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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2009
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                   to                 .

 

Commission File Number:  001-11038

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL
CORPORATION

(Exact name of registrant as specified in its charter)

 

 

4201 Woodland Rd. Circle Pines, Minnesota 55014
(Address of principal executive offices)

 

(763) 225-6600
(Registrant’s telephone number including area code)

 

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

 

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

 

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

 

 

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

 

As of July 14, 2009, 3,754,597 shares of common stock of the registrant were outstanding.

 

 

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

May 31, 2009

 

TABLE OF CONTENTS

 

Description			Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Consolidated Balance Sheets as of May 31, 2009 (unaudited) and August 31, 2008		3
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended May 31, 2009 and 2008		4
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended May 31, 2009 and 2008		5
	Notes to Consolidated Financial Statements (unaudited)		6-12
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		24
PART II.	OTHER INFORMATION		24
Item 1.	Legal Proceedings		24
Item 1A.	Risk Factors		24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 3.	Defaults Upon Senior Securities		25
Item 4.	Submission of Matters to a Vote of Security Holders		25
Item 5.	Other Information		25
Item 6.	Exhibits		25
SIGNATURE PAGE			26
EXHIBIT INDEX			27

 

 

This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. For more information, see “Part I. Financial Information — Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operation— Forward-Looking Statements.”

 

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

 

All trademarks, trade names or service marks referred to in this report are the property of their respective owners.

 

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PART I - FINANCIAL INFORMATION

 

ITEM 1.           FINANCIAL STATEMENTS

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2009 (UNAUDITED) AND AUGUST 31, 2008 (AUDITED)

 

		May 31, 2009			August 31, 2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	141,639		$	260,460
Receivables:
Trade excluding corporate joint ventures, less allowance for doubtful accounts of $30,000 at May 31, 2009 and $10,000 at August 31, 2008		1,172,454			1,962,222
Trade corporate joint ventures		658,559			530,609
Technical and other services, corporate joint ventures		1,621,489			3,065,738
Income taxes		734,505			28,961
Inventories		2,294,229			2,725,466
Prepaid expenses		198,179			179,766
Deferred income taxes		183,300			183,300
Total current assets		7,004,354			8,936,522
PROPERTY AND EQUIPMENT, net		3,637,944			3,754,565
OTHER ASSETS:
Investments in corporate joint ventures:
Industrial chemical		14,146,452			15,676,876
Industrial non-chemical		312,913			339,471
Deferred income taxes		837,300			837,300
Notes receivable		140,000			140,000
Industrial patents and trademarks, net		903,393			1,015,321
Goodwill		—			304,000
Other		13,193			325,557
		16,353,251			18,638,525
		$	26,995,549		$	31,329,612
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Bank overdrafts		$	187,473		$	1,039,757
Borrowings made on line of credit		963,000			86,000
Current portion of note payable		33,562			31,556
Accounts payable		289,423			1,251,522
Accrued liabilities:
Payroll and related benefits		210,304			1,102,992
Deferred joint venture royalties		288,000			288,000
Other		117,452			195,324
Total current liabilities		2,089,214			3,995,151
NOTE PAYABLE, NET OF CURRENT PORTION		1,153,959			1,179,972
MINORITY INTEREST		—			3,398
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value; authorized 10,000 shares; none issued and outstanding		—			—
Common stock, $0.02 par value per share; authorized 10,000,000 shares; issued and outstanding 3,754,597 and 3,729,457, respectively		75,092			74,556
Additional paid-in capital		5,596,307			5,271,417
Retained earnings		16,533,454			18,672,938
Accumulated other comprehensive income		1,547,523			2,132,180
Total stockholders’ equity		23,752,376			26,151,091
		$	26,995,549		$	31,329,612
See notes to consolidated financial statements.

 

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES - CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

THREE AND NINE MONTHS ENDED MAY 31, 2009 AND 2008

 

		Three Months Ended						Nine Months Ended
		May 31, 2009			May 31, 2008			May 31, 2009			May 31, 2008
NORTH AMERICAN OPERATIONS:
Sales		$	1,673,634		$	3,269,721		$	6,678,748		$	9,518,162
Cost of goods sold		995,672			2,059,855			4,444,075			5,763,500
Gross profit		677,962			1,209,866			2,234,673			3,754.662
Operating expenses:
Selling		577,736			799,949			1,924,102			2,413,895
General and administrative		599,012			702,592			2,184,974			2,545,414
Lab and technical support		13,823			32,631			51,285			143,375
Loss on impairment		—			—			554,000			—
		1,190,571			1,535,172			4,714,361			5,102,684
NORTH AMERICAN OPERATING LOSS		(512,609		)	(325,306		)	(2,479,688		)	(1,348,022		)
CORPORATE JOINT VENTURES AND HOLDING COMPANIES:
Equity in income of industrial chemical corporate joint ventures and holding companies		(14,824		)	1,155,282			663,734			3,109,093
Equity in income (loss) of industrial non-chemical corporate joint ventures and holding companies		7,986			(16,142		)	(12,834		)	(102,097		)
Gain on sale of industrial chemical corporate joint venture		—			—			—			172,767
Fees for technical support and other services provided to corporate joint ventures		821,810			1,517,428			2,760,379			4,537,855
Expenses incurred in support of corporate joint ventures and new technologies		(880,168		)	(1,412,582		)	(3,375,230		)	(3,837,266		)
(LOSS) INCOME FROM ALL CORPORATE JOINT VENTURES AND HOLDING COMPANIES		(65,196		)	1,243,986			36,049			3,880,352
INTEREST INCOME		6,509			22,277			7,828			23,196
INTEREST EXPENSE		(27,933		)	(21,757		)	(102,271		)	(93,872		)
OTHER INCOME		4,550			6,825			18,200			21,582
GAIN ON SALE OF ASSETS		—			—			—			5,529
MINORITY INTEREST		—			10,123			3,398			32,269
(LOSS) INCOME BEFORE INCOME TAX EXPENSE		(594,679		)	936,148			(2,516,484		)	2,521,034
INCOME TAX EXPENSE (BENEFIT)		44,000			148,000			(377,000		)	415,000
NET (LOSS) INCOME		$	(638,679	)	$	788,148		$	(2,139,484	)	$	2,106,034
NET (LOSS) INCOME PER COMMON SHARE:
Basic		$	(0.17	)	$	0.21		$	(0.57	)	$	0.57
Diluted		$	(0.17	)	$	0.21		$	(0.57	)	$	0.56
WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:
Basic		3,754,596			3,723,166			3,746,977			3,704,673
Diluted		3,754,596			3,758,646			3,746,977			3,741,558
See notes to consolidated financial statements.

