FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

 

Washington, DC 20549

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2003
		or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from               to               .
Commission File Number:  0-12395

 

ALCIDE CORPORATION

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

YES        ý                        NO        o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES        o                        NO        ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 31, 2003:  2,654,638, net of Treasury Stock.

 

 

ALCIDE CORPORATION

 

INDEX

 

PART I.	FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets – August 31, 2003 and May 31, 2003
	Condensed Consolidated Statements of Operations – For the three months ended August 31, 2003 and August 31, 2002
	Condensed Consolidated Statements of Shareholders’ Equity
	Condensed Consolidated Statements of Cash Flows – For the three months ended August 31, 2003 and August 31, 2002
	Notes to Unaudited Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II.	OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE

 

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ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

		August 31, 2003			May 31, 2003
Assets:
Current assets:
Cash and cash equivalents		$	2,900,150		$	2,286,641
Accounts receivable – trade, net		3,779,837			3,831,527
Inventory		2,003,621			2,097,097
Deferred and prepaid income taxes		310,063			243,413
Spare parts		889,730			884,226
Prepaid expenses and other current assets		378,794			468,863
Total current assets		10,262,195			9,811,767
Equipment and leasehold improvements:
SANOVA plant assets		17,379,438			17,037,502
Construction in progress		2,795,555			2,596,332
Office equipment		602,973			567,158
Laboratory, manufacturing equipment and vehicles		571,796			523,718
Leasehold improvements		73,483			73,483
Less:  Accumulated depreciation and amortization		(10,744,549		)	(9,790,948		)
Total equipment and leasehold improvements, net		10,678,696			11,007,245
Goodwill		478,807			478,807
Other assets		70,885			70,885
Total Assets		$	21,490,583		$	21,368,704
Liabilities and Shareholders’ Equity:
Current liabilities:
Accounts payable		$	751,431		$	686,391
Accrued expenses		380,546			501,578
Income taxes payable		115,300			115,300
Total current liabilities		1,247,277			1,303,269
Deferred tax liability		655,238			565,287
Other long-term liabilities		3,293			8,140
Total Liabilities		1,905,808			1,876,696
Commitments and Contingencies
Redeemable Class “B” Preferred Stock –$.01 par value; authorized 10,000,000 shares; issued and outstanding: August 31, 2003 – 63,675; May 31, 2003 – 63,675		167,145			167,145
Shareholders’ equity:
Class “A” Preferred Stock – no par value, authorized 1,000 shares; issued and outstanding: August 31, 2003 – 138; May 31, 2003 – 138		18,636			18,636
Common Stock – $.01 par value; authorized 10,000,000 shares; issued: August 31, 2003 – 3,040,597; May 31, 2003 – 3,040,597		30,406			30,406
Common treasury stock at cost August 31, 2003 – 385,959; May 31, 2003 – 385,959		(7,260,041		)	(7,260,041		)
Additional paid-in capital		21,502,828			21,502,828
Retained earnings		5,125,801			5,033,034
Total Shareholders’ Equity		19,417,630			19,324,863
Total Liabilities and Shareholders’ Equity		$	21,490,583		$	21,368,704

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

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ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Three Months Ended August 31,
		2003			2002
Revenue:
Net sales		$	4,888,326		$	5,015,795
License revenue		308,270			29,397
Total revenue		5,196,596			5,045,192
Expenditures:
Cost of goods sold		3,002,936			2,805,278
Research and development expense		479,415			590,624
Consulting expense to related parties		15,000			15,000
Selling, general and administrative expense		1,570,034			1,535,374
Total expenditures		5,067,385			4,946,276
Operating income		129,211			98,916
Interest income		4,087			7,867
Interest expense		—			(21,048		)
Other income		9,420			9,139
Income before provision for income taxes		142,718			94,874
Provision for income taxes		49,951			33,205
Net income		$	92,767		$	61,669
Basic earnings per common share		$	.03		$	.02
Diluted earnings per common share		$	.03		$	.02
Weighted average common stock and dilutive potential common shares outstanding:
Basic		2,654,638			2,656,022
Diluted		2,661,577			2,690,726

