Northern Technologies International Corporation
NORTHERN TECHNOLOGIES INTERNATIONAL CORP (Form: 10-Q, Received: 04/12/2013 08:01:47)
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 February 28, 2013
 
[  ] 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
Circle Pines, Minnesota    55014
(Address of principal executive offices) (Zip code)
 
(763) 225-6600
(Registrant’s telephone number including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES [x]    NO [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES [x]    NO [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer [ ]
Accelerated filer [ ]
Non-accelerated filer (Do not check if a smaller reporting company) [ ]
Smaller reporting company [x]
 
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 April 12, 2013, there were 4,421,870 shares of common stock of the registrant outstanding.

 
 

 
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
FORM 10-Q
February 28, 2013

TABLE OF CONTENTS
 
 
Description
 
Page
     
PART I.
FINANCIAL INFORMATION
 
     
 
     
 
     
 
 
   
 
     
 
     
 
     
     
     
     
PART II.
OTHER INFORMATION
 
     
     
     
     
     
     
     
     
   
_________________

This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections.  For more information, see “Part I. Financial Information – Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations– Forward-Looking Statements.”
 
 
1

 
_________________

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 subsidiaries, NTI Facilities, Inc. and Northern Technologies Holding Company, LLC, and its majority owned subsidiaries, Zerust Prevenção de Corrosão S.A. and NTI Asean LLC, all of which are consolidated on NTIC’s consolidated financial statements.
 
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 NTIC’s majority owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A., or NTIC’s majority owned subsidiary, NTI Asean LLC, which is a holding company that holds investments in eight entities that operate in the Association of Southeast Asian Nations (ASEAN) region, including the following countries:   China, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.
 
As used in this report, references to “Zerust Brazil” refer to NTIC’s majority owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A.
 
As used in this report, references to “NTI Asean” refer to NTIC’s majority owned holding company subsidiary,  NTI Asean LLC.
 
As used in this report, references to “HNTI” refer to NTIC’s joint venture in India, Harita NTI Limited.
 
As used in this report, references to “EXCOR” refer to NTIC’s primary joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH.
 
All trademarks, trade names or service marks referred to in this report are the property of their respective owners.
 
 
2

 
PART I - FINANCIAL INFORMATION
 
FINANCIAL STATEMENTS
 
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 2013 (UNAUDITED)
AND AUGUST 31, 2012 (AUDITED)

   
February 28,
2013
   
August 31,
2012
 
ASSETS
           
   CURRENT ASSETS:
           
Cash and cash equivalents
  $ 4,261,145     $ 4,137,547  
Receivables:
               
     Trade excluding joint ventures, less allowance for doubtful accounts of $20,000 at February 28, 2013 and August 31, 2012
    2,752,750       2,516,961  
Trade joint ventures
    982,009       734,543  
Fees for services provided to joint ventures
    2,437,920       1,316,933  
Income taxes
    109,677       58,129  
Inventories
    5,153,531       4,151,197  
Prepaid expenses
    640,286       548,331  
Deferred income taxes
    596,085       596,085  
Total current assets
    16,933,403       14,059,726  
                 
   PROPERTY AND EQUIPMENT, NET
    4,182,735       4,288,618  
                 
   OTHER ASSETS:
               
Investments in joint ventures
    22,189,562       21,461,492  
Deferred income taxes
    1,030,610       1,030,610  
Patents and trademarks, net
    1,027,097       961,181  
Other
    76,000       76,000  
            Total other assets
    24,323,269       23,529,283  
            Total assets
  $ 45,439,407     $ 41,877,627  
                 
LIABILITIES AND EQUITY
               
   CURRENT LIABILITIES:
               
Current portion of note payable
    77,090       76,120  
Accounts payable
    1,254,432       1,818,309  
Accrued liabilities:
               
Payroll and related benefits
    623,830       1,565,866  
Deferred joint venture royalties
    288,000       288,000  
Other
    100,484       251,350  
Total current liabilities
    2,343,836       3,999,645  
                 
   NOTE PAYABLE, NET OF CURRENT PORTION (Note 7)
    894,384       933,413  
                 
   COMMITMENTS AND CONTINGENCIES (Note 13)
               
                 
   EQUITY:
               
Preferred stock, no par value; authorized 10,000 shares; none issued and  outstanding
           
Common stock, $0.02 par value per share; authorized 10,000,000 shares; issued and outstanding 4,418,821 and 4,403,656, respectively
    88,376       88,073  
Additional paid-in capital
    11,399,966       11,130,966  
Retained earnings
    26,084,067       25,260,034  
Accumulated other comprehensive income
    618,099       277,583  
           Stockholders’ equity
    38,190,508       36,756,656  
Non-controlling interest
    4,010,679       187,913  
           Total equity
    42,201,187       36,944,569  
           Total liabilities and equity
  $ 45,439,407     $ 41,877,627  
 
See notes to consolidated financial statements.
 
 
3

 
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2013 AND FEBRUARY 29, 2012

   
Three Months Ended
   
Six Months Ended
 
   
February 28,
2013
   
February 29,
2012
   
February 28,
2013
   
February 29,
2012
 
NET SALES:
                       
       Net sales, excluding joint ventures
  $ 4,485,203     $ 4,125,618     $ 9,255,590     $ 8,403,261  
       Net sales, to joint ventures
    761,147       848,710       1,282,507       1,403,181  
             Total net sales
    5,246,350       4,974,328       10,538,097       9,806,442  
                                 
Cost of goods sold
    3,633,913       3,480,082       7,324,885       6,689,558  
     Gross profit
    1,612,437       1,494,246       3,213,212       3,116,884  
                                 
JOINT VENTURE OPERATIONS:
                               
      Equity in income of joint ventures
    1,138,438       1,224,675       2,292,734       2,582,355  
      Fees for services provided to joint ventures
    1,770,881       1,298,126       3,617,158       2,743,378  
         Total joint venture operations
    2,909,319       2,522,801       5,909,892       5,325,733  
                                 
OPERATING EXPENSES:
                               
      Selling expenses
    1,174,065       1,014,082       2,345,160       2,122,568  
      General and administrative expenses
    1,143,987       1,100,812       2,392,683       2,370,825  
      Expenses incurred in support of joint ventures
    321,456       235,557       691,143       435,821  
      Research and development expenses
    912,393       974,777       1,850,599       1,789,082  
             Total operating expenses
    3,551,901       3,325,228       7,279,585       6,718,296  
                                 
OPERATING INCOME
    969,855       691,819       1,843,519       1,724,321  
                                 
INTEREST INCOME
    22,288       12,631       47,634       20,691  
INTEREST EXPENSE
    (6,988 )     (7,284 )     (13,462 )     (13,250 )
OTHER INCOME
          6,825             13,650  
                                 
INCOME BEFORE INCOME TAX EXPENSE
    985,155       703,991       1,877,691       1,745,412  
                                 
INCOME TAX EXPENSE
    240,000       100,000       374,000       206,000  
                                 
NET INCOME
    745,155       603,991       1,503,691       1,539,412  
                                 
NET INCOME ATTRIBUTABLE TO NON CONTROLLING INTEREST
    310,745       (2,202 )     679,659       (25,538 )
                                 
NET INCOME ATTRIBUTABLE TO NTIC
  $ 434,410     $ 606,193     $ 824,032     $ 1,564,950  
                                 
NET INCOME PER COMMON SHARE:
                               
Basic
  $ 0.10     $ 0.14     $ 0.19     $ 0.36  
Diluted
  $ 0.10     $ 0.14     $ 0.18     $ 0.35  
                                 
WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:
                               
Basic
    4,418,821       4,398,356       4,409,954       4,366,932  
Diluted
    4,485,076       4,466,435       4,460,197       4,440,001  
 
See notes to consolidated financial statements.

