NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION This Management's Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess NTIC's financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading "Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations-Forward-Looking Statements" in this report and under "Part 1. Item 1A. Risk Factors" in our annual report on Form 10-K for the fiscal year endedAugust 31, 2019 . The following discussion of the results of the operations and financial condition of NTIC should be read in conjunction with NTIC's consolidated financial statements and the related notes thereto included under the heading "Part I. Item 1. Financial Statements."
Business Overview
NTIC develops and markets proprietary, environmentally-beneficial products and services in over 60 countries either directly or via a network of subsidiaries, joint ventures, independent distributors, and agents. NTIC's primary business is corrosion prevention marketed mainly under the ZERUST® brand. NTIC has been selling its proprietary ZERUST® products and services to the automotive, electronics, electrical, mechanical, military, and retail consumer markets for over 40 years and, in recent years, has targeted and expanded into the oil and gas industry. NTIC also markets and sells a portfolio of bio-based and certified compostable (fully biodegradable) polymer resin compounds and finished products under the Natur-Tec® brand. These products are intended to reduce NTIC's customers' carbon footprint and provide environmentally sound waste disposal options.
NTIC's ZERUST® rust and corrosion inhibiting products include plastic and paper packaging, liquids, coatings, rust removers, cleaners, and diffusers as well as engineered solutions designed specifically for the oil and gas industry. NTIC also offers worldwide, on-site, technical consulting for rust and corrosion prevention issues. NTIC's technical service consultants work directly with the end users of NTIC's ZERUST® rust and corrosion inhibiting products to analyze their specific needs and develop systems to meet their performance requirements. InNorth America , NTIC sells its ZERUST® corrosion prevention solutions through a network of independent distributors and agents supported by a direct sales force. Internationally, NTIC sells its ZERUST® corrosion prevention solutions through its wholly-owned subsidiary inChina ,NTIC (Shanghai) Co., Ltd. (NTICChina ), its majority-owned joint venture holding company for NTIC's joint venture investments in theAssociation of Southeast Asian Nations (ASEAN) region,NTI Asean LLC (NTI Asean), certain majority-owned and wholly-owned subsidiaries, and joint venture arrangements inNorth America ,Europe , andAsia . NTIC also sells products directly to its joint venture partners through its wholly-owned subsidiary inGermany ,NTIC Europe GmbH (NTI Europe). One of NTIC's strategic initiatives is to expand into and penetrate other markets for its ZERUST® corrosion prevention technologies. Consequently, for the past several years, NTIC has focused significant sales and marketing efforts on the oil and gas industry, as the infrastructure that supports that industry is typically constructed using metals that are highly susceptible to corrosion. NTIC believes that its ZERUST® corrosion prevention solutions will minimize maintenance downtime on critical oil and gas industry infrastructure, extend the life of such infrastructure, and reduce the risk of environmental pollution
due to corrosion leaks.
NTIC markets and sells its ZERUST® rust and corrosion prevention solutions to
customers in the oil and gas industry across several countries either directly,
through its subsidiaries, or through its joint venture partners and other
strategic partners. The sale of ZERUST® corrosion prevention solutions to
customers in the oil and gas industry typically involves long sales cycles,
often including multi-year trial periods with each customer and a slow
integration process thereafter.
20
Natur-Tec® bio-based and compostable plastics are manufactured using NTIC's
patented and/or proprietary technologies and are intended to replace
conventional petroleum-based plastics. The Natur-Tec®biopolymer resin compound
portfolio includes formulations that have been optimized for a variety of
applications, including blown-film extrusion, extrusion coating, injection
molding, and engineered plastics. These resin compounds are certified to be
fully biodegradable in a composting environment and are currently being used to
produce finished products, including can liners, shopping and grocery bags, lawn
and leaf bags, pet waste collection bags, cutlery, and coated paper products. In
North America , NTIC markets its Natur-Tec®resin compounds and finished products
primarily through a network of regional and national distributors as well as
independent agents. NTIC continues to see significant opportunities for finished
bioplastic products and, therefore, continues to strengthen and expand its North
American distribution network for finished Natur-Tec® bioplastic products.
Internationally, NTIC sells its Natur-Tec® resin compounds and finished products
both directly and through its wholly-owned subsidiary in China and
majority-owned subsidiaries in India and Sri Lanka , and through distributors and
certain joint ventures.
NTIC's Subsidiaries and Joint Venture Network
NTIC has ownership interests in nine operating subsidiaries inNorth America ,South America ,Europe , andAsia . The following table sets forth a list of NTIC's operating subsidiaries as ofFebruary 29, 2020 , the country in which the subsidiary is organized, and NTIC's ownership percentage in each subsidiary: NTIC Subsidiary Name Country Percent (%) Ownership NTIC (Shanghai) Co., Ltd China 100% NTI Asean LLC United States 60% Zerust Prevenção de Corrosão S.A. Brazil 85% ZERUST-EXCOR MEXICO, S. de R.L. de C.V Mexico 100% Natur-Tec India Private Limited India 75% Natur Tec Lanka (Pvt) Ltd Sri Lanka(1) 75% NTIC Europe GmbH Germany 100% Zerust Singapore Pte Ltd Singapore(2) 60% Zerust Vietnam Co. Ltd Vietnam(2) 60%
(1)
and, therefore, indirectly owned by NTIC.
(2)
Asean LLC and, therefore, indirectly owned by NTIC.
The results of these subsidiaries are fully consolidated in NTIC's consolidated financial statements.
NTIC participates in 19 active joint venture arrangements inNorth America ,Europe , andAsia . Each of these joint ventures generally manufactures and markets products in the geographic territory to which it is assigned. While most of NTIC's joint ventures exclusively sell rust and corrosion inhibiting products, some of the joint ventures also sell NTIC's Natur-Tec® resin compounds. NTIC has historically funded its investments in joint ventures with cash generated from operations. 21
The following table sets forth a list of NTIC's operating joint ventures as of
NTIC
Joint Venture Name Country Percent (%) Ownership TAIYONIC LTD. Japan 50% ACOBAL SAS France 50%
EXCOR KORROSIONSSCHUTZ - TECHNOLOGIEN UND PRODUKTE GMBH
50% ZERUST AB Sweden 50% MOSTNIC-ZERUST Russia 50% ZERUST OY Finland 50% HARITA-NTI LTD India 50% ZERUST (U.K.) LTD. United Kingdom 50% EXCOR-ZERUST S.R.O. Czech Republic 50% EXCOR SP. Z.O.O. Poland 50% ZERUST A.?. Turkey 50%
ZERUST CONSUMER PRODUCTS, LLCUnited States
50% ZERUST - DNEPR Ukraine 50% KOREA ZERUST CO., LTD. South Korea(1) 30% ZERUST-NIC (TAIWAN) CORP. Taiwan(1) 30% PT. CHEMINDO - NTIA Indonesia(1) 30%
ZERUST SPECIALTY TECH CO. LTD.Thailand (1)
30%
CHONG WAH-NTIA SDN. BHD.Malaysia (1)
30%
NTIA ZERUSTPHILIPPINES , INC.Philippines (1)
30%
____________________________
(1) Indirect ownership interest through NTI Asean.
