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This annual report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the safe harbor created by those sections. For more information, see “Item 1. Business – Forward-Looking Statements.”
As used in this report, references to “NTIC,” the “Company,” “we,” “our” or “us,” unless the context otherwise requires, refer to Northern Technologies International Corporation and its wholly owned subsidiaries, NTI Facilities, Inc. and Northern Technologies Holding Company, LLC, and its majority owned subsidiary, Zerust Prevenção de Corrosão S.A., all of which are consolidated on NTIC’s consolidated financial statements. NTIC’s consolidated financial statements do not include the accounts of any of its joint ventures.
References in this report to NTIC’s joint ventures do not include NTIC’s majority owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A. As used in this report, references to “Zerust Brazil” refer to NTIC’s majority owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A. As used in this report, references to “EXCOR” refer to NTIC’s primary joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH, references to “NTI ASEAN” refer to NTIC’s joint venture holding company for NTIC’s joint venture investments in the Association of Southeast Asian Nations (ASEAN) region, NTI ASEAN, LLC, and references to “HNTI” refer to NTIC’s joint venture in India, Harita NTI Limited.
All trademarks, trade names or service marks referred to in this report are the property of their respective owners.
1.
BUSINESS
Overview
Northern Technologies International Corporation develops and markets proprietary environmentally beneficial products and services in over 55 countries either directly or via a network of 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® rust and corrosion inhibiting products and services to the automotive, electronics, electrical, mechanical, military and retail consumer markets for over 35 years, and more recently, has targeted and expanded into the oil and gas industry. NTIC also sells a portfolio of bio-based and biodegradable (compostable) polymer resin compounds and finished products marketed under the Natur-Tec® brand. These products are intended to reduce NTIC’s customers’ carbon footprint and provide environmentally sound disposal options.
In fiscal 2012, 92.1% of NTIC’s consolidated net sales were derived from the sales of ZERUST® rust and corrosion inhibiting products and services. NTIC’s ZERUST® rust and corrosion inhibiting products include plastic and paper packaging, liquids and coatings, rust removers and cleaners, diffusers and variations of these products designed specifically for the oil and gas industry. NTIC’s also offers worldwide on-site technical consulting for rust and corrosion prevention issues. NTIC’s technical service consultants work directly with the end users of NTIC’s ZERUST® rust and corrosion inhibiting products to analyze their specific needs and develop systems to meet their technical requirements. In North America, NTIC sells its ZERUST® corrosion prevention solutions through a direct sales force as well as a network of independent distributors and agents. Internationally, NTIC sells its ZERUST® corrosion prevention solutions through its majority owned Brazilian subsidiary, Zerust Prevenção de Corrosão S.A. (Zerust Brazil), and joint venture arrangements in Europe and Asia.
One of NTIC’s strategic initiatives is to expand into and penetrate other significantly larger markets for its ZERUST® corrosion prevention solutions. For the past several years, NTIC has focused its sales and marketing efforts on the oil and gas industry since 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.
Petroleo Brasileiro S.A. (Petrobras), an oil company located in Brazil, has conducted extensive multi-year product field trials of NTIC’s ZERUST® rust and corrosion inhibiting products. During fiscal 2010, Zerust Brazil received a Phase I contract for an initial implementation of $1.4 million in ZERUST® products which was delivered in fiscal 2010 and fiscal 2011. During fiscal 2011, Zerust Brazil signed a Phase 2 contract with Petrobras to supply $2.4 million in ZERUST® products. During fiscal 2012, Petrobras expanded this Phase 2 contract to supply an additional $657,000 in ZERUST® products, bringing the total Phase 2 contract value to $3.1 million in ZERUST® products. During early fiscal 2013, Zerust Brazil signed a Phase 3 contract with Petrobras to supply to supply $3.7 million in ZERUST® products.
NTIC is also pursuing opportunities to market its ZERUST® rust and corrosion prevention solutions to other targeted potential customers in the oil and gas industry across several countries through NTIC’s joint venture partners and other strategic partners. NTIC believes the sale of its ZERUST® corrosion prevention solutions to customers in the oil and gas industry will involve a long sales cycle, likely including a one- to multi-year trial period with each customer and a slow integration process thereafter.
