Northern Technologies International Corp (NTIC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2015 earnings conference call. (Operator Instructions). 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 am 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-quarter quarterly report on Form 10-Q plan 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 rate that has crossed into profitability.

Furthermore, as has consistently been the case, our competitive position, operations and balance sheet are all stronger today than they were a year ago.

Although the termination of the license agreement with our former joint venture in China continues to adversely affect our financial results during the third quarter, we believe that our new wholly-owned subsidiary, which we refer to as NTIC China, is making good progress in capturing the business of our former joint venture entity in China and will continue to aggressively grow that business going forward.

NTIC's total net sales increased over 14% in the first nine months of fiscal 2015 to almost $22.2 million compared to the same period in fiscal 2014. This growth was largely attributable to sales of our industrial ZERUST products to new and existing customers in North America as well as significant sales growth in Natur-Tec in North America and India.

As announced in January, on December 31, 2014, NTIC terminated its license agreement with Tianjin-Zerust, our former joint venture in China. At this time, litigation against our former Chinese partner continues and we are still seeking, amongst other things, an orderly liquidation of this joint venture Company. Since January 1 of this year, NTIC Shanghai Company Limited, which we refer to as NTIC China, is the only authorized source of ZERUST and export branded products and services in the PRC.

While the primary cause for this significant shift in our strategy was unfortunate, and was the impetus for our now-ongoing litigation against our former Chinese joint venture partner, we believe it has also given us the opportunity to invest in and grow our business in this market much more aggressively than before. NTIC China has successfully transitioned more and more ZERUST customers away from Tianjin-Zerust, our former joint venture in China.

By this time next year however, NTIC China intends to have shifted its attention towards aggressively developing new business.

Our consolidated financial statements include the financial results of NTIC China. The largest impact to our financial results of our operation in China was $1.1 million of expense incurred related to the termination of our license agreement with Tianjin-Zerust. The litigation initiated against our former Chinese joint venture partner in the court of Tianjin, and the formation and ongoing operations of NTIC China. The pace of these expenses slowed considerably in the third quarter of fiscal 2015 compared to the first two quarters of fiscal 2015, and the sales of NTIC China began to grow at an accelerated pace during the third quarter.

Future ongoing expenses by NTIC related to this matter will be primarily dependent on the cost of the related litigation.

Additionally, during the second and third quarter of fiscal 2015, NTIC did not record any royalty or equity income from Tianjin-Zerust. The net impact to NTIC after subtracting out the minority income was over $800,000 as Tianjin-Zerust completed almost $2.0 million of royalties and equity income to NTIC during the first nine months of fiscal 2014 compared to only $694,000 of royalties and equity income to NTIC during the first nine months of fiscal 2015, prior to the termination of the license agreement.

Obviously, this impact on NTIC's earnings was significant during the second and third quarters of fiscal 2015 and will continue to be so during the next couple of quarters until our new operations in China really hit their stride.

Sales by our joint ventures, which are not consolidated with our financial results, showed a decrease of $12.2 million or almost 14% decrease to $76 million during the nine months ended May 31, 2015 compared to the same period last fiscal year. This decrease was mostly attributable to the termination of our license agreement with Tianjin-Zerust.

Sales at Tianjin-Zerust in the first nine months of fiscal 2014 were almost $12 million compared to only $4.3 million in sales, prior to the termination of the joint venture agreement -- of the license agreement in fiscal 2015. The remainder of the decrease in sales in our joint ventures was primarily attributable to the continued weakening of the euro to the US dollar.

All said, NTIC earned $0.39 per diluted common share during the nine months ended May 31, 2015 compared to $0.63 per diluted share during the same period into the fiscal 2014, which is a 38% decrease.

Starting in the second quarter of fiscal 2015, our consolidated financial statements included the financial results of our new NTIC China subsidiary. Our Annual Report on Form 10-K each year break out certain financial information on our joint ventures, including our former Chinese joint venture, Tianjin-Zerust, and our Quarterly Reports on Form 10-K also contain financial information on Tianjin-Zerust because of the significance to our total financial results.

As previously disclosed in our fiscal 2014 Form 10-K, Tianjin-Zerust had net sales of almost $16 million and operating income before paying royalties to shareholders of over $5.3 million during fiscal 2014. Our 30% portion of Tianjin-Zerust operating income was over $1.6 million during fiscal 2014 which means that, assuming we are eventually successful in transitioning a significant portion of the sales of Tianjin-Zerust to NTIC China, our earnings should significantly increase since we fully consolidate 100% of NTIC China's net sales and operating income. Although we are doing our best to aggressively convert these sales, there is obviously an associated risk that we will not convert these sales or that we will take much more time to do so than we currently anticipate.

