NORTHERN TECHNOLOGIES INTERNATIONAL CORP - Quarter Report: 2019 May (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2019

[_] 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)

Delaware

(State or other jurisdiction of incorporation or organization)

41-0857886

(I.R.S. Employer Identification No.)

4201 Woodland Road

P.O. Box 69

Circle Pines, Minnesota 55014

(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.02 per share	NTIC	Nasdaq Global Market

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 [_]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [_]

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

Large accelerated filer [_]

Accelerated filer [X]

Non-accelerated filer [_]

Smaller reporting company [X]

Emerging growth company [_]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 [_] No [X]

As of July 8, 2019, there were 9,086,816 shares of common stock of the registrant outstanding.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

May 31, 2019

TABLE OF CONTENTS

Description

Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets as of May 31, 2019 (unaudited) and August 31, 2018	3
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended May 31, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (unaudited) for the Three and Nine Months Ended May 31, 2019 and 2018	5
	Consolidated Statements of Equity (unaudited) for the Three and Nine Months Ended May 31, 2019 and 2018	6
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended May 31, 2019 and 2018	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	38
SIGNATURES		39

_________________

This quarterly report on Form 10-Q contains certain forward-looking statements that are 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 Operations—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 and its wholly-owned and majority-owned subsidiaries, all of which are consolidated on NTIC’s consolidated financial statements.

As used in this report, references to: (1) “NTIC China” refer to NTIC’s wholly-owned subsidiary in China, NTIC (Shanghai) Co., Ltd.; (2) “NTI Europe” refer to NTIC’s wholly-owned subsidiary in Germany, NTIC Europe GmbH; (3) “Zerust Mexico” refer to NTIC’s wholly-owned subsidiary in Mexico, ZERUST-EXCOR MEXICO, S. de R.L. de C.V; (4) “Zerust Brazil” refer to NTIC’s majority-owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A.; (5) “Natur-Tec India” refer to NTIC’s majority-owned subsidiary in India, Natur-Tec India Private Limited; and (6) “NTI Asean” refer to NTIC’s majority-owned holding company subsidiary, NTI Asean LLC, which is a holding company that holds investments in seven entities that operate in the Association of Southeast Asian Nations (ASEAN) region, including the following countries: Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand.

NTIC’s consolidated financial statements do not include the accounts of any of its joint ventures. Except as otherwise indicated, references in this report to NTIC’s joint ventures do not include any of NTIC’s wholly-owned or majority-owned subsidiaries.

As used in this report, references to “EXCOR” refer to NTIC’s joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH.

As used in this report, references to “Tianjin Zerust” refer to NTIC’s former joint venture in China, Tianjin-Zerust Anticorrosion Co., Ltd.

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

On June 3, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock effected in the form of a 100% share dividend distributed on June 28, 2019 to record holders as of June 17, 2019. All share and per share values in this report have been adjusted to retroactively reflect the effect of the two-for-one stock split.

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2019 (UNAUDITED)

AND AUGUST 31, 2018

		May 31, 2019			August 31, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,224,480		$	4,163,023
Available for sale securities		2,540,613			3,300,110
Receivables:
Trade excluding joint ventures, less allowance for doubtful accounts of $65,000 at May 31, 2019 and $50,000 at August 31, 2018		10,068,632			9,920,108
Trade joint ventures		935,685			761,506
Fees for services provided to joint ventures		1,242,928			1,357,255
Income taxes		628,360			273,333
Inventories		10,619,012			9,130,861
Prepaid expenses		1,105,319			1,661,577
Total current assets		32,365,029			30,567,773

PROPERTY AND EQUIPMENT, NET		7,293,137			7,168,826

OTHER ASSETS:
Investments in joint ventures		24,077,361			22,950,995
Deferred income taxes		1,371,664			1,551,536
Patents and trademarks, net		1,048,249			1,156,257
Other		—			153,849
Total other assets		26,497,274			25,812,637
Total assets	$	66,155,440		$	63,549,236

LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,458,928		$	3,905,034
Income taxes payable		636			70,892
Accrued liabilities:
Payroll and related benefits		1,357,164			2,747,303
Other		856,578			1,006,953
Total current liabilities		6,673,306			7,730,182

COMMITMENTS AND CONTINGENCIES (Note 12)

EQUITY:
Preferred stock, no par value; authorized 10,000 shares; none issued and outstanding		—			—
Common stock, $0.02 par value per share; authorized 15,000,000 shares; issued and outstanding 9,086,816 and 9,082,606, respectively		181,736			181,652
Additional paid-in capital		15,655,353			14,528,951
Retained earnings		44,708,934			41,963,341
Accumulated other comprehensive loss		(4,206,472	)		(3,597,199	)
Stockholders’ equity		56,339,551			53,076,745
Non-controlling interest		3,142,583			2,742,309
Total equity		59,482,134			55,819,054
Total liabilities and equity	$	66,155,440		$	63,549,236

*Share and per share data have been adjusted for all periods presented to reflect the two-for-one stock split effective June 28, 2019.

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2019 AND 2018

	Three Months Ended						Nine Months Ended
		May 31, 2019			May 31, 2018			May 31, 2019			May 31, 2018
NET SALES:
Net sales, excluding joint ventures	$	13,780,804		$	12,044,513		$	39,998,118		$	34,479,773
Net sales, to joint ventures		1,112,313			879,324			2,304,455			2,201,077
Total net sales		14,893,117			12,923,837			42,302,573			36,680,850
Cost of goods sold		10,138,353			8,592,366			28,883,589			24,493,672
Gross profit		4,754,764			4,331,471			13,418,984			12,187,178

JOINT VENTURE OPERATIONS:
Equity in income from joint ventures		1,877,410			2,246,066			5,596,788			5,793,391
Fees for services provided to joint ventures		1,433,823			1,508,500			4,299,032			4,624,532
Total joint venture operations		3,311,233			3,754,566			9,895,820			10,417,923

OPERATING EXPENSES:
Selling expenses		2,761,488			2,784,694			8,077,663			8,028,279
General and administrative expenses		2,527,192			1,987,785			6,986,526			6,012,746
Research and development expenses		1,005,045			860,347			2,804,739			2,581,824
Total operating expenses		6,293,725			5,632,826			17,868,928			16,622,849

OPERATING INCOME		1,772,272			2,453,211			5,445,876			5,982,252

INTEREST INCOME		24,114			35,630			52,023			84,569
INTEREST EXPENSE		(5,165	)		(3,139	)		(11,357	)		(14,007	)

INCOME BEFORE INCOME TAX EXPENSE		1,791,221			2,485,702			5,486,542			6,052,814

INCOME TAX EXPENSE		150,257			181,683			652,331			1,128,583

NET INCOME		1,640,964			2,304,019			4,834,211			4,924,231

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTERESTS		158,815			161,267			453,435			365,006

NET INCOME ATTRIBUTABLE TO NTIC	$	1,482,149		$	2,142,752		$	4,380,776		$	4,559,225

NET INCOME ATTRIBUTABLE TO NTIC PER COMMON SHARE:
Basic	$	0.16		$	0.24		$	0.48		$	0.50
Diluted	$	0.16		$	0.23		$	0.46		$	0.49

WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic		9,084,354			9,078,706			9,085,584			9,077,676
Diluted		9,392,444			9,414,064			9,440,858			9,327,694
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.06		$	0.05		$	0.18		$	0.15

*Share and per share data have been adjusted for all periods presented to reflect the two-for-one stock split effective June 28, 2019.

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2019 AND 2018

	Three Months Ended						Nine Months Ended
		May 31, 2019			May 31, 2018			May 31, 2019			May 31, 2018
NET INCOME	$	1,640,964		$	2,304,019		$	4,834,211		$	4,924,231
Other comprehensive LOSS – foreign currency translation adjustment		(493,488	)		(1,011,685	)		(596,468	)		(569,151	)

COMPREHENSIVE INCOME		1,147,476			1,292,334			4,237,743			4,355,081
COMPREHENSIVE INCOME ATTRIBUTABLE TO NON- CONTROLLING INTERESTS		129,541			137,502			466,240			383,464
COMPREHENSIVE INCOME ATTRIBUTABLE TO NTIC	$	1,017,935		$	1,154,832		$	3,771,503		$	3,971,617

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

FOR THE THREE AND SIX MONTHS ENDED MAY 31, 2019 AND 2018

.	STOCKHOLDERS’ EQUITY – THREE MONTHS ENDED MAY 31
											Accumulated
						Additional					Other			Non-
	Common Stock					Paid-in		Retained			Comprehensive			Controlling			Total
		Shares		Amount		Capital		Earnings			Income (Loss)			Interests			Equity

BALANCE AT FEBRUARY 28, 2019		9,084,354	$	181,688	$	15,262,556	$	43,771,843		$	(3,742,258	)	$	3,013,042		$	58,486,871
Stock issued for employee stock purchase plan		2,462		48		34,817		—			—			—			34,865
Stock option expense		—		—		357,980		—			—			—			357,980
Dividends paid to shareholders		—		—		—		(545,058	)		—			—			(545,058	)
Net income		—		—		—		1,482,149			—			158,815			1,640,964
Other comprehensive loss		—		—		—		—			(464,214	)		(29,274	)		(493,488	)
BALANCE AT MAY 31, 2019		9,086,816	$	181,736	$	15,655,353	$	44,708,934		$	(4,206,472	)	$	3,142,583		$	59,482,134

BALANCE AT FEBRUARY 28, 2018		9,074,816	$	181,496	$	14,307,103	$	38,586,704		$	(2,070,752	)	$	2,903,410		$	53,907,961
Stock options exercised		5,820		58		—		—			—			—			58
Stock issued for employee stock purchase plan		1,970		40		15,430		—			—			—			15,470
Stock option expense		—		—		103,209		—			—			—			103,209
Dividends paid to shareholders		—		—		—		(454,130	)		—			—			(454,130	)
Net income		—		—		—		2,142,752			—			161,267			2,304,019
Other comprehensive loss		—		—		—		—			(987,920	)		(23,765	)		(1,011,685	)
BALANCE AT MAY 31, 2018		9,082,606	$	181,652	$	14,425,684	$	40,275,326		$	(3,058,672	)	$	3,040,912		$	54,864,902

.	STOCKHOLDERS’ EQUITY – NINE MONTHS ENDED MAY 31
											Accumulated
						Additional					Other			Non-
	Common Stock					Paid-in		Retained			Comprehensive			Controlling			Total
		Shares		Amount		Capital		Earnings			Income (Loss)			Interests			Equity

BALANCE AT AUGUST 31, 2018		9,082,606	$	181,652	$	14,528,951	$	41,963,341		$	(3,597,199	)	$	2,742,309		$	55,819,054
Stock issued for employee stock purchase plan		4,210		84		52,462		—			—			—			52,546
Stock option expense		—		—		1,073,940		—			—			—			1,073,940
Investment by non-controlling interest		—		—		—		—			—			134,034			134,034
Dividends paid to shareholders		—		—		—		(1,635,183	)		—			—			(1,635,183	)
Dividend received by non-controlling interest		—		—		—		—			—			(200,000	)		(200,000	)
Net income		—		—		—		4,380,776			—			453,435			4,834,211
Other comprehensive income (loss)		—		—		—		—			(609,273	)		12,805			(596,468	)
BALANCE AT MAY 31, 2019		9,086,816	$	181,736	$	15,655,353	$	44,708,934		$	(4,206,472	)	$	3,142,583		$	59,482,134

BALANCE AT AUGUST 31, 2017		9,070,036	$	181,400	$	14,072,809	$	37,077,483		$	(2,471,064	)	$	2,857,448		$	51,718,076
Stock options exercised		8,820		176		15,257		—			—			—			15,433
Stock issued for employee stock purchase plan		3,750		76		27,875		—			—			—			27,951
Stock option expense		—		—		309,743		—			—			—			309,743
Dividends paid to shareholders		—		—		—		(1,361,382	)		—			—			(1,361,382	)
Dividend received by non-controlling interest		—		—		—		—			—			(200,000	)		(200,000	)
Net income		—		—		—		4,559,225			—			365,006			4,924,231
Other comprehensive income (loss)		—		—		—		—			(587,608	)		18,458			(569,150	)
BALANCE AT MAY 31, 2018		9,082,606	$	181,652	$	14,425,684	$	40,275,326		$	(3,058,672	)	$	3,040,912		$	54,864,902

*Share and per share data have been adjusted for all periods presented to reflect the two-for-one stock split effective June 28, 2019.

