NTIC believes that a combination of its
existing cash and cash equivalents, forecasted cash flows from future
operations, distributions of earnings and technical assistance fees to NTIC from
its joint venture investments and funds available through existing or
anticipated financing arrangements, will continue to be adequate to fund its
operations, capital expenditures, debt repayments and any stock repurchases for
at least the next twelve months. In an effort to increase net sales, NTIC is in
the process of expanding the application of its corrosion inhibiting technology
into the oil and gas industry and its product line to include biodegradable and
compostable plastics and machinery that converts waste plastics back into
diesel, gasoline and mid-distillates. During the remainder of fiscal 2008, NTIC
expects to invest additional research and development and marketing efforts and
resources into these new emerging businesses, product lines and markets. In
order to take advantage of such new product and market opportunities to expand
its business and increase its revenues, NTIC may decide to finance such
opportunities by increasing borrowings under its 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 NTICs current stockholders.
Uses of Cash and Cash
Flows
. Cash flows used in operations for the
three months ended November 30, 2007 was $905,868, which resulted principally
from net income, depreciation and amortization expense, inventories and trade
corporate joint ventures being offset by equity income of corporate joint
ventures, trade excluding corporate joint ventures, technical and other services
receivable, prepaid expenses, accounts payable and accrued liabilities. Cash
flows used in operations for the three months ended November 30, 2006 was
$265,279, which resulted principally from net income, depreciation and
amortization expense, inventories and accounts payable being offset by equity
income of corporate joint ventures, trade excluding corporate joint ventures,
prepaid expenses, gain on sale of assets and accrued liabilities.
Net cash used in investing activities
for the three months ended November 30, 2007 was $20,419 which comprised of
proceeds from the dividends received from corporate joint ventures, offset by
additions to property and equipment, loans made and investments in joint
ventures. Net cash provided by investing activities for the three months ended
November 30, 2006 was $135,698, which resulted from additions to property and
equipment and industrial patents, offset by proceeds from the sale of assets and
dividends received from corporate joint ventures.
Net cash provided by financing
activities for the three months ended November 30, 2007 was $807,418, which
resulted primarily from borrowings on the line of credit, proceeds from the
employee stock purchase plan and bank overdrafts. Net cash provided by financing
activities for the three months ended November 30, 2006 was $337,481, which
resulted primarily from borrowings on the line of credit, offset by repayment of
bank overdrafts.
Capital Expenditures and
Commitments
. NTIC had no material lease
commitments as of November 30, 2007, except a lease agreement entered into by
NTI Facilities, Inc., a subsidiary of NTIC, for approximately 16,994 square feet
of office, manufacturing, laboratory and warehouse space in Beachwood, Ohio,
requiring monthly payments of $17,500, which are adjusted annually according to
the annual consumer price index, through November 2014.
NTIC moved its corporate headquarters
in September 2006. NTIC purchased the real estate and 40,000 square feet
building in which its new corporate headquarters is located pursuant to a
like-kind exchange transaction within the meaning of Section 1031 of the
Internal Revenue Code of 1986, as amended, for a purchase price of $1,475,000.
To finance the transaction, NTIC obtained a secured term loan in the principal
amount of $1,275,000. The term loan matures on May 1, 2011, bears interest at a
fixed rate of 8.01% and is payable in 59 monthly installments equal to
approximately $10,776 (inclusive of principal and interest) commencing June 1,
2006. All of the remaining unpaid principal and accrued interest is due and
payable on the May 1, 2011 maturity date. The loan is secured by a first lien on
the real estate and building.
23
NTIC sold the real property and
building in which NTICs former Lino Lakes corporate headquarters was located
for a purchase price of $870,000 on September 8, 2006. The net book value of the
building held for sale was $89,636 and the closing costs and fees associated
with the sale of the property was $46,571. The gain on sale of the property was
$724,495.
NTIC has no post-retirement benefit
plan and does not anticipate establishing any post-retirement benefit program.
Off-Balance Sheet
Arrangements
NTIC does not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet financial
arrangements. As such, NTIC is not materially exposed to any financing,
liquidity, market or credit risk that could arise if NTIC had engaged in such
arrangements.
In fiscal 1999, a subsidiary of NTIC,
NTI Facilities, Inc., acquired a one-third ownership of Omni-Northern Ltd.,
which owns and operates a rental property located at 23205 Mercantile Road,
Beachwood, Ohio. The property has an approximate value of $2,205,000, based upon
the cash-to-mortgage acquisition price of the property paid in fiscal 2000. NTIC
has guaranteed up to $329,082 of Omni-Northern Ltd.s $1,903,571 mortgage
obligation with National City Bank, Cleveland, Ohio. The building is fully
leased at present.
