-Tec \( ^{®} \)  is extremely well positioned to benefit from these positive secular trends.

## Closing

While the timing and pace of the economic recovery remains uncertain, especially while the COVID-19 pandemic is not fully under control, I am encouraged by the direction we are headed, as well as, NTIC's compelling position within large, growing, and global markets. I am proud of how NTIC and our joint venture partners have responded throughout this challenging period and excited by the new business opportunities we continue to uncover. I want to thank all the members of NTIC's global family of employees, joint venture partners, friends and colleagues for their hard work and dedication during fiscal 2020.

As we start fiscal 2021, I am excited by the potential NTIC has to continue to create long-term value for stockholders with profitable sales growth throughout our ZERUST \( ^{®} \)  industrial, ZERUST \( ^{®} \)  Oil & Gas, and Natur-Tec \( ^{®} \)  product categories.

Sincerely,

![](images/4_0.jpg)

G. Patrick Lynch
President & CEO, NTIC

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G. Patrick Lynch

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