 
4

 
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2013 AND FEBRUARY 29, 2012

   
Three Months Ended
   
Six Months Ended
 
   
February 28,
2013
   
February 29,
2012
   
February 28,
2013
   
February 29,
2012
 
NET INCOME
  $ 745,155     $ 603,991     $ 1,503,691     $ 1,539,412  
     OTHER COMPREHENSIVE INCOME (LOSS)      –  FOREIGN CURRENCY  TRANSLATION    ADJUSTMENT
    (25,641 )     (65,805 )     395,544       (1,253,876 )
                                 
COMPREHENSIVE INCOME (LOSS)
    719,514       538,186       1,899,235       285,536  
    COMPREHENSIVE INCOME (LOSS)  ATTRIBUTABLE TO NONCONTROLLING  INTERESTS
    331,252       300       734,687       (32,842 )
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO STOCKHOLDERS
  $ 388,262     $ 537,886     $ 1,164,548     $ 318,378  
 
See notes to consolidated financial statements.
 
 
5

 
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2013 AND FEBRUARY 29, 2012

   
Six Months Ended
 
   
February 28,
 2013
   
February 29,
 2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,503,691     $ 1,539,412  
Adjustments to reconcile net income to net cash used in operating activities:
               
Expensing of fair value of stock options vested
    137,550       145,046  
Depreciation expense
    211,874       163,171  
Amortization expense
    35,122       77,493  
Loss on disposal of assets
    13,845        
Equity in income from joint ventures
    (2,292,734 )     (2,582,355 )
Changes in current assets and liabilities:
               
Receivables:
               
Trade, excluding joint ventures
    (223,731 )     (290,512 )
Trade, joint ventures
    (247,466 )     (316,174 )
Fees for services receivables, joint ventures
    221,099       164,795  
Income taxes
    (51,111 )     (822 )
    Inventories
    (990,720 )     (111,041 )
    Prepaid expenses and other
    (91,869 )     (425,711 )
    Accounts payable
    (574,037 )     (902,749 )
    Income tax payable
    (2,748 )     (51,921 )
    Accrued liabilities
    (1,094,446 )     (198,639 )
Net cash used in operating activities
    (3,445,681 )     (2,790,007 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Investments in joint ventures
           
Dividends received from joint ventures
    2,953,435       3,036,344  
Additions to property and equipment
    (102,259 )     (80,698 )
Effect of NTI Asean consolidation on cash (Note 2)
    1,612,768        
Additions to patents
    (114,882 )     (85,176 )
Net cash provided by investing activities
    4,349,062       2,870,470  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Repayment of note payable
    (38,059 )     (38,059 )
Dividend received by non-controlling interest
    (872,841 )      
Proceeds from employee stock purchase plan
    28,938       22,414  
Proceeds from exercise of stock options
    102,815       15,040  
           Net cash provided by financing activities
    (779,147 )     (605 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH:
    (636 )     (10,422 )
                 
                 
NET  INCREASE IN CASH AND CASH EQUIVALENTS
    123,598       69,436  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    4,137,547       3,266,362  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 4,261,145     $ 3,335,798  
 
See notes to consolidated financial statements.
 
 
6

 
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 February 28, 2013 and August 31, 2012 and the results of their operations for the three and six months ended February 28, 2013 and February 29, 2012 and their cash flows for the six months ended February 28, 2013 and February 29, 2012, in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).
 
Certain amounts reported in the consolidated financial statements for the previous reporting periods have been reclassified to conform to the current period presentation.  These reclassifications did not have a material impact on the Company’s previously reported consolidated balance sheets or statements of cash flows.
 
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, 2012.  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 six months ended February 28, 2013 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2013.
 
The Company evaluates events occurring after the date of the consolidated financial statements requiring recording or disclosure in the consolidated financial statements.
 
2.           NTI ASEAN
 
NTI Asean LLC (NTI Asean) is an entity that holds investments in eight entities operating in the Association of Southeast Asian Nations (ASEAN) region, including the following countries: China, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.
 
Prior to September 1, 2012, the Company owned 50% of NTI Asean, which it considered to be less than a majority, of the equity and voting rights and accounted for its investment using the equity method.  On September 1, 2012, the Company obtained an additional 10% ownership interest in NTI Asean in exchange for a license agreement, and thereafter holds 60% of the equity and voting rights of NTI Asean.
 
The Company accounted for the transaction resulting in the additional ownership as a business combination.  Beginning in the first quarter of fiscal 2013, the Company consolidated the results of NTI Asean.  Immediately prior to the transaction, the Company re-measured the fair value of NTI Asean and determined that there was no difference between the fair value and the book value of the entity.  As a result, there was no accounting impact related to the business combination in the consolidated statements of operations.
 
The Company determined the fair value of NTI Asean using the capitalized income method, including a capitalization rate of 25%.  The allocation of the total transaction amount was as follow:
 
Net assets acquired (liabilities assumed):
     
Cash and cash equivalents
  $ 1,613,000  
Accounts receivables
    1,342,000  
Investments in joint ventures
    4,967,000  
Value of assets
  $ 7,922,000  
Purchase price:
       
Fair value of non-controlling interest
  $ 3,961,000  
Value of previously held interest
    3,961,000  
Total consideration
  $ 7,922,000  

 
7

 
The following is a summary of certain line items of the Company’s consolidated statement of operations for the three months ended February 29, 2012 as reported and on a pro forma basis, assuming the consolidation of NTI Asean on the Company’s consolidated financial statements as of the beginning of such period:
 
         
NTI
   
Eliminated in
       
   
As Reported
   
Asean
   
Consolidation
   
Pro Forma
 
Net sales                                                                
  $ 4,974,328     $     $     $ 4,974,328  
Cost of goods sold                                                                
    3,480,082                   3,480,082  
Gross profit                                                                
    1,494,246                   1,494,246  
Joint venture operations                                                                
    2,522,801       868,382       (322,654 )     3,068,529  
Operating expenses                                                                
    3,325,228       20,470             3,345,698  
Operating income                                                                
    691,819       847,912       (322,654 )     1,217,077  
Income before income tax expense                                                                
    703,991       847,912       (322,654 )     1,229,249  
Income tax expense                                                                
    100,000       95,500             195,500  
Net income                                                                
    603,991       752,412       (322,654 )     1,033,749  
Net income attributable to non-controlling interest
    (2,202 )     (300,965 )           (303,167 )
Net income attributable to NTIC                                                                
    606,193       451,447       (322,654 )     734,804  
Net income per common diluted share                                                                
  $ 0.13     $ 0.10     $ (0.08 )   $ 0.16  

The following is a summary of certain line items of the Company’s consolidated statements of operations for the six months ended February 29, 2012 as reported and on a pro forma basis, assuming the consolidation of NTI Asean on the Company’s consolidated financial statements as of the beginning of such period:
 
         
NTI
   
Eliminated in
       
   
As Reported
   
Asean
   
Consolidation
   
Pro Forma
 
Net sales                                                              
  $ 9,806,442     $     $     $ 9,806,442  
Cost of goods sold                                                              
    6,689,558                   6,689,558  
Gross profit                                                              
    3,116,884                   3,116,884  
Joint venture operations                                                              
    5,325,733       1,699,280       (692,115 )     6,332,898  
Operating expenses                                                              
    6,718,296       23,135             6,741,431  
Operating income                                                              
    1,724,321       1,676,145       (692,115 )     2,708,351  
Income before income tax expense                                                              
    1,745,412       1,676,145       (692,115 )     2,729,442  
Income tax expense                                                              
    206,000       184,811             390,811  
Net income                                                              
    1,539,412       1,491,334       (692,115 )     2,338,631  
Net income attributable to non-controlling interest
    (25,538 )     (596,534 )           (622,072 )
Net income attributable to NTIC                                                              
    1,564,950       894,800       (692,115 )     1,767,635  
Net income per common diluted share                                                              
  $ 0.35     $ 0.20     $ (0.16 )   $ 0.40  

3.           INVENTORIES
 
Inventories consisted of the following:
 
   
February 28,
2013
   
August 31,
2012
 
Production materials
  $ 952,997     $ 1,462,615  
Finished goods
    4,200,534       2,688,582  
    $ 5,153,531     $ 4,151,197  

 
8

 
4.           PROPERTY AND EQUIPMENT, NET
 
Property and equipment, net consisted of the following:
 
   
February 28,
2013
   
August 31,
2012
 
Land
  $ 310,365     $ 310,365  
Buildings and improvements
    3,556,041       3,406,674  
Machinery and equipment
    2,861,709       2,908,021  
      6,728,115       6,625,060  
Less accumulated depreciation
    (2,545,380 )     (2,336,442 )
    $ 4,182,735     $ 4,288,618  

5.           PATENTS AND TRADEMARKS, NET
 
Patents and trademarks, net consisted of the following:
 
   
February 28,
2013
   
August 31,
2012
 
Patents and trademarks
  $ 2,045,102     $ 1,945,785  
Less accumulated amortization
    (1,018,005 )     (984,604 )
    $ 1,027,097     $ 961,181  

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 is estimated to approximate $80,000 in each of the next five fiscal years.
 
