Northern Technologies International : Annual Report for Fiscal Year Ending 08-31, 2025 (Form 10-K)

About this update from Northern Technologies International Corporation

MANAGEMENT ' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 1. Business - Forward-Looking Statements " and under the heading " Part I. Item 1A. Risk Factors ." 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 " Part II. Item 8. Financial Statements and Supplementary Data ." This Management's Discussion and Analysis is organized in the following major sections: ● Business Overview . This section provides a brief overview description of NTIC's business, focusing in particular on developments during the most recent fiscal year. ● NTIC ' s Subsidiaries and Joint Venture Network . This section provides a brief overview of NTIC's subsidiaries and its joint venture network, the joint ventures which are considered individually significant to NTIC's consolidated assets and income, and how NTIC's joint ventures are accounted for by NTIC. ● Financial Overview . This section provides a brief summary of NTIC's financial results and financial condition for fiscal 2025 compared to fiscal 2024. ● Sales and Expense Components . This section provides a brief description of the significant line items in NTIC's consolidated statements of operations. ● Results of Operations . This section provides an analysis of the significant line items in NTIC's consolidated statements of operations. ● Liquidity and Capital Resources . This section provides an analysis of NTIC's liquidity and cash flows and a discussion of NTIC's financial condition and financial commitments. ● Inflation and Seasonality . This section describes the effects of inflation and seasonality, if any, on NTIC's business and operating results. ● Market Risk . This section describes material market risks to which NTIC is subject. ● Related Party Transactions . This section describes any material related party transactions to which NTIC is a party. ● Critical Accounting Policies and Estimates . This section discusses NTIC's critical accounting policies and estimates, which require NTIC to exercise subjective or complex judgments in their application. NTIC's significant accounting policies, including its critical accounting estimates, are summarized in Note 1 to NTIC's consolidated financial statements. ● Recent Accounting Pronouncements . This section references Notes 2 and 3 to NTIC's consolidated financial statements, which summarizes the effect of recently issued accounting pronouncements on NTIC's results of operations and financial condition. Business Overview NTIC develops and markets proprietary, environmentally beneficial products and services in over 65 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, general industrial, mechanical, mining, agricultural, and retail consumer markets for over 50 years and, more recently, has also expanded into the oil and gas industry. Additionally, NTIC markets and sells a portfolio of proprietary bio-based and certified compostable (fully biodegradable) polymer resin compounds and finished products under the Natur-Tec® brand. These sustainable packaging 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 industries it serves. NTIC also offers worldwide, on-site, technical consulting for rust and corrosion prevention issues. In North 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 in China, NTIC (Shanghai) Co., Ltd. (NTIC China), its wholly owned subsidiary in India, HNTI Limited (Zerust India), its majority-owned joint venture holding company for NTIC's joint venture investments in the Association of Southeast Asian Nations (ASEAN) region, NTI Asean LLC (NTI Asean), its majority-owned subsidiary in Brazil, Zerust Prevenção de Corrosão S.A (Zerust Brazil), and certain majority-owned and wholly owned subsidiaries, and joint venture arrangements in North America, Europe, and Asia. NTIC also sells products directly to its European joint venture partners through its wholly owned subsidiary in Germany, 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 leaks caused by corrosion. During fiscal 2025, NTIC made significant strategic investments in its ZERUST® oil and gas sales infrastructure. NTIC markets and sells its ZERUST® rust and corrosion prevention solutions to customers in the oil and gas industry in a continuously increasing number of 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. In November 2025, Zerust Brazil secured a three-year offshore oil and gas production asset preservation contract with a leading global engineering, procurement, and construction company to provide advanced corrosion protection solutions for floating production storage and offloading units. The project under this agreement is expected to ramp during fiscal 2026 and run through calendar 2028 with an estimated total value of approximately R$70 million (US$13 million). This includes approximately R$40 million (US$7.4 million) in materials and approximately R$30 million (US$5.6 million) in engineering and field services. The amount and timing of revenue anticipated to be generated under this agreement may materially positively affect NTIC's future quarterly sales and other operating results. 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, coatings, injection molding, thermoforming, profile extrusion and engineered plastics. These resin compounds are certified to be fully biodegradable in a commercial composting environment and are currently being used to produce finished products, including can liners, shopping and grocery bags, lawn and leaf bags, branded apparel packaging bags and accessories, and various foodservice items, such as disposable cutlery, drinking straws, food-handling gloves, 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. During fourth quarter of fiscal 2025, we entered into a preferred supplier agreement with the nation's leading specialized distributor for a foodservice and industrial packaging company, which we expect to translate into higher Natur-Tec sales growth in fiscal 2026 compared to fiscal 2025. 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 12 operating subsidiaries in North America, South America, Europe, and Asia, which are listed in " Part I. Item 1. Business " of this annual report on Form 10-K. The results of these subsidiaries are fully consolidated in NTIC's consolidated financial statements. NTIC participates in 15 active joint venture arrangements in North America, Europe, and Asia, which are listed in " Part I. Item 1. Business " of this annual report on Form 10-K. NTIC has historically funded its investments in joint ventures with cash generated from operations. NTIC's receives funds from its joint ventures as fees 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 in Germany (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 consolidated financial statements utilizing the equity method of accounting. NTIC considers EXCOR to be individually significant to NTIC's consolidated assets and income as of August 31, 2025 and 2024. Therefore, NTIC provides certain additional information regarding this entity in the notes to NTIC's consolidated financial statements and in this section of this report. 