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 February 28, 2017

 

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

 

For the transition period from ________________ to __________________.

 

Commission File Number: 001-11038

____________________

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware (State or other jurisdiction of incorporation or organization)	41-0857886 (I.R.S. Employer Identification No.)
4201 Woodland Road P.O. Box 69 Circle Pines, Minnesota 55014 (Address of principal executive offices) (Zip code)

 

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

 

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 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 ☒ 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  ☒

 

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 April 11, 2017, there were 4,524,970 shares of common stock of the registrant outstanding.

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

February 28, 2017

 

TABLE OF CONTENTS

 

Description		Page
PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of February 28, 2017 (unaudited) and August 31, 2016	3
	Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended February 28, 2017 and February 29, 2016	4
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Six Months Ended February 28, 2017 and February 29, 2016	5
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended February 28, 2017 and February 29, 2016	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	33
PART II	OTHER INFORMATION	34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
SIGNATURES		36
EXHIBIT INDEX		37

 

_________________

 

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.”

 

 

_________________

 

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

 

As used in this report, references to: (1) “NTIC China” refer to NTIC’s wholly-owned subsidiary in China, NTIC (Shanghai) Co., Ltd.; (2) “NTI Europe” refer to NTIC’s wholly-owned subsidiary in Germany, NTIC Europe GmbH; (3) “Zerust Mexico” refer to NTIC’s wholly-owned subsidiary in Mexico, ZERUST-EXCOR MEXICO, S. de R.L. de C.V; (4) “Zerust Brazil” refer to NTIC’s majority-owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A.; (5) “Natur-Tec India” refer to NTIC’s majority-owned subsidiary in India, Natur-Tec India Private Limited; and (5) “NTI Asean” refer to NTIC’s majority-owned holding company 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 (although the joint venture agreements for the Chinese joint venture were terminated as of December 31, 2014 and liquidation of this joint venture is anticipated), Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand.

 

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

 

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

 

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

 

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

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 2017 (UNAUDITED)
AND AUGUST 31, 2016 (AUDITED)

 

 

See notes to consolidated financial statements.

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016

 

 

See notes to consolidated financial statements.

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016

 

 

See notes to consolidated financial statements.

 

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2017 AND FEBRUARY 29, 2016

 

 

See notes to consolidated financial statements.

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ITEM 2.

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

 

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess NTIC’s financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements” in this report and under “Part 1. Item 1A. Risk Factors” in our annual report on Form 10-K for the fiscal year ended August 31, 2016. 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 biobased 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 and coatings, rust removers and cleaners, diffusers and 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 technical 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, its majority-owned subsidiary in Brazil, Zerust Prevenção de Corrosão S.A. (Zerust Brazil), and its wholly-owned subsidiary in Mexico, ZERUST-EXCOR MEXICO, S. de R.L. de C.V (Zerust Mexico), and joint venture arrangements in North America, Europe and Asia. NTIC also sells products directly to its joint venture partners through its wholly-owned subsidiary in Germany, NTIC Europe GmbH (NTI Europe).

 

One of NTIC’s strategic initiatives is to expand into and penetrate other markets for its ZERUST^® corrosion prevention solutions. 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 a long sales cycle, often including a one- to multi-year trial period with each customer and a slow integration process thereafter.

 

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

 

 

Termination of Chinese Joint Venture

 

On January 2, 2015, NTIC announced that, effective as of December 31, 2014, it is selling its ZERUST^® products and services in China through a wholly-owned subsidiary, NTIC (Shanghai) Co., Ltd., and has terminated its joint venture agreements with Tianjin-Zerust Anticorrosion Co., Ltd. (Tianjin Zerust). NTIC and NTI Asean LLC have filed a lawsuit in China against Mr. Tao Meng, the former joint venture entity’s other shareholder, and his spouse, seeking, among other things, an orderly liquidation of Tianjin Zerust.

 

NTIC indirectly has a 30% ownership interest in Tianjin Zerust through its 60% owned holding company subsidiary, NTI Asean LLC.

 

NTIC expects that its operating results may continue to be volatile as a result of its ongoing Chinese operations.

 

NTIC’s Subsidiaries and Joint Venture Network

 

NTIC has ownership interests in six subsidiaries in North America, Europe and Asia. The following table sets forth a list of NTIC’s operating subsidiaries as of February 28, 2017, the country in which the subsidiary is organized and NTIC’s ownership percentage in each subsidiary:

 

Joint Venture Name		Country		NTIC Percent (%) Ownership
NTIC (Shanghai) Co., Ltd		China			100	%
NTI Asean LLC		United States			60	%
Zerust Prevenção de Corrosão S.A.		Brazil			85	%
ZERUST-EXCOR MEXICO, S. de R.L. de C.V		Mexico			100	%
Natur-Tec India Private Limited		India			90	%
NTIC Europe GmbH		Germany			100	%

 

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

 

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

 

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 net sales of the individual joint ventures, and NTIC’s receipt of dividend distributions from the 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 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 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, 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.