6.           INVESTMENTS IN JOINT VENTURES
 
The 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 approximate U.S. GAAP in all material respects.  All material profits recorded on sales from the Company to its joint ventures of goods that remain in inventory, 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), China, NTI Asean and all of the Company’s other joint ventures, are summarized as follows:
 
   
At February 28, 2013
 
   
Total
   
EXCOR
   
China
   
All Other
 
Current assets
  $ 61,997,739     $ 22,196,110     $ 12,442,364     $ 27,359,265  
Total assets
    68,522,275       24,625,927       12,474,170       31,422,178  
Current liabilities
    19,532,691       3,848,126       5,094,516       10,590,049  
Noncurrent liabilities
    4,210,364             856,978       3,353,386  
Joint ventures’ equity
    44,779,219       20,777,801       6,522,675       17,478,742  
Northern Technologies International Corporation’s share of joint ventures’ equity
    22,189,562       10,388,902       3,261,338       8,539,322  
Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings
  $ 20,075,092     $ 10,357,997     $ 3,215,436     $ 6,501,659  

 
9

 
   
At August 31, 2012
 
   
Total
   
EXCOR
   
NTI ASEAN
   
All Other
 
Current assets
  $ 61,973,725     $ 24,357,139     $ 15,358,967     $ 22,257,619  
Total assets
    68,585,974       26,620,589       15,522,456       26,442,929  
Current liabilities
    18,686,181       4,749,574       5,763,857       8,172,750  
Noncurrent liabilities
    4,700,458             1,055965       3,644,493  
Joint ventures’ equity
    45,199,335       21,871,015       8,702,634       14,625,686  
Northern Technologies International Corporation’s share of joint ventures’ equity
    21,461,492       10,935,509     $ 3,685,404       6,840,579  
Northern Technologies International Corporation’s share of joint ventures’ undistributed earnings
  $ 19,403,150     $ 10,904,604     $ 3,314,445     $ 5,184,101  

   
Six Months Ended February 28, 2013
 
   
Total
   
EXCOR
   
China
   
All Other
 
Net sales
  $ 54,247,135     $ 17,451,153     $ 6,929,260     $ 29,866,722  
Gross profit
    25,852,537       9,105,579       3,290,660       13,456,298  
Net income
    4,728,680       3,260,575       524,546       943,559  
Northern Technologies International Corporation’s share of equity in income of joint ventures
  $ 2,292,734     $ 1,631,125     $ 262,148     $ 399,461  

   
Six Months Ended February 29, 2012
 
   
Total
   
EXCOR
   
NTI ASEAN
   
All Other
 
Net sales
  $ 54,792,662     $ 16,958,519     $ 10,482,144     $ 27,351,999  
Gross profit
    25,945,925       8,860,381       4,705,397       12,380,147  
Net income
    4,798,435       3,158,682       1,276,056       363,697  
Northern Technologies International Corporation’s share of equity in income of joint ventures
  $ 2,582,355     $ 1,576,496     $ 692,115     $ 313,744  
 
*Prior to September 1, 2012, the Company owned 50% of NTI Asean, which included the joint venture in China, and disclosed its financial information accordingly. On September 1, 2012, the Company obtained an additional 10% ownership interest in NTI Asean and has consolidated the results of NTI Asean subsequent to that date.  As a result the Company now discloses the financial information for only its joint venture in China and not all of NTI Asean accordingly.
 
The Company records expenses that are directly attributable to the joint ventures on the consolidated statements of operations on the line “Expenses incurred in support of joint ventures”.  The expenses include items such as employee compensation and benefit expenses, travel expense and consulting expense.
 
The Company did not make any other joint venture investments during the six months ended February 28, 2013 and February 29, 2012.
 
7.           CORPORATE DEBT
 
As of February 28, 2013, Northern Technologies Holding Company, LLC (NTI LLC) had a term loan with a principal amount of $971,474 outstanding that NTI LLC obtained from PNC Bank, National Association (PNC Bank) in connection with the purchase of NTIC’s corporate headquarters in September 2006.  The term loan matures on January 10, 2016, bears interest at an annual rate based on the daily LIBOR rate plus 2.15% and is payable in consecutive monthly installments equal to approximately $6,343 (inclusive of principal but exclusive of interest).  The term loan is secured by a first lien on the real estate and building owned by NTI LLC and all of the assets of the Company and is guaranteed by the  Company.
 
 
10

 
The Company has a revolving line of credit with PNC Bank of $3,000,000.  No amounts were outstanding under the line of credit as of February 28, 2013 and August 31, 2012.  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. Interest is payable in arrears (a) for the portion of advances bearing interest under the prime rate on the last day of each month during the term thereof and (b) for the portion of advances bearing interest under the LIBOR option on the last day of the respective LIBOR interest period selected for such advance.  Any unpaid interest is payable on the maturity date.  As of February 28, 2013, the interest rate was 2.93% and the weighted average rate was 3.04% for the six months ended February 28, 2013.  As of February 29, 2012, the interest rate was 3.24% and the weighted average rate was 3.13% for the six months ended February 29, 2012.  The revolving line of credit is secured by cash, receivables and inventory.
 
The term loan and the line of credit are governed under separate loan agreements (collectively, the Loan Agreements).  The Loan Agreements contain 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 Agreements, the Company is subject to a minimum fixed charge coverage ratio of 1.10:1.00.  As of February 28, 2013, the Company was in compliance with all debt covenants.
 
On December 11, 2012, PNC Bank extended the maturity date of the line of credit from January 9, 2013 to January 8, 2014, and waived a technical covenant default by the Company to deliver quarterly compliance certificates.  All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same.
 
8.           STOCKHOLDERS’ EQUITY
 
During the six months ended February 28, 2013, the Company did not purchase or retire any shares of its common stock.  The following stock options to purchase shares of common stock were exercised during the six months ended February 28, 2013:
 
Options Exercised
Exercise Price
25,140
$9.95
1,734
7.65

The Company granted stock options under the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan (the 2007 Plan) to purchase an aggregate of 118,294 shares of its common stock to various employees and directors during the six months ended February 28, 2013.  The weighted average per share exercise price of the stock options is $10.25, which is equal to the fair market value of the Company’s common stock on the date of grant.
 
During the six months ended February 29, 2012, the Company did not purchase or retire any shares of its common stock.  The following stock options to purchase shares of common stock were exercised during the six months ended February 29, 2012:
 
Options Exercised
Exercise Price
            1,966
$           7.65

 
11

 
The Company granted stock options under the 2007 Plan to purchase an aggregate of 26,000 shares of its common stock to various employees and directors during the six months ended February 29, 2012.  The weighted average per share exercise price of the stock options is $16.45, which is equal to the fair market value of the Company’s common stock on the date of grant.
 
During the six months ended February 29, 2012, the Company paid stock bonuses under the 2007 Plan for an aggregate of 42,707 shares of its common stock to various employees at a grant price of $14.42 per share.  The aggregate fair value of the shares of the Company’s common stock as of the date of payment of the stock bonuses was $615,830, based on the closing sale price of a share of the Company’s common stock on the date of payment. The fair value of common stock granted during the six months ended February 29, 2012 was based on fiscal 2011 performance and was included in accrued liabilities at August 31, 2011.
 