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. Highlights of NTIC's financial results for fiscal 2025 include the following, with increases or decreases in each case as compared to fiscal 2024: ● NTIC's consolidated net sales decreased 1.0% primarily due to decreased sales and demand for ZERUST® and Natur-Tec® products. 74.2% of NTIC's consolidated net sales were derived from sales of ZERUST® products and services, which decreased 1.0%. 25.8% of NTIC's consolidated net sales were derived from sales of Natur-Tec® products, which decreased 1.0%. ● Cost of goods sold as a percentage of net sales increased to 62.4% from 60.3% primarily due to slightly higher raw material prices and discounts on selling prices. ● NTIC's total joint venture operations decreased 9.8% to $8,545,207 compared to $9,475,078 during fiscal 2024 primarily due to decreases in equity in income from joint ventures and fees for services provided to joint ventures, which were driven primarily by decreased sales at most joint ventures. Net sales at NTIC's joint ventures, which are not consolidated with NTIC's net sales, decreased 4.9% to $91,236,272 compared to $95,940,014 during fiscal 2024. ● NTIC's total operating expenses increased 6.4% to $37,651,465 compared to $35,392,957 during fiscal 2024. This increase was primarily due to strategic investments in ZERUST® oil and gas marketing and sales efforts, including personnel expenses and the corresponding benefits, as well as increased travel and professional fees. ● NTIC earned net income attributable to NTIC of $17,619, or $0.00 per diluted common share, for fiscal 2025 compared to $5,409,082, or $0.55 per diluted common share, for fiscal 2024. During fiscal 2025, NTIC incurred additional costs related to tariffs and expects such costs to continue in fiscal 2026. Management has implemented, and expects to continue to implement, proactive measures to mitigate inflationary and supply chain pressures resulting from tariffs through a combination of supplier diversification, regional sourcing initiatives, cost-reduction programs, and manufacturing optimization. Management continues to monitor global trade developments and evaluate opportunities to further reduce its exposure to tariffs by localizing production and developing alternative sourcing options where practicable. With respect to NTIC China, a majority of its production and sales are for local consumption. Accordingly, management believes that NTIC China's exposure to tariffs, including those imposed by the United States, is limited. However, given the complex and evolving nature of global trade policy, there can be no assurance that tariffs or other trade restrictions will not adversely affect NTIC's net sales, gross margins, or operating results in fiscal 2026 or future periods. Tariffs have had a particular impact on NTIC's Natur-Tec® business, which relies on the global procurement of raw materials and finished goods. These factors may affect production economics, customer pricing, and competitive positioning, particularly in markets where NTIC competes with local producers not subject to comparable tariff exposure. Sales and Expense Components The following is a description of the primary components of net sales and expenses: Net Sales . NTIC derives net sales from the sale of its ZERUST® products and services and its Natur-Tec® products. NTIC sells its ZERUST® products and services and its Natur-Tec® products either directly, through its subsidiaries, or via a network of joint ventures, independent distributors, and agents. Net sales, excluding joint ventures, represents net sales by NTIC either directly to end users or to distributors worldwide, but not sales to NTIC's joint ventures and not sales by NTIC's joint ventures. NTIC recognizes revenue from the sale of its products primarily upon shipment of the products. Cost of Goods Sold . Most of NTIC's products are manufactured by third parties, and its cost of goods sold for those products consists primarily of the price invoiced by its third-party vendors. For the portion of products that NTIC manufactures, NTIC's cost of goods sold for those products consists primarily of direct labor, allocated manufacturing overhead, raw materials, and components. NTIC's margins on its Natur-Tec® resin compounds and finished products are generally smaller than its margins on its ZERUST® products and services, and NTIC's margins on its ZERUST® products and services sold into the oil and gas industry are generally greater than its margins on its traditional ZERUST® products and services. Equity in Income from Joint Ventures . NTIC's equity in income from joint ventures consists of NTIC's share of equity in income from each joint venture based on the overall profitability of the joint ventures. Such profitability is subject to variability from quarter to quarter, which, in turn, subjects NTIC's earnings to variability from quarter to quarter. Traditionally, a portion of the equity income recorded in a given fiscal year is paid to the owners of the joint venture entity during the following fiscal year through a dividend. The payment of a dividend by a joint venture entity is determined by a vote of the joint venture owners and is not at the sole discretion of NTIC. NTIC typically owns only 50% or less of its joint venture entities and, thus, does not control the decisions of these entities regarding whether to pay dividends and, if paid, how much they should be in a given year. Fees for Services Provided to Joint Ventures . NTIC provides certain services to its joint ventures, including consulting, legal, travel, insurance, technical, and marketing services based on licensing or other agreements with its joint ventures. NTIC receives fees for these services it provides to its joint ventures based primarily on the net sales by NTIC's joint ventures, the latter of which are not included in NTIC's net sales reflected on NTIC's consolidated statements of operations. The fees for services received by NTIC from its joint ventures are generally determined based on either a flat fee or a percentage of net sales by NTIC's joint ventures depending on local laws and tax regulations. With respect to EXCOR, NTIC receives an agreed upon fixed quarterly fee for such services. Under NTIC's agreements with its joint ventures in which the fees for services are described, amounts are earned when product is shipped from