 

 

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; and therefore, provides certain additional information regarding EXCOR in the notes to NTIC’s consolidated financial statements and in this section of this report.

 

Financial Overview

 

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

 

NTIC’s consolidated net sales increased 13.5% and 25.2% during the three and six months ended February 28, 2017, respectively, compared to the three and six months ended February 29, 2016. These increases were primarily a result of an increase in sales of ZERUST® rust and corrosion inhibiting packaging products, sales to joint ventures and sales of Natur-Tec® products.

 

During the three and six months ended February 28, 2017, 82.7% and 83.0% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST® products and services, which increased 13.2% and 23.9% to $7,228,027 and $15,312,705 during the three and six months ended February 28, 2017, respectively, compared to $6,385,337 and $12,363,019 during the three and six months ended February 29, 2016, respectively. These increases were due to higher sales from existing customers for new and existing products as a result of increased demand. NTIC has expanded 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 six months ended February 28, 2017 included $952,240 of sales made to customers in the oil and gas industry compared to $717,570 for the six months ended February 29, 2016. 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 addition, we believe demand for ZERUST® products and services in the oil and gas industry may be dependent upon oil prices, with low oil prices causing existing or potential customers to delay purchases and installations.

 

During the three and six months ended February 28, 2017, 17.3% and 17.0%, of NTIC’s consolidated net sales were derived from sales of Natur-Tec® products compared to 17.1% and 16.1% during the three and six months ended February 29, 2016, respectively. Net sales of Natur-Tec® products increased 14.8% and 32.4% during the three and six months ended February 28, 2017 compared to the three and six months ended February 29, 2016, respectively. These increases were primarily due to an increase in finished product sales in North America and finished product sales at NTIC’s majority-owned subsidiary in India, Natur-Tec India Private Limited (Natur-Tec India).

 

Cost of goods sold as a percentage of net sales decreased to 67.1% during the three months ended February 28, 2017 compared to 68.4% during the three months ended February 29, 2016 and decreased to 67.7% during the six months ended February 28, 2017 compared to 68.9% during the prior fiscal year period. These decreases were primarily due to increased sales of ZERUST® products and services in the oil and gas industry which carry higher margins than NTIC’s ZERUST® industrial products and services.

 

NTIC’s equity in income of joint ventures increased 45.2% and 37.2% to $1,383,139 and $2,657,143, respectively, during the three and six months ended February 28, 2017 compared to $952,667 and $1,936,420 during the three and six months ended February 29, 2016, respectively. These increases were primarily due to increases in profitability at the joint ventures. Total net sales of NTIC’s joint ventures increased 14.1% and 12.3% to $22,962,599 and $47,163,046 during the three and six months ended February 28, 2017, respectively, compared to $20,129,215 and $42,000,424 for the three and six months ended February 29, 2016, respectively. These increases were due primarily to higher sales from existing customers for new and existing products as a result of increased demand.

 

 

NTIC’s total operating expenses increased 9.7%, or $885,131, to $9,984,433 during the six months ended February 28, 2017 compared to the six months ended February 29, 2016. This increase was primarily due to an increase in legal expenses in North America related to the litigation against Cortec Corporation of $250,000 and an increase in operating expenses at NTIC China of $118,000. Such expenses consisted primarily of selling and personnel expense associated with the increase in sales in China. Additionally, there was a management bonus accrual of $185,000 made during the six months ended February 28, 2017 compared to no bonus accrual for the six months ended February 29, 2016.

 

NTIC spent $1,384,559 and $2,117,622 of expense during the six months ended February 28, 2017 and February 29, 2016, respectively, in connection with its research and development activities. NTIC anticipates that it will spend between $2,200,000 and $2,800,000 in fiscal 2017 on research and development activities. This anticipated significant decrease from fiscal 2016 is due to the transition of efforts from research and development to selling, general and administrative areas, specifically as they relate to Natur-Tec^® and the ZERUST^® oil and gas business since most of the expenses related to these business units are no longer in the research and development phase of product development.

 

Net income attributable to NTIC increased $494,755 to $386,966, or $0.09, per diluted common share, for the three months ended February 28, 2017 compared to net loss of $(107,789), or $(0.02) per diluted common share, for the three months ended February 29, 2016. Net income attributable to NTIC increased 300.1%, to $684,605, or $0.15 per diluted common share, for the six months ended February 28, 2017 compared to net loss attributable to NTIC of $(342,140), or $(0.08) per diluted common share, for the six months ended February 29, 2016. These increases were primarily the result of the increase in gross profit, partially offset by the increase in operating expenses.

 

NTIC anticipates that its quarterly net income or loss will continue to remain subject to significant volatility primarily due to the financial performance of its subsidiaries and joint ventures and sales of its ZERUST® products and services into the oil and gas industry and Natur-Tec® bioplastics products, which sales fluctuate more on a quarterly basis than the traditional ZERUST® business. NTIC also anticipates that its operating results during the next few quarters will be particularly volatile as a result of the changes in its Chinese operations.

