NORTHERN TECHNOLOGIES INTERNATIONAL CORP - Quarter Report: 2020 May (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended May 31, 2020

or

☐ 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)

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

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

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 ☒ 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 ☒ 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.

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 ☒

As of July 9, 2020, there were 9,099,990 shares of common stock of the registrant outstanding.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

May 31, 2020

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

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 that 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; and (4)“NTI Asean” refer to NTIC’s majority-owned holding company subsidiary, NTI Asean LLC, which holds investments in certain entities that operate in the Association of Southeast Asian Nations (ASEAN) region, including the following countries: Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand and Vietnam.

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

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 2020 (UNAUDITED)

AND AUGUST 31, 2019 (AUDITED)

*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, 2020 AND 2019

*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, 2020 AND 2019

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, 2020 AND 2019

*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, 2020 AND 2019

See notes to consolidated financial statements.

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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, 2019. 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), certain majority-owned and wholly-owned subsidiaries, 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 wholly-owned subsidiary in China and majority-owned subsidiaries in India and Sri Lanka, and through distributors and certain joint ventures.

NTIC’s Subsidiaries and Joint Venture Network

NTIC has ownership interests in nine operating 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, 2020, the country in which the subsidiary is organized, and NTIC’s ownership percentage in each subsidiary:

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

NTIC participates in 19 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, 2020, the country in which the joint venture is organized, and NTIC’s ownership percentage in each joint venture:

(1)       Indirect ownership interest through NTI Asean.

NTIC receives funds from its joint ventures as fees received for services that NTIC provides to its joint ventures 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.

Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the novel coronavirus (COVID-19) outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets and has resulted in an economic slowdown. The outbreak and continuing rapid spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both in the United States and abroad.

As part of efforts to contain the spread of COVID-19, federal, state, local and foreign governments imposed various restrictions on the conduct of business and travel, some of which remain in place in whole or in part. Government restrictions, such as stay-at-home orders, quarantines and worker absenteeism as a result of COVID-19, have led to a significant number of business closures and slowdowns. These business closures and slowdowns have adversely impacted and will likely continue to adversely impact NTIC directly and have caused some of NTIC’s customers and suppliers to operate at a fraction of their capacities or wholly lock down, which has disrupted and may continue to disrupt NTIC’s sales and production.

As the events surrounding the COVID-19 pandemic continued to unfold during the third quarter of fiscal 2020, NTIC’s primary focus was, and continues to be, the health, safety and wellbeing of its employees, customers and suppliers. In order to continue its operations, as permitted by respective state, local and foreign governments, NTIC has adopted numerous safety measures in accordance with U.S. Centers for Disease Control and Prevention, World Health Organization, and federal, state, local and foreign guidance in order to protect its employees, customers and suppliers. These safety measures include, but are not limited to, adhering to social distancing protocols, enabling the majority of its employees to work from home, suspending non-essential travel, disinfecting facilities and workspaces extensively and frequently, suspending all non-essential visitors and requiring employees who must be present at NTIC’s facilities to wear face coverings. NTIC expects to continue such safety measures for the foreseeable future and may take further actions, or adapt these existing policies, as government authorities may require or recommend or as it may determine to be in the best interests of its employees, customers and suppliers.

NTIC has been balancing its safety-focused approach with the needs of its customers. Government mandated measures resulting in the substantial curtailment of business activities generally have excluded certain essential businesses and services, including certain manufacturing. With the exception of the temporary closures of NTIC’s facilities in China and India during the second and third fiscal quarter of 2020, NTIC’s manufacturing activities are generally considered part of the “critical sector” with respect to state and local government orders. This has allowed NTIC to continue to receive orders and provide uninterrupted order fulfillment to its customers. However, its facilities have been operating at a reduced capacity in order to abide by local government requirements and recommendations, such as social distancing practices, and in response to reduced demand. During the third quarter of fiscal 2020, certain of NTIC’s facilities were impacted by reduced levels of production, manufacturing inefficiencies due to the reconfiguration of certain of its manufacturing processes in order to implement social distancing protocols and reduced demand. NTIC has engaged and continues to engage in communications with its suppliers in an attempt to identify and mitigate supply chain risks and proactively manage inventory levels in order to align production with demand. While domestic and international governmental measures may be modified or extended, NTIC currently expects that its global facilities will remain operational, although operating at reduced production capacity at certain of its facilities, during the remainder of fiscal 2020. However, such expectation is dependent upon future governmental actions and demand for NTIC’s products, the stability of its global supply chain and the ability of carriers to transport supplies to its facilities and products to its customers.

