# To the Shareholders of Northern Technologies International Corporation

_Source: `DeepSeekOCR_Ardian_pruned_1k/basic-materials-specialty-chemicals/NASDAQ_NTIC_2017/NASDAQ_NTIC_2017.mmd` · pages 2-8_

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

The positive business momentum of fiscal 2017, demonstrated the strength of NTIC's corrosion inhibiting products and solutions, as well as that of the investments we have been making towards expanding both our markets and technologies. This solid foundation helped the company achieve record sales for fiscal 2017 and significantly improved profitability. We anticipate that these same strong fundamentals will drive significant business and financial growth in fiscal 2018 and beyond.

NTIC's consolidated net sales for fiscal 2017 increased 20%, to a record \(39,569,000, as sales of ZERUST \( ^{\circledR} \)  industrial products increased nearly 19% to an annual \)32,789,000 and sales of Natur-Tec \( ^{\circledR} \)  products jumped approximately 27% to \(6,780,000, compared to fiscal 2016. At the same time, sales of ZERUST \( ^{\circledR} \)  Oil & Gas products and services declined about 1% to \)1,720,000 as NTIC continues to gradually extend its sales reach into this large market.

For quite some time, we have been reinvesting the healthy operating cash flows generated by NTIC's strong core ZERUST \( ^{®} \)  business, into emerging businesses, including NTIC China, Zerust Oil & Gas, and Natur-Tec. Fiscal 2017 proved to be the defining turning point for both NTIC China and Natur-Tec, as both of these segments began producing income. Achieving profitability at these two businesses was a significant milestone for the company, and will help produce additional value through incremental sales growth.

NTIC's litigation against Cortec Corporation was a key factor negatively impacting profitability for the past two years. We incurred legal expenses related to this matter of \(849,000 and \)568,000 during fiscal 2017 and fiscal 2016, respectively. In September 2017, the United States District Court for the Northern District of Ohio dismissed with prejudice all claims asserted by NTIC against Cortec Corporation. While we believe we had a strong case and are disappointed by the Court's position, for the time being, NTIC does not plan to take further legal actions at this time against Cortec Corporation. NTIC intends to always assert its global intellectual property rights when challenged, but we anticipate that during fiscal 2018, our total legal expenses will be significantly lower than fiscal 2017.

With the transformation of NTIC China and Natur-Tec to profitable business segments, and the cessation of the litigation against Cortec Corporation, NTIC is well positioned to further improve earnings as it enters the new year. As a result of NTIC's improved profitability, strong financial position, and favorable business outlook, the company's Board of Directors recently approved a $0.10 quarterly cash dividend payable on December 21, 2017 to stockholders of record on December 8, 2017.

NTIC is committed to maintaining a strong balance sheet and capital structure, which enables the company to self-finance growth-generating initiatives while also enhancing stockholder value through active dividend and share repurchase programs. At the end of fiscal 2017, NTIC had \(9,684,000 of cash, cash equivalents, and available for sale securities, compared to \)5,639,000 at the end of fiscal 2016. In addition, NTIC has over $11,000,000 of additional cash at our joint ventures.

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

Worldwide sales of ZERUST \( ^{®} \)  Industrial products continued to rebound during fiscal 2017 from the market challenges created by the transition of our former Chinese joint venture to a wholly-owned subsidiary. The improvement in ZERUST \( ^{®} \)  Industrial product sales during fiscal 2017 was driven by strong global demand for our products and solutions, improved market share, and the significant contribution of NTIC China.

Sales by our joint ventures increased approximately 12% to over \(101,000,000 during fiscal 2017, compared to nearly \)91,000,000 last fiscal year. Sales from NTIC to its joint ventures also ended the fiscal year on a strong note, as sales increased over 15% for the fourth quarter ended August 31, 2017, compared to the prior fiscal year period. We are optimistic that the trends across our global joint venture network will remain strong in fiscal 2018, driven by growing market share, improving performance, and better global economic growth.

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Sales at NTIC China were \(7,226,000 for fiscal 2017, an increase of nearly 76% from the prior fiscal year. Higher sales reduced the impact of NTIC China's start-up and operating expenses, and as a result, NTIC China's operating loss went from \)3,410,000 last fiscal year, which included the full impairment of our $1,130,000 investment in Tianjin Zerust, to a loss of [ ] in fiscal 2017. Most importantly, during the fourth quarter of fiscal 2017, NTIC China sales increased over 36% to \(2,234,000, which positioned the emerging business to close out the fiscal year with its first full quarter of operating profit. NTIC China has the infrastructure to take advantage of significant opportunities throughout the Chinese market, and we are optimistic favorable sales and profitability trends will continue.

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

The oil & gas industry remains compelling and it is important for NTIC to continue to invest growing its market presence. While it is taking longer than expected, we believe we have a strong portfolio of solutions that will, ultimately, be broadly adopted.

Unfortunately, continued oil & gas market volatility limited our results. Nevertheless, the market's interest in NTIC's solutions remains very high and the company is actively pursuing a growing number of opportunities in North America, Europe, the Middle East and Southeast Asia.

## Natur-Tec \( ^{®} \)  Bioplastics

Sales of Natur-Tec \( ^{®} \)  products grew to a record 6,780,000 during fiscal 2017, representing a 27% increase over fiscal 2016. With this increase, Natur-Tec \( ^{®} \)  represented approximately 17% of NTIC's consolidated net sales for fiscal 2017. Favorable regulations continue to positively influence demand for Natur-Tec \( ^{®} \)  bioplastics products. This trend is expected to continue for the foreseeable future, as local and state governments around the world enact zero-waste regulations and waste management initiatives. We continue to experience strong demand for finished products, such as compostable bags and cutlery in North America, and anticipate broader adoption of our product lines by customers throughout Europe, Asia and North America during fiscal 2018.

## Closing

In closing, 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 a successful year. Our fiscal 2017 results demonstrate the strength of our business strategies and compelling financial model. Based on current trends, we expect fiscal 2018 will enjoy record sales and improved profitability and we look forward to sharing our successes with stockholders throughout the new year.

Sincerely,

![](images/3_0.jpg)

G. Patrick Lynch
President & CEO, NTIC

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G. Patrick Lynch