 

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND

SUBSIDIARIES - CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

NINE MONTHS ENDED May 31, 2009 and 2008

 

		Nine Months Ended
		May 31, 2009			May 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(2,139,484	)	$	2,106,034
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Expensing of fair value of stock options vested		75,000			71,403
Change in allowance for doubtful accounts		20,000			—
Depreciation expense		294,852			262,808
Amortization expense		106,391			116,196
Loss on asset impairment		554,000			—
Loss (gain) on disposal of assets		46,302			(5,529		)
Minority interest expense		(3,398		)	(32,269		)
Equity in income (loss) from corporate joint ventures:
Industrial chemical		(663,734		)	(3,109,093		)
Industrial non-chemical		12,834			102,097
Gain on sale of industrial chemical corporate joint venture		—			(172,767		)
Deferred income taxes		—			413,000
Deferred joint venture royalties		—			72,000
Change in current assets and liabilities:
Receivables:
Trade excluding corporate joint ventures		769,768			(443,078		)
Trade corporate joint ventures		(127,950		)	121,062
Technical and other services receivables, corporate joint ventures		1,444,249			(1,106,084		)
Income taxes		(705,544		)	29,755
Inventories		431,237			(227,709		)
Prepaid expenses and other assets		29,708			(93,622		)
Income taxes payable		—			168,145
Accounts payable		(962,099		)	(483,276		)
Accrued liabilities		(743,599		)	614,972
Net cash used in operating activities		(1,561,467		)	(1,595,955		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets		—			6,201
Investment in corporate joint ventures		(666,663		)	(117,950		)
Dividends received from corporate joint ventures		2,289,888			1,805,411
Proceeds from sale of industrial chemical corporate joint ventures		—			364,000
Loans made					(140,000		)
Additions to property and equipment		(178,231		)	(266,192		)
Additions to industrial patents		(26,522		)	(141,105		)
Net cash provided by investing activities		1,418,472			1,510,365
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdrafts		(852,284		)	236,480
Net borrowings made on line of credit		877,000			—
Repayment of note payable		(24,007		)	(21,895		)
Proceeds from employee stock purchase plan		23,465			45,500
Net cash provided by financing activities		24,174			260,085
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(118,821		)	174,495
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		260,460			244,499
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	141,639		$	418,994

 

See notes to consolidated financial statements.

 

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1.         INTERIM FINANCIAL INFORMATION

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, which are of a normal recurring nature, and present fairly the consolidated financial position of Northern Technologies International Corporation and its subsidiaries (the “Company”) as of May 31, 2009 and the results of their operations for the three and nine months ended May 31, 2009 and 2008 and their cash flows for the nine months ended May 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).

 

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2008 and with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section appearing in this report.  Operating results for the three and nine months ended May 31, 2009 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2009.

 

2.         RECENTLY ISSUED FINANCIAL PRONOUNCEMENTS

 

In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”.  This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  The objective of this Statement is to replace Statement 162 and to establish the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Company does not believe that the adoption of SFAS 168 will have a material effect on its results of operations, financial position or cash flows.

 

In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”, which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R). This statement is effective as of the beginning of the first fiscal year that begins after November 15, 2009. This statement will be effective for the Company beginning in fiscal 2011. The Company is assessing the potential impact of adoption.

 

In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS 166”).  SFAS 166 is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets.   SFAS 166 must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited.   This Statement must be applied to transfers occurring on or after the effective date.

 

Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes.  Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance.  If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation.  Additionally, the disclosure provisions of this Statement should be applied to transfers that occurred both before and after the effective date of this Statement.   The Company is assessing the potential impact of adoption.

 

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In May 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 165, Subsequent Events (“SFAS 165”).  SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date—that is, whether that date represents the date the financial statements were issued or were available to be issued.  This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented.  SFAS 165 is effective for interim and annual periods ending after June 15, 2009.  The Company is currently assessing the effect that SFAS 165 will have on its results of operations, financial position and cash flows.