As a result of the global economic slowdown caused by the COVID-19 pandemic, NTIC began experiencing softened demand. During the third quarter of fiscal 2020, demand significantly decreased, which had a material adverse effect on NTIC’s business, operating results and financial condition. NTIC anticipates decreased global demand for its products and services during the fourth quarter of fiscal 2020 and beyond. Due to the international reach of COVID-19, NTIC’s international joint ventures have also been adversely impacted, which has had and may continue to have a material adverse effect on NTIC’s joint venture operations and equity in income from joint ventures. It is currently not possible to predict the precise potential impact, as well as the extent of any impact, of the COVID-19 pandemic on NTIC’s business and on the global economy as a whole. It is also currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. A prolonged situation could have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on NTIC’s business, operating results and financial condition.

The extent to which the COVID-19 pandemic will continue to impact NTIC’s business will likely depend on numerous evolving factors that NTIC may not be able to accurately predict, including:

Any of these events could materially adversely affect NTIC’s business, operating results and financial condition.

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

NTIC’s consolidated net sales decreased 34.6% and 11.1% during the three and nine months ended May 31, 2020, respectively, compared to the three and nine months ended May 31, 2019. NTIC’s consolidated net sales for the three months ended May 31, 2020 were adversely affected by reduced demand globally as a result of the COVID-19 pandemic. NTIC anticipates that the COVID-19 pandemic will continue to significantly adversely affect NTIC’s consolidated net sales and earnings in the fourth quarter of fiscal 2020 and beyond.

During the three and nine months ended May 31, 2020, 75.5% and 70.0% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST^® products and services, which decreased 27.0% and 10.0% to $7,356,781 and $26,322,515, respectively, compared to $10,077,203 and $29,250,772 during the three and nine months ended May 31, 2019, respectively. These decreases were due to lower sales to 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, 2020 included $2,012,543 of sales made to customers in the oil and gas industry, compared to $2,225,490 for the nine months ended May 31, 2019. 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. NTIC’s sales of ZERUST^® products and services for the three months ended May 31, 2020 were adversely affected by reduced demand globally as a result of the COVID-19 pandemic. NTIC anticipates that the COVID-19 pandemic will continue to significantly adversely affect sales of ZERUST^® products and services in the fourth quarter of fiscal 2020 and beyond.

During the three and nine months ended May 31, 2020, 24.5% and 30.0% of NTIC’s consolidated net sales, respectively, were derived from sales of Natur-Tec^® products, compared to 32.3% and 30.9% during the three and nine months ended May 31, 2019, respectively. Net sales of Natur-Tec^® products decreased 50.4% and 13.5% during the three and nine months ended May 31, 2020, respectively, compared to the three and nine months ended May 31, 2019 primarily due to a decrease 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), and reduced demand globally as a result of the COVID-19 pandemic. NTIC anticipates that the COVID-19 pandemic will continue to significantly adversely affect sales of Natur-Tec^® products in the fourth quarter of fiscal 2020 and beyond.

Cost of goods sold as a percentage of net sales decreased to 66.7% during the three months ended May 31, 2020, compared to 68.1% during the three months ended May 31, 2019 and decreased to 66.4% during the nine months ended May 31, 2020, compared to 68.3% during the prior fiscal year period, primarily as a result of a decreased 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 56.8% and 38.1% to $811,787 and $3,466,581 during the three and nine months ended May 31, 2020, respectively, compared to $1,877,410 and $5,596,788 during the three and nine months ended May 31, 2019, respectively. These decreases were primarily due to corresponding decreases in net sales at the joint ventures, which decreased 32.4% and 20.3% to $18,782,233 and $68,531,897 during the three and nine months ended May 31, 2020, respectively, compared to $27,774,112 and $86,003,918 for the three and nine months ended May 31, 2019, respectively. These decreases in net sales of NTIC’s joint ventures were primarily due to lower sales to 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 anticipates that net sales of its joint ventures will continue to decrease significantly as a result of decreased demand as a result of the COVID-19 pandemic and may continue to have a significant adverse effect on NTIC’s equity in income from its joint ventures.

