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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended February 28, 2010

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

For the transition period from                     to                     .

Commission File Number:  001-11038

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

4201 Woodland Rd

Circle Pines, Minnesota  55014

(Address of principal executive offices)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x  NO  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  o NO  o

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

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

As of April 13, 2010, 4,240,679 shares of common stock of the registrant were outstanding.

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION

FORM 10-Q

February 28, 2010

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

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

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

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PART I - FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 2010 (UNAUDITED) AND AUGUST 31, 2009

See notes to consolidated financial statements.

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

THREE AND SIX MONTHS ENDED FEBRUARY 28, 2010 AND 2009

See notes to consolidated financial statements.

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

SIX MONTHS ENDED FEBRUARY 28, 2010 AND 2009

See notes to consolidated financial statements.

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.         INTERIM FINANCIAL INFORMATION

In the opinion of management, the accompanying unaudited consolidated financial statements contain all necessary adjustments, which are of a normal recurring nature, and present fairly the consolidated financial position of Northern Technologies International Corporation and its subsidiaries (the “Company”) as of February 28, 2010 and the results of their operations for the three and six months ended February 28, 2010 and February 28, 2009 and their cash flows for the six months ended February 28, 2010 and February 28, 2009, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2009 and with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section appearing in this report.  Operating results for the three and six months ended February 28, 2010 are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2010.

The Company has evaluated subsequent events occurring through April 13, 2010, the date on which this quarterly report on Form 10-Q was issued.

2.         INVENTORIES

Inventories consisted of the following:

3.         PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

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4.         INDUSTRIAL PATENTS AND TRADEMARKS, NET

Industrial patents and trademarks consisted of the following:

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 $38,669 and $29,721 for the three months ended February 28, 2010 and 2009, respectively, and $77,144 and $63,683 for the six months ended February 28, 2010 and February 28, 2009, respectively.  Amortization expense is estimated to approximate $160,000 in each of the next five fiscal years.

5.             INVESTMENTS IN CORPORATE JOINT VENTURES

Composite financial information from the audited and unaudited financial statements of the Company’s joint ventures carried on the equity basis is summarized as follows:

The financial statements of the Company’s foreign joint ventures are prepared using accounting principles accepted in the joint ventures’ respective countries of domicile.  Amounts related to foreign joint ventures reported in the above tables and the accompanying financial statements have been adjusted to approximate U.S. GAAP in all material respects.  All material profits recorded on sales from the Company to its joint ventures have been eliminated for financial reporting purposes.

6.         CORPORATE DEBT

The Company has a demand line of credit of $2,300,000 with National City Bank (the “Bank”).  Advances made under the demand line of credit are made at the sole discretion of the Bank and are due and payable on demand.  Outstanding amounts under the demand line of credit bear interest at an annual rate based on LIBOR plus 2.25%. 

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As of February 28, 2010, the interest rate was 3.08% and the weighted average rate was 3.36% for the six months ended February 28, 2010.  As of February 28, 2009, the interest rate was 4.23% and the weighted average rate was 5.10% for the six months ended February 28, 2009.  Interest is payable in arrears on the 15th day of each month and on demand. There were no amounts outstanding under the demand line of credit and no amounts were committed under the line of credit to cover letters of credit as of February 28, 2010.  As of February 28, 2009, NTIC had $599,000 borrowings under its $2,300,000 demand line of credit and $600,000 was committed under the demand line of credit to cover a letter of credit.

In connection with the purchase of its corporate headquarters, in September 2006, the Company obtained 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, unless the Bank demands payment earlier due to a covenant breach by the Company as discussed in more detail below.  The term loan is secured by a first lien on the Company’s Circle Pines facility pursuant to a Mortgage dated as of May 3, 2006 between Northern Technologies Holding Company LLC and the Bank and is guaranteed by the Company.