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.
 
Options to purchase shares of common stock of 48,000 were excluded from the computation of common share equivalents for the three and six months ended February 28, 2013, as the exercise prices of such options were greater than market price of a share of common stock.  Options to purchase shares of common stock of 26,000 were excluded from the computation of common share equivalents for the three and six months ended February 29, 2012, as the exercise prices of such options were greater than market price of a share of common stock.
 
The following is a reconciliation of the earnings per share computation for the three and six months ended February 28, 2013 and February 29, 2012:
 
   
Three Months Ended
   
Six Months Ended
 
Numerators:
 
February 28,
2013
   
February 29,
2012
   
February 28,
2013
   
February 29,
2012
 
Net income attributable to NTIC
  $ 434,410     $ 606,193     $ 824,032     $ 1,564,950  
                                 
Denominator:
                               
Basic – weighted shares outstanding
    4,418,821       4,398,356       4,409,954       4,366,932  
Weighted shares assumed upon exercise of stock options
    66,255       68,079       50,243       73,069  
Diluted – weighted shares outstanding
    4,485,076       4,466,435       4,460,197       4,440,001  
Basic earnings per share:
  $ 0.10     $ 0.14     $ 0.19     $ 0.36  
Diluted earnings per share:
  $ 0.10     $ 0.14     $ 0.18     $ 0.35  
 
 
12

 
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.  Earnings per common share were based on the weighted average number of common shares outstanding during the periods when computing the basic earnings per share. When dilutive, stock options are included as equivalents using the treasury stock market method when computing the diluted earnings per share.
 
10.           STOCK-BASED COMPENSATION
 
The Company has two stock-based compensation plans under which stock options and other stock-based awards have been granted, including the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan and the Northern Technologies International Corporation Employee Stock Purchase Plan (the ESPP).  The Compensation Committee of the Board of Directors and the Board of Directors administers these plans.
 
The 2007 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, stock unit awards, performance awards and stock bonuses to eligible recipients to enable the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to reward those individuals who contribute to the achievement of the Company’s economic objectives.  Subject to adjustment as provided in the 2007 Plan, up to a maximum of 800,000 shares of the Company’s common stock are issuable under the 2007 Plan.  Options granted under the 2007 Plan generally have a term of five years and become exercisable over a three- or four-year period beginning on the one-year anniversary 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.  To date, only stock options and stock bonuses have been granted under the 2007 Plan.
 
The maximum number of shares of common stock of the Company available for issuance under the ESPP is 100,000 shares, subject to adjustment as provided in the ESPP.  The ESPP provides for 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 118,294 and 26,000 shares of its common stock during the six months ended February 28, 2013 and February 29, 2012, 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.  Based on these valuations, the Company recognized compensation expense of $137,550 and $145,046 during the six months ended February 28, 2013 and February 29, 2012, respectively, related to the options that vested during such time period.  The stock-based expense recorded reduced after-tax net income per share by $0.03 for each of the six months ended February 28, 2013 and February 29, 2012, respectively.  As of February 28, 2013, the total compensation cost for non-vested options not yet recognized in the Company’s consolidated statements of operations was $478,992 net of estimated forfeitures.  Additional stock-based compensation expense of $173,220 is expected through the remainder of fiscal year 2013, and expense of $185,815 and $99,964 is expected to be recognized during fiscal 2014 and fiscal 2015, respectively.  Future option grants will impact the compensation expense recognized.
 
The Company currently estimates a ten percent forfeiture rate for stock options and continually reviews this estimate for future periods.
 
 
13

 
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:
 
   
 
February 28,
2013
 
February 29,
2012
Dividend yield
  0.00%       0.00 %
Expected volatility
  48.0%       48.8 %
Expected life of option (years)
5
-
10    
5
 
Average risk-free interest rate
  0.71%       1.31 %

The weighted average per share fair value of options granted during six months ended February 28, 2013 and February 29, 2012 was $5.53 and $7.14, respectively.  The weighted average remaining contractual life of the options outstanding as of February 28, 2013 and February 29, 2012 was 4.58 years and 2.07 years, respectively.
 
11.           GEOGRAPHIC AND SEGMENT INFORMATION
 
Net sales by geographic location as a percentage of total consolidated net sales for the three and six months ended February 28, 2013 and February 29, 2012 were as follows:
 
   
Three Months Ended
   
Six Months Ended
 
   
February 28,
2013
   
February 29,
2012
   
February 28,
2013
   
February 29,
2012
 
Inside the U.S.A. to unaffiliated customers
    65.6 %     58.9 %     68.4 %     63.3 %
Outside the U.S.A to:
                               
Joint ventures in which the Company is a shareholder directly and indirectly
    18.2 %     11.9 %     16.8 %     13.7 %
Unaffiliated customers
    16.2 %     29.2 %     14.8 %     23.0 %
      100.0 %     100.0 %     100.0 %     100.0 %

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 months ended February 28, 2013 and February 29, 2012 were as follows:
 
   
Three Months Ended
 
   
February 28,
2013
   
% of Total Fees
for Services
Provided to
Joint Ventures
   
February 29,
2012
   
% of Total Fees
for Services
Provided to
Joint Ventures
 
China*
  $ 450,586       25.4 %   $       0.0 %
Germany
    249,513       14.1 %     251,387       19.4 %
Japan
    169,205       9.6 %     214,984       16.6 %
Poland
    154,839       8.7 %     130,470       10.1 %
Thailand*
    148,303       8.4 %           0.0 %
France
    147,896       8.3 %     127,004       9.8 %
Korea**
    123,388       7.0 %     532       0.0 %
Sweden
    77,627       4.4 %     148,277       11.4 %
Finland
    72,329       4.1 %     118,911       9.2 %
United Kingdom
    35,754       2.0 %     80,639       6.2 %
India
          0.0 %     163,689       12.6 %
Other
    141,441       8.0 %     62,233       4.8 %
    $ 1,770,881       100.0 %   $ 1,298,126       100.0 %
_______________
Joint venture owned by NTI Asean.
 
 
14

 
**
Joint venture owned by NTI Asean as of February 28, 2013, but not as of February 29, 2012.  NTI Asean results are not included on the consolidated financial statements for the three months ended February 29, 2012. (See Note 2)

   
Six Months Ended
 
   
February 28,
2013
   
% of Total Fees
for Services
Provided to
Joint Ventures
   
February 29,
2012
   
% of Total Fees
for Services
Provided to
Joint Ventures
 
China*
  $ 943,897       26.1 %   $       0.0 %
Germany
    492,213       13.6 %     500,833       18.3 %
Japan
    371,186       10.3 %     503,522       18.4 %
Thailand*
    301,989       8.4 %           0.0 %
France
    276,398       7.6 %     268,643       9.8 %
Poland
    266,311       7.4 %     228,298       8.3 %
Korea**
    262,131       7.2 %     76,997       2.8 %
Sweden
    164,619       4.6 %     304,934       11.1 %
Finland
    160,180       4.4 %     251,407       9.2 %
United Kingdom
    102,812       2.8 %     160,138       5.8 %
India
          0.0 %     299,844       10.9 %
Other
    275,422       7.6 %     148,762       5.4 %
    $ 3,617,158       100.0 %   $ 2,743,378       100.0 %
________________
Joint venture owned by NTI Asean.
**
Joint venture owned by NTI Asean as of February 28, 2013, but not as of February 29, 2012.  NTI Asean results are not included on the consolidated financial statements for the six months ended February 29, 2012. (See Note 2)

The following table sets forth the Company’s net sales for the three and six months ended February 28, 2013 and February 29, 2012 by segment:
 
   
Three Months Ended
   
Six Months Ended
 
   
February 28,
2013
   
February 29,
2012
   
February 28,
2013
   
February 29,
2012
 
ZERUST® sales
  $ 4,710,412     $ 4,570,779     $ 9,505,695     $ 9,023,425  
Natur-Tec™ sales
    535,938       403,549       1,032,402       783,017  
    $ 5,246,350     $ 4,974,328     $ 10,538,097     $ 9,806,442  

The following table sets forth the Company’s cost of goods sold for the three and six months ended February 28, 2013 and February 29, 2012 by segment:
 
   
Three Months Ended
   
Six Months Ended
 
   
February 28,
2013
   
% of
Product
Sales*
   
February 29,
2012
   
% of
Product
Sales*
   
February 28,
2013
   
% of
Product
Sales*
   
February 29,
2012
   
% of
Product
Sales*
 
Direct cost of goods sold
                                               
   ZERUST®
  $ 2,623,070       55.7 %   $ 2,569,588       56.2 %   $ 5,267,365       55.4 %   $ 5,027,387       55.7 %
   Natur-Tec®
    453,147       84.6 %     361,704       89.6 %     892,820       86.5 %     658,265       84.1 %
Indirect cost of goods sold
    557,696             548,790             1,164,700             1,003,906        
Total net cost of goods sold
  $ 3,633,913             $ 3,480,082             $ 7,324,885             $ 6,689,558          
______________
*
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’s management 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.