NTIC receives funds from its joint ventures as fees received for services that NTIC provides to its joint ventures and as dividend distributions. The fees for services provided to joint ventures are determined based on either a flat fee or a percentage of sales depending on local laws and tax regulations. With respect to NTIC's joint venture inGermany (EXCOR), NTIC recognizes an agreed upon quarterly fee for services. NTIC recognizes equity income from each joint venture based on the overall profitability of the joint venture. Such profitability is subject to variability from quarter to quarter, which, in turn, subjects NTIC's earnings to variability from quarter to quarter. The profits of each joint venture are shared by the respective joint venture owners in accordance with their respective ownership percentages. NTIC typically directly or indirectly owns 50% or less of each of its joint venture entities and, thus, does not control the decisions of these entities regarding whether to pay dividends and, if paid, what amount is paid in a given year. The payment of a dividend by an entity is determined by a joint vote of the owners and is not at the sole discretion of NTIC.
NTIC accounts for the investments and financial results of its joint ventures in its financial statements utilizing the equity method of accounting.
NTIC considers EXCOR to be individually significant to NTIC's consolidated assets and income. Therefore, NTIC provides certain additional information regarding EXCOR in the notes to NTIC's consolidated financial statements and in this section of this report.
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Potential Impact of the COVID-19 Pandemic
NTIC is closely monitoring the novel strain of coronavirus (COVID-19) pandemic and its potential impact on its business. The outbreak and continuing rapid spread of COVID-19 has resulted in a substantial curtailment of business activities worldwide and is causing weakened economic conditions, both inthe United States and many countries abroad. As part of intensifying efforts to contain the spread of COVID-19, a growing number of state, local and foreign governments have imposed various restrictions on the conduct of business and travel. Government restrictions, such as stay-at-home orders, quarantines and worker absenteeism as a result of COVID-19 have led to a significant number of business closures and slowdowns. These business closures and slowdowns have already adversely impacted and will likely continue to adversely impact NTIC directly, as well as cause its customers and suppliers to slow or stop production, which will likely significantly disrupt NTIC's sales, production and supply chain. For example, as a result of the COVID-19 outbreak inChina inDecember 2019 , NTIC experienced decreased demand for its products and services inChina and other places inAsia during the three months endedFebruary 29, 2020 . The operations at NTIC China were suspended onJanuary 18, 2020 and did not resume untilFebruary 28, 2020 . In addition, NTIC's location inIndia is currently under mandated governmental shutdown untilApril 15, 2020 . NTIC anticipates significantly decreased global demand for its products and services during third quarter of fiscal 2020 and beyond. This significantly decreased demand will likely have a material adverse effect on NTIC's business, operating results and financial condition beginning with third quarter of fiscal 2020. Due to the international reach of COVID-19, NTIC anticipates that its international joint ventures will also be adversely impacted by the causes listed above, as well as other local issues that may arise, which will likely have a material adverse effect on NTIC's joint venture operations and equity in income from joint ventures in the third quarter of fiscal 2020 and beyond. It is currently not possible to predict the precise potential impact, as well as the extent of any impact, of the COVID-19 pandemic on NTIC's business, and on the global economy as a whole. It is also currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. A prolonged situation could have a significant adverse effect on economies and financial markets globally, potentially leading to a significant worldwide economic downturn, which could have a significant adverse effect on NTIC's business, operating results and financial condition.
The extent to which the COVID-19 pandemic impacts NTIC's business will likely depend on numerous evolving factors that NTIC may not be able to accurately predict, including:
· the duration and scope of the pandemic;
· governmental, business and individuals' actions that have been and continue to
be taken in response to the pandemic;
· the impact of the pandemic on economic activity and actions taken in response;
· the effect on NTIC's customers and demand for its products and services;
· NTIC's ability to continue to manufacture and sell its products and services,
including as a result of travel restrictions and people working from home;
· the ability of NTIC's customers to pay for its products and services; and
· any closures of NTIC's facilities and the facilities of its customers and
supplier.
23
Any of these events could materially adversely affect NTIC's business, operating results and financial condition.