joint venture facilities, at which point a sale is deemed to have occurred and results in obligation of the joint venture to pay the royalty and recognition of the fee by NTIC. Selling Expenses . Selling expenses consist primarily of sales commissions and support costs for NTIC's direct sale and distribution system and marketing costs. General and Administrative Expenses . General and administrative expenses consist primarily of salaries and benefits and other costs for NTIC's executives, accounting, stock-based compensation, finance, legal, information technology, and human resources functions. Research and Development Expenses . Research and development expenses include costs associated with the design, development, market analysis, lab testing, and field trials and enhancements of NTIC's products and services. NTIC expenses costs related to product research and development as incurred. Research and development expenses reflect the net amount after being reduced by reimbursements related to certain research and development contracts. With respect to such research and development contracts, NTIC accrues proceeds received under the contracts and offsets research and development expenses incurred in equal installments over the timelines associated with completion of the contracts' specific objectives and milestones. Interest Income . Interest income consists of interest earned on investments, which typically consist of investment-grade, interest-bearing securities and money market accounts. Interest Expense . Interest expense results primarily from interest associated with any borrowings under NTIC's line of credit with JPMorgan Chase Bank, N.A. and NTIC China's terms loans with China Construction Bank Corporation. Other Income . Other income for fiscal 2025 consists of $1,139,756 in cash received during fiscal 2025 as a result of employee retention credits received under the Coronavirus Aid, Relief, and Economic Security Act. See Note 1 to NTIC's consolidated financial statements. Other Expense . Other expense for fiscal 2025 consists of an accrual of $386,785 for an assessed repayment obligation of NTIC China to Ningbo Customs, the customs authority at the Ningbo Port in China, for misclassified Natur-Tec products. See Note 16 to NTIC's consolidated financial statements. Income Tax Expense . Income tax expense includes federal income taxes, foreign withholding taxes, income tax of consolidated entities in foreign jurisdictions, state income tax, and changes to NTIC's deferred tax valuation allowance. NTIC utilizes the asset and liability method of accounting for income taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. NTIC records a tax valuation allowance when it is more likely than not that some portion or all of its deferred tax assets will not be realized. NTIC makes this determination based on all available evidence, including historical data and projections of future results. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Net Income Attributable to Non-Controlling Interests . Net income attributable to non-controlling interests represents the portion of net income (or loss) in consolidated subsidiaries that is allocated to shareholders outside of NTIC. These non-controlling shareholders hold ownership stakes in certain subsidiaries but do not control these entities. In instances where NTIC owns less than 100% of a subsidiary, the share of that subsidiary's income attributable to non-controlling shareholders is excluded from NTIC's net income and reported separately in NTIC's financial statements. Results of Operations Fiscal Year 2025 Compared to Fiscal Year 2024 The following table sets forth NTIC's results of operations for fiscal 2025 and fiscal 2024. Fiscal 2025 % of Net Sales Fiscal 2024 % of Net Sales $ Change % Change Net sales $ 84,234,474 N/A $ 85,059,517 N/A $ (825,043 ) (1.0 )% Cost of goods sold 52,557,919 62.4 % 51,273,155 60.3 % 1,284,764 2.5 % Equity in income from joint ventures 3,539,056 N/A 4,223,296 N/A (684,240 ) (16.2 )% Fees for services provided to joint ventures 5,006,151 N/A 5,251,782 N/A (245,631 ) (4.7 )% Selling expenses 17,820,196 21.2 % 16,413,672 19.3 % 1,406,524 8.6 % General and administrative expenses 14,792,988 17.6 % 14,176,494 16.7 % 616,494 4.3 % Research and development expenses 5,038,281 6.0 % 4,802,791 5.6 % 235,490 4.9 % Net Sales . NTIC's consolidated net sales decreased 1.0% to $84,234,474 during fiscal 2025 compared to $85,059,517 during fiscal 2024. This decrease was primarily due to decreased sales and demand for ZERUST® and Natur-Tec® products. The following table sets forth NTIC's net sales by product segment for fiscal 2025 and fiscal 2024: Fiscal 2025 Fiscal 2024 $ Change % Change Total ZERUST® sales $ 62,488,397 $ 63,092,575 $ (604,178 ) (1.0 )% Total Natur-Tec® sales 21,746,077 21,966,942 (220,865 ) (1.0 )% Total net sales $ 84,234,474 $ 85,059,517 $ (825,043 ) (1.0 )% During fiscal 2025, 74.2% of NTIC's consolidated net sales were derived from sales of ZERUST® products and services, which decreased 1.0% to $62,488,397 compared to $63,092,575 during fiscal 2024. This decrease was primarily due to decreased demand for ZERUST® oil and gas products and was partially offset by increased demand for ZERUST® industrial products. The following table sets forth NTIC's net sales of ZERUST® products for fiscal 2025 and fiscal 2024: Fiscal 2025 Fiscal 2024 $ Change % Change ZERUST® industrial net sales $ 55,170,693 $ 53,863,296 $ 1,307,397 2.4 % ZERUST® oil & gas net sales 7,317,704 9,229,279 (1,911,575 ) (20.7 )% Total ZERUST® net sales $ 62,488,397 $ 63,092,575 $ (604,178 ) (1.0 )% ZERUST® industrial net sales increased 2.4% during fiscal 2025 compared to fiscal 2024 primarily due to increased demand for North American ZERUST® industrial products. 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, construction, agriculture, and mining markets in particular. ZERUST® oil and gas net sales decreased 20.7% during fiscal 2025 compared to fiscal 2024 primarily due to decreased demand. NTIC 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. 