 
15

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

The geographical distribution of key financial statement data is as follows:
 
   
At February 28, 2013
 
   
Brazil
   
North
America
   
Total
 
Total assets
  $ 1,456,793     $ 43,982,614     $ 45,439,407  
 
   
At August 31, 2012
 
   
Brazil
   
North
America
   
Total
 
Total assets
  $ 1,744,693     $ 40,132,934     $ 41,877,627  
 
   
Six Months Ended February 28, 2013
 
   
Brazil
   
North
America
   
Total
 
Net sales
  $ 1,131,469     $ 9,406,628     $ 10,538,097  
Operating income
  $ (106,759 )   $ 1,950,278     $ 1,843,519  

   
Six Months Ended February 29, 2012
 
   
Brazil
   
North
America
   
Total
 
Net sales
  $ 1,216,532     $ 8,589,910     $ 9,806,442  
Operating income
  $ (173,651 )   $ 1,897,972     $ 1,724,321  
 
Total assets located in Brazil primarily consist of cash and cash equivalents, customer receivables and inventory.  These assets 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.
 
12.           RESEARCH AND DEVELOPMENT
 
The Company expenses all costs related to product research and development as incurred.   The Company incurred $1,850,599 and $1,789,082 of expense during the six months ended February 28, 2013 and February 29, 2012, respectively, in connection with its research and development activities.   These costs related to product research and development are net of reimbursements related to certain research and development contracts of $137,364 and $228,576 for the six months ended February 28, 2013 and February 29, 2012, respectively.  The net fees are accounted for in the “Research and Development Expenses” section of the consolidated statements of operations.
 
The Company has certain research and development contracts.  The Company accrues proceeds received under such contracts and offsets research and development expenses incurred in equal installments over the timelines associated with completion of the contracts’ specific objectives and milestones. At February 28, 2013, the Company had $85,418 as a receivable, and as of August 31, 2012, the Company had $96,861 of deferred amounts in other accrued liabilities as the Company had not yet performed under the obligations of the contract at that time.
 
 
16

 
13.           COMMITMENTS AND CONTINGENCIES
 
On August 31, 2012, the Board of Directors of the Company, upon recommendation of the Compensation Committee of the Board of Directors, approved the material terms of an annual bonus plan for the Company’s executive officers and certain officers and employees for the fiscal year ending August 31, 2013.  For fiscal 2013 as in past years, the total amount available under the bonus plan will be up to 25% of 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), assuming the achievement of at least a minimum Adjusted EBITOI, which is generally 70% of a budgeted target Adjusted EBITOI for fiscal 2013.  For each plan participant, 50% of the amount of the participant’s individual bonus payout will be determined based upon the participant’s individual allocation percentage of the total amount available under the bonus plan and 50% of the participant’s payout will be determined based upon the participant’s achievement of certain pre-established but more qualitative individual performance objectives.  The payment of bonuses under the plan are discretionary and may be paid to executive officer participants in both cash and shares of NTIC common stock, the exact amount and percentages of which will be 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 2013.  There was $275,000 for management bonuses accrued for six months ended February 28, 2013 compared to a management bonus accrual of $542,720 for the six months ended February 29, 2012.
 
The Company leases property with future lease payments as follows: fiscal 2013 - $119,250; fiscal 2014 - $59,500 and thereafter - $0.
 
Three joint ventures accounted for 54.2% and 55.3% of the Company’s trade joint venture receivables at February 28, 2013 and August 31, 2012, respectively.
 
From time to time, the Company is subject to various claims and legal actions in the ordinary course of its business.  The Company is not currently involved in any legal proceeding in which the Company believes, based on information currently available, that there is a reasonable possibility of a material loss.
 
 
17

 
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.” 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 55 countries either directly or via a network of majority owned 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® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 35 years, and more recently, has targeted and expanded into the oil and gas industry.  NTIC also sells a portfolio of bio-based and biodegradable (compostable) polymer resin compounds and finished products marketed under the Natur-Tec® brand.  These products are intended to reduce NTIC’s customers’ carbon footprint and provide environmentally sound disposal options.
 
NTIC’s ZERUST® rust and corrosion inhibiting products include plastic and paper packaging, liquids and coatings, rust removers and cleaners, diffusers and variations of these products designed specifically for the oil and gas industry.   NTIC’s 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 technical requirements.  In North America, NTIC sells its ZERUST® corrosion prevention solutions through a direct sales force as well as a network of independent distributors and agents.  Internationally, NTIC sells its ZERUST® corrosion prevention solutions through its majority owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A. (Zerust Brazil), its majority owned joint venture holding company for NTIC’s joint venture investments in the Association of Southeast Asian Nations (ASEAN) region, NTI Asian LLC (NTI Asean), and joint venture arrangements in North America and Europe.
 
One of NTIC’s strategic initiatives is to expand into and penetrate other markets for its ZERUST® corrosion prevention solutions.  For the past several years, NTIC has focused its sales and marketing efforts on the oil and gas industry since the infrastructure that supports that industry is typically constructed using metals that are highly susceptible to corrosion and 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.
 
Petroleo Brasileiro S.A. (Petrobras), an oil company located in Brazil, has conducted extensive multi-year product field trials of NTIC’s ZERUST® rust and corrosion inhibiting products against competitive alternatives.  During fiscal 2010, Zerust Brazil received a Phase 1 contract for an initial implementation of $1.4 million in ZERUST® products which was delivered in fiscal 2010 and fiscal 2011.  During fiscal 2011, Zerust Brazil signed a Phase 2 contract with Petrobras to supply $2.4 million in ZERUST® products.  During fiscal 2012, Petrobras expanded this Phase 2 contract to supply an additional $657,000 in ZERUST® products, bringing the total Phase 2 contract value to $3.1 million in ZERUST® products, which were delivered in fiscal 2012.  During first quarter of fiscal 2013, Zerust Brazil signed a Phase 3 contract with Petrobras to supply $3.7 million in ZERUST® products. While NTIC initially had anticipated that Petrobras would fulfill this Phase 3 contract in one large order prior to the end of fiscal 2013, based on NTIC’s recent discussions with Petrobras, NTIC believes that Petrobras intends to place a larger number of smaller orders during the remainder of fiscal 2013 and fiscal 2014, rather than one large order prior to the end of fiscal 2013 as NTIC previously had anticipated.
 
 
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NTIC is also pursuing opportunities to market its ZERUST® rust and corrosion prevention solutions to other targeted potential customers in the oil and gas industry across several geographies through NTIC’s joint venture partners as well as other strategic partners.  NTIC believes that sales of its ZERUST® corrosion prevention solutions to customers in the oil and gas industry require long sales cycles that include trial periods of at least one year with each customer, followed by a slow integration process thereafter.
 
Natur-Tec® bio-based and biodegradable 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 include 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 fully biodegradable in a composting environment and are currently being used to produce finished products including shopping and grocery bags, lawn and leaf bags, can liners, pet waste collection bags, cutlery, packaging foam 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 some of its joint ventures.
 
