Good day, ladies and gentlemen, and welcome to the third quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during this conference, please press star and then zero. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Patrick Lynch, President and CEO. Please go ahead, sir.

Good morning. I’m Patrick Lynch, NTIC’s Chief Executive Officer, and I’m here with Matt Wolsfeld, NTIC’s Chief Financial Officer. Please note that our third quarter of fiscal 2015 financial results were included in a press release issued earlier this morning, a copy of which is now available at NTIC.com. During this call, we will review various key aspects of our fiscal 2015 third quarter and year-to-date financial results, give a brief business update, comment on our annual sales and earnings guidance for fiscal 2015, and then conclude with a short question and answer session. As part of the discussion today, we will be making certain forward-looking statements regarding NTIC’s future financial and operating results, as well as our 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 of 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 our forward-looking statements due to certain risks and uncertainties, including those described in our most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q, and our recent press releases. Please read these reports and other future filings that we will make with the SEC, including our third quarterly report on Form 10-Q, which we intend to file with the SEC during the next couple of days. We disclaim any duty to update or revise our forward-looking statements. In the third quarter of fiscal 2015, which ended on May 31, 2015, each of our business units showed a significant year-over-year net sales increase. During this same time period, our new NTIC China subsidiary started operating at a monthly run…

Thanks, Patrick. Sales of NTIC’s Zerust products increased across both our industrial and oil and gas market segments during the nine months ended May 31, 2015 compared to the same period in fiscal 2014. Sales of industrial Zerust corrosion inhibiting products increased over 10% as we experienced increase in demand from both existing and new customers. Sales of Zerust oil and gas solutions increased almost 33% in the nine months ended May 31, 2015 as we completed implementation at multiple new and existing customer sites in North America. Sales of Zerust corrosion inhibiting products to our joint ventures decreased almost 3% during the nine months ended May 31, 2015 compared to the prior fiscal year period. Income provided by our joint venture operations decreased almost 13% to over $9.2 million during the nine months ended May 31, 2015 compared to the prior fiscal year period; however, that was mostly attributable to the termination of our former joint venture in China previously discussed. Lastly, sales of Natur-Tec products increased over 45% to $3.1 million during the nine months ended May 31, 2015 compared to the same period in 2014. Our total operating expenses increased 10% to $13.4 million during the nine months ended May 31, 2015 compared to the prior fiscal year period, primarily due to an increase in selling and general administrative expenses and expense incurred in support of our joint ventures, which as previously mentioned was related primarily to the change in our Chinese operations. Overall net income attributable to NTIC decreased 38% to $1.8 million or $0.39 per diluted common share in the nine months ended May 31, 2015 compared to $0.63 in the prior fiscal year period. As of May 31, 2015, our working capital was $17.3 million, including $3.8 million in cash and cash equivalents and $2.5 million in available for sale securities compared to $17.8 million, including $2.5 million in cash and cash equivalents and $5.5 million in available for sale securities as of August 31, 2014. Turning now to NTIC’s annual guidance, for fiscal year ending August 31, 2015, we continue to expect our net sales to be in the estimated range of $32 million to $34 million, and we continue to expect net income of between $2.8 million to $3.1 million, or between $0.62 and $0.68 per diluted share. With that update, we’ll now answer any questions you may have.

[Operator instructions] Our first question comes from Tim Clarkson with Van Clemens & Company. Your line is open, please go ahead.

Hey guys. Outstanding results, obviously. On the Zerust oil and gas, how many customers would you say you have done business with so far?

I couldn’t give you a number off the top of my head - probably 15 or so?

Are they typically refiners or is it a blend of both refiners and oil and gas producers?

In North America, it’s primarily oil terminal operators, so basically storage.

And so far, how have the tanks have been performing?

Very well. That’s why we’re getting repeat orders from our existing customers; and showing those results to prospective customers, we’re converting those as well. During the last quarter, we finally did our first installation in India and we’re getting also significant new interest out of the Middle East and shipping products.

On the tanks, are you claiming that - I’m just giving you some rough time periods - if an average tank would last 10 years, that you can double the length of the tank? Is that kind of the sales pitch?

The pitch is that we can significantly extend the life of the bottom of the storage tank and protect it from leaking. When you have these leaks, obviously the requirement is by regulation that the tank operators, as soon as they become aware of a leak in the bottom, they have to shut down the tank, take it out of operation and do a full maintenance and repair operation on it. That costs them a ton of money, so what we’re basically saying is we’re dramatically increasing their up time and the ability to use their capacity to the fullest, which saves them millions.