Under the note governing the term loan (the “Note”), the Company is subject to a minimum debt service coverage ratio of 1.0:1.0.  At August 31, 2009, November 30, 2009 and February 28, 2010, the Company failed to meet this financial covenant.  Although the Bank subsequently waived the covenant violation as of August 31, 2009, the Company has not sought and has not obtained a waiver of any subsequent covenant violations from the Bank.  As a result, an event of default occurred under the Note and the Bank has the right in its discretion, by giving written notice to the Company, to declare the full amount outstanding under the Note immediately due and payable in full. The Company has no intention to obtain a waiver for the event of default or desire to renegotiate or refinance the term loan.  The Company has not received any notice from the Bank regarding the Bank’s intent to call the loan.  In the event the Bank declares the Note immediately due and payable, the Company intends to pay off the Note in full with the Company’s existing cash and cash equivalents. The Company has classified all amounts outstanding under the Note as a current liability on its consolidated balance sheets as of February 28, 2010 and August 31, 2009.

7.         STOCKHOLDERS’ EQUITY

During the six months ended February 28, 2010, the Company did not purchase or retire any shares of its common stock.  The following stock options to purchase shares of common stock were exercised during the six months ended February 28, 2010:

The Company granted stock options under the Northern Technologies International Corporation 2007 Stock Incentive Plan to purchase an aggregate of 128,333 shares of its common stock to various employees during the six months ended February 28, 2010.  The weighted average per share exercise price of the stock options is $7.76, which is equal to the fair market value of the Company’s common stock on the date of grant.

The Company sold an aggregate of 2,583 shares of its common stock to various employees at a purchase price of $6.47 per share under the Northern Technologies International Corporation Employee Stock Purchase Plan, resulting in gross proceeds to the Company of $16,710, during the six months ended February 28, 2010.

In September 2009, the Company completed a $3,552,000 registered direct offering in which it sold an aggregate of 480,000 shares of its common stock to institutional investors at a purchase price of $7.40 per share, resulting in net proceeds of $3,195,613, after deducting placement agent fees and expenses and the Company’s offering expenses.

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During the six months ended February 28, 2009, the Company did not purchase or retire any shares of its common stock and no stock options to purchase shares of the Company’s common stock were exercised or granted.  The Company granted stock bonuses under the Northern Technologies International Corporation 2007 Stock Incentive Plan for an aggregate of 21,513 shares of its common stock to various employees during the six months ended February 28, 2009.  The fair value of the shares of the Company’s common stock as of the date of grant of the stock bonuses was $226,961, based on the closing sale price of a share of the Company’s common stock on that date.  The Company did not sell any shares of its common stock to employees under the Northern Technologies International Corporation Employee Stock Purchase Plan during the six months ended February 28, 2009.

8.         TOTAL COMPREHENSIVE (LOSS) INCOME

The Company’s total comprehensive (loss) income was as follows:

9.         NET INCOME (LOSS) PER COMMON SHARE

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

Options to purchase shares of common stock of 64,140 and 149,472 were excluded from the computation of common share equivalents as of February 29, 2010 and 2009, respectively, as stock option exercise prices were greater than market price of a share of common stock.

10.       STOCK-BASED COMPENSATION

In January 2007, the Company’s stockholders approved the Northern Technologies International Corporation 2007 Stock Incentive Plan (the “2007 Plan”) and the Northern Technologies International Corporation Employee Stock Purchase Plan (the “ESPP”).  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 continues 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 Company’s economic objectives.  Up to a total of 400,000 shares of the Company’s 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 of the date of grant.  Options are granted at per share exercise prices equal to the market value of the Company’s common stock on the date of grant.  To date, only stock options and stock bonuses have been granted under the 2007 Plan.

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The maximum number of shares of common stock of the Company available for issuance under the ESPP is 100,000 shares, subject to adjustment as provided in the ESPP.  The ESPP provides for six-month offering periods beginning on September 1 and March 1 of each year.  The purchase price of the shares is 90% of the lower of the fair market value of common stock at the beginning or end of the offering period.  This discount may not exceed the maximum discount rate permitted for plans of this type under Section 423 of the Internal Revenue Code of 1986, as amended.  The ESPP is compensatory for financial reporting purposes.