During fiscal 2012, NTIC’s joint venture in India, Harita NTI Limited (HNTI) entered into an agreement to supply a major global apparel brand compostable packaging for branded garments. HNTI is also pursuing bioplastic opportunities in food and personal care product packaging. During fiscal 2011, NTIC entered into an agreement with Italy-based Naturfuels s.r.l. to distribute its Natur-Tec ® bioplastic materials and products in the Italian market.  Under the terms of the distribution agreement, NTIC supplies Naturfuels with patented high-strength Natur-Tec ® film grade resin compounds suited to producing  compostable shopping and garbage bags on conventional plastic film production equipment. In 2011, the Italian government passed legislation banning the use of non-biodegradable disposable plastic shopping bags. However, enforcement of this law was delayed to allow Italian bag manufacturers to exhaust their current supply of conventional polyolefinic resins.  Consequently, significant sales of these to Natur-Tec ® film grade resin compounds to Naturfuels are not expected until fiscal 2014.
 
NTIC’s Joint Venture Network
 
NTIC participates in 23 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 sell NTIC’s Natur-Tec® resin compounds.  NTIC historically has funded its investments in joint ventures with cash generated from operations.
 
NTIC’s receipt of funds from its joint ventures is dependent upon fees for services that NTIC provides to its joint ventures, based primarily on the revenues of the joint ventures, and NTIC’s receipt of dividend distributions from the joint ventures.  NTIC receives fees for services provided to its joint ventures based primarily on the net sales of the individual joint ventures.  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 primary joint venture in Germany (EXCOR), NTIC recognizes an agreed upon quarterly fee for such services.  NTIC recognizes equity income from its joint ventures based on the overall profitability of its joint ventures. 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 NTIC’s joint ventures are shared by the respective joint venture owners in accordance with their respective ownership percentages.  NTIC typically owns only 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, how much they should be 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.
 
 
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NTIC does not consolidate the results of its 23 joint ventures in its consolidated financial statements.  NTIC’s investments in its joint ventures are accounted for using the equity method.
 
Zerust Brazil’s results are consolidated in NTIC’s consolidated financial statements.  NTIC holds 85% of the equity and 85% of the voting rights of Zerust Brazil.
 
In addition, beginning in the first quarter of fiscal 2013, NTIC has consolidated the results of NTI Asean, which effective as of September 1, 2012 is a majority owned subsidiary of NTIC.   On September 1, 2012, NTIC and the other 50% owner in NTI Asean contributed their respective shares of capital stock of Korea Zerust Co., Ltd. (Korea Zerust), constituting an aggregate of 50% of the equity and voting rights of Korea Zerust, to NTI Asean, and NTIC contributed exclusive license rights and other intellectual property to NTI Asean in exchange for an additional 10% ownership interest in NTI Asean.  As a result of the transaction, NTIC holds 60% of the equity and 60% of the voting rights of NTI Asean.  NTI Asean holds investments in eight entities that operate in the following eight territories located in the ASEAN region:  China, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.  With respect to NTIC’s joint ventures, NTIC considers EXCOR and China to be individually significant to NTIC’s consolidated assets and income; and therefore, provides certain additional information regarding EXCOR and China 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 5.5% and 7.5% during the three and six months ended February 28, 2013, respectively, compared to the three and six months ended February 29, 2012.  These increases were primarily a result of increased demand for Natur-Tec® products and ZERUST® rust and corrosion inhibiting packaging products and services.  During the three and six months ended February 28, 2013, 89.8% and 90.2% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST® products and services, which increased 3.1% and 5.3% to $4,710,412 and $9,505,695 during the three and six months ended February 28, 2013, respectively, compared to $4,570,779 and $9,023,425 during the three and six months ended February 29, 2012, respectively, due to increased demand from both new and existing customers.  NTIC has strategically focused its sales efforts for ZERUST® products and services on customers with sizeable corrosion problems in sectors, including the oil and gas, that offer sizable growth opportunities.  NTIC’s consolidated net sales for the three and six months ended February 28, 2013 included $579,655 and $1,131,469, respectively, of sales made by Zerust Brazil, and of those sales, $149,257 and $189,642, respectively, in sales were made to the oil and gas industry in Brazil.  Overall demand for ZERUST® products and services depends heavily on the overall health of the markets in which NTIC sells its products, including in particular the automotive market.
 
During the three and six months ended February 28, 2013, 10.2% and 9.8%, of NTIC’s consolidated net sales were derived from sales of Natur-Tec® products compared to 8.1% and 8.0% during the three and six months ended February 29, 2012, respectively.  Net sales of Natur-Tec® products increased 32.8% and 31.8% during the three and six months ended February 28, 2013 compared to the three and six months ended February 29, 2012.  These increases were due to increased sales to Natur-Tec® expanding industrial distributor base in the United States.  Additionally, NTIC continues to target key regional and national retailers through independent sales agents.  Demand for the Natur-Tec® products depends primarily on market acceptance and the reach of NTIC’s distribution network.
 
 
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Cost of goods sold as a percentage of net sales decreased to 69.3% during the three months ended February 28, 2013 compared to 70.0% during the three months ended February 28, 2013 primarily as a result of slightly decreased production expense associated with the production and shipping of both ZERUST® and Natur Tec® products.  Cost of goods sold as a percentage of net sales increased slightly to 69.5% during the six months ended February 28, 2013 compared to 68.2% during the six months ended February 29, 2012 primarily as a result of increased production expenses associated with the production and shipping of both ZERUST® and Natur Tec® products.  The increase in production expenses for the six month comparison is considered temporary as new suppliers are ramping up for new products and applications.
 
NTIC’s equity in income of joint ventures decreased 7.0% and 11.2% to $1,138,438 and $2,292,734, respectively, during the three and six months ended February 28, 2013 compared to $1,224,675 and $2,582,355 during the three and six months ended February 29, 2012, which was primarily a result of the consolidation of NTI Asean which was included in the current fiscal year periods, but not in the prior fiscal year periods.
 
NTIC recognized a 36.4% and 31.9% increase in fees for services provided to joint ventures during the three and six months ended February 28, 2013 compared to the three and six months ended February 29, 2012, respectively.  These increases were primarily a result of the consolidation of fees for services earned by NTI Asean which are included in the current fiscal year periods, but not in the prior fiscal year periods.  Fees for services provided are a function of the net sales of NTIC’s joint ventures which were $26,722,201 and $54,247,135 during the three and six months ended February 28, 2013 compared to $25,997,430 and $54,792,662 for the three and six months ended February 29, 2012.  Total net sales of NTIC’s joint ventures were adversely affected in part by the European economic slowdown, which NTIC believes adversely affected the net sales of NTIC’s European joint ventures as well as certain of NTIC’s other non-European joint ventures, and the weakening of the EURO and other currencies compared to the U.S. dollar.
 
NTIC’s total operating expenses increased 8.4%, or $561,289, to $7,279,585 during the six months ended February 28, 2013 compared to the six months ended February 29, 2012.  These increases were primarily the result of increases in selling expenses, general and administrative expenses and expenses incurred in support of joint ventures, research and development expenses, and overall reflected NTIC’s efforts to support its new business efforts.
 
NTIC expenses all costs related to product research and development as incurred.  NTIC incurred $1,850,599 and $1,789,082 of expense during the six months ended February 28, 2013 and February 29, 2012, respectively, in connection with its research and development activities.  These represent net amounts after being reduced by reimbursements related to certain research and development contracts.  Such reimbursements totaled $137,364 and $228,576 for the six months ended February 28, 2013 and February 29, 2012, respectively.  NTIC anticipates that it will spend between $3,800,000 and $4,000,000 in total during fiscal 2013 on research and development activities related to its new technologies.  This estimate is a net range after being reduced by anticipated reimbursements related to certain research and development contracts.
 
