Good day and thank you for standing by. Welcome to the NTIC Conference Call and Webcast. As part of the discussion today, the representatives from NTIC will be making certain forward-looking statements regarding NTIC’s future financial and operating results as well as their business plans, objectives and expectations.

Please be advised that these forward-looking statements are covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and that NTIC desires to avail itself to the protections of the Safe Harbor for these statements.

Please also be advised that actual results could differ materially from those stated or implied by the forward-looking statements due to certain risks and uncertainties, including those described in NTIC’s most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and recent press releases.

Please read these reports and other future filings that NTIC will make with the SEC. NTIC disclaims any duty to update or revise its forward-looking statements. I would now like to hand the conference over to your host today, Patrick Lynch. Please go ahead..

Good morning. I am Patrick Lynch, NTIC’s CEO and I am here with Matt Wolsfeld, NTIC’s CFO. Please note that a press release regarding our first quarter fiscal 2022 financial results was issued earlier this morning and is available at ntic.com. Let me begin by wishing everyone a healthy and prosperous 2022 New Year.

I’d also like to remind everyone of our upcoming Annual Meeting of Stockholders on January 21. Please note, however, that although the meeting will be held in person due to the COVID-19 pandemic, we are strongly encouraging all stockholders to vote by proxy in advance.

The safety and well-being of our stockholders as well as our employees is extremely important and we believe that we will be able to better comply with the CDC and state safety guidelines if attendance is kept to an absolute minimum.

And the meeting itself is kept as short as possible by only reporting the election results and not making any business presentation this year.

Now, for the remainder of this call, we will review various key aspects of our fiscal 2022 first quarter financial results, provide a brief business update, and then conclude with a question-and-answer session.

Overall, fiscal 2022 sales are off to a record start as we experienced strong demand during first quarter across many of our global markets, which is very encouraging.

We are also excited about our first quarter announcement that we acquired the remaining 50% ownership interest in Harita-NTI, our ZERUST joint venture in India, which we refer to as ZERUST India.

The financial results of ZERUST India are now included in our consolidated financial statements effective as of September 1, and therefore, for the entire first quarter of fiscal 2022. As a result, sales from ZERUST India are consolidated within our income statement and are no longer accounted for through joint venture operating income.

This transaction also resulted in several one-time financial charges and accounting adjustments that Matt will review in more detail in his prepared remarks.

A strong demand we experienced during first quarter led to a 42.4% increase in our total consolidated net sales as compared to the first quarter ended November 30, 2020 to a quarterly record of $18.2 million.

The year-over-year increase in consolidated sales was primarily a result of sales growth across all of the company’s product categories due to higher global demand and the recovery from the COVID-19 pandemic as well as contribution from ZERUST India.

For first quarter of fiscal 2022, ZERUST India contributed $2,453,000 in sales to NTIC’s consolidated net sales. Even excluding the incremental sales from ZERUST India, we still experienced strong organic growth.

That being said, NTIC has not been immune to significant inflationary pressures, which has affected the cost of our raw materials and labor as well as intense friction across our global supply chain and the impact of the continuing COVID-19 pandemic.

Unfortunately, our profitability lagged during the first quarter due to several one-time items associated with the ZERUST India transaction as well as higher raw material, freight and labor expenses.

While we plan to implement certain measures to address these inflationary pressures, we anticipate these measures taking effect during the second half of our fiscal 2022. So, with this overview, let’s begin to examine the drivers for the first quarter in more detail.

For the first quarter ended November 30, 2021, our total consolidated net sales increased 42.4% to a quarterly record of $18.2 million as compared to the first quarter ended November 30, 2020.

Broken down by business units, this included a 72.7% increase in ZERUST oil and gas net sales, a 47.3% increase in Natur-Tec net sales, and a 38.9% increase in ZERUST industrial net sales. Total net sales for the fiscal 2022 first quarter by our joint ventures, which we do not consolidate in our financial statements were $26.8 million.