The Company granted options to purchase 128,333 and 30,000 shares of its common stock during the six months ended February 28, 2010 and 2009, 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 $94,210 and $50,000 during the six months ended February 28, 2010 and 2009, respectively, related to the options that vested during such time period.  The stock-based expense recorded reduced after-tax net income per share by $0.02 and $0.01 for the six months ended February 28, 2010 and 2009, respectively.  As of February 28, 2010, the total compensation cost for non-vested options not yet recognized in the Company’s statements of income was $356,624, net of estimated forfeitures.  Additional stock-based compensation expense of $94,210 is expected through the remainder of fiscal year 2010, and expense of $150,820 and $111,594 is expected to be recognized during fiscal 2011 and 2012, respectively.  Future option grants will impact the compensation expense recognized.

The Company currently estimates a ten percent forfeiture rate for stock options, but will continue to review this estimate in future periods.

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:

The weighted average fair value of options granted during the three and six months ended February 28, 2010 and 2009 was $2.99 and $4.78, respectively.

11.       GEOGRAPHIC AND SEGMENT INFORMATION

Net sales by geographic location as a percentage of total consolidated net sales for the three and six months ended February 28, 2010 and February 28, 2009 were as follows:

Net sales by geographic location are based on the location of the customer.

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The following table sets forth the Company’s net sales for the three and six months ended February 28, 2010 and 2009 by segment:

The following table sets forth the Company’s cost of sales for the three and six months ended February 28, 2010 and 2009 by segment:

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

The Company’s management utilizes product net sales and direct and indirect cost of goods sold for each product in reviewing the financial performance of a product type.  Further allocation of Company expenses or assets, aside from amounts presented in the tables above, is not utilized in evaluating product performance, nor does such allocation occur for internal financial reporting.

The foregoing geographic and segment information represents only sales by the Company’s North American operations.  Although sales to the Company’s corporate joint ventures are included, sales by the Company’s corporate joint ventures to other parties are not included.

12.  RESEARCH AND DEVELOPMENT

During the year ended August 31, 2009, the Company was awarded multiple research and development contracts.  The Company accrues proceeds received under the grants and offsets research and development expenses incurred in equal installments over the timelines associated with completion of the grants specific objectives and milestones. At February 28, 2010 and August 31, 2009, the Company deferred amounts received of $204,543 and $145,562, respectively, in other accrued liabilities, as the Company had not yet performed under the obligations of the contracts.

The Company expenses all costs related to product research and development as incurred.  The Company incurred $1,565,698 and $1,567,296 during the six months ended February 28, 2010 and 2009, respectively, in connection with its research and development activities.  These costs related to product research and development are the net amount after being reduced by reimbursements related to the awarding of the multiple research and development contracts of $286,479 and $0 for the six months ended February 28, 2010 and 2009, respectively.  The net fees are accounted for in the “Expenses incurred in support of corporate joint ventures” section of statements of operations.

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13.       COMMITMENTS AND CONTINGENCIES

On November 20, 2009, the Company’s Board of Directors, upon recommendation of the Compensation Committee, approved the material terms of an annual bonus plan for the Company’s executive officers and certain employees for the fiscal year ending August 31, 2010, the purpose of which is to align the interests of the Company, its 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 officer’s 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 Company’s earnings before interest, taxes and other income (EBITOI);

·                  The total amount available under the cash 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 purely discretionary and will be paid to executive officer participants in both cash and stock, the exact amount and percentages of which will be determined by the Company’s Board of Directors, upon recommendation of the Compensation Committee.

There was a $266,311 management bonus accrued at February 28, 2010.  There was no management bonus accrued as of February 28, 2009.

In fiscal 1999, a subsidiary of the Company, 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.  The Company 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.