 

3.             INVENTORIES

 

Inventories consisted of the following:

 

		May 31, 2009			August 31, 2008
Production materials		$	977,080		$	1,039,549
Finished goods		1,317,149			1,685,917
		$	2,294,229		$	2,725,466

 

4.             PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

INDUSTRIAL PATENTS AND TRADEMARKS, NET

 

		May 31, 2009			August 31, 2008
Land		$	310,365		$	310,365
Buildings and improvements		3,085,098			3,031,103
Machinery and equipment		1,732,806			1,608,570
		5,128,269			4,950,038
Less accumulated depreciation		(1,490,325		)	(1,195,473		)
		$	3,637,944		$	3,754,565

 

5.             INDUSTRIAL PATENTS AND TRADEMARKS, NET

 

Industrial patents and trademarks consisted of the following:

 

		May 31, 2009			August 31, 2008
Patents and trademarks		$	1,417,215		$	1,580,172
Less accumulated amortization		(513,822		)	(564,851		)
		$	903,393		$	1,015,321

 

Patent and trademark costs are amortized over seven years once a patent or trademark is filed and approved.  Amortization expense related to patents and trademarks was $28,466 and $39,207 for the three months ended May 31, 2009 and 2008, respectively and $92,149 and $102,844 for the nine months ended May 31, 2009 and 2008, respectively.

 

6. DISSOLUTION OF REACT, INC. BUSINESS

 

As previously disclosed, almost all historical sales by React-NTI included in the Company’s consolidated statement of operations were derived from sales by React Inc., a 100% owned subsidiary of React-NTI, of proprietary ink additives to one customer.  During fourth quarter of fiscal 2007, this customer notified React Inc. that no future orders would be placed after current orders were received.  As a result, the Company anticipates no additional sales of proprietary ink additives.  Concurrent with the decline of its ink additive sales, React-NTI continued to develop and pursue additional sales through a patented sintered metal mold release agent sold under the brand name SERAVAT™ and renewable resource-based personal care chemical additive under the brand name Farona™.  In fiscal 2009, the Company

 

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implemented several cost control and cash preservation measures.  These measures included elimination of further product and market development related to these products.

 

As a result of these changes, management determined that the fair value of the React-NTI reporting unit was less than the carrying value.  As a result, a loss on impairment of goodwill and intangible assets of $554,000 was recorded for the nine months ended May 31, 2009 to appropriately reflect the fair value of such assets.   In addition, during the nine months ended May 31, 2009, the Company derecognized previously recorded trade payables of $320,000 as a result of negotiations between the Company and its vendor.  This amount is recorded in general and administrative expenses in the Company’s consolidated statement of operations.  At May 31, 2009, the remaining net book value of the assets and liabilities of React-NTI and its subsidiaries approximates $0.

 

7.             GOODWILL

 

The Company applies Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which sets forth financial and reporting standards for the acquisition of intangible assets, other than those acquired in a business combination, and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires that goodwill no longer be amortized but tested for impairment on a periodic basis.

 

The changes in the carrying amount of the Company’s goodwill for the periods presented are as follows:

 

Carrying amount at August 31, 2008:		$	304,000
Impairment charge (see Note 6):		$	(304,000	)
Carrying amount at May 31, 2009:		$	0

 

8.             INVESTMENTS IN CORPORATE JOINT VENTURES

 

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

 

		May 31, 2009			August 31, 2008
Current assets		$	40,614,800		$	51,847,643
Total assets		48,282,708			58,958,102
Current liabilities		12,173,751			20,424,810
Noncurrent liabilities		5,300,670			4,756,650
Joint ventures’ equity		30,808,287			33,776,642
Northern Technologies International Corporation’s share of corporate joint ventures’ equity		$	14,459,365		$	16,016,347

 

		Three Months Ended						Nine Months Ended
		May 31, 2009			May 31, 2008			May 31, 2009			May 31, 2008
Net sales		$	14,151,960		$	30,802,632		$	46,628,644		$	79,893,753
Gross profit		6,545,492			13,840,622			21,551,740			36,383,556
Net income (loss)		(55,923		)	2,174,841			1,009,691			5,434,476
NTIC’s share of equity in income (loss) of corporate joint ventures		$	(6,838	)	$	1,139,140		$	650,900		$	3,006,996

 

The financial statements of the Company’s foreign joint ventures are prepared using accounting principles accepted in the joint ventures’ countries of domicile.  Amounts related to foreign joint ventures reported in the above tables and the accompanying financial statements have been adjusted to approximate US GAAP in all material respects.

 

During the nine months ended May 31, 2008, the Company invested $87,950 in a non-industrial chemical joint venture in Thailand in addition to $143,000 previously invested in December 2006.  The Company has a 50% ownership interest in the Thailand joint venture.  The entity had no operations prior to the Company’s investment in December 2006.  The total capitalization by both owners of the joint venture was $461,900 as of May 31, 2008.

 

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During the three months ended May 31, 2009, the Company invested $666,663 in its existing industrial chemical joint venture in India. The Company has a 50% ownership interest in the India joint venture.  The total increased capitalization by both owners of the joint venture was $1,333,326.  Additionally, at the same time that the capital contributions were made by the owners, the joint venture in India remitted past due royalty and service charge payments to the Company of $611,974.  The other 50% local partner also received $611,974 for past due management fees.

 

No other additional contributions have been made to the Company’s joint ventures during the nine months ended May 31, 2009.

 

9.         STOCKHOLDERS’ EQUITY

 

During the nine months ended May 31, 2009, the Company did not purchase or retire any shares of its common stock and no stock options to purchase shares of the Company’s common stock were exercised.  The Company granted stock bonuses under the Northern Technologies International Corporation 2007 Stock Incentive Plan for an aggregate of 21,513 shares of its common stock to various employees during the nine months ended May 31, 2009.  The fair value of the shares of the Company’s common stock as of the date of grant of the stock bonuses was $226,961, based on the closing sale price of a share of the Company’s common stock on that date.