With the consolidation of NTIC China, we also expect that NTIC's cost of goods sold and operating expenses will increase and our equity and income from joint ventures and fee income for services provided to its joint ventures will decrease in future periods compared to the prior fiscal year periods. We recognize that it will take some time to transition customers from Tianjin-Zerust to NTIC China and that this will result in some volatility in our operating results during the next few quarters. This will be especially true with respect to the remainder of fiscal 2015.

During the first nine months of fiscal 2015, we incurred over $1.1 million of direct expenses related to the termination of the license agreement with Tianjin-Zerust and the formation of NTIC China. These expenses consisted primarily of legal expenses associated with the establishment of the subsidiary, as well as hiring a seasoned management sales and operations team. These expenses are reflected in increased selling and general administrative expenses and increased expenses incurred in support of joint ventures during the nine months ended May 31, 2015 compared to the prior fiscal year periods.

The decision to go direct in China came under circumstances that were very disappointing to NTIC and our federation of joint venture partners. However, we are now focusing this as an excellent opportunity to finally grow the very important international market on our own terms.

Moving to our oil and gas business, in the nine months of fiscal 2015, our oil and gas team continued to focus its sales efforts on protecting the bottom plates of oil storage tanks from corrosion. In this effort our team continued to primarily target oil terminal operators and refineries in North America, with success, although we also converted new opportunities in other countries including India and the United Arab Emirates.

Having seen the need for an acceptance of our innovative solutions, we expect this growth opportunity to continue during the last quarter of fiscal 2015 and beyond.

With the relative stabilization of global oil prices, key prospective ZERUST clients in the oil and gas industry appear to be ready to ease certain budget restrictions over the course of the remainder of the calendar year of 2015. With this development, we anticipate a noticeable acceleration in our sales efforts in the coming months.

Nevertheless, as we have repeatedly mentioned, this is still a relatively new market for us. So we expect that any associated benefits to our financial results will not be immediate and may be choppy with spikes in sales as our opportunities are converted and revenue is recognized over the next few years.

Now turning to our Natur-Tec bioplastics business, net sales of Natur-Tec products increased almost 45% during the first nine months of fiscal 2015 compared to the prior fiscal year period. This increase was partially due to finished product sales through NTIC's majority-owned subsidiary in India and also due to increased sales in North America through our domestic distribution network. We continue to see strong demand for finished products such as compostable bags and cutlery in North America as a direct result of increases zero waste initiatives as well as favorable local and state level waste management regulation.

We expect both of these segments to continue to be strong growth areas as we continue to target and convert additional manufacturers to the use of Natur-Tec sustainable packaging solutions in Asia and worldwide.

I will now turn the call over to Matt Wolsfeld to summarize in more detail our financial results for the first nine months of fiscal 2015.

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 implementations 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 joint venture agreement with Tianjin-Zerust, our former joint venture in China, as previously discussed.

Lastly, sales of Natur-Tec's 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, general and 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 for 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 credit, 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 will now answer any questions you may have.

Tim Clarkson, Van Clemens & Company.

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 people.

And so far how have the tanks been performing?

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

And on the tanks, are you claiming -- 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 pitches for 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 are basically saying is we are dramatically increasing their uptime 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 are 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 products. So you can basically make compostable products cheaper and better than the competitive offerings.

Okay, all right, I'm good, thanks.

(Operator Instructions) Dick Feldman, Axiom Capital.

Thanks for taking my call and congrats on a very solid quarter. You 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 nonrecurring 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 are referring to is that as a standalone entity.

And if I remember (multiple speakers) -- so from previous calls, I think you have stated that it was about a $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 get just at an overall -- being in 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.

We expect that to happen sometime either towards the end of fourth quarter or beginning of first quarter of 2016.

The next milestone that we have to the sales level that would be equivalent to what these sales were that we previously had to the joint venture in China. So we have crossed the first milestone of the subsidiary getting to profitability and we feel like we are on track to the second milestone to hit some point soon.

Jerry Wells, private investor.

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 have kind of crossed the positive cash flow, or whatever, how you look at it in those two divisions?

