NTIC 10-Q Quarter ended Feb. 28, 2019

i

ii

		February 28, 2019				August 31, 2018
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	4,936,377			$	4,163,023
Available for sale securities			1,227,268				3,300,110
Receivables:
Trade excluding joint ventures, less allowance for doubtful accounts of $65,000 at February 28, 2019 and $50,000 at August 31, 2018			9,329,725				9,920,108
Trade joint ventures			679,349				761,506
Fees for services provided to joint ventures			1,338,493				1,357,255
Income taxes			515,448				273,333
Inventories			11,304,475				9,130,861
Prepaid expenses			1,457,059				1,661,577
Total current assets			30,788,194				30,567,773
PROPERTY AND EQUIPMENT, NET			7,229,398				7,168,826
OTHER ASSETS:
Investments in joint ventures			24,418,491				22,950,995
Deferred income taxes			1,420,791				1,551,536
Patents and trademarks, net			1,084,313				1,156,257
Other			153,846				153,849
Total other assets			27,077,441				25,812,637
Total assets		$	65,095,033			$	63,549,236
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable		$	4,307,450			$	3,905,034
Income taxes payable			8,555				70,892
Accrued liabilities:
Payroll and related benefits			1,137,209				2,747,303
Other			1,154,948				1,006,953
Total current liabilities			6,608,162				7,730,182
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY:
Preferred stock, no par value; authorized 10,000 shares; none issued and outstanding			—				—
Common stock, $0.02 par value per share; authorized 15,000,000 shares; issued and outstanding 4,542,177 and 4,541,303, respectively			90,844				90,826
Additional paid-in capital			15,353,400				14,619,777
Retained earnings			43,771,843				41,963,341
Accumulated other comprehensive loss			(3,742,258	)			(3,597,199	)
Stockholders’ equity			55,473,829				53,076,745
Non-controlling interest			3,013,042				2,742,309
Total equity			58,486,871				55,819,054
Total liabilities and equity		$	65,095,033			$	63,549,236

1

		Three Months Ended								Six Months Ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
NET SALES:
Net sales, excluding joint ventures		$	12,606,449			$	11,399,853			$	26,217,314			$	22,435,260
Net sales, to joint ventures			708,955				814,122				1,192,142				1,321,753
Total net sales			13,315,404				12,213,975				27,409,456				23,757,013
Cost of goods sold			9,284,099				8,012,836				18,745,236				15,901,306
Gross profit			4,031,305				4,201,139				8,664,220				7,855,707
JOINT VENTURE OPERATIONS:
Equity in income from joint ventures			1,715,216				1,805,997				3,719,378				3,547,325
Fees for services provided to joint ventures			1,436,774				1,608,890				2,865,209				3,116,032
Total joint venture operations			3,151,990				3,414,887				6,584,587				6,663,357
OPERATING EXPENSES:
Selling expenses			2,505,081				2,643,636				5,316,175				5,243,585
General and administrative expenses			1,963,537				1,805,216				4,459,334				4,024,961
Research and development expenses			927,537				922,746				1,799,694				1,721,477
Total operating expenses			5,396,155				5,371,598				11,575,203				10,990,023
OPERATING INCOME			1,787,140				2,244,428				3,673,604				3,529,041
INTEREST INCOME			15,122				24,883				27,909				48,939
INTEREST EXPENSE			(3,835	)			(5,779	)			(6,192	)			(10,868	)
INCOME BEFORE INCOME TAX EXPENSE			1,798,427				2,263,532				3,695,321				3,567,112
INCOME TAX EXPENSE			246,371				841,909				502,074				946,900
NET INCOME			1,552,056				1,421,623				3,193,247				2,620,212
NET INCOME ATTRIBUTABLE TO NON- CONTROLLING INTERESTS			150,488				88,776				294,620				203,739
NET INCOME ATTRIBUTABLE TO NTIC		$	1,401,568			$	1,332,847			$	2,898,627			$	2,416,473
NET INCOME ATTRIBUTABLE TO NTIC PER COMMON SHARE:
Basic		$	0.31			$	0.29			$	0.64			$	0.53
Diluted		$	0.30			$	0.29			$	0.61			$	0.52
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic			4,542,177				4,537,408				4,542,175				4,537,368
Diluted			4,723,930				4,673,338				4,731,608				4,641,042
CASH DIVIDENDS DECLARED PER COMMON SHARE		$	0.12			$	0.10			$	0.24			$	0.20