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

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ALCIDE CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

		Class “A” Preferred Stock					Common Stock					Additional Paid-in Capital			Common Treasury Stock					Retained Earnings			Total Shareholders’ Equity
		Shares		Amount			Shares		Amount						Shares		Amount
Balance May 31, 2003		138		$	18,636		3,040,597		$	30,406		$	21,502,828		(385,959	)	$	(7,260,041	)	$	5,033,034		$	19,324,863
Net income																				92,767			92,767
Balance August 31, 2003		138		$	18,636		3,040,597		$	30,406		$	21,502,828		(385,959	)	$	(7,260,041	)	$	5,125,801		$	19,417,630

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

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ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Three Months Ended August 31,
		2003			2002
Cash Flows from Operating Activities:
Net income		$	92,767		$	61,669
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		966,518			861,860
Deferred income taxes		49,951			33,205
Decrease (increase) in assets:
Accounts receivable – trade, net		51,690			(281,043		)
Inventory		93,476			(115,236		)
Prepaid income taxes		(26,650		)	205,000
Spare parts		(5,504		)	(117,188		)
Prepaid expenses and other current assets		90,069			8,963
Other assets		—			3,539
Increase (decrease) in liabilities:
Accounts payable		65,040			(65,266		)
Accrued expenses		(121,032		)	(279,666		)
Other long-term liabilities		(4,847		)	(18,956		)
Net cash provided by operating activities		1,251,478			296,881
Cash Flows from Investing Activities:
Acquisition of equipment		(637,969		)	(1,160,576		)
Cash Flows from Financing Activities:
Exercise of stock options		—			5,755
Net increase (decrease) in cash and cash equivalents		613,509			(857,940		)
Cash and cash equivalents at beginning of period		2,286,641			2,847,581
Cash and cash equivalents at end of period		$	2,900,150		$	1,989,641
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for income taxes		$	26,650		$	—
Cash paid during the period for interest		$	—		$	21,048

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

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ALCIDE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                                     Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Alcide Corporation (the “Company”) for the three month periods ended August 31, 2003 and 2002 have been prepared in accordance with the instructions to Form 10-Q.  Certain information and disclosures normally included in notes to financial statements have been condensed or omitted according to the rules and regulations of the Securities and Exchange Commission, although the Company believes that the disclosures are adequate to make the information presented not misleading.  The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2003.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation.  Certain reclassifications have been made to prior year financial statements to conform to current year presentation.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

Stock Option Plans

 

The Company has two stock option plans that allow granting of options to employees, officers, directors and consultants.  Options granted to directors vest immediately while all other options vest evenly over a five-year period.  As allowed by Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and Statement No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS 148), the Company accounts for its stock option plans under the guidelines of Accounting Principles Board Opinion No. 25, “Accounting for Stock issued to Employees” (APB 25).

 

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS 123.

 

		Three Months Ended August 31,
		2003			2002
Net income, as reported		$	92,767		$	61,669
Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		$	152,300		$	150,700
Pro forma net loss		$	(59,533	)	$	(89,031	)
Earnings (loss) per share
Basic – as reported		$	.03		$	.02
Basic – pro forma		$	(.02	)	$	(.03	)
Diluted – as reported		$	.03		$	.02
Diluted – pro forma		$	(.02	)	$	(.03	)

 

Recently issued accounting pronouncements

 

In May 2003, the EITF issued a final consensus on Issue 01-8, “Determining Whether an Arrangement Contains a Lease.”  Issue 01-8 provides guidance on determining whether an arrangement is or includes a lease within the scope of SFAS No. 13 “Accounting for Leases.”  If it is determined that a lease exists, the lease and non-lease

 

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components of a combined sales arrangement must be accounted for separately.  Issue 01-8 is effective prospectively for arrangements entered into, modified, or acquired in fiscal periods beginning after May 28, 2003.