This is an increase of 1% when compared to the same period last fiscal year and demonstrating continued strength in the global demand for our products for both existing and new – from both existing and new customers.

Fiscal 2022 first quarter net sales by our wholly owned NTIC China subsidiary decreased 10.7% to $4.1 million over the first quarter of fiscal 2021. We believe the year-over-year decline in NTIC China sales was primarily due to COVID-19 related lockdowns and weaker economic conditions in China.

Despite the near-term volatility within this market, we continue to believe China will likely become our largest geographic market in the coming years. To support this significant opportunity, our new facility in Shanghai, China is expected to open soon and support our R&D production, sales and marketing, and training efforts throughout the region.

Moving on to our ZERUST oil and gas product group, I am encouraged by the continued progress we are making within this large and compelling market. First quarter fiscal 2022 ZERUST oil and gas sales increased 72.7% over the prior fiscal year period.

We continue to see higher growth and market interest globally across our oil and gas solutions, which include applications to protect above ground oil storage tanks and pipeline casings from corrosion. We expect oil and gas to track above fiscal 2021 sales throughout the remainder of fiscal 2022.

Turning to our Natur-Tec bioplastics business, fiscal 2022 first quarter Natur-Tec sales were $3.8 million, a 47.3% increase over the prior fiscal year period. This is the highest level of quarterly NTI – quarterly Natur-Tec sales since the COVID-19 pandemic began 2 years ago.

However, we expect quarterly volatility will remain over the near-term as the COVID-19 pandemic continues and large users of compostable plastics cycle in and out of lockdowns. We are operating at limited capacities. Our long-term prospects within the worldwide compostable plastics market are exciting.

We continue to focus our efforts on developing custom solutions for specific customer product needs that aren’t available elsewhere. And we remain optimistic about Natur-Tec’s strong position within this large and compelling compostable plastics market.

So, to conclude my prepared remarks, we are encouraged by the record sales growth we experienced during the first quarter and are diligently working to improve our profitability.

Our first quarter sales growth continued to benefit from our geographic end market and product diversification strategies, which is supported by our robust balance sheet, experienced management team and asset-light business model.

While considerable global uncertainty remains, we believe NTIC is on track for another strong year of sales growth and profitability in fiscal 2022. With this overview, let me now turn the call over to Matt Wolsfeld to summarize our financial results for the fiscal 2022 first quarter..

Thanks, Patrick. The quarter ended November 30, 2021 represents the first quarter since we completed the acquisition of the remaining 50% ownership interest in our Indian joint venture, which we refer to as ZERUST India for $6.25 million.

We funded the purchase price with a combination of cash on hand and borrowings under our revolving line of credit, which was also increased in connection with the transaction to $5 million.

As a result, the acquisition ZERUST India’s financial results are now reflected in our consolidated financial statements effective September 1, the beginning of our first quarter of fiscal 2022.

In addition, during the fiscal 2022 first quarter, we accounted for a gain on the acquisition of $3.95 million during the quarter and this is reflected in the line item remeasurement gain on acquisition of equity method investee on our consolidated statement of operations.

Looking at our consolidated results in more detail, compared to prior fiscal year period, NTIC’s consolidated net sales increased 42.4% in the fiscal 2022 first quarter to a quarterly record, because of the positive trends Patrick reviewed in his prepared remarks and the incremental sales from ZERUST India.

While we expect these positive trends to continue throughout fiscal 2022, we anticipate some softness in our sales during the short-term primarily a result of the continued COVID-19 pandemic and its variants.

Despite a 1% increase in first quarter sales across our global joint ventures, first quarter joint venture operating income declined 12.3% compared to the prior fiscal year period. This decrease was primarily attributable to the acquisition of the remaining 50% of ZERUST India and lower profitability at the company’s joint ventures.