2

		Three Months Ended								Six Months Ended
		February 28, 2019				February 28, 2018				February 28, 2019				February 28, 2018
NET INCOME		$	1,552,056			$	1,421,623			$	3,193,247			$	2,620,212
Other comprehensive income – foreign currency translation adjustment			194,838				467,762				(102,980	)			442,535
COMPREHENSIVE INCOME			1,746,894				1,889,385				3,090,267				3,062,747
COMPREHENSIVE INCOME ATTRIBUTABLE TO NON- CONTROLLING INTERESTS			169,499				109,047				336,699				245,962
COMPREHENSIVE INCOME ATTRIBUTABLE TO NTIC		$	1,577,395			$	1,780,338			$	2,753,568			$	2,816,785

3

.		STOCKHOLDERS’ EQUITY – THREE MONTHS ENDED FEBRUARY 28
																		Accumulated
										Additional								Other				Non-
		Common Stock								Paid-in				Retained				Comprehensive				Controlling				Total
		Shares				Amount				Capital				Earnings				Income (Loss)				Interests				Equity
BALANCE AT NOVEMBER 30, 2018			4,532,177			$	90,844			$	14,995,420			$	42,915,335			$	(3,918,085	)		$	3,043,543			$	57,127,057
Stock issued for employee stock purchase plan			—				—				—				—				—				—				—
Stock option expense			—				—				357,980				—				—				—				357,980
Investment by non-controlling interest			—				—				—				—				—				—				—
Dividends paid to shareholders			—				—				—				(545,060	)			—				—				(545,064	)
Dividend received by non-controlling interest			—				—				—				—				—				(200,000	)			(200,000	)
Net income (loss)			—				—				—				1,401,568				—				150,544				1,552,056
Other comprehensive income (loss)			—				—				—				—				175,827				19,011				194,838
BALANCE AT FEBRUARY 28, 2019			4,542,177			$	90,844			$	15,353,400			$	43,771,843			$	(3,742,258	)		$	3,013,042			$	58,486,871
BALANCE AT NOVEMBER 30, 2017			4,537,408			$	90,748			$	14,294,584			$	37,706,367			$	(2,518,243	)		$	2,794,363			$	52,367,819
Stock options exercised			—				—				—				—				—				—				—
Stock issued for employee stock purchase plan			—				—				—				—				—				—				—
Stock option expense			—				—				103,267				—				—				—				103,267
Dividends paid to shareholders			—				—				—				(452,510	)			—				—				(452,514	)
Dividend received by non-controlling interest			—				—				—				—				—				—				—
Net income (loss)			—				—				—				1,332,847				—				88,776				1,421,623
Other comprehensive income (loss)			—				—				—				—				447,491				20,271				467,762
BALANCE AT FEBRUARY 28, 2018			4,537,408			$	90,748			$	14,397,851			$	38,586,704			$	(2,070,752	)		$	2,903,410			$	53,907,961