Financial Overview NTIC's management, including its chief executive officer, who is NTIC's chief operating decision maker, reports and manages NTIC's operations in two reportable business segments based on products sold, customer base, and distribution center: ZERUST® products and services and Natur-Tec® products. All share and per share data have been adjusted for all periods presented to reflect the two-for-one stock split effectiveJune 28, 2019 . NTIC's consolidated net sales decreased 0.6% and increased 1.7% during the three and six months endedFebruary 29, 2020 , respectively, compared to the three and six months endedFebruary 28, 2019 . NTIC's consolidated net sales for the three months endedFebruary 29, 2020 were adversely affected by reduced demand inChina and other parts ofAsia as a result of the novel strain of coronavirus (COVID-19) outbreak inChina . The operations at NTIC China were suspended onJanuary 18, 2020 and did not resume untilFebruary 28, 2020 . NTIC anticipates that the COVID-19 outbreak will continue to significantly adversely affect NTIC's consolidated net sales and earnings in the third quarter of fiscal 2020 and beyond. During both the three and six months endedFebruary 29, 2020 , 68.1% of NTIC's consolidated net sales were derived from sales of ZERUST® products and services, which decreased 1.0% and 1.1% to$9,016,222 and$18,965,734 , respectively, compared to$9,108,395 and$19,173,569 during the three and six months endedFebruary 28, 2019 , respectively. These decreases were due to lower sales from existing customers for existing products as a result of decreased demand. NTIC has focused its sales efforts of ZERUST® products and services by strategically targeting customers with specific corrosion issues in new market areas, including the oil and gas industry and other industrial sectors that offer sizable growth opportunities. NTIC's consolidated net sales for the six months endedFebruary 29, 2020 included$1,587,862 of sales made to customers in the oil and gas industry compared to$1,343,460 for the six months endedFebruary 28, 2019 . Overall demand for ZERUST® products and services depends heavily on the overall health of the markets in which NTIC sells its products, including the automotive, oil and gas, agriculture, and mining markets in particular. NTIC's sales of ZERUST®products and services for the three months endedFebruary 29, 2020 were adversely affected by reduced demand inChina and other parts ofAsia as a result of the COVID-19 outbreak inChina . NTIC anticipates that the COVID-19 outbreak will continue to significantly adversely affect sales of ZERUST® products and services in the third quarter of fiscal 2020 and beyond. During both the three and six months endedFebruary 29, 2020 , 31.9% of NTIC's consolidated net sales were derived from sales of Natur-Tec® products compared to 31.6% and 30.0% during the three and six months endedFebruary 28, 2019 , respectively. Net sales of Natur-Tec® products increased 0.3% and 8.1% during the three and six months endedFebruary 29, 2020 , respectively, compared to the three and six months endedFebruary 28, 2019 primarily due to an increase in finished product sales inNorth America and finished product sales at NTIC's majority-owned subsidiary inIndia ,Natur-Tec India Private Limited (Natur-TecIndia ), partially offset by reduced demand inChina and other parts ofAsia as a result of the COVID-19 outbreak inChina during the three months endedFebruary 29, 2020 . NTIC anticipates that the COVID-19 outbreak will continue to significantly adversely affect sales of Natur-Tec® products in the third quarter of fiscal 2020 and beyond. Cost of goods sold as a percentage of net sales decreased to 65.6% during the three months endedFebruary 29, 2020 , compared to 69.7% during the three months endedFebruary 28, 2019 , and decreased to 66.4% during the six months endedFebruary 29, 2020 , compared to 68.4% during the prior fiscal year period primarily as a result of an increased percentage of product sales from oil and gas products that have higher gross margins than NTIC's traditional ZERUST®industrial products. 24 NTIC's equity in income from joint ventures decreased 20.7% and 28.6% to$1,360,804 and$2,654,794 during the three and six months endedFebruary 29, 2020 , respectively, compared to$1,715,216 and$3,719,378 during the three and six months endedFebruary 28, 2019 , respectively. These decreases were primarily due to corresponding decreases in net sales at the joint ventures, which decreased 12.5% and 14.6% to$24,289,370 and$49,749,664 during the three and six months endedFebruary 29, 2020 , respectively, compared to$27,749,880 and$58,229,806 during the three and six months endedFebruary 28, 2019 , respectively. These decreases in net sales of NTIC's joint ventures were primarily due to lower sales from existing customers for existing products as a result of decreased demand. The decreases in net sales of NTIC's joint ventures resulted in corresponding decreases in fees for services provided to joint ventures, as such fees are a function of net sales of NTIC's joint ventures. NTIC anticipates that net sales of its joint ventures will decrease significantly as a result of anticipated decreased demand as a result of the COVID-19 outbreak and may have a significant adverse effect on NTIC's equity in income from its joint ventures commencing in the third quarter of fiscal 2020.
NTIC's total operating expenses increased 19.7% and 6.8% to
NTIC spent$1,006,395 and$1,968,036 during the three and six months endedFebruary 29, 2020 , compared to$927,537 and$1,799,694 during the three and six months endedFebruary 28, 2019 , respectively, in connection with its research and development activities. NTIC anticipates that it will spend a total of between$3,500,000 and$3,700,000 in fiscal 2020 on research and development activities.
Net income attributable to NTIC decreased to$179,834 , or$0.02 per diluted common share, for the three months endedFebruary 29, 2020 , compared to$1,401,568 , or$0.15 per diluted common share, for the three months endedFebruary 28, 2019 , a decrease of$1,212,734 , or$0.13 per diluted share. Net income attributable to NTIC decreased to$1,392,384 , or$0.15 per diluted common share, for the six months endedFebruary 29, 2020 , compared to$2,898,627 , or$0.31 per diluted common share, for the six months endedFebruary 28, 2019 , a decrease of$1,506,243 , or$0.16 per diluted share. These decreases were primarily the result of the increase in operating expenses and decrease in income from joint venture operations during the current fiscal year periods compared to the prior fiscal year periods, partially offset by increases in gross profit. NTIC anticipates that its earnings may be significantly adversely affected by COVID-19 in the third quarter of fiscal 2020 and beyond and that its quarterly net income or loss will continue to remain subject to significant volatility primarily due to the financial performance of its subsidiaries and joint ventures, sales of its ZERUST®products and services into the oil and gas industry, and sales of its Natur-Tec® bioplastics products, which fluctuate more on a quarterly basis than the traditional ZERUST® business.
NTIC's working capital, defined as current assets less current liabilities, was
25
On January 22, 2020 , the Company's Board of Directors declared a cash dividend
of $0.065 per share of NTIC's common stock, payable on February 19, 2020 to
stockholders of record on February 5, 2020 . On October 22, 2019 , the Company's
Board of Directors declared a cash dividend of $0.065 per share of NTIC's common
stock, payable on November 20, 2019 to stockholders of record on November 6,
2019 . During fiscal 2019, the Company's Board of Directors declared four
quarterly cash dividends of $0.06 per share each. The declaration of future
dividends is not guaranteed and will be determined by NTIC's Board of Directors
in light of conditions then existing, including NTIC's earnings, financial
condition, cash requirements, restrictions in financing agreements, business
conditions, and other factors, including without limitation the effect of
COVID-19 on its business, operating results and financial condition.