Total first quarter fiscal 2022 operating expenses were $7.1 million. The 19.9% increase over the prior fiscal year period was due primarily to the incremental expense due to the ZERUST India acquisition and increased selling expenses associated with higher consolidated sales as well as higher wages, travel expenses and R&D investments.

Operating expenses as a percentage of net sales were 39% compared to 46.3%, the same period last fiscal year.

As illustrated in our first quarter results, ZERUST India, the ZERUST India transaction, increased our net sales and operating expenses, since it has now consolidated with our financial results and decreased our equity and income from joint ventures in which in each case as compared to the same period last fiscal year and we anticipate that the acquisition will continue to have these effects on our financial results during the remainder of fiscal 2022.

Cost of goods sold as a percentage of net sales increased to 69% during the 3 months ended November 30, 2021 compared to 65% during the same period last fiscal year, primarily a result of the price increases on raw materials and increased labor costs. Although as Patrick said, we intend to take certain actions to address inflationary pressures.

We expect these inflationary pressures to persist into at least the second quarter of fiscal 2022 and don’t expect to realize benefits from these actions until the second half of the fiscal 2022.

NTIC reported net income of $4.7 million or $0.48 per diluted share for the fiscal 2022 first quarter compared to $1.3 million or $0.13 per share for the fiscal 2021 first quarter.

Excluding the one-time gain of $3.9 million led to the acquisition of the remaining 50% ownership interest in ZERUST India and other related adjustments, NTIC’s non-GAAP adjusted net income was $780,000 or $0.08 per diluted share for the fiscal 2022 first quarter compared to $1.3 million or $0.13 per diluted share for the same quarter last year.

A reconciliation of GAAP to non-GAAP financial measures is available in our first quarter earnings press release that was issued this morning.

As of November 30 2021, working capital was $25.8 million, including $8 million in cash and cash equivalents and $5,000 in available-for-sale securities compared to $25.2 million, including $7.7 million in cash and cash equivalents and $5,000 in available-for-sale securities as of August 31, 2021.

On November 30, 2021, the company had nearly $22 million in investments in joint ventures, of which approximately 54%, or nearly $11.6 million was in cash with the remaining balance primarily invested in other working capital.

During the fiscal 2022 first quarter, NTIC’s Board of Directors increased our regular quarterly cash dividend by 7.7% to $0.07 per share that was payable on November 17, 2021 to shareholders of record on November 3, 2021.

So, to conclude our prepared remarks, we are focused on making the necessary adjustments to our business to navigate the near-term expense, raw material and supply chain challenges. In addition, we continue to invest across our global operations to support our significant long-term growth opportunities.

While near-term uncertainty appears to have picked up recently, especially in light of the COVID variants, we believe overall fiscal 2022 will be another good year for sales and profitability for NTIC. With this overview, Patrick and I are happy to take any questions..

Thank you. And we do have a question from the line of Tim Clarkson with Van Clemens. Your line is open. Please go ahead..

Hey, guys. Great quarter.

Just wanted to ask, so it’s a little confusing to me, because it looks like when I look at the operational profits, they were much higher, but you are saying with the GAAP, non-GAAP results that the profitability was lower? I mean, what are – what were the one-time expenses that were occurred or are they added into the one-time gain? How did you do that on an accounting basis?.

Well, then the one-time expenses that we had for the transaction are included in the – we broke that out in the non-GAAP calculation that’s in the back of the press release. So, there is some expenses associated with the transaction.

There is new amortization expense that we had in the quarter as far as the amortization of the new intangibles that are on our balance sheet. There is a tax impact from the items we have talked about to add back.

So, those are items that are included in the – to get to the non-GAAP numbers that are included in our normal operating expenses if you are looking at our income statement..

Right.

So, I mean, just looking at it from how far, it looks like you are solidly profitable and you had more intrinsic profitability this quarter than last quarter, but you get all these numbers bouncing back reflecting GAAP and non-GAAP earnings?.