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.  Shamrock further claims lost profits with respect to sales made by Shamrock that were manufactured by parties other than React LLC.  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 Shamrock’s 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 Shamrock’s failure to comply with alternative dispute resolution procedures contained in the license agreement.  By court order, the matter was stayed so that the parties could attempt mediation.  The parties mediated for one day and were unsuccessful in resolving the matter. The parties proceeded with discovery, exchanging answers to interrogatories and documents, and the parties also obtained documents by subpoena from third parties.  With more complete information, the parties decided to dismiss their respective claims without prejudice and return to mediation.  A mediation session was held on December 4, 2008, and the parties continued to negotiate through the mediator thereafter without any final agreement by either party.  Because the mediation and negotiation process did not result in a final settlement, there can be no permanent assurance at the present time that the matter will not result in a material adverse effect on the Company’s business, financial condition or results of operations at some

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point in the future, however, at this point in time the Company has not recorded any loss accruals related to this matter.

From time to time, the Company is involved in various legal actions arising in the normal course of business.  Management is of the opinion that any judgment or settlement resulting from any currently pending or threatened actions would not have a material adverse effect on the Company’s financial position or consolidated results of operations.

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This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess NTIC’s financial condition and results of operations.  Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Part I. Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements.” The following discussion of the results of the operations and financial condition of NTIC should be read in conjunction with NTIC’s consolidated financial statements and the related notes thereto included under the heading “Part I. Item 1.  Financial Statements.”

General Overview

NTIC develops and markets proprietary environmentally beneficial products and technical services in over 50 countries either directly or via a network of joint ventures and independent distributors.  NTIC’s primary business is corrosion prevention.  From this base, NTIC has expanded into three new business areas that have started recently to generate revenue (1) corrosion prevention technologies specifically designed for the oil and gas industry, which NTIC sells both directly as well as through joint ventures and independent agents; (2) a proprietary portfolio of bio-plastic compounds and finished products marketed under the Natur-Tec® brand, which NTIC sells directly as well as through distributors and independent agents; and (3) technology and machines that converts waste plastic into diesel, gasoline and heavy fractions, which is exclusively licensed and sold in North America and Asia through NTIC’s joint venture Polymer Energy, LLC.

NTIC participates, either directly or indirectly through holding companies, in 27 active corporate joint venture arrangements in North America, South America, Europe, Asia and the Middle East.  Each of these joint ventures generally manufactures and markets finished products in the geographic territory to which it is assigned.  While most of NTIC’s joint ventures currently sell rust and corrosion inhibiting products and custom packaging systems, NTIC also has joint ventures that manufacture, market and sell corrosion prevention technology for the oil and gas industry and the Polymer Energy™ technology and equipment that converts waste plastic into diesel, gasoline, and heavy fractions.  The profits of NTIC’s corporate joint ventures are shared by the respective corporate joint venture owners in accordance with their respective ownership percentages.  NTIC typically owns 50% of its joint venture entities.  NTIC does not control the decisions of its joint venture entities regarding whether to pay dividends or how much to pay in dividends in any given year. NTIC funds its joint venture investments with cash generated from operations.

NTIC has been selling its proprietary ZERUST® and EXCOR® brand rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 30 years.  NTIC also offers worldwide on-site technical consulting for rust and corrosion prevention issues.  In North America, NTIC markets its technical services and products principally to industrial users by a direct sales force as well as a network of independent distributors and agents.  NTIC’s technical service consultants work directly with the end users of NTIC’s products to analyze their specific needs and develop systems to meet their technical requirements.