NTIC’s total operating expenses decreased 10.2% and increased 0.8% to $5,651,075 and $18,011,443 during the three and nine months ended May 31, 2020, respectively, compared to $6,293,725 and $17,868,928 for the three and nine months ended May 31, 2019, respectively. These changes were due to the decrease in overall operating expenses during the three months ended May 31, 2020 due to the suspension of travel and work from home initiatives as a result of the COVID-19 pandemic.

NTIC spent $950,127 and $2,918,163 during the three and nine months ended May 31, 2020, respectively, compared to $1,005,045 and $2,804,739 during the three and nine months ended May 31, 2019, respectively, in connection with its research and development activities. NTIC anticipates that it will spend a total of between $3,500,000 and $3,700,000 in fiscal 2020 on research and development activities.

NTIC incurred a net loss attributable to NTIC of $(965,221), or $(0.11) per diluted common share, for the three months ended May 31, 2020, compared to net income attributable to NTIC of $1,482,149, or $0.16 per diluted common share, for the three months ended May 31, 2019, a decrease of $2,447,370 or $0.27 per diluted share. Net income attributable to NTIC decreased to $427,163, or $0.05 per diluted common share, for the nine months ended May 31, 2020, compared to $4,380,776, or $0.46 per diluted common share, for the nine months ended May 31, 2019, a decrease of $3,953,613 or $0.41 per diluted share. NTIC anticipates that its earnings may continue to be significantly adversely affected by the COVID-19 pandemic in the fourth quarter of fiscal 2020 and beyond and 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 $28,135,178 at May 31, 2020, including $5,050,722 in cash and cash equivalents and $5,450,693 in available for sale securities, compared to $25,460,569 at August 31, 2019, including $5,856,758 in cash and cash equivalents and $3,565,258 in available for sale securities.

On April 23, 2020, the Company announced the temporary suspension of its quarterly cash dividend pending clarity on the COVID-19 crisis. Therefore, the Company did not declare a cash dividend during the quarter ended May 31, 2020. Prior to this suspension, on January 22, 2020, the Company’s Board of Directors declared a cash dividend of $0.065 per share of NTIC’s common stock, payable on February 19, 2020 to stockholders of record on February 5, 2020. On October 22, 2019, the Company’s Board of Directors declared a cash dividend of $0.065 per share of NTIC’s common stock, payable on November 20, 2019 to stockholders of record on November 6, 2019. During fiscal 2019, the Company’s Board of Directors declared four quarterly cash dividends of $0.06 per share each. The length of the Company’s suspension of its quarterly cash dividend is currently unknown, and 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, including without limitation the effect of COVID-19 on NTIC’s business, operating results and financial condition.

Results of Operations

The following table sets forth NTIC’s results of operations for the three and nine months ended May 31, 2020 and 2019.

Net Sales. NTIC’s consolidated net sales decreased 34.6% and 11.1% to $9,744,823 and $37,610,006 during the three and nine months ended May 31, 2020, respectively, compared to the three and nine months ended May 31, 2019. NTIC’s consolidated net sales for the three months ended May 31, 2020 were adversely affected by reduced demand globally as a result of the COVID-19 pandemic. NTIC’s consolidated net sales to unaffiliated customers excluding NTIC’s joint ventures decreased 34.2% and 9.7% to $9,071,072 and $36,105,009 during the three and nine months ended May 31, 2020, respectively, compared to the same respective periods in fiscal 2019. Net sales to joint ventures decreased 39.4% and 34.7% to $673,751 and $1,504,997 during the three and nine months ended May 31, 2020, respectively, compared to the same respective periods in fiscal 2019. These decreases were primarily a result of reduced demand globally as a result of the COVID-19 pandemic. NTIC anticipates that the COVID-19 pandemic will continue to significantly adversely affect sales of ZERUST^® products and services in the fourth quarter of fiscal 2020 and beyond.