Inflation and Seasonality
Inflation in the U.S. and abroad
historically has had little effect on NTICs business, results of operations or
financial condition. NTICs business has not historically been
seasonal.
Market Risk
NTIC is exposed to some market risk
stemming from changes in foreign currency exchange rates, commodity prices and
interest rates.
NTIC is exposed to foreign currency
exchange rate risk arising from its investments in its foreign corporate joint
ventures and holding companies since NTICs fees for technical support and other
services and dividend distributions from these foreign entities are paid in
foreign currencies. NTICs principal exchange rate exposure is with the Euro,
the Japanese yen, Korean won and the English pound against the U.S. dollar. NTIC
does not hedge against its foreign currency exchange rate risk. Since NTICs
investments in its corporate joint ventures and holding companies 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 of joint ventures and holding companies reflected in
NTICs consolidated statement of income.
Some raw materials used in NTICs
products are exposed to commodity price changes. The primary commodity price
exposures are with a variety of plastic resins.
NTICs revolving credit facility bears
interest at a rate based on LIBOR and thus may subject NTIC to some market risk
on interest rates. The outstanding balance under this facility as of November
30, 2007 was $693,000.
Related Party Transactions
See note 15 to NTICs consolidated
financial statements for related party transaction disclosure.
24
Critical Accounting Policies
The preparation of NTICs 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 companys most critical accounting policies as those that are most
important to the portrayal of its financial condition and results of operations,
and 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.
Investments in Corporate Joint
Ventures
NTICs investments in corporate joint
ventures are accounted for using the equity method, except for React-NTI LLC
which has been fully consolidated, due to the adoption of FIN 46R. Periodically,
NTIC evaluates the investments for any impairment and assesses the future cash
flow projections to determine if there are any going concern issues. If an
investment were determined to be impaired, then a reserve would be created to
reflect the impairment on the financial results of NTIC. NTICs evaluation of
its investments in corporate joint ventures requires NTIC to make assumptions
about future cash flows of its corporate joint ventures. These assumptions
require significant judgment and actual results may differ from assumed or
estimated amounts. NTICs investments in corporate joint ventures were
$15,290,974 and $13,602,842 as of November 30, 2007 and August 31, 2007,
respectively.
Principles of
Consolidation
The consolidated financial statements
include the accounts of Northern Technologies International Corporation, its
wholly owned subsidiaries, NTI Facilities, Inc. and Northern Technologies
Holding Company, LLC, and its 75% owned subsidiary, React-NTI LLC. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Accounts and Notes
Receivable
NTIC values accounts and notes
receivable, net of an allowance for doubtful accounts. Each quarter, NTIC
prepares an analysis of its ability to collect outstanding receivables that
provides a basis for an allowance estimate for doubtful accounts. In doing so,
NTIC evaluates the age of its receivables, past collection history, current
financial conditions of key customers, and economic conditions. Based on this
evaluation, NTIC establishes a reserve for specific accounts and notes
receivable that it believes are uncollectible, as well as an estimate of
uncollectible receivables not specifically known. Deterioration in the financial
condition of any key customer or a significant slowdown in the economy could
have a material negative impact on NTICs ability to collect a portion or all of
the accounts and notes receivable. NTIC believes that an analysis of historical
trends and its current knowledge of potential collection problems provide NTIC
with sufficient information to establish a reasonable estimate for an allowance
for doubtful accounts. However, since NTIC cannot predict with certainty future
changes in the financial stability of its customers, NTICs actual future losses
from uncollectible accounts may differ from its estimates. In the event NTIC
determined that a smaller or larger uncollectible accounts reserve is
appropriate, NTIC would record a credit or charge to selling expense in the
period that it made such a determination. Accounts receivable have been reduced
by an allowance for uncollectible accounts of $20,000 and $30,000 at November
30, 2007 and August 31, 2007, respectively.
Revenue
Recognition
In recognizing revenue, NTIC applies
the provisions of the Securities and Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition. NTIC recognizes revenue from the sale of
its products when persuasive evidence of an arrangement exists, the product has
been delivered, the price is fixed and determinable and
collection of the resulting receivable is reasonably assured. These criteria are
met at the time of shipment when risk of loss and title pass to the customer or
distributor.