 

Management has determined that at this time the revenue derived from the lease component in connection with SANOVA contracts is not material and, therefore, the Company has not separately reported lease revenue.  If in the future, the amount becomes material and Issue 01-8 does not change the definition of a “lease”, the Company will be required to separately report lease revenue.

 

2.                                       Accounts Receivable - Trade consisted of the following:

 

		August 31, 2003			May 31, 2003
Domestic Distributors		$	224,621		$	372,837
International Distributors		1,260,139			1,402,504
SANOVA Customers		2,242,413			1,888,840
Other Receivables		52,664			167,346
Total Accounts Receivable - Trade		$	3,779,837		$	3,831,527

 

The Company evaluates impairment of its trade receivables on a regular basis.  The allowance for doubtful accounts was $28,000 as of August 31, 2003 and May 31, 2003, respectively, which was estimated based on collection history and known events.

 

3.                                     Inventory consisted of the following:

 

		August 31, 2003			May 31, 2003
Raw Materials		$	648,190		$	692,480
Finished Products		474,317			484,426
SANOVA Inventory at Customer Sites		881,114			920,191
Total Inventory		$	2,003,621		$	2,097,097

 

4.                                     Commitments and Contingencies

 

As of August 31, 2003, the Company had contracts for future startups of four poultry and three red meat processing operations.  These systems will be installed in the second and third quarters of fiscal 2004 at an approximate total cost of $1,850,000.  As of August 31, 2003, $1,120,000 of the equipment required for these installations was on hand.

 

5.                                       Earnings Per Share

 

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. Potential common shares of the Company include the dilutive effect of outstanding stock options and warrants. Potential common shares excluded because of their antidilutive effect were 320,096 for the three month period ended August 31, 2003, and 190,192 shares for the three months ended August 31, 2002.

 

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Basic and diluted earnings per share were calculated as follows:

 

		Three Months Ended August 31,
		2003			2002
Net income		$	92,767		$	61,669
Weighted average number of common shares outstanding		2,654,638			2,656,022
Basic earnings per share		$	.03		$	.02
Assuming exercise of options and warrants reduced by the number of shares which could have been purchased with the proceeds from exercise of such options and warrants		6,939			34,704
Weighted average common shares outstanding and dilutive potential common shares		2,661,577			2,690,726
Diluted earnings per share		$	.03		$	.02

 

6.                                       Orders for Future Delivery

 

At August 31, 2003 and 2002, the Company had orders for future delivery of $686,548 and $637,722, respectively.  The $686,548 orders for future delivery are scheduled for shipment during the period September 2003 through November 2003.  Data for both years excludes expected sales of SANOVA because contracts with SANOVA customers do not require placement of purchase orders for future delivery.

 

7.                                       Segment Information

 

The Company follows the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information” and reports segment information in the same format as reviewed by the Company’s management (the “Management Approach”), which is organized around differences in products and services.  Management has determined the Company has two reportable segments, Animal Health and Surface Disinfectants and SANOVA Food Antimicrobial Products.

 

The Company’s reportable segments are strategic business units that offer similar products, but to entirely different customers at substantially different selling prices and cost of goods sold structures.  The Company does not have any inter-segment revenues.

 

The accounting policies of the segments are the same as those described in Note 2 — Summary of Significant Accounting Policies in the Company’s May 31, 2003 Form 10-K.  The Company evaluates performance based on gross margin from the sale of each segment’s products and does not allocate expenses beyond gross margin to the two segments.