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. For example, in November 2025, Zerust Brazil secured a three-year offshore oil and gas production asset preservation contract with a leading global engineering, procurement, and construction company to provide advanced corrosion protection solutions for floating production storage and offloading units. The project under this agreement is expected to ramp during fiscal 2026 and run through calendar 2028 with an estimated total value of approximately R$70 million (US$13 million). This includes approximately R$40 million (US$7.4 million) in materials and approximately R$30 million (US$5.6 million) in engineering and field services. The amount and timing of revenue anticipated to be generated under this agreement may materially positively affect NTIC's future quarterly sales and other operating results. During each of fiscal 2025 and fiscal 2024, 25.8% of NTIC's consolidated net sales were derived from sales of Natur-Tec® products. Sales of Natur-Tec® products decreased 1.0% to $21,746,077 during fiscal 2025 compared to $21,966,942 during fiscal 2024 primarily due to reduced pricing to major customers during fiscal 2025. The market for biodegradable plastics is expanding worldwide, driven by increasing environmental awareness, regulatory support for sustainable materials, and growing demand for eco-friendly alternatives. As consumers and industries seek to reduce plastic waste, biodegradable plastics offer a viable solution, particularly in sectors like packaging, agriculture, and consumer goods. This trend is further supported by government policies promoting sustainable practices and by advances in biodegradable technology, which make these materials more accessible and cost-effective. Cost of Goods Sold . Cost of goods sold increased 2.5% in fiscal 2025 compared to fiscal 2024 primarily due to slightly higher raw material prices and reduced pricing to major customers during fiscal 2025 for Natur-Tec® products. Cost of goods sold as a percentage of net sales increased to 62.4% during fiscal 2025 compared to 60.3% during fiscal 2024 primarily due to the factors noted above. Equity in Income from Joint Ventures . NTIC's equity in income from joint ventures decreased 16.2% to $3,539,056 during fiscal 2025 compared to $4,223,296 during fiscal 2024 primarily due to a decrease in net income at NTIC's joint venture in Germany, EXCOR. NTIC's equity in income from joint ventures fluctuates based on net sales and profitability of the joint ventures during the respective periods. Of the total equity in income from joint ventures, NTIC had equity in income from joint ventures of $1,664,532 attributable to EXCOR during fiscal 2025 compared to $2,299,274 in fiscal 2024. This decrease was due to a decrease in net sales by EXCOR during fiscal 2025 compared to fiscal 2024. NTIC had equity in income of all other joint ventures of $1,874,524 during fiscal 2025. Fees for Services Provided to Joint Ventures . NTIC recognized fee income for services provided to joint ventures of $5,006,151 during fiscal 2025 compared to $5,251,782 during fiscal 2024, representing a decrease of 4.7%. Fee income for services provided to joint ventures is traditionally a function of the sales made by NTIC's joint ventures; however, at various joint ventures, the fee income for services is a fixed amount that does not fluctuate with the change in sales experienced by certain joint ventures, specifically EXCOR. Net sales at the joint ventures decreased 4.9% to $91,236,272 during fiscal 2025 compared to $95,940,014 during fiscal 2024. This decrease was primarily due to decreased demand at NTIC's joint venture in Germany. Net sales of NTIC's joint ventures are not included in NTIC's product sales and are not included in NTIC's consolidated financial statements. Of the total fee income for services provided to joint ventures, fees of $846,281 were attributable to EXCOR during fiscal 2025 compared to $828,932 attributable to EXCOR during fiscal 2024. Selling Expenses . NTIC's selling expenses increased 8.6% in fiscal 2025 compared to fiscal 2024 primarily due to increased personnel expense in fiscal 2025 as a result of an expansion in the ZERUST® oil and gas sales team. As a percentage of net sales, selling expenses increased to 21.2% for fiscal 2025 compared to 19.3% in fiscal 2024 primarily due to increased selling expenses and decreased net sales. General and Administrative Expenses . NTIC's general and administrative expenses increased 4.3% in fiscal 2025 compared to fiscal 2024 primarily due to increased professional services and travel and personnel expenses, which relate in part to increased information technology infrastructure, during fiscal 2025 compared to fiscal 2024. As a percentage of net sales, general and administrative expenses increased to 17.6% for fiscal 2025 from 16.7% for fiscal 2024 primarily due to increased general and administrative expenses and decreased net sales. Research and Development Expenses . NTIC's research and development expenses increased 4.9% in fiscal 2025 compared to fiscal 2024 primarily due to continued investment in new product development. Interest Income . NTIC's interest income increased to $308,053 in fiscal 2025 compared to $118,827 in fiscal 2024 primarily due to $181,529 in interest income earned on a delayed IRS payment related to Employee Retention Credit (ERC) claims recognized in the second quarter of fiscal 2025, as described in Note 1 to NTIC's consolidated financial statements, and changes in the invested cash balances and rate of return at various subsidiaries. Interest Expense . NTIC's interest expense increased to $599,927 in fiscal 2025 compared to $340,129 in fiscal 2024 primarily due to increased average outstanding borrowings during fiscal 2025. Other Income . In February 2025, NTIC recognized $1,139,756 in other income during due to the receipt of an ERC payment. No other income was recognized during fiscal 2024. The ERC income was recognized upon receipt of a cash payment in accordance with applicable accounting guidance and was claimed under the suspension test criteria, as described in Note 1 to NTIC's consolidated financial statements. The ERC payment is a one-time event and does not represent recurring operational revenue. Other Expense . In June 2025, NTIC China was notified by Ningbo Customs, the customs authority at the Ningbo Port in China, that certain Natur-Tec® masterbatch resin products had been historically misclassified for export value-added tax rebate purposes. Ningbo Customs reclassified the products to a code that does not qualify for a value-added tax rebate, resulting in repayment obligations and penalties totaling approximately $386,785. NTIC recorded the full amount within Other Expense in fiscal 2025 and is evaluating potential avenues to negotiate a reduction in penalties; however, no such reductions have been agreed upon as of the issuance date of the consolidated financial statements included in this Annual Report on Form 10-K. See Note 16 to NTIC's consolidated financial statements. Income Before Income Tax Expense . NTIC had income before income tax expense of $3,031,395 for fiscal 2025 compared to income before income tax expense of $7,647,181 for fiscal 2024. Income Tax Expense . Income tax expense was $2,045,002 during fiscal 2025 compared to $1,325,797 during fiscal 2024 for an effective tax rate of 67.5% and 17.3% during fiscal 2025 and 2024, respectively. The change primarily reflects increased income tax expense at NTIC's foreign