Net income attributable to NTIC decreased 28.3%, to $434,410, or $0.10 per diluted common share, for the three months ended February 28, 2013 compared to $606,193, or $0.14 per diluted common share, for the three months ended February 29, 2012.  Net income attributable to NTIC decreased 47.3%, to $824,032, or $0.18 per diluted common share, for the six months ended February 28, 2013 compared to $1,564,950, or $0.35 per diluted common share, for the six months ended February 29, 2012.  These decreases were primarily the result of increases in operating expenses and income taxes.  NTIC anticipates that its quarterly net income will remain subject to significant volatility primarily due to the sales performance of its joint ventures, sales of its ZERUST® products and services into the oil and gas industry, and sales of Natur-Tec® bioplastics products. Each of these fluctuates more on a quarterly basis than the traditional ZERUST® business in North America.
 
NTIC’s working capital was $14,589,567 at February 28, 2013, including $4,261,145 in cash and cash equivalents compared to $10,060,081 at August 31, 2012, including $4,137,547 in cash and cash equivalents.
 
 
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Results of Operations
 
The following tables set forth NTIC’s results of operations for the three and six months ended February 28, 2013 and February 29, 2012.
 
   
Three Months Ended
 
   
February 28,
2013
   
% of
Net Sales
   
February 29,
2012
   
% of
Net Sales
   
$
Change
   
%
Change
 
Net sales, excluding joint ventures
  $ 4,485,203       85.5 %   $ 4,125,618       82.9 %   $ 359,585       8.7 %
Net sales, to joint ventures                                                    
    761,147       14.5 %     848,710       17.1 %     (87,563 )     (10.3 %)
Cost of goods sold                                                    
    3,633,913       69.3 %     3,480,082       70.0 %     153,831       4.4 %
Equity in income of joint ventures
    1,138,438       21.7 %     1,224,675       24.6 %     (86,237 )     (7.0 %)
Fees for services provided to joint ventures
    1,770,881       33.8 %     1,298,126       26.1 %     472,755       36.4 %
Selling expenses                                                    
    1,174,065       22.4 %     1,014,082       20.4 %     159,983       15.8 %
General and administrative expenses
    1,143,987       21.8 %     1,100,812       22.1 %     43,175       3.9 %
Expenses incurred in support of joint ventures
    321,456       6.1 %     235,557       4.7 %     85,899       36.5 %
Research and development expenses
    912,393       17.4 %     974,777       19.6 %     (62,384 )     (6.4 %)

   
Six Months Ended
 
   
February 28,
2013
   
% of
Net Sales
   
February 29,
2012
   
% of
Net Sales
   
$
Change
   
%
Change
 
Net sales, excluding joint ventures
  $ 9,255,590       87.8 %   $ 8,403,261       85.7 %   $ 852,329       10.1 %
Net sales, to joint ventures                                                    
    1,282,507       12.2 %     1,403,181       14.3 %     (120,674 )     (8.6 %)
Cost of goods sold                                                    
    7,324,885       69.5 %     6,689,558       68.2 %     635,327       9.5 %
Equity in income of joint ventures
    2,292,734       21.8 %     2,582,355       26.3 %     (289,621 )     (11.2 %)
Fees for services provided to joint ventures
    3,617,158       34.3 %     2,743,378       28.0 %     873,780       31.9 %
Selling expenses                                                    
    2,345,160       22.3 %     2,122,568       21.6 %     222,592       10.5 %
General and administrative expenses
    2,392,683       22.7 %     2,370,825       24.2 %     21,858       0.9 %
Expenses incurred in support of joint ventures
    691,143       6.6 %     435,821       4.4 %     255,322       58.6 %
Research and development expenses
    1,850,599       17.6 %     1,789,082       18.2 %     61,517       3.4 %

Net Sales . NTIC’s consolidated net sales increased 5.5% and 7.5% to $5,246,350 and $10,538,097, respectively, during the three and six months ended February 28, 2013 compared to the three and six months ended February 29, 2012.  NTIC’s consolidated net sales to unaffiliated customers excluding NTIC’s joint ventures increased 8.7% and 10.1% to $4,485,203 and $9,255,590, respectively, during the three and six months ended February 28, 2013 compared to the same respective prior year periods.  These increases were primarily a result of increased demand and sales of Natur-Tec ® products and ZERUST ® rust and corrosion inhibiting packaging products and services.  Net sales to joint ventures decreased 10.3% and 8.6% to $761,147 and $1,282,507 during the three and six months ended February 28, 2013, respectively, compared to the same respective prior year periods.  These decreases were primarily due to timing differences with orders placed with our joint ventures.
 
The following table sets forth NTIC’s net sales by product category for the three and six months ended February 28, 2013 and February 29, 2012 by segment:
 
   
Three Months Ended
   
Six Months Ended
 
   
February 28,
2013
   
February 29,
2012
   
February 28,
2013
   
February 29,
2012
 
ZERUST® sales                                                           
  $ 4,710,412     $ 4,570,779     $ 9,505,695     $ 9,023,425  
Natur-Tec® sales                                                           
    535,938       403,549       1,032,402       783,017  
Total net sales                                                           
  $ 5,246,350     $ 4,974,328     $ 10,538,097     $ 9,806,442  

During the three and six months ended February 28, 2013, 89.8% and 90.2% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST ® products and services, which increased 3.1% and 5.3% to $4,710,412 and $9,505,695 during the three and six months ended February 28, 2013, respectively, compared to $4,570,779 and $9,023,425 during the three and six months ended February 29, 2012, respectively, due to increased demand from existing customers and the addition of new customers.  NTIC has strategically focused its sales efforts for ZERUST® products and services on customers with sizeable corrosion problems in sectors , including the oil and gas, that offer sizable growth opportunities.

 
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NTIC’s consolidated net sales during the three and six months ended February 28, 2013 included $579,655 and $1,131,469 respectively, of sales made by Zerust Brazil, and of those sales, $149,257 and $189,642, respectively, in sales were made to the oil and gas industry sector in Brazil.

During the three and six months ended February 28, 2013, 10.2% and 9.8% of NTIC’s consolidated net sales, respectively, were derived from sales of Natur-Tec® products, which increased 32.8% and 31.8% to $535,938 and $1,032,402 during the three and six months ended February 28, 2013, respectively, compared to the three and six months ended February 29, 2012.  These increases were due to increased sales to the growing network of Natur-Tec® distributors in the United States.  Additionally, NTIC continues to target key regional and national retailers utilizing independent sales agents.  Demand for the Natur-Tec® products depends primarily on market acceptance and the reach of NTIC’s distribution network.

Cost of Goods Sold .  Cost of goods sold increased 4.4% and 9.5% for the three and six months ended February 28, 2013, respectively, compared to the three and six months ended February 29, 2012 primarily as a result of increased net sales as described above, as well as for the six month comparison, a slight increase in production and shipping costs associated with ZERUST® products.  Cost of goods sold as a percentage of net sales decreased to 69.3% during the three months ended February 28, 2013 compared to 70.0% the three months ended February 29, 2012 primarily as a result of slightly decreased production expense associated with the production and shipping of both ZERUST® and Natur Tec® products during the three months then ended.  Cost of goods sold as a percentage of net sales increased slightly to 68.5% during the six months ended February 28, 2013 compared to 68.2% during the six months ended February 29, 2012 primarily as a result of increased production expenses associated with the production and shipping of both ZERUST® and Natur Tec® products.  The increase in production expenses for the six month comparison is considered temporary as new suppliers are ramping up for new products and applications.
 
Equity in Income of Joint Ventures. NTIC’s equity in income of joint ventures decreased 7.0% and 11.2% to $1,138,438 and $2,292,734 during the three and six months ended February 28, 2013, respectively, compared to equity in income of joint ventures of $1,224,675 and $2,582,355 during the three and six months ended February 29, 2012, respectively, primarily as a result of the consolidation of NTI Asean in the current fiscal year periods, but not in the prior fiscal year periods. Of the total equity in income of joint ventures, NTIC had equity in income of joint ventures of $1,631,125 attributable to EXCOR during the six months ended February 28, 2013 compared to $1,576,496 attributable to EXCOR during the six months ended February 29, 2012.  Of the total equity in income of joint ventures, NTIC had equity in income of joint ventures of $262,148 attributable to NTIC’s joint venture in China during the six months ended February 28, 2013 compared to $248,322 attributable to NTIC’s joint venture in China during the six months ended February 29, 2012.  NTIC had equity in income of all other joint ventures of $399,461 during the six months ended February 28, 2013 compared to $757,537 during the six months ended February 29, 2012.
 