 

NTIC’s working capital was $15,364,837 at February 28, 2017, including $3,048,948 in cash and cash equivalents and $748,254 in available for sale securities, compared to $16,948,069 at August 31, 2016, including $3,395,274 in cash and cash equivalents and $2,243,864 in available for sale securities.

 

 

Results of Operations

 

The following tables set forth NTIC’s results of operations for the three and six months ended February 28, 2017 and February 29, 2016.

 

		Three Months Ended
		February 28, 2017				% of Net Sales				February 29, 2016				% of Net Sales				$ Change				% Change
Net sales, excluding joint ventures		$	8,309,586				95.0	%		$	7,027,614				91.2	%		$	1,281,972				16.6	%
Net sales, to joint ventures			433,317				5.0	%			677,320				8.8	%			(244,003	)			(36.0	%)
Cost of goods sold			5,870,186				67.1	%			5,268,224				68.4	%			601,962				11.4	%
Equity in income of joint ventures			1,383,139				15.8	%			952,667				12.4	%			430,472				45.2	%
Fees for services provided to joint ventures			1,184,028				13.5	%			971,042				12.6	%			212,986				21.9	%
Selling expenses			2,246,482				25.7	%			1,475,433				19.1	%			771,049				52.3	%
General and administrative expenses			1,842,528				21.1	%			1,806,557				23.5	%			35,971				2.0	%
Research and development expenses			742,037				8.5	%			1,113,525				14.5	%			(371,488	)			(33.4	%)

 

		Six Months Ended
		February 28, 2017				% of Net Sales				February 29, 2016				% of Net Sales				$ Change				% Change
Net sales, excluding joint ventures		$	17,191,551				93.2	%		$	13,529,024				91.9	%		$	3,662,527				27.1	%
Net sales, to joint ventures			1,253,375				6.8	%			1,200,347				8.1	%			53,028				4.4	%
Cost of goods sold			12,482,952				67.7	%			10,143,647				68.9	%			2,339,305				23.1	%
Equity in income of joint ventures			2,657,143				14.4	%			1,936,420				13.1	%			720,723				37.2	%
Fees for services provided to joint ventures			2,499,619				13.6	%			2,456,471				16.7	%			43,148				1.8	%
Selling expenses			4,285,566				23.2	%			3,000,516				20.4	%			1,285,050				42.8	%
General and administrative expenses			4,314,308				23.4	%			3,981,164				22.9	%			333,144				8.4	%
Research and development expenses			1,384,559				7.5	%			2,117,622				14.4	%			(733,063	)			(34.6	%)

 

Net Sales. NTIC’s consolidated net sales increased 13.5% and 25.2% to $8,742,903 and $18,444,926, during the three and six months ended February 28, 2017, respectively, compared to the three and six months ended February 29, 2016. These increases were primarily a result of an increase in sales of ZERUST® rust and corrosion inhibiting packaging products, sales to joint ventures and sales of Natur-Tec® products. NTIC’s consolidated net sales to unaffiliated customers excluding NTIC’s joint ventures increased 16.6% and 27.1% to $8,309,586 and $17,191,551 during the three and six months ended February 28, 2017, respectively, compared to the same respective prior fiscal year periods. These increases were primarily a result of increased demand from the addition of new customers at NTI China and an increase in sale of our Natur-Tec® products. Net sales to joint ventures decreased 36.0% and increased 4.4% to $433,317 and $1,253,375 during the three and six months ended February 28, 2017, respectively, compared to the same respective prior fiscal year periods. These changes were primarily the result of the timing of shipments during the quarter and at quarter end.

 

The following table sets forth NTIC’s net sales for the three and six months ended February 28, 2017 and February 29, 2016 by segment:

 

		Three Months Ended								Six Months Ended
		February 28, 2017				February 29, 2016				February 28, 2017				February 29, 2016
Total ZERUST® sales		$	7,228,027			$	6,385,337			$	15,312,705			$	12,363,019
Total Natur-Tec® sales			1,514,876				1,319,597				3,132,221				2,366,352
Total net sales		$	8,742,903			$	7,704,934			$	18,444,926			$	14,729,371

 

During the three and six months ended February 28, 2017, 82.7% and 83.0% of NTIC’s consolidated net sales, respectively, were derived from sales of ZERUST^® products and services, which increased 13.2% and 23.9% to $7,228,027 and $15,312,705 during the three and six months ended February 28, 2017, respectively, compared to $6,385,337 and $12,363,019 during the three and six months ended February 29, 2016, respectively. These increases were 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 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. In addition, we believe demand for ZERUST® products and services in the oil and gas industry may be dependent upon oil prices, with low oil prices causing existing or potential customers to delay purchases and installations.