.		STOCKHOLDERS’ EQUITY – SIX MONTHS ENDED FEBRUARY 28
																		Accumulated
										Additional								Other				Non-
		Common Stock								Paid-in				Retained				Comprehensive				Controlling				Total
		Shares				Amount				Capital				Earnings				Income (Loss)				Interests				Equity
BALANCE AT AUGUST 31, 2018			4,541,303			$	90,826			$	14,619,777			$	41,963,341			$	(3,597,199	)		$	2,742,309			$	55,819,054
Stock issued for employee stock purchase plan			874				18				17,663				—				—				—				17,681
Stock option expense			—				—				715,960				—				—				—				715,960
Investment by non-controlling interest			—				—				—				—				—				134,034				134,034
Dividends paid to shareholders			—				—				—				(1,090,125	)			—				—				(1,090,125	)
Dividend received by non-controlling interest			—				—				—				—				—				(200,000	)			(200,000	)
Net income (loss)			—				—				—				2,898,627				—				294,620				3,193,247
Other comprehensive income (loss)			—				—				—				—				(145,059	)			42,079				(102,980	)
BALANCE AT FEBRUARY 28, 2019			4,542,177			$	90,844			$	15,353,400			$	43,771,843			$	(3,742,258	)		$	3,013,042			$	58,486,871
BALANCE AT AUGUST 31, 2017			4,535,018			$	90,700			$	14,163,509			$	37,077,483			$	(2,471,064	)		$	2,857,448			$	51,718,076
Stock options exercised			1,500				30				15,345				—				—				—				15,375
Stock issued for employee stock purchase plan			890				18				12,463				—				—				—				12,481
Stock option expense			—				—				206,534				—				—				—				206,534
Dividends paid to shareholders			—				—				—				(907,252	)			—				—				(907,252	)
Dividend received by non-controlling interest			—				—				—				—				—				(200,000	)			(200,000	)
Net income (loss)			—				—				—				2,416,473				—				203,739				3,193,247
Other comprehensive income (loss)			—				—				—				—				400,312				42,223				(102,980	)
BALANCE AT FEBRUARY 28, 2018			4,537,408			$	90,748			$	14,397,851			$	38,586,704			$	(2,070,752	)		$	2,903,410			$	53,907,961

4

		Six Months Ended
		February 28, 2019				February 28, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	3,193,247			$	2,620,212
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation			715,960				206,534
Depreciation expense			429,377				418,562
Amortization expense			129,346				125,092
Equity in income from joint ventures			(3,719,378	)			(3,547,325	)
Deferred income taxes			135,167				700,000
Dividends received from joint ventures			2,027,243				1,770,116
Gain on sale of property and equipment			(36,285	)			—
Changes in current assets and liabilities:
Receivables:
Trade, excluding joint ventures			730,647				(2,292,004	)
Trade, joint ventures			82,157				244,372
Fees for services provided to joint ventures			18,762				(62,381	)
Income taxes			(222,609	)			(178,998	)
Inventories			(2,048,648	)			(1,631,734	)
Prepaid expenses and other			215,178				(504,848	)
Accounts payable			113,849				1,669,859
Income tax payable			15,607				139,991
Accrued liabilities			(1,517,466	)			(193,647	)
Net cash provided by (used in) operating activities			262,153				(516,199	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of available for sale securities			2,072,842				498,558
Purchases of property and equipment			(439,899	)			(207,350	)
Investments in patents			(57,401	)			(44,621	)
Net cash provided by investing activities			1,575,542				246,587
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend received by non-controlling interest			(200,000	)			(200,000	)
Investment by non-controlling interest			134,035				—
Dividends paid on NTIC common stock			(1,090,125	)			(907,252	)
Proceeds from option exercises			—				15,375
Proceeds from employee stock purchase plan			17,681				12,481
Net cash used in financing activities			(1,138,409	)			(1,079,396	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			74,068				55,894
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			773,354				(1,293,114	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			4,163,023				6,360,201
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	4,936,377			$	5,067,087

5

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, 2019, and August 31, 2018, the results of their operations for the three and six months ended February 28, 2019 and 2018, the changes in stockholders’ equity for the three and six months ended February 28, 2019 and their cash flows for the six months ended February 28, 2019 and 2018, 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, 2018. These consolidated financial statements also should be read in conjunction with the “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” section appearing in this report.