Results of Operations
The following table sets forth NTIC's results of operations for the three and
six months ended
Three Months Ended
February 29, % of February 28, % of $ %
2020 Net Sales 2019 Net Sales Change Change
Net sales, excluding joint
ventures $ 12,988,153 98.1 % $ 12,606,449 94.7 % $ 381,704 3.0 %
Net sales, to joint
ventures 245,630 1.9 % 708,955 5.3 % (463,325 ) (65.4 )%
Cost of goods sold 8,687,301 65.6 % 9,284,099 69.7 % (596,798 ) (6.4 )%
Equity in income from joint
ventures 1,360,804 10.3 % 1,715,216 12.9 % (354,412 ) (20.7 )%
Fees for services provided
to joint ventures 1,256,213 9.5 % 1,436,774 10.8 % (180,561 ) (12.6 )%
Selling expenses 3,110,240 23.5 % 2,505,081 18.8 % 605,159 24.2 %
General and administrative
expenses 2,345,113 17.7 % 1,963,537 14.7 % 381,576 19.4 %
Research and development
expenses $ 1,006,395 7.6 % $ 927,537 7.0 % $ 78,858 8.5 %
Six Months Ended
February 29, % of February 28, % of $ %
2020 Net Sales 2019 Net Sales Change Change
Net sales, excluding joint
ventures $ 27,033,937 97.0 % $ 26,217,314 95.7 % $ 816,623 3.1 %
Net sales, to joint
ventures 831,246 3.0 % 1,192,142 4.3 % (360,896 ) (30.0 )%
Cost of goods sold 18,492,385 66.4 % 18,745,236 68.4 % (252,851 ) (1.3 )%
Equity in income from joint
ventures 2,654,794 9.5 % 3,719,378 13.6 % (1,064,584 ) (28.6 )%
Fees for services provided
to joint ventures 2,614,538 9.4 % 2,865,209 10.5 % (250,671 ) (8.7 )%
Selling expenses 5,997,532 21.5 % 5,316,175 19.4 % 681,357 12.8 %
General and administrative
expenses 4,394,800 15.8 % 4,459,334 16.3 % (64,534 ) (1.4 )%
Research and development
expenses $ 1,968,036 7.1 % $ 1,799,694 6.6 % $ 168,342 9.4 %
Net Sales . NTIC's consolidated net sales decreased 0.6% and increased 1.7% to$13,233,783 and$27,865,183 during the three and six months endedFebruary 29, 2020 , respectively, compared to the three and six months endedFebruary 28, 2019 . NTIC's consolidated net sales for the three months endedFebruary 29, 2020 were adversely affected by reduced demand inChina and other parts ofAsia as a result of the COVID-19 outbreak inChina . The operations at NTIC China were suspended onJanuary 18, 2020 and did not resume untilFebruary 28, 2020 . NTIC's consolidated net sales to unaffiliated customers excluding NTIC's joint ventures increased 3.0% and 3.1% to$12,988,153 and$27,033,937 during the three and six months endedFebruary 29, 2020 , respectively, compared to the same respective periods in fiscal 2019. These increases were primarily a result of an increase in sales of Zerust oil & gas and Natur-Tec® products. Net sales to joint ventures decreased 65.4% and 30.3% to$245,630 and$831,246 , during the three and six months endedFebruary 29, 2020 , respectively, compared to the same respective periods in fiscal 2019. These decreases were primarily a result of decreased demand and the timing of shipments compared to the prior fiscal year periods. 26
The following table sets forth NTIC's net sales by product segment for the six
months ended
Three Months Ended Six Months Ended
February 29, 2020 February 28 ,
2019
$ 9,016,222 $
9,108,395
4,217,561 4,207,009 8,899,449 8,235,887
Total net sales $ 13,233,783 $ 13,315,404 $ 27,865,183 $ 27,409,456
During both the three and six months ended February 29, 2020 , 68.1% of NTIC's
consolidated net sales were derived from sales of ZERUST® products and services,
which decreased 1.0% and 1.1% to $9,106,222 and $18,965,734 during the three and
six months ended February 29, 2020 , respectively, compared to $9,108,395 and
$19,173,569 during the three and six months ended February 28, 2019 ,
respectively.
NTIC has strategically focused its sales efforts for ZERUST® products and
services on customers with sizeable corrosion problems in industry sectors that
offer sizable growth opportunities, including the oil and gas sector. Overall,
demand for ZERUST® products and services depends heavily on the overall health
of the market segments to which NTIC sells its products, including the
automotive, oil and gas, agriculture, and mining markets in particular.
The following table sets forth NTIC's net sales of ZERUST® products for the
three and six months ended
Three Months Ended
$ %
February 29, 2020 February 28, 2019 Change Change
ZERUST® industrial net sales $ 7,703,575 $ 8,042,154 $ (338,579 ) (4.2 )%
ZERUST® joint venture net sales 245,629 708,954 (463,325 ) (65.4 )%
ZERUST® oil & gas net sales 1,067,018 357,287 709,731 198.6 %
Total ZERUST® net sales $ 9,016,222 $ 9,108,395 $ (92,173 ) (1.0 )%
Six Months Ended
$ %
February 29, 2020 February 28, 2019 Change Change
ZERUST® industrial net sales
831,245 1,192,141 (360,896 ) (30.3 )%
ZERUST® oil & gas net sales 1,587,862 1,343,460 244,402 18.2 %
Total ZERUST® net sales $ 18,965,734 $ 19,173,569 $ (207,835 ) (1.1 )%
NTIC's total ZERUST® net sales decreased during the three months and six months
ended February 29, 2020 , compared to the prior fiscal year periods, primarily
due to an overall decreased demand for ZERUST® industrial products and services
in North America , partially offset by increased demand for ZERUST® oil and gas
products and services. NTIC's sales of ZERUST® products and services for the
three months ended February 29, 2020 were adversely affected by reduced demand
in China and other parts of Asia as a result of the COVID-19 outbreak in China .