25
Foreign Currency Translation
(Accumulated Other Comprehensive Income)
The functional currency of each
international corporate joint venture is the applicable local currency. The
translation of the applicable foreign currencies into U.S. dollars is performed
for balance sheet accounts using current 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.
Stock-Based
Compensation
In December 2004, FASB published FASB
Statement No. 123 (revised 2004), Share-Based Payment. FAS 123(R) requires
that the compensation cost relating to share-based payment transactions,
including grants of employee stock options, be recognized in financial
statements. That cost will be measured based on the fair value of the equity or
liability instruments issued. FAS 123(R) covers a wide range of share-based
compensation arrangements including stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. FAS 123(R) is a replacement of FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and its related interpretive guidance. The effect of
FAS 123(R) is to require entities to measure the cost of employee services
received in exchange for stock options based on the grant-date fair value of the
award, and to recognize the cost over the period the employee is required to
provide services for the award. FAS 123(R) permits entities to use any
option-pricing model that meets the fair value objective in FAS 123(R). NTIC
implemented FAS 123(R) on September 1, 2006, using the modified prospective
transition method.
Forward-Looking Statements
This report contains not only
historical information, but also forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the safe harbor
created by those sections. In addition, NTIC or others on its behalf may make
forward-looking statements from time to time in oral presentations, including
telephone conferences and/or web casts open to the public, in press releases or
reports, on NTICs Internet web sites or otherwise. All statements other than
statements of historical facts included in this report that address activities,
events or developments that NTIC expects, believes or anticipates will or may
occur in the future are forward-looking statements including, in particular, the
statements about NTICs plans, objectives, strategies and prospects regarding,
among other things, its financial condition, results of operations and business.
NTIC has identified some of these forward-looking statements with words like
believe, may, could, might, forecast, possible, potential,
project, will, should, expect, intend, plan, predict,
anticipate, estimate, approximate or continue and other words and terms
of similar meaning. These forward-looking statements may be contained in the
notes to NTICs consolidated financial statements and elsewhere in this report,
including under the heading Part 1. Financial Information. Item 2. Managements
Discussion and Analysis or Plan of Operation.
NTIC wishes to caution readers not to
place undue reliance on any forward-looking statement that speaks only as of the
date made and to recognize that forward-looking statements are predictions of
future results, which may not occur as anticipated. Actual results could differ
materially from those anticipated in the forward-looking statements and from
historical results, due to the risks and uncertainties described under the
heading Risk Factors below, as well as others that NTIC may consider
immaterial or does not anticipate at this time. Although NTIC believes that the
expectations reflected in its forward-looking statements are reasonable, NTIC
does not know whether its expectations will prove correct. NTICs expectations
reflected in its forward-looking statements can be affected by inaccurate
assumptions NTIC might make or by known or unknown risks
and uncertainties, including those described below under the heading Risk
Factors. The risks and uncertainties described under the heading Risk Factors
below are not exclusive and further information concerning NTIC and its
business, including factors that potentially could materially affect its
financial results or condition, may emerge from time to time. NTIC assumes no
obligation to update forward-looking statements to reflect actual results or
changes in factors or assumptions affecting such forward-looking statements.
NTIC advises you, however, to consult any further disclosures it may make on
related subjects in its Annual Reports on Form 10-KSB, Quarterly Reports on Form
10-QSB and Current Reports on Form 8-K that NTIC files with or furnishes to the
Securities and Exchange Commission.
26
Risk Factors
The following are the most significant
factors known to NTIC that could materially adversely affect its business,
financial condition or operating results.
A significant portion of NTICs
historical consolidated net sales were dependent upon a single customer, which
has indicated a desire not to purchase any future products from NTIC or its
subsidiaries. As a result, NTICs future consolidated net sales will be
materially harmed.
A customer of NTICs React-NTI, LLC
joint venture accounted for, in the aggregate, approximately 28.0% and 26.6% of
NTICs consolidated net sales for the fiscal year ended August 31, 2007 and
2006. As described in more detail under the heading Part I. Financial
Information. Item 2. Managements Discussion and Analysis or Plan of
OperationRecent Development, during fourth quarter of fiscal 2007, this
customer notified React that it would place future orders for Reacts remaining
inventory of ink additives, but that after such inventory was purchased, the
customer would not place any future orders. The loss of this customer had a
material adverse impact on NTICs consolidated net sales during the first
quarter of fiscal 2008 and NTIC anticipates that the loss of this customer will
continue to have a material adverse impact on NTICs consolidated net sales
thereafter. However, since the margins on Reacts sales of the ink additives to
this customer were extremely small, the loss of this customer did not have a
material adverse effect on NTICs consolidated net income for the first quarter
of fiscal 2008 and NTIC does not expect that the anticipated continued decrease
in net sales by React will have a material adverse effect on NTICs future
consolidated net income.