 

During the nine months ended May 31, 2008, the Company did not purchase or retire any shares of its common stock and no stock options to purchase shares of the Company’s common stock were exercised.  The Company granted stock bonuses under the Northern Technologies International Corporation 2007 Stock Incentive Plan for an aggregate of 33,595 shares of its common stock to various employees during the nine months ended May 31, 2008.  The fair value of the shares of the Company’s common stock as of the date of grant of the stock bonuses was $334,270, based on the closing sale price of a share of the Company’s common stock on that date.

 

10.       TOTAL COMPREHENSIVE (LOSS) INCOME

 

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

 

		Three Months Ended						Nine Months Ended
		May 31, 2009			May 31, 2008			May 31, 2009			May 31, 2008
Net (loss) income		$	(638,679	)	$	788,148		$	(2,139,484	)	$	2,106,034
Other comprehensive (loss) income — foreign currency translation adjustment		1,202,403			149,198			(584,657		)	1,461,997
Total comprehensive (loss) income		$	563,724		$	937,346		$	(2,724,141	)	$	3,568,031

 

11.       NET (LOSS) INCOME PER COMMON SHARE

 

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

 

All options to purchase shares of common stock were excluded from the computation of common share equivalents for the three and nine months ended May 31, 2009, respectively, as the Company reported losses for the three and nine months ended May 31, 2009.

 

12.       STOCK-BASED COMPENSATION

 

The Northern Technologies International Corporation 2007 Stock Incentive Plan (the “2007 Plan”) provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, stock unit awards, performance awards and stock bonuses to eligible recipients to enable the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to reward those individuals who contribute to the achievement of the Company’s economic objectives.  Up to a total of 400,000 shares of the Company’s common stock has been reserved for issuance under the 2007 Plan, subject to adjustment as

 

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provided in the 2007 Plan.  Options granted under the 2007 Plan generally have a term of five years and become exercisable over a three- or four-year period beginning on the one-year anniversary date of the grant.  Options are granted at per share exercise prices equal to the market value of the Company’s common stock on the date of grant.  To date, only stock options and stock bonuses have been granted under the 2007 Plan.

 

The Northern Technologies International Corporation Employee Stock Purchase Plan (the “ESPP”) allows eligible employees of the Company to acquire shares of the Company’s common stock on favorable terms through payroll deductions.  The maximum number of shares of common stock of the Company available for issuance under the ESPP is 100,000 shares, subject to adjustment as provided in the ESPP.  The ESPP provides for nine-month offering periods beginning on September 1 and March 1 of each year.  The purchase price of the shares is 90% of the lower of the fair market value of common stock at the beginning or end of the offering period.  This discount may not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financial reporting purposes.

 

The Company granted options to purchase 30,000 and 37,140 shares of its common stock during the nine months ended May 31, 2009 and 2008, respectively.  No options were granted during the three months ended May 31, 2009 and 2008.  The fair value of option grants is determined at date of grant, using the Black-Scholes option pricing model with the assumptions listed below. The Company recognized compensation expense of $75,000 and $71,403 during the nine months ended May 31, 2009 and 2008, respectively, related to the value of the options that vested during such time period.  The stock-based expense recorded reduced after-tax net income per share by $0.02 for the nine months ended May 31, 2009 and 2008.  As of May 31, 2009, the total compensation cost for non-vested options not yet recognized in the Company’s statements of operations was $165,509, net of estimated forfeitures.  Additional stock-based compensation expense of $25,248 is expected through the remainder of fiscal year 2009, and expense of $90,424 and $47,837 is expected to be recognized during fiscal 2010 and 2011, respectively.  Future option grants will impact the compensation expense recognized.

 

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

 

 

The weighted average fair value of options granted during the nine months ended May 31, 2009 and 2008 was $4.78 and $3.50, respectively.

 

13.       GEOGRAPHIC AND SEGMENT INFORMATION

 

Net sales by geographic location as a percentage of total consolidated net sales for the three and nine months ended May 31, 2009 and 2008 were as follows:

 

		Three Months Ended				Nine Months Ended
		May 31, 2009		May 31, 2008		May 31, 2009		May 31, 2008
Inside the U.S.A. to unaffiliated customers		87.9	%	75.9	%	83.2	%	75.9	%
Outside the U.S.A. to:
Corporate joint ventures in which the Company is a shareholder directly and indirectly		7.1		13.5		12.4		14.7
Unaffiliated customers		5.0		10.6		4.4		9.4
		100.0	%	100.0	%	100.0	%	100.0	%

 

The following table sets forth the Company’s net sales for the three and nine months ended May 31, 2009 and 2008 by segment:

 

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		Three Months Ended						Nine Months Ended
		May 31, 2009			May 31, 2008			May 31, 2009			May 31, 2008
ZERUST® sales		$	1,646,715		$	3,161,206		$	6,159,096		$	9,021,496
Natur-Tec™ sales		14,029			102,290			499,037			204,998
React-NTI sales		12,890			6,225			20,615			43,508
React Inc. sales		—			—			—			248,160
Total North American net sales		$	1,673,634		$	3,269,721		$	6,678,748		$	9,518,162

 

The following table sets forth the Company’s direct cost of sales for the three and nine months ended May 31, 2009 and 2008 by segment:

 