NTIC has developed proprietary corrosion inhibiting technologies for use in the mitigation of corrosion on capital assets used in the petroleum and process chemical industry and is initially targeting the sale of these new ZERUST® products to the oil and gas industry sector.  During fiscal 2009, NTIC announced the signing of a multi-year contract between NTIC’s Brazilian joint venture (Zerust Prevencao de Corrosao S.A.) and Petroleo Brasileiro S.A. (Petrobras) to install and service proprietary corrosion protection technologies on the roofs of an initial set of aboveground oil storage tanks at the Petrobras REDUC refinery in Rio de Janeiro, Brazil.  Also during fiscal 2009, NTIC signed multiple joint research and development contracts with Petrobras’s research and development group at the Leopoldo Américo Miguez de Mello Research & Development Center (CENPES) pursuant to which the parties

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will undertake a 20-month Petrobras funded effort to explore, understand and resolve bottom plate corrosion issues in aboveground storage tanks.  A second 12-month Petrobras sponsored project has also started aimed at field trials of certain pipeline protection technologies.  NTIC also is pursuing opportunities to market its ZERUST® corrosion prevention technology to other potential customers in the oil and gas industry across several countries through NTIC’s joint venture partners and other strategic partners.  NTIC believes the sale of its ZERUST® products to customers in the oil and gas industry will involve a long sales cycle, likely including a one- to two-year trial period with each customer and a slow integration process thereafter.

In addition to ZERUST® products and services, NTIC develops and markets a portfolio of bio-based and/or biodegradable (compostable) polymer resin compounds and finished products under the Natur-Tec® brand.  These products are intended to reduce NTIC’s customers’ carbon footprint and provide environmentally sound disposal options.  Natur-Tec® bio-based and biodegradable plastics are manufactured using NTIC’s patented and/or proprietary technologies and are intended to replace conventional petroleum-based plastics.  The Natur-Tec® bioplastics portfolio includes flexible film, foam, rigid injection molded materials and engineered plastics. Natur-Tec® biodegradable and compostable finished products include shopping and grocery bags, lawn and leaf bags, can liners, pet waste collection bags, cutlery, packaging foam and coated paper products and are engineered to be fully biodegradable in a composting environment.

NTIC’s Polymer Energy LLC joint venture markets and sells a system that uses catalytic pyrolysis to convert plastic waste (primarily polyolefins) into hydrocarbons (primarily a mix of diesels, gasoline and heavy fractions) resulting in an economically viable and environmentally responsible alternative to current methods of recycling and disposal of plastic waste.  Each unit can process up to ten tons of plastic waste per day, and the modular design allows for easily scalable capacity.  The crude output is high-grade and can be further processed in a refinery or used as an input for co-generation of electricity.

Financial Overview

NTIC’s consolidated net sales increased 65.9% and 11.6% during the three and six months ended February 28, 2010 compared to the three and six months ended February 28, 2009, respectively.  The increase was primarily as a result of increased sales of ZERUST® and EXCOR® rust and corrosion inhibiting packaging products and services.  During the six months ended February 28, 2010, 96.9% of NTIC’s consolidated net sales were derived from sales of ZERUST® and EXCOR® rust and corrosion inhibiting packaging products and services.  Net sales of ZERUST® products increased 20.0% to $5,413,009 during the six months ended February 28, 2010 compared to $4,512,380 during the six months ended February 28, 2009 due to increased demand primarily as a result of the economic recovery of the domestic manufacturing sector. NTIC experienced a significant decrease in sales orders during its second quarter of fiscal 2009 as compared to the prior year period due to the then economic recession.  Although NTIC experienced decreased sales from its existing customers during that time period, NTIC does not believe it lost any significant customers.   Due to an economic recovery of the domestic manufacturing sector to some extent, NTIC experienced an increase in sales orders from existing customers during the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 and received sales orders from several new customers due in part to its efforts during the past year to expand further out of its traditional core automotive markets.  Additionally, NTIC has focused efforts to develop new product offerings to its existing customer base in an effort to increase sales to existing customers.

During the six months ended February 28, 2010, 3.1% of NTIC’s consolidated net sales were derived from the sales of its Natur-Tec® products compared to 9.7% during the six months ended February 28, 2009.  Net sales of Natur-Tec® products decreased by 63.9% to $174,871 during the six months ended February 28, 2010 compared to $485,009 during the six months ended February 28, 2009.  This decrease was primarily due to several large stocking orders of Natur-Tec® products received during the three months ended November 30, 2009.  Net sales of Natur-Tec® products increased $85,447 during the three months ended February 28, 2010 to $88,139 compared to $2,692 during the three months ended February 28, 2009.