 

 

The following table sets forth NTIC’s net sales of ZERUST^® products for the three and six months ended February 28, 2017 and February 29, 2016:

 

		Three Months Ended
		February 28, 2017				February 29, 2016				$ Change				% Change
ZERUST® industrial net sales		$	6,588,801			$	5,330,686			$	1,258,115				23.6	%
ZERUST® joint venture net sales			433,317				677,320				(244,003	)			(36.0	%)
ZERUST® oil & gas net sales			205,909				377,331				(171,422	)			(45.4	%)
Total ZERUST® net sales		$	7,228,027			$	6,385,337			$	842,690				13.2	%

 

		Six Months Ended
		February 28, 2017				February 29, 2016				$ Change				% Change
ZERUST® industrial net sales		$	13,107,090			$	10,445,102			$	2,661,988				25.5	%
ZERUST® joint venture net sales			1,253,375				1,200,347				53,028				4.4	%
ZERUST® oil & gas net sales			952,240				717,570				234,670				32.7	%
Total ZERUST® net sales		$	15,312,705			$	12,363,019			$	2,949,686				23.9	%

 

NTIC’s net sales to the oil and gas industry sector decreased during the three months ended February 28, 2017 compared to the prior fiscal year period primarily as a result of volatility in that sector and the timing of projects. NTIC’s net sales to the oil and gas industry sector increased during the six months ended February 28, 2017 compared to the prior fiscal year period primarily as a result of increased sales to India as a result of increased demand. NTIC anticipates that its sales of ZERUST® products and services into the oil and gas industry will continue to remain subject to significant volatility from quarter to quarter as sales are recognized, specifically due to the volatility of oil prices.

 

During the three and six months ended February 28, 2017, 17.3% and 17.0% of NTIC’s consolidated net sales, respectively, were derived from sales of Natur-Tec® products, which increased 14.8% and 32.4% to $1,514,876 and $3,132,221 during the three and six months ended February 28, 2017, respectively, compared to the three and six months ended February 29, 2016. Such increases were due to the addition of new customers in North America and India as well as increased sales by existing distributors. Demand for Natur-Tec® 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 Natur-Tec® products, the timing of one or more orders can materially affect NTIC’s quarterly sales of Natur-Tec® products and the comparisons to prior fiscal year quarters.

 

Cost of Goods Sold. Cost of goods sold increased 11.4% and 23.1% for the three and six months ended February 28, 2017, respectively, compared to the three and six months ended February 29, 2016. These increases were primarily as a result of the corresponding increased sales levels. Cost of goods sold as a percentage of net sales decreased to 67.1% during the three months ended February 28, 2017 compared to 68.4% the three months ended February 29, 2016 and decreased to 67.7% during the six months ended February 28, 2017 compared to 68.9% during the six months ended February 29, 2016. These decreases were primarily as a result of increased net sales and cost reductions realized on the raw materials associated with NTIC’s ZERUST® industrial products.

 

Equity in Income of Joint Ventures. NTIC’s equity in income of joint ventures increased 45.2% and 37.2% to $1,383,139 and $2,657,143 during the three and six months ended February 28, 2017, respectively, compared to equity in income of joint ventures of $952,667 and $1,936,420 during the three and six months ended February 29, 2016, respectively. These increases were primarily a result of improved sales and profitability at the joint ventures. Of the total equity in income of joint ventures, NTIC had equity in income of joint ventures of $2,006,441 attributable to EXCOR during the six months ended February 28, 2017 compared to $1,480,975 attributable to EXCOR during the six months ended February 29, 2016. NTIC had equity in income of joint ventures of $170,549 attributable to India during the six months ended February 28, 2017 compared to $157,474 attributable to India during the six months ended February 29, 2016. NTIC had equity in income of joint ventures of $126,361 attributable to Finland during the six months ended February 28, 2017 compared to $104,070 attributable to Finland during the six months ended February 29, 2016. NTIC had equity in income of all other joint ventures of $353,792 during the six months ended February 28, 2017 compared to $193,900 during the six months ended February 29, 2016.

 

 

Fees for Services Provided to Joint Ventures. NTIC recognized fee income for services provided to joint ventures of $1,184,028 and $2,499,619 during the three and six months ended February 28, 2017, respectively, compared to $971,042 and $2,456,471 during the three and six months ended February 29, 2016, respectively, representing increases of 21.9% and 1.8%, respectively. Fee income for services provided to joint ventures is traditionally a function of sales made by NTIC’s joint ventures. Total net sales of NTIC’s joint ventures increased to $22,962,599 and $47,163,046 during the three and six months ended February 28, 2017, respectively, compared to $20,129,215 and $42,000,424 for the three and six months ended February 29, 2016, respectively.

 

Net sales of NTIC’s joint ventures are not included in NTIC’s net sales in NTIC’s consolidated financial statements or in any description of NTIC’s net sales. Of the total fee income for services provided to joint ventures, fees of $402,509 were attributable to EXCOR during the six months ended February 28, 2017 compared to $422,654 attributable to EXCOR during the six months ended February 29, 2016. Fees of $138,731 were attributable to India during the six months ended February 28, 2017 compared to $152,527 attributable to India during the six months ended February 29, 2016. Fees of $143,282 were attributable to Finland during the six months ended February 28, 2017 compared to $121,829 attributable to Finland during the six months ended February 29, 2016.