Well, from a Natur-Tec standpoint we've always been pretty upfront with everybody in saying it's a volume-based business because the margins are not as large as they are with our traditional ZERUST products. So the breakeven point for Natur-Tec is somewhere in the -- right around 5 million and that is something that we certainly plan to be at breakeven or better during fiscal 2016. That's when we look at our strategic planning and we looked at where we want to be with the increasing sales coming from Natur-Tec India and with the significant increase in sales that is happening across North America, because of all the legislative changes and mandates that have taken place, we certainly see the -- that there is a large opportunity and we certainly see the forecasts of how they are coming in and what we were looking for as far as close goes.

So from a Natur-Tec standpoint, is performing according to where our budgets are and we are very happy with how things have played out with Natur-Tec.

From an oil and gas standpoint, things have been a little bit slower this year. We certainly still doubled the output from a number of tank standpoint or plan to during the remainder of our fiscal 2015, 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 are looking at we could certainly be at a profitability level with oil and gas that would be -- that would have a positive net impact on our bottom line, rather than both those entities being at a loss position which they had been since we started in both of the groups.

Thanks and then just one last question relating to that is, have you looked at any kind of joint venture in the US with the distribution and marketing side of the Natur-Tec or the tank business where you've got some big sales force that 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 have seen such a significant growth in 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 are also corrosion-related, so they see this service company, see us 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, a great job getting in China turned around as fast as you have. It is surprising to me, but very happy to see that. Good job. Thank you.

Thank you, appreciate that.

Joe Furst, Furst Associates.

Good morning, gentlemen. A question for Matt. I just want to doublecheck 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 3 times higher than it was before, since you only own -- you've got 30% of the profit before and now you've got 100%? Is that -- why it is there are 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 that 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 making us go through the supplier evaluation process vetting us as a company. It's just a standard process. So that is one component.

Obviously we are not going to get all of the business. Some of the customers are saying, well, that is great but given that you've had problems with your internal partner, we will be looking at Brand X that some business will also -- where we will not be recovering. The rest of us just --. We think it's mostly just a matter of time where we were talking to the customers, showing that we have operations in place, that our product quality is where they need to be, that our services are where they need to be, it's just a getting to know you phase where there is transitioning from the old management and contacts from Tianjin-Zerust over to NTIC China.

Thank you and congratulations on your progress. You're doing a great job.

Greg Weaver, Ensenada Capital Management.

Just following up on the same question again. Is China being a little bit ahead of plan, where you are looking at a function of the existing customers switching over? Are you having some luck getting new guys? I get the impression before that your partner was not pushing too hard to trying to find different opportunities.

Good question. As I mentioned earlier in the presentation, right now our salesforce is merely focused on pretty prior ZERUST customers to the new Company. Once we cleared most of those hurdles, we expect to expand more aggressively into new market segment. We've already developed a distributional relationship with a fairly large division Company in China that we expect that in the next few months to start picking up into new opportunities in regions in China and markets in China that we previously have not served.

Okay, that sounds good. And how about on the litigation expense? You mentioned about how you are initiating litigation. I guess what should we expect there?

We are certainly initiating litigation expense, but it's also not as expensive in China as far as the litigation expense that we are going to push these things through. It's more a matter of time. So far we are talking about a few hundred thousand dollars of litigation expense. We are not talking about millions of dollars. We are talking about $200,000 of expenses so far and that is what we expect to continue into 2016 until the entity is liquidated.

Got you. Okay. And, Matt, your comment in the release on the COGS going up, I understand that as just a mechanical function obviously if your revenue goals up because of the recognition with the Chinese joint venture going away.

But is that -- the gross margins for your standard ZERUST product in China are no different than they should be if you are selling them in North America. Is that fair?

Yes, that is correct. They are fairly similar.

Okay, so from a mixed perspective it should help your overall gross margin because there is less percent of Natur-Tec.

Correct. But if you're looking at it from 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 to do any 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 the sales increase as a function of a manufacturing company.

So the wording is a little tough, because you're not talking about gross margin percentage. So that makes sense.

Right, yes, I am talking about gross margin percentage not growth profit dollars. So, if anything, it's flat to up margin.

Correct, correct.

Okay, and how about just, Patrick, maybe also a little color on how we are doing on selling some of the other products, the [spray G], the bombs and other products that you are adding to the roster outside of just the films through your joint venture partners.

Okay, sure. Sales of all those are going up significantly. Actually I think you are just talking about our active packs. We just got a very significant order in one go for active packs which basically was the same -- the equivalent of all the active packs we sold to date. So 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 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 had mentioned that you might take the reins, if the partner wasn't interested.