subsidiaries. The increase in the effective tax rate is primarily due to the aforementioned increase in income tax expense as compared to reduced consolidated pre-tax book income. As a result, NTIC's effective tax rate was unusually high and volatile for fiscal 2025. Management expects NTIC's effective tax rate to normalize in future periods when additional profits are recognized in NTIC's North American operations. NTIC considers the earnings of certain foreign joint ventures to be indefinitely invested outside the United States on the basis 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 $27,667,432 and $23,645,685 as of August 31, 2025 and August 31, 2024, 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. Net Income Attributable to NTIC . Net income attributable to NTIC decreased to $17,619, or $0.00 per diluted common share, for fiscal 2025 compared to $5,409,082, or $0.55 per diluted common share, for fiscal 2024. This decrease was primarily due to increases in operating expenses, decreases in gross margin and income from our joint venture operations and the other expense incurred as a result of the Customs issue in China discussed above. This decrease in net income attributable to NTIC was partially offset by the one-time ERC payment received during fiscal 2025. NTIC anticipates that its earnings will continue to be adversely affected to some extent by inflation and worldwide supply chain disruptions, among other factors. Additionally, NTIC anticipates that its quarterly net income 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 sales 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 fluctuation of the U.S. dollar compared to the Euro and other foreign currencies during fiscal 2025 compared to fiscal 2024. Liquidity and Capital Resources Sources of Cash and Working Capital NTIC's working capital, defined as current assets less current liabilities, was $20,438,722 as of August 31, 2025, including $7,250,523 in cash and cash equivalents, $9,329,021 outstanding under NTIC's line of credit, $2,804,695 outstanding under NTIC China's term loans and $522,545 outstanding under Natur-Tec India's term loan, compared to $23,682,276 as of August 31, 2024, including $4,952,184 in cash and cash equivalents, $4,291,608 outstanding under NTIC's line of credit and $2,820,835 outstanding under NTIC China's term loans. Reducing debt through positive operating cash flow and improving working capital efficiencies will be a strategic focus for fiscal 2026. 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. In fiscal 2026, NTIC expects to continue to invest through its use of working capital in Zerust India, NTIC China, NTI Europe, its joint ventures, 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. NTIC also expects to use some of its capital resources to acquire the remaining ownership interests of joint ventures not owned by NTIC as they become available or appropriate and for the formation of one or more new subsidiaries to assume the operations of a joint venture. Some of these joint venture transitions may materially impact NTIC's results of operations for a particular reporting period. 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. In order to take advantage of new product and market opportunities to expand its business and increase its revenues and assist with joint venture transitions, NTIC may decide to finance such opportunities by additional borrowings 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. Credit Agreement with JPMorgan Chase Bank, N.A. NTIC is party to a Credit Agreement (as amended, the Credit Agreement) with JPMorgan Chase Bank, N.A. (JPM), which provides NTIC with a senior secured revolving line of credit (the Credit Facility) of up to $10.0 million. The Credit Facility includes a $5.0 million sublimit for standby letters of credit. Borrowings of $9,329,021 were outstanding under the Credit Facility as of August 31, 2025. Since NTIC was out of compliance with the fixed charge coverage ratio under the Credit Agreement, NTIC obtained a waiver of the non-compliance from JPM. Based on its current business plan and projections for fiscal 2026, NTIC expects to remain in compliance with the covenant during fiscal 2026, although no assurance can be provided that it will do so. The principal amount under the Credit Facility, together with all accrued unpaid interest and other amounts owing thereunder, if any, will be payable in full on the January 5, 2026 maturity date unless the Credit Facility is extended or renewed or terminated earlier. It is anticipated that the Credit Facility will be renewed each year for one additional year for the immediate foreseeable future. Borrowings under the Credit Agreement bear interest at a floating rate, at the option of NTIC, equal to either the CB Floating Rate or the Adjusted SOFR Rate. The term "CB Floating Rate" means the greater of the Prime Rate in the United States or 2.50%. The term "Adjusted SOFR Rate" means the term secured overnight financing rate for either one, three or six months (depending on the interest period selected by NTIC) plus 0.10% per annum. With respect to any borrowings using an Adjusted SOFR Rate, there is an applicable margin of 2.35% applied per annum. There is no applicable margin with respect to borrowings using a CB Floating Rate. The weighted average interest rate was 6.61% for fiscal 2025. To secure the Credit Agreement, NTIC assigned to JPM a continuing security interest in all of its right, title and interest in collateral made up of the assets of NTIC. The Credit Agreement contains customary affirmative and negative covenants, including, among other matters, limitations on NTIC's ability to incur additional debt, grant liens, engage in certain business operations and transactions, make certain investments, modify its organizational documents or form any new subsidiaries, subject to certain exceptions. Further, the Credit Agreement contains a negative covenant that restricts the ability of NTIC to redeem or repurchase its common stock or pay dividends if the result of which would cause an event of default under the Credit Agreement. The Credit Agreement also requires the Company to maintain a Fixed Charge Coverage Ratio of at least 1.25 to 1.00. The term "Fixed Charge Coverage Ratio" means the ratio, computed for NTIC on a consolidated basis, of net income plus income tax expense, plus amortization expense, plus depreciation expense, plus interest expense, and plus dividends received from joint ventures, minus unfinanced capital expenditures and equity in income from joint ventures, all computed for the twelve month period then ending, to scheduled principal payments made, plus scheduled finance lease payments made, plus interest expense paid, plus income tax expense paid, and plus cash distributions