27
Demand for ZERUST® products and services decreased significantly beginning inFebruary 2020 largely as a result of the COVID-19 outbreak inChina and may have a significant adverse effect on sales of ZERUST®products and services in the third quarter of fiscal 2020 and beyond. NTIC also anticipates that its sales of ZERUST®products and services into the oil and gas industry will continue to remain subject to significant volatility from quarter to quarter as sales are recognized, specifically due to the volatility of oil prices. Demand for oil and gas products around the world depends primarily on market acceptance and the reach of NTIC's distribution network. Because of the typical size of individual orders and overall size of NTIC's net sales derived from sales of oil and gas products, the timing of one or more orders can materially affect NTIC's quarterly sales compared to prior fiscal year quarters. During both the three and six months endedFebruary 29, 2020 , 31.9% of NTIC's consolidated net sales were derived from sales of Natur-Tec® products, which increased 0.3% and 8.1% to$4,217,561 and$8,899,449 during the three and six months endedFebruary 29, 2020 , respectively, compared to the three and six months endedFebruary 28, 2019 . These increases were primarily due to an increase in finished product sales inNorth America and finished product sales at NTIC's majority-owned subsidiary inIndia ,Natur-Tec India Private Limited (Natur-Tec India), partially offset by decreased demand inChina and other parts ofAsia as a result of the COVID-19 outbreak inChina during the three months endedFebruary 29, 2020 . NTIC anticipates that the COVID-19 outbreak will continue to significantly adversely affect sales of Natur-Tec® products in the third quarter of fiscal 2020 and beyond. Cost of Goods Sold. Cost of goods sold decreased 6.4% and 1.3% for the three and six months endedFebruary 29, 2020 , respectively, compared to the three and six months endedFebruary 28, 2019 . Cost of goods sold as a percentage of net sales decreased to 65.6% during the three months endedFebruary 29, 2020 , compared to 69.7% during the three months endedFebruary 28, 2019 , and decreased to 66.4% during the six months endedFebruary 29, 2020 , compared to 68.4% during the six months endedFebruary 28, 2019 . These increases were due primarily to an increased percentage of product sales from ZERUST®oil and gas products that have higher gross margins than NTIC's traditional ZERUST® industrial products. Equity in Income from Joint Ventures. NTIC's equity in income from joint ventures decreased 20.7% to$1,360,804 and 28.6% to$2,654,794 during the three and six months endedFebruary 29, 2020 , respectively, compared to$1,715,216 and$3,719,378 during the three and six months endedFebruary 28, 2019 , respectively. These decreases were primarily a result of declining profitability of the joint ventures during the respective periods based on decreases in net sales. Of the total equity in income from joint ventures, NTIC had equity in income from joint ventures of$1,710,390 attributable to EXCOR during the six months endedFebruary 29, 2020 , compared to$2,740,907 during the six months endedFebruary 28, 2019 . NTIC had equity in income of all other joint ventures of$944,404 during the six months endedFebruary 29, 2020 , compared to$978,471 during the six months endedFebruary 28, 2019 . Fees for Services Provided to Joint Ventures. NTIC recognized fee income for services provided to joint ventures of$1,256,213 and$2,614,538 during the three and six months endedFebruary 29, 2020 , respectively, compared to$1,436,774 and$2,865,209 during the three and six months endedFebruary 28, 2019 , respectively, representing decreases of 12.6% and 8.7%, respectively. Fee income for services provided to joint ventures is traditionally a function of the sales made by NTIC's joint ventures. Total net sales of NTIC's joint ventures decreased to$24,289,370 and$49,749,664 during the three and six months endedFebruary 29, 2020 , respectively, compared to$27,749,880 and$58,229,806 during the three and six months endedFebruary 28, 2019 , respectively, representing decreases of 12.5% and 14.6%, respectively. Net sales of NTIC's joint ventures are not included in NTIC's consolidated financial statements. Of the total fee income for services provided to joint ventures, fees of$420,229 were attributable to EXCOR during the six months endedFebruary 29, 2020 , compared to$430,328 attributable to EXCOR during the six months endedFebruary 28, 2019 . NTIC anticipates that net sales of its joint ventures may decrease significantly as a result of anticipated decreased demand as a result of the COVID-19 outbreak and is expected to have a significant adverse effect on NTIC's equity in income from its joint ventures for the third quarter of fiscal 2020 and beyond. 28
Selling Expenses. NTIC's selling expenses increased 24.2% and 12.8% for the three and six months endedFebruary 29, 2020 , respectively, compared to the same respective periods in fiscal 2019 due primarily to increases in operating expenses associated with ZERUST® sales efforts, consisting primarily of selling and personnel expenses. Selling expenses as a percentage of net sales increased to 23.5% and 21.5% for the three and six months endedFebruary 29, 2020 , respectively, from 18.8% and 19.4% for the three and six months endedFebruary 28, 2019 , respectively, primarily due to the increases in personnel expenses as previously described, partially offset by the small increase in net sales. General and Administrative Expenses. NTIC's general and administrative expenses increased 19.4% and decreased 1.4% for the three and six months endedFebruary 29, 2020 , respectively, compared to the same respective periods in fiscal 2019 primarily due to the timing of various expenses. As a percentage of net sales, general and administrative expenses were 17.7% and 15.8% for the three and six months endedFebruary 29, 2020 , respectively, from 14.7% and 16.3% for the same respective periods in fiscal 2019, respectively. The changes in general and administrative expenses as a percentage of net sales for the three and six-month comparisons were primarily due to the changes in net sales and expenses as previously described. Research and Development Expenses. NTIC's research and development expenses increased 8.5% and 9.4% for the three and six months endedFebruary 29, 2020 , respectively, compared to the same respective periods in fiscal 2019 primarily due to increases in research and development efforts. Interest Income. NTIC's interest income increased to$55,042 and$104,080 during the three and six months endedFebruary 29, 2020 , respectively, compared to$15,122 and$27,909 during the three and six months endedFebruary 28, 2019 , respectively, due to changing levels of invested cash.
Interest Expense. NTIC's interest expense increased to
Income Before Income Tax Expense. NTIC incurred income before income tax expense equal to$747,416 and$2,371,021 for the three and six months endedFebruary 29, 2020 , respectively, compared to$1,798,427 and$3,695,321 for the three and six months endedFebruary 28, 2019 , respectively. Income Tax Expense. Income tax expense was$463,594 and$727,660 for the three and six months endedFebruary 29, 2020 , respectively, compared to income tax expense of$246,371 and$502,074 during the three and six months endedFebruary 28, 2019 , respectively. Income tax expense was calculated based on management's estimate of NTIC's annual effective income tax rate. The quarter-over-quarter increase in the Company's effective income tax rate is primarily due to foreign withholding taxes paid on dividends received from NTIC's joint ventures during the quarter. Dividends received from NTIC's joint ventures do not represent a component of income before income tax expense. Therefore, to the extent dividends received from NTIC's joint ventures exceed estimated amounts, foreign withholding taxes paid on such dividends result in an increase in the effective income tax rate in comparison to prior periods. NTIC considers the earnings of certain foreign joint ventures to be indefinitely invested outsidethe United States on the bases of estimates that NTIC's future domestic cash generation will be sufficient to meet future domestic cash needs. As a result,U.S. income and foreign withholding taxes have not been recognized on the cumulative undistributed earnings of$19,267,931 and$22,178,126 atFebruary 29, 2020 , andAugust 31, 2019 , respectively. To the extent undistributed earnings of NTIC's joint ventures are distributed in the future, they are not expected to result in any material additional income tax liability after the application of foreign tax credits. 29
Net Income Attributable to NTIC. Net income attributable to NTIC decreased to$179,834 , or$0.02 per diluted common share, for the three months endedFebruary 29, 2020 , compared to$1,401,568 , or$0.15 per diluted common share, for the three months endedFebruary 28, 2019 , a decrease of$1,221,734 or$0.13 per diluted common share. Net income attributable to NTIC decreased to$1,392,384 , or$0.15 per diluted common share, for the six months endedFebruary 29, 2020 , compared to$2,898,627 , or$0.31 per diluted common share, for the six months endedFebruary 28, 2019 , a decrease of$1,506,243 or$0.16 per diluted common share. These decreases were primarily the result of the increase in operating expenses and decreases in income from joint venture operations during the current fiscal year periods compared to the prior fiscal year periods, partially offset by increases in gross profit. NTIC anticipates that its earnings will be significantly adversely affected by COVID-19 in the third quarter of fiscal 2020 and beyond and that its quarterly net income or loss will continue to remain subject to significant volatility primarily due to the financial performance of its subsidiaries and joint ventures, sales of its ZERUST®products and services into the oil and gas industry, and sales of its Natur-Tec® bioplastics products, which fluctuate more on a quarterly basis than the traditional ZERUST® business.