					Three Months Ended										Nine Months Ended
		May 31, 2009			% of Cost of Sales*		May 31, 2008			% of Cost of Sales*		May 31, 2009			% of Cost of Sales*		May 31, 2008			% of Cost of Sales*
Direct cost of sales
ZERUST® cost of sales		$	828,933		50.3	%	$	1,657,121		52.4	%	$	3,341,166		54.2	%	$	4,543,170		50.4	%
Natur-Tec™ cost of sales		7,944			56.6	%	99,556			97.3	%	425,178			85.2	%	185,911			90.7	%
React-NTI cost of sales		6,490			50.3	%	2,932			47.1	%	10,610			51.5	%	21,885			50.3	%
React Inc. cost of sales		—			—		—			—		—			—		209,880			84.6	%
Indirect cost of sales		152,305			—		300,246			—		667,121			—		802,654			—
Total North American net cost of sales		$	995,672				$	2,059,855				$	4,444,075				$	5,763,500

 

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

 

The Company’s management utilizes product net sales and direct cost of sales for each product in reviewing the financial performance of a product type.  Further allocation of Company expenses or assets, aside from amounts presented in the tables above, is not utilized in evaluating product performance, nor does such allocation occur for internal financial reporting.

 

14.       COMMITMENTS AND CONTINGENCIES

 

On July 25, 2008, the Company’s Board of Directors, upon recommendation of the Compensation Committee, approved the material terms of an annual bonus plan for the Company’s executive officers and certain employees for the fiscal year ending August 31, 2009, the purpose of which is to align the interests of the Company, its executive officers and stockholders by providing an incentive for the achievement of key corporate and individual performance measures that are critical to the success of the Company and linking a significant portion of each executive officer’s annual compensation to the achievement of such measures. The following is a brief summary of the material terms approved by the Board:

 

·                  The total amount available under the bonus plan will be up to 25% of NTIC’s earnings before interest, taxes and other income (EBITOI);

 

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

 

·                  The payment of bonuses under the plan will be purely discretionary and will be paid to executive officer participants in both cash and stock, the exact amount and percentages of which will be determined by NTIC’s Board of Directors, upon recommendation of the Compensation Committee.

 

No management bonus for fiscal 2009 was made or accrued as of May 31, 2009.  There was a $843,000 management bonus accrual as of May 31, 2008 for the Company’s fiscal 2008 bonus plan.

 

In April 2007, REACT-NTI, LLC (“React LLC”), an entity that was 75% owned by the Company, was served with a summons and complaint that was filed by Shamrock Technologies, Inc. (“Shamrock”) in state court in New York, which was subsequently removed to the Federal District Court for the Southern District of New York.  The lawsuit sought payment from React LLC of commissions in the approximate amount of $314,500 owed by React LLC under a

 

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license agreement between React LLC and Shamrock.  The complaint alleged breach of the license agreement by React LLC and sought damages in an unspecified amount for such breach as well as damages of approximately $300,000 for the alleged failure of React LLC to purchase from Shamrock certain inventory manufactured for sale to a customer.  Shamrock further claimed lost profits with respect to sales made by REACT LLC that were manufactured by parties other than Shamrock.  React LLC denied all of the claims of breach of the license agreement by it and believed that damages caused by Shamrock’s breach of the license agreement and tortious conduct exceeded any amounts owing to Shamrock.  React LLC formally responded to the complaint after removal by moving to dismiss or stay because of Shamrock’s failure to comply with alternative dispute resolution procedures contained in the license agreement.  By court order, the matter was stayed so that the parties could attempt mediation.  The parties mediated for one day and were unsuccessful in resolving the matter.  The parties proceeded with discovery, exchanging answers to interrogatories and documents, and the parties also obtained documents by subpoena from third parties.  With more complete information, the parties decided 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 via telephone and email thereafter.  The mediator ultimately determined that the parties were at an impasse, and the parties have had no further communication.  Because the mediation and negotiation process did not result in a final settlement, there can be no permanent assurance at the present time that the matter will not result in a material adverse effect on the Company’s business, financial condition or results of operations at some point in the future.

 

The Company is involved in various other legal actions arising in the normal course of business.  Management is of the opinion that any judgment or settlement resulting from these pending or threatened actions would not have a material adverse effect on the Company’s business, financial condition or results of operations.

 

In June 2007, the U.S. Internal Revenue Service concluded its audit of the Company’s U.S. federal income tax returns for fiscal 2004 and 2005.  During the course of such audit, the IRS took the position that the Company failed to withhold and assessed against the Company approximately  $505,000 of payroll taxes and individual income taxes on travel and other expense reimbursements made to Philip M. Lynch, the Company’s former Chairman of the Board and Chief Executive Officer, and commissions payments made to Inter Alia Holding Co. under that certain former Manufacturer’s Representative Agreement between the Company and Inter Alia, which agreement has since been terminated.  Inter Alia beneficially owns approximately 22.7% of the Company’s outstanding common stock.  G. Patrick Lynch, the Company’s current President and Chief Executive Officer, and three other members of the Lynch family, are shareholders of Inter Alia.   The Company disagreed with the IRS’ position and appealed the matter.  In February 2009, the IRS reversed its position and concluded its audit of the Company’s U.S. federal income tax returns for fiscal 2004 and 2005.

 

15.       STATEMENTS OF CASH FLOWS

 

The Company did not declare or pay any cash dividends during fiscal 2008 and as of July 14, 2009, had not declared or paid any cash dividends during fiscal 2009.