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE NINE MONTHS ENDED MAY 31, 2019 AND 2018

	Nine Months Ended
		May 31, 2019			May 31, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,834,211		$	4,924,231
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation		1,073,940			309,743
Depreciation expense		627,853			631,399
Amortization expense		195,230			188,460
Gain on disposal of assets		(36,210	)		(11,662	)
Equity in income from joint ventures		(5,596,788	)		(5,793,391	)
Dividends received from joint ventures		3,822,785			2,941,807
Deferred income taxes		177,916			700,000
Changes in current assets and liabilities:
Receivables:
Trade, excluding joint ventures		(132,122	)		(2,827,606	)
Trade, joint ventures		(174,179	)		93,947
Fees for services provided to joint ventures		114,327			(49,305	)
Income taxes		(343,377	)		(267,131	)
Inventories		(1,465,663	)		(1,773,085	)
Prepaid expenses and other		709,049			(718,839	)
Accounts payable		495,251			728,657
Income tax payable		(93,169	)		104,643
Accrued liabilities		(1,491,663	)		676,138
Net cash provided by (used in) operating activities		2,717,391			(141,994	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities		(2,340,503	)		(1,018,596	)
Proceeds from the sale of available for sale securities		3,100,000			1,502,665
Purchases of property and equipment		(716,212	)		(500,924	)
Investments in patents		(87,222	)		(62,594	)
Net cash used in investing activities		(43,937	)		(79,449	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend received by non-controlling interest		(200,000	)		(200,000	)
Investment by non-controlling interest		134,034			—
Dividends paid on NTIC common stock		(1,635,183	)		(1,361,382	)
Proceeds from employee stock purchase plan		52,547			27,951
Proceeds from option exercises		—			15,433
Net cash used in financing activities		(1,648,602	)		(1,517,998	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		36,605			(10,435	)


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,061,457			(1,749,876	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,163,023			6,360,201

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	5,224,480		$	4,610,325


See notes to consolidated financial statements.

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, 2019 and August 31, 2018, the results of their operations for the three and nine months ended May 31, 2019 and 2018, the changes in stockholders’ equity for the three and nine months ended May 31, 2019 and their cash flows for the nine months ended May 31, 2019 and 2018, in conformity with accounting principles generally accepted in the United States of America (U.S. 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, 2018. These consolidated financial statements also should be read in conjunction 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, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2019.

The Company evaluates events occurring after the date of the consolidated financial statements requiring recording or disclosure in the consolidated financial statements.

2.	Accounting PronouncementS

New Accounting Pronouncements Adopted

The Company’s significant accounting policies are detailed in “Note 1. Nature of Business and Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the year ended August 31, 2018. In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification (ASC) Section 606, Revenue from Contracts with Customers (ASC 606), which establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

On September 1, 2018, the Company adopted ASC 606 for all customer contracts using the modified retrospective method. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to, or services it performs for, the customer.

The adoption of ASC 606 neither impacted the previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. Therefore, the adoption of the standard did not impact the Company’s revenue recognition process. Generally, the Company’s performance obligations are satisfied when the customers take possession of the products, which normally occurs at the shipping point or destination depending on the terms of the contracts. The Company’s services are generally sold based upon quotes or contracts with customers that include a fixed or determinable price, and sales arrangements do not contain any significant financing component for its customers. The Company does not recognize revenue related to product warranties, nor does the Company incur significant contract costs. Customer arrangements do not generate contract assets or liabilities.

Changes to the Company’s significant accounting policies as a result of adopting ASC 606 are discussed below.

Revenue Recognition - Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to customers, and significant financing components. While most of the Company’s revenue is contracted with customers through one-time purchase orders and short-term contracts, the Company does have long-term arrangements with certain customers. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer.

Individually promised goods and services in a contract are considered a distinct performance obligation and accounted for separately if the customer can benefit from the individual good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement. When an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs are met. Costs of revenues consist primarily of direct labor, manufacturing overhead, materials, and components. The Company does not incur significant upfront costs to obtain a contract. If costs to obtain a contract were to become material, the costs would be recorded as an asset and amortized to expense in a manner consistent with the related recognition of revenue.

The Company excludes government assessed and imposed taxes on revenue generating transactions that are invoiced to customers from revenue. The Company includes freight billed to customers in revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

The timing of revenue recognition, billing, and cash collections results in accounts receivable on the balance sheet.

Performance Obligations - A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation in proportion to its standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s various performance obligations and the timing or method of revenue recognition are discussed below.

The Company sells its products to both distributors and end-users. Each unit of product delivered under a customer order represents a distinct and separate performance obligation, as the customer can benefit from each unit on its own or with other resources that are readily available to the customer, and each unit of product is separately identifiable from other products in the arrangement.

The transaction price for the Company’s products is the invoiced amount. The Company does not have variable consideration in the form of refunds, credits, rebates, price concessions, pricing incentives, or other items impacting transaction price. The purchase order pricing in arrangements with customers is deemed to approximate standalone selling price; therefore, the Company does not need to allocate proceeds on a relative standalone selling price allocation between performance obligations. The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. There are no material obligations that extend beyond one year.

Revenue is recognized when transfer of control occurs as defined by the terms in the customer agreement. The Company immediately recognizes incidental items that are immaterial in the context of the contract. The Company has applied the practical expedient in paragraph 606-10-25-16A and does not assess if immaterial items are promised goods or services. The Company has also applied the practical expedient in paragraph 606-10-32-18 regarding the adjustment of the promised amount of consideration for the effects of a significant financing component when the customer pays for that good or service within one year or less, as the Company does not have any significant financing components in its customer arrangements since payment is received at or shortly after the point of sale, generally thirty to ninety days.

The Company estimates returns based on an analysis of historical experience if the right to return products is granted to its customers. The Company does not record a return asset, as non-conforming products are generally not returned. The Company’s return policy does not vary by geography. The customer has no rotation or price protection rights, and the Company is not under a warranty obligation.

Trade Receivables - Trade receivables include amounts invoiced and currently due from customers. The amounts due are stated at their net estimated realizable value. The Company records an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based on a review of all outstanding amounts on an on-going basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considers a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible and have been historically insignificant. Recoveries of trade receivables previously written off are recorded when received. Accounts are considered past due if payment is not received according to agreed-upon terms.

Sales Commissions - Sales commissions paid to sales representatives are eligible for capitalization, as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company has elected to apply the practical expedient provided by ASC 340-40-25-4 and recognize the incremental costs of obtaining contracts as an expense when incurred, as the amortization period of the assets that would have otherwise been recognized is one year or less. The Company records these costs as a selling expense.

Product Warranty - The Company offers warranties on various products and services. These warranties are assurance type warranties that are not sold on a standalone basis; therefore, they are not considered distinct performance obligations. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the revenue is recognized for the product sale.

International Revenue - The Company markets its products to numerous countries in North America, Europe, Latin America, Asia, and other parts of the world. See Note 11, Segment and Geographical Information, for information regarding revenue disaggregation by geography.

Recently Issued Accounting Pronouncements

During February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The guidance will be effective for the Company’s first quarter of fiscal year 2020. The Company is currently assessing the effect that ASU No. 2016-02 will have on its consolidated financial statements but does not expect it will have a material impact on its consolidated balance sheet.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from the Tax Cuts and Jobs Act (Tax Reform Act) that are stranded in accumulated other comprehensive income. This standard also requires certain disclosures about stranded tax effects. ASU No. 2018-02, however, does not change the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations. ASU No. 2018-02 will be effective for the Company’s fiscal year 2020, with the option for early adoption at any time prior to the effective date. It must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company is currently assessing the impact this new accounting guidance will have on its consolidated financial statements.

3.	INVENTORIES

Inventories consisted of the following:

		May 31, 2019		August 31, 2018
Production materials	$	2,135,972	$	1,824,489
Finished goods		8,483,040		7,306,372
	$	10,619,012	$	9,130,861

4.	PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consisted of the following:

		May 31, 2019			August 31, 2018
Land	$	310,365		$	310,365
Buildings and improvements		7,553,462			6,927,484
Machinery and equipment		4,787,247			4,680,072
		12,651,074			11,917,921
Less accumulated depreciation		(5,357,937	)		(4,749,095	)
	$	7,293,137		$	7,168,826

5.	PATENTS AND TRADEMARKS, NET

Patents and trademarks, net, consisted of the following:

		May 31, 2019			August 31, 2018
Patents and trademarks	$	2,911,662		$	2,824,440
Less accumulated amortization		(1,863,413	)		(1,668,183	)
	$	1,048,249		$	1,156,257

Patent and trademark costs are amortized over seven years. Costs incurred related to patents and trademarks are capitalized until filed and approved, at which time the amounts capitalized to date are amortized, and any further costs, including maintenance costs, are expensed as incurred. Amortization expense of approximately $260,000 is estimated for each of the next five fiscal years.

6.	INVESTMENTS IN JOINT VENTURES

The consolidated financial statements of the Company’s foreign joint ventures are initially prepared using the accounting principles accepted in the respective joint ventures’ countries of domicile. Amounts related to foreign joint ventures reported in the below tables and the accompanying consolidated financial statements have subsequently been adjusted to conform with U.S. GAAP in all material respects. All material profits recorded that remain on the consolidated balance sheet of sales from the Company to its joint ventures and from joint ventures to other joint ventures have been eliminated for financial reporting purposes.