Other Comprehensive Income - Foreign Currency Translations Adjustment. The
changes in the foreign currency translations adjustment were due to the
fluctuations of the
Liquidity and Capital Resources
Sources ofCash and Working Capital . NTIC's working capital, defined as current assets less current liabilities, was$29,431,014 atFebruary 29, 2020 , including$5,626,410 in cash and cash equivalents and$6,512,166 in available for sale securities, compared to$25,460,569 atAugust 31, 2019 , including$5,856,758 in cash and cash equivalents and$3,565,258 in available for sale securities. As ofFebruary 29, 2020 , NTIC had a revolving line of credit withPNC Bank of$3,000,000 with no amounts outstanding. At the option of the Company, outstanding advances under the line of credit bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by the Company or (b) at the rate publicly announced byPNC Bank from time to time as its prime rate. OnDecember 16, 2019 , the Company andPNC Bank extended the maturity date of the line of credit fromJanuary 7, 2020 toJanuary 7, 2021 . All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same. It is anticipated that, as historically has been the practice, the line of credit will be renewed each year for one additional year for the immediate foreseeable future. The line of credit is evidenced by an amended and restated committed line of credit note in the principal amount of up to$3,000,000 . The line of credit has a$1,200,000 standby letter of credit sub-facility, with any standby letters of credit issued thereunder being at the sole discretion ofPNC Bank . Any lines of credit issued byPNC Bank would decrease the availability under the revolving line of credit.
The line of credit is subject to standard covenants, including affirmative financial covenants, such as the maintenance of a minimum fixed charge coverage ratio, and negative covenants, which, among other things, limit the incurrence of additional indebtedness, loans and equity investments, disposition of assets, mergers and consolidations, and other matters customarily restricted in such agreements. Under the loan agreement, NTIC is subject to a minimum fixed charge coverage ratio of 1.10:1.00. As ofFebruary 29, 2020 , NTIC was in compliance with all debt covenants. 30
NTIC believes that a combination of its existing cash and cash equivalents, available for sale securities, forecasted cash flows from future operations, anticipated distributions of earnings, anticipated fees to NTIC for services provided to its joint ventures, and funds available through existing or anticipated financing arrangements will be adequate to fund its existing operations, investments in new or existing joint ventures or subsidiaries, capital expenditures, debt repayments, cash dividends, and any stock repurchases for at least the next 12 months. During the remainder of fiscal 2020, NTIC expects to continue to invest directly and through its use of working capital in NTIC China, Zerust Mexico, NTI Europe, research and development, marketing efforts, resources for the application of its corrosion prevention technology in the oil and gas industry, and its Natur-Tec® bio-plastics business, although the amounts of these various investments are not known at this time. In order to take advantage of such new product and market opportunities to expand its business and increase its revenues, NTIC may decide to finance such opportunities by borrowing under its revolving line of credit or raising additional financing through the issuance of debt or equity securities. There is no assurance that any financing transaction will be available on terms acceptable to NTIC or at all or that any financing transaction will not be dilutive to NTIC's current stockholders. NTIC traditionally has used the cash generated from its operations, distributions of earnings from joint ventures, and fees for services provided to its joint ventures to fund NTIC's new technology investments and capital contributions to new and existing subsidiaries and joint ventures. NTIC's joint ventures traditionally have operated with little or no debt and have been self-financed with minimal initial capital investment and minimal additional capital investment from their respective owners. Therefore, NTIC believes there is limited exposure by NTIC's joint ventures that could materially impact their respective operations and/or liquidity. Uses of Cash and Cash Flows. Net cash provided by operating activities during the six months endedFebruary 29, 2020 was$4,207,710 , which resulted principally from NTIC's net income, dividends received from joint ventures, stock based compensation, depreciation, amortization, and an increase in accounts payable and accounts receivable, partially offset by NTIC's equity in income from joint ventures, an increase in inventories and a decrease in accrued liabilities. Net cash provided by operating activities during the six months endedFebruary 28, 2019 , was$262,153 , which resulted principally from NTIC's net income, depreciation, amortization, and an increase in accounts payable and accounts receivable, partially offset by NTIC's equity in income from joint ventures, an increase in inventory, a decrease in accrued liabilities, and an increase in income tax receivable. NTIC's cash flows from operations are impacted by significant changes in certain components of NTIC's working capital, including inventory turnover and changes in receivables. NTIC considers internal and external factors when assessing the use of its available working capital, specifically when determining inventory levels and credit terms of customers. Key internal factors include existing inventory levels, stock reorder points, customer forecasts, and customer requested payment terms. Key external factors include the availability of primary raw materials and sub-contractor production lead times. NTIC's typical contractual terms for trade receivables, excluding joint ventures, are traditionally 30 days and 90 days for trade receivables from its joint ventures. Before extending unsecured credit to customers, excluding NTIC's joint ventures, NTIC reviews customers' credit histories and will establish an allowance for uncollectible accounts based upon factors surrounding the credit risk of specific customers and other information. Accounts receivable over 30 days are considered past due for most customers. NTIC does not accrue interest on past due accounts receivable. If accounts receivables in excess of the provided allowance are determined uncollectible, they are charged to selling expense in the period that the determination is made. Accounts receivable are deemed uncollectible based on NTIC exhausting reasonable efforts to collect. NTIC's typical contractual terms for receivables for services provided to its joint ventures are 90 days. NTIC records receivables for services provided to its joint ventures on an accrual basis, unless circumstances exist that make the collection of the balance uncertain, in which case the fee income will be recorded on a cash basis until there is consistency in payments. This determination is handled on a case by case basis. 31 NTIC experienced an increase in trade receivables and increase in inventories as ofFebruary 29, 2020 , compared toAugust 31, 2019 . Trade receivables, excluding joint ventures, as ofFebruary 29, 2020 , increased$31,027 compared toAugust 31, 2019 , primarily related to the timing of collections and the increase in sales. Outstanding trade receivables, excluding joint ventures balances as ofFebruary 29, 2020 decreased to 66 days to an average of 67 days from balances outstanding from these customers as ofAugust 31, 2019 . Outstanding trade receivables from joint ventures as ofFebruary 29, 2020 decreased$285,298 compared toAugust 31, 2019 , primarily due to the timing of payments. Outstanding balances from trade receivables from joint ventures increased an average of 3 days from an average of 115 days from balances outstanding from these customers compared toAugust 31, 2019 . The average days outstanding of trade receivables from joint ventures as ofFebruary 29, 2020 were primarily due to the receivable balances at NTIC's joint ventures inSouth Korea ,India , andThailand . Outstanding receivables for services provided to joint ventures as ofFebruary 29, 2020 decreased$72,781 compared toAugust 31, 2019 , and the average days to pay increased an average of 2 days to an average of 83 days compared toAugust 31, 2019 .