 

The Company issued 21,513 and 33,595 shares of common stock as stock bonuses under its stock incentive plans to various employees to satisfy $226,961 and $334,270 of accrued payroll liabilities during the nine months ended May 31, 2009 and 2008, respectively.  The accrued payroll liabilities related to the Company’s fiscal 2008 and 2007 bonus plans.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess NTIC’s financial condition and results of operations.  Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Forward-Looking Statements” appearing elsewhere in this report.  The following discussion of the results of the operations and financial condition of NTIC should be read in conjunction with NTIC’s consolidated financial statements and the related notes thereto included under Part I, Item 1 entitled “Financial Statements” of this report.

 

General Overview

 

Northern Technologies International Corporation develops and markets proprietary environmentally beneficial products and technical services either directly or via a network of joint ventures and independent distributors in over 50 countries.  NTIC’s primary business is corrosion prevention.  However, NTIC has three emerging businesses that have all generated revenue or are expected to generate revenues in the near future (1) corrosion prevention technology used in the oil and gas industry, which NTIC sells both directly and through joint ventures; (2) a product line of compounds and finished products based on a portfolio of proprietary bio-plastic technologies marketed under the Natur-Tec™ brand; and (3) technology and equipment that convert plastic waste into diesel, gasoline and heavy fractions, which is exclusively licensed from Zbigniew Tokarz, the inventor of the technology and sold through NTIC’s joint venture Polymer Energy, LLC in North America and Asia.

 

NTIC participates, either directly or indirectly through holding companies, in 29 corporate joint venture arrangements in North America, South America, Europe, Asia and the Middle East.  Each of these joint ventures generally manufactures and markets finished products in the geographic territory to which it is assigned.  While most of NTIC’s joint ventures currently sell rust and corrosion inhibiting products and custom packaging systems, NTIC also has joint ventures that manufacture, market and sell NTIC’s Natur-Tec™ products, the Polymer Energy technology and equipment that converts plastic waste into diesel, gasoline, and heavy fractions, and its corrosion prevention technology used in the oil and gas industry.  NTIC categorizes its joint ventures into two principal areas: industrial chemical and non-industrial chemical.  The profits of NTIC’s corporate joint ventures are shared by the respective corporate joint venture owners in accordance with their respective ownership percentages.  NTIC typically owns 50% of its joint venture entities and thus does not control the decisions of these entities regarding whether to pay dividends or how much to pay in dividends in any given year.

 

NTIC has been selling its proprietary ZERUST® and EXCOR® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 30 years.  NTIC also offers worldwide on-site technical consulting for rust and corrosion prevention issues.  In North America, NTIC markets its technical services and ZERUST® products principally to industrial users by a direct sales force and a network of independent distributors.  NTIC’s technical service consultants work directly with the end users of NTIC’s products to analyze their specific needs and develop systems to meet their technical requirements.

 

In January 2009, NTIC announced the signing of a multi-year contract between NTIC’s Brazilian joint venture (Zerust Prevencao de Corrosao S.A.) and Petroleo Brasileiro S.A. (Petrobras) to install and service proprietary corrosion protection technologies on the roofs of an initial set of above ground oil storage tanks at the Petrobras REDUC refinery in Rio de Janeiro, Brazil.  At the end of March 2009, NTIC announced that it has signed multiple research and development contracts with Petrobras’ research and development group at the Leopoldo Américo Miguez de Mello Research & Development Center (CENPES) pursuant to which the parties will undertake a 20-month Petrobras funded effort to explore, understand and resolve bottom plate corrosion issues in aboveground storage tanks. A second 12-month Petrobras sponsored project also has started aimed at field trials of certain pipeline protection technologies. These initiatives are designed to help mitigate corrosion for critical oil and gas industry infrastructure. The projects are directly between NTIC and Petrobras and will be supported primarily by NTIC’s R&D facilities in Beachwood, Ohio. Any new intellectual property generated will be jointly owned by NTIC and Petrobras with NTIC having access to commercialization rights.  In addition, NTIC is pursuing opportunities to market NTIC’s technology to other potential customers in the oil and gas industry across several countries through its joint venture partners and other strategic

 

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partners.  NTIC believes the sale of its new ZERUST® products to customers in the oil and gas industry will involve a long sales cycle, likely including a one- to two-year trial period with each customer and a slow integration process thereafter.

 

In addition to ZERUST® products and services, NTIC develops and in the beginning of fiscal 2008 launched a portfolio of bio-based and/ or biodegradable (compostable) polymer resin compounds and finished products under the Natur-Tec™ brand.  These products are intended to reduce NTIC’s customers’ carbon footprint and provide environmentally sound disposal options.  In recent years, a combination of market drivers, such as higher petroleum prices, a desire to reduce dependence on foreign oil, increased environmental awareness at the consumer level and regulations banning the use of traditional, petroleum-based plastics, have led to interest in sustainable, renewable resource-based and compostable alternatives to traditional plastics.  Natur-Tec™ bio-based and/ or biodegradable plastics are manufactured using NTIC’s patented and/or proprietary technologies and are intended to replace conventional petroleum-based plastics.  The Natur-Tec™ bioplastics portfolio includes flexible film, foam, rigid injection molded materials and engineered plastics.  Natur-Tec™ biodegradable and compostable finished products include shopping and grocery bags, lawn and leaf bags, can liners, pet waste collection bags, cutlery, packaging foam and coated paper products and are engineered to be fully biodegradable in a composting environment.  Unlike competing plastic products claiming to be “degradable” or “oxo-degradable” that only break down into smaller plastic fragments, Natur-Tec™ products are designed to completely biodegrade within 180 days in accordance with the ASTM D6400 standard for compostable plastics and are certified 100 percent biodegradable and compostable by the Biodegradable Products Institute.