Well, I think that with the introduction of regional business development managers, particularly in Europe and in Asia, where we have seen an increase in our ability to push for the introduction of new products into the regions, it's still a little bit early days to see what the long-term consequences of that are. But we certainly are 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 comments, you gave the usual caveat about the volatility of the business there, but your commentary prior to that was the 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 has 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 has 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 are quoting more, we are installing more and, assuming that everything continues on pace, we should be fairly busy through the rest of the calendar year.

Okay, that's it for me, thanks. Appreciate it.

Dick Feldman, Axiom Capital.

Thank you. A couple questions. One relates to the tax rate. What guidance could you give us 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 that, in the effective rate.

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

I would say 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 and other South American companies. 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 savors] on a monthly basis, not as large as we hoped them to be by now, but still is an ongoing business for us. But certainly, until a few things 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 all this had from a ZERUST Brazil standpoint is the currency issue with Brazil. We were at a 2 to 1 currency rate before -- when I say before meaning within the last 12 months and we are 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 are showing in US dollars.

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

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 and that was of the -- mostly of the European currencies to the US dollar. And we basically had a $620,000 impact on 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 of cash from -- on our earnings-per-share from a foreign currency standpoint is almost $1 million through nine months. Which would equate to pretax over $0.22 per share impact.

Wow. So --

Yes, so if you look at the euro on May 31, 2014 compared to May 31, 2015, there is a 24% change in the currency value. At one point in time during March there was a 28% change, comparing March to March. Given the significance of our European operation, it has 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 compared to the two results. So when I look at our total Company earnings-per-share at being very similar third quarter last year to third quarter this year, but also seeing the foreign currency impact of probably close to $400,000 to $450,000, it's a significant impact.

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

That would include (multiple speakers)

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 expenses, current selling expenses and R&D in each of those areas, as well as various corporate allocations and things like that to bring it -- to bring each of those groups to profitability.

With both of those groups, we are transitioning from more of a -- on an R&D phase to, I would say more business development. We are much more into the D than the R from an R&D standpoint as far as how we are working with these two groups. Very little -- our current focus is on selling.

We are 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. And 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 salespeople are out in the field, this is really 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 in dollars are being put towards selling the products and handling the installation.

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 is it for me. Once again, a great quarter and thank you.

Michael Ross, Van Clemens & Company.

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

You are talking about the distribution agreement with Nature Works or (multiple speakers)

Yes.

As far as I know, it's ongoing and we are getting certain sales for them. But I'm not quite sure whether that is really a significant growth factor. So far, it's not (technical difficulty).

Okay, so are you saying so far since it's not -- you are not seeing anything material with it at this point?

No. They just started really the distribution efforts for the PLA in India. And we expect that during the coming -- in 2016 we might start to see some sales. But not so far.

Okay, and what about additional opportunities or sales in other regions or 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 open scale that we have seen at Petrobras or expect even an increase at Petrobras. So it's -- the sales are increasing, the use is expanding, but it is still going fairly slowly. We are seeing the primary growth really right now in the tank bottom solution.

Just a 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 in 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 be onshore warehouses, how do you get the maintenance workers to the offshores, to install them, where do you keep all this? It's more of the logistics and kind of application issues rather than technology questions.

I am gathering, though, that currently you are really focusing on a greater amount of resources to the tank bottom opportunity there. That, I would assume, would be a fair statement, right?

Yes, and again, with -- at least with the tank bottom solutions, it's far more in our control in order to get the -- those installations done. It's not -- the logistics nightmare of getting on the offshore isn't there.

So, we can have our supervisory crews plus the installation crews go on-site 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 is something that is really in the hands of the manager who is running the oil and gas group for us.

All right, thanks.

Scott Billeadeau, Walrus Partners.

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? Now you are the feet on the street for these products, maybe you could flesh that out a little bit.

I would not anticipate -- what I would anticipate seeing is that as we spend less on pure R&D, the amount -- the dollars that were not spending on R&D we will be spending on increases in sales. We have traditionally hired additional salespeople when we fully see the market and see the need to have a salesperson in that territory or in that specific market. And that is something we anticipate to continue.

The Company is not going to go out and double sell-in 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 site for additional salespeople. That is when we will bring in additional salespeople.

Okay, thanks.

At this time, I'm showing no further questions. I would like to turn the call over to management for any closing remarks.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.