No assurance can be provided, however, that the loss of this
customer will not have a material adverse effect on NTICs future consolidated
net income.
The automotive industry in the
United States has experienced contraction in recent years thus resulting in
decreased demand for NTICs Zerust
®
products in the United
States, which has adversely affected and may continue to adversely affect NTICs
net sales from North American operations and net income.
During the fiscal year ended August 31,
2007 and during the three months ended November 30, 2007, over 70% and 75.9%,
respectively, of NTICs consolidated net sales were derived from the sales of
Zerust
®
rust and corrosion inhibiting packaging products and services. Most of these
products and services were sold to customers in the automotive industry and to a
lesser extent to customers in the electronics, electrical, mechanical, military
and retail consumer markets. The automotive industry in the United States has
experienced contraction in recent years and is not expected to improve in the
foreseeable future, which may result in a continued adverse effect on NTICs net
sales from North American operations and net income. While NTIC intends to
increase marketing efforts of its Zerust
®
products and services to customers
in other target industries, no assurance can be provided that NTIC will be
successful in doing so or will recognize increased sales from such new target
markets.
NTIC intends to invest additional
research and development and marketing efforts and resources to expand its
existing product lines and the distribution of its products into new target
markets, such as the oil and gas industry. No assurance can be provided,
however, that NTICs investments in such new products and markets will be
successful and result in additional revenue.
27
In an effort to increase net sales,
NTIC is expanding its corrosion solution products into new markets, such as the
oil and gas industry, and expanding its product lines to include other products,
such as biodegradable and compostable plastics, plastic recycling technology and
corrosion solutions in the oil and gas industry. During fiscal 2008, NTIC
expects to invest additional research and development and marketing efforts and
resources into these new product lines and markets. NTIC anticipates additional
revenue from these new technologies beginning in fiscal year ending August 31,
2008; however, no assurance can be provided that such new businesses will be
successful or that NTIC will be successful in obtaining such additional revenue.
NTICs emerging new businesses
are risky and may not prove to be successful, which could harm NTICs operating
results and financial condition.
NTIC is in the process of expanding its
technologies into other applications and businesses. NTIC is undertaking these
new businesses either directly or through joint ventures. Such new businesses
are risky and subject to all of the risks inherent in the establishment of a new
business enterprise, including:
-
the absence of an operating
history;
-
the lack of commercialized products;
-
insufficient capital and other resources;
-
expected substantial and continual losses for such businesses
for the foreseeable future;
-
the lack of manufacturing experience and limited marketing
experience;
-
an expected reliance on third parties for the
commercialization of some of the proposed products;
-
a competitive environment characterized by numerous,
well-established and well-capitalized competitors; and
-
reliance on key personnel.
A significant portion of NTICs
consolidated net sales, including corporate joint venture sales, are generated
outside of the U.S. and NTIC intends to continue to expand its international
operations. NTICs international operations require management attention and
financial resources and expose NTIC to difficulties and risks presented by
international economic, political, legal, accounting and business factors.
NTIC offers direct on-site technical
support on rust and corrosion issues in over 50 countries, and operates a
marketing, distribution, and technical network through joint ventures in North
America, South America, Europe, Asia and the Middle East. NTICs consolidated
net sales, including the corporate joint venture sales, outside the United
States were 24.1% and 20.8% of its total consolidated net sales for the three
months ended November 30, 2007 and for the fiscal year ended August 31, 2007,
respectively. One of NTICs strategic objectives is to expand its international
operations. NTIC has recently entered into joint ventures in Indonesia, the
Ukraine, Thailand and the United Arab Emirates. The expansion of NTICs existing
international operations and entry into additional international markets
requires management attention and financial resources. Many of the countries in
which NTIC sells its products directly or indirectly through its corporate joint
ventures, are, to some degree, subject to political, economic and/or social
instability. NTICs international operations expose NTIC and its joint venture
partners, representatives, agents and distributors to risks inherent in
operating in foreign jurisdictions. These risks include:
28
-
difficulties in managing and staffing
international operations and the required infrastructure costs including
legal, tax, accounting, information technology;
-
the imposition of additional U.S. and foreign
governmental controls or regulations, new trade restrictions and restrictions
on the activities of foreign agents, representatives and distributors, the
imposition of costly and lengthy export licensing requirements and changes in
duties and tariffs, license obligations and other non-tariff barriers to
trade;
-
the imposition of U.S. and/or international
sanctions against a country, company, person or entity with whom NTIC does
business that would restrict or prohibit continued business with the
sanctioned country, company, person or entity;
-
pricing pressure that NTIC or its corporate joint
ventures may experience internationally;
-
laws and business practices favoring local
companies;
-
currency exchange rate
fluctuations;
-
longer payment cycles and difficulties in
enforcing agreements and collecting receivables through certain foreign legal
systems;
-
difficulties in enforcing or defending
intellectual property rights; and
-
multiple, changing and often inconsistent
enforcement of laws and regulations.