Fees for Services Provided to Joint Ventures.   NTIC recognized fee income for services provided to joint ventures of $1,770,881 and $3,617,158 during the three and six months ended February 28, 2013, respectively, compared to $1,298,126 and $2,743,378 during the three and six months ended February 29, 2012, respectively, representing an increase of 36.4% and 31.9%, respectively.  These increases were primarily a result of the consolidation of the fees for services earned by NTI Asean which are included in the current fiscal year periods, but not in the prior fiscal year periods.  Fee income for services provided to joint ventures are a function of the sales made by the various joint ventures of $26,722,201 and $54,247,135 during the three and six months ended February 28, 2013 compared to $25,997,430 and $54,792,662 for the three and six months ended February 29, 2012, respectively.  Total net sales of NTIC’s joint ventures were adversely affected in part by the European economic slowdown, which NTIC believes also adversely affected net sales of certain of NTIC’s other non-European joint ventures, as well as the weakening of the EURO and other currencies compared to the U.S. dollar.  Sales of NTIC’s joint ventures are not included in NTIC’s product sales and are not combined with NTIC’s sales in NTIC’s consolidated financial statements or in any description of NTIC’s sales.

 
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Of the total fee income for services provided to joint ventures, fees of $492,213 were attributable to EXCOR during the six months ended February 28, 2013 compared to $500,833 attributable to EXCOR during the six months ended February 29, 2012.  This decrease was primarily the result of foreign currency exchange rate fluctuations.  Fees of $943,897 were attributable to NTIC’s joint venture in China during the six months ended February 28, 2013 compared to $0 during the six months ended February 29, 2012, as a result of the consolidation of NTI Asean in the current fiscal year periods, but not in the prior fiscal year periods.

Selling Expenses .  NTIC’s selling expenses increased 15.8% and 10.5% for the three and six months ended February 28, 2013 compared to the same respective periods in fiscal 2012 due to increases in compensation and employee benefits, lab testing related expenses, commission expenses, travel and related expenses, and consulting expenses and selling expenses incurred at Zerust Brazil.  Selling expenses as a percentage of net sales increased slightly to 22.4% and 22.3% for the three and six months ended February 28, 2013, from 20.4% and 21.6% and during the three and six months ended February 29, 2012, due primarily to the increase in selling expenses, partially offset by the increase in net sales, as previously described.
 
General and Administrative Expenses .  NTIC’s general and administrative expenses increased 3.9% and 0.9% for the three and six months ended February 28, 2013 compared to the same respective periods in fiscal 2012 due to increases in consulting expenses.  As a percentage of net sales, general and administrative expenses decreased to 21.8% and 22.7% for the three and six months ended February 28, 2013 from 22.1% and 24.2% for the three and six months ended February 29, 2012.
 
Expenses Incurred in Support of Joint Ventures.   Expenses incurred in support of NTIC’s joint ventures were $321,456 and $691,143 during the three and six months ended February 28, 2013, respectively, compared to $235,557 and $435,821 during the three and six months ended February 29, 2012, respectively, representing an increase of 36.5% and 58.6%, respectively.  These increases were due primarily to increased compensation and benefits expenses associated with increased headcount.
 
Research and Development Expenses .  NTIC’s research and development expenses decreased 6.4% for the three months ended February 28, 2013 compared to the same period in fiscal 2012 and increased 3.4% for the six months ended February 28, 2013 compared to the same period in fiscal 2012.
 
Interest Income .  NTIC’s interest income increased to $22,288 and $47,634 during the three and six months ended February 28, 2013, respectively, compared to $12,631 and $20,691 during the three and six months ended February 29, 2012, respectively, primarily due to increased cash balances in Brazil earning interest during the most recent periods.
 
Interest Expense .  NTIC’s interest expense decreased to $6,988 during the three months ended February 28, 2013 compared to $7,284 during the three months ended February 29, 2012, primarily due to lower average outstanding debt levels during the most recent period. NTIC’s interest expense increased slightly to $13,462 during the six months ended February 28, 2013 compared to $13,250 during the months ended February 29, 2012.
 
Income Before Income Tax Expense .  Income before income tax expense increased to $985,155 and $1,877,691 for the three and six months ended February 28, 2013, respectively, compared to $703,991 and $1,745,412 for the three and six months ended February 29, 2012, respectively.
 
 
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Income Tax Expense .  Income tax expense was $240,000 and $374,000 during the three and six months ended February 28, 2013, respectively, compared $100,000 and $206,000 during the three and six months ended February 29, 2012, respectively.  Income tax expense was calculated based on management’s estimate of NTIC’s annual effective income tax rate.  NTIC’s annual effective income tax rate during the three and six months ended February 28, 2013 and February 29, 2012 was lower than the statutory rate primarily due to NTIC’s equity in income of joint ventures being recognized based on after-tax earnings of these entities.  To the extent undistributed earnings of NTIC’s joint ventures are distributed to NTIC, it is not expected to result in any material additional income tax liability after the application of foreign tax credits. NTIC records a tax valuation allowance when it is more likely than not that some portion or all of its deferred tax assets will not be realized to reduce deferred tax assets to the amount expected to be realized.  NTIC determined based on all available evidence, including historical data and projections of future results, that it is more likely than not that all of its deferred tax assets, except for its foreign tax credit carryforwards and Minnesota state research and development credit carryforwards, will be fully realized.  In addition, NTIC determined based upon all available evidence, including new IRS guidance, historical results, projected future taxable income and foreign tax credit utilization, that it was not more likely than not that the federal research and development credits would be utilized during the carryforward period and as a result, a valuation allowance was recorded against all of NTIC’s federal research and development credits.  In addition, NTIC continues to believe that its deferred tax asset related to foreign tax credit carryforwards will not be realized due to insufficient federal taxable income within the carryforward period and the fact that for ordering purposes the foreign tax credit carryforwards are not allowed to be used until after any current year foreign tax credits are utilized.
 
NTIC considers the earnings of certain foreign joint ventures to be indefinitely invested outside the United States on the basis of estimates that 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 $20.1 million and $19.4 million at February 28, 2013 and August 31, 2012, 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
 
Other Comprehensive Income - Foreign Currency Translations Adjustment.   The volatility of the foreign currency translations adjustment was due to the volatility of the U.S. dollar compared to the Euro and other foreign currencies during the three and six months ended February 28, 2013 compared to the same respective periods in fiscal 2012.
 
Liquidity and Capital Resources
 
Sources of Cash and Working Capital .  As of February 28, 2013, NTIC’s working capital was $14,589,567, including $4,261,145 in cash and cash equivalents, compared to working capital of $10,060,081, including $4,137,547 in cash and cash equivalents, at August 31, 2012.
 
As of February 28, 2013, NTIC had a term loan with a principal amount of $971,474 outstanding that Northern Technologies Holding Company, LLC (NTI LLC) obtained from PNC Bank, National Association (PNC Bank) in connection with the purchase of NTIC’s corporate headquarters in September 2006.  The term loan matures on January 10, 2016, bears interest at an annual rate based on the daily LIBOR rate plus 2.15% and is payable in consecutive monthly installments equal to $6,343 (inclusive of principal but exclusive of interest).  The term loan is secured by a first lien on the real estate and building owned by NTI LLC and all of the assets of NTIC and is guaranteed by NTIC.
 
As of February 28, 2013, NTIC also had a revolving line of credit with PNC Bank of $3,000,000 with no amounts outstanding as of such date.  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 subfacility, with any standby letters of credit issued thereunder being at the sole discretion of PNC Bank.  Any standby letters of credit issued under the subfacility are subject to customary fees and charges payable by NTIC.  At the option of NTIC, 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 NTIC or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate.  Interest is payable in arrears (a) for the portion of advances bearing interest under the prime rate on the last day of each month during the term thereof and (b) for the portion of advances bearing interest under the LIBOR option on the last day of the res