Operating results for the three and six months ended February 28, 2019, are not necessarily indicative of the results that may be expected for the full fiscal year ending August 31, 2019.

The Company evaluates events occurring after the date of the consolidated financial statements requiring recording or disclosure in the consolidated financial statements.

2.

ACCOUNTING PRONOUNCEMENTS

New Accounting Pronouncements Adopted

The Company’s significant accounting policies are detailed in “Note 1: Nature of Business and Significant Accounting Policies” of the Company’s Annual Report on Form 10-K for the year ended August 31, 2018. In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification (ASC) Section 606, Revenue from Contracts with Customers (ASC 606), which establishes a comprehensive new model for the recognition of revenue from contracts with customers. This model is based on the core principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

On September 1, 2018, the Company adopted ASC 606 for all customer contracts using the modified retrospective method. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to, or services it performs for, the customer.

The adoption of ASC 606 neither impacted the previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. Therefore, the adoption of the standard did not impact the Company’s revenue recognition process. Generally, the Company’s performance obligations are satisfied when the customers take possession of the products, which normally occurs at the shipping point or destination depending on the terms of the contracts. The Company’s services are generally sold based upon quotes or contracts with customers that include a fixed or determinable price, and sales arrangements do not contain any significant financing component for its customers. The Company does not recognize revenue related to product warranties, nor does the Company incur significant contract costs. Customer arrangements do not generate contract assets or liabilities.

Changes to the Company’s significant accounting policies as a result of adopting ASC 606 are discussed below:

Revenue Recognition - Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to customers, and significant financing components. While most of the Company’s revenue is contracted with customers through one-time purchase orders and short-term contracts, the Company does have long-term arrangements with certain customers. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer.

Individually promised goods and services in a contract are considered a distinct performance obligation and accounted for separately if the customer can benefit from the individual good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement. When an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price. Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs are met. Costs of revenues consist primarily of direct labor, manufacturing overhead, materials, and components. The Company does not incur significant upfront costs to obtain a contract. If costs to obtain a contract were to become material, the costs would be recorded as an asset and amortized to expense in a manner consistent with the related recognition of revenue.

The Company excludes government assessed and imposed taxes on revenue generating transactions that are invoiced to customers from revenue. The Company includes freight billed to customers in revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

The timing of revenue recognition, billings, and cash collections results in accounts receivable on the balance sheet.

Performance Obligations - A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. A contract’s transaction price is allocated to each distinct performance obligation in proportion to its standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s various performance obligations and the timing or method of revenue recognition are discussed below.

The Company sells its products to both distributors and end-users. Each unit of product delivered under a customer order represents a distinct and separate performance obligation, as the customer can benefit from each unit on its own or with other resources that are readily available to the customer, and each unit of product is separately identifiable from other products in the arrangement.

The transaction price for the Company’s products is the invoiced amount. The Company does not have variable consideration in the form of refunds, credits, rebates, price concessions, pricing incentives, or other items impacting transaction price. The purchase order pricing in arrangements with customers is deemed to approximate standalone selling price; therefore, the Company does not need to allocate proceeds on a relative standalone selling price allocation between performance obligations. The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. There are no material obligations that extend beyond one year.

Revenue is recognized when transfer of control occurs as defined by the terms in the customer agreement. The Company immediately recognizes incidental items that are immaterial in the context of the contract. The Company has applied the practical expedient in paragraph 606-10-25-16A and does not assess if immaterial items are promised goods or services. The Company has also applied the practical expedient in paragraph 606-10-32-18 regarding the adjustment of the promised amount of consideration for the effects of a significant financing component when the customer pays for that good or service within one year or less, as the Company does not have any significant financing components in its customer arrangements since payment is received at or shortly after the point of sale, generally thirty to ninety days.