and dividends paid, all computed for the same twelve month period then ending. The Credit Agreement also contains customary events of default, including, without limitation, payment defaults, material inaccuracy of representations and warranties, covenant defaults, bankruptcy and insolvency proceedings, cross-defaults to certain other agreements, breach of any financial covenant and change of control. Upon the occurrence and during the continuance of any event of default, JPM may accelerate the payment of the obligations thereunder and exercise various other customary default remedies. Other Credit Arrangements On each of April 22, 2025 and May 29, 2025, NTIC's wholly owned subsidiary in China, NTIC China, entered into a loan agreement with China Construction Bank Corporation. Each term loan provided NTIC China with a RMB 10,000,000 (USD $1.39 million). The term loans mature in April 2026 and May 2026, respectively, unless extended. It is anticipated that each term loan will be extended for an additional one-year period. The term loan that matures in April 2026 has an annual interest rate of 2.75% with interest due monthly, and the term loan that matures in May 2026 has an annual interest rate of 2.96% with interest due monthly. Both term loans are secured by an office building owned by NTIC China and the loan agreements contain certain financial and other covenants. NTIC was in compliance with the covenants as of August 31, 2025. The outstanding balance as of August 31, 2025 for both term loans is a total of USD $2,804,695. On August 30, 2025, NTIC's majority owned subsidiary in India, Natur-Tec India, entered into a Foreign Currency Term Loan Agreement with IDFC FIRST Bank Limited (the Bank). The term loan provides Natur-Tec India with a facility of INR 500 lakhs (USD $600,000) to finance the purchase of land in Chennai, India. The loan was disbursed on August 30, 2025 for INR 461 lakhs (USD $522,545) and is repayable in 85 monthly installments to a US dollar account of USD $7,899 each beginning October 5, 2025 and continuing through September 5, 2032. Borrowings bear interest at a fixed rate of 6.45% per annum. The loan is secured by a lien over Natur-Tec India's cash deposits with the Bank totaling INR 476 lakhs (USD $539,731), and the related land purchase is expected to be registered in late November 2025. The outstanding balance as of August 31, 2025 was INR 461 lakhs (USD $522,545), of which INR 61.7 lakhs (USD $55,561) was classified as current and INR 399.3 lakhs (USD $466,984) as long-term. The term loan contains customary affirmative and negative covenants applicable to Natur-Tec India, including, among other matters, restrictions on incurring additional indebtedness, creating liens, or changing the nature of its business. Natur-Tec India was in compliance with all covenants as of August 31, 2025. Uses of Cash and Cash Flow Net cash provided by operating activities during fiscal 2025 was $2,442,955, which resulted principally from NTIC's net income, dividends received from joint ventures, depreciation and amortization expense, stock-based compensation and changes in working capital, deferred income tax, partially offset by equity in income from joint ventures and changes in working capital. Net cash provided by operating activities during fiscal 2024 was $5,883,193, which resulted principally from NTIC's net income, dividends received from joint ventures, dividends receivable from joint venture, depreciation and amortization expense, stock-based compensation and changes in working capital, partially offset by equity in income from joint ventures, deferred income tax and an increase in trade receivables and inventories. 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 and payables. 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. NTIC experienced a decrease in trade receivables and an increase in inventory as of August 31, 2025 compared to August 31, 2024. Trade receivables as of August 31, 2025 decreased $743,849 compared to August 31, 2024, primarily related to timing differences of sales and collections. Outstanding trade receivables increased by an average of 2 days to an average of 80 days from balances outstanding from these customers as of August 31, 2025 from an average of 82 days as of August 31, 2024. Outstanding receivables for services provided to joint ventures as of August 31, 2025 decreased $157,464 compared to August 31, 2024, and the average days to pay decreased an average of 7 days to an average of 79 days from an average of 86 days as of August 31, 2024. Net cash used in investing activities during fiscal 2025 was $3,390,323, which was primarily the result of purchases of property and equipment and investment in intangibles for software costs, and, to a lesser extent, investments in patents. Net cash used in investing activities during fiscal 2024 was $3,418,228, which was primarily the result of purchases of property and equipment, investment in intangibles for software costs and investments in patents. Net cash used in financing activities for fiscal 2025 was $3,861,638, which resulted from borrowing on the line of credit, proceeds from long-term debt and NTIC's employee stock purchase plan, partially offset by repayments on the line of credit, dividends paid on NTIC common stock and dividends received by non-controlling interest. Net cash used in financing activities for fiscal 2024 was $2,957,280, which resulted from dividends paid on NTIC common stock and dividends received by non-controlling interest and was partially offset by borrowings under the line of credit and proceeds from the exercise of stock options and NTIC's employee stock purchase plan. Stock Repurchase Program On January 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. As of August 31, 2025, up to $2,640,548 in shares of NTIC common stock remained available for repurchase under NTIC's stock repurchase program. No repurchases occurred during fiscal 2025 or fiscal 2024. Cash Dividends During fiscal 2025, NTIC's Board of Directors declared cash dividends on the following dates in the following amounts to holders of record of NTIC common stock as of the following record dates: Declaration Date Amount Record Date Payable Date October 16, 2024 $0.07 October 30, 2024 November 13, 2024 January 15, 2025 $0.07 January 29, 2025 February 12, 2025 April 16, 2025 $0.01 April 30, 2025 May 14, 2025 July 16, 2025 $0.01 July 30, 2025 August 13, 2025 On April 10, 2025, NTIC announced that it had determined to temporarily adjust its quarterly dividend to $0.01 per share effective with its fiscal 2025 third quarter dividend in light of the current global environment. Subsequent to the end of fiscal 2025, on October 15, 2025, NTIC's Board of Directors declared a cash dividend of $0.01 per share of NTIC's common stock, payable on November 12, 2025 to stockholders of record on October 29, 2025. 