Financial information from the audited and unaudited financial statements of the Company’s joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH (EXCOR) and all the Company’s other joint ventures, are summarized as follows:

	As of May 31, 2019
		Total		EXCOR		All Other
Current assets	$	60,397,874	$	29,698,867	$	30,699,007
Total assets		64,887,307		32,137,535		32,749,772
Current liabilities		15,628,449		4,606,287		11,022,162
Noncurrent liabilities		467,330		-		467,330
Joint ventures’ equity		48,791,528		27,531,248		21,260,280
NTIC’s share of joint ventures’ equity		24,077,361		13,765,626		10,311,735
NTIC’s share of joint ventures’ undistributed earnings		22,048,149		13,734,721		8,313,428

	As of August 31, 2018
		Total		EXCOR		All Other
Current assets	$	58,086,747	$	27,354,788	$	30,731,959
Total assets		62,803,261		30,033,750		32,769,511
Current liabilities		15,991,886		4,535,954		11,455,932
Noncurrent liabilities		403,653		—		403,653
Joint ventures’ equity		46,407,722		25,497,796		20,909,926
NTIC’s share of joint ventures’ equity		22,950,995		12,748,899		10,195,263
NTIC’s share of joint ventures’ undistributed earnings		20,921,783		12,717,994		8,203,789

	Three Months Ended May 31, 2019
		Total		EXCOR		All Other
Net sales	$	27,774,112	$	10,933,386	$	16,840,726
Gross profit		12,557,580		6,129,046		6,428,534
Net income		3,797,785		2,707,342		1,090,443
NTIC’s share of equity in income from joint ventures		1,877,410		1,353,856		523,554
NTIC’s dividends received from joint ventures	$	1,795,542	$	1,673,700	$	121,842

	Nine Months Ended May 31, 2019
		Total		EXCOR		All Other
Net sales	$	86,003,918	$	34,895,042	$	51,108,876
Gross profit		38,547,018		19,118,704		19,428,314
Net income		11,412,552		8,187,467		3,225,085
NTIC’s share of equity in income from joint ventures		5,596,788		4,094,763		1,502,025
NTIC’s dividends received from joint ventures	$	3,822,785	$	2,517,450	$	1,305,335

	Three Months Ended May 31, 2018
		Total		EXCOR		All Other
Net sales	$	31,480,885	$	12,219,414	$	19,261,471
Gross profit		14,209,819		6,823,609		7,386,210
Net income		4,540,968		3,113,660		1,427,308
NTIC’s share of equity in income from joint ventures		2,246,066		1,558,243		687,823
NTIC’s dividends received from joint ventures	$	1,168,420	$	581,250	$	587,170

	Nine Months Ended May 31, 2018
		Total		EXCOR		All Other
Net sales	$	90,200,146	$	35,450,664	$	54,749,482
Gross profit		40,529,217		19,315,099		21,214,118
Net income		11,753,467		8,272,237		3,481,230
NTIC’s share of equity in income from joint ventures		5,793,391		4,138,814		1,654,577
NTIC’s dividends received from joint ventures	$	2,941,807	$	1,780,392	$	1,161,415

The Company did not make any joint venture investments during the three and nine months ended May 31, 2019 and 2018.

7.	CORPORATE DEBT

The Company has a revolving line of credit with PNC Bank, National Association (PNC Bank) of $3,000,000. No amounts were outstanding under the line of credit as of either May 31, 2019 or August 31, 2018. At the option of the Company, outstanding advances under the line of credit bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by the Company or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate.

The line of credit is governed under a loan agreement. The loan agreement contains standard covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio, and negative covenants, which, among other things, limit the incurrence of additional indebtedness, loans and equity investments, disposition of assets, mergers and consolidations, and other matters customarily restricted in such agreements. Under the loan agreement, the Company is subject to a minimum fixed charge coverage ratio of 1.10:1.00. As of May 31, 2019, the Company was in compliance with all debt covenants.

The revolving credit facility allows the Company to request that PNC Bank issue letters of credit up to $1,200,000. The Company did not have any letters of credit reserved against the available letters of credit balance as of May 31, 2019 and August 31, 2018 with PNC Bank. The availability of advances under the line of credit will be reduced by the face amount of any letter of credit issued and outstanding (whether or not drawn) under the revolving credit facility.

On November 30, 2018, the Company and PNC Bank extended the maturity date of the line of credit from January 7, 2019 to January 7, 2020. All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same.

As of both May 31, 2019 and August 31, 2018, the Company had $88,831 of letters of credit that are performance based and set to expire between 2020 and 2022.

8.	STOCKHOLDERS’ EQUITY

On June 3, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock effected in the form of a 100% share dividend distributed on June 28, 2019 to record holders as of June 17, 2019. All share and per share values have been adjusted to retroactively reflect the effect of the two-for-one stock split.

The Company held its 2019 Annual Meeting of Stockholders (2019 Annual Meeting) on January 18, 2019. At the 2019 Annual Meeting, a proposal to ratify an amendment to the Company’s Restated Certificate of Incorporation to increase the Company’s authorized shares of common stock from 10,000,000 to 15,000,000 (Share Increase Amendment) was approved by the Company’s stockholders by the required vote. The proposal to approve the Share Increase Amendment was initially voted on and approved at the 2018 Annual Meeting of Stockholders. However, because the description of the authority of brokers to vote on proposals without instruction in the proxy statement for the 2018 Annual Meeting of Stockholders could have created some uncertainty as to the effect of the vote obtained at last year’s meeting, and out of an abundance of caution, the Board requested that stockholders at the 2019 Annual Meeting ratify the filing and effectiveness of the Certificate of Amendment to the Company’s Restated Certificate of Incorporation, which was filed with the Secretary of State of the State of Delaware on January 16, 2018, pursuant to Delaware law, in order to eliminate any uncertainty related to the effectiveness of the share increase amendment. Since the ratification proposal was approved by stockholders at the 2019 Annual Meeting, the ratification was retroactive to January 16, 2018, the time of filing of the Share Increase Amendment with the Secretary of State of the State of Delaware.

At the 2019 Annual Meeting held on January 18, 2019, the Company’s stockholders approved the Northern Technologies International Corporation 2019 Stock Incentive Plan (the 2019 Plan), which replaced the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan (2007 Plan). No new awards will be granted under the 2007 Plan, although the terms of the 2007 Plan continue to govern awards outstanding under the 2007 Plan until exercised, expired, paid, or otherwise terminated or canceled. Subject to adjustment, the maximum number of shares of common stock authorized for issuance under the 2019 Plan is 800,000 shares. No stock options or other equity awards have been granted under the 2019 Plan as of May 31, 2019.

During the nine months ended May 31, 2019, the Company granted stock options under the 2007 Plan to purchase an aggregate of 141,768 shares of its common stock to various employees and directors. The weighted average per share exercise price of the stock options is $18.23, which was equal to the fair market value of the Company’s common stock on the date of grant. During the nine months ended May 31, 2019, no stock options to purchase common stock were exercised.

During the nine months ended May 31, 2018, the Company granted stock options under the 2007 Plan to purchase an aggregate of 94,504 shares of its common stock to various employees and directors. The weighted average per share exercise price of the stock options is $9.18, which was equal to the fair market value of the Company’s common stock on the date of grant. During the nine months ended May 31, 2018, stock options to purchase an aggregate of 8,820 shares of common stock were exercised at a weighted average exercise price of $5.80 per share.

The Company issued 1,748 and 1,782 shares of common stock on September 1, 2018 and 2017, respectively, under the Northern Technologies International Corporation Employee Stock Purchase Plan (the ESPP). The Company issued 2,462 and 1,970 shares of common stock on March 1, 2019 and 2018, respectively, under the ESPP.

During the nine months ended May 31, 2019, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to holders of record of the Company’s common stock as of the following record dates:

Declaration Date	Amount		Record Date	Payable Date
October 24, 2018	$	0.06	November 7, 2018	November 21, 2018
January 23, 2019	$	0.06	February 6, 2019	February 22, 2019
April 25, 2019	$	0.06	May 9, 2019	May 23, 2019

During the nine months ended May 31, 2018, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to holders of record of the Company’s common stock as of the following record dates:

Declaration Date	Amount		Record Date	Payable Date
November 20, 2017	$	0.05	December 8, 2017	December 21, 2017
January 24, 2018	$	0.05	February 8, 2018	February 21, 2018
April 25, 2018	$	0.05	May 9, 2018	May 23, 2018

During the nine months ended May 31, 2019, and 2018, the Company repurchased no shares of its common stock.

9.	NET INCOME PER COMMON SHARE

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

The following is a reconciliation of the net income per share computation for the three and nine months ended May 31, 2019 and 2018:

	Three Months Ended				Nine Months Ended
Numerators:		May 31, 2019		May 31, 2018		May 31, 2019		May 31, 2018
Net income attributable to NTIC	$	1,482,149	$	2,142,752	$	4,380,776	$	4,559,225
Denominators:
Basic – weighted shares outstanding		9,084,354		9,078,706		9,085,584		9,077,676
Weighted shares assumed upon exercise of stock options		308,090		335,358		355,274		250,018
Diluted – weighted shares outstanding		9,392,444		9,414,064		9,440,858		9,327,694
Basic net income per share:	$	0.16	$	0.24	$	0.48	$	0.50
Diluted net income per share:	$	0.16	$	0.23	$	0.46	$	0.49

*Share and per share data have been adjusted for all periods presented to reflect the two-for-one stock split effective June 28, 2019.

The dilutive impact summarized above relates to the periods when the average market price of the Company’s common stock exceeded the exercise price of the potentially dilutive option securities granted. Net income per common share was based on the weighted average number of common shares outstanding during the periods when computing basic net income per share. When dilutive, stock options are included as equivalents using the treasury stock method when computing the diluted net income per share. Excluded from the computation of diluted net income per share for the three and nine months ended May 31, 2019 were options outstanding to purchase 141,768 shares of common stock. There were no shares excluded from the computation of diluted income per share for the three and nine months ended May 31, 2018.

10.

STOCK-BASED COMPENSATION

The Company has two stock-based compensation plans under which stock options and other stock-based awards have been granted, the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan and the Northern Technologies International Corporation Employee Stock Purchase Plan. As previously described in Note 8, at the 2019 Annual Meeting held on January 18, 2019, the Board of Directors and stockholders of the Company approved a new Northern Technologies International Corporation 2019 Stock Incentive Plan. No stock options or other equity awards have been granted under that plan. The Compensation Committee of the Board of Directors and the Board of Directors administer these plans.

The 2019 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. Subject to adjustment as provided in the 2019 Plan, up to a maximum of 800,000 shares of the Company’s common stock are issuable under the 2019 Plan. Options granted generally have a term of ten years and become exercisable over a three- or four-year period beginning on the one-year anniversary of the date of 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. The Company issues new shares upon the exercise of options. As of May 31, 2019, only stock options and stock bonuses had been granted under the 2007 Plan and no stock options or other equity awards had been granted under the 2019 Plan.

The maximum number of shares of common stock of the Company available for issuance under the ESPP is 200,000 shares, subject to adjustment as provided in the ESPP. The ESPP provides for six-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 an aggregate of 141,768 and 94,504 shares of its common stock during the nine months ended May 31, 2019 and 2018, respectively. 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 $1,073,940 and $309,473 during the nine months ended May 31, 2019 and 2018, respectively, related to the options that vested during such time period. As of May 31, 2019, the total compensation cost for non-vested options not yet recognized in the Company’s consolidated statements of operations was $423,245. Stock-based compensation expense of $357,985 is expected through the remainder of fiscal year 2019, and $65,260 is expected to be recognized during fiscal 2020, based on outstanding options as of May 31, 2019. Future option grants will impact the compensation expense recognized. Stock-based compensation expense is included in general and administrative expense on the consolidated statements of operations.

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:

	Nine Months Ended
		May 31, 2019		May 31, 2018
Dividend yield		1.32	%	2.18	%
Expected volatility		45.8	%	45.9	%
Expected life of option (years)		10		10
Average risk-free interest rate		2.75	%	1.87	%

The weighted average per share fair value of options granted during the nine months ended May 31, 2019 and 2018 was $9.01 and $3.88, respectively. The weighted average remaining contractual life of the options outstanding as of May 31, 2019 and 2018 was 6.15 years and 6.52 years, respectively.

11.

SEGMENT AND GEOGRAPHIC INFORMATION

Segment Information

The Company’s chief operating decision maker (CODM) is its Chief Executive Officer. The Company’s business is organized into two reportable segments: ZERUST® and Natur-Tec®. The Company has been selling its proprietary ZERUST® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 40 years and, more recently, has targeted and expanded into the oil and gas industry. The Company also sells a portfolio of bio-based and compostable (fully biodegradable) polymer resins and finished products under the Natur-Tec® brand.