 

Selling Expenses. NTIC’s selling expenses increased 52.3% and 42.8% for the three and six months ended February 28, 2017, respectively, compared to the same respective periods in fiscal 2016 due to the transition of focus from research and development to selling, specifically as they relate to Natur-Tec^® and the ZERUST^® oil and gas business, since most of the expenses related to these business units are no longer in the research and development phase of product development. Selling expenses as a percentage of net sales increased to 25.7% and 23.2% for the three and six months ended February 28, 2017, respectively, from 19.1% and 20.4% during the three and six months ended February 29, 2016, respectively. The increases in selling expenses as a percentage of net sales were due primarily to the transition of expenses as noted above.

 

General and Administrative Expenses. NTIC’s general and administrative expenses increased 2.0% and 8.4% for the three and six months ended February 28, 2017, respectively, compared to the same respective periods in fiscal 2016 due primarily to the transition of expenses that were previously focused on research and development efforts, but now relate to general and administrative focus, specifically as they relate to Natur-Tec^® and the ZERUST^® oil and gas business, since most of the expenses related to these business units are no longer in the research and development phase of product development. NTIC’s general and administrative expenses also increased due to an increase in legal expenses in North America related to the litigation against Cortec Corporation. NTIC incurred expense of $477,000 during the six months ended February 28, 2017, compared to $221,000 during the six months ended February 29, 2016. As a percentage of net sales, general and administrative expenses decreased to 21.1% for the three months ended February 28, 2017, from 23.5% and to 23.4% for the six months ended February 28, 2017, from 27.0%. The decrease in general and administrative expenses as a percentage of net sales for the three and six-month comparison was due primarily to the increase in net sales, partially offset by the increase in general and administrative expenses, as previously described.

 

Research and Development Expenses. NTIC’s research and development expenses decreased 33.4% and 34.6% for the three and six months ended February 28, 2017 compared to the same respective periods in fiscal 2016. These decreases were due primarily to the transition of resources that were previously devoted towards research and development to selling and general and administrative efforts, as previously described.

 

 

Interest Income. NTIC’s interest income decreased to $4,516 during the three months ended February 28, 2017 and $8,079 during the six months ended February 28, 2017, compared to $14,384 and $28,557 during the three and six months ended February 29, 2016, respectively, due primarily to lower average cash balances.

 

Interest Expense. NTIC’s interest expense decreased to $3,470 during the three months ended February 28, 2017 compared to $10,796 during the three months ended February 29, 2016 and decreased to $8,093 during the six months ended February 28, 2017 compared to $15,522 during the six months ended February 29, 2016.

 

Income (Loss) Before Income Tax Expense. NTIC incurred income before income tax expense of $609,883 and $1,134,289 for the three and six months ended February 28, 2017, respectively, compared to loss before income tax expense of $30,547 and $106,691 for the three and six months ended February 29, 2016, respectively.

 

Income Tax Expense. Income tax expense was $124,909 and $242,622 during the three and six months ended February 28, 2017, respectively, compared income tax expense of $40,466 and $36,964 during the three and six months ended February 29, 2016, respectively. Income tax expense was calculated based on management’s estimate of NTIC’s annual effective income tax rate.

 

NTIC considers the earnings of certain foreign joint ventures to be indefinitely invested outside the United States based on estimates that NTIC’s future domestic cash generation will be sufficient to meet future domestic cash needs. Thus, U.S. income and foreign withholding taxes have not been recognized on the cumulative undistributed earnings of $18,984,898 and $17,779,912 at February 28, 2017 and August 31, 2016, 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 (Loss) - Foreign Currency Translations Adjustment. The significant changes in the foreign currency translations adjustment was due to the strengthening of the U.S. dollar compared to the Euro and other foreign currencies during the three and six months ended February 28, 2017 compared to the same respective periods in fiscal 2016.

 

Liquidity and Capital Resources

 

Sources of Cash and Working Capital. As of February 28, 2017, NTIC’s working capital was $15,364,837, including $3,048,948 in cash and cash equivalents and $748,254 in available for sale securities, compared to $16,948,069 at August 31, 2016, including $3,395,274 in cash and cash equivalents and $2,243,864 in available for sale securities.

 

As of February 28, 2017, NTIC had a revolving line of credit with PNC Bank of $3,000,000, with no amounts outstanding. 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. 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 February 28, 2017, NTIC was in compliance with all debt covenants.

 

On January 11, 2017, NTIC and PNC Bank extended the maturity date of the line of credit retroactively from January 7, 2017 to January 7, 2018. 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.