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. Capital Expenditures and Commitments NTIC spent $3,950,323 on capital expenditures during fiscal 2025, which related primarily to facility improvements to the warehouse facility NTIC purchased during fiscal 2023 and the installation of a new Enterprise Resource Planning (ERP) software system and associated equipment. NTIC expects to spend an aggregate of approximately $3,000,000 to $4,500,000 on capital expenditures during fiscal 2026, which it expects will relate primarily to construction of new buildings and warehouses in India and Brazil, as well as the purchase of new equipment and facility improvements in the United States. Inflation and Seasonality Inflation in the United States and abroad historically has had minimal effect on NTIC and did not adversely affect NTIC's gross margins during fiscal 2025. NTIC believes there is some seasonality in its business. NTIC's net sales in the second fiscal quarter are typically adversely affected by the long Chinese New Year, the North American holiday season, and overall less corrosion taking place at lower winter temperatures worldwide. Market Risk For information regarding NTIC's exposure to market risk, see " Part I. Item 7A. Quantitative and Qualitative Disclosures About Market Risk " of this annual report on Form 10-K. Related Party Transactions Since NTIC's joint ventures are considered related parties, NTIC recorded sales to its joint ventures as a separate line item on the face of NTIC's consolidated statements of operations and recorded fees for services provided to its joint ventures as separate line items on the face of NTIC's consolidated statements of operations. NTIC also records trade receivables from joint ventures, receivables for fees for services provided to joint ventures, and NTIC's investments in joint ventures as separate line items on its consolidated balance sheets. NTIC established its joint venture network approximately 30 years ago as a method to increase its worldwide distribution network for ZERUST® rust and corrosion inhibiting products and services. NTIC participates, either directly or indirectly, in 15 active joint venture arrangements in North America, Europe, and Asia. Each of these joint ventures generally manufactures and markets finished products in the geographic territory to which it is assigned. NTIC's joint venture partners are knowledgeable in the applicable environmental, labor, tax, and other requisite regulations and laws of the respective foreign countries in which they operate, as well as the local customs and business practices. NTIC's revenue recognition policy for sales to its joint ventures is the same as its policy for sales to unaffiliated customers. 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 in Germany, EXCOR, NTIC recognizes an agreed upon quarterly fee for such services. NTIC records revenue related to fees for services provided to joint ventures when earned, amounts are determinable, and collectability is reasonably assured. Under NTIC's agreements with its joint ventures, fee amounts are earned when product is shipped from joint venture facilities. NTIC reviews the financial situation of each joint venture to assist in the likelihood of collections on amounts earned. From time to time, NTIC elects to account for such fees on a cash basis for certain joint ventures when uncertainty exists surrounding the collections of such fees. There are no fees being accounted for in this manner at present. The expenses incurred in support of its joint ventures are direct expenses that NTIC incurs related to its joint ventures and include such items as employee compensation and benefit expenses, travel expense, insurance, consulting expense, legal expense, and lab supplies and testing expense. See Note 14 to NTIC's consolidated financial statements for other related party transaction disclosures. Critical Accounting Policies and Estimates The preparation of NTIC's consolidated financial statements requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Securities and Exchange Commission has defined a company's most critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations and those which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, NTIC has identified the following critical accounting policies. Although NTIC believes that its estimates and assumptions are reasonable, they are based upon information available when they are made. Actual results may differ significantly from these estimates under different assumptions or conditions. Principles of Consolidation NTIC evaluates its voting and variable interests in entities on a qualitative and quantitative basis. NTIC consolidates entities in which it concludes it has the power to direct the activities that most significantly impact an entity's economic success and has the obligation to absorb losses or the right to receive benefits that could be significant to the entity. All such relationships are evaluated on an ongoing basis. The consolidated financial statements included in this report include the accounts of Northern Technologies International Corporation, its wholly owned subsidiaries, Northern Technologies Holding Company, LLC, NTIC (Shanghai) Co., Ltd., NTIC Europe GmbH ZERUST-EXCOR MEXICO, S. de R.L. de C.V., and HNTI Limited, NTIC's majority-owned subsidiary in Brazil, Zerust Prevenção de Corrosão S.A., NTIC's majority-owned holding company, NTI Asean LLC, and NTIC's majority-owned subsidiary in India, Natur-Tec India Private Limited, Natur-Tec Lanka, Zerust Integrity Solutions Trading LLC (ZIS UAE), Zerust Singapore Pte Ltd (Zerust Singapore), Zerust Vietnam Co. Ltd (Zerust Vietnam) and Zerust Taiwan Co. Ltd (Zerust Taiwan). NTIC's consolidated financial statements do not include the accounts of any of its joint ventures. Investments in Joint Ventures and Recoverability of Investments in Joint Ventures NTIC's investments in its joint ventures are accounted for using the equity method. NTIC assesses its joint ventures for impairment on an annual basis as of August 31 of each year as part of its fiscal year end analysis. In addition to the annual review for impairment, NTIC reviews the operating results of each joint venture on a quarterly basis in comparison to its historical operating results and its accrual for fees for services provided to joint ventures. If the operating results of a joint venture do not meet NTIC's financial performance expectations, an additional evaluation is performed on the joint venture. In addition to the annual assessments for impairment, non-periodic assessments for impairment may occur if cash remittances are less than accrued balances, a joint venture's management requests capital, or other