NTIC cannot assure you that one or more
of the factors listed above will not harm its business. Any material decrease in
NTICs international sales could adversely affect NTICs operating
results.
NTICs liquidity and financial
position rely on dividend distributions from its corporate joint ventures, which
if such dividends cease or are reduced could adversely affect NTICs liquidity
and financial position.
NTICs liquidity and financial position
rely on dividend distributions from its corporate joint ventures. During the
three months ended November 30, 2007 and the fiscal year ended August 31, 2007,
NTIC received approximately $336,286 and $1,643,000, respectively, in dividends
from its corporate joint ventures. Because NTIC typically owns only 50% or less
of its joint venture entities, NTIC does not control the decisions of these
entities regarding whether to pay dividends and how much in dividends should be
paid in any given year. Thus, NTIC cannot guarantee that any of its joint
ventures will pay dividends in any given year. The failure of NTICs joint
ventures to declare dividends in amounts typically expected by NTIC could
adversely affect NTICs liquidity and financial position.
Fluctuations in foreign currency
exchange rates could result in declines in NTICs reported consolidated net
sales and net income.
Because the functional currency of
NTICs foreign operations and investments in its foreign corporate joint
ventures and holding companies is the applicable local currency, NTIC is exposed
to foreign currency exchange rate risk arising from transactions in the normal
course of business since NTICs fees for technical support and other services
and dividend distributions from these foreign entities are paid in foreign
currencies. NTICs reported consolidated net sales and net income are subject to
fluctuations in foreign exchange rates. NTICs principal exchange rate exposure
is with the Euro, the Japanese yen, Korean won and the English pound against the
U.S. dollar. NTIC does not hedge against its foreign currency exchange rate
risk. Since NTICs investments in its corporate joint ventures and holding
companies 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 of joint ventures and
holding companies reflected in NTICs consolidated statements of
income.
29
NTICs compliance with U.S.
generally accepted accounting principles and any changes in such principles
might adversely affect NTICs operating results and financial condition. Any
requirement to consolidate NTICs corporate joint ventures or subject them to
compliance with the internal control provisions of the Sarbanes-Oxley Act of
2002 could adversely affect NTICs operating results and financial
condition.
NTIC adopted accounting policy FASB
Interpretation No. 46R (FIN 46R),
Consolidation of
Variable Interest Entities
,
a revision of
FIN 46
effective as of February 28, 2005. As a result of FIN 46R,
NTIC consolidated React-NTI LLC, one of its corporate joint ventures that is 75%
owned by NTIC. If the interpretation of FIN 46R were to change and NTIC were
required to fully consolidate the remaining 28 of its corporate joint ventures
or if NTICs corporate joint ventures otherwise would be required to be in
compliance with the internal control provisions of the Sarbanes-Oxley Act of
2002, NTIC would incur significant additional costs. NTIC estimates that the
costs for each of its corporate joint ventures to become Sarbanes-Oxley
compliant would range between $150,000 to $500,000 and that annual maintenance
expenses would range from $50,000 to $100,000 per year per corporate joint
venture thereafter. In addition, other accounting pronouncements issued in the
future could have a material cost associated with NTICs implementation of such
new accounting pronouncements.
One of NTICs principal
stockholders beneficially owns 24.9% of NTICs outstanding common stock and is
affiliated with NTICs President and Chief Executive Officer and thus may be
able influence matters requiring stockholder approval, including the election of
directors, and could discourage or otherwise impede a transaction in which a
third party wishes to purchase NTICs outstanding shares at a
premium.