One more question. On the compostable end, what would you say is the differentiator between you and some of your competitors?

It depends on which product line you’re talking about. In general, we say that with our specialty formulations in resins, they are easier to process and provide greater strength in the finished product, so you can basically make compostable products cheaper and better then the competitive offerings.

Okay, I’m good. Thanks.

Thank you, and as a reminder, if you have a question at this time, please press star and then one. We have a question from Dick Feldman from Axiom Capital. Your line is open.

Thanks for taking my call, and congrats on a very solid quarter. You’ve mentioned in your press release that the Chinese business has now crossed over into profitability. How do you define that against the -- is that just operating profit, or does that also cover some of the legal expenses and perhaps non-recurring, start-up expenses?

Well, there’s two groups of expenses. What I’m referring to when we talk about the profitability of NTIC China is the monthly net income of the operation. The legal expenses are being paid by NTIC at a corporate level, not at the subsidiary level, so when we talk about switching from being in the red to being in the black, what we’re referring to is that as a standalone entity.

So from previous calls, you stated that it was about $6 million to $7 million a year run rate would be breakeven. Is that still a good number?

Well, there’s kind of three different milestones that we had with the joint venture, with the new subsidiary in China. The first milestone was to hit just an overall--be at an overall monthly run rate of being in the black and being profitable. The second milestone was to get the net income of the entity on a monthly basis to be equivalent to the amount of income that we took in when we owned 30% of the previous joint venture with Tianjin-Zerust. We expect that to happen sometime either towards the end of fourth quarter or beginning of first quarter of 2016. The next milestone we have is to hit is sales level that would be equivalent to what the sales were that we previously had through the joint venture in China. So we’ve crossed the first milestone of the subsidiary hitting profitability, and we feel like we’re on track to hit the second milestone at some point soon.

Thank you. Our next question comes from the line of Jerry Wells [ph], who is a private investor. Please go ahead.

Morning guys. My question relates to kind of a breakeven point for both Natur-Tec and the tank business, if you break it down that way. When do you expect that you’ll kind of cross the positive cash flow, whatever, how you look at it in those two divisions?

Well, from a Natur-Tec standpoint, we’ve always been pretty upfront with everybody, saying that it’s a volume-based business because the margins are not as large as they are with our traditional Zerust product, so the breakeven point for Natur-Tec is somewhere in the -- right around probably $5 million, and that’s something that we certainly plan to be at breakeven or better during fiscal 2016. When we look at our strategic planning and we look at where we want to be, with the increase in sales coming from Natur-Tec India and with the significant increase in sales that’s happening across North America because of all the legislative changes and mandates that have taken place. We certainly see that there’s a large opportunity, and we certainly see the forecasts of how they are coming in, and what we’re looking for as far as growth goes. So from a Natur-Tec standpoint, it’s performing according to where our budgets are and we’re very happy with how things have played out with Natur-Tec. From an oil and gas standpoint, things have developed a little bit slower this year. We’ve certainly still doubled the output from a number of tanks standpoint, or plan to during the remainder of our fiscal ’15, which was one of the key goals that we had. We certainly feel that our fiscal 2016 for oil and gas will be at or very close to a breakeven level with minimal growth, so with some of the opportunities we’re looking at, we could certainly be a profitability level with oil and gas that would have a positive net impact on our bottom line, rather than both those entities being at a loss position, which they have been since we started in both of the groups.

Thanks, and then just one last question related to that is, have you looked at any kind of a joint venture in the U.S. on the distribution and marketing side with either Natur-Tec or the tank business, you know, where you got some big sales force or you could license somebody or whatever to kind of accelerate the revenue growth for either side of the business, Natur-Tec or the tank business?

Let me address both of those individually. With respect to Natur-Tec in the United States, we certainly have partnered with some very large both regional and national distribution companies, and that is one of the reasons we’ve seen such a significant growth in the Natur-Tec products. Similarly, we are in cooperation with a very large oil service company and they are now aggressively marketing our solutions to the oil industry. They are already providing other services, some of them also corrosion related, so this service company sees this as a natural fit to their service offerings and look at this as a major growth opportunity for their business, so they are working very hard with us to increase the business, not just in the United States but in other parts of the world as well.

Okay. Thanks a lot, guys. Great job getting China turned around as fast as you have. It’s surprising to me, but very happy to see that. Good job. Thank you.

Thank you. Appreciate that.