Net cash used in investing activities for the six months endedFebruary 29, 2020 was$3,289,108 , which was primarily the result of proceeds from the sale of available for sale securities, additions to property and equipment, and additions to patents, partially offset by the purchase of available for sale securities. Net cash provided by investing activities for the six months endedFebruary 28, 2019 was$1,575,542 , which was primarily the result of proceeds from the sale of available for sale securities, partially offset by additions to property and equipment, and additions to patents Net cash used in financing activities for the six months endedFebruary 29, 2020 was$1,146,591 , which resulted from dividends paid on NTIC common stock, partially offset by proceeds from NTIC's employee stock purchase plan. Net cash used in financing activities for the six months endedFebruary 28, 2019 was$1,138,409 , which resulted from dividends paid on NTIC common stock and a dividend paid to a non-controlling interest, partially offset by an investment by a non-controlling interest and proceeds from NTIC's employee stock purchase plan. Share Repurchase Plan. OnJanuary 15, 2015 , NTIC's Board of Directors authorized the repurchase of up to$3,000,000 in shares of NTIC common stock through open market purchases or unsolicited or solicited privately negotiated transactions. This program has no expiration date but may be terminated by NTIC's Board of Directors at any time. No repurchases occurred during the six months endedFebruary 29, 2020 . As ofFebruary 29, 2020 , up to$2,640,548 in shares of NTIC common stock remained available for repurchase under NTIC's stock repurchase program. Cash Dividends. OnJanuary 22, 2020 , the Company's Board of Directors declared a cash dividend of$0.065 per share of NTIC's common stock, payable onFebruary 19, 2020 , to stockholders of record onFebruary 5, 2020 . This was an increase compared to the cash dividend of$0.06 per share of NTIC's common stock declared and paid during the quarter endedFebruary 28, 2019 . The declaration of future dividends is not guaranteed and will be determined by NTIC's Board of Directors in light of conditions then existing, including NTIC's earnings, financial condition, cash requirements, restrictions in financing agreements, business conditions, and other factors, including without limitation the effect of COVID-19 on its business, operating results and financial condition. 32 Stock Split. OnJune 3, 2019 , NTIC's Board of Directors declared a two-for-one stock split of NTIC's common stock effected in the form of a 100% share dividend distributed onJune 28, 2019 to record holders as ofJune 17, 2019 . As a result of this action, approximately 4.5 million shares were issued to stockholders of record as ofJune 17, 2019 . The par value of the common stock remains at$0.02 per share, and, accordingly, approximately$90,900 was transferred from additional paid-in capital to common stock. Net income and dividends declared per share and weighted average shares outstanding presented in this report reflect the 100 percent stock dividend. The two-for-one stock split is reflected in the share amounts in all periods presented in this report.
Capital Expenditures and Commitments. NTIC spent
Contractual Obligations There has been no material change to NTIC's contractual obligations as provided in "Part II. Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations," included in NTIC's annual report on Form 10-K for the fiscal year endedAugust 31, 2019 .
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 are established for the purpose of facilitating off-balance sheet financial arrangements. As such, NTIC is not materially exposed to any financing, liquidity, market, or credit risk that could arise if NTIC had engaged in such arrangements. Inflation and Seasonality Inflation inthe United States and abroad historically has had little effect on NTIC. Although NTIC's business historically has not been seasonal, NTIC believes there is some seasonality in its business. NTIC believes its net sales in the second fiscal quarter were adversely affected by the longChinese New Year , which was extended in an effort to combat the spread of COVID-19, the North American holiday season, and overall less corrosion taking place at lower winter temperatures worldwide. Market Risk
NTIC is exposed to some market risk stemming from changes in foreign currency exchange rates, commodity prices, and interest rates.
Because the functional currency of NTIC's foreign operations and investments in its foreign joint ventures is the applicable local currency, NTIC is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. NTIC's principal exchange rate exposure is with the Euro, the Japanese Yen, the Indian Rupee, the Chinese Renminbi, the South Korean Won, and the English Pound against theU.S. Dollar. NTIC's fees for services provided to joint ventures and dividend distributions from these foreign entities are paid in foreign currencies, and, thus, fluctuations in foreign currency exchange rates could result in declines in NTIC's reported net income. Since NTIC's investments in its joint ventures are accounted for using the equity method, any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment and would not change NTIC's equity in income from joint ventures reflected in its consolidated statements of operations. NTIC does not hedge against its foreign currency exchange rate risk. 33
Some raw materials used in NTIC's products are exposed to commodity price changes. The primary commodity price exposures are with a variety of plastic resins.
At the option of NTIC, outstanding advances under NTIC's$3,000,000 revolving line of credit withPNC Bank bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by NTIC or (b) at the rate publicly announced byPNC Bank from time to time as its prime rate, and thus may subject NTIC to some market risk on interest rates. As ofFebruary 29, 2020 , NTIC had no borrowings under the line of credit.
Critical Accounting Policies and Estimates
There have been no material changes to NTIC's critical accounting policies and estimates from the information provided in "Part II. Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" included in NTIC's annual report on Form 10-K for the fiscal year endedAugust 31, 2019 .