As of November 16, 2007, Inter Alia
Holding Company beneficially owned approximately 24.9% of NTICs outstanding
common stock. Inter Alia is an entity owned by, among others, G. Patrick Lynch,
NTICs President and Chief Executive Officer and a director, and Philip M.
Lynch, NTICs former Chairman of the Board and Chief Executive Officer and
current Chairman Emeritus. G. Patrick Lynch is the son of Philip M. Lynch.
Messrs. G.P. Lynch and P.M. Lynch share voting and dispositive power of shares
of NTICs common stock held by Inter Alia Holding Company. As a result of his
share ownership through Inter Alia and his position as President and Chief
Executive Officer and a director of NTIC, Mr. G.P. Lynch may be able to
influence the affairs and actions of NTIC, including matters requiring
stockholder approval, such as the election of directors and approval of
significant corporate transactions. The interests of Messrs. G.P. Lynch and
Inter Alia may differ from the interests of NTICs other stockholders. This
concentration of ownership may have the effect of delaying, preventing or
deterring a change in control of NTIC, could deprive NTICs stockholders of an
opportunity to receive a premium for their common stock as part of a sale or
merger of NTIC and may negatively affect the market price of NTICs common
stock. Transactions that could be affected by this concentration of ownership
include proxy contests, tender offers, mergers or other purchases of common
stock that could give stockholders the opportunity to realize a premium over the
then-prevailing market price for shares of NTICs common stock.
NTIC is currently involved in
litigation over its trademark on the use of the color Yellow in corrosion
inhibiting packaging, the loss of which could adversely affect NTICs
business.
One of NTICs important trademarks for
its business is the trademark for the color Yellow. NTIC is currently involved
in litigation against a competitor over this trademark. NTIC has also in the
past successfully prosecuted infringement claims against other competitors and
third parties for their use of the color Yellow. If NTIC were to lose this
current or any future litigation over its trademark for the color Yellow, NTIC
could be in a more difficult position to enforce its rights to this trademark in
other countries and against other third parties. NTIC believes that the loss of
its trademark for the color Yellow could have an adverse effect on NTICs
business.
3
0
NTICs business, properties and
products are subject to governmental regulation and taxes with which compliance
may require NTIC to incur expenses or modify its products or operations and may
expose NTIC to penalties for non-compliance. Governmental regulation may also
adversely affect the demand for some of NTICs products and NTICs operating
results.
NTICs business, properties and
products are subject to a wide variety of international, federal, state and
local laws, rules, taxes and regulations relating to the protection of the
environment, natural resources, and worker health and safety and the use,
management, storage, and disposal of hazardous substances, wastes and other
regulated materials. These laws, rules and regulations may affect the way NTIC
conducts its operations, and the failure to comply with these regulations could
lead to fines and other penalties. Because NTIC owns and operates real property,
various environmental laws also may impose liability on NTIC for the costs of
cleaning up and responding to hazardous substances that may have been released
on NTICs property, including releases unknown to NTIC. These environmental laws
and regulations also could require NTIC to pay for environmental remediation and
response costs at third-party locations where NTIC disposed of or recycled
hazardous substances. NTICs future costs of complying with the various
environmental requirements, as they now exist or may be altered in the future,
could adversely affect NTICs financial condition and operating results. NTIC is
also subject to other international, federal and state laws, rules and
regulations, the future non-compliance of which may harm NTICs business or may
adversely affect the demand for some of its products. Changes in laws and
regulations, including changes in accounting standards and taxation changes,
including tax rate changes, new tax laws, revised tax law interpretations, also
may adversely affect NTICs operating results.
NTIC intends to grow its business
through additional joint ventures, alliances and acquisitions, which could be
risky and harm its business.
One of NTICs growth strategies is to
expand its business by entering into additional joint ventures and alliances and
acquiring businesses, technologies and products that complement or augment
NTICs existing products. The benefits of a joint venture, alliance or
acquisition may take more time than expected to develop, and NTIC cannot
guarantee that any future joint ventures, alliances or acquisitions will in fact
produce the intended benefits. In addition, joint ventures, alliances and
acquisitions involve a number of risks, including:
-
diversion of managements
attention;
-
difficulties in assimilating the operations and
products of an acquired business or in realizing projected efficiencies, cost
savings and revenue synergies;
-
potential loss of key employees or customers of
the acquired businesses or adverse effects on existing business relationships
with suppliers and customers;
-
adverse impact on overall profitability if
acquired businesses do not achieve the financial results projected in NTICs
valuation models;
-
reallocation of amounts of capital from other
operating initiatives and/or an increase in NTICs leverage and debt service
requirements to pay the acquisition purchase prices, which could in turn
restrict NTICs ability to access additional capital when needed or to pursue
other important elements of NTICs business strategy;
-
inaccurate assessment of undisclosed, contingent
or other liabilities or problems and unanticipated costs associated with the
acquisition; and
-
incorrect estimates made in the accounting for
acquisitions, incurrence of non-recurring charges and write-off of significant
amounts of goodwill that could adversely affect NTICs operating
results.