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NTIC’s consolidated net sales for fiscal 2012 included $1.8 million in sales of Natur-Tec® bio-plastic resin compounds and finished products. Natur-Tec® bio-based and biodegradable plastics are manufactured using NTIC’s patented and/or proprietary technologies and are intended to replace conventional petroleum-based plastics. The Natur-Tec® bioplastics portfolio includes biopolymer resin compounds which are available in several grades tailored for a variety of applications, such as blown-film extrusion, extrusion coating, injection molding and rigid, engineered plastics, and finished products, including shopping and grocery bags, lawn and leaf bags, can liners, cutlery, packaging foam and bio-polymer coated paper products, which are engineered to be fully biodegradable in a composting environment. In North America, NTIC primarily markets its Natur-Tec® resin compounds and finished products through a network of national and regional distributors and 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 some of its joint venture arrangements, including in particular its joint venture in India, Harita NTI Limited (HNTI).
During fiscal 2012, HNTI and a major global apparel brand entered into an agreement for the supply by HNTI of compostable packaging for branded garments. In addition, HNTI is pursuing applications for bioplastics in food and personal care product packaging through alliances with several local partners in India. In fiscal 2011, NTIC entered into an agreement with Italy-based Naturfuels s.r.l. to distribute its Natur-Tec® bioplastic materials and products in the Italian market. Under the terms of the distribution agreement, NTIC supplies Naturfuels with NTIC’s patented high-strength Natur-Tec® compostable film grade resin compounds to be used for the production of bio-plastic shopping and garbage bags on conventional plastic film production equipment. In 2011, the Italian government passed legislation banning the use of non-biodegradable plastic shopping bags. However, enforcement of this law has been delayed to allow Italian bag manufacturers to exhaust their current supply of conventional polyolefinic resins before completely changing to certified compostable resins. As a result, resin sales to Naturfuels are not expected to have a material effect on NTIC’s operating results until mid fiscal 2013.
In fiscal 2012, NTIC also received two research grants totaling $1 million over two years. The first one was a National Science Foundation – Small Business Technology Transfer Phase II grant for the development of Advanced Polylactide (PLA) materials for biobased and biodegradable plastic products, and the second one was a Department of Defense – Small Business Innovation Research Phase II grant for the development of biobased and marine biodegradable non-plastic bags for use on U.S. Naval ships. Both these projects are being conducted in collaboration with Ramani Narayan, Ph.D., a current director of NTIC, at Michigan State University.
Joint Ventures
NTIC participates, either directly or indirectly, in 23 active joint venture arrangements in North America, Europe and Asia. Each of these joint ventures generally manufactures and markets products in the geographic territory to which it is assigned. While most of NTIC’s joint ventures exclusively sell rust and corrosion inhibiting products, some of the joint ventures sell NTIC’s Natur-Tec® resin compounds. NTIC historically has funded its joint venture investments with cash generated from operations.
The following table sets forth a list of NTIC’s operating joint ventures as of November 19, 2012, the country in which the joint venture is organized and NTIC’s ownership percentage in each joint venture:
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Joint Venture Name
Country
NTIC
Percent (%)
Ownership
TAIYONIC LTD.
Japan
50%
ACOBAL SAS
France
ZERUST-NIC (TAIWAN) CORP.
Taiwan(1)
25%
EXCOR GMBH
Germany
ZERUST SINGAPORE PTE. LTD
Singapore(1)
ZERUST AB
Sweden
MOSTNIC-ZERUST
Russia
KOREA ZERUST CO., LTD.
South Korea
ZERUST OY
Finland
ZERUST (U.K.) LTD.
United Kingdom
EXCOR-ZERUST S.R.O.
Czech Republic
EXCOR SP. Z.O.O.
Poland
ZERUST SPECIALTY TECH CO. LTD.
Thailand(1)
TIANJIN ZERUST CO.
China(1)
HARITA NTI LIMITED
India
CHONG WAH-NTIA SDN. BHD.
Malaysia(1)
NTIA ZERUST PHILIPPINES, INC.
Philippines(1)
ZERUST A.Ş.
Turkey
ZERUST CONSUMER PRODUCTS, LLC
United States
ZERUST – DNEPR
Ukraine
PT. CHEMINDO – NTIA
Indonesia(1)
LENPROMTECHNOLOGIES, LLC
MUTEC GMBH
Germany(2)
44%