 

NTIC believes that a combination of its existing cash and cash equivalents, 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 and any stock repurchases for at least the next 12 months. During the remainder of fiscal 2017, NTIC expects to continue to invest in NTIC China, research and development and in marketing efforts and resources into the application of its corrosion prevention technology into the oil and gas industry and its Natur-Tec® bio-plastics business. 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 and fees for services provided to its joint ventures to fund NTIC’s new technology investments and capital contributions to new and existing 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 it is not likely that there exists any exposure to debt by NTIC’s joint ventures that could materially impact their respective operations and/or liquidity.

 

Uses of Cash and Cash Flows. Net cash used in operating activities during the six months ended February 28, 2017 was $823,425, which resulted principally from NTIC’s equity in income from joint ventures, dividends received from joint ventures, increases in trade receivables, inventory, prepaid expenses, accrued liabilities, and income tax payable, partially offset by NTIC’s net income, depreciation and amortization. Net cash provided by operating activities during the six months ended February 29, 2016 was $1,248,810, which resulted principally from NTIC’s equity in income from joint ventures, dividends from joint ventures, a decrease in accrued liabilities and increases in receivables and prepaid expenses, partially offset by depreciation and amortization.

 

NTIC’s cash flows from operations are impacted by significant changes in certain components of NTIC’s working capital, including inventory turnover and changes in receivables. NTIC considers internal and external factors when assessing the use of its available working capital, specifically when determining inventory levels and credit terms of customers. Key internal factors include existing inventory levels, stock reorder points, customer forecasts and customer requested payment terms, and 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 for trade receivables from its joint ventures are 90 days. 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 determination is made. Accounts receivable are deemed uncollectible based on NTIC exhausting reasonable efforts to collect. NTIC’s typical contractual terms for receivables for services provided to its joint ventures are 90 days. NTIC records receivables for services provided to its joint ventures on an accrual basis, unless circumstances exist that make the collection of the balance uncertain in which case the fee income will be recorded on a cash basis until there is consistency in payments. This determination is handled on a case by case basis.

 

NTIC experienced an increase in trade receivables and inventory as of February 28, 2017 compared to August 31, 2016. Trade receivables excluding joint ventures as of February 28, 2017 increased $1,161,166 compared to August 31, 2016, primarily related to the timing of collections and the increase in sales. Outstanding trade receivables excluding joint ventures balances as of February 28, 2017 increased 15 days to an average of 65 days from balances outstanding from these customers as of August 31, 2016. Outstanding trade receivables from joint ventures as of February 28, 2017 decreased $329,321 compared to August 31, 2016 primarily due to the timing of payments. Outstanding balances from trade receivables from joint ventures decreased as of February 28, 2017 by an average of 20 days from an average of 96 days from balances outstanding from these customers compared to August 31, 2016. The significant average days outstanding of trade receivables from joint ventures as of February 28, 2017 were primarily due to the receivables balances at NTIC’s joint venture in South Korea.

 

 

Outstanding receivables for services provided to joint ventures as of February 28, 2017 decreased $164,018 compared to August 31, 2016, which resulted in a decrease of 3 days of fees receivable outstanding as of February 28, 2017 to an average of 95 days compared to August 31, 2016.

 

Net cash provided by investing activities for the six months ended February 28, 2017 was $810,588, which was primarily the result of the proceeds from the sale of available for sale securities, offset by additions to property and equipment and additions to patents. Net cash used in investing activities for the six months ended February 29, 2016 was $1,080,567, which was primarily the result of cash used in the purchase of available for sale securities, additions to property and equipment and additions to patents.

 

Net cash used in financing activities for the six months ended February 28, 2017 was $315,207, which resulted from a dividend paid to a non-controlling interest and the repurchase of common stock, partially offset by proceeds from NTIC’s employee stock purchase plan. Net cash used in financing activities for the six months ended February 29, 2016 was $235,586, which resulted from a dividend paid to a non-controlling interest and the repurchase of common stock, partially offset by 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. As of February 28, 2017, up to $2,688,605 in shares of NTIC common stock remained available for repurchase under NTIC’s stock repurchase program.

 

Capital Expenditures and Commitments. NTIC spent $599,063 on capital expenditures during the six months ended February 28, 2017 and expects to spend an aggregate of approximately $700,000 to $800,000 on capital expenditures during fiscal 2017, which it expects will relate primarily to the purchase of new equipment.

 

Contractual Obligations

 

There has been no material change to NTIC’s contractual obligations as provided in “Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations,” included in NTIC’s annual report on Form 10-K for the fiscal year ended August 31, 2016.

 

Off-Balance Sheet Arrangements

 

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

 

Inflation and Seasonality

 

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

 

 

Market Risk

 

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

 

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

 

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

 

At the option of NTIC, outstanding advances under NTIC’s $3,000,000 revolving line of credit with PNC Bank bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by NTIC or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate, and thus may subject NTIC to some market risk on interest rates. As of February 28, 2017, NTIC had no borrowings under the line of credit.

 

Critical Accounting Policies and Estimates

 

There have been no material changes to NTIC’s critical accounting policies and estimates from the information provided in “Part II. Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies,” included in NTIC’s annual report on Form 10-K for the fiscal year ended August 31, 2016.