3
1
NTICs ability to grow through joint
ventures, alliances and acquisitions will depend, in part, on the availability
of suitable opportunities at an acceptable cost, NTICs ability to compete
effectively for these opportunities and the availability of capital to complete
such transactions.
NTIC relies on its independent
distributors, manufacturers sales representatives and corporate joint ventures
to market and sell its products.
In addition to its direct sales force,
NTIC relies on its independent distributors, manufacturers sales
representatives and corporate joint ventures to market and sell its products in
the United States and internationally. NTICs independent distributors,
manufacturers sales representatives and joint venture partners might terminate
their relationship with NTIC, or devote insufficient sales efforts to NTICs
products. NTIC does not control its independent distributors, manufacturers
sales representatives and joint ventures and they may not be successful in
implementing NTICs marketing plans. NTICs failure to maintain its existing
relationships with its independent distributors, manufacturers sales
representatives and joint ventures, or its failure to recruit and retain
additional skilled independent distributors, manufacturers sales
representatives and joint venture partners could have an adverse effect on
NTICs operations.
NTIC has very limited staffing
and will continue to be dependent upon key employees.
NTICs success is dependent upon the
efforts of a small management team and staff. NTICs future success will also
depend in large part on its ability to retain these individuals and identify,
attract and retain other highly qualified managerial, technical, sales and
marketing and customer service personnel. Competition for these individuals is
intense, especially in the markets in which NTIC operates. NTIC may not succeed
in identifying, attracting and retaining these personnel. The current
management, other than the President and Chief Executive Officer, do not have
any material stock ownership in NTIC or any contractual obligation to maintain
their employment with us. The loss or interruption of services of any of NTICs
key personnel, the inability to identify, attract or retain qualified personnel
in the future, delays in hiring qualified personnel, or any employee slowdowns,
strikes or similar actions could make it difficult for NTIC to manage its
business and meet key objectives, which could harm NTICs business, financial
condition and operating results.
NTIC relies on its management
information systems for inventory management, distribution and other functions.
If these information systems fail to adequately perform these functions or if
NTIC experiences an interruption in their operation, NTICs business and
operating results could be adversely affected.
The efficient operation of NTICs
business is dependent on its management information systems. NTIC relies on its
management information systems to effectively manage accounting and financial
functions; manage order entry, order fulfillment and inventory replenishment
processes; and to maintain its research and development data. The failure of
management information systems to perform as anticipated could disrupt NTICs
business and product development and could result in decreased sales, causing
NTICs business and operating results to suffer. In addition, NTICs management
information systems are vulnerable to damage or interruption from natural or
man-made disasters, terrorist attacks and attacks by computer viruses or
hackers, or power loss or computer systems, Internet, telecommunications or data
network failure. Any such interruption could adversely affect NTICs business
and operating results.
NTICs reliance upon patents,
trademark laws, trade secrets and contractual provisions to protect its
proprietary rights may not be sufficient to protect its intellectual property
from others who may sell similar products.
NTIC holds patents relating to various
aspects of its products and believes that proprietary technical knowhow is
critical to many of its products. Proprietary rights relating to NTICs products
are protected from unauthorized use by third parties only to the extent that
they are covered by valid and enforceable patents or are maintained in
confidence as trade secrets. NTIC cannot be certain that it will be issued any
patents from any pending or future patent applications owned by or licensed to
NTIC or that the claims allowed under any issued patents will be sufficiently
broad to protect its technology. In the absence of patent protection, NTIC may
be vulnerable to competitors who attempt to copy NTICs products or gain access
to its trade secrets and know-how. NTICs competitors may initiate litigation to
challenge the validity of NTICs patents, or they may use their resources to
design comparable products that do not infringe NTICs patents. NTIC may incur
substantial costs if its competitors initiate litigation to challenge the
validity of its patents or if it initiates any proceedings to protect its
proprietary rights and if the outcome of any such litigation is unfavorable to
NTIC, its business and operating results could be materially adversely
affected.