Our next question comes from the line of Joe Furst from Furst Associates. Your line is open.

Good morning, gentlemen. A question for Matt. I just wanted to double-check on the China situation. You mentioned that third goal of getting the sales up to the same level they were with your previous partner. If you do that, then am I correct in assuming your profitability would be approximately three times higher than it was before, since you only owned 30%--you got 30% of the profits before, and now you’ll get 100%? Is that--or is there more expense in there which would cut that down?

No, we think it would be in that area.

Okay, and what’s the stumbling block in just getting these same customers, because the other person can’t sell it anymore. Why doesn’t it just immediately transfer over to you?

We are considered by certain companies, just by policy, to be now as a different company, as a new supplier, so basically they are making us go through the supplier evaluation process, just vetting us as a company. It’s just a standard process, so that’s one component of it. Obviously we’re not going to get all of the business. Some of the customers are saying, well, that’s great but given that you’ve had problems with your internal partner, we’ll be looking at Brand X. That’s some business we will also not be recovering. The rest is just, we think, mostly just a matter of time where we’re talking to the customers, showing them that we have our operations in place, that our product quality is where they need it to be, that our services are where they need it to be. It’s just the getting to know you phase where they’re transitioning from the old management and contacts from Tianjin-Zerust to NTIC China.

Got you, okay. Thank you, and congratulations on your progress. You’re doing a good job.

Thanks, appreciate that.

Our next question comes from the line of Greg Weaver from Invicta Capital Management. Your line is open.

Hi, good morning guys. Just following up on the same question again, is China being a little bit ahead of plan where you were looking at a function of the existing customers switching over, or are you having some luck getting new guys? I got the impression before that your partner wasn’t pushing too hard in terms of trying to find different opportunities.

Good question. As I mentioned earlier in the presentation, right now our sales force is primarily focused on converting prior Zerust customers to the new company. Once we have cleared most of those hurdles, then we expect to expand more aggressively into new market segments. We’ve already developed a distribution relationship with a fairly large distribution company in China that we expect that in the next few months will start taking us into new opportunities in regions of China and markets in China that we previously have not served.

Okay, that sounds good. How about on the litigation expense front? You mentioned about how you’re initiating litigation. What should we expect there?

We’re certainly initiating litigation expense, but it’s also--it’s not as expensive in China as far as litigation expense that we’re going through to push these things through. It’s more a matter of time. So far, we’re talking about a few hundred thousand dollars of litigation expense. You’re not talking about millions of dollars; you’re talking about a few hundred thousand dollars of expense we’ve seen so far, and that’s what we would expect to continue into 2016 until the entity is liquidated.

Got you, okay. Matt, your comment in the release on the COGS going up, I understand that is just a mechanical function, obviously, if your revenue goes up because the recognition with the change, the joint venture going away. But the gross margins for your standard Zerust product in China are no different than they should be if you’re selling them in North America - is that fair?

Yes, that’s correct. They are fairly similar.

Okay, so from a mix perspective, that should help your overall gross margin because there is less percent of Natur-Tec?

Correct, but if you’re looking at a pure dollar to dollar standpoint, obviously your gross margin is going to increase. I think what we’re talking about, it’s more of a wording standpoint. I don’t anticipate our gross margin percentage changing significantly with the products coming in or the sales coming in from China, but obviously the cost of goods sold as a dollar value is going to increase as sales increase. It’s just a function of a manufacturing company. So the wording is a little tough because you’re not talking about gross margin percentage, so--if that makes sense.

Right, yeah. I’m talking about gross margin percentage, not gross profit dollars, so if anything, it’s flat to up margin.

Correct.

Okay. How about, Patrick, maybe also a little color on how we’re doing on selling some of the other products, such as Spray-G and the balms and other products that you are adding to the roster, outside of just the films, through your joint venture partners?

Oh, okay. Sure. Sales of all those are going up significantly. Actually, I think you were just talking about our Actifax [ph]. We just got a very significant order in one go for Actifax, which basically was the same as all of the--equivalent of all the Actifax we’ve sold to date, and that was with one customer. So we see a dramatic uptick in the acceptance of those products and expect to continue to see that going forward.

Has there been any kind of best practices among your joint venture partners? I know historically you had maybe one or two more active type folks and the other guys maybe weren’t as aggressive, I guess. How should we think about the adoption there in some of the various geographies, and maybe you’d mentioned that you might take the reins if the partner wasn’t interested.