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Cost of goods sold as a percentage of net sales decreased to 64.4% for the six months ended February 28, 2010 compared to 68.9% for the six months ended February 28, 2009 primarily as a result of decreased raw material costs for ZERUST® products and higher sales volumes.

Total net sales of all of NTIC’s joint ventures increased 22.7% to $39,854,071 during the six months ended February 28, 2010 compared to $32,476,685 during the six months ended February 28, 2009 primarily as a result of increased demand for ZERUST® products due to the global economic recovery.  NTIC recognized an 18.7% increase in fee income for technical and support services as a result of the increase in total net sales of the joint ventures, along with an 18.2% decrease in direct joint venture expense.  NTIC’s equity in income of corporate joint ventures and holding companies increased 112.5% to $1,397,586 during the six months ended February 28, 2010 compared to $657,732 during the six months ended February 28, 2009.  NTIC’s total income from its corporate joint ventures and holding companies increased 1,538.4% to $1,658,772 for the six months ended February 28, 2010 compared to $101,245 for the six months ended February 28, 2009.

NTIC has been awarded multiple research and development contracts.  NTIC accrues proceeds received under the grants and offsets research and development expenses incurred in equal installments over the timelines associated with completion of the grants’ specific objectives and milestones.  At February 28, 2010 and August 31, 2009, NTIC deferred amounts received of $286,479 and $145,562 in other accrued liabilities, as NTIC had not yet completed all of the necessary performance under the obligations of the contracts.

NTIC expenses all costs related to product research and development as incurred.  NTIC incurred $1,565,698 and $1,567,296 during the six months ended February 28, 2010 and 2009, respectively, in connection with its research and development activities.  These costs related to product research and development are the net amount after being reduced by reimbursements related to the awarding of the multiple research and development contracts of $286,479 and $0 for the six months ended February 28, 2010 and 2009, respectively.   NTIC anticipates that it will spend between $3,000,000 and $3,500,000 in total during fiscal 2010 on research and development activities related to its new technologies.  The net fees are accounted for in the “Expenses incurred in support of corporate joint ventures” section of NTIC’s consolidated statements of operations.

Net income was $782,346, or $0.18 per diluted common share, for the six months ended February 28, 2010 compared to a loss of $(1,500,805), or a loss of $(0.40) per diluted common share, for the six months ended February 28, 2009.  This return to profitability was primarily the result of the significant increase in sales from NTIC’s North American operations and the significant increase in income from corporate joint ventures.  Additionally, most of the cost control initiatives that NTIC initiated during second quarter of fiscal 2009 remained in place through the first two quarters of fiscal 2010.  However, in January 2010, salary cuts that were made in January 2009 were reinstated and NTIC began hiring employees to fill positions that were previously cut during the economic downturn.  NTIC believes the hiring of such additional personnel was necessary meet anticipated increased demand from new sales efforts being made in both NTIC’s ZERUST oil & gas business and with Natur-Tec business.  In addition, $554,000 of the loss for the six months ended February 28, 2009 was attributable to a loss on impairment relating to NTIC’s React-NTI joint venture.

NTIC’s working capital was $5,817,415 at February 28, 2010, including $1,334,389 in cash and cash equivalents.  As of February 28, 2010, NTIC had no borrowings under its $2,300,000 demand line of credit.  NTIC expects to meet its future liquidity requirements during at least the next 12 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 ventures and holding companies and funds available through existing or anticipated financing arrangements.  NTIC also may raise additional financing to help fund its new businesses through the issuance of debt or equity securities.

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Results of Operations

NTIC’s results of operations exclude the impact of its activities with its joint ventures and holding companies, other than its former joint venture React-NTIC LLC.  As explained in more detail in Note 1 to NTIC’s consolidated financial statements contained in NTIC’s annual report on Form 10-K for the fiscal year ended August 31, 2009, the results of React-NTIC LLC are included in NTIC’s consolidated results of operations and thus included in the table below.  NTIC does not consolidate the results of its other joint ventures or holding companies.