 

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Segment net sales, gross margin, assets, fixed asset additions and depreciation expense are as follows:

 

		Three Months Ended August 31,
		2003			2002
Animal Health and Surface Disinfectants
License Revenue – U.S.		$	308,270		$	29,397
Net Sales – U.S.		524,995			838,283
Net Sales – International		835,700			823,126
Total Revenue		1,668,965			1,690,806
Gross Margin		1,044,842			913,438
Assets (at end of period)		3,150,599			2,750,886
Fixed Asset Additions		—			—
Depreciation Expense		1,344			1,344
SANOVA
Net Sales – U.S.		3,527,631			3,354,386
Gross Margin		1,148,818			1,326,476
Assets (at end of period)		14,404,927			15,823,850
Fixed Asset Additions		611,011			1,104,578
Depreciation Expense		934,935			833,089
Not Segment Related
Assets (at end of period)		3,935,057			3,030,136
Fixed Asset Additions		26,958			55,998
Depreciation Expense		30,239			27,427
Total
License Revenue		308,270			29,397
Net Sales		4,888,326			5,015,795
Total Revenue		5,196,596			5,045,192
Gross Margin		2,193,660			2,239,914
Assets (at end of period)		21,490,583			21,604,872
Fixed Asset Additions		637,969			1,160,576
Depreciation Expense		966,518			861,860

 

Assets assigned to the business segments include accounts receivable, inventories, fixed assets, spare parts and goodwill.  No single customer accounted for 10% or more of revenues.

 

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PART I.

 

ITEM 2.                             Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

 

Alcide Corporation (the “Company” or “Alcide”) is a Delaware Corporation organized in 1983 which has its executive offices and research laboratories at 8561 154^th Avenue N.E., Redmond, Washington 98052.

 

Alcide is engaged in the research, development and commercialization of unique chemical compounds having intense microbiocidal activity.  The Company holds substantial worldwide rights to its discoveries through various patents, patent applications, trademarks and other intellectual property, technology and know-how.

 

Risk and Uncertainties

 

This report includes forward looking statements which involve risk and uncertainty including, without limitation, risk of dependence on patents, trademarks, third party suppliers, market acceptance of and demand for the Company’s products, distribution capabilities and the development of technology and governmental regulatory approval thereof.

 

Sentences or phrases that use words such as “believes”, “anticipates”, “hopes”, “plans”, “may”, “can”, “will”, “expects” and others are often used to flag such forward looking statements, but their absence does not necessarily mean a statement is not forward looking.  Such statements reflect management’s current opinion and are designed to help readers understand management’s thinking.  By their very nature, however, such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expected or projected.  Readers are cautioned not to place undo reliance on these forward looking statements which speak only as of the date hereof.  The Company undertakes no obligation to release publicly any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Risks and uncertainties that may affect the Company’s operating results and business performance include:  the Company’s ability to protect its patents and other proprietary rights; the volume and timing of product sales; pricing; market acceptance of its products; the costs and effects of complying with laws and regulations relating to the environment and to the manufacture, storage, distribution and labeling of the Company’s products; the ability to develop and maintain distribution and supply arrangements; the effect of the Company’s accounting policies; changes in tax, fiscal and governmental and regulatory policies; economic factors such as the worldwide economy, interest rates, currency rates and currency movements; changes in the capital markets affecting the Company’s ability to raise capital; the occurrence of litigation or claims; the loss or insolvency of a major customer, distributor or supplier; losses of or changes in executive management; the Company’s ability to continue product introductions and technological innovations; and other uncertainties and risks reported from time to time in our reports filed with the Securities and Exchange Commission.  In addition, the Company notes that its stock price can be affected by fluctuations in quarterly earnings.  There can be no assurance that the Company’s earnings levels will meet investors’ expectations.

 

Substantially all of the Company’s products are subject to regulatory approval of or control by various governmental agencies such as the FDA, USDA and EPA in the United States and their equivalents in international markets.  The exercise of control and regulatory authority by these agencies can have a material effect on the Company’s business directly as it relates to the Company’s products and indirectly as it relates to competitors’ products.

 

Within the Animal Health and Surface Disinfectant business segment, all of the Company’s Animal Health products are sold through distributors having exclusive or semi-exclusive rights to specified geographical territories.  The loss of a distributor can have a material effect on the Company’s sales, particularly, in the short-term until a replacement is found, contracted and trained in the sale of the Company’s products.  Further, the Company faces well established competition in each of the markets where its Animal Health products are sold.  Such competition, particularly, competition claiming equivalence to the Company’s products, can limit the sales potential for Alcide’s products.