Yes, it’s – I mean, the income statement comparing the 3 months ended fiscal 2022 and prior years, it’s sometimes difficult to reconcile, because of the transaction – because of the transaction that took place in the quarter and also because you are switching from the equity consolidation of ZERUST India to the full consolidation of ZERUST India.

So, you are essentially adding $500,000 plus of expenses to the operating expense line that are we have – that are related to India. You are adding the sales and cost of goods sold to the top line. Then ultimately, you are pulling income out of the joint venture operating line from what previously would have been there related to the consolidation.

So, it’s a little difficult going quarter-to-quarter because of the adjustments. But overall, the main issue we had this quarter is sales were up and sales were solid, sales comparing to fourth quarter last year, the income from – the sales and income from our oil and gas was pretty significant in the fourth quarter.

And so there is a bit of a falloff to first quarter with the revenue that we recognized. And obviously, there is different gross margins that are associated with that.

Beyond that, across the ZERUST industrial market, the gross margins throughout first quarter and what we are seeing kind of in the second quarter is that with the increase in the cost of the resins, the main materials, the main raw materials that go into our product, it was pretty volatile during the last 6 months of the last fiscal year and through the first 3 months of this year.

So, we are at a point where we are making adjustments to account for that and to increase our profitability, but it’s going to take a little bit of time for that to kind of flow through our inventory and get pushed out.

So, the expectations that we are going to be able to increase our gross margins throughout the from kind of now or February on increased gross margins through the industrial products and then also the expectations that we are going to have more sales in the second half of the fiscal 2022 related to oil and gas similar to what we did last year.

And obviously, the gross margins on the oil and gas business are better and stronger than the industrial business. So that should bring back some profitability as well.

So, I would expect that our first and second quarters, there is going to be some, call it, gross margin pressures that we are dealing with because of supply chain issues, because of raw material issues and raw material pricing. But we would expect a lot of that to be ironed out in the second half of the year.

So, we still think we are going to have a very strong year, from a profitability standpoint. Certainly from a sales standpoint, even if you pull out the $2.5 million of revenue that ZERUST India contributed during the first 3 months of the year, we still saw significant increases across the board from a sales standpoint.

And so, that’s something that we were pretty excited about. Specifically, if you look at the revenue from comparing fourth quarter to first quarter, the Natur-Tec sales were up close to 50%. This is going from fourth quarter to first quarter, not first quarter to first quarter, sorry, I misspoke.

The Natur-Tec total sales are up 30%, comparing fourth quarter to first quarter and almost 50% comparing first quarter to first quarter. Similarly, all those sales in oil and gas were down going from fourth quarter to first quarter. They were up 72% comparing the first quarter to first quarter.

So, we are pretty optimistic given where sales are headed and given the measures that we put in place to kind of deal with some of the profitability issues, but we are pretty confident with kind of how we are going forward for the rest of the year..

Sure. So, on the compostable business, noticed when I was in Costco that they are starting to switch to compostable packaging, I think they are using somebody else.

I mean, what would you say is the differentiator for Natur-Tec’s compostable products?.

And the key differentiator we have always had is that when we use or take the compostable resins that are available on the market produced by some very major chemical companies, but they in and of themselves do not have certain mechanical properties that make them easy to manufacture process and also the finished products tend to be weaker if they are just those resin systems used by themselves.

So, we take their resin systems, we add our chemistries to it, which make them easier to process and therefore reduce the cost while increasing the quality and also the finished products have greater mechanical strength and that’s how we differentiate ourselves in the market. And we also don’t go after all of the commodity applications.

We are always seeking to get to find specialty applications, where our technology really differentiates ourselves – differentiates us from the competition, because we can produce certain products that nobody else can..

Sure, sure. Okay, fine. And then one last question just on the oil and gas, I know that you are making some progress with using that technology on specifically on pipelines.

Has anything developed further as far as that goes, or is that just kind of an ongoing thing?.

That’s an ongoing thing. There is no – there is nothing we have developed recently that augments that..