The following table sets forth NTIC’s results of operations for the three months ended February 28, 2010 and February 28, 2009.

The following table sets forth NTIC’s results of operations for the six months ended February 28, 2010 and February 28, 2009.

Net Sales. NTIC’s consolidated net sales increased 65.9% and 11.6% during the three and six months ended February 28, 2010 compared to the three and six months ended February 28, 2009, respectively.  The increase was primarily as a result of increased sales of ZERUST® and EXCOR® rust and corrosion inhibiting packaging products and services.  During both the three and six months ended February 28, 2010, 96.9% of NTIC’s consolidated net sales were derived from sales of ZERUST® and EXCOR® rust and corrosion inhibiting packaging products and services.  Net sales of ZERUST® products increased 20.0% to $5,413,009 during the six months ended February 28, 2010 compared to $4,512,380 during the six months ended February 28, 2009 and 61.2% to $2,785,452 during the three months ended February 28, 2010 compared to $1,727,845 during the three months ended February 28, 2009.  Both increases were due to increased demand primarily as a result of the economic recovery of the domestic manufacturing sector.  NTIC experienced a significant decrease in sales orders during its second quarter of fiscal 2009 as compared to the prior year period due to the then economic recession.  Although NTIC experienced decreased sales from its existing customers during that time period, NTIC does not believe it lost any significant customers.   Due to some economic recovery of the domestic manufacturing sector, NTIC experienced an increase in sales orders from existing customers during the second quarter of fiscal 2010 compared to the second quarter of fiscal 2009 and received sales orders from several new customers during the second quarter of fiscal 2010 due in part to its efforts during the past year to expand beyond its traditional core automotive markets.  Additionally, NTIC has focused efforts to develop new product offering to its existing customer base in an effort to increase sales to existing customers.

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During both the three and six months ended February 28, 2010, 3.1% of NTIC’s consolidated net sales were derived from the sales of its Natur-Tec® products compared to 0.2% and 9.7% during the three and six months end February 28, 2009, respectively.  Net sales of Natur-Tec® products decreased by 63.9% to $174,871 during the six months ended February 28, 2010 compared to $485,009 during the six months ended February 28, 2009.  This decrease was primarily due to several large stocking orders of Natur-Tec® products during the three months ended November 30, 2008.  Net sales of Natur-Tec® products increased $85,447 during the three months ended February 28, 2010 to $88,139 compared to $2,692 during the three months ended February 28, 2009.

The following table sets forth additional detail regarding NTIC’s net sales by product category for the three months ended February 28, 2010 and February 28, 2009:

The following table sets forth additional detail regarding NTIC’s net sales by product category for the six months ended February 28, 2010 and February 28, 2009:

Cost of Goods Sold.  Cost of goods sold increased 59.3% and 4.3% for the three and six months ended February 28, 2010, respectively, compared to the same respective periods in fiscal 2009 primarily as a result of increased net sales as described above.  Cost of sales as a percentage of net sales decreased to 64.0% and 64.4% for the three and six months ended February 28, 2010, respectively, compared to 66.6% and 68.9% in the same respective periods in fiscal 2009 primarily as a result of the increase in net sales and decreases in raw material prices of the ZERUST® products.

Selling Expenses.  NTIC’s selling expenses decreased 3.6% for the three months ended February 28, 2010 compared to the same period in fiscal 2009 due to decreases in (i) consulting expense of $34,000, (iii) lab testing  related expenses of $41,000 and (iii) insurance expense of $17,000, partially offset by increases of salary and benefits of $62,000.  NTIC’s selling expenses decreased 17.0% for the six months ended February 28, 2010 compared the same period in fiscal 2009 due to decreases in (i) consulting expense of $65,000, (ii) advertising expense of $29,000, (iii) lab testing of $50,000 and (iv) sales and promotional expense of $30,000.  Selling expenses as a percentage of net sales decreased to 19.3% and 20.0% during the three and six months ended February 28, 2010, respectively, from 33.2% and 26.9% during the same respective periods in fiscal 2009, due to the increase in net sales while holding costs stable or down.