The Company estimates returns based on an analysis of historical experience if the right to return products is granted to its customers. The Company does not record a return asset, as non-conforming products are generally not returned. The Company’s return policy does not vary by geography. The customer has no rotation or price protection rights, and the Company is not under a warranty obligation.

Trade Receivables - Trade receivables include amounts invoiced and currently due from customers. The amounts due are stated at their net estimated realizable value. The Company records an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based on a review of all outstanding amounts on an on-going basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considers a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible and have been historically insignificant. Recoveries of trade receivables previously written off are recorded when received. Accounts are considered past due if payment is not received according to agreed-upon terms.

Sales Commissions - Sales commissions paid to sales representatives are eligible for capitalization, as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company has elected to apply the practical expedient provided by ASC 340-40-25-4 and recognize the incremental costs of obtaining contracts as an expense when incurred, as the amortization period of the assets that would have otherwise been recognized is one year or less. The Company records these costs as a selling expense.

Product Warranty - The Company offers warranties on various products and services. These warranties are assurance type warranties that are not sold on a standalone basis; therefore, they are not considered distinct performance obligations. The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the revenue is recognized for the product sale.

International Revenue - The Company markets its products to numerous countries in North America, Europe, Latin America, Asia, and other parts of the world. See Note 11, Segment and Geographical Information, for information regarding revenue disaggregation by geography.

Recently Issued Accounting Pronouncements

During February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases . ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The guidance will be effective for the Company’s first quarter of fiscal year 2020. The Company is currently assessing the effect that ASU No. 2016-02 will have on its consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income , which will allow a reclassification from accumulated other comprehensive income to retained earnings for the tax effects resulting from the Tax Cuts and Jobs Act (Tax Reform Act) that are stranded in accumulated other comprehensive income. This standard also requires certain disclosures about stranded tax effects. ASU No. 2018-02, however, does not change the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations. ASU No. 2018-02 will be effective for the Company’s fiscal year 2020, with the option for early adoption at any time prior to the effective date. It must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. The Company is currently assessing the impact this new accounting guidance will have on its consolidated financial statements.

3.

INVENTORIES

Inventories consisted of the following:

4.	PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consisted of the following:

9

5.

PATENTS AND TRADEMARKS, NET

Patents and trademarks, net, consisted of the following:

Patent and trademark costs are amortized over seven years. Costs incurred related to patents and trademarks are capitalized until filed and approved, at which time the amounts capitalized to date are amortized, and any further costs, including maintenance costs, are expensed as incurred. Amortization expense is estimated to approximate $260,000 in each of the next five fiscal years.

6.

INVESTMENTS IN JOINT VENTURES

The consolidated financial statements of the Company’s foreign joint ventures are initially prepared using the accounting principles accepted in the respective joint ventures’ countries of domicile. Amounts related to foreign joint ventures reported in the below tables and the accompanying consolidated financial statements have subsequently been adjusted to conform with U.S. GAAP in all material respects. All material profits recorded that remain on the consolidated balance sheet of sales from the Company to its joint ventures and from joint ventures to other joint ventures have been eliminated for financial reporting purposes.

Financial information from the audited and unaudited financial statements of the Company’s joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH (EXCOR) and all the Company’s other joint ventures, are summarized as follows:

The Company did not make any joint venture investments during the six months ended February 28, 2019 or 2018.

7.

CORPORATE DEBT

The Company has a revolving line of credit with PNC Bank, National Association (PNC Bank) of $3,000,000. No amounts were outstanding under the line of credit as of either February 28, 2019, or August 31, 2018. At the option of the Company, outstanding advances under the line of credit bear interest at either (a) an annual rate based on LIBOR plus 2.15% for the applicable LIBOR interest period selected by the Company or (b) at the rate publicly announced by PNC Bank from time to time as its prime rate.

The line of credit is governed under a loan agreement. The loan agreement contains 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, the Company is subject to a minimum fixed charge coverage ratio of 1.10:1.00. As of February 28, 2019, the Company was in compliance with all debt covenants.