events occur suggesting anything other than temporary decline in value. If an investment were determined to be impaired, then a reserve would be created to reflect the impairment on the financial results of NTIC. NTIC's evaluation of its investments in joint ventures requires NTIC to make assumptions about future cash flows of its joint ventures. These assumptions require significant judgment, and actual results may differ from assumed or estimated amounts. Investments at Carrying Value If NTIC is no longer able to exercise significant influence over operating and financial policy of a joint venture previously accounted for under the equity method, it maintains the investment at the carrying value as of the date that significant influence no longer exists and discontinues accruing the proportionate earnings or losses of the investment. Investments are considered to be impaired when a decline in fair value is judged to be other-than-temporary. Fair value is calculated based on publicly available market information or other estimates determined by management. NTIC employs a systematic methodology on a quarterly basis that considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, NTIC evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, the duration and extent to which the fair value is less than cost, and for equity securities, its intent and ability to hold, or plans to sell, the investment. NTIC also considers specific adverse conditions related to the financial health of and business outlook for the investee, including industry and sector performance, changes in technology, and operational and financing cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded to other income (expense), and a new cost basis in the investment is established. 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 NTIC's revenue is contracted with customers through one-time purchase orders and short-term contracts, NTIC 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. The transaction price for NTIC's products is the invoiced amount. Revenue is recognized when transfer of control occurs as defined by the terms in the customer agreement, generally upon shipment of product. With respect to recording revenue related to fees earned for services provided to NTIC's joint ventures, amounts are earned when product is shipped from joint venture facilities, at which point a sale is deemed to have occurred and results in obligation for the joint venture to pay the royalty and recognition of the fee by NTIC. The support and services NTIC provides its joint ventures include consulting, travel, insurance, technical and marketing services to existing joint ventures, legal fees incurred in the establishment of new joint ventures, registration and promotion and legal defense of worldwide trademarks, and legal fees incurred in connection with the filing of patent applications based on licensing or other agreements with its joint ventures. NTIC receives fees for the services it provides to its joint ventures based primarily on the net sales by NTIC's joint ventures. The fees for support services received by NTIC from its joint ventures are generally determined based on either a flat fee or a percentage of net sales by NTIC's joint ventures depending on local laws and tax regulations. Under NTIC's agreements with its joint ventures, amounts are earned when product is shipped from joint venture facilities. NTIC reviews the financial situation of each of its joint ventures to assist in the likelihood of collections on amounts earned. NTIC elects to account for these fees on a cash basis for certain joint ventures when uncertainty exists surrounding the collections of such fees. Goodwill Impairment Goodwill represents the excess purchase price over the fair value of tangible net assets acquired in acquisitions after amounts have been allocated to intangible assets. Goodwill is tested for impairment annually (at August 31), or more frequently when events or changes in circumstances indicate that the asset might be impaired. Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition. Recoverability of Long-Lived Assets NTIC reviews its long-lived assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable and determines potential impairment by comparing the carrying value of the assets with expected net cash flows expected to be provided by operating activities of the business or related products. If the sum of the expected undiscounted future net cash flows were less than the carrying value, NTIC would determine whether an impairment loss should be recognized. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset. Foreign Currency Translation (Accumulated Other Comprehensive Loss) The functional currency of each international joint venture and subsidiary is the applicable local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average monthly exchange rate. Translation gains or losses are reported as an element of accumulated other comprehensive income (loss). NTIC (excluding NTIC China, Zerust Brazil, Natur-Tec India, Natur-Tec Lanka, NTI Asean, Zerust Singapore, Zerust Vietnam, Zerust Taiwan, Zerust Mexico, Zerust India, NTI Europe, and NTIC's joint ventures) conducts all foreign transactions based on the U.S. dollar. 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 the equity in income from joint ventures reflected in NTIC's consolidated statements of operations. Stock-Based Compensation NTIC recognizes compensation cost relating to share-based payment transactions, including grants of employee stock options and transactions under NTIC's employee stock purchase plan, in its consolidated financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. NTIC measures the cost of employee services received in exchange for stock options or other stock-based awards based on the grant-date fair value of the award and recognizes the cost over the period the employee is required to provide services for the award. Income Taxes NTIC utilizes the asset and liability method of accounting for income taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Deferred income tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that includes the enactment date. NTIC records net deferred tax assets to the extent NTIC believes these assets will more likely than not be realized. In making such a determination, NTIC considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations, including the prior three-year history. In the event NTIC determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, NTIC makes an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. Recent Accounting Pronouncements See Notes 2 and 3 to NTIC's consolidated financial statements for a discussion of recent accounting pronouncements.

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