The following table sets forth NTIC’s net sales by product segment for the three and nine months ended May 31, 2020 and 2019 by segment:

During the three and nine months ended May 31, 2020, 75.5% and 70.0% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST^® products and services, which decreased 27.0% and 10.0% to $7,356,781 and $26,322,515 during the three and nine months ended May 31, 2020, respectively, compared to $10,077,203 and $29,250,772 during the three and nine months ended May 31, 2019, 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. These decreases were primarily a result of reduced demand globally as a result of the COVID-19 pandemic. NTIC anticipates that the COVID-19 pandemic will continue to significantly adversely affect sales of ZERUST^® products and services in the fourth quarter of fiscal 2020 and beyond.

The following table sets forth NTIC’s net sales of ZERUST^® products for the three and nine months ended May 31, 2020 and 2019:

NTIC’s total ZERUST^® net sales decreased during the three months and nine months ended May 31, 2020, compared to the prior fiscal year periods, primarily due to an overall decreased demand for ZERUST^® industrial products and services in North America and decreased demand for ZERUST^® oil and gas products and services. NTIC’s sales of ZERUST^® products and services for the three months ended May 31, 2020 were adversely affected by reduced demand globally as a result of the COVID-19 pandemic.

Demand for ZERUST^® products and services decreased significantly beginning in February 2020 largely as a result of the COVID-19 outbreak in China and will likely have a significant adverse effect on sales of ZERUST^® products and services in the fourth quarter of fiscal 2020 and beyond. Although net sales by NTIC’s wholly owned NTIC China subsidiary decreased 16.3% to $3.1 million for the three months ended May 31, 2020, compared to $3.7 million for the same period last fiscal year, management believes NTIC China sales are beginning to improve to close to pre-pandemic levels due primarily to NTIC’s successful expansion into new non-automotive market segments in China.

ZERUST^® oil and gas net sales decreased 51.9% during the three months ended March 31, 2020 compared to the same period last fiscal year primarily as a result of the COVID-19 pandemic. The pandemic’s impact on NTIC’s ZERUST^® oil and gas business was primarily due to significantly lower oil prices and travel restrictions, which inhibited NTIC’s ability to travel to customer sites in order to install solutions. NTIC expects its oil and gas sales will continue to be impacted for the duration of the pandemic. NTIC also 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 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, 2020, 24.5% and 30.0% of NTIC’s consolidated net sales, respectively, were derived from sales of Natur-Tec^® products, which decreased 50.4% and 13.5% to $2,388,042 and $11,287,491 during the three and nine months ended May 31, 2020, respectively, compared to the three and nine months ended May 31, 2019. These decreases were primarily due to a decrease 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), and decreased demand globally as a result of the COVID-19 pandemic. The COVID pandemic has adversely impacted demand from across the apparel industry, as well as many large users of bioplastics, including college campuses, stadiums, arenas, restaurants, and corporate office complexes. NTIC currently expects these customers will be some of the last businesses to re-open, and accordingly, anticipates that the COVID-19 pandemic will continue to significantly adversely affect sales of Natur-Tec^® products in the fourth quarter of fiscal 2020 and beyond.

Cost of Goods Sold. Cost of goods sold decreased 35.9% and 13.5% for the three and nine months ended May 31, 2020, respectively, compared to the three and nine months ended May 31, 2019. Cost of goods sold as a percentage of net sales decreased to 66.7% during the three months ended May 31, 2020, compared to 68.1% during the three months ended May 31, 2019 and 66.4% during the nine months ended May 31, 2020, compared to 68.3% during the nine months ended May 31, 2019. These decreases were due primarily to a decreased 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 56.8% and 38.1% to $811,787 and $3,466,581 during the three and nine months ended May 31, 2020, respectively, compared to $1,877,410 and $5,596,788 during the three and nine months ended May 31, 2019, 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 $2,246,930 attributable to EXCOR during the nine months ended May 31, 2020, compared to $4,094,763 during the nine months ended May 31, 2019. NTIC had equity in income from all other joint ventures of $1,219,651 during the nine months ended May 31, 2020, compared to $1,502,025 during the nine months ended May 31, 2019.