The following table sets forth the Company’s net sales for the three and nine months ended May 31, 2019 and 2018 by segment:

	Three Months Ended				Nine Months Ended
		May 31, 2019		May 31, 2018		May 31, 2019		May 31, 2018
ZERUST® net sales	$	10,077,203	$	10,382,884	$	29,250,772	$	30,102,080
Natur-Tec® net sales		4,815,914		2,540,953		13,051,801		6,578,770
Total net sales	$	14,893,117	$	12,923,837	$	42,302,573	$	36,680,850

The following table sets forth the Company’s cost of goods sold for the three and nine months ended May 31, 2019 and 2018 by segment:

	Three Months Ended										Nine Months Ended
	May 31, 2019		% of Segment Sales*			May 31, 2018		% of Segment Sales*			May 31, 2019		% of Segment Sales*			May 31, 2018		% of Segment Sales*
Direct cost of goods sold
ZERUST®	$	5,725,220		56.8	%	$	6,139,699		59.1	%	$	16,596,536		56.7	%	$	17,948,941		59.6	%
Natur-Tec®		3,670,282		76.2	%		1,812,084		71.3	%		10,181,050		78.0	%		4,738,523		72.0	%
Indirect cost of goods sold		742,851		—			640,583		—			2,106,003		—			1,806,208		—
Total net cost of goods sold	$	10,138,353				$	8,592,366				$	28,883,589				$	24,493,672

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

The Company utilizes product net sales and direct and indirect cost of goods sold 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.

Geographic Information

Net sales by geographic location for the three and nine months ended May 31, 2019 and 2018 were as follows:

	Three Months Ended				Nine Months Ended
		May 31, 2019		May 31, 2018		May 31, 2019		May 31, 2018
Inside the U.S.A. to unaffiliated customers	$	6,172,882	$	7,434,991	$	19,564,756	$	19,771,031
Outside the U.S.A. to:
Joint ventures in which the Company is a shareholder directly and indirectly		1,112,313		879,324		2,304,455		2,201,077
Unaffiliated customers		7,607,922		4,609,522		20,433,362		14,708,742
	$	14,893,117	$	12,923,837	$	42,302,573	$	36,680,850

Net sales by geographic location are based on the location of the customer. Fees for services provided to joint ventures by geographic location as a percentage of total fees for services provided to joint ventures during the three and nine months ended May 31, 2019 and 2018 were as follows:

	Three Months Ended
		May 31, 2019	% of Total Fees for Services Provided to Joint Ventures			May 31, 2018	% of Total Fees for Services Provided to Joint Ventures
Germany	$	212,825	14.8	%	$	224,366	14.9	%
Poland		181,057	12.6	%		185,107	12.3	%
Japan		164,136	11.5	%		183,335	12.2	%
Sweden		137,642	9.6	%		155,588	10.3	%
India		114,705	8.0	%		49,778	3.3	%
France		112,063	7.8	%		146,949	9.7	%
Thailand		109,427	7.6	%		110,894	7.4	%
South Korea		85,732	6.0	%		96,574	6.4	%
Czech Republic		83,086	5.8	%		100,131	6.6	%
Finland		75,135	5.2	%		81,402	5.4	%
United Kingdom		70,972	5.0	%		80,931	5.4	%
Other		87,043	6.1	%		93,445	6.1	%
	$	1,433,823	100.0	%	$	1,508,500	100.0	%

	Nine Months Ended
		May 31, 2019	% of Total Fees for Services Provided to Joint Ventures			May 31, 2018	% of Total Fees for Services Provided to Joint Ventures
Germany	$	643,154	15.0	%	$	680,939	14.7	%
Poland		551,430	12.8	%		598,221	13.0	%
Japan		501,432	11.6	%		529,412	11.4	%
Sweden		417,635	9.7	%		448,707	9.7	%
France		328,395	7.6	%		416,913	9.0	%
Thailand		313,075	7.3	%		325,205	7.0	%
India		294,833	6.9	%		274,980	5.9	%
Czech Republic		266,706	6.2	%		283,193	6.1	%
United Kingdom		261,961	6.1	%		275,137	6.0	%
South Korea		259,612	6.0	%		279,524	6.0	%
Finland		221,599	5.2	%		247,574	5.4	%
Other		239,200	5.6	%		264,727	5.8	%
	$	4,299,032	100.0	%	$	4,624,532	100.0	%

The geographical distribution of key financial statement data is as follows:

		At May 31, 2019		At August 31, 2018
China	$	341,145	$	205,490
Brazil		117,811		71,677
India		51,208		22,220
Other		15,619		7,058
United States		6,767,354		6,862,381
Total property and equipment	$	7,293,137	$	7,168,826

	Three Months Ended				Nine Months Ended
		May 31, 2019		May 31, 2018		May 31, 2019		May 31, 2018
China	$	3,691,220	$	3,069,232	$	9,864,479	$	9,176,174
Brazil		792,299		853,675		2,343,894		2,310,131
India		2,283,346		564,339		6,159,136		1,642,633
Other		1,953,370		1,267,475		4,370,308		2,875,428
United States		6,172,882		7,169,116		19,564,756		20,676,484
Total net sales	$	14,893,117	$	12,923,837	$	42,302,573	$	36,680,850

Total property and equipment are periodically reviewed to assure the net realizable value from the estimated future production based on forecasted sales exceeds the carrying value of the assets. Total assets located in the United States include the Company’s investments in joint ventures.

Sales to the Company’s joint ventures are included in the foregoing segment and geographic information; however, sales by the Company’s joint ventures to other parties are not included. The foregoing segment and geographic information represents only sales and cost of goods sold recognized directly by the Company.

All joint venture operations, including equity in income, fees for services, and related dividends, are primarily related to ZERUST® products and services.

12.

COMMITMENTS AND CONTINGENCIES

On August 31, 2018, the Compensation Committee of the Board of Directors of the Company approved the material terms of an annual bonus plan for the Company’s executive officers as well as certain officers and employees for the fiscal year ending August 31, 2019. For fiscal 2019, as in past years, the total amount available under the bonus plan for all plan participants, including executive officers, is dependent upon the Company’s earnings before interest, taxes, and other income, as adjusted to take into account amounts to be paid under the bonus plan and certain other adjustments (Adjusted EBITOI). Each plan participant’s percentage of the overall bonus pool is based upon the number of plan participants, the individual’s annual base salary, and the individual’s position and level of responsibility within the Company. In the case of each of the Company’s executive officer participants, 75% of the amount of their individual bonus payout will be determined based upon the Company’s actual EBITOI for fiscal 2019 compared to a pre-established target EBITOI for fiscal 2019 and 25% of the payout will be determined based upon such executive officer’s achievement of certain pre-established individual performance objectives. The payment of bonuses under the plan is discretionary and may be paid to executive officer participants in both cash and shares of NTIC common stock, with the exact amount and percentages determined by the Company’s Board of Directors, upon recommendation of the Compensation Committee, after the completion of the Company’s consolidated financial statements for fiscal 2019. There was $1,450,000 accrued for management bonuses for the nine months ended May 31, 2019, compared to $1,380,000 accrued for management bonuses for the nine months ended May 31, 2018.

Two joint ventures (consisting of the Company’s joint ventures in South Korea and Germany) accounted for 76.4% of the Company’s trade joint venture receivables at May 31, 2019, and three joint ventures (consisting of the Company’s joint ventures in South Korea, Thailand, and India) accounted for 74.1% of the Company’s trade joint venture receivables at August 31, 2018.

From time to time, the Company is subject to various other claims and legal actions in the ordinary course of its business. The Company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements, and judgments, where the Company has assessed that a loss is probable, and an amount could be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that material loss may have been incurred. In the opinion of management, as of May 31, 2019, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect the Company’s consolidated results of operations, financial position, or cash flows.

13.

Fair Value Measurements

Assets and liabilities that are measured at fair value on a recurring basis primarily relate to marketable equity securities. These items are marked-to-market at each reporting period, and the Company estimates that market value approximates costs.

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:

			Fair Value Measurements Using Inputs Considered as
		Fair value as of May 31, 2019		Level 1		Level 2		Level 3
Available for sale securities	$	2,540,613	$	2,540,613	$	—	$	—

			Fair Value Measurements Using Inputs Considered as
		Fair value as of August 31, 2018		Level 1		Level 2		Level 3
Available for sale securities	$	3,300,110	$	3,300,110	$	—	$	—

There were no transfers between Level 1, Level 2, or Level 3 during the three and nine months ended May 31, 2019 and 2018.

14.

SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures of cash flow information consisted of:

	Three Months Ended
		May 31, 2019		May 31, 2018
Cash paid for interest	$	5,165	$	3,139
Cash paid for income taxes		—		45,000

	Nine Months Ended
		May 31, 2019		May 31, 2018
Cash paid for interest	$	11,357	$	14,007
Cash paid for income taxes		53,975		45,000

15.

INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or Tax Reform Act. The Tax Reform Act makes broad and complex changes to the U.S. tax code that impacted the Company’s fiscal year ended August 31, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, generally eliminating U.S. federal income taxes on dividends received from foreign subsidiaries and joint ventures after December 31, 2017, and imposing a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries and joint ventures.

The Company recorded income tax expense during the three and nine months ended May 31, 2019 of $150,257 and $652,331, respectively, compared to $181,683 and $1,128,583 for the three and nine months ended May 31, 2018.

16.

SUBSEQUENT EVENTS

On June 3, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock effected in the form of a 100% share dividend distributed on June 28, 2019 to record holders as of June 17, 2019. All share and per share values have been adjusted to retroactively reflect the effect of the two-for-one stock split.

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 “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements” in this report and under “Part 1. Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended August 31, 2018. 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 the heading “Part I. Item 1. Financial Statements.”

Business Overview

NTIC develops and markets proprietary, environmentally-beneficial products and services in over 60 countries either directly or via a network of subsidiaries, joint ventures, independent distributors, and agents. NTIC’s primary business is corrosion prevention marketed mainly under the ZERUST® brand. NTIC has been selling its proprietary ZERUST® products and services to the automotive, electronics, electrical, mechanical, military, and retail consumer markets for over 40 years and, in recent years, has targeted and expanded into the oil and gas industry. NTIC also markets and sells a portfolio of bio-based and certified compostable (fully biodegradable) 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 waste disposal options.

NTIC’s ZERUST^® rust and corrosion inhibiting products include plastic and paper packaging, liquids, coatings, rust removers, cleaners, and diffusers as well as engineered solutions designed specifically for the oil and gas industry. NTIC also offers worldwide, on-site, technical consulting for rust and corrosion prevention issues. NTIC’s technical service consultants work directly with the end users of NTIC’s ZERUST^® rust and corrosion inhibiting products to analyze their specific needs and develop systems to meet their performance requirements. In North America, NTIC sells its ZERUST^® corrosion prevention solutions through a network of independent distributors and agents supported by a direct sales force. Internationally, NTIC sells its ZERUST^® corrosion prevention solutions through its wholly-owned subsidiary in China, NTIC (Shanghai) Co., Ltd. (NTIC China), its majority-owned joint venture holding company for NTIC’s joint venture investments in the Association of Southeast Asian Nations (ASEAN) region, NTI Asean LLC (NTI Asean), its majority-owned subsidiary in Brazil, Zerust Prevenção de Corrosão S.A. (Zerust Brazil), its wholly-owned subsidiary in Mexico, ZERUST-EXCOR MEXICO, S. de R.L. de C.V (Zerust Mexico), and joint venture arrangements in North America, Europe, and Asia. NTIC also sells products directly to its joint venture partners through its wholly-owned subsidiary in Germany, NTIC Europe GmbH (NTI Europe).

One of NTIC’s strategic initiatives is to expand into and penetrate other markets for its ZERUST^® corrosion prevention technologies. Consequently, for the past several years, NTIC has focused significant sales and marketing efforts on the oil and gas industry, as the infrastructure that supports that industry is typically constructed using metals that are highly susceptible to corrosion. NTIC believes that its ZERUST^® corrosion prevention solutions will minimize maintenance downtime on critical oil and gas industry infrastructure, extend the life of such infrastructure, and reduce the risk of environmental pollution due to corrosion leaks.