 

Recent Accounting Pronouncements

 

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

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. In addition, NTIC or others on NTIC’s behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on NTIC’s Internet web site or otherwise. All statements other than statements of historical facts included in this report or expressed by NTIC orally from time to time that address activities, events or developments that NTIC expects, believes or anticipates will or may occur in the future are forward-looking statements including, in particular, the statements about NTIC’s plans, objectives, strategies and prospects regarding, among other things, NTIC’s financial condition, results of operations and business, the outcome of contingencies such as legal proceedings and the effect of the liquidation of Tianjin Zerust and the operations of NTIC China. NTIC has identified some of these forward-looking statements in this report with words like “believe,” “can,” “may,” “could,” “would,” “might,” “forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “approximate” “outlook” or “continue” or the negative of these words or other words and terms of similar meaning. The use of future dates is also an indication of a forward-looking statement. Forward-looking statements may be contained in the notes to NTIC’s consolidated financial statements and elsewhere in this report, including under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

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

 

·

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

 

·

NTIC’s ongoing litigation against Mr. Tao Meng, its former joint venture partner, and NTIC’s options relating to the recent dismissal of its litigation against Cortec Corporation, and the effect of these legal matters and the expense associated therewith on NTIC’s business and future operating results;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

·

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

 

 

·

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

 

·

NTIC’s reliance upon suppliers;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

Loss of or changes in executive management or key employees;

 

·

Ability of management to manage around unplanned events;

 

·

Pending and future litigation;

 

·

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

 

·

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

 

·

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

 

·

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

 

·

Fluctuations in NTIC’s effective tax rate; and

 

·

NTIC’s reliance upon its management information systems.

 

For more information regarding these and other uncertainties and factors that could cause NTIC’s actual results to differ materially from what NTIC has anticipated in its forward-looking statements or otherwise could materially adversely affect its business, financial condition or operating results, see NTIC’s annual report on Form 10-K for the fiscal year ended August 31, 2016 under the heading “Part I. Item 1A. Risk Factors.”

 

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

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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

 

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

 

At the option of NTIC, outstanding advances under NTIC’s $3,000,000 revolving line of credit with PNC Bank bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by NTIC or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate, and thus may subject NTIC to some market risk on interest rates. As of February 28, 2017, NTIC had no borrowings under the line of credit.

 

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

NTIC maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to provide reasonable assurance that information required to be disclosed by NTIC in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to NTIC’s management, including NTIC’s principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. NTIC’s management evaluated, with the participation of its Chief Executive Officer and its Chief Financial Officer, the effectiveness of the design and operation of NTIC’s disclosure controls and procedures as of the end of the period covered in this report. Based on that evaluation, NTIC’s Chief Executive Officer and Chief Financial Officer concluded that NTIC’s disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in the reports that NTIC files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to NTIC’s management, including NTIC’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in NTIC’s internal control over financial reporting that occurred during the quarter ended February 28, 2017 that has materially affected, or is reasonably likely to materially affect NTIC’s internal control over financial reporting.

 

 

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

On March 23, 2015, NTIC and NTI Asean LLC, a majority-owned subsidiary of NTIC, filed a lawsuit in Tianjin No 1 Intermediate People’s Court against two individuals, Tao Meng and Xu Hui, related to breaches of duties and contractual commitments owed to NTI Asean under certain agreements related to NTIC’s former joint venture in China, Tianjin Zerust Anti-Corrosion Technologies Ltd. The lawsuit alleges, among other things, that Mr. Tao Meng and Xu Hui have engaged in self-dealing, usurped business opportunities, and received economic benefits that were required to go to Tianjin Zerust. At this point it is too early in the lawsuit to reasonably estimate the amount of any recovery to NTI Asean.

 

On April 21, 2015, NTIC and NTI Asean initiated a lawsuit in the District Court for the Second Judicial District, County of Ramsey, State of Minnesota against Cortec Corporation alleging, among other things, that Cortec Corporation aided and abetted breaches of duties and contractual commitments owed to NTIC and NTI Asean related to NTIC’s joint venture in China, Tianjin Zerust. On November 4, 2015, NTIC and NTI Asean were permitted to file an amended complaint adding new counts, including, but not limited to, one for breach of contract, arising out of Cortec’s breach of a 2005 Settlement Agreement and Consent Order. The case was subsequently assigned to the complex civil jury trial calendar, extending deadlines for discovery and trial. The parties attended a court ordered mediation on September 24, 2015 which did not result in a settlement. A second mediation deadline of August 12, 2016 was set by the court in the amended scheduling order, which also did not result in a settlement. Fact discovery closed on September 23, 2016. On October 10, 2016, NTIC and NTI Asean moved the court for permission to amend their amended supplemental complaint to assert a claim for punitive damages. On November 23, 2017, NTIC and NTI Asean moved for partial summary judgment on their breach of contract claim. Cortec cross-moved for summary judgment on all of NTIC’s and NTI Asean’s claims and moved to dismiss the amended supplemental complaint for failure to join an indispensable party. On February 16, 2017, the Court denied the parties’ cross-motions for dispositive relief and sua sponte dismissed NTIC’s and NTI Asean’s claims based on a non-exclusive forum-selection clause contained in a settlement agreement between the parties. On March 9, 2017, the Court denied NTIC’s and NTI Asean’s request to move for reconsideration of the Court’s February 16, 2017 Order. NTIC and NTI Asean are currently evaluating their options related to this litigation. 