The revolving credit facility allows the Company to request that PNC Bank issue letters of credit up to $1,200,000. The Company did not have any letters of credit reserved against the available letters of credit balance as of February 28, 2019, and August 31, 2018, with PNC Bank. The availability of advances under the line of credit will be reduced by the face amount of any letter of credit issued and outstanding (whether or not drawn) under the revolving credit facility.

As of February 28, 2019, and August 31, 2018, the Company had $88,831 of letters of credit that are performance based and set to expire between 2020 and 2022.

On November 30, 2018, the Company and PNC Bank extended the maturity date of the line of credit from January 7, 2019 to January 7, 2020. All other terms of the line of credit and the loan agreement and other documents evidencing the line of credit remain the same.

8.

STOCKHOLDERS’ EQUITY

The Company held its 2019 Annual Meeting of Stockholders (2019 Annual Meeting) on January 18, 2019. At the 2019 Annual Meeting, a proposal to ratify an amendment to the Company’s Restated Certificate of Incorporation to increase the Company’s authorized shares of common stock from 10,000,000 to 15,000,000 (Share Increase Amendment) was approved by the Company’s stockholders by the required vote. The proposal to approve the Share Increase Amendment was initially voted on and approved at the 2018 Annual Meeting of Stockholders. However, because the description of the authority of brokers to vote on proposals without instruction in the proxy statement for the 2018 Annual Meeting of Stockholders could have created some uncertainty as to the effect of the vote obtained at last year’s meeting, and out of an abundance of caution, the Board requested that stockholders at the 2019 Annual Meeting ratify the filing and effectiveness of the Certificate of Amendment to the Company’s Restated Certificate of Incorporation, which was filed with the Secretary of State of the State of Delaware on January 16, 2018, pursuant to Delaware law, in order to eliminate any uncertainty related to the effectiveness of the share increase amendment. Since the ratification proposal was approved by stockholders at the 2019 Annual Meeting, the ratification will be retroactive to January 16, 2018, the time of filing of the Share Increase Amendment with the Secretary of State of the State of Delaware.

On November 16, 2018, the Board of Directors, upon recommendation of the Compensation Committee, approved the Northern Technologies International Corporation 2019 Stock Incentive Plan (the 2019 Plan) subject to approval by the Company’s stockholders at its 2019 Annual Meeting. The stockholders approved the 2019 Plan, which will replace the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan (2007 Plan), with the remaining shares available for grant under the 2007 Plan rolling over into the 2019 Plan, and no new awards will be granted under the 2007 Plan. The terms of the 2007 Plan will continue to govern awards outstanding under the 2007 Plan until exercised, expired, paid, or otherwise terminated or canceled. Subject to adjustment, the maximum number of shares of common stock to be authorized for issuance under the 2019 Plan is 400,000 shares. No stock options or other equity awards have been granted under the 2019 Plan as of February 28, 2019.

During the six months ended February 28, 2019, the Company granted stock options under the 2007 Plan to purchase an aggregate of 70,884 shares of its common stock to various employees and directors. The weighted average per share exercise price of the stock options is $36.45, which was equal to the fair market value of the Company’s common stock on the date of grant. During the six months ended February 28, 2019, no stock options to purchase common stock were exercised.

During the six months ended February 28, 2018, the Company granted stock options under the 2007 Plan to purchase an aggregate of 47,252 shares of its common stock to various employees and directors during the six months ended February 28, 2018. The weighted average per share exercise price of the stock options is $18.35, which was equal to the fair market value of the Company’s common stock on the date of grant. During the six months ended February 28, 2018, stock options to purchase an aggregate of 1,500 shares of common stock were exercised at a weighted average exercise price of $10.25 per share.

The Company issued 874 and 891 shares of common stock on September 1, 2018 and 2017, respectively, under the Northern Technologies International Corporation Employee Stock Purchase Plan (the ESPP).