NTIC markets and sells its ZERUST® rust and corrosion prevention solutions to customers in the oil and gas industry across several countries either directly, through its subsidiaries, or through its joint venture partners and other strategic partners. The sale of ZERUST® corrosion prevention solutions to customers in the oil and gas industry typically involves long sales cycles, often including multi-year trial periods with each customer and a slow integration process thereafter.

Natur-Tec^® bio-based and compostable plastics are manufactured using NTIC’s patented and/or proprietary technologies and are intended to replace conventional petroleum-based plastics. The Natur-Tec^® biopolymer resin compound portfolio includes formulations that have been optimized for a variety of applications, including blown-film extrusion, extrusion coating, injection molding, and engineered plastics. These resin compounds are certified to be fully biodegradable in a composting environment and are currently being used to produce finished products, including can liners, shopping and grocery bags, lawn and leaf bags, pet waste collection bags, cutlery and, coated paper products. In North America, NTIC markets its Natur-Tec^® resin compounds and finished products primarily through a network of regional and national distributors as well as independent agents. NTIC continues to see significant opportunities for finished bioplastic products and, therefore, continues to strengthen and expand its North American distribution network for finished Natur-Tec^® bioplastic products. Internationally, NTIC sells its Natur-Tec^® resin compounds and finished products both directly and through its majority-owned subsidiary in India, Natur-Tec India Private Limited (Natur-Tec India), and through distributors and certain joint ventures.

NTIC’s Subsidiaries and Joint Venture Network

NTIC has ownership interests in six subsidiaries in North America, South America, Europe, and Asia. The following table sets forth a list of NTIC’s operating subsidiaries as of May 31, 2019, the country in which the subsidiary is organized, and NTIC’s ownership percentage in each subsidiary:

Subsidiary Name	Country	NTIC Percent (%) Ownership
NTIC (Shanghai) Co., Ltd	China		100%
NTI Asean LLC	United States		60%
Zerust Prevenção de Corrosão S.A.	Brazil		85%
ZERUST-EXCOR MEXICO, S. de R.L. de C.V	Mexico		100%
Natur-Tec India Private Limited	India		75%
NTIC Europe GmbH	Germany		100%

The results of these subsidiaries are fully consolidated in NTIC’s consolidated financial statements.

On September 1, 2018, the minority owner in Natur-Tec India made an additional capital contribution of INR 9,340,110 (US$ 134,034), which diluted NTIC’s ownership interest from 90% to 75%. This contribution was made with NTIC’s consent and with the intended purpose of increasing the minority owner’s ownership interest accordingly.

NTIC participates in 20 active joint venture arrangements in North America, Europe, and Asia. Each of these joint ventures generally manufactures and markets products in the geographic territory to which it is assigned. While most of NTIC’s joint ventures exclusively sell rust and corrosion inhibiting products, some of the joint ventures also sell NTIC’s Natur-Tec® resin compounds. NTIC has historically funded its investments in joint ventures with cash generated from operations.

The following table sets forth a list of NTIC’s operating joint ventures as of May 31, 2019, the country in which the joint venture is organized, and NTIC’s ownership percentage in each joint venture:

Joint Venture Name	Country	NTIC Percent (%) Ownership
TAIYONIC LTD.	Japan	50%
ACOBAL SAS	France	50%
EXCOR KORROSIONSSCHUTZ – TECHNOLOGIEN UND PRODUKTE GMBH	Germany	50%
ZERUST AB	Sweden	50%
MOSTNIC-ZERUST	Russia	50%
ZERUST OY	Finland	50%
HARITA-NTI LTD	India	50%
ZERUST (U.K.) LTD.	United Kingdom	50%
EXCOR-ZERUST S.R.O.	Czech Republic	50%
EXCOR SP. Z.O.O.	Poland	50%
ZERUST A.Ş.	Turkey	50%
ZERUST CONSUMER PRODUCTS, LLC	United States	50%
ZERUST – DNEPR	Ukraine	50%
KOREA ZERUST CO., LTD.	South Korea⁽¹⁾	30%
ZERUST-NIC (TAIWAN) CORP.	Taiwan⁽¹⁾	30%
PT. CHEMINDO – NTIA	Indonesia⁽¹⁾	30%
ZERUST SPECIALTY TECH CO. LTD.	Thailand⁽¹⁾	30%
CHONG WAH-NTIA SDN. BHD.	Malaysia⁽¹⁾	30%
NTIA ZERUST PHILIPPINES, INC.	Philippines⁽¹⁾	30%
ZERUST SINGAPORE PTE. LTD	Singapore⁽¹⁾⁽²⁾	60%

(1) Indirect ownership interest through NTI Asean.

(2) NTI Asean owns 100% of this joint venture.

NTIC receives funds from its joint ventures for fees received for services that NTIC provides and as dividend distributions. The fees for services provided to joint ventures are determined based on either a flat fee or a percentage of sales depending on local laws and tax regulations. With respect to NTIC’s joint venture in Germany (EXCOR), NTIC recognizes an agreed upon quarterly fee for services. NTIC recognizes equity income from each joint venture based on the overall profitability of the joint venture. Such profitability is subject to variability from quarter to quarter which, in turn, subjects NTIC’s earnings to variability from quarter to quarter. The profits of each joint venture are shared by the respective joint venture owners in accordance with their respective ownership percentages. NTIC typically directly or indirectly owns 50% or less of each of its joint venture entities and, thus, does not control the decisions of these entities regarding whether to pay dividends and, if paid, what amount is paid in a given year. The payment of a dividend by an entity is determined by a joint vote of the owners and is not at the sole discretion of NTIC.

NTIC accounts for the investments and financial results of its joint ventures in its financial statements utilizing the equity method of accounting.

NTIC considers EXCOR to be individually significant to NTIC’s consolidated assets and income. Therefore, NTIC provides certain additional information regarding EXCOR in the notes to NTIC’s consolidated financial statements and in this section of this report.

Financial Overview

NTIC’s management, including its chief executive officer, who is NTIC’s chief operating decision maker, reports and manages NTIC’s operations in two reportable business segments based on products sold, customer base, and distribution center: ZERUST® products and services and Natur-Tec® products.

NTIC’s consolidated net sales increased 15.2% and 15.3% during the three and nine months ended May 31, 2019, respectively, compared to the three and nine months ended May 31, 2018. These increases were primarily a result of an increase in sales of Natur-Tec® products.

During the three and nine months ended May 31, 2019, 67.7% and 69.1% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST® products and services, which decreased 2.9% and 2.8% to $10,077,203 and $29,250,772 during the three and nine months ended May 31, 2019, respectively, compared to $10,382,884 and $30,102,080 during the three and nine months ended May 31, 2018, respectively. These decreases were due to lower sales from existing customers for products as a result of decreased demand. NTIC has focused its sales efforts of ZERUST® products and services by strategically targeting customers with specific corrosion issues in new market areas, including the oil and gas industry and other industrial sectors that offer sizable growth opportunities. NTIC’s consolidated net sales for the nine months ended May 31, 2019 included $2,225,490 of sales made to customers in the oil and gas industry compared to $1,418,573 for the nine months ended May 31, 2018. Overall demand for ZERUST® products and services depends heavily on the overall health of the markets in which NTIC sells its products, including the automotive, oil and gas, agriculture, and mining markets in particular.

During the three and nine months ended May 31, 2019, 32.3% and 30.9%, of NTIC’s consolidated net sales, respectively, were derived from sales of Natur-Tec® products compared to 19.7% and 17.9% during the three and nine months ended May 31, 2018, respectively. Net sales of Natur-Tec® products increased 89.5% and 98.4% during the three and nine months ended May 31, 2019, respectively, compared to the three and nine months ended May 31, 2018, primarily due to an increase in finished product sales in North America and finished product sales at NTIC’s majority-owned subsidiary in India, Natur-Tec India Private Limited (Natur-Tec India).

Cost of goods sold as a percentage of net sales increased to 68.1% during the three months ended May 31, 2019 compared to 66.5% during the three months ended May 31, 2018 and increased to 68.3% during the nine months ended May 31, 2019 compared to 66.8% during the prior fiscal year period, primarily as a result of an increased percentage of product sales from Natur-Tec® products that have lower gross margins than NTIC’s traditional ZERUST® industrial products.

NTIC’s equity in income from joint ventures decreased 16.4% and 3.4% to $1,877,410 and $5,596,788 during the three and nine months ended May 31, 2019, respectively, compared to $2,246,066 and $5,793,391 during the three and nine months ended May 31, 2018, respectively. These decreases were primarily due to corresponding decreases in net sales at the joint ventures, which decreased 11.8% and 4.7% to $27,774,112 and $86,003,918 during the three and nine months ended May 31, 2019, respectively, compared to $31,480,885 and $90,200,146 for the three and nine months ended May 31, 2018, respectively. These decreases in net sales of NTIC’s joint ventures were primarily due to decreased sales from existing customers for existing products as a result of decreased demand. The decreases in net sales of NTIC’s joint ventures resulted in corresponding decreases in fees for services provided to joint ventures, as such fees are a function of net sales of NTIC’s joint ventures.

NTIC’s total operating expenses increased 11.7% and 7.5% to $6,293,725 and $17,868,928 during the three and nine months ended May 31, 2019, respectively, compared to $5,632,826 and $16,622,849 for the three and nine months ended May 31, 2018, respectively. These increases were primarily due to an increase in NTIC’s personnel expenses. Operating expenses, as a percent of net sales, for the three months ended May 31, 2019 were 42.3%, compared to 43.6% for the same period last fiscal year and for the nine months ended May 31, 2019 were 42.2%, compared to 45.3% for the same period last fiscal year. These reductions in operating expenses, as a percent of net sales, were primarily due to significantly higher net sales, partially offset by higher operating expenses.

NTIC spent $1,005,045 and $2,804,739 during the three and nine months ended May 31, 2019, respectively, compared to $860,347 and $2,581,824 during the three and nine months ended May 31, 2018, respectively, in connection with its research and development activities. NTIC anticipates that it will spend a total of between $3,400,000 and $3,600,000 in fiscal 2019 on research and development activities.

Net income attributable to NTIC decreased to $1,482,149, or $0.16 per diluted common share, for the three months ended May 31, 2019 compared to $2,142,752, or $0.23 per diluted common share, for the three months ended May 31, 2018, a decrease of $660,603 or $0.07 per diluted share. Net income attributable to NTIC decreased 3.9% to $4,380,776, or $0.46 per diluted common share, for the nine months ended May 31, 2019 compared to $4,559,225, or $0.49 per diluted common share, for the nine months ended May 31, 2018, a decrease of $178,449 or $0.03 per diluted share. These decreases were primarily the result of the increase in operating expenses and decrease in joint venture operations during the current fiscal year periods compared to the prior fiscal year periods, partially offset by the increase in gross margin and decrease in tax expense, specifically the $700,000 one-time provisional adjustment related to the Tax Cuts and Jobs Act (Tax Reform Act) that occurred in the second quarter of fiscal year 2018, as described in more detail below.

NTIC anticipates that its quarterly net income or loss will continue to remain subject to significant volatility primarily due to the financial performance of its subsidiaries and joint ventures, sales of its ZERUST® products and services into the oil and gas industry, and sales of its Natur-Tec® bioplastics products, which fluctuate more on a quarterly basis than the traditional ZERUST® business.