Well, I think that with the introduction of business development, regional business development managers particularly in Europe and in Asia, we’ve seen an increase in our ability to push for the introduction of new products into those regions. It’s still a little bit early days to see what the long-term consequences of that are, but we’re certainly seeing a much greater ability for us to introduce new products into these markets than before.

Okay. Just last one - on your oil and gas comment, you gave a usual caveat about the volatility of the business there, but your commentary prior to that was a noticeable acceleration in the coming months, I guess, is the driver of that commentary due to the partner you referenced?

That’s part of it, but I guess that once you saw the dramatic drop in oil prices over the previous six months or so, now that that’s kind of stabilized and the price of oil has gone up a bit, there is less--I guess the management of the various oil service companies in the United States have calmed down a little bit and they are more willing to release money for maintenance and service operations than before. So while our discussions had slowed a little bit for about a three-month period, now they are all picking up and they are trying to get a lot of these installations done before the end of the calendar 2015. So we’re quoting more, we’re installing more, and assuming that everything continues on pace, things are--we should be fairly busy through the rest of the calendar year.

Okay, that’s it for me. Thanks, appreciate it.

We have a follow-up question from the line of Dick Feldman with Axiom Capital. Your line is open.

Thank you. A couple of questions. One relates to the tax rate. What guidance can you give us for that for the remainder of this year and for 2016?

I would see the effective rate being very consistent with where it’s been through last year, through the first three quarters of this year, and that continuing through 2016. I don’t see a significant fluctuation in the effective rate.

The next question I have relates to Brazil. How is it doing? There’s a lot of turmoil, both within Petrobras as well as in the oil and gas industry.

Well, I would say that on the whole, the business in Brazil is doing appreciably well, given all of the challenges you just mentioned. We are seeing increases in sales primarily in our regular industrial customers, both Brazil and now through distribution in other South American countries. The oil and gas business, obviously, is a bit of a conundrum for us right now considering the large-scale issues that they are dealing with on a governmental level in Brazil at this point. We are still getting regular orders for flange savers on a monthly basis, not as large as we had hoped them to be by now but still it’s an ongoing business for us. But certainly until a few things have, in terms of management and other issues, have been shaken out at Petrobras, we don’t expect to see too much business in terms of other technologies at Petrobras moving forward in the near future.

The other impact that I’ll just add from a Zerust Brazil standpoint is the currency issue with Brazil. You were at a two to one currency rate before, and when I say before, meaning within the last 12 months, and we’re now over three, so obviously that’s a very, very large impact to the sales. So even if they have increasing sales, from our standpoint it’s showing as flat or down because of the currency rate that we’re showing in U.S. dollars.

While we’re on currency, what was the impact of the strength of the dollar elsewhere?

Well, I ran our joint venture financials assuming that there was no foreign currency change from last year to this year, to see what the results would be, to basically figure out what the economic impact was of the--mostly of the European currencies to the U.S. dollar. We basically had a $620,000 impact from an equity income standpoint, meaning that if the currency rates were the same this year as they were last year, we would have taken in an additional $620,000 in equity income, and from a royalty standpoint we would have taken in an additional $380,000 of income. So the net impact on our earnings per share from a foreign currency standpoint is almost $1 million through nine months, which would equate to pre-tax over $0.22 per share impact.

Wow.

Yeah. I mean, if you look at the euro on May 31, 2014 compared to May 31, 2015, there’s a 24% change in the currency value. At one point in time during March, there was a 28% change comparing March to March, so obviously given the significance of our European operations, it’s had a pretty big negative impact this year. So when you look at just in third quarter, the equity impact was about $350,000 just in third quarter comparing the two results. So when I look at our total company earnings per share had been very similar in third quarter last year to third quarter this year, but also seeing the foreign currency impact of probably close to U.S. $400,000 to $450,000, it’s a significant impact.

When you or Patrick spoke earlier about believing that in 2016, both the oil and gas and the Natur-Tec operations could be profitable, is that basically saying that you’ll be able to with profitability cover the R&D expenses that have been largely been focused on those areas?

That would include--oh, sorry?

And then what is the outlook for R&D expenses going forward?