 

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Alcide’s Food Safety products participate in a rapidly evolving marketplace which by its nature attracts innovation and competing technologies.  The Company’s SANOVA sales are based on performance, price and convenience.  Introduction of competitive products better meeting these customer needs can have a material impact on the Company’s ability to sell and expand the use of its SANOVA products.

 

The Company’s business model for its Food Safety business involves a capital investment ranging from $20,000 to $500,000 for each user plant site depending on the size of the operation.  The capital investments are depreciated over a five-year life while customer contracts range from one to four years.  If a substantial number of customers elect not to renew their contracts, non-productive assets would exist until new customers are found.

 

Occasionally, the Company also incurs installation costs of between $80,000 and $120,000 to install the SANOVA equipment components at the customer site and connect the components with plumbing and electrical interfaces to put the system into operation.  Installation costs are depreciated over the shorter of a five-year life or the contract term.

 

The economic vitality of the industries served by the Company’s products can have an impact on Alcide’s ability to sell its products, expand sales and maintain product price levels.  Within the Animal Health business segment, the Company’s products are premium priced consistent with their superior performance.  However, as dairy industry product margins are compressed, some farmers may discontinue the use of Alcide products in favor of lower priced competitors’ products.  Likewise, the Company’s ability to sell and expand sales of its Food Safety products may be impacted by economic conditions within the poultry and red meat industries.

 

Critical Accounting Policies

 

•                                          Revenue Recognition

Revenue from sales of SANOVA food antimicrobials is recognized based on the terms of the Company’s contracts with individual customers.  For customers using more than 15,000 gallons of SANOVA per month, Alcide provides bulk shipments of inventory to the customer and the customer is invoiced at month-end with revenue recognized based on the amount of product processed or gallons of SANOVA used.  All other customers are invoiced and revenue is recognized at the time SANOVA is shipped to their facilities.  Payment in either case is due fifteen to thirty days after billing.

 

Animal Health and Surface Disinfectant sales are recognized at the time of shipment to distributors or to end users.  The Company provides a limited warranty to its distributors which limits the Company’s obligation to replacement of defective product.  Such replacements have, for the past several years, been less than .1% of net sales.  The distributors have no contractual right to return unsold product.

 

•                                          Depreciation and Book Value of SANOVA Plant Assets

Capital investments for SANOVA plant assets are depreciated over a five-year life, while customer contracts range from one year to four years.  As the SANOVA food antimicrobial business has been in existence for less than five years, the Company has a limited, practical basis on which to assign depreciable life.  Management believes, however, based on over four and one half years experience, that well-maintained assets will be operational beyond five years and, further, that if customers decide not to renew their contracts, the assets can be relocated to new customer sites.  As of August 31, 2003, plant assets from two installations have been successfully redeployed to new sites.  The cost to maintain the assets is charged to operations.

 

Commitments and Contingencies

 

Leases:  The Company leases certain property under non-cancelable operating leases that expire through July 2009.  Insurance, utilities and maintenance expenses are borne by the Company.  There are no contingent rentals or sublease rentals.

 

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SANOVA Agreements:  The Company has signed contracts with poultry and beef processing plants for SANOVA systems to be installed in the second and third quarters of FY 2004, which will cost approximately $1,850,000.  As of August 31, 2003, $1,120,000 of the equipment required was on hand for these installations.

 

Employment Agreements:  One officer has a one year, automatically renewable, employment agreement which currently obligates the Company to a base salary of $287,929 per year.  Bonus compensation of 100% of base pay can be earned at the discretion of the Board of Directors.