NTIC’s working capital, defined as current assets less current liabilities, was $25,691,723 at May 31, 2019, including $5,224,480 in cash and cash equivalents and $2,540,613 in available for sale securities, compared to $22,837,591 at August 31, 2018, including $4,163,023 in cash and cash equivalents and $3,300,110 in available for sale securities.

On April 25, 2019, the Company’s Board of Directors declared a cash dividend of $0.06 per share of NTIC’s common stock, payable on May 23, 2019 to stockholders of record on May 9, 2019.

On June 3, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock effected in the form of a 100% share dividend distributed on June 28, 2019 to record holders as of June 17, 2019. All share and per share values have been adjusted to retroactively reflect the effect of the two-for-one stock split.

Results of Operations

The following table sets forth NTIC’s results of operations for the three and nine months ended May 31, 2019 and 2018.

	Three Months Ended
		May 31, 2019	% of Net Sales			May 31, 2018	% of Net Sales			$ Change		% Change
Net sales, excluding joint ventures	$	13,780,804	92.5	%	$	12,044,513	93.2	%	$	1,736,291		14.4	%
Net sales, to joint ventures		1,112,313	7.5	%		879,324	6.8	%		232,989		26.5	%
Cost of goods sold		10,138,353	68.1	%		8,592,366	66.5	%		1,545,987		18.0	%
Equity in income from joint ventures		1,877,410	12.6	%		2,246,066	17.4	%		(368,656	)	(16.4	)%
Fees for services provided to joint ventures		1,433,823	9.6	%		1,508,500	11.7	%		(74,677	)	(5.0	)%
Selling expenses		2,761,488	18.5	%		2,784,694	21.5	%		(23,206	)	(0.8	)%
General and administrative expenses		2,527,192	17.0	%		1,987,785	15.4	%		539,407		27.1	%
Research and development expenses		1,005,045	6.7	%		860,347	6.7	%		144,698		16.8	%

	Nine Months Ended
		May 31, 2019	% of Net Sales			May 31, 2018	% of Net Sales			$ Change		% Change
Net sales, excluding joint ventures	$	39,998,118	94.6	%	$	34,479,773	94.0	%	$	5,518,345		16.0	%
Net sales, to joint ventures		2,304,455	5.4	%		2,201,077	6.0	%		103,378		4.7	%
Cost of goods sold		28,883,589	68.3	%		24,493,672	66.8	%		4,389,917		17.9	%
Equity in income from joint ventures		5,596,788	13.2	%		5,793,391	15.8	%		(196,603	)	(3.4	)%
Fees for services provided to joint ventures		4,299,032	10.2	%		4,624,532	12.6	%		(325,500	)	(7.0	)%
Selling expenses		8,077,663	19.1	%		8,028,279	21.9	%		49,384		0.6	%
General and administrative expenses		6,986,526	16.5	%		6,012,746	16.4	%		973,780		16.2	%
Research and development expenses		2,804,739	6.6	%		2,581,824	7.0	%		222,915		8.6	%

Net Sales. NTIC’s consolidated net sales increased 15.2% and 15.3% to $14,893,117 and $42,302,573 during the three and nine months ended May 31, 2019, respectively, compared to the three and nine months ended May 31, 2018. NTIC’s consolidated net sales to unaffiliated customers excluding NTIC’s joint ventures increased 14.4% and 16.0% to $13,780,804 and $39,998,118 during the three and nine months ended May 31, 2019, respectively, compared to the same respective periods in fiscal 2018. These increases were primarily a result of an increase in sales of Natur-Tec® products. Net sales to joint ventures increased 26.5% and 4.7% to $1,112,313 and $2,304,455 during the three and nine months ended May 31, 2019, respectively, compared to the same respective periods in fiscal 2018. These increases were primarily a result of increased demand for our Natur-Tec® products.

The following table sets forth NTIC’s net sales by product segment for the three and nine months ended May 31, 2019 and 2018 by segment:

	Three Months Ended				Nine Months Ended
		May 31, 2019		May 31, 2018		May 31, 2019		May 31, 2018
Total ZERUST® sales	$	10,077,203	$	10,382,884	$	29,250,772	$	30,102,080
Total Natur-Tec® sales		4,815,914		2,540,953		13,051,801		6,578,770
Total net sales	$	14,893,117	$	12,923,837	$	42,302,573	$	36,680,850

During the three and nine months ended May 31, 2019, 67.7% and 69.1% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST^® products and services, which decreased 2.9% and 2.8% to $10,077,203 and $29,250,772 during the three and nine months ended May 31, 2019, respectively, compared to $10,382,884 and $30,102,080 during the three and nine months ended May 31, 2018, respectively. NTIC has strategically focused its sales efforts for ZERUST^® products and services on customers with sizeable corrosion problems in industry sectors that offer sizable growth opportunities, including the oil and gas sector. Overall, demand for ZERUST^® products and services depends heavily on the overall health of the market segments to which NTIC sells its products, including the automotive, oil and gas, agriculture, and mining markets in particular.

The following table sets forth NTIC’s net sales of ZERUST^® products for the three and nine months ended May 31, 2019 and 2018:

	Three Months Ended
	May 31, 2019		May 31, 2018		$ Change			% Change
ZERUST® industrial net sales	$	8,244,759	$	8,947,847	$	(703,088	)		(7.9	)%
ZERUST® joint venture net sales		950,414		879,324		71,090			8.1	%
ZERUST® oil & gas net sales		882,030		555,713		326,317			58.7	%
Total ZERUST® net sales	$	10,077,203	$	10,382,884	$	(305,681	)		(2.9	)%

	Nine Months Ended
	May 31, 2019		May 31, 2018		$ Change			% Change
ZERUST® industrial net sales	$	24,882,727	$	26,482,430	$	(1,599,703	)		(6.0	)%
ZERUST® joint venture net sales		2,142,555		2,201,077		(58,522	)		(2.7	)%
ZERUST® oil & gas net sales		2,225,490		1,418,573		806,917			56.9	%
Total ZERUST® net sales	$	29,250,772	$	30,102,080	$	(851,308	)		(2.8	)%

NTIC’s total ZERUST® net sales decreased during the three months and nine months ended May 31, 2019, compared to the prior fiscal year periods, primarily due to an overall decreased demand for ZERUST® industrial products and services in North America and China, partially offset by increased demand for ZERUST® oil and gas products and services. NTIC anticipates that its sales of ZERUST® products and services into the oil and gas industry will continue to remain subject to significant volatility from quarter to quarter as sales are recognized, specifically due to the volatility of oil prices. Demand for ZERUST® oil and gas products around the world depends primarily on market acceptance and the reach of NTIC’s distribution network. Because of the typical size of individual orders and overall size of NTIC’s net sales derived from sales of oil and gas products, the timing of one or more orders can materially affect NTIC’s quarterly sales compared to prior fiscal year quarters.

During the three and nine months ended May 31, 2019, 32.3% and 30.9% of NTIC’s consolidated net sales, respectively, were derived from sales of Natur-Tec® products, which increased 89.5% and 98.4% to $4,815,914 and $13,051,801 during the three and nine months ended May 31, 2019, respectively, compared to the three and nine months ended May 31, 2018. These increases were primarily due to an increase in finished product sales in North America and finished product sales at NTIC’s majority-owned subsidiary in India, Natur-Tec India.

Cost of Goods Sold. Cost of goods sold increased 18.0% and 17.9% for the three and nine months ended May 31, 2019, respectively, compared to the three and nine months ended May 31, 2018. Cost of goods sold as a percentage of net sales increased to 68.1% during the three months ended May 31, 2019 compared to 66.5% during the three months ended May 31, 2018 and increased to 68.3% during the nine months ended May 31, 2019 compared to 66.8% during the nine months ended May 31, 2018. These increases were due primarily to an increased percentage of product sales from Natur-Tec® products that have lower gross margins than NTIC’s traditional ZERUST® industrial products.

Equity in Income from Joint Ventures. NTIC’s equity in income from joint ventures decreased 16.4% and 3.4% to $1,877,410 and $5,596,788 during the three and nine months ended May 31, 2019, respectively, compared to $2,246,066 and $5,793,391 during the three and nine months ended May 31, 2018, respectively. These changes were primarily a result of changing profitability of the joint ventures during the respective periods that fluctuate based on net sales. Of the total equity in income from joint ventures, NTIC had equity in income from joint ventures of $4,094,763 attributable to EXCOR during the nine months ended May 31, 2019 compared to $4,138,814 during the nine months ended May 31, 2018. NTIC had equity in income of all other joint ventures of $1,502,025 during the nine months ended May 31, 2019 compared to $1,654,577 during the nine months ended May 31, 2018.

Fees for Services Provided to Joint Ventures. NTIC recognized fee income for services provided to joint ventures of $1,433,823 and $4,299,032 during the three and nine months ended May 31, 2019, respectively, compared to $1,508,500 and $4,624,532 during the three and nine months ended May 31, 2018, respectively, representing decreases of 5.0% and 7.0%, respectively. Fee income for services provided to joint ventures is traditionally a function of the sales made by NTIC’s joint ventures. Total net sales of NTIC’s joint ventures decreased to $27,774,112 and $86,003,918 during the three and nine months ended May 31, 2019, respectively, compared to $31,480,885 and $90,200,146 during the three and nine months ended May 31, 2018, respectively, representing decreases of $3,706,773 and $4,196,228, respectively. Net sales of NTIC’s joint ventures are not included in NTIC’s consolidated financial statements. Of the total fee income for services provided to joint ventures, fees of $643,154 were attributable to EXCOR during the nine months ended May 31, 2019 compared to $680,939 attributable to EXCOR during the nine months ended May 31, 2018.

Selling Expenses. NTIC’s selling expenses decreased 0.8% and increased 0.6% for the three and nine months ended May 31, 2019, respectively, compared to the same respective periods in fiscal 2018 due primarily to increases in operating expenses associated with ZERUST® sales efforts, consisting primarily of selling and personnel expenses. Selling expenses as a percentage of net sales decreased to 18.5% and 19.1% for the three and nine months ended May 31, 2019, respectively, from 21.5% and 21.9% for the three and nine months ended May 31, 2018, respectively, primarily due to the increase in net sales, as previously described.

General and Administrative Expenses. NTIC’s general and administrative expenses increased 27.1% and 16.2% for the three and nine months ended May 31, 2019, respectively, compared to the same respective periods in fiscal 2018 primarily due to increased personnel costs. As a percentage of net sales, general and administrative expenses increased to 17.0% and 16.5% for the three and nine months ended May 31, 2019, respectively, from 15.4% and 16.4% for the same respective periods in fiscal 2018. The increases in general and administrative expenses as a percentage of net sales for the three and six month comparisons were primarily due to the increase in net sales, as previously described.

Research and Development Expenses. NTIC’s research and development expenses increased 16.8% and 8.6% for the three and nine months ended May 31, 2019, respectively, compared to the same respective periods in fiscal 2018 primarily due to increases in research and development efforts.

Interest Income. NTIC’s interest income decreased to $24,114 and $52,023 during the three and nine months ended May 31, 2019, respectively, compared to $35,630 and $84,569 during the three and nine months ended May 31, 2018, respectively, due to changing levels of invested cash.

Interest Expense. NTIC’s interest expense increased to $5,165 and decreased to $11,357 during the three and nine months ended May 31, 2019, respectively, compared to $3,139 and $14,007 during the three and nine months ended May 31, 2018, respectively.

Income Before Income Tax Expense. NTIC incurred income before income tax expense equal to $1,791,221 and $5,486,542 for the three and nine months ended May 31, 2019, respectively, compared to $2,485,702 and $6,052,814 for the three and nine months ended May 31, 2018, respectively.