General and Administrative Expenses.  NTIC’s general and administrative expenses increased 30.2% for the three months ended February 28, 2010 compared to the same period in fiscal 2009 due to increases in (i) auditing and tax expense of $45,000, (ii) stock option expense of $44,000, (iii) salaries and related benefits of $75,000.  NTIC’s general and administrative expenses increased 10.9% during the six months ended February 28, 2010 compared to the same period in fiscal 2009 as a result of the same general increases in expenses noted above during the three

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months ended February 28, 2010.  As a percentage of net sales, general and administrative expenses decreased to 29.2% and 31.5% for the three and six months ended February 28, 2010, respectively, from 37.2% and 31.7% during the same respective periods in fiscal 2009, primarily as a result of fixed general and administrative expenses spread over increased net sales and NTIC’s cost reduction efforts during the second quarter of fiscal 2009, many of which had remained in place during the second quarter of fiscal 2010.

NTIC includes expenses in general and administrative expenses that provide benefit to the various joint ventures in addition to providing benefit to NTIC’s North American operations, including specifically, expenses associated with information technology, general insurance, executive and non-executive salaries, bonuses and benefits, building expenses, audit and tax fees and expenses and directors fees and expenses.

Lab and Technical Support Expenses.  NTIC’s lab and technical support expenses increased 3.5% and 80.4% during the three and six months ended February 28, 2010, respectively, compared to the same respective periods in fiscal 2009.  These increases were immaterial as lab and technical support expenses represented 1.1% and 1.2% as a percentage of net sales for the three and six months ended February 28, 2010, respectively.  As a percentage of net sales, lab and technical support expenses increased by a negligible amount during the three and six months ended February 28, 2010, respectively, compared to the same respective periods in fiscal 2009.

International Corporate Joint Ventures and Holding Companies.  Net sales of NTIC’s corporate joint ventures and holding companies for the three and six months ended February 28, 2010 and 2009 were as follows:

The increase in net sales of NTIC’s corporate joint ventures and holding companies in the three and six months ended February 28, 2010 compared to the same respective periods in fiscal 2009 were primarily a result of increased demand of ZERUST® and EXCOR® products as a result of the worldwide economic recovery.

NTIC receives fees for technical and other support services it provides to its corporate joint ventures and holding companies based on the revenues of the individual corporate joint ventures and holding companies.  The support and services NTIC provide its corporate joint ventures include consulting, travel, technical and marketing services to existing joint ventures, legal fees incurred in the establishment of new joint ventures, registration and promotion and legal defense of worldwide trademarks, and legal fees incurred in connection with the filing of patent applications.  NTIC recognized fee income for such support of $1,149,338, and $2,301,268 in the three and six months ended February 28, 2010, respectively, compared to $617,850 and $1,938,569 during the same respective periods in fiscal 2009, an increase of 86.0% and 18.7%, respectively.  The increase in fees for technical and other support to its corporate joint ventures was due to the increase in net sales of NTIC’s corporate joint ventures and holding companies.

NTIC sponsors a worldwide corporate joint venture conference approximately every three to four years in which all of its corporate joint ventures are invited to participate.  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 next conference, reflecting that NTIC has not fully earned the payments received during that period.  The next corporate joint venture conference is scheduled to be held in the fall of 2010 or spring of 2011.  There was no deferred income recorded within other accrued liabilities during the three and six months ended February 28, 2010 related to this future conference since $288,000 had been accrued over the past three fiscal years, which represents the amount that NTIC expects to spend every three years to hold the conference.  This amount is based on the historical experience of NTIC, current conditions and the intentions of NTIC’s management.  NTIC does not anticipate

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