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In addition, NTIC relies on trade
secrets and proprietary know-how that it seeks to protect, in part, by
confidentiality agreements with its employees, and consultants. These agreements
may be breached and NTIC may not have adequate remedies for any such breach.
Even if these confidentiality agreements are not breached, NTICs trade secrets
may otherwise become known or be independently developed by
competitors.
If NTIC is unable to continue to
enhance existing products and develop and market new products that respond to
customer needs and achieve market acceptance, NTIC may experience a decrease in
demand for its products, and its business could suffer.
One of NTICs strategies is to enhance
its existing products and develop and market new products that respond to
customer needs. NTIC may not be able to compete effectively with its competitors
unless NTIC can keep up with existing or new products in the markets in which it
competes. Product development requires significant financial and other
resources. Although in the past NTIC has implemented lean manufacturing and
other productivity improvement initiatives to provide investment funding for new
products, NTIC cannot assure you that it will be able to continue to do so in
the future. Product improvements and new product introductions also require
significant planning, design, development and testing at the technological,
product, and manufacturing process levels and NTIC may not be able to timely
develop product improvements or new products. NTICs competitors new products
may beat NTICs products to market, may be more effective or less expensive than
NTICs products or render NTICs products obsolete. Any new products that NTIC
may develop may not receive market acceptance or otherwise generate any
meaningful net sales or profits for NTIC relative to its expectations, based on,
among other things, existing and anticipated investments in manufacturing
capacity and commitments to fund advertising, marketing, promotional programs,
and research and development.
NTIC faces intense competition in
almost all of its product lines, including from competitors that have
substantially greater resources than NTIC does. NTIC cannot assure you it will
be able to compete effectively, which would harm its business and operating
results.
NTICs products are sold in highly
competitive markets throughout the world. The principal competitive factors in
NTICs markets are pricing, product innovation, quality and reliability, product
support and customer service and reputation. NTIC often competes with numerous
manufacturers, many of who have substantially greater financial, marketing, and
other resources than NTIC does. As a result, they may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the promotion and sale of their products than
NTIC can. In addition, competition could increase if new companies enter the
market or if existing competitors expand their product lines or intensify
efforts within existing product lines. NTICs current products, products under
development and its ability to develop new and improved products may be
insufficient to enable NTIC to compete effectively with its competitors. NTIC
cannot assure you that it will be able to compete effectively, which would harm
its business and operating results.
NTIC is currently involved in
several litigation matters and an audit matter with the U.S. Internal Revenue
Service, which are costly to defend and the resolution of which could have a
material adverse effect on NTICs operating results and financial
position.
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NTIC is party to several litigation
matters and an audit matter with the U.S. Internal Revenue Service as described
in more detail in Note 17 to NTICs consolidated financial statements. Such
litigation and audit matter are costly and may adversely affect NTICs operating
results and financial condition. In addition, the resolution of such matters may
also have a material adverse effect on NTICs operating results and financial
condition.
NTIC is exposed to risks relating
to its evaluation of its internal control over financial reporting as required
by Section 404 of the Sarbanes-Oxley Act.
Changing laws, regulations and
standards relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002 and related and other recent regulations implemented
by the SEC and The American Stock Exchange, are creating uncertainty for public
companies, increasing legal and financial compliance costs and making some
activities more time consuming. NTIC will be evaluating its internal controls
systems to allow management to report on, and its independent registered public
accounting firm to attest to, NTICs internal control over financial reporting.
NTIC will be performing the system and process evaluation and testing (and any
necessary remediation) required to comply with the management certification and
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. NTIC
cannot be certain as to the timing of completion of its evaluation, testing and
remediation actions or the impact of the same on its operations since there is
presently no precedent available by which to measure compliance adequacy. If
NTIC is not able to implement the requirements of Section 404 in a timely manner
or with adequate compliance, NTIC may be subject to sanctions or investigation
by regulatory authorities, including the SEC or The American Stock Exchange.
This type of action could adversely affect NTICs financial results or
investors confidence in NTIC, and could cause NTICs stock price to decline. In
addition, the controls and procedures that NTIC may implement may not comply
with all of the relevant rules and regulations of the SEC and The American Stock
Exchange. If NTIC fails to develop and maintain effective controls and
procedures, it may be unable to provide the required financial information in a
timely and reliable manner. In addition, NTICs efforts to comply with Section
404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding its
assessment of its internal control over financial reporting and its independent
registered public accounting firms report on that assessment will require the
commitment of significant financial and managerial resources.
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