Recent Accounting Pronouncements
See Note 2 to NTIC's consolidated financial statements for a discussion of recent accounting pronouncements.
Forward-Looking Statements
This quarterly report on Form 10-Q contains not only historical information, but
also forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are subject to the
safe harbor created by those sections. In addition, NTIC or others on NTIC's
behalf may make forward-looking statements from time to time in oral
presentations, including telephone conferences and/or web casts open to the
public, in press releases or reports, on NTIC's Internet web site, or otherwise.
All statements other than statements of historical facts included in this report
or expressed by NTIC orally from time to time that address activities, events,
or developments that NTIC expects, believes, or anticipates will or may occur in
the future are forward-looking statements, including, in particular, the
statements about NTIC's plans, objectives, strategies, and prospects regarding,
among other things, NTIC's financial condition, results of operations and
business, the anticipated effect of COVID-19 on NTIC's business, operating
results and financial condition, the outcome of contingencies, such as legal
proceedings and the effect of the liquidation of Tianjin Zerust, and the
operations of NTIC China. NTIC has identified some of these forward-looking
statements in this report with words like "believe," "can," "may," "could,"
"would," "might," "forecast," "possible," "potential," "project," "will,"
"should," "expect," "intend," "plan," "predict," "anticipate," "estimate,"
"approximate," "outlook," or "continue" or the negative of these words or other
words and terms of similar meaning. The use of future dates is also an
indication of a forward-looking statement. Forward-looking statements may be
contained in the notes to NTIC's consolidated financial statements and elsewhere
in this report, including under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
34
Forward-looking statements are based on current expectations about future events
affecting NTIC and are subject to uncertainties and factors that affect all
businesses operating in a global market as well as matters specific to NTIC.
These uncertainties and factors are difficult to predict, and many of them are
beyond NTIC's control. The following are some of the uncertainties and factors
known to us that could cause NTIC's actual results to differ materially from
what NTIC has anticipated in its forward-looking statements:
· The effect of current worldwide economic conditions and any turmoil and
disruption in the global credit and financial markets on NTIC's business;
· The effect of the novel strain of coronavirus (COVID-19) on NTIC's business,
operating results and financial condition, including disruption to our
customers, suppliers and subcontractors, as well as the global economy and
financial markets;
· Variability in NTIC's sales of ZERUST® products and services to the oil and gas
industry and Natur-Tec®products and NTIC's equity income of joint ventures,
which variability in sales and equity in income from joint ventures, in turn,
subject NTIC's earnings to quarterly fluctuations;
· Risks associated with NTIC's international operations and exposure to
fluctuations in foreign currency exchange rates, import duties, taxes, and
tariffs;
· The effect of the
operating results, including, in particular, future net sales of NTIC's
European and other joint ventures;
· The effect of the health of the
· NTIC's dependence on the success of its joint ventures and fees and dividend
distributions that NTIC receives from them;
· NTIC's relationships with its joint ventures and its ability to maintain those
relationships, especially in light of anticipated succession planning issues;
· Fluctuations in the cost and availability of raw materials, including resins
and other commodities;
· The success of and risks associated with NTIC's emerging new businesses and
products and services, including in particular NTIC's ability and the ability
of NTIC's joint ventures to sell ZERUST® products and services to the oil and
gas industry and Natur-Tec® products and the often lengthy and extensive sales
process involved in selling such products and services;
· NTIC's ability to introduce new products and services that respond to changing
market conditions and customer demand;
· Market acceptance of NTIC's existing and new products, especially in light of
existing and new competitive products;
· Maturation of certain existing markets for NTIC's ZERUST® products and services
and NTIC's ability to grow market share and succeed in penetrating other existing and new markets;
· Increased competition, especially with respect to NTIC's ZERUST® products and
services, and the effect of such competition on NTIC's and its joint ventures'
pricing, net sales, and margins;
· NTIC's reliance upon and its relationships with its distributors, independent
sales representatives, and joint ventures;
35
· NTIC's reliance upon suppliers;
· Oil prices, which may affect sales of NTIC's ZERUST® products and services to
the oil and gas industry;
· NTIC's operations in
of the joint venture agreements with Tianjin Zerust, and the anticipated
liquidation of Tianjin Zerust and the effect of all these events on NTIC's
business and future operating results;
· The costs and effects of complying with laws and regulations and changes in
tax, fiscal, government, and other regulatory policies, including rules relating to environmental, health, and safety matters;
· Unforeseen product quality or other problems in the development, production,
and usage of new and existing products;
· Unforeseen production expenses incurred in connection with new customers and
new products;
· Loss of or changes in executive management or key employees;
· Ability of management to manage around unplanned events;
· Pending and future litigation;
· NTIC's reliance on its intellectual property rights and the absence of
infringement of the intellectual property rights of others;
· NTIC's ability to maintain effective internal control over financial reporting,
especially in light of its joint venture arrangements;
· Changes in applicable laws or regulations and NTIC's failure to comply with
applicable laws, rules, and regulations;
· Changes in generally accepted accounting principles and the effect of new
accounting pronouncements;
· Fluctuations in NTIC's effective tax rate, including from the Tax Cuts and Jobs
Act;
· The effect of extreme weather conditions on NTIC's operating results; and
· NTIC's reliance upon its management information systems.
For more information regarding these and other uncertainties and factors that could cause NTIC's actual results to differ materially from what NTIC has anticipated in its forward-looking statements or otherwise could materially adversely affect its business, financial condition, or operating results, see NTIC's annual report on Form 10-K for the fiscal year endedAugust 31, 2019 , under the heading "Part I. Item 1A. Risk Factors." All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. NTIC wishes to caution readers not to place undue reliance on any forward-looking statement that speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results due to the uncertainties and factors described above and others that NTIC may consider immaterial or does not anticipate at this time. Although NTIC believes that the expectations reflected in its forward-looking statements are reasonable, NTIC does not know whether its expectations will prove correct. NTIC's expectations reflected in its forward-looking statements can be affected by inaccurate assumptions NTIC might make or by known or unknown uncertainties and factors, including those described above. The risks and uncertainties described above are not exclusive, and further information concerning NTIC and its business, including factors that potentially could materially affect its financial results or condition, may emerge from time to time. NTIC assumes no obligation to update, amend, or clarify forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. NTIC advises you, however, to consult any further disclosures NTIC makes on related subjects in its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K that NTIC files with or furnishes to the Securities and
Exchange Commission . 36
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