Income Tax Expense. Income tax expense was $150,257 and $652,331 for the three and nine months ended May 31, 2019, respectively, compared to income tax expense of $181,683 and $1,128,583 during the three and nine months ended May 31, 2018, respectively. Income tax expense was calculated based on management’s estimate of NTIC’s annual effective income tax rate. The effective tax rate for the three and nine months ended May 31, 2019 was 8.4% and 11.9%, respectively, compared to 7.3% and 18.6% for the three and nine months ended May 31, 2018, respectively. These decreases were primarily due to one-time provisional adjustments related to the Tax Reform Act during the prior fiscal year periods. The Tax Reform Act, among other things, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, generally eliminated U.S. federal income taxes on dividends received from foreign subsidiaries and joint ventures after December 31, 2017, and imposed a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries and joint ventures. As a result of the change in the tax law, a one-time non-cash tax provisional charge of $700,000 related to the re-measurement of deferred tax assets and liabilities was recorded in the nine months ended May 31, 2018. The impact of this non-cash tax charge increased NTIC’s effective rate by approximately 30.3% for the nine months ended May 31, 2018.

NTIC considers the earnings of certain foreign joint ventures to be indefinitely invested outside the United States on the bases of estimates that NTIC’s future domestic cash generation will be sufficient to meet future domestic cash needs. As a result, U.S. income and foreign withholding taxes have not been recognized on the cumulative undistributed earnings of $22,048,149 and $20,921,783 at May 31, 2019, and August 31, 2018, respectively. To the extent undistributed earnings of NTIC’s joint ventures are distributed in the future, they are not expected to result in any material additional income tax liability after the application of foreign tax credits.

Net Income Attributable to NTIC. Net income attributable to NTIC decreased to $1,482,149, or $0.16, per diluted common share, for the three months ended May 31, 2019 compared to $2,142,752, or $0.23, per diluted common share, for the three months ended May 31, 2018. Net income attributable to NTIC decreased to $4,380,776, or $0.46 per diluted common share, for the nine months ended May 31, 2018 compared to $4,559,225, or $0.49 per diluted common share, for the nine months ended May 31, 2018. These decreases were primarily the result of the increase in operating expenses and decrease in joint venture operations during the current fiscal year periods compared to the prior fiscal year periods, partially offset by the increase in gross margin and decrease in tax expense, specifically the $700,000 one-time provisional adjustment related to the Tax Cuts and Jobs Act (Tax Reform Act) that occurred in the second quarter of fiscal year 2018, as described in more detail below.

Other Comprehensive Income - Foreign Currency Translations Adjustment. The changes in the foreign currency translations adjustment were due to the fluctuations of the U.S. dollar compared to the Euro and other foreign currencies during the three and nine months ended May 31, 2019 compared to the same period in fiscal 2018.

Liquidity and Capital Resources

Sources of Cash and Working Capital. NTIC’s working capital, defined as current assets less current liabilities, was $25,691,723 at May 31, 2019, including $5,224,480 in cash and cash equivalents and $2,540,613 in available for sale securities, compared to $22,837,591 at August 31, 2018, including $4,163,023 in cash and cash equivalents and $3,300,110 in available for sale securities.

As of May 31, 2019, NTIC had a revolving line of credit with PNC Bank of $3,000,000 with no amounts outstanding. At the option of the Company, outstanding advances under the line of credit bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by the Company or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate. On November 30, 2018, the Company and PNC Bank extended the maturity date of the line of credit from January 7, 2019, to January 7, 2020. All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same. It is anticipated that, as historically has been the practice, the line of credit will be renewed each year for one additional year for the immediate foreseeable future. The line of credit is evidenced by an amended and restated committed line of credit note in the principal amount of up to $3,000,000. The line of credit has a $1,200,000 standby letter of credit sub-facility, with any standby letters of credit issued thereunder being at the sole discretion of PNC Bank. Any lines of credit issued by PNC Bank would decrease the availability under the revolving line of credit. The line of credit is subject to standard covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio, and negative covenants, which, among other things, limit the incurrence of additional indebtedness, loans and equity investments, disposition of assets, mergers and consolidations and other matters customarily restricted in such agreements. Under the loan agreement, NTIC is subject to a minimum fixed charge coverage ratio of 1.10:1.00. As of May 31, 2019, NTIC was in compliance with all debt covenants.

NTIC believes that a combination of its existing cash and cash equivalents, available for sale securities, forecasted cash flows from future operations, anticipated distributions of earnings, anticipated fees to NTIC for services provided to its joint ventures, and funds available through existing or anticipated financing arrangements will be adequate to fund its existing operations, investments in new or existing joint ventures or subsidiaries, capital expenditures, debt repayments, cash dividends, and any stock repurchases for at least the next 12 months. During the remainder of fiscal 2019, NTIC expects to continue to invest in NTIC China, research and development, and in marketing efforts and resources for the application of its corrosion prevention technology in the oil and gas industry and its Natur-Tec® bio-plastics business, although the amounts of these various investments are not known at this time. In order to take advantage of such new product and market opportunities to expand its business and increase its revenues, NTIC may decide to finance such opportunities by borrowing under its revolving line of credit or raising additional financing through the issuance of debt or equity securities. There is no assurance that any financing transaction will be available on terms acceptable to NTIC, or at all, or that any financing transaction will not be dilutive to NTIC’s current stockholders.

NTIC traditionally has used the cash generated from its operations, distributions of earnings from joint ventures, and fees for services provided to its joint ventures to fund NTIC’s new technology investments and capital contributions to new and existing subsidiaries and joint ventures. NTIC’s joint ventures traditionally have operated with little or no debt and have been self-financed with minimal initial capital investment and minimal additional capital investment from their respective owners. Therefore, NTIC believes there is limited exposure by NTIC’s joint ventures that could materially impact their respective operations and/or liquidity.

Uses of Cash and Cash Flows. Net cash provided by operating activities during the nine months ended May 31, 2019 was $2,717,391, which resulted principally from NTIC’s net income, dividends received from joint ventures, depreciation, amortization, and an increase in stock-based compensation, accounts payable, partially offset by NTIC’s equity in income from joint ventures, an increase in inventory, a decrease in accrued liabilities, and an increase in income tax receivable. Net cash used in operating activities during the nine months ended May 31, 2018, was $141,994, which resulted principally from NTIC’s equity in income from joint ventures, increases in trade receivables excluding joint ventures, inventories, and prepaid expenses and other, partially offset by NTIC’s net income, dividends received from joint ventures, and increases in accounts payable, accrued liabilities, depreciation, and amortization.

NTIC’s cash flows from operations are impacted by significant changes in certain components of NTIC’s working capital, including inventory turnover and changes in receivables. NTIC considers internal and external factors when assessing the use of its available working capital, specifically when determining inventory levels and credit terms of customers. Key internal factors include existing inventory levels, stock reorder points, customer forecasts, and customer requested payment terms. Key external factors include the availability of primary raw materials and sub-contractor production lead times. NTIC’s typical contractual terms for trade receivables, excluding joint ventures, are traditionally 30 days and 90 days for trade receivables from its joint ventures. Before extending unsecured credit to customers, excluding NTIC’s joint ventures, NTIC reviews customers’ credit histories and will establish an allowance for uncollectible accounts based upon factors surrounding the credit risk of specific customers and other information. Accounts receivable over 30 days are considered past due for most customers. NTIC does not accrue interest on past due accounts receivable. If accounts receivables in excess of the provided allowance are determined uncollectible, they are charged to selling expense in the period that the determination is made. Accounts receivable are deemed uncollectible based on NTIC exhausting reasonable efforts to collect. NTIC’s typical contractual terms for receivables for services provided to its joint ventures are 90 days. NTIC records receivables for services provided to its joint ventures on an accrual basis, unless circumstances exist that make the collection of the balance uncertain, in which case the fee income will be recorded on a cash basis until there is consistency in payments. This determination is handled on a case by case basis.

NTIC experienced an increase in trade receivables and an increase in inventory as of May 31, 2019, compared to August 31, 2018. Trade receivables, excluding joint ventures, as of May 31, 2019 increased $148,524 compared to August 31, 2018, primarily related to the timing of collections and the increase in sales. Outstanding trade receivables, excluding joint ventures balances as of May 31, 2019 increased 2 days to an average of 67 days from balances outstanding from these customers as of August 31, 2018. Outstanding trade receivables from joint ventures as of May 31, 2019 increased $174,179 compared to August 31, 2018 primarily due to the timing of payments. Outstanding balances from trade receivables from joint ventures decreased an average of 22 days to an average of 77 days from balances outstanding from these customers compared to August 31, 2018. The average days outstanding of trade receivables from joint ventures as of May 31, 2019 were primarily due to the receivable balances at NTIC’s joint ventures in South Korea and Germany.

Outstanding receivables for services provided to joint ventures as of May 31, 2019 decreased $114,327 compared to August 31, 2018, and the average days to pay decreased an average of 3 days to an average of 80 days compared to August 31, 2018.

Net cash used in investing activities for the nine months ended May 31, 2019, was $43,937, which was primarily the result of net proceeds from the sale of available for sale securities, partially offset by additions to property and equipment, and additions to patents. Net cash used in investing activities for the nine months ended May 31, 2018 was $79,449, which was primarily the result of additions to property and equipment and additions to patents, partially offset by net proceeds from the sale of available for sale securities.

Net cash used in financing activities for the nine months ended May 31, 2019 was $1,648,602, which resulted from dividends paid on NTIC common stock and a dividend paid to a non-controlling interest, partially offset by an investment by a non-controlling interest and proceeds from NTIC’s employee stock purchase plan. Net cash used in financing activities for the nine months ended May 31, 2018 was $1,517,998, which resulted from dividends paid on NTIC common stock and a dividend paid to a non-controlling interest, partially offset by proceeds from stock option exercises and purchases under NTIC’s employee stock purchase plan.

Share Repurchase Plan. On January 15, 2015, NTIC’s Board of Directors authorized the repurchase of up to $3,000,000 in shares of NTIC common stock through open market purchases or unsolicited or solicited privately negotiated transactions. This program has no expiration date but may be terminated by NTIC’s Board of Directors at any time. No repurchases occurred during the nine months ended May 31, 2019. As of May 31, 2019, up to $2,640,548 in shares of NTIC common stock remained available for repurchase under NTIC’s stock repurchase program.

Cash Dividends. During the nine months ended May 31, 2019, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to holders of record of the Company’s common stock as of the following record dates:

Declaration Date	Amount		Record Date	Payable Date
October 24, 2018	$	0.06	November 7, 2018	November 21, 2018
January 23, 2019	$	0.06	February 6, 2019	February 22, 2019
April 25, 2019	$	0.06	May 9, 2019	May 23, 2019

During fiscal 2018, the Company’s Board of Directors declared quarterly cash dividends of $0.05 per share. Although NTIC’s Board of Directors intends to continue to declare regular quarterly cash dividends, the declaration of future dividends is not guaranteed and will be determined by NTIC’s Board of Directors in light of conditions then existing, including NTIC’s earnings, financial condition, cash requirements, restrictions in financing agreements, business conditions, and other factors.

Stock Split. On June 3, 2019, the Company’s Board of Directors declared a two-for-one stock split of the Company’s common stock effected in the form of a 100% share dividend distributed on June 28, 2019 to record holders as of June 17, 2019. All share and per share values have been adjusted to retroactively reflect the effect of the two-for-one stock split.

Capital Expenditures and Commitments. NTIC spent $716,212 on capital expenditures during the nine months ended May 31, 2019, which related primarily to the purchase of new equipment. NTIC expects to spend an aggregate of approximately $750,000 to $900,000 on capital expenditures during fiscal 2019, which it expects will relate primarily to the purchase of new equipment.