 

ITEM 1A.

RISK FACTORS

 

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

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales of Unregistered Equity Securities

 

During the three months ended February 28, 2017, NTIC did not issue any shares of its common stock or other equity securities of NTIC that were not registered under the Securities Act of 1933, as amended.

 

 

Issuer Purchases of Equity Securities

 

The following table shows NTIC’s stock repurchase activity during the three months ended February 28, 2017.

 

Period		Total Number of Shares (or Units) Purchased				Average Price Paid Per Share (or Unit)				Total Number of Shares (or Units) Purchased As Part of Publicly Announced Plans or Programs				Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
December 1, 2016 through December 31, 2016			5,900			$	12.96				0				(1	)
January 1, 2017 through January 31, 2017			0				N/A				0				(1	)
February 1, 2017 through February 28, 2017			0				N/A				0				(1	)(2)
Total			5,900			$	12.96				0				(1	)(2)

 

(1)

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

 

(2)

As of February 28, 2017, up to $2,688,605 in shares of NTIC common stock remained available for repurchase under NTIC’s stock repurchase program.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

Not applicable.

 

ITEM 6.

EXHIBITS

 

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

 

Exhibit No.		Description
10.1		Letter Agreement effective as of January 11, 2017 between PNC Bank, National Association and Northern Technologies International Corporation (incorporated by reference to Exhibit 10.1 to NTIC’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2016 (File No. 001-11038))
10.2		Consulting Agreement dated January 11, 2017 by and among Northern Technologies International Corporation, BioPlastic Polymers LLC, and Ramani Narayan, Ph.D. (incorporated by reference to Exhibit 10.2 to NTIC’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2016 (File No. 001-11038))
31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101		The following materials from NTIC’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Consolidated Balance Sheets, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income (Loss), (iv) the unaudited Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements (filed herewith)

 

 

SIGNATURES

 

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

 

	NORTHERN TECHNOLOGIES INTERNATIONAL
	CORPORATION
Date:  April 11, 2017	Matthew C. Wolsfeld, CPA
	Chief Financial Officer
	(Principal Financial and Accounting Officer and
	Duly Authorized to Sign on Behalf of the Registrant)

 

 

 

 

 

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
QUARTERLY REPORT ON FORM 10-Q

 

EXHIBIT INDEX

 

Exhibit No.	Description	Method of Filing
10.1	Letter Agreement effective as of January 11, 2017 between PNC Bank, National Association and Northern Technologies International Corporation	Incorporated by reference to Exhibit 10.1 to NTIC’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2016 (File No. 001-11038)
10.2	Consulting Agreement dated January 11, 2017 by and among Northern Technologies International Corporation, BioPlastic Polymers LLC, and Ramani Narayan, Ph.D.	Incorporated by reference to Exhibit 10.2 to NTIC’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2016 (File No. 001-11038)
31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Furnished herewith
101	The following materials from Northern Technologies International Corporation’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the unaudited Consolidated Balance Sheets, (ii) the unaudited Consolidated Statements of Operations, (iii) the unaudited Consolidated Statements of Comprehensive Income (Loss), (iv) the unaudited Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements	Filed herewith

 

 

 

 

 

 

 

 

37

 

Exhibit 31.1

 

CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

 

I, G. Patrick Lynch, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Northern Technologies International Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  April 11, 2017	G. Patrick Lynch
	President and Chief Executive Officer
	(principal executive officer)

 

Exhibit 31.2

 

CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

 

I, Matthew C. Wolsfeld, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Northern Technologies International Corporation;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:  April 11, 2017	Matthew C. Wolsfeld, CPA
	Chief Financial Officer and Corporate Secretary
	(principal financial officer)

 

 

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Northern Technologies International Corporation (the “Company”) on Form 10-Q for the period ended February 28, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, G. Patrick Lynch, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

_________________________

G. Patrick. Lynch

President and Chief Executive Officer

(principal executive officer)  

 

Circle Pines, Minnesota

April 11, 2017

 

Exhibit 32.2

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Northern Technologies International Corporation (the “Company”) on Form 10-Q for the period ended February 28, 2017 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Matthew C. Wolsfeld, Chief Financial Officer and Corporate Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

_______________________

Matthew C. Wolsfeld, CPA Chief Financial Officer and Corporate Secretary

(principal financial officer and principal accounting
officer)

 

Circle Pines, Minnesota

April 11, 2017