Okay. Alright. Well, good, that was good quarter and I will let somebody ask some questions. Thank you..

Thank you. And our next question comes from the line of Scott Billeadeau with Walrus Partners. Your line is open. Please go ahead..

Hi, guys. Thanks.

A couple of my questions were asked, but on a go forward basis, just as you know, when you – the deals such as the India deal, so everything kind of moves above the line? Was there any difference in kind of what operating profits at India versus several other joint ventures are, or is it kind of in line with what with others as you know based on scale or whatever else you plan on doing there?.

Well, in general, I would say that a lot of our joint ventures experienced some similar – some similar issues with the price of the resin.

Some joint ventures have done better had enable to – and enabled to push the cost of raw materials and dealing with those on to the customers, others have not, when you specifically look at that, that’s just from the JV standpoint.

And pull back and address your India comments, in last year, the contribution of income from zero from India in the first quarter was about $280,000. That was about 50% contribution. This year with the 100% contribution, we had about $420,000.

So, kind of looking at that, ZERUST India was slightly less profitable in the first quarter this year than they were last year, again, dealing with kind of some of the same issues that everybody is dealing with..

Great. Good.

And I guess just outlook for – on the oil and gas side, is there much visibility, pipeline versus tank bottom? Do you got any spread, is that something that you guys can give us a little view on? And I know, the pipeline is a little newer, but any breakdown there at all?.

Yes. I was going to say, I mean what we saw last year with kind of how things rebounded in the second half of the European oil and gas standpoint is there was a significant contribution from the pipeline business.

And I would say that, that’s looking forward, kind of through the remainder of our fiscal year, and a lot of the projects that obviously, we have some visibility into the projects that are going to be happening in the next calendar year, and in the next really eight months of this fiscal year.

I would say it’s a pretty even split between the tank bottom opportunities and the pipeline opportunities that we are working on, which is good.

And if I look at the kind of the opportunities that we have going beyond that, with kind of the interest from – interest that we have seen after the API, technical report that came out and things like that, we are pretty kind of excited about what the opportunity is for oil and gas, I think over the next 12 months to 18 months..

Great. Thanks, guys. Appreciate it..

Sure..

And our next question comes from the line of Gus Richard with Northland. Your line is open. Please go ahead..

Yes. Thanks for taking the question.

Matt, just some unclear, what is the incremental OpEx from India in the first quarter? Is that what you expect going forward?.

Yes. The incremental operating expenses that hit our operating expense line, I want to say about $520,000. And I would expect that to be pretty flat, at least for the next three quarters..

Got it? And then it was notable the weakness in China, and is that a tough comp, is that the auto industry having supply chain issues, can you add a little bit of color on the weakness in that region?.

That’s right. Now the exemplary of the Chinese market and we are having ongoing problems with COVID and other soft misses in their markets, so we expect that to be temporary as the pandemic recovers. But that’s it – that’s what we are facing basically in China..

Okay. That makes sense.

And then in Europe, I noted that car sales were rather weak and I was wondering if the JVs there and your operations there were impacted by that?.

Well, I can speak to – I can speak to XCORE , which is kind of the main, if you are looking at the sale that we have in Europe, that certainly dominates that, what I can say is that and this will be out in our Q as well, that XCORE Germany had sales increases in first quarter compared to last first quarter about 20%.

But their overall income contribution decreased by about 9%. So again, we are seeing some similar issues where we are seeing the opportunities out there.

We are going after a lot of the opportunities, even with some of the supply constraints, it’s just a matter of how to account for the – both the increase in operating expenses that we are seeing and also the gross margin pressure..

Got it.

And then the last one is you have got some cost reduction efforts in place, is also in part of the plan to help gross margins passing on your incremental increase in costs on to year customers?.

Yes. We are doing – we are certainly right in the middle of kind of a more comprehensive analysis of what we can do from a gross margin standpoint. And that’s going to include everything from shipping costs to internal labor issues to prices that we are paying for products to potentially look at in-sourcing certain products to increase gross margins.