Contractual Obligations

There has been no material change to NTIC’s contractual obligations as provided in “Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations,” included in NTIC’s annual report on Form 10-K for the fiscal year ended August 31, 2018.

Off-Balance Sheet Arrangements

NTIC does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements. As such, NTIC is not materially exposed to any financing, liquidity, market, or credit risk that could arise if NTIC had engaged in such arrangements.

Inflation and Seasonality

Inflation in the United States and abroad historically has had little effect on NTIC. Although NTIC’s business historically has not been seasonal, NTIC believes there is some seasonality in its business. NTIC believes its net sales in the second fiscal quarter were adversely affected by the long Chinese New Year, the North American holiday season, and overall less corrosion taking place at lower winter temperatures worldwide.

Market Risk

NTIC is exposed to some market risk stemming from changes in foreign currency exchange rates, commodity prices, and interest rates.

Because the functional currency of NTIC’s foreign operations and investments in its foreign joint ventures is the applicable local currency, NTIC is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. NTIC’s principal exchange rate exposure is with the Euro, the Japanese Yen, Indian Rupee, Chinese Renminbi, South Korean Won, and the English Pound against the U.S. Dollar. NTIC’s fees for services provided to joint ventures and dividend distributions from these foreign entities are paid in foreign currencies, and, thus, fluctuations in foreign currency exchange rates could result in declines in NTIC’s reported net income. Since NTIC’s investments in its joint ventures are accounted for using the equity method, any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment and would not change NTIC’s equity in income from joint ventures reflected in its consolidated statements of operations. NTIC does not hedge against its foreign currency exchange rate risk.

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

At the option of NTIC, outstanding advances under NTIC’s $3,000,000 revolving line of credit with PNC Bank bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by NTIC or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate, and thus may subject NTIC to some market risk on interest rates. As of May 31, 2019, NTIC had no borrowings under the line of credit.

Critical Accounting Policies and Estimates

There have been no material changes to NTIC’s critical accounting policies and estimates from the information provided in “Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” included in NTIC’s annual report on Form 10-K for the fiscal year ended August 31, 2018, other than as a result of NTIC’s adoption of ASC 606.

Recent Accounting Pronouncements

See Note 2 to NTIC’s consolidated financial statements for a discussion of recent accounting pronouncements.

Forward-Looking Statements

This quarterly report on Form 10-Q contains not only historical information, but also 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. These forward-looking statements are subject to the safe harbor created by those sections. In addition, NTIC or others on NTIC’s behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on NTIC’s Internet web site, or otherwise. All statements other than statements of historical facts included in this report or expressed by NTIC orally from time to time that address activities, events, or developments that NTIC expects, believes, or anticipates will or may occur in the future are forward-looking statements, including, in particular, the statements about NTIC’s plans, objectives, strategies, and prospects regarding, among other things, NTIC’s financial condition, results of operations and business, the outcome of contingencies, such as legal proceedings and the effect of the liquidation of Tianjin Zerust, and the operations of NTIC China. NTIC has identified some of these forward-looking statements in this report with words like “believe,” “can,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate,” “outlook,” or “continue” or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to NTIC’s consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are based on current expectations about future events affecting NTIC and are subject to uncertainties and factors that affect all businesses operating in a global market as well as matters specific to NTIC. These uncertainties and factors are difficult to predict, and many of them are beyond NTIC’s control. The following are some of the uncertainties and factors known to us that could cause NTIC’s actual results to differ materially from what NTIC has anticipated in its forward-looking statements:

The effect of current worldwide economic conditions and any turmoil and disruption in the global credit and financial markets on NTIC’s business;

Variability in NTIC’s sales of ZERUST® products and services to the oil and gas industry and Natur-Tec^® products and NTIC’s equity income of joint ventures, which variability in sales and equity in income from joint venture, in turn, subject NTIC’s earnings to quarterly fluctuations;

Risks associated with NTIC’s international operations and exposure to fluctuations in foreign currency exchange rates and import duties, taxes, and tariffs;

The effect of the United Kingdom’s process to exit the European Union on NTIC’s operating results, including in particular future net sales of NTIC’s European and other joint ventures;

The effect of the health of the U.S. automotive industry on NTIC’s business;

NTIC’s dependence on the success of its joint ventures and fees and dividend distributions that NTIC receives from them;

NTIC’s relationships with its joint ventures and its ability to maintain those relationships, especially in light of anticipated succession planning issues;

Fluctuations in the cost and availability of raw materials, including resins and other commodities;

The success of and risks associated with NTIC’s emerging new businesses and products and services, including in particular NTIC’s ability and the ability of NTIC’s joint ventures to sell ZERUST® products and services to the oil and gas industry and Natur-Tec^® products and the often lengthy and extensive sales process involved in selling such products and services;

NTIC’s ability to introduce new products and services that respond to changing market conditions and customer demand;

Market acceptance of NTIC’s existing and new products, especially in light of existing and new competitive products;

Maturation of certain existing markets for NTIC’s ZERUST^® products and services and NTIC’s ability to grow market share and succeed in penetrating other existing and new markets;

Increased competition, especially with respect to NTIC’s ZERUST^® products and services, and the effect of such competition on NTIC’s and its joint ventures’ pricing, net sales, and margins;

NTIC’s reliance upon and its relationships with its distributors, independent sales representatives, and joint ventures;

NTIC’s reliance upon suppliers;

Oil prices, which may affect sales of NTIC’s ZERUST^® products and services to the oil and gas industry;

NTIC’s operations in China, and the risks associated therewith, the termination of the joint venture agreements with Tianjin Zerust, and the anticipated liquidation of Tianjin Zerust and the effect of all these events on NTIC’s business and future operating results;

The costs and effects of complying with laws and regulations and changes in tax, fiscal, government, and other regulatory policies, including rules relating to environmental, health, and safety matters;

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

Unforeseen production expenses incurred in connection with new customers and new products;

Loss of or changes in executive management or key employees;

Ability of management to manage around unplanned events;

Pending and future litigation;

NTIC’s reliance on its intellectual property rights and the absence of infringement of the intellectual property rights of others;

NTIC’s ability to maintain effective internal control over financial reporting, especially in light of its joint venture arrangements;

Changes in applicable laws or regulations and NTIC’s failure to comply with applicable laws, rules, and regulations;

Changes in generally accepted accounting principles and the effect of new accounting pronouncements;

Fluctuations in NTIC’s effective tax rate, including from the Tax Cuts and Jobs Act;

The effect of extreme weather conditions on NTIC’s operating results; and

NTIC’s reliance upon its management information systems.

For more information regarding these and other uncertainties and factors that could cause NTIC’s actual results to differ materially from what NTIC has anticipated in its forward-looking statements or otherwise could materially adversely affect its business, financial condition, or operating results, see NTIC’s annual report on Form 10-K for the fiscal year ended August 31, 2018 under the heading “Part I. Item 1A. Risk Factors.”

All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. NTIC wishes to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results due to the uncertainties and factors described above and others that NTIC may consider immaterial or does not anticipate at this time. Although NTIC believes that the expectations reflected in its forward-looking statements are reasonable, NTIC does not know whether its expectations will prove correct. NTIC’s expectations reflected in its forward-looking statements can be affected by inaccurate assumptions NTIC might make or by known or unknown uncertainties and factors, including those described above. The risks and uncertainties described above are not exclusive, and further information concerning NTIC and its business, including factors that potentially could materially affect its financial results or condition, may emerge from time to time. NTIC assumes no obligation to update, amend, or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. NTIC advises you, however, to consult any further disclosures NTIC makes on related subjects in its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K that NTIC files with or furnishes to the Securities and Exchange Commission.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

NTIC is exposed to some market risk stemming from changes in foreign currency exchange rates, commodity prices, and interest rates.

Because the functional currency of NTIC’s foreign operations and investments in its foreign joint ventures is the applicable local currency, NTIC is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. NTIC’s principal exchange rate exposure is with the Euro, the Japanese Yen, the Indian Rupee, the Chinese Renminbi, the South Korean Won, and the English Pound against the U.S. Dollar. NTIC’s fees for services provided to joint ventures and dividend distributions from these foreign entities are paid in foreign currencies, and, thus, fluctuations in foreign currency exchange rates could result in declines in NTIC’s reported net income. Since NTIC’s investments in its joint ventures are accounted for using the equity method, any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment and would not change NTIC’s equity in income from joint ventures reflected in its consolidated statements of operations. NTIC does not hedge against its foreign currency exchange rate risk.

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

At the option of NTIC, outstanding advances under NTIC’s $3,000,000 revolving line of credit with PNC Bank bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by NTIC or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate and, thus, may subject NTIC to some market risk on interest rates. As of May 31, 2019, NTIC had no borrowings under the line of credit.

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 the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that information required to be disclosed by NTIC in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that 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 timely decisions regarding required disclosure. NTIC’s management evaluated, with the participation of its Chief Executive Officer and its Chief Financial Officer, the effectiveness of the design and operation of NTIC’s disclosure controls and procedures as of the end of the period covered in this report. Based on that evaluation, NTIC’s Chief Executive Officer and Chief Financial Officer concluded that NTIC’s disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in the reports that NTIC files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to NTIC’s management, including NTIC’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in NTIC’s internal financial control over financial reporting that occurred during the quarter ended May 31, 2019 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On March 23, 2015, NTIC and NTI Asean LLC (NTI Asean) filed a lawsuit in Tianjin No 1 Intermediate People’s Court against two individuals, Tao Meng and Xu Hui, related to breaches of duties and contractual commitments owed to NTI Asean under certain agreements related to NTIC’s former joint venture in China, Tianjin Zerust Anti-Corrosion Technologies Ltd. (Tianjin Zerust). The lawsuit alleges, among other things, that Mr. Tao Meng and Xu Hui have engaged in self-dealing, usurped business opportunities, and received economic benefits that were required to go to Tianjin Zerust. As of May 31, 2019, the Company is not able to reasonably estimate the amount of any recovery to NTI Asean, if any.

ITEM 1A.

RISK FACTORS

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Equity Securities

During the three months ended May 31, 2019, NTIC did not issue any shares of its common stock or other equity securities of NTIC that were not registered under the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

The following table shows NTIC’s third quarter of fiscal 2019 stock repurchase activity. Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective June 28, 2019.

Period	Total Number of Shares (or Units) Purchased	Average Price Paid Per Share (or Unit)	Total Number of Shares (or Units) Purchased As Part of Publicly Announced Plans or Programs	Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
March 1, 2019 through March 31, 2019	0	$0	0	(1)
April 1, 2019 through April 30, 2019	0	$0	0	(1)
May 1, 2019 through May 31, 2019	0	$0	0	(1)
Total	0	$0	0	(1)(2)

(1)

On January 15, 2015, NTIC’s Board of Directors authorized the repurchase of up to $3,000,000 in shares of NTIC common stock through open market purchases or unsolicited or solicited privately negotiated transactions. This program has no expiration date but may be terminated by NTIC’s Board of Directors at any time.

(2)

As of May 31, 2019, up to $2,640,548 in shares of NTIC common stock remained available for repurchase under NTIC’s stock repurchase program.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

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

Exhibit No.	Description	Method of Filing
31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted 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

101	The following materials from NTIC’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Consolidated Balance Sheets, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income, (iv) the unaudited Consolidated Statements of Equity, (v) the unaudited Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements	Filed herewith

SIGNATURES

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

		NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION


Date: July 9, 2019		Matthew C. Wolsfeld, CPA
		Chief Financial Officer
		(Principal Financial and Accounting Officer and
		Duly Authorized to Sign on Behalf of the Registrant)