 

NTIC’s Polymer Energy LLC joint venture markets and sells a system that uses catalytic pyrolysis to efficiently convert plastic waste (primarily polyolefins) into hydrocarbons (primarily a mix of diesel, gasoline, and heavy fractions,). Each unit can process up to ten tons of plastic waste per day, and the modular design allows for easily scalable capacity. The Polymer Energy™ process can handle plastic that is contaminated with other types of waste such as metals, glass, dirt and water and the system can tolerate up to 25% of other waste in the input waste stream. The output crude oil mix is high-grade and can be further processed in a refinery or used as an input for co-generation of electricity. NTIC, through Polymer Energy LLC, a joint venture in which NTIC has a 62.5% interest has an exclusive license to market the technology in countries in Asia and North America as per the current JV agreement.

 

Financial Overview

 

Like many companies, NTIC’s operating results have been adversely affected by worldwide economic conditions, particularly adverse conditions affecting the worldwide automobile industry.  One of the primary markets for NTIC’s rust and corrosion inhibiting products has been the automotive industry, which is not expected to improve in the short to medium term, especially in light of the current worldwide economic conditions affecting that industry.  In particular, the U.S. auto industry furloughs in the beginning of calendar 2009 adversely affected sales of NTIC’s ZERUST® products during NTIC’s second and third fiscal quarters 2009.

 

In response to such conditions, NTIC implemented in December 2008 and January 2009 several cost reduction measures.  NTIC reduced the base salaries of its executive and other officers by approximately 15% on average, by 10% for all other employees and suspended NTIC’s matching of 401(k) contributions.  NTIC also implemented a hiring freeze and laid off 16% of its work force.  Furthermore, significant cost concessions were requested and obtained from all of NTIC’s major vendors and service providers.  NTIC enacted other expense control measures across all of its departments with the objective to conserve cash and reduce expenses while protecting the essential sales and marketing efforts of each business.  For the three months ending May 31, 2009, NTIC has realized an a 28.5% and 19.4% reduction in its total overall operating expense and expenses incurred in support of corporate joint ventures and new technologies as a result of these cost cutting measures compared to the three months ended November 30, 2008 and February 28, 2009, respectively.  NTIC may consider additional cost reduction measures during fourth quarter of fiscal 2009 or first quarter of fiscal 2010, if its net sales do not improve in the near future.

 

NTIC’s North American consolidated net sales decreased 48.8% and 29.8% during the three and nine months ended May 31, 2009, respectively, compared to the three and nine months ended May 31, 2008 primarily as a result of decreased demand for NTIC’s ZERUST® products and the elimination of the React Inc. sales.  Although sales of NTIC’s Natur-Tec™ products offset to some extent decreased demand for NTIC’s ZERUST® products during the nine

 

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month period comparison, sales of NTIC’s Natur-Tec™ products decreased significantly during the three month period comparisons.  During the three and nine months ended May 31, 2009, over 90% of NTIC’s consolidated net sales were derived from sales of ZERUST® and EXCOR® rust and corrosion inhibiting packaging products and services.  Net sales of ZERUST® products decreased 47.9% and 31.7% during the three and nine months ended May 31, 2009, respectively, compared to the three and nine months ended May 31, 2008.

 

During the three and nine months ended May 31, 2009, 0.8% and 7.5% of NTIC’s North American consolidated net sales, respectively, were derived from the sales of Natur-Tec™ products compared to 3.1% and 2.2% during the three and nine months ended May 31, 2008, respectively.  Net sales of Nature-Tec™ products decreased 86.3% during the three months ended May 31, 2009 and increased 143.4% during the nine months ended May 31, 2009 compared to the three and nine months ended May 31, 2008. NTIC believes that its Natur-Tec™ business during second and third fiscal quarters 2009 were adversely affected by the U.S. economic recession, which NTIC believes adversely affected the ability of its principal Natur-Tec™ distributor to purchase and distribute Natur-Tec™ products from NTIC during that time.  NTIC believes that its Natur-Tec™ sales will increase during its fourth fiscal quarter 2009 as compared to the previous two fiscal quarters primarily as a result of this significant customer.

 

As previously disclosed, almost all historical sales by React-NTI included in NTIC’s consolidated statement of operations were derived from sales by React Inc., a 100% owned subsidiary of React-NTI, of proprietary ink additives to one customer.  During fourth quarter of fiscal 2007, this customer notified React Inc. that no future orders would be placed after current orders were received.  As a result, NTIC anticipates no additional sales of proprietary ink additives.  Concurrent with the decline of its ink additive sales, React-NTI continued to develop and pursue additional sales through a patented sintered metal mold release agent sold under the brand name SERAVAT™ and renewable resource-based personal care chemical additive under the brand name Farona™.   In fiscal 2009, NTIC implemented several cost control and cash preservation measures.  These measures included elimination of further product and market development related to these products.  As previously disclosed, during the second quarter of fiscal 2009, management determined that the fair value of the React-NTI reporting unit was less than the carrying value.  As a result, a loss on impairment of goodwill and long-lived assets of $554,000 was recorded to appropriately reflect the fair value of such assets.   In addition, during the nine months ended May 31, 2009, NTIC derecognized previously recorded trade payables of $320,000 as a result of negotiations between NTIC and its vendor.  This amount is recorded in general and administrative expenses in NTIC’s consolidated statement of operations.  At May 31, 2009, the remaining net book value of the assets and liabilities of React-NTI and its subsidiaries approximates $0.