When I talk about getting to profitability in each of those areas, that would fully cover all business development expense, current selling expenses, and R&D in each of those areas, as well as various corporate allocations and things like that to bring each of those groups to profitability. With both of those groups, we’re transitioning from more of an R&D phase to, I’d say, more business development. We’re much more into the D than the R from an R&D standpoint as far as how we’re working with these two groups. Our current focus is on selling. We’re not looking--right now, we do not have a heavy focus on developing new products in oil and gas. We feel we have several products that we want to aggressively push out to the market, so our expense dollars are going to go towards selling those products, not to developing new products at this point. The other side of that is as our sales people are out in the field, particularly from an oil and gas standpoint, there is a lot of opportunity, and they see a lot of opportunity because there is so much corrosion in the oil and gas area. So there are plenty of oil and gas projects that we come along, that we are contemplating and looking at and talking about solutions, but right now the majority of our efforts and dollars are being put towards selling the products and handling the installations.

Okay. So what you’re saying is that probably R&D expenses are going to be flat to maybe declining a bit as you transition from pure research to product development?

Yes.

Okay. That’s it for me. Once again, a great quarter, and thank you.

Our next question comes from Michael Ross of Van Clemens & Company. Your line is open.

Hi, good morning. This is Charlie Pine. I’m in Mike’s office. A couple of my questions were already answered, but I’ve conjured up a couple more. Any update at all on what’s happening with that new project that you set up in India with that offshoot of Cargill? And I’ve got some other follow-ups too.

Oh, you’re talking about the distribution agreement with Nature Works for--?

Yes.

Okay. As far as I know, it’s ongoing and we are getting certain deals for them, but I’m not quite sure whether that’s a significant growth factor.

It’s not material.

So far, it’s not material.

Okay, so are you saying so far you’re not seeing anything material with it at this point?

No. I mean, they just started really their distribution efforts for the PLA in India, and we expect that during the coming--in fiscal 2016, we might start to see some sales, but not so far.

All right, okay. And what about additional opportunities or sales in other regions for flange savers? Are you getting any more positive activity from a sales standpoint with new customers in the flange saver area?

We continue to see more adoptions on a small scale, nothing on the scope and scale that we have seen at Petrobras or expect to even increase at Petrobras. So the sales are increasing, the use is expanding, but it’s still going fairly slowly. We’re seeing the primary growth really right now in the tank bottom solution.

Okay. Just to follow up on the flange saver, to what do you attribute, would you say, the continued reluctance or resistance for adoption of flange savers in the marketplace?

I wouldn’t say reluctance or resistance. It’s more of the same that we found with Petrobras in terms of getting this to be part of the mentality and into the maintenance cycles of these offshore rigs, where they are changing their habits from what they were doing in the past, how do you get these flange savers to the onshore warehouses, how do you get the maintenance workers to the offshores to install them, where do you keep all these. It’s more of a logistics and kind of application issue rather than a technology question.

Okay. I’m gathering, though, that currently you’re really focusing a greater amount of resources to the tank bottom opportunity. That, I assume, would be a fair statement, right?

Yes; and again, at least with the tank bottom solutions, it’s far more in our control in order to get those installations done. The logistics nightmare of getting on the offshores isn’t there, so we can have our supervisory crews plus the installation crews go onsite and do the work under our supervision, which has always been a complication with the offshores.

Okay. Lastly, as far as the tank bottom customers, at this point now, of the customers that you currently have, what would be the greatest number of tanks that any one customer has installed your solution up to this point?

I wouldn’t have that information. I can get it for you, but that’s something that’s really in the hands of the manager who is running the oil and gas group for us.

Okay. All right, thanks.

Thank you. Our next question comes from Scott Billeadeau from Walrus Partners. Your line is open.

Thanks for taking my question. Just talking about the business moving more from R&D to development and sales, and historically a good chunk of the business really coming in through JVs, what does that mean for the SG&A expenses going forward? Is that a focus of incremental spending here because now you’re the feet on the street for these products? Maybe you could flesh that out a little bit.

I wouldn’t anticipate--what I would anticipate seeing is that as we spend less on pure R&D, the amount of--the dollars that we’re not spending on R&D, we will be spending on increases in sales. We’ve traditionally hired additional salespeople when, let’s say, we fully see the market and see the need to have a salesperson in that territory or in that specific market, and that’s something that we anticipate to continue. The company is not going to go out and double selling expense or all of a sudden hire an additional 15 people just because all of a sudden you have these products. It’s definitely going to be as we see the revenue and as we see the need at the customer sites for additional salespeople, that’s when we will bring in additional salespeople.

Great. All right, great. Thanks.

Thank you, and at this time I’m showing no further questions. I’d like to turn the call back over to management for any closing remarks.

I’d like to thank everyone for participating today and for your interest in NTIC. Have a great day.