During the six months ended February 28, 2019, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to the following holders of the Company’s common stock:

During the six months ended February 28, 2018, the Company’s Board of Directors declared cash dividends on the following dates in the following amounts to the following holders of the Company’s common stock:

During the six months ended February 28, 2019 and 2018, the Company repurchased no shares of its common stock.

9.

NET INCOME PER COMMON SHARE

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

The following is a reconciliation of the net income per share computation for the three and six months ended February 28, 2019 and 2018:

The dilutive impact summarized above relates to the periods when the average market price of the Company’s common stock exceeded the exercise price of the potentially dilutive option securities granted. Net income per common share was based on the weighted average number of common shares outstanding during the periods when computing basic net income per share. When dilutive, stock options are included as equivalents using the treasury stock method when computing the diluted net income per share.

Excluded from the computation of diluted income per share for the three and six months ended February 28, 2019, were options outstanding to purchase 70,884 shares of common stock. There were no shares excluded from the computation of diluted income per share for the three and six months ended February 28, 2018.

10.

STOCK-BASED COMPENSATION

The Company has two stock-based compensation plans under which stock options and other stock-based awards have been granted, the Northern Technologies International Corporation Amended and Restated 2007 Stock Incentive Plan and the Northern Technologies International Corporation Employee Stock Purchase Plan. As previously described in Note 8, the Board of Directors and stockholders of the Company approved a new Northern Technologies International Corporation 2019 Stock Incentive Plan, no stock options or other equity awards have been granted under that plan. The Compensation Committee of the Board of Directors and the Board of Directors administer these plans.

The 2019 Plan provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, stock unit awards, performance awards, and stock bonuses to eligible recipients to enable the Company and its subsidiaries to attract and retain qualified individuals through opportunities for equity participation in the Company and to reward those individuals who contribute to the achievement of the Company’s economic objectives. Subject to adjustment as provided in the 2019 Plan, up to a maximum of 400,000 shares of the Company’s common stock are issuable under the 2019 Plan.

Options granted generally have a term of ten 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. The Company issues new shares upon the exercise of options. As of February 28, 2019, only stock options and stock bonuses had been granted under the 2007 Plan and no stock options or other equity awards had been granted under the 2019 Plan.

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

The Company granted options to purchase an aggregate of 70,884 and 47,252 shares of its common stock during the six months ended February 28, 2019 and 2018, 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. The Company recognized compensation expense of $715,960 and $206,534 during the six months ended February 28, 2019 and 2018, respectively, related to the options that vested during such time period. As of February 28, 2019, the total compensation cost for non-vested options not yet recognized in the Company’s consolidated statements of operations was $781,195. Stock-based compensation expense of $715,961 is expected through the remainder of fiscal year 2019 and $65,234 is expected to be recognized during fiscal 2020, based on outstanding options as of February 28, 2019. Future option grants will impact the compensation expense recognized. Stock-based compensation expense is included in general and administrative expense on the consolidated statements of operations.

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 per share fair value of options granted during the six months ended February 28, 2019 and 2018 was $18.03 and $7.75, respectively. The weighted average remaining contractual life of the options outstanding as of February 28, 2019 and 2018 was 6.40 years and 6.75 years, respectively.

11.

SEGMENT AND GEOGRAPHIC INFORMATION

Segment Information

The Company’s chief operating decision maker (CODM) is its Chief Executive Officer. The Company’s business is organized into two reportable segments: ZERUST® and Natur-Tec®. The Company has been selling its proprietary ZERUST® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military, and retail consumer markets for over 40 years and, more recently, has targeted and expanded into the oil and gas industry. The Company also sells a portfolio of bio-based and compostable (fully biodegradable) polymer resins and finished products under the Natur-Tec® brand.

The following table sets forth the Company’s net sales for the three and six months ended February 28, 2019 and 2018 by segment:

The following table sets forth the Company’s cost of goods sold for the three and six months ended February 28, 2019 and 2018 by segment:

*

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

The Company 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.