Fees for Services Provided to Joint Ventures. NTIC recognized fee income for services provided to joint ventures of $876,706 and $3,491,244 during the three and nine months ended May 31, 2020, respectively, compared to $1,433,823 and $4,299,032 during the three and nine months ended May 31, 2019, respectively, representing decreases of 38.9% and 18.8%, 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 32.4% and 20.3% to $18,782,233 and $68,531,897 during the three and nine months ended May 31, 2020, respectively, compared to $27,774,112 and $86,003,918 for the three and nine months ended May 31, 2019, 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 $620,106 were attributable to EXCOR during the nine months ended May 31, 2020, $643,154 attributable to EXCOR during the nine months ended May 31, 2019. NTIC anticipates that net sales of its joint ventures may continue to decrease significantly as a result of continued decreased demand as a result of the COVID-19 pandemic and is expected to have a significant adverse effect on NTIC’s equity in income from its joint ventures for the fourth quarter of fiscal 2020 and beyond.

Selling Expenses. NTIC’s selling expenses decreased 9.9% for the three months ended May 31, 2020 compared to the same period in fiscal 2019 due primarily to decreased travel expenses and other expenses due to work from home arrangements necessitated by the COVID-19 pandemic. NTIC’s selling expenses increased 5.0% for the nine months ended May 31, 2020 compared to the same period in fiscal 2019 due primarily to increased operating expenses associated with ZERUST® sales efforts, consisting primarily of personnel expenses. Selling expenses as a percentage of net sales increased to 25.5% and 22.6% for the three and nine months ended May 31, 2020, respectively, from 18.5% and 19.1% for the three and nine months ended May 31, 2019, respectively, primarily due to the decrease in net sales as previously described.

General and Administrative Expenses. NTIC’s general and administrative expenses decreased 12.4% and 5.4% for the three and nine months ended May 31, 2020, respectively, compared to the same respective periods in fiscal 2019 primarily due to decreased travel expenses and other expenses due to work from home arrangements necessitated by the COVID-19 pandemic, partially offset by a $170 thousand charge due to a loss on disposal of certain fixed assets and patents. As a percentage of net sales, general and administrative expenses increased to 22.7% and 17.6% for the three and nine months ended May 31, 2020, respectively, from 17.0% and 16.5% for the same respective periods in fiscal 2019. These increases were primarily due to the decrease in net sales as previously described.

Research and Development Expenses. NTIC’s research and development expenses decreased 5.5% for the three months ended May 31, 2020 compared to the same period in fiscal 2019 primarily due to decreased travel expenses and other expenses due to work from home arrangements necessitated by the COVID-19 pandemic. NTIC’s research and development expenses increased 4.0% for the nine months ended May 31, 2020 compared to the same period in fiscal 2019 primarily due to a slight increase in spending on personnel.

Interest (Expense) Income. NTIC incurred interest expense of $(73,378) during the three months ended May 31, 2020 compared to interest income of $18,949 during the three ended May 31, 2019. NTIC incurred interest income of $15,881 during the nine months ended May 31, 2020 compared to interest income of $40,666 during the nine months ended May 31, 2019. These changes were due primarily to volatile changes to the invested cash in a conservative bond fund.

(Loss) Income Before Income Tax Expense. NTIC incurred a loss before income tax expense of $(790,239) for the three months ended May 31, 2020 compared to income before income tax expense of $1,791,221 for the three months ended May 31, 2019. NTIC incurred income before income tax expense of $1,580,782 for the nine months ended May 31, 2020 compared to $5,486,542 for the nine months ended May 31, 2019.

Income Tax Expense. Income tax expense was $142,285 and $869,945 for the three and nine months ended May 31, 2020, respectively, compared to income tax expense of $150,257 and $652,331 during the three and nine months ended May 31, 2019, respectively. Income tax expense was calculated based on management’s estimate of NTIC’s annual effective income tax rate. The quarter-over-quarter increase in the Company’s effective income tax rate is primarily due to foreign withholding taxes paid on dividends received from NTIC’s joint ventures during the quarter. Dividends received from NTIC’s joint ventures do not represent a component of income before income tax expense. Therefore, to the extent dividends received from NTIC’s joint ventures exceed estimated amounts, foreign withholding taxes paid on such dividends result in an increase in the effective income tax rate in comparison to prior periods.