 

Cost of goods sold as a percentage of net sales decreased to 59.5% in the three months ended May 31, 2009 as compared to 63.0% for the three months ended May 31, 2008 primarily as a result of the decrease in Natur-Tec™ products sales as a percentage of total sales during the three months ended May 31, 2009 compared to the three months ended May 31, 2008, which sales are sold at lower margins than NTIC’s ZERUST® products. Cost of goods sold as a percentage of net sales increased to 66.5% in the nine months ended May 31, 2009 as compared to 60.6% for the nine months ended May 31, 2008 primarily as a result of the increase of Natur-Tec™ products sales as a percentage of total sales during the nine months ended May 31, 2009 compared to the nine months ended May 31, 2008.

 

Total net sales of all of NTIC’s joint ventures decreased 54.1% and 41.6% during the three and nine months ended May 31, 2009, respectively, compared to the three and nine months ended May 31, 2008 primarily as a result of decreased demand for ZERUST® products due to the global economic slowdown and, to a lesser extent, fluctuations in the foreign currency exchange rate of the U.S. dollar compared to other currencies in which NTIC’s joint ventures conduct business.  As a result of the decrease in total net sales of NTIC’s joint ventures, NTIC recognized a decrease in fee income for technical and support services of 45.8% and 39.2%, respectively, and a decrease in its equity in income of corporate joint ventures and holding companies of 100.6% and 78.4%, respectively, during the three and nine months ended May 31, 2009.  NTIC incurs direct expenses related to its corporate joint ventures and holding companies.  Such expenses include product and business development, consulting, travel, technical and marketing services to existing joint ventures, legal fees incurred in the establishment of new joint ventures, registration and promotion and legal defense of worldwide trademarks, and legal fees incurred in connection with the filing of patent applications.  NTIC’s direct joint venture expenses decreased 37.7% and 12.0% during the three and nine months ended May 31, 2009, respectively, compared to the three and nine months ended May 31, 2008.  NTIC’s total income from its corporate joint ventures and holding companies decreased 105.2% and 99.1% during the three and nine

 

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months ended May 31, 2009, respectively, compared to the nine months ended May 31, 2008 primarily as a result of the adverse worldwide economic situation.

 

NTIC spent $2,222,575 in the nine months ended May 31, 2009 and $1,847,547 in the nine months ended May 31, 2008 in connection with its research and development activities.  NTIC anticipates that it will spend between $2,800,000 and $3,000,000 in total during fiscal 2009 on research and development activities related to its new technologies.  These expenses are accounted for in the “Expenses incurred in support of corporate joint ventures” section of NTIC’s consolidated statements of operations.

 

NTIC incurred a net loss of ($638,679), or ($0.17) per diluted common share, during the three months ended May 31, 2009 compared to net income of $788,148 or $0.21 per diluted common share, for the three months ended May 31, 2008.  NTIC incurred a net loss of ($2,139,484), or (0.57) per diluted common share, during the nine months ended May 31, 2009 compared to net income of $2,106,034 or $0.56 per diluted common share, for the nine months ended May 31, 2008.  These significant decreases were primarily the result of the decreased demand of NTIC’s ZERUST® products in the United States and internationally due to the global economic recession, and to a lesser extent, the $554,000 loss on impairment relating to React-NTI.

 

NTIC’s working capital was $4,915,140 at May 31, 2009, including $141,639 in cash and cash equivalents.  As of May 31, 2009, NTIC had $963,000 of borrowings under its $2,300,000 demand line of credit.

 

NTIC expects to meet its future liquidity requirements during at least the next 12 months by using its existing cash and cash equivalents, forecasted cash flows from future operations, distributions of earnings and technical assistance fees to NTIC from its joint venture investments and funds available through existing or anticipated financing arrangements.  In order to take advantage of new product market opportunities to expand its business and increase its revenues, NTIC may decide to finance such opportunities by borrowing under its line of credit or raising additional financing through the issuance of debt or equity securities.

 

Results of Operations

 

The following table sets forth NTIC’s results of operations for the three months ended May 31, 2009 and May 31, 2008.

 

		May 31, 2009			% of Net Sales		May 31, 2008			% of Net Sales		$ Change			% Change
Net sales		$	1,673,634		100.0	%	$	3,269,721		100.0	%	$	(1,596,087	)	-48.8	%
Cost of goods sold		995,672			59.5	%	2,059,855			63.0	%	(1,064,183		)	-51.7	%
Selling expenses		577,736			34.5	%	799,949			24.5	%	(222,213		)	-27.8	%
General and administrative expenses		599,012			35.8	%	702,592			21.5	%	(103,580		)	-14.7	%
Lab and technical support expenses		13,823			0.8	%	32,631			1.0	%	(18,808		)	-57.6	%

 

The following table sets forth NTIC’s results of operations for the nine months ended May 31, 2009 and May 31, 2008.

 

		Nine Months Ended May 31, 2009			% of Net Sales		Nine Months Ended May 31, 2008			% of Net Sales		$ Change			% Change
Net sales		$	6,678,748		100.0	%	$	9,518,162		100.0	%	$	(2,839,414	)	-29.8	%
Cost of goods sold		4,444,075			66.5	%	5,763,500			60.6	%	(1,319,425		)	-22.9	%
Selling expenses		1,924,102			28.8	%	2,413,895			25.4	%	(489,793		)	-20.3	%
General and administrative expenses		2,184,974			32.7	%	2,545,414			26.7	%	(360,440		)	-14.2	%
Lab and technical support expenses		51,285			0.8	%	143,375			1.5	%	(92,090		)	-64.2	%
Loss on impairment		554,000			8.3	%	—			0.0	%	554,000			0.0	%

 

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