Geographic Information

Net sales by geographic location for the three and six months ended February 28, 2019 and 2018 were as follows:

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

Fees for services provided to joint ventures by geographic location as a percentage of total fees for services provided to joint ventures during the three and six months ended February 28, 2019 and 2018 were as follows:

The geographical distribution of key financial statement data is as follows:

Total property and equipment are periodically reviewed to assure the net realizable value from the estimated future production based on forecasted sales exceeds the carrying value of the assets. Total assets located in the United States include the Company’s investments in joint ventures.

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

All joint venture operations, including equity in income, fees for services, and related dividends, are primarily related to ZERUST ® products and services.

12.

COMMITMENTS AND CONTINGENCIES

On August 31, 2018, the Compensation Committee of the Board of Directors of the Company approved the material terms of an annual bonus plan for the Company’s executive officers as well as certain officers and employees for the fiscal year ending August 31, 2019. For fiscal 2019, as in past years, the total amount available under the bonus plan for all plan participants, including executive officers, is dependent upon the Company’s earnings before interest, taxes, and other income, as adjusted to take into account amounts to be paid under the bonus plan and certain other adjustments (Adjusted EBITOI). Each plan participant’s percentage of the overall bonus pool is based upon the number of plan participants, the individual’s annual base salary, and the individual’s position and level of responsibility within the company. In the case of each of the Company’s executive officer participants, 75% of the amount of their individual bonus payout will be determined based upon the Company’s actual EBITOI for fiscal 2019 compared to a pre-established target EBITOI for fiscal 2019, and 25% of the payout will be determined based upon such executive officer’s achievement of certain pre-established individual performance objectives. The payment of bonuses under the plan is discretionary and may be paid to executive officer participants in both cash and shares of NTIC common stock, with the exact amount and percentages determined by the Company’s Board of Directors, upon recommendation of the Compensation Committee, after the completion of the Company’s consolidated financial statements for fiscal 2019. There was $900,000 accrued for management bonuses for the six months ended February 28, 2019, compared to $880,000 accrued for management bonuses for the six months ended February 28, 2018.

Three joint ventures (consisting of the Company’s joint ventures in South Korea, Thailand and Germany) accounted for 77.5% of the Company’s trade joint venture receivables at February 28, 2019, and three joint ventures (consisting of the Company’s joint ventures in South Korea, Thailand, and India) accounted for 74.1% of the Company’s trade joint venture receivables at August 31, 2018.

From time to time, the Company is subject to various other claims and legal actions in the ordinary course of its business. The Company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements, and judgments, where the Company has assessed that a loss is probable, and an amount could be reasonably estimated. If the reasonable estimate of a probable loss is a range, the Company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The Company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that material loss may have been incurred. In the opinion of management, as of February 28, 2019, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect the Company’s consolidated results of operations, financial position, or cash flows.

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13.

FAIR VALUE MEASUREMENTS

Assets and liabilities that are measured at fair value on a recurring basis primarily relate to marketable equity securities. These items are marked-to-market at each reporting period, and the Company estimates that market value approximates costs. The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis:

There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended February 28, 2019 and 2018.

14.

SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures of cash flow information consisted of:

15.	INCOME TAXES

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or Tax Reform Act. The Tax Reform Act makes broad and complex changes to the U.S. tax code that impacted the Company’s fiscal year ended August 31, 2018, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, generally eliminating U.S. federal income taxes on dividends received from foreign subsidiaries and joint ventures after December 31, 2017, and imposing a one-time deemed repatriation tax on certain unremitted earnings of foreign subsidiaries and joint ventures.

The Company recorded income tax expense during the three and six months ended February 28, 2019, of $246,371 and $502,074, respectively, compared to $841,909 and $946,900 for the three and six months ended February 28, 2018.

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