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 $19,706,983 and $22,178,126 at May 31, 2020 and August 31, 2019, 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 (Loss) Income Attributable to NTIC. Net loss attributable to NTIC was $(965,221), or $(0.11) per diluted common share, for the three months ended May 31, 2020, compared to net income attributable to NTIC of $1,482,149, or $0.16 per diluted common share, for the three months ended May 31, 2019, a decrease of $(2,447,370), or $0.27 per diluted common share. Net income attributable to NTIC decreased to $427,163, or $0.05 per diluted common share, for the nine months ended May 31, 2020, compared to $4,380,776, or $0.46 per diluted common share, for the nine months ended May 31, 2019, a decrease of $3,953,613, or $0.41 per diluted common share. These decreases were primarily the result of the decreases in income from joint venture operations during the current fiscal year periods compared to the prior fiscal year periods due to the impact of the COVID-19 pandemic.

NTIC anticipates that its earnings will be significantly adversely affected by the COVID-19 pandemic in the fourth quarter of fiscal 2020 and beyond and 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.

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, 2020 compared to the same periods in fiscal 2019.

Liquidity and Capital Resources

Sources of Cash and Working Capital. NTIC’s working capital, defined as current assets less current liabilities, was $28,135,178 at May 31, 2020, including $5,050,722 in cash and cash equivalents and $5,450,693 in available for sale securities, compared to $25,460,569 at August 31, 2019, including $5,856,758 in cash and cash equivalents and $3,565,258 in available for sale securities.

As of May 31, 2020, 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 December 16, 2019, the Company and PNC Bank extended the maturity date of the line of credit from January 7, 2020 to January 7, 2021. 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, 2020, 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 2020, NTIC expects to continue to invest directly and through its use of working capital in NTIC China, Zerust Mexico, NTI Europe, research and development, marketing efforts, 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, 2020 was $3,012,533, which resulted principally from NTIC’s net income, dividends received from joint ventures, stock-based compensation, depreciation, amortization, and a decrease in accounts receivable, partially offset by NTIC’s equity in income from joint ventures and an increase in inventory, accrued liabilities and accounts payable. 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, stock-based compensation, depreciation, amortization, and an increase in accounts payable and accounts receivable, partially offset by NTIC’s equity in income from joint ventures, an increase in inventory and a decrease in accrued liabilities.

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 a decrease in trade receivables and an increase in inventory as of May 31, 2020, compared to August 31, 2019. Trade receivables, excluding joint ventures, as of May 31, 2020 decreased $2,234,632, compared to August 31, 2019, primarily related to the timing of collections and the decrease in sales.

Outstanding trade receivables, excluding joint ventures balances, as of May 31, 2020 increased 9 days to an average of 77 days from balances outstanding from these customers as of August 31, 2019.

Outstanding trade receivables from joint ventures as of May 31, 2020 increased $32,904, compared to August 31, 2019 primarily due to the timing of payments. Outstanding balances from trade receivables from joint ventures decreased an average of 132 days to an average of 118 days from balances outstanding from these customers, compared to August 31, 2019. The average days outstanding of trade receivables from joint ventures as of May 31, 2020 were primarily due to the receivable balances at NTIC’s joint ventures in South Korea and Thailand.

Outstanding receivables for services provided to joint ventures as of May 31, 2020 decreased $391,880, compared to August 31, 2019, and the average days to pay increased an average of 11 days to an average of 93 days, compared to August 31, 2019.

Net cash used in investing activities for the nine months ended May 31, 2020 was $2,337,471, which was primarily the result of proceeds from the sale of available for sale securities, partially offset by the purchase of available for sale securities and the purchase of property and equipment. 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 financing activities for the nine months ended May 31, 2020 was $1,318,005 which resulted from dividends paid on NTIC common stock and a dividend paid to a non-controlling interest, partially offset by proceeds from NTIC’s employee stock repurchase plan. 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.

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, 2020. As of May 31, 2020, 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, 2020, 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: