|
(Mark one)
x QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
November 30, 2007
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________.
Commission file number
1-11038
____________________
NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
(Name of small business issuer in its charter)
Delaware | 41-0857886 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
4201 Woodland Rd | |
Circle Pines, Minnesota | 55014 |
(Address of principal executive offices) | (Zip Code) |
(763) 225-6600
(Issuers telephone
number, including area code)
Check whether the issuer (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the past 12 months (or for such shorter period that the
issuer was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes
x No o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2) of the Exchange Act).
Yes o No x
State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date.
Class | Outstanding as of January 11, 2008 |
Common Stock, $0.02 par value | 3,720,522 |
Transitional Small Business
Disclosure Format (check one): Yes o No x |
NORTHERN TECHNOLOGIES INTERNATIONAL
CORPORATION
FORM 10-QSB
November 30,
2007
TABLE OF CONTENTS
Description | Page | |||
PART I. FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | 3 | ||
Consolidated Balance Sheets as of November 30, 2007 (unaudited) and | ||||
August 31, 2007 (audited) | 3 | |||
Consolidated Statements of Operations (unaudited) for the Three Months Ended | ||||
November 30, 2007 and 2006 | 4 | |||
Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended | ||||
November 30, 2007 and 2006 | 5 | |||
Notes to Consolidated Financial Statements | 6-16 | |||
Item 2. | Managements Discussion and Analysis or Plan of Operation | 17-34 | ||
Item 3. | Controls and Procedures | 35 | ||
PART II. OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 36 | ||
Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds and Small Business Issuer | |||
Purchases of Equity Securities | 36 | |||
Item 5. | Other Information | 36 | ||
Item 6. | Exhibits | 37 | ||
SIGNATURE PAGE | 38 | |||
EXHIBIT INDEX | 39 |
____________________
This Quarterly Report on Form 10-QSB 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. Managements Discussion and Analysis or Plan of Operation Forward-Looking Statements.
As used in this report, references to NTIC, the Company, we, our or us, unless the context otherwise requires, refer to Northern Technologies International Corporation, its wholly owned subsidiaries NTI Facilities, Inc. and Northern Technologies Holding Company, LLC, and its majority-owned subsidiary React-NTI, LLC, all of which are consolidated on NTICs financial statements.
All trademarks, trade names or service marks referred to in this report are the property of their respective owners.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTHERN TECHNOLOGIES
INTERNATIONAL CORPORATION AND SUBSIDIARIES |
November 30, | August 31, | |||
2007 | 2007 | |||
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash and cash equivalents | $125,630 | $244,499 | ||
Receivables: | ||||
Trade excluding corporate joint ventures, less allowance for doubtful | ||||
accounts of $20,000 & $30,000 at November 30, 2007 and August 31, 2007 | 1,841,290 | 1,622,420 | ||
Trade corporate joint ventures | 527,751 | 642,518 | ||
Technical and other services, corporate joint ventures | 1,750,235 | 1,514,139 | ||
Income taxes | 13,765 | 29,755 | ||
Inventories | 1,587,360 | 1,636,073 | ||
Prepaid expenses | 383,424 | 184,407 | ||
Deferred income taxes | 562,000 | 562,000 | ||
Total current assets | 6,791,455 | 6,435,811 | ||
PROPERTY AND EQUIPMENT, net | 3,784,700 | 3,792,461 | ||
OTHER ASSETS: | ||||
Investments in corporate joint ventures: | ||||
Industrial chemical | 14,855,299 | 13,180,576 | ||
Industrial non-chemical | 435,675 | 422,266 | ||
Deferred income taxes | 779,500 | 779,500 | ||
Notes receivable | 140,000 | - | ||
Note from employee | - | 32,187 | ||
Industrial patents and trademarks, net | 1,003,240 | 983,206 | ||
Goodwill | 304,000 | 304,000 | ||
Other | 404,253 | 366,749 | ||
17,921,967 | 16,068,484 | |||
$28,498,122 | $26,296,756 | |||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||
CURRENT LIABILITIES: | ||||
Bank overdrafts | $94,637 | $- | ||
Borrowings made on line of credit | 693,000 | - | ||
Current portion of note payable | 29,392 | 29,319 | ||
Accounts payable | 1,260,244 | 1,337,443 | ||
Accrued liabilities: | ||||
Payroll and related benefits | 520,221 | 1,025,858 | ||
Deferred joint venture royalties | 216,000 | 192,000 | ||
Other | 137,904 | 62,414 | ||
Total current liabilities | 2,951,398 | 2,647,034 | ||
NOTE PAYABLE, NET OF CURRENT PORTION | 1,204,486 | 1,211,528 | ||
MINORITY INTEREST | 14,496 | 36,133 | ||
STOCKHOLDERS EQUITY: | ||||
Preferred stock, no par value; authorized 10,000 shares; none issued and outstanding | - | - | ||
Common stock, $0.02 par value per share; authorized 10,000,000 | ||||
shares; issued and outstanding 3,720,522 and 3,683,016, respectively | 74,410 | 73,660 | ||
Additional paid-in capital | 5,140,096 | 4,755,146 | ||
Retained earnings | 16,777,178 | 16,118,982 | ||
Accumulated other comprehensive income | 2,336,058 | 1,454,273 | ||
Total stockholders equity | 24,327,742 | 22,402,061 | ||
$28,498,122 | $26,296,756 |
See notes to consolidated financial statements.
3
NORTHERN TECHNOLOGIES
INTERNATIONAL CORPORATION AND SUBSIDIARIES - |
November 30, | November 30, | |||||
2007 | 2006 | |||||
NORTH AMERICAN OPERATIONS: | ||||||
Net sales | $3,485,585 | $4,617,374 | ||||
Cost of sales | 2,093,691 | 2,945,055 | ||||
Gross profit | 1,391,894 | 1,672,319 | ||||
Operating expenses: | ||||||
Selling | 859,644 | 769,039 | ||||
General and administrative | 948,297 | 822,883 | ||||
Lab and technical support | 57,128 | 85,040 | ||||
1,865,069 | 1,676,962 | |||||
NORTH AMERICAN OPERATING LOSS | (473,175 | ) | (4,643 | ) | ||
CORPORATE JOINT VENTURES AND | ||||||
HOLDING COMPANIES: | ||||||
Equity in income of industrial chemical corporate | ||||||
joint ventures and holding companies | 1,073,034 | 592,990 | ||||
Equity in income (loss) of industrial non-chemical | ||||||
corporate joint ventures and holding companies | (18,352 | ) | 42,229 | |||
Fees for technical support and other services | ||||||
provided to corporate joint ventures | 1,393,795 | 1,132,841 | ||||
Expenses incurred in support of corporate | ||||||
joint ventures | (1,239,175 | ) | (1,316,249 | ) | ||
INCOME FROM ALL CORPORATE JOINT | 1,209,302 | 451,811 | ||||
VENTURES AND HOLDING COMPANIES | ||||||
INTEREST INCOME | 495 | 935 | ||||
INTEREST EXPENSE | (31,523 | ) | (42,881 | ) | ||
OTHER INCOME | 7,930 | 2,093 | ||||
GAIN ON SALE OF ASSETS | 1,529 | 724,495 | ||||
MINORITY INTEREST | 21,638 | (9,586 | ) | |||
INCOME BEFORE INCOME TAX EXPENSE | 736,196 | 1,122,224 | ||||
INCOME TAX EXPENSE | 78,000 | 132,000 | ||||
NET INCOME | $658,196 | $990,224 | ||||
NET INCOME PER COMMON SHARE: | ||||||
Basic | $0.18 | $0.27 | ||||
Diluted | $0.18 | $0.27 | ||||
WEIGHTED AVERAGE COMMON SHARES | ||||||
ASSUMED OUTSTANDING: | ||||||
Basic | 3,692,153 | 3,624,314 | ||||
Diluted | 3,734,102 | 3,668,095 |
See notes to consolidated financial statements.
4
NORTHERN TECHNOLOGIES
INTERNATIONAL CORPORATION AND SUBSIDIARIES - |
November 30, | November 30, | |||||
2007 | 2006 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
Net income | $658,196 | $990,224 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||
Expensing of fair value of stock options vested | 24,680 | 44,793 | ||||
Depreciation expense | 77,309 | 76,156 | ||||
Amortization expense | 35,384 | 40,211 | ||||
Gain on sale of assets | (1,529 | ) | (724,495 | ) | ||
Minority interest | (21,637 | ) | 9,586 | |||
Equity in (income) loss from corporate joint ventures: | ||||||
Industrial chemical | (1,073,034 | ) | (592,990 | ) | ||
Industrial non-chemical | 18,352 | (42,229 | ) | |||
Deferred joint venture royalties | 24,000 | 24,000 | ||||
Change in current assets and liabilities: | ||||||
Receivables: | ||||||
Trade excluding corporate joint ventures | (218,870 | ) | (382,568 | ) | ||
Trade corporate joint ventures | 114,767 | 75,293 | ||||
Technical and other services receivables, corporate joint ventures | (236,096 | ) | 27,891 | |||
Income taxes | 15,990 | 30,613 | ||||
Inventories | 48,713 | 20,124 | ||||
Prepaid expenses and other | (199,017 | ) | (133,853 | ) | ||
Employee note receivable | - | 6,622 | ||||
Accounts payable | (77,199 | ) | 221,694 | |||
Accrued liabilities | (95,877 | ) | 43,649 | |||
Net cash used in operating activities | (905,868 | ) | (265,279 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Investment in joint ventures: | ||||||
Industrial chemical | (87,950 | ) | (81,522 | ) | ||
Proceeds from the sale of assets | 2,200 | 848,667 | ||||
Dividends received from corporate joint ventures | 336,285 | 19,978 | ||||
Issuance of note receivable | (140,000 | ) | - | |||
Additions to property and equipment | (70,219 | ) | (562,845 | ) | ||
Decrease in other assets | (9,697 | ) | (58,716 | ) | ||
Additions to industrial patents | (51,038 | ) | (29,864 | ) | ||
Net cash (used in) provided by investing activities | (20,419 | ) | 135,698 | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Bank overdraft | 94,637 | (299,109 | ) | |||
Repayment of note payable | (6,969 | ) | (6,410 | ) | ||
Net borrowings made on line of credit | 693,000 | 643,000 | ||||
Proceeds from employee stock purchase plan | 26,750 | - | ||||
Net cash provided by financing activities | 807,418 | 337,481 | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (118,869 | ) | 207,900 | |||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 244,499 | 299,117 | ||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $125,630 | $507,017 |
See notes to consolidated financial statements.
5
NORTHERN TECHNOLOGIES
INTERNATIONAL CORPORATION AND SUBSIDIARIES - |
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 November 30, 2007 and the results of their operations for the three months ended November 30, 2007 and November 30, 2006 and their cash flows for the three months ended November 30, 2007 and November 30, 2006, in conformity with accounting principles generally accepted in the United States of America (US GAAP).
These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Companys annual report on Form 10-KSB for the fiscal year ended August 31, 2007 and with the Managements Discussion and Analysis or Plan of Operation section appearing in this quarterly report. Operating results for the three months ended November 30, 2007 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2008.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective September 1, 2007, we adopted the provisions of the FASB Interpretation 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entitys financial statements in accordance with SFAS No. 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken in a tax return. Under FIN 48, the impact of an uncertain tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on subsequent derecognition of tax positions, financial statement classification, recognition of interest and penalties, accounting in interim periods and disclosure and transition rules. The adoption of FIN 48 did not have a material impact on our financial condition, results of operations or cash flows.
As of August 31, 2007, we had $75,000 of unrecognized tax benefits. If recognized, $75,000 would have an impact on our effective tax rate. During the three months ended November 30, 2007, the unrecognized tax benefits have not increased or decreased materially. It is expected that the amount of unrecognized tax benefits will change in the next 12 months; however we can not reasonably estimate that change.
We recognize interest and penalties related to unrecognized tax benefits as a component of our income tax provision. This policy will not change as a result of the adoption of FIN 48. As of September 1, 2007, we recorded a liability of $11,300 for interest and penalties. The liability for the payment of interest and penalties did not materially change during the quarter ended November 30, 2007.
We operate in multiple tax jurisdictions, both within the United States and outside the United States. With certain exceptions, we are no longer subject to examination for tax years prior to 2004. Our tax filings for the years August 31, 2004 and August 31, 2005 were examined by the Internal Revenue Service. The examination has been concluded with the exception of the payroll tax issue discussed within Note 17 to these consolidated financial statements entitled Commitments and Contingencies.
6
On December 4, 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 (Statement 160). Statement 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, Statement 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Statement 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, Statement 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. Statement 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. Statement 160 is effective for fiscal years, and interim periods within those fiscal years, beginning with the quarter ended November 30, 2008. Earlier adoption is prohibited.
On December 4, 2007, the FASB issued FASB Statement No. 141 (Revised 2007), Business Combinations (FAS 141(R)). FAS 141(R) will significantly change the accounting for business combinations. Under Statement 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS 141(R) will change the accounting treatment for certain specific items, including:
FAS 141(R) also includes a substantial number of new disclosure requirements. The statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the fiscal year ended August 31, 2009. Earlier adoption is prohibited.
3. INVENTORIES
Inventories consisted of the following:
November 30, | August 31, | |||
2007 | 2007 | |||
Production materials | $181,070 | $183,658 | ||
Finished goods | 1,406,291 | 1,452,415 | ||
$1,587,360 | $1,636,073 |
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
November 30, | August 31, | |||||
2007 | 2007 | |||||
Land | $310,365 | $310,365 | ||||
Buildings and improvements | 3,048,101 | 3,048,103 | ||||
Machinery and equipment | 1,344,256 | 1,274,707 | ||||
4,702,722 | 4,633,175 | |||||
Less accumulated depreciation | (918,022 | ) | (840,714 | ) | ||
$3,784,700 | $3,792,461 |
7
The Company recognized a gain on the sale of land, building and equipment that previously served as its corporate headquarters of $724,495 during the three months ended November 30, 2006. This was a one-time sale and no additional gain is anticipated to be recognized relating to the building in the future as the entire sale was received in cash and the Company does not have any continued interest in the property sold.
5. INDUSTRIAL PATENTS AND TRADEMARKS, NET
Industrial patents and trademarks, net consisted of the following:
November 30, | August 31, | |||||
2007 | 2007 | |||||
Patents and trademarks | $1,463,246 | $1,412,209 | ||||
Less accumulated amortization | (460,006 | ) | (429,003 | ) | ||
$1,003,240 | $983,206 |
Patent and trademark costs are amortized over seven years once a patent or trademark is filed and approved. Amortization expense related to patents and trademarks was $31,004 and $40,213 for the three months ended November 30, 2007 and 2006, respectively. Amortization expense is estimated to approximate $140,000 in each of the next five fiscal years.
6. INVESTMENTS IN CORPORATE JOINT VENTURES
Composite financial information from the audited and unaudited financial statements of the Companys joint ventures carried on the equity basis is summarized as follows:
November 30, | August 31, | |||
2007 | 2007 | |||
Current assets | $48,001,145 | $42,767,569 | ||
Total assets | 54,939,063 | 49,312,491 | ||
Current liabilities | 17,167,450 | 14,939,496 | ||
Noncurrent liabilities | 5,564,480 | 4,971,199 | ||
Joint ventures equity | 32,207,133 | 29,401,796 | ||
Northern Technologies International Corporations | ||||
share of Corporate Joint Ventures equity | $15,240,974 | $13,602,842 | ||
November 30, | November 30, | |||
2007 | 2006 | |||
Net sales | $23,944,115 | $18,879,432 | ||
Gross profit | 11,009,748 | 9,068,677 | ||
Net income | 1,697,769 | 1,624,028 | ||
Northern Technologies International Corporations share of | ||||
equity in income of Corporate Joint Ventures | $1,054,682 | $635, 219 |
8
The financial statements of the Companys foreign joint ventures are prepared using accounting principles accepted in the joint ventures country of domicile. Amounts related to foreign joint ventures reported in the above tables and the accompanying financial statements have been adjusted to approximate US GAAP in all material respects.
During the three months ended November 30, 2007, the Company invested $87,950 in a non-industrial chemical joint venture in Thailand in addition to $143,000 previously invested in December 2006. The Company has a 50% ownership interest in the joint venture entity. The joint venture entity had no operations prior to the Companys investment in December 2006. The total capitalization by both owners of the joint venture was $461,900 as of November 30, 2007.
7. GOODWILL
The Company tests goodwill annually for impairment and in interim periods if certain events occur indicating that the carrying value of goodwill may be impaired. Goodwill at both November 30, 2007 and August 31, 2007 was $304,000.
8. CORPORATE DEBT
The Company has a revolving credit facility of $1,500,000 that expires on January 31, 2008. Outstanding amounts under the revolving credit facility bear interest at an annual rate based on LIBOR plus 2.25%. As of November 30, 2007, the interest rate was 7.49% and the average interest rate over the quarter ended November 30, 2007 and 2006 was 7.43% and 7.25%, respectively. Amounts borrowed under the facility are collateralized by a lien on substantially all of the Companys assets, excluding its corporate joint venture interests, intellectual property rights and its Circle Pines headquarters. The credit documents contain other terms and provisions (including representations, covenants and conditions) customary for transactions of this type. Significant financial covenants include the maintenance of a minimum fixed charge coverage ratio of 1.0 to 1.0. The Company is in compliance with all covenants under the revolving credit facility. Outstanding balances were $693,000 and $0 as of November 30, 2007 and August 31, 2007, respectively.
The Company entered into a term loan with a principal amount of $1,275,000 that matures on May 1, 2011, bears interest at a fixed rate of 8.01% and is payable in 59 monthly payments equal to approximately $10,776 (inclusive of principal and interest). All of the remaining unpaid principal and accrued interest is due and payable on the maturity date. The term loan note is secured by a first lien on the Companys Circle Pines facility pursuant to a Mortgage dated as of May 3, 2006 between Northern Technologies Holding Company LLC and National City Bank and is guaranteed by the Company. Future minimum principal payments on the term loan are as follows:
Fiscal 2008 | $22,350 | ||
Fiscal 2009 | $31,411 | ||
Fiscal 2010 | $34,897 | ||
Fiscal 2011 | $1,145,220 |
9. STOCKHOLDERS EQUITY
During the three months ended November 30, 2007, the Company did not purchase or retire any shares of its common stock and no stock options to purchase shares of the Companys common stock were exercised. The Company granted stock bonuses under the Northern Technologies International Corporation 2007 Stock Incentive Plan for an aggregate of 33,595 shares of its common stock to various employees during the three months ended November 30, 2007. The fair value of the shares of the Companys common stock as of the date of grant of the stock bonuses was $334,270, based on the closing sale price of a share of the Companys common stock on that date.
9
During the three months ended November 30, 2006, the Company did not purchase or retire any shares of its common stock and no stock options were exercised. The Company granted stock bonuses under the Northern Technologies International Corporation 2000 Stock Incentive Plan for an aggregate of 37,245 shares of its common stock to various employees during the three months ended November 30, 2006. The fair value of the shares of the Companys common stock as of the date of grant of the stock bonuses was $298,330, based on the closing sale price of a share of the Companys common stock on that date.
10. TOTAL COMPREHENSIVE INCOME
The Companys total comprehensive income was as follows:
November 30, | November 30, | |||
2007 | 2006 | |||
Net income | $658,196 | $990,224 | ||
Other comprehensive income: foreign currency translation adjustment | 881,785 | 371,450 | ||
Total comprehensive income | $1,539,981 | $1,361,674 |
11. 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.
No options to purchase shares of common stock were excluded from the computation of common share equivalents as of November 30, 2007 and November 30, 2006, as all stock option exercise prices were less than the average market price of a share of common stock.
12. STOCK-BASED COMPENSATION
The Company regularly grants stock options to individuals under various plans. In January 2007, the Companys stockholders approved the Northern Technologies International Corporation 2007 Stock Incentive Plan and the Northern Technologies International Corporation Employee Stock Purchase Plan. The Compensation Committee of the Board of Directors administers both of the plans.
The 2007 plan replaced the Northern Technologies International Corporation 2000 Stock Incentive Plan, which was terminated with respect to future grants, but will continue to govern grants outstanding under such plan. The 2007 plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, stock unit awards, performance awards and stock bonuses to eligible recipients to enable the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company, and to reward those individuals who contribute to the achievement of the Companys economic objectives. Up to a total of 400,000 shares of the Companys common stock has been reserved for issuance under the 2007 plan, subject to adjustment as provided in the 2007 plan. Options granted under the 2007 plan generally have a term of five years and become exercisable over a three- or four-year period beginning on the one-year anniversary date of the grant. Options are granted at per share exercise prices equal to the market value of the Companys common stock on the date of grant.
In addition to the 2007 Stock Incentive Plan, the Company also maintains the Northern Technologies International Corporation Employee Stock Purchase Plan (ESPP). The maximum number of shares of the Companys common stock 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 the Companys 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.
10
FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R)) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on the fair value of the equity or liability instrument issued. The Company implemented FAS 123(R) on September 1, 2006, using the modified prospective transition method.
The Company granted options to purchase 37,140 and 14,000 shares of its common stock during the three months ended November 30, 2007 and 2006, 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 $24,680 and $44,793 during the three months ended November 30, 2007 and 2006, respectively, related to the options that vested during such time period. The stock-based expense recorded reduced after-tax net income per share by $0.01 and $0.02 for the three months ended November 30, 2007 and 2006, respectively. As of November 30, 2007, the total compensation cost for non-vested options not yet recognized in the Companys statements of income was $172,738, net of estimated forfeitures. Additional stock-based compensation expense of $74,041 is expected through the remainder of fiscal year 2008, and expense of $54,843 and $43,854 is expected to be recognized during fiscal 2009 and 2010, respectively. Future option grants will impact the compensation expense recognized.
The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions and results for the grants:
November 30, | November 30, | |||
2007 | 2006 | |||
Dividend yield | 2.00% | 2.00% | ||
Expected volatility | 42.0% | 42.9% | ||
Expected life of option | 5 years | 5 years | ||
Average risk-free interest rate | 3.84% | 4.67% |
Dividend yield and expected volatility are estimated using historical amounts that are anticipated to be consistent with current values. Expected life of option is based on the life of the option agreements. The risk free interest rate used is based on U.S. treasury rates appropriate for the expected term.
Stock option activity during the periods indicated is as follows:
Weighted | ||||||
Average | ||||||
Number of | Exercise | Aggregate | ||||
Shares (#) | Price | Intrinsic Value | ||||
Outstanding at August 31, 2007 | 86,167 | $5.67 | ||||
Granted | 37,140 | $9.32 | ||||
Exercised | - | - | ||||
Terminated | - | - | ||||
Outstanding at November 30, 2007 | 123,307 | $5.67 | $488,930 | |||
Exercisable at August 31, 2007 | 28,672 | $5.46 | ||||
Exercisable at November 30, 2007 | 56,732 | $5.62 | $227,787 | |||
Available for future grant at November 30, 2007 | 328,098 |
11
The following table summarizes information about stock options outstanding and exercisable at November 30, 2007:
Per Share | Remaining | Number of | Number of | |||||
Option Grant | Exercise | Contractual Life | Options | Options | ||||
Date | Prices | (years) | Outstanding (#) | Exercisable (#) | ||||
9/1/2003 | $5.30 | 0.8 | 2,000 | 2,000 | ||||
9/1/2004 | 5.25 | 1.8 | 4,000 | 4,000 | ||||
11/12/2004 | 6.15 | 2.0 | 3,000 | 3,000 | ||||
9/1/2005 | 5.75 | 2.8 | 10,000 | 6,670 | ||||
11/4/2005 | 5.38 | 2.9 | 56,000 | 37,338 | ||||
9/1/2006 | 8.01 | 3.8 | 10,000 | 3,335 | ||||
1/23/2007 | 7.51 | 4.2 | 1,167 | 389 | ||||
9/1/2007 | 8.01 | 4.8 | 12,000 | 0 | ||||
11/16/2007 | $9.95 | 5.0 | 25,140 | 0 | ||||
123,307 | 56,732 |
The weighted average fair value of options granted during the three months ended November 30, 2007 and 2006 was $3.54 and $2.95, respectively.
13. SEGMENT INFORMATION
Net sales by geographic location as a percentage of total consolidated net sales were as follows:
November 30, | November 30, | |||
2007 | 2006 | |||
Inside the U.S.A. to unaffiliated customers | 75.9% | 80.4% | ||
Outside the U.S.A. to: | ||||
Corporate Joint Ventures in which the Company is | ||||
a shareholder directly and indirectly | 15.9 | 11.7 | ||
Unaffiliated customers | 8.2 | 7.9 | ||
100% | 100% |
One of the Companys North American customers accounted for in the aggregate approximately 7.3% and 33.5% of the Companys net sales for the three months ended November 30, 2007 and 2006 respectively, and $199,090 and $144,999 of the Companys receivables at November 30, 2007 and August 31, 2007, respectively.
14. RETIREMENT PLAN
The Company has a 401(k) employee savings plan. Employees who meet certain age and service requirements may elect to contribute up to 15% of their salaries. The Company contributes the lesser of 50% of the participants contributions or 3.5% of the employees salary. The Company recognized expense for the savings plan of $40,987 and $26,426, for the three months ended November 30, 2007 and 2006, respectively.
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15. RELATED PARTY TRANSACTIONS
On May 18, 2006, the Company and Emeritushnic Facilities Company, Inc. (EFC), an entity owned by the Companys former Chairman of the Board and Chief Executive Officer and current Chairman Emeritus, Philip M. Lynch, and certain of his family members, excluding G. Patrick Lynch, the Companys current President and Chief Executive Officer, entered into a Consulting Agreement, effective as of May 1, 2006. Pursuant to the Consulting Agreement, the Company has engaged EFC to perform certain consulting services to the Company, including maintaining communications and relations between the Company and its joint venture partners. In consideration for such services, the Company paid EFC consulting fees totaling $75,000 during both the three months ended November 30, 2007 and 2006, and reimbursed EFC for out-of-pocket expenses reasonably incurred in the course of providing such services in an aggregate amount of $48,554 and $47,085 for the three months ended November 30, 2007 and 2006, respectively. The Consulting Agreement provides for fees of $25,000 per month and up to $180,000 in expense reimbursement in a given fiscal year. Additionally, it may be terminated by either party for any reason upon at least 90 days prior written notice to the other party and may be terminated upon the occurrence of other certain events, as set forth in the Consulting Agreement. The Consulting Agreement also contains other standard and customary terms, including provisions regarding confidentiality, non-competition and non-solicitation.
The Company made consulting payments to Bioplastic Polymers LLC which is owned by Dr. Ramani Narayan, a director of the Company, of $25,000 on each of November 2, 2006, February 1, 2007, May 1, 2007 and August 1, 2007. The consulting services rendered by Bioplastic Polymers LLC are related to research and development associated with various new technologies and are contracted on an annual basis paid monthly and cancellable by the Company at any time. During the three months ended November 30, 2007, no payments were made to Bioplastic Polymers LLC; however, the Company has accrued expenses totaling $25,000 during the three months ended November 30, 2007. Additionally, the Company has been invoiced by Bioplastic Polymers LLC and is anticipating making payments totaling $100,000 by the end of fiscal year 2008.
The Company made consulting payments to Dr. Sunggyu Lee, a director of the Company, of $25,000 on November 28, 2006 and February 1, 2007. The consulting services rendered by Dr. Lee related to research and development associated with various new technologies. In May 2007, the consulting arrangement between the Company and Dr. Lee was terminated.
The Company pays rent for its Beachwood office and lab location to a related party. See Note 17.
16. INCOME TAXES
Reconciliations of the expected federal income tax at the statutory rate with the provisions for income taxes for the three months ended November 30 are as follows:
November 30, | November 30, | |||||
2007 | 2006 | |||||
Tax computed at statutory rates | $265,000 | $377,000 | ||||
Tax effect on equity in income of international joint ventures | (380,000 | ) | (213,000 | ) | ||
Tax effect on dividends received from corporate joint ventures | 144,000 | 7,000 | ||||
Research and development credit | (32,000 | ) | (50,000 | ) | ||
Other | 81,000 | 11,000 | ||||
$78,000 | $132,000 |
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17. COMMITMENTS AND CONTINGENCIES
In April 2007, REACT-NTI, LLC (React LLC), a company that is 75% owned by the Company, was served with a summons and complaint that was filed by Shamrock Technologies, Inc. (Shamrock) in state court in New York. This case has been removed to the Federal District Court for the Southern District of New York. The lawsuit seeks payment from React LLC of commissions in the approximate amount of $314,500 owed by React LLC under a license agreement between React LLC and Shamrock. The complaint alleges breach of the license agreement by React LLC and seeks damages in an unspecified amount for such breach as well as damages of approximately $300,000 for the alleged failure of React LLC to purchase from Shamrock certain inventory manufactured for sale to a customer. React LLC acknowledges that React LLC has not made payment for product in the approximate amount of $300,000 to Shamrock as the invoice for this was only received after Shamrock had already filed its complaint, but denies all of the claims of breach of the license agreement by it and believes that damages caused by Shamrocks breach of the License Agreement and tortious conduct exceed any amounts owing to Shamrock. React LLC formally responded to the complaint after removal by moving to dismiss or stay because of Shamrocks failure to comply with alternative dispute resolution procedures contained in the license agreement. By court order, the matter is presently stayed, and the parties will attempt mediation. If the mediation is unsuccessful, React LLC will both defend against Shamrocks allegations and pursue counterclaims against Shamrock for breach of the license agreement and for tortious interference. Because this matter is in the early stage, the Company cannot estimate the possible loss or range of loss, if any, associated with its resolution. However, there can be no assurance that the ultimate resolution of the matter will not result in a material adverse effect on the Companys business, financial condition or results of operations.
In February 2007, the Company was named as a defendant in a lawsuit brought by Evelyna Cantwell and Jack Cantwell, individually, and also doing business as the principals of Byrd-Walsh International, LLC, in United States Federal District Court for the Southern District of Florida against the Company and its former Chairman of the Board and Chief Executive Officer and current Chairman Emeritus, Philip M. Lynch. The lawsuit alleges causes of action for breach of contract, breach of implied contract, quasi contract, promissory estoppel, equitable estoppel, negligence, wrongful conversion, fraud, constructive fraud, misappropriation and violation of the Uniform Trade Secrets Act. The suit seeks unspecified injunctive relief as well as compensatory and punitive damages in an unspecified amount which, based on the allegations of the complaint, may be claimed by plaintiffs to be in an amount in excess of $45 million. Based on the allegations in the complaint and the Companys understanding of relevant facts and circumstances, the Company believes that the claims made by the Cantwells and Byrd-Walsh in this lawsuit are without merit and the Company intends to vigorously defend against them. Because this matter is in the early stage, the Company cannot estimate the possible loss or range of loss, if any, associated with its resolution. The amounts claimed in this lawsuit are substantial, however, and, there can be no assurance that the ultimate resolution of the matter will not result in a material adverse effect on the Companys business, financial condition or results of operations.
The Company is involved in a legal action in Finland whereby the Company sued a Finnish company for trademark infringement. Upon initiation of legal action, the courts seized the inventory of the Finnish company as contraband. The Company won the initial case, but has subsequently lost on appeal. The Company is currently appealing the latest court decision. The outcome of the appeal is unknown and any potential loss cannot be estimated at this time; however, the potential judgment or settlement resulting from the case could have a material impact on the financial position or results of operations of the Company due to claims against the Company related to expiration of inventory seized from the Finnish company. The Company has obtained a $600,000 stand-by letter of credit to potentially fund the Companys obligations related to the courts in Finland against the defendants products that were seized as contraband. Advances made under the demand letter of credit will be made at the sole discretion of National City Bank and will be due and payable on demand. Any outstanding unpaid principal balance under the demand letter of credit bears interest at an annual rate based on LIBOR plus 2.25%. Interest is payable in arrears beginning on January 15, 2007 and on the 15th day of each month thereafter and on demand. Because the Company believes that it has valid legal grounds for appeal, it has determined that a loss is not probable at this time as defined by SFAS 5, “Accounting for Contingencies.” However, there can be no assurance that the ultimate resolution of the matter will not result in a material adverse effect on the Company’s business, financial condition or results of operations.
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The Company is involved in various other legal actions arising in the normal course of business. Management is of the opinion that any judgment or settlement resulting from these pending or threatened actions would not have a material adverse effect on the Companys financial position or consolidated results of operations.
In June 2007, the U.S. Internal Revenue Service concluded its audit of the Companys U.S. federal income tax returns for fiscal 2004 and 2005. As a result of such audit, the Company paid the IRS approximately $25,000 in additional payroll taxes. The Company also agreed in principle with the IRS to adjustments that will result in the additional payment of approximately $60,000 in income tax and interest. As a result of the audit, the IRS has also taken the position that the Company failed to withhold and has assessed against the Company approximately $505,000 of payroll taxes and individual income taxes on travel and other expense reimbursements made to Philip M. Lynch, the Companys former Chairman of the Board and Chief Executive Officer and current Chairman Emeritus, and commissions payments made to Inter Alia Holding Co. under that certain former Manufacturers Representative Agreement dated as of October 1, 1976 and as subsequently amended thereafter between the Company and Inter Alia, which agreement has since been terminated. Inter Alia beneficially owns approximately 24.9% of the Companys outstanding common stock, and Philip M. Lynch, the Companys former Chairman of the Board and Chief Executive Officer and current Chairman Emeritus, and G. Patrick Lynch, the Companys current President and Chief Executive Officer, are shareholders of Inter Alia. The Company disagrees with the IRS position on withholding and is in the process of appealing the matter. Because the Company believes that it has valid legal grounds for appeal, it has determined that a loss is not probable at this time as defined by SFAS 5, Accounting for Contingencies. However, there can be no assurance that the ultimate resolution of the matter will not result in a material adverse effect on the Companys business, financial condition or results of operations.
In fiscal 1999, a subsidiary of the Company, NTI Facilities, Inc., acquired a one-third ownership of Omni-Northern Ltd., an Ohio limited liability company and entered into a lease agreement with Omni-Northern Ltd. for approximately 50% of the net rental space in a building owned by Omni-Northern Ltd. Omni-Northern Ltd. owns and operates a rental property located at 23205 Mercantile Road, Beachwood, Ohio, comprising approximately two acres of land and a building of approximately 34,000 square feet. NTI Facilities consolidates its ownership in Omni-Northern LTD utilizing the equity method of consolidation. The property has an approximate value of $2,205,000, based upon the cash-to-mortgage acquisition price of the property paid in fiscal 2000. The Company has guaranteed up to $329,082 of the Omni-Northern Ltd.s $1,903,571 mortgage obligation with National City Bank, Cleveland, Ohio. NTI Facilities, Inc. entered into a 15-year lease agreement with Omni-Northern Ltd. for approximately 17,000 square feet of office, manufacturing, laboratory and warehouse space, requiring monthly rental payments of $17,500, which are adjusted annually according to the annual consumer price index, through November 2014. By its ownership interest in Omni-Northern Ltd., NTI Facilities Inc. is entitled to one-third of the operating profits (losses) of Omni-Northern Ltd. Omni-Northern has leased the remaining 50% of the net rental space to other third parties.
15
On November 16, 2007, the Companys Board of Directors, upon recommendation of the Compensation Committee, approved the material terms of an annual bonus plan for executive officers and certain employees of the Company for fiscal year ending August 31, 2008, the purpose of which is to align the interests of the Company and its subsidiaries, executive officers and stockholders by providing an incentive for the achievement of key corporate and individual performance measures that are critical to the success of the Company and linking a significant portion of each executive officers annual compensation to the achievement of such measures. The following is a brief summary of the material terms approved by the Board:
18. STATEMENTS OF CASH FLOWS
The Company did not declare or pay any cash dividends during fiscal 2007 and as of January 11, 2008, had not declared or paid any cash dividends during fiscal 2008.
The Company issued 33,595 and 37,245 shares of common stock as stock bonuses under its stock incentive plans to various employees to satisfy $334,270 and $298,330 of accrued payroll liability during the quarter ended November 30, 2007 and 2006, respectively.
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ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Managements Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess NTICs financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the headings Forward-Looking Statements and Risk Factors appearing elsewhere in this report. The following discussion of the results of the operations and financial condition of NTIC should be read in conjunction with NTICs consolidated financial statements and the related notes thereto included under Part I, Item 1 entitled Financial Statements of this report.
General Overview
NTIC focuses on developing, marketing and selling proprietary environmentally responsible materials science based products and technical services directly and via a network of independent distributors, manufacturers representatives and joint ventures in over 50 countries. NTIC manufactures, markets and sells primarily rust and corrosion inhibiting products and services for automotive, electronics, electrical, mechanical and military applications, sold under the brand names Zerust® and EXCOR®. NTIC also offers direct, worldwide on-site technical support on rust and corrosion issues. In North America, NTIC markets its technical services and Zerust® products principally to industrial users by a direct sales force and through a network of independent distributors and sales representatives. NTICs technical service representatives work directly with the end users of NTICs products to analyze their specific needs and develop systems to meet their technical requirements. NTICs consolidated net sales were derived from the sales of Zerust® rust and corrosion inhibiting packaging products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets.
NTIC participates, either directly or indirectly through holding companies, in 29 corporate joint venture arrangements in North America, South America, Europe, Asia and the Middle East. Each of these joint ventures manufactures, markets and sells finished products generally in the countries to which it is assigned. NTICs joint venture partners are knowledgeable in the applicable environmental, labor, tax and other requisite regulations and laws of the respective foreign countries in which they operate, as well as the local customs and business practices. While most of NTICs joint ventures currently sell rust and corrosion inhibiting products and custom packaging systems, NTIC also has joint ventures that manufacture, market and sell or intend to manufacture, market or sell bio-based additives with both industrial and personal care applications, machinery that converts waste plastics back into diesel, gasoline and mid-distillates and electronic sensing instruments. The Company categorizes its joint ventures into two principal areas: industrial chemical and non-industrial chemical.
NTICs consolidated net sales in North America decreased 24.5% during the three months ended November 30, 2007 as compared to the three months ended November 30, 2006 primarily as a result of the anticipated loss of its React-NTI, LLC subsidiarys most significant customer as discussed in more detail below under the heading Recent Development. However, since the profit on React-NTI LLCs product sales to this customer was extremely small, the effect on NTICs net income during the three months ended November 30, 2007 was not material. Net income decreased 33.5% to $658,196, or $0.18 per diluted common share, during the three months ended November 30, 2007 compared to $990,224, or $0.27 per diluted common share, during the three months ended November 30, 2006, primarily as a result of a one-time gain on sale of assets of $724,495 during the first three months of fiscal 2007. NTIC anticipates that its net sales will continue to decrease significantly during the remainder of fiscal 2008 compared to the same periods in fiscal 2007 as a result of the loss of the significant React-NTI customer. NTIC does not expect, however, that the decrease will have a material adverse effect on NTICs future consolidated net income.
Despite the decrease in NTICs consolidated net sales in North America, sales of NTICs rust and corrosion inhibiting products in North America increased during the three months ended November 30, 2007 compared to the same period in fiscal 2007. Net sales of NTICs Zerust® products increased 6.8% to $3,229,123 during the three months ended November 30, 2007 as compared to $3,023,384 during the three months ended November 30, 2006.
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NTICs international rust and corrosion inhibiting product business has expanded significantly during the past several fiscal years. Total net sales of all of NTICs joint ventures increased 26.8% to $23,944,115 during the three months ended November 30, 2007 as compared to $18,879,432 during the three months ended November 30, 2006. The profits of NTICs corporate joint ventures are shared, however, by the respective corporate joint venture owners in accordance with their respective ownership percentages. In addition, NTICs receipt of funds as a result of sales by its joint ventures are dependent upon NTICs receipt of dividend distributions from the joint ventures and NTICs receipt of fees for technical and other support services that NTIC provides to its joint ventures based on the revenues of the joint ventures. NTIC typically owns 50% or less of its joint venture entities and thus does not control the decisions of these entities regarding whether to pay dividends and how much in dividends in any given year. NTICs income from its corporate joint ventures and holding companies increased 167.7% to $1,209,302 for the three months ended November 30, 2007 compared to $451,811 for the three months ended November 30, 2006.
In an effort to increase net sales, NTIC is in the process of expanding the application of its corrosion inhibiting technology to include solutions targeted at the oil and gas industry and its product line to include biodegradable and compostable plastics and machinery that converts waste plastics back into diesel, gasoline and mid-distillates. During fiscal 2008, NTIC expects to invest in aggregate between $2,800,000 and $3,200,000 in additional research and development and marketing efforts and resources into these new emerging businesses, product lines and markets. During the first quarter of fiscal 2008, NTIC invested approximately $715,564 in additional research and development and marketing efforts and resources into these new emerging businesses, product lines and markets. NTIC anticipates additional revenue from these new technologies in fiscal year ending August 31, 2008; however, no assurance can be provided that such new businesses will be successful or that NTIC will be successful in obtaining such additional revenue.
Recent Development
NTICs consolidated financial statements include the accounts of Northern Technologies International Corporation, its wholly owned subsidiaries, NTI Facilities, Inc. and Northern Technologies Holding Company, LLC, and its 75% owned subsidiary React-NTI LLC (React-NTI).
React-NTI is an industrial chemical corporate joint venture of NTIC that focuses on the development, manufacture and marketing of proprietary lines of bio-based additives with both industrial and personal care applications. Based on cotton, soy, corn and other renewable resources, React-NTI products outperform many synthetically derived competing alternatives. React-NTIs target market includes NTICs existing industrial customer base, as well as the personal care and cosmetics industry. As of February 28, 2005, NTIC began fully consolidating this 75% owned subsidiary, which was previously accounted for using the equity method.
Since NTIC has been consolidating React-NTI, the sales of React-NTI included in NTICs consolidated net sales have consisted almost entirely of sales by React Inc., a 100% owned subsidiary of React-NTI, of proprietary ink additives to one customer. As previously disclosed by NTIC, during fourth quarter of fiscal 2007, this single customer notified React Inc. of the intent to purchase Reacts remaining inventory of ink additives, but that after such inventory was depleted, the customer would not place any future orders with React Inc. Sales by React Inc. to this customer were pursuant to standard purchase orders and not pursuant to any agreement between React Inc. and this customer containing minimum purchase requirements or similar provisions obligating the customer to purchase future products from React Inc.
React-NTI had consolidated sales of $256,462 and $1,593,990 in the three months ended November 30, 2007 and the three months ended November 30, 2006, respectively. A vast majority of such sales by React-NTIC were from React Inc., which had sales of $248,160 during the three months ended November 30, 2007 and $1,571,640 during the three months ended November 30, 2006.
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NTIC anticipates no additional sales for React Inc. after the three months ended November 30, 2007. Accordingly, the loss of Reacts sole customer has had and is expected to continue to have a material adverse impact on NTICs consolidated net sales. However, since the profit on Reacts sales of the ink additives to this customer was extremely small, the effect on NTICs net income during the three months ended November 30, 2007 was not material and NTIC does not expect that the anticipated continued decrease in net sales by React will have a material adverse effect on NTICs future consolidated net income.
Financial Overview
NTIC conducts all foreign transactions based on the U.S. dollar, except for its investments in various foreign corporate joint ventures and holding companies. The exchange rate differential relating to investments in foreign corporate joint ventures and holding companies is accounted for under the requirements of SFAS No. 52, Foreign Currency Translation. Since NTICs investments in its corporate joint ventures and holding companies 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 the equity in income of joint ventures and holding companies reflected in NTICs consolidated statement of income.
NTICs consolidated net sales decreased 24.5% during the three months ended November 30, 2007 as compared to the three months ended November 30, 2006 primarily as a result of the loss of React Incs principal customer as described above, partially offset by an increase in demand for Zerust® products. Net sales of React-NTI products decreased $1,337,528 to $256,462 during the three months ended November 30, 2007 as compared to the three months ended November 30, 2006. Net sales of Zerust® products increased 6.8% to $3,229,123 during the three months ended November 30, 2007 as compared to $3,023,384 during the three months ended November 30, 2006. As discussed in more detail above under the heading Recent Development, NTIC anticipates that its net sales will significantly decrease during the remainder of fiscal 2008 compared to the same periods in fiscal 2007 as a result of the loss of a principal customer of a subsidiary of NTICs React-NTI joint venture.
Cost of sales as a percentage of net sales decreased to 60.0% in the three months ended November 30, 2007 as compared to 63.8% for the three months ended November 30, 2006 primarily as a result of the significant decrease during the three months ended November 30, 2007 as compared to the same period during fiscal 2007 of React Inc. sales which are sold at lower margins than NTICs Zerust® products.
NTIC spent $715,564 in the three months ended November 30, 2007 and $710,296 in the three months ended November 30, 2006 in connection with its research and development activities. NTIC anticipates that it will spend between $2,800,000 and $3,200,000 in total during fiscal 2008 on research and development activities related to its new technologies. These fees are accounted for in the Expenses incurred in support of corporate joint ventures section of NTICs consolidated statements of income.
Total net sales of all of NTICs joint ventures increased 26.8% to $23,944,115 during the three months ended November 30, 2007 as compared to $18,879,432 during the three months ended November 30, 2006. NTICs equity in income of corporate joint ventures and holding companies increased 66.1% to $1,054,682 during the three months ended November 30, 2007 as compared to $635,219 during the three months ended November 30, 2006. NTIC also recognized increased fee income for such technical and support services during the three months ended November 30, 2007 as compared to the three months ended November 30, 2006 as a result of the increase in total net sales of the joint ventures. NTIC incurred decreased direct expenses related to its corporate joint ventures and holding companies during the three months ended November 30, 2007 as compared to the three months ended November 30, 2006. NTICs income from its corporate joint ventures and holding companies increased 167.7% to $1,209,302 for the three months ended November 30, 2007 compared to $451,811 for the three months ended November 30, 2006.
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NTICs working capital was $3,840,057 at November 30, 2007, including $125,630 in cash and cash equivalents. Additionally, as of November 30, 2007, NTIC had borrowings under its $1,500,000 revolving credit facility of $693,000. The revolving credit facility expires on January 31, 2008. NTIC intends to renew or replace this facility on or prior to the January 31, 2008 maturity date.
NTIC elected not to pay a cash dividend to its stockholders in fiscal 2007 or thus far in fiscal 2008 in order to preserve cash and make investments in future operations. NTIC expects to meet its future liquidity requirements during at least the next twelve months by using its existing cash and cash equivalents, forecasted cash flows from future operations, distributions of earnings and technical assistance fees to NTIC from its joint venture investments and funds available through existing or anticipated financing arrangements.
Results of Operations
The following table sets forth NTICs results of operations for the three months ended November 30, 2007 and 2006.
November 30, | % of Net | November 30, | % of Net | % | ||||||||||||
2007 | Sales | 2006 | Sales | $ Change | Change | |||||||||||
Net sales | $3,485,585 | 100.0 | % | $4,617,374 | 100.0 | % | (1,131,789 | ) | (24.5 | %) | ||||||
Cost of goods sold | 2,093,691 | 60.0 | % | 2,945,055 | 63.8 | % | (851,364 | ) | (28.9 | %) | ||||||
Selling expenses | 859,644 | 24.66 | % | 769,039 | 16.7 | % | 90,605 | 11.8 | % | |||||||
General and administrative expenses | 948,297 | 27.2 | % | 822,883 | 17.8 | % | 125,414 | 15.2 | % | |||||||
Lab and technical support expenses | 57,128 | 1.6 | % | $85,040 | 1.8 | % | (27,912 | ) | (32.8 | %) |
Net Sales. NTICs net sales originating in the United States decreased during the three months ended November 30, 2007 compared to the same period in fiscal 2007 primarily as a result of the loss of the principal customer of React Inc. as discussed in more detail above under the heading Recent Development, partially offset by an increase in demand for Zerust® products sold to existing customers.
Cost of Goods Sold. Cost of goods sold decreased as a percentage of net sales for the three ended November 30, 2007 compared to the same period in fiscal 2007 primarily as a result of the significant decrease of React Inc. sales which are sold at lower margins than NTICs Zerust® products
Selling Expenses. NTICs selling expenses increased for the three months ended November 30, 2007 compared the same period in fiscal 2007 primarily as a result of increases in (i) marketing trial expenses of $56,000, (ii) new employee hire expense of $40,000 and (iii) salary and related benefit expenses of $40,000, partially offset by decreases in travel and related expenses of $18,000. Selling expenses as a percentage of net sales increased significantly due to the decrease in React Inc. net sales that is discussed in more detail above under the heading Recent Development for the three months ended November 30, 2007 compared to same period in fiscal 2007.
General and Administrative Expenses. NTICs general and administrative expenses increased for the three months ended November 30, 2007 compared to same period in fiscal 2007 primarily as a result of increases in (i) audit and tax expense of $134,000 and (ii) salary and benefits expenses of $25,000, partially offset by decreases in (i) information technology expenses of $25,000 and (ii) insurance expense of $37,000. As a percentage of net sales, general and administrative expenses increased significantly due to the decrease in React Inc. net sales that is discussed in more detail above under the heading Recent Development for the three months ended November 30, 2007 compared to same period in fiscal 2007.
NTIC includes expenses in general and administrative expenses that provide benefit to the various joint ventures in addition to providing benefit to NTICs North American operations, including specifically, expenses associated with information technology, general insurance, building expenses, audit and tax and directors fees.
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Lab and Technical Support Expenses. NTICs lab and technical support expenses decreased slightly for the three months ended November 30, 2007 compared to the same period in fiscal 2007. As a percentage of net sales, lab and technical support expenses remained relatively stable for the three months ended November 30, 2007 compared to same period in fiscal 2007.
International Corporate Joint Ventures and Holding Companies. Net sales of NTICs corporate joint ventures in fiscal 2007 and fiscal 2006, excluding React-NTI LLC, were as follows:
Three Months | Three Months | ||
Ended | Ended | ||
November 30, | November 30, | ||
2007 | 2006 | ||
Industrial chemical | $23,626,448 | $18,320,653 | |
Non-industrial chemical | 317,667 | 558,780 | |
Total | $23,944,115 | $18,879,433 |
NTIC had equity in income of corporate joint ventures and holding companies of $1,054,682 during the three months ended November 30, 2007 as compared to $635,219 during the three months ended November 30, 2006. The increase in equity in income was due to the significant increase in sales and profitability from the corporate joint ventures as a whole due to increasing global demand of NTICs Zerust® products and services.
NTIC receives fees for technical and other support services it provides to its corporate joint ventures based on the revenues of the individual corporate joint ventures. NTIC recognized fee income for such support of $1,393,795 in the three months ended November 30, 2007 compared to $1,132,841 during the same period in fiscal 2007. The increase in fees for technical and other support to its corporate joint ventures was due to the significant increase in total net sales of the corporate joint ventures and the weakening of the United States dollar.
NTIC sponsors a worldwide corporate joint venture conference approximately every four to five years in which all of its corporate joint ventures are invited to participate. The most recent conference was in August 2005 and the next corporate joint venture conference is scheduled to be held in 2008 or 2009. NTIC defers a portion of its technical and other support fees received from its corporate joint ventures in each accounting period leading up to the conference, reflecting that NTIC has not fully earned the payments received during that period. There was $24,000 of deferred income recorded during the three months ended November 30, 2007 bringing the total deferred accrual for the conference to $216,000 at November 30, 2007. The costs associated with these joint venture conferences are offset against the deferral as incurred, generally in the period in which the conference is held and immediately before.
NTIC incurred direct expenses related to its corporate joint ventures and the holding companies of $1,239,175 during the three months ended November 30, 2007 compared to $1,316,249 in the same period in fiscal 2007. These expenses include: product and business development, consulting, travel, technical and marketing services to existing joint ventures, legal fees related to the establishment of new joint ventures, registration and promotion and legal defense of worldwide trademarks and legal fees incurred in the filing of patent applications for new technologies to which NTIC acquired certain rights. The decrease in direct expenses incurred relating to NTICs corporate joint ventures and holding companies during the three months ended November 30, 2007 compared to the three months ended November 30, 2006 was attributable to decreases of (i) lab testing and lab supplies of $22,000, (ii) consulting expense of $26,000, (iii) legal expense of $97,000, partially offset by increases in (i) expenses related to employee wages of $46,000, (ii) travel and related expenses of $15,000, and (iv) miscellaneous expenses of $36,000.
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Interest Income. NTICs interest income decreased to $495 during the three months ended November 30, 2007 compared to $935 for the same period in fiscal 2007 due to a lower average invested cash balances during the most recent period.
Interest Expense. NTICs interest expense decreased to $31,523 during the three months ended November 30, 2007 compared to $42,881 for the same period in fiscal 2007 due to a lower average outstanding debt and a decrease in interest rates during the most recent period.
Gain on sale of assets. NTIC recognized a gain on the sale of land, building and equipment that previously served as NTICs corporate headquarters of $724,495 during the three months ended November 30, 2006. This was a one-time sale and no additional gain was recognized or is anticipated to be recognized relating to the building in the future. NTIC did recognize a gain on sale of assets of $1,529 during the three months ended November 30, 2007.
Income Before Income Tax Expense. Income before income tax expense decreased $386,028 to $736,196 during the three months ended November 30, 2007 compared to $1,122,224 for the same period in fiscal 2007.
Income Tax Expense. Income tax expense during the three months ended November 30, 2007 and 2006 was calculated based on managements estimate of NTICs annual effective income tax rate. NTICs annual effective income tax rate during the three months ended November 30, 2007 and 2006 was lower than the statutory rate primarily due to NTICs equity in income of corporate joint ventures being recognized based on after-tax earnings of these entities. To the extent joint ventures undistributed earnings are distributed to NTIC, it is not expected to result in any material additional income tax liability after the application of foreign tax credits.
Liquidity and Capital Resources
Sources of Cash and Working Capital. As of November 30, 2007, NTICs working capital was $3,840,057, including $125,630 in cash and cash equivalents, compared to working capital of $3,788,777, including $244,499 in cash and cash equivalents, as of August 31, 2007.
NTIC has a revolving credit facility that expires on January 31, 2008 that NTIC expects to renew prior to the January 31, 2008 maturity date. Outstanding amounts under the revolving credit facility bear interest at an annual rate based on LIBOR plus 2.25%. As of November 30, 2007, the interest rate was 7.49%. Amounts borrowed under the facility are collateralized by a lien on substantially all of NTICs assets, excluding its corporate joint venture interests, intellectual property rights and its Circle Pines headquarters. The credit documents contain other terms and provisions, including representations, covenants and conditions, customary for transactions of this type. Significant financial covenants include minimum fixed charge coverage ratio of 1.0 to 1.0. Other covenants include a prohibition on any merger or consolidation without prior consent of the lender and restrictions on future credit extensions and non-equity investments and the incurrence of additional indebtedness without the lenders prior consent. NTIC is in compliance with all covenants under the revolving credit facility. The facility contains customary events of default, including nonpayment of principal or other amounts when due; breach of covenants; inaccuracy of representations and warranties; cross-default and/or cross-acceleration to other indebtedness; non-compliance with laws; certain voluntary and involuntary bankruptcy events; judgments entered against NTIC; and a sale of material assets. If an event of default occurs and is continuing, the lender may, among other things, terminate its obligations thereunder and require NTIC to repay all amounts thereunder. As of November 30, 2007, there was $693,000 outstanding under the facility. NTIC has the right to prepay the facility at any time without premium or penalty. The line of credit is subject to a borrowing base calculation and at November 30, 2007, NTIC had $807,000 available.
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NTIC believes that a combination of its existing cash and cash equivalents, forecasted cash flows from future operations, distributions of earnings and technical assistance fees to NTIC from its joint venture investments and funds available through existing or anticipated financing arrangements, will continue to be adequate to fund its operations, capital expenditures, debt repayments and any stock repurchases for at least the next twelve months. In an effort to increase net sales, NTIC is in the process of expanding the application of its corrosion inhibiting technology into the oil and gas industry and its product line to include biodegradable and compostable plastics and machinery that converts waste plastics back into diesel, gasoline and mid-distillates. During the remainder of fiscal 2008, NTIC expects to invest additional research and development and marketing efforts and resources into these new emerging businesses, product lines and markets. In order to take advantage of such new product and market opportunities to expand its business and increase its revenues, NTIC may decide to finance such opportunities by increasing borrowings under its 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 NTICs current stockholders.
Uses of Cash and Cash Flows. Cash flows used in operations for the three months ended November 30, 2007 was $905,868, which resulted principally from net income, depreciation and amortization expense, inventories and trade corporate joint ventures being offset by equity income of corporate joint ventures, trade excluding corporate joint ventures, technical and other services receivable, prepaid expenses, accounts payable and accrued liabilities. Cash flows used in operations for the three months ended November 30, 2006 was $265,279, which resulted principally from net income, depreciation and amortization expense, inventories and accounts payable being offset by equity income of corporate joint ventures, trade excluding corporate joint ventures, prepaid expenses, gain on sale of assets and accrued liabilities.
Net cash used in investing activities for the three months ended November 30, 2007 was $20,419 which comprised of proceeds from the dividends received from corporate joint ventures, offset by additions to property and equipment, loans made and investments in joint ventures. Net cash provided by investing activities for the three months ended November 30, 2006 was $135,698, which resulted from additions to property and equipment and industrial patents, offset by proceeds from the sale of assets and dividends received from corporate joint ventures.
Net cash provided by financing activities for the three months ended November 30, 2007 was $807,418, which resulted primarily from borrowings on the line of credit, proceeds from the employee stock purchase plan and bank overdrafts. Net cash provided by financing activities for the three months ended November 30, 2006 was $337,481, which resulted primarily from borrowings on the line of credit, offset by repayment of bank overdrafts.
Capital Expenditures and Commitments. NTIC had no material lease commitments as of November 30, 2007, except a lease agreement entered into by NTI Facilities, Inc., a subsidiary of NTIC, for approximately 16,994 square feet of office, manufacturing, laboratory and warehouse space in Beachwood, Ohio, requiring monthly payments of $17,500, which are adjusted annually according to the annual consumer price index, through November 2014.
NTIC moved its corporate headquarters in September 2006. NTIC purchased the real estate and 40,000 square feet building in which its new corporate headquarters is located pursuant to a like-kind exchange transaction within the meaning of Section 1031 of the Internal Revenue Code of 1986, as amended, for a purchase price of $1,475,000. To finance the transaction, NTIC obtained a secured term loan in the principal amount of $1,275,000. The term loan matures on May 1, 2011, bears interest at a fixed rate of 8.01% and is payable in 59 monthly installments equal to approximately $10,776 (inclusive of principal and interest) commencing June 1, 2006. All of the remaining unpaid principal and accrued interest is due and payable on the May 1, 2011 maturity date. The loan is secured by a first lien on the real estate and building.
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NTIC sold the real property and building in which NTICs former Lino Lakes corporate headquarters was located for a purchase price of $870,000 on September 8, 2006. The net book value of the building held for sale was $89,636 and the closing costs and fees associated with the sale of the property was $46,571. The gain on sale of the property was $724,495.
NTIC has no post-retirement benefit plan and does not anticipate establishing any post-retirement benefit program.
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.
In fiscal 1999, a subsidiary of NTIC, NTI Facilities, Inc., acquired a one-third ownership of Omni-Northern Ltd., which owns and operates a rental property located at 23205 Mercantile Road, Beachwood, Ohio. The property has an approximate value of $2,205,000, based upon the cash-to-mortgage acquisition price of the property paid in fiscal 2000. NTIC has guaranteed up to $329,082 of Omni-Northern Ltd.s $1,903,571 mortgage obligation with National City Bank, Cleveland, Ohio. The building is fully leased at present.
Inflation and Seasonality
Inflation in the U.S. and abroad historically has had little effect on NTICs business, results of operations or financial condition. NTICs business has not historically been seasonal.
Market Risk
NTIC is exposed to some market risk stemming from changes in foreign currency exchange rates, commodity prices and interest rates.
NTIC is exposed to foreign currency exchange rate risk arising from its investments in its foreign corporate joint ventures and holding companies since NTICs fees for technical support and other services and dividend distributions from these foreign entities are paid in foreign currencies. NTICs principal exchange rate exposure is with the Euro, the Japanese yen, Korean won and the English pound against the U.S. dollar. NTIC does not hedge against its foreign currency exchange rate risk. Since NTICs investments in its corporate joint ventures and holding companies 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 the equity in income of joint ventures and holding companies reflected in NTICs consolidated statement of income.
Some raw materials used in NTICs products are exposed to commodity price changes. The primary commodity price exposures are with a variety of plastic resins.
NTICs revolving credit facility bears interest at a rate based on LIBOR and thus may subject NTIC to some market risk on interest rates. The outstanding balance under this facility as of November 30, 2007 was $693,000.
Related Party Transactions
See note 15 to NTICs consolidated financial statements for related party transaction disclosure.
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Critical Accounting Policies
The preparation of NTICs consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Securities and Exchange Commission has defined a companys most critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, NTIC has identified the following critical accounting policies. Although NTIC believes that its estimates and assumptions are reasonable, they are based upon information available when they are made. Actual results may differ significantly from these estimates under different assumptions or conditions.
Investments in Corporate Joint Ventures
NTICs investments in corporate joint ventures are accounted for using the equity method, except for React-NTI LLC which has been fully consolidated, due to the adoption of FIN 46R. Periodically, NTIC evaluates the investments for any impairment and assesses the future cash flow projections to determine if there are any going concern issues. If an investment were determined to be impaired, then a reserve would be created to reflect the impairment on the financial results of NTIC. NTICs evaluation of its investments in corporate joint ventures requires NTIC to make assumptions about future cash flows of its corporate joint ventures. These assumptions require significant judgment and actual results may differ from assumed or estimated amounts. NTICs investments in corporate joint ventures were $15,290,974 and $13,602,842 as of November 30, 2007 and August 31, 2007, respectively.
Principles of Consolidation
The consolidated financial statements include the accounts of Northern Technologies International Corporation, its wholly owned subsidiaries, NTI Facilities, Inc. and Northern Technologies Holding Company, LLC, and its 75% owned subsidiary, React-NTI LLC. All significant intercompany transactions and balances have been eliminated in consolidation.
Accounts and Notes Receivable
NTIC values accounts and notes receivable, net of an allowance for doubtful accounts. Each quarter, NTIC prepares an analysis of its ability to collect outstanding receivables that provides a basis for an allowance estimate for doubtful accounts. In doing so, NTIC evaluates the age of its receivables, past collection history, current financial conditions of key customers, and economic conditions. Based on this evaluation, NTIC establishes a reserve for specific accounts and notes receivable that it believes are uncollectible, as well as an estimate of uncollectible receivables not specifically known. Deterioration in the financial condition of any key customer or a significant slowdown in the economy could have a material negative impact on NTICs ability to collect a portion or all of the accounts and notes receivable. NTIC believes that an analysis of historical trends and its current knowledge of potential collection problems provide NTIC with sufficient information to establish a reasonable estimate for an allowance for doubtful accounts. However, since NTIC cannot predict with certainty future changes in the financial stability of its customers, NTICs actual future losses from uncollectible accounts may differ from its estimates. In the event NTIC determined that a smaller or larger uncollectible accounts reserve is appropriate, NTIC would record a credit or charge to selling expense in the period that it made such a determination. Accounts receivable have been reduced by an allowance for uncollectible accounts of $20,000 and $30,000 at November 30, 2007 and August 31, 2007, respectively.
Revenue Recognition
In recognizing revenue, NTIC applies the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition. NTIC recognizes revenue from the sale of its products when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. These criteria are met at the time of shipment when risk of loss and title pass to the customer or distributor.
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Foreign Currency Translation (Accumulated Other Comprehensive Income)
The functional currency of each international corporate joint venture is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average monthly exchange rate. Translation gains or losses are reported as an element of accumulated other comprehensive income.
Stock-Based Compensation
In December 2004, FASB published FASB Statement No. 123 (revised 2004), Share-Based Payment. FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. FAS 123(R) is a replacement of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretive guidance. The effect of FAS 123(R) is to require entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in FAS 123(R). NTIC implemented FAS 123(R) on September 1, 2006, using the modified prospective transition method.
Forward-Looking Statements
This report 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 its 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 NTICs Internet web sites or otherwise. All statements other than statements of historical facts included in this report 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 NTICs plans, objectives, strategies and prospects regarding, among other things, its financial condition, results of operations and business. NTIC has identified some of these forward-looking statements with words like believe, may, could, might, forecast, possible, potential, project, will, should, expect, intend, plan, predict, anticipate, estimate, approximate or continue and other words and terms of similar meaning. These forward-looking statements may be contained in the notes to NTICs consolidated financial statements and elsewhere in this report, including under the heading Part 1. Financial Information. Item 2. Managements Discussion and Analysis or Plan of Operation.
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 risks and uncertainties described under the heading Risk Factors below, 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. NTICs expectations reflected in its forward-looking statements can be affected by inaccurate assumptions NTIC might make or by known or unknown risks and uncertainties, including those described below under the heading Risk Factors. The risks and uncertainties described under the heading Risk Factors below 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 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 it may make on related subjects in its Annual Reports on Form 10-KSB, Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K that NTIC files with or furnishes to the Securities and Exchange Commission.
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Risk Factors
The following are the most significant factors known to NTIC that could materially adversely affect its business, financial condition or operating results.
A significant portion of NTICs historical consolidated net sales were dependent upon a single customer, which has indicated a desire not to purchase any future products from NTIC or its subsidiaries. As a result, NTICs future consolidated net sales will be materially harmed.
A customer of NTICs React-NTI, LLC joint venture accounted for, in the aggregate, approximately 28.0% and 26.6% of NTICs consolidated net sales for the fiscal year ended August 31, 2007 and 2006. As described in more detail under the heading Part I. Financial Information. Item 2. Managements Discussion and Analysis or Plan of OperationRecent Development, during fourth quarter of fiscal 2007, this customer notified React that it would place future orders for Reacts remaining inventory of ink additives, but that after such inventory was purchased, the customer would not place any future orders. The loss of this customer had a material adverse impact on NTICs consolidated net sales during the first quarter of fiscal 2008 and NTIC anticipates that the loss of this customer will continue to have a material adverse impact on NTICs consolidated net sales thereafter. However, since the margins on Reacts sales of the ink additives to this customer were extremely small, the loss of this customer did not have a material adverse effect on NTICs consolidated net income for the first quarter of fiscal 2008 and NTIC does not expect that the anticipated continued decrease in net sales by React will have a material adverse effect on NTICs future consolidated net income. No assurance can be provided, however, that the loss of this customer will not have a material adverse effect on NTICs future consolidated net income.
The automotive industry in the United States has experienced contraction in recent years thus resulting in decreased demand for NTICs Zerust® products in the United States, which has adversely affected and may continue to adversely affect NTICs net sales from North American operations and net income.
During the fiscal year ended August 31, 2007 and during the three months ended November 30, 2007, over 70% and 75.9%, respectively, of NTICs consolidated net sales were derived from the sales of Zerust® rust and corrosion inhibiting packaging products and services. Most of these products and services were sold to customers in the automotive industry and to a lesser extent to customers in the electronics, electrical, mechanical, military and retail consumer markets. The automotive industry in the United States has experienced contraction in recent years and is not expected to improve in the foreseeable future, which may result in a continued adverse effect on NTICs net sales from North American operations and net income. While NTIC intends to increase marketing efforts of its Zerust® products and services to customers in other target industries, no assurance can be provided that NTIC will be successful in doing so or will recognize increased sales from such new target markets.
NTIC intends to invest additional research and development and marketing efforts and resources to expand its existing product lines and the distribution of its products into new target markets, such as the oil and gas industry. No assurance can be provided, however, that NTICs investments in such new products and markets will be successful and result in additional revenue.
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In an effort to increase net sales, NTIC is expanding its corrosion solution products into new markets, such as the oil and gas industry, and expanding its product lines to include other products, such as biodegradable and compostable plastics, plastic recycling technology and corrosion solutions in the oil and gas industry. During fiscal 2008, NTIC expects to invest additional research and development and marketing efforts and resources into these new product lines and markets. NTIC anticipates additional revenue from these new technologies beginning in fiscal year ending August 31, 2008; however, no assurance can be provided that such new businesses will be successful or that NTIC will be successful in obtaining such additional revenue.
NTICs emerging new businesses are risky and may not prove to be successful, which could harm NTICs operating results and financial condition.
NTIC is in the process of expanding its technologies into other applications and businesses. NTIC is undertaking these new businesses either directly or through joint ventures. Such new businesses are risky and subject to all of the risks inherent in the establishment of a new business enterprise, including:
A significant portion of NTICs consolidated net sales, including corporate joint venture sales, are generated outside of the U.S. and NTIC intends to continue to expand its international operations. NTICs international operations require management attention and financial resources and expose NTIC to difficulties and risks presented by international economic, political, legal, accounting and business factors.
NTIC offers direct on-site technical support on rust and corrosion issues in over 50 countries, and operates a marketing, distribution, and technical network through joint ventures in North America, South America, Europe, Asia and the Middle East. NTICs consolidated net sales, including the corporate joint venture sales, outside the United States were 24.1% and 20.8% of its total consolidated net sales for the three months ended November 30, 2007 and for the fiscal year ended August 31, 2007, respectively. One of NTICs strategic objectives is to expand its international operations. NTIC has recently entered into joint ventures in Indonesia, the Ukraine, Thailand and the United Arab Emirates. The expansion of NTICs existing international operations and entry into additional international markets requires management attention and financial resources. Many of the countries in which NTIC sells its products directly or indirectly through its corporate joint ventures, are, to some degree, subject to political, economic and/or social instability. NTICs international operations expose NTIC and its joint venture partners, representatives, agents and distributors to risks inherent in operating in foreign jurisdictions. These risks include:
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NTIC cannot assure you that one or more of the factors listed above will not harm its business. Any material decrease in NTICs international sales could adversely affect NTICs operating results.
NTICs liquidity and financial position rely on dividend distributions from its corporate joint ventures, which if such dividends cease or are reduced could adversely affect NTICs liquidity and financial position.
NTICs liquidity and financial position rely on dividend distributions from its corporate joint ventures. During the three months ended November 30, 2007 and the fiscal year ended August 31, 2007, NTIC received approximately $336,286 and $1,643,000, respectively, in dividends from its corporate joint ventures. Because NTIC typically owns only 50% or less of its joint venture entities, NTIC does not control the decisions of these entities regarding whether to pay dividends and how much in dividends should be paid in any given year. Thus, NTIC cannot guarantee that any of its joint ventures will pay dividends in any given year. The failure of NTICs joint ventures to declare dividends in amounts typically expected by NTIC could adversely affect NTICs liquidity and financial position.
Fluctuations in foreign currency exchange rates could result in declines in NTICs reported consolidated net sales and net income.
Because the functional currency of NTICs foreign operations and investments in its foreign corporate joint ventures and holding companies is the applicable local currency, NTIC is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business since NTICs fees for technical support and other services and dividend distributions from these foreign entities are paid in foreign currencies. NTICs reported consolidated net sales and net income are subject to fluctuations in foreign exchange rates. NTICs principal exchange rate exposure is with the Euro, the Japanese yen, Korean won and the English pound against the U.S. dollar. NTIC does not hedge against its foreign currency exchange rate risk. Since NTICs investments in its corporate joint ventures and holding companies 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 the equity in income of joint ventures and holding companies reflected in NTICs consolidated statements of income.
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NTICs compliance with U.S. generally accepted accounting principles and any changes in such principles might adversely affect NTICs operating results and financial condition. Any requirement to consolidate NTICs corporate joint ventures or subject them to compliance with the internal control provisions of the Sarbanes-Oxley Act of 2002 could adversely affect NTICs operating results and financial condition.
NTIC adopted accounting policy FASB Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities, a revision of FIN 46 effective as of February 28, 2005. As a result of FIN 46R, NTIC consolidated React-NTI LLC, one of its corporate joint ventures that is 75% owned by NTIC. If the interpretation of FIN 46R were to change and NTIC were required to fully consolidate the remaining 28 of its corporate joint ventures or if NTICs corporate joint ventures otherwise would be required to be in compliance with the internal control provisions of the Sarbanes-Oxley Act of 2002, NTIC would incur significant additional costs. NTIC estimates that the costs for each of its corporate joint ventures to become Sarbanes-Oxley compliant would range between $150,000 to $500,000 and that annual maintenance expenses would range from $50,000 to $100,000 per year per corporate joint venture thereafter. In addition, other accounting pronouncements issued in the future could have a material cost associated with NTICs implementation of such new accounting pronouncements.
One of NTICs principal stockholders beneficially owns 24.9% of NTICs outstanding common stock and is affiliated with NTICs President and Chief Executive Officer and thus may be able influence matters requiring stockholder approval, including the election of directors, and could discourage or otherwise impede a transaction in which a third party wishes to purchase NTICs outstanding shares at a premium.
As of November 16, 2007, Inter Alia Holding Company beneficially owned approximately 24.9% of NTICs outstanding common stock. Inter Alia is an entity owned by, among others, G. Patrick Lynch, NTICs President and Chief Executive Officer and a director, and Philip M. Lynch, NTICs former Chairman of the Board and Chief Executive Officer and current Chairman Emeritus. G. Patrick Lynch is the son of Philip M. Lynch. Messrs. G.P. Lynch and P.M. Lynch share voting and dispositive power of shares of NTICs common stock held by Inter Alia Holding Company. As a result of his share ownership through Inter Alia and his position as President and Chief Executive Officer and a director of NTIC, Mr. G.P. Lynch may be able to influence the affairs and actions of NTIC, including matters requiring stockholder approval, such as the election of directors and approval of significant corporate transactions. The interests of Messrs. G.P. Lynch and Inter Alia may differ from the interests of NTICs other stockholders. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of NTIC, could deprive NTICs stockholders of an opportunity to receive a premium for their common stock as part of a sale or merger of NTIC and may negatively affect the market price of NTICs common stock. Transactions that could be affected by this concentration of ownership include proxy contests, tender offers, mergers or other purchases of common stock that could give stockholders the opportunity to realize a premium over the then-prevailing market price for shares of NTICs common stock.
NTIC is currently involved in litigation over its trademark on the use of the color Yellow in corrosion inhibiting packaging, the loss of which could adversely affect NTICs business.
One of NTICs important trademarks for its business is the trademark for the color Yellow. NTIC is currently involved in litigation against a competitor over this trademark. NTIC has also in the past successfully prosecuted infringement claims against other competitors and third parties for their use of the color Yellow. If NTIC were to lose this current or any future litigation over its trademark for the color Yellow, NTIC could be in a more difficult position to enforce its rights to this trademark in other countries and against other third parties. NTIC believes that the loss of its trademark for the color Yellow could have an adverse effect on NTICs business.
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NTICs business, properties and products are subject to governmental regulation and taxes with which compliance may require NTIC to incur expenses or modify its products or operations and may expose NTIC to penalties for non-compliance. Governmental regulation may also adversely affect the demand for some of NTICs products and NTICs operating results.
NTICs business, properties and products are subject to a wide variety of international, federal, state and local laws, rules, taxes and regulations relating to the protection of the environment, natural resources, and worker health and safety and the use, management, storage, and disposal of hazardous substances, wastes and other regulated materials. These laws, rules and regulations may affect the way NTIC conducts its operations, and the failure to comply with these regulations could lead to fines and other penalties. Because NTIC owns and operates real property, various environmental laws also may impose liability on NTIC for the costs of cleaning up and responding to hazardous substances that may have been released on NTICs property, including releases unknown to NTIC. These environmental laws and regulations also could require NTIC to pay for environmental remediation and response costs at third-party locations where NTIC disposed of or recycled hazardous substances. NTICs future costs of complying with the various environmental requirements, as they now exist or may be altered in the future, could adversely affect NTICs financial condition and operating results. NTIC is also subject to other international, federal and state laws, rules and regulations, the future non-compliance of which may harm NTICs business or may adversely affect the demand for some of its products. Changes in laws and regulations, including changes in accounting standards and taxation changes, including tax rate changes, new tax laws, revised tax law interpretations, also may adversely affect NTICs operating results.
NTIC intends to grow its business through additional joint ventures, alliances and acquisitions, which could be risky and harm its business.
One of NTICs growth strategies is to expand its business by entering into additional joint ventures and alliances and acquiring businesses, technologies and products that complement or augment NTICs existing products. The benefits of a joint venture, alliance or acquisition may take more time than expected to develop, and NTIC cannot guarantee that any future joint ventures, alliances or acquisitions will in fact produce the intended benefits. In addition, joint ventures, alliances and acquisitions involve a number of risks, including:
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NTICs ability to grow through joint ventures, alliances and acquisitions will depend, in part, on the availability of suitable opportunities at an acceptable cost, NTICs ability to compete effectively for these opportunities and the availability of capital to complete such transactions.
NTIC relies on its independent distributors, manufacturers sales representatives and corporate joint ventures to market and sell its products.
In addition to its direct sales force, NTIC relies on its independent distributors, manufacturers sales representatives and corporate joint ventures to market and sell its products in the United States and internationally. NTICs independent distributors, manufacturers sales representatives and joint venture partners might terminate their relationship with NTIC, or devote insufficient sales efforts to NTICs products. NTIC does not control its independent distributors, manufacturers sales representatives and joint ventures and they may not be successful in implementing NTICs marketing plans. NTICs failure to maintain its existing relationships with its independent distributors, manufacturers sales representatives and joint ventures, or its failure to recruit and retain additional skilled independent distributors, manufacturers sales representatives and joint venture partners could have an adverse effect on NTICs operations.
NTIC has very limited staffing and will continue to be dependent upon key employees.
NTICs success is dependent upon the efforts of a small management team and staff. NTICs future success will also depend in large part on its ability to retain these individuals and identify, attract and retain other highly qualified managerial, technical, sales and marketing and customer service personnel. Competition for these individuals is intense, especially in the markets in which NTIC operates. NTIC may not succeed in identifying, attracting and retaining these personnel. The current management, other than the President and Chief Executive Officer, do not have any material stock ownership in NTIC or any contractual obligation to maintain their employment with us. The loss or interruption of services of any of NTICs key personnel, the inability to identify, attract or retain qualified personnel in the future, delays in hiring qualified personnel, or any employee slowdowns, strikes or similar actions could make it difficult for NTIC to manage its business and meet key objectives, which could harm NTICs business, financial condition and operating results.
NTIC relies on its management information systems for inventory management, distribution and other functions. If these information systems fail to adequately perform these functions or if NTIC experiences an interruption in their operation, NTICs business and operating results could be adversely affected.
The efficient operation of NTICs business is dependent on its management information systems. NTIC relies on its management information systems to effectively manage accounting and financial functions; manage order entry, order fulfillment and inventory replenishment processes; and to maintain its research and development data. The failure of management information systems to perform as anticipated could disrupt NTICs business and product development and could result in decreased sales, causing NTICs business and operating results to suffer. In addition, NTICs management information systems are vulnerable to damage or interruption from natural or man-made disasters, terrorist attacks and attacks by computer viruses or hackers, or power loss or computer systems, Internet, telecommunications or data network failure. Any such interruption could adversely affect NTICs business and operating results.
NTICs reliance upon patents, trademark laws, trade secrets and contractual provisions to protect its proprietary rights may not be sufficient to protect its intellectual property from others who may sell similar products.
NTIC holds patents relating to various aspects of its products and believes that proprietary technical knowhow is critical to many of its products. Proprietary rights relating to NTICs products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. NTIC cannot be certain that it will be issued any patents from any pending or future patent applications owned by or licensed to NTIC or that the claims allowed under any issued patents will be sufficiently broad to protect its technology. In the absence of patent protection, NTIC may be vulnerable to competitors who attempt to copy NTICs products or gain access to its trade secrets and know-how. NTICs competitors may initiate litigation to challenge the validity of NTICs patents, or they may use their resources to design comparable products that do not infringe NTICs patents. NTIC may incur substantial costs if its competitors initiate litigation to challenge the validity of its patents or if it initiates any proceedings to protect its proprietary rights and if the outcome of any such litigation is unfavorable to NTIC, its business and operating results could be materially adversely affected.
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In addition, NTIC relies on trade secrets and proprietary know-how that it seeks to protect, in part, by confidentiality agreements with its employees, and consultants. These agreements may be breached and NTIC may not have adequate remedies for any such breach. Even if these confidentiality agreements are not breached, NTICs trade secrets may otherwise become known or be independently developed by competitors.
If NTIC is unable to continue to enhance existing products and develop and market new products that respond to customer needs and achieve market acceptance, NTIC may experience a decrease in demand for its products, and its business could suffer.
One of NTICs strategies is to enhance its existing products and develop and market new products that respond to customer needs. NTIC may not be able to compete effectively with its competitors unless NTIC can keep up with existing or new products in the markets in which it competes. Product development requires significant financial and other resources. Although in the past NTIC has implemented lean manufacturing and other productivity improvement initiatives to provide investment funding for new products, NTIC cannot assure you that it will be able to continue to do so in the future. Product improvements and new product introductions also require significant planning, design, development and testing at the technological, product, and manufacturing process levels and NTIC may not be able to timely develop product improvements or new products. NTICs competitors new products may beat NTICs products to market, may be more effective or less expensive than NTICs products or render NTICs products obsolete. Any new products that NTIC may develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for NTIC relative to its expectations, based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.
NTIC faces intense competition in almost all of its product lines, including from competitors that have substantially greater resources than NTIC does. NTIC cannot assure you it will be able to compete effectively, which would harm its business and operating results.
NTICs products are sold in highly competitive markets throughout the world. The principal competitive factors in NTICs markets are pricing, product innovation, quality and reliability, product support and customer service and reputation. NTIC often competes with numerous manufacturers, many of who have substantially greater financial, marketing, and other resources than NTIC does. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products than NTIC can. In addition, competition could increase if new companies enter the market or if existing competitors expand their product lines or intensify efforts within existing product lines. NTICs current products, products under development and its ability to develop new and improved products may be insufficient to enable NTIC to compete effectively with its competitors. NTIC cannot assure you that it will be able to compete effectively, which would harm its business and operating results.
NTIC is currently involved in several litigation matters and an audit matter with the U.S. Internal Revenue Service, which are costly to defend and the resolution of which could have a material adverse effect on NTICs operating results and financial position.
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NTIC is party to several litigation matters and an audit matter with the U.S. Internal Revenue Service as described in more detail in Note 17 to NTICs consolidated financial statements. Such litigation and audit matter are costly and may adversely affect NTICs operating results and financial condition. In addition, the resolution of such matters may also have a material adverse effect on NTICs operating results and financial condition.
NTIC is exposed to risks relating to its evaluation of its internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and related and other recent regulations implemented by the SEC and The American Stock Exchange, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. NTIC will be evaluating its internal controls systems to allow management to report on, and its independent registered public accounting firm to attest to, NTICs internal control over financial reporting. NTIC will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. NTIC cannot be certain as to the timing of completion of its evaluation, testing and remediation actions or the impact of the same on its operations since there is presently no precedent available by which to measure compliance adequacy. If NTIC is not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, NTIC may be subject to sanctions or investigation by regulatory authorities, including the SEC or The American Stock Exchange. This type of action could adversely affect NTICs financial results or investors confidence in NTIC, and could cause NTICs stock price to decline. In addition, the controls and procedures that NTIC may implement may not comply with all of the relevant rules and regulations of the SEC and The American Stock Exchange. If NTIC fails to develop and maintain effective controls and procedures, it may be unable to provide the required financial information in a timely and reliable manner. In addition, NTICs efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding its assessment of its internal control over financial reporting and its independent registered public accounting firms report on that assessment will require the commitment of significant financial and managerial resources.
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ITEM 3 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 reasonably ensure 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 Commissions rules and forms and that such information is accumulated and communicated to NTICs management, including NTICs principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating NTICs disclosure controls and procedures, NTIC recognizes that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives and NTIC necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. NTICs management evaluated, with the participation of its Chief Executive Officer and its Chief Financial Officer, the effectiveness of the design and operation of NTICs disclosure controls and procedures as of the end of the period covered in this report. Based on that evaluation, NTICs Chief Executive Officer and Chief Financial Officer concluded that NTICs disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in NTICs Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms, and that material information relating to NTIC and its consolidated subsidiaries is made known to management, including NTICs Chief Executive Officer and Chief Financial Officer, particularly during the period when NTICs periodic reports are being prepared.
NTICs management is aware, however, that there is a lack of segregation of duties due to the small number of employees of NTIC dealing with general administrative and financial matters. However, NTICs management has decided that considering the employees involved and the control procedures in place, risks associated with such lack of segregation are minimal and the potential benefits of adding employees to clearly segregate duties do not at this time justify the expenses associated with such increases.
Changes in Internal Control over Financial Reporting
There was no change in NTICs internal control over financial reporting that occurred during the quarter ended November 30, 2007 that has materially affected, or is reasonably likely to materially affect NTICs internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A description of NTICs legal proceedings in Note 17 of NTICs consolidated financial statements included within this report is incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Recent Sales of Unregistered Equity Securities
During the three months ended November 30, 2007, 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.
Small Business Issuer Purchases of Equity Securities
During the three months ended November 30, 2007, NTIC did not purchase any shares of its common stock or other equity securities of NTIC.
On November 13, 2003, the Board of Directors of NTIC authorized Matthew Wolsfeld, Chief Financial Officer of NTIC, to repurchase on behalf of NTIC, up to 100,000 shares of NTICs common stock from time to time in accordance with applicable rules governing issuer stock repurchases. Since being authorized, NTIC has repurchased and retired an aggregate of 44,200 shares of its common stock.
ITEM 5. OTHER INFORMATION
On November 16, 2007, NTICs Board of Directors, upon recommendation of the Compensation Committee, approved the material terms of an annual bonus plan for NTICs executive officers and certain employees for fiscal year ending August 31, 2008, the purpose of which is to align the interests of NTIC and its subsidiaries, executive officers and stockholders by providing an incentive for the achievement of key corporate and individual performance measures that are critical to the success of NTIC and linking a significant portion of each executive officers annual compensation to the achievement of such measures. The following is a brief summary of the material terms approved by the Board:
The total amount available under the bonus plan will be up to 25% of the Companys earnings before interest, taxes and other income (EBITOI) for the fiscal year ending August 31, 2008;
The total amount available under the bonus plan will be $0 if EBITOI, as adjusted to take into account amounts to be paid under the bonus plan, fall below 70% of target EBITOI; and
The payment of bonuses under the plan will be made in both cash and shares of the Companys common stock, the exact amount and percentages of which will be determined by the Board, upon recommendation of the Compensation Committee, within a reasonable period of time after the completion of the Companys financial statements for the fiscal year ending August 31, 2008.
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ITEM 6. EXHIBITS
The following exhibits are being filed or furnished with this quarterly report on Form 10-QSB:
Exhibit No. | Description | |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
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 | |
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 |
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SIGNATURES
Pursuant to the requirements of the Securities and 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: January 11, 2008 | Matthew C. Wolsfeld, CPA | |
Chief Financial Officer | ||
(Principal Financial and Accounting Officer and Duly Authorized to Sign on Behalf of the Registrant) |
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NORTHERN TECHNOLOGIES INTERNATIONAL
CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
EXHIBIT INDEX
Exhibit | ||
No. | Description | Method of Filing |
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
31.2 | Certification of Chief Financial Officer 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 |
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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-QSB 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 small business issuer as of, and for, the periods presented in this report; | ||
4. | The small business issuers other certifying officers 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)) for the small business issuer 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 small business issuer, 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) Evaluated the effectiveness of the small business issuers 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 | |||
(c) Disclosed in this report any change in the small business issuers internal control over financial reporting that occurred during the small business issuers fourth quarter that has materially affected, or is reasonably likely to materially affect, the small business issuers internal control over financial reporting; and | |||
5. | The small business issuers other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the small business issuers auditors and the audit committee of the small business issuers board of directors (or persons performing the equivalent function): | ||
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuers 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 small business issuers internal controls over financial reporting. |
Date: January 11, 2008 | ||
G. Patrick Lynch | ||
President and Chief 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-QSB 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 small business issuer as of, and for, the periods presented in this report; | ||
4. | The small business issuers other certifying officers 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)) for the small business issuer 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 small business issuer, 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) Evaluated the effectiveness of the small business issuers 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 | |||
(c) Disclosed in this report any change in the small business issuers internal control over financial reporting that occurred during the small business issuers fourth quarter that has materially affected, or is reasonably likely to materially affect, the small business issuers internal control over financial reporting; and | |||
5. | The small business issuers other certifying officers and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the small business issuers auditors and the audit committee of the small business issuers board of directors (or persons performing the equivalent function): | ||
(a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the small business issuers 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 small business issuers internal controls over financial reporting. |
Date: January 11, 2008 | Matthew C. Wolsfeld, CPA | |
Chief Financial Officer and Corporate Secretary |
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-QSB for the period ending November 30, 2007 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:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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
January 11,
2008
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-QSB for the period ending November 30, 2007 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:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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
January 11,
2008