Similar things that we are going to be able to do to give us more control over our product, especially given some of the uncertainties out there in the market. Some of the big things that we have seen, it’s been really volatile, has been lead time changes with utilizing some of our subcontractors.

What you typically have is that you may not be – the main ingredient goes new product, but it’s kind of one small ingredient, or once when you are outsourcing certain things, one small component that is difficult to get or the price in that component has increased.

And so there is just a lot more emphasis from our standpoint that has been placed on the procurement cycle to on the purchase side or procurement process, to make sure they have everything you need in a timely manner and be able to turn it around and deliver it to the customers.

And so – and I would say we have spent so much more time over the past six months dealing with supply issues compared to anything that we have previously had to do. And so yes, we are certainly very much aware of what’s going on from a gross margins standpoint and addressing every different aspect of it that we can..

Got it. That makes a lot of sense.

So, would it be fair to assume you are going to have to carry a little bit more inventory going forward just to make sure that you don’t get hit with these disruptions?.

In certain in certain places, yes, I mean for certain products, yes. But similar to what you are seeing when you look at a car lot we are building it as quick as we can, as quick as we can at this point in time. And with sales being up where they are, it’s we are replenishing as quick as we can.

So, there are certain products where we are trying to bring in inventory, but it’s going out the door as fast as it’s coming in..

Okay. Got it. Very good. Thanks so much..

Thank you. And our next question comes from the line of Jim Dowling with Jefferies. Your line is open. Please go ahead..

Yes.

Two questions related to Natur-Tec, the increase in sales that you have reported? Is any of that from new customers obtained in the last three months to six months? And the second question is, can you give us a sense geographically on the sales strength of Natur-Tec?.

You are looking at, I mean yes we are constantly acquiring new customers. I wouldn’t say that we have acquired significantly – significant new customers. But our sales increase reflects obviously recovery of certain customers that had dropped off during the COVID pandemic, but also certain new applications as well.

In terms of geographic locations, right now, our primary geographic markets are North America and Southeast Asia, particularly India, Pakistan, Sri Lanka, and Bangladesh with some increasing business in China.

Although China tends to be a little bit slower right now, because their push towards regulation, particularly in regards to compostable is not as – hasn’t happened as fast as we had expected to originally. But we are also now gaining customers in Europe as well. So, I mean we are diversifying across geographically, and growing in that respect..

What is the breakdown between North American revenues in the rest of the world?.

Matt, are you going to handle it?.

Yes. In the first quarter of 2022, which we just finished sales of Natur-Tec in North America were about $1.4 million. Sales at Natur-Tec in India were a little over $2 million and China sales were about $300,000 plus. So, you are looking at total – for total Natur-Tec revenue of $3.8 million..

Thank you..

Thank you. And we have a follow-up question from the line of Scott Billeadeau with Walrus Partners. Your line is open. Please go ahead..

Thanks. I was just wondering on as you try to do either cost cutting or sourcing, how does that play out across the JVs? Do you have to do a JV by JV, or is there hey, there is common – there is some common chemicals that you buy for all, maybe give us a little sense for what kind of process does that take, as you go across JV by JV..

It’s mostly done on JV-by-JV basis, because the majority of our raw materials are best locally sourced and also manufacturer. Our primary business is packaging. And it doesn’t make a lot of sense to ship empty packaging around the world. So, that’s why we try to manufacture as close to the customer and user as possible..

Got it. So and I assume there is some best practices you can share.

But it is very much a local decision?.

Yes..

Great. Thanks..

Thank you. And I am showing no further questions at this time. And I would like to turn the conference back over to Patrick Lynch for any further or closing remarks..

Just want to – I just want to thank everyone for participating today and your interest in NTIC. Have a great day and I look forward to seeing you again next quarter..

This concludes today’s conference call. Thank you for participating. You may now disconnect..