 

Redeemable Class “B” Preferred Stock:  On September 30th of each year, the Company redeems a portion of its outstanding Series 2 Class “B” Preferred Stock.  The amount redeemed is equal to .7% of the Company’s prior year net income.  As the Company recorded net income of $1,129,610 in fiscal 2003, it redeemed 3,012 shares of Series 2 Stock on September 30, 2003 for $7,906.50.  This leaves a total of $159,239 of Class “B” Preferred Stock to be redeemed in subsequent fiscal years.  The amounts to be redeemed subsequent to September 2003 depend upon future net income and are not yet known.

 

The following table summarizes the above commitments:

 

		Less than 1 year			FY 2005			FY 2006			FY 2007			FY 2008			FY 2009
Operating Leases		$	233,592		$	135,544		$	137,999		$	140,946		$	141,437		$	23,573
SANOVA Agreements		730,000			—			—			—			—			—
Employment Agreements		287,929			—			—			—			—			—
Redeemable Class “B” Preferred Stock		7,907			—			—			—			—			—
Total Contractual Commitments		$	1,259,428		$	135,544		$	137,999		$	140,946		$	141,437		$	23,573

 

Financial Condition and Results of Operations

 

Net Sales

 

Net sales and license revenue totaling $5,196,596 for the quarter ended August 31, 2003 were $151,404 higher than for the equivalent quarter last year.

 

Sales of SANOVA food antimicrobial to the poultry and red meat industries totaled $3,527,631 for the quarter ended August 31, 2003, $173,245 higher than the first fiscal quarter last year.  At the end of the first quarter, SANOVA systems were contracted for and installed at 37 poultry plants and 15 red meat plants.  Eight of the poultry plants were using SANOVA applications both pre-chill and post-chill, thus bringing the total to 60 operations at quarter’s end.

 

The Company’s Animal Health and Surface Disinfectant revenues for the quarter ended August 31, 2003 were $1,668,965, including $308,270 in license revenue.  During the first quarter last fiscal year,  Animal Health and Surface Disinfectant revenues were $1,690,806, including $29,397 in license revenue.

 

Cost of Goods Sold

 

Cost of goods sold was 58% of total revenue for the quarter ended August 31, 2003, as compared to 56% of total revenue for the equivalent period a year ago.

 

Cost of goods sold as a percentage of net sales for the SANOVA (Food Safety) business segment was at 67% for the quarter ended August 31, 2003, as compared to 60% of net sales for the same period last year.  The seven point increase in costs of goods as a percentage of sales was caused by three factors each having approximately equal impact.  SANOVA usage increased in four plants concurrent with a transition to post-chill

 

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dip operations. Secondly, the under utilization of equipment idled at five sites late in the first quarter of 2003, continued into the first quarter of 2004 and lastly, investments made to transition into post-chill operations added to the depreciation expense component of cost of goods.

 

Cost of goods sold for the Animal Health and Surface Disinfectant business segment was 46% of net sales (excludes license revenue) for the quarter ended August 31, 2003 versus 47% of net sales for the first quarter last year.  The decreased cost of goods sold as a percentage of net sales for the segment was caused primarily by a shift in product mix.

 

Research and Development Expense

 

Reflecting the conclusion of development activities related to the Company’s new Animal Health products and the reduction in the scope of SANOVA process validation trials, research and development expenses for the quarter ended August 31, 2003 were $479,415 which were $111,209, or, 19% lower than for the equivalent period a year ago.

 

Selling, General and Administrative Expense

 

Selling, general and administrative expense of $1,570,034 for the quarter ended August 31, 2003 was $34,660 higher than for the equivalent quarter last year.  Although SG&A expenses in total are within 2% of the first quarter prior year amount, there were several significant expense category increases and decreases when compared to prior year:

 

•                  During the first quarter of fiscal 2003 Alcide paid executive bonuses totaling $288,481.  No executive bonuses were paid during the first quarter of fiscal 2004.

 

•                  Expenses related to patent/trademark registration and fees to maintain patents were $28,000 during the first quarter of fiscal 2004 as compared to approximately $50,000 during the first quarter of fiscal 2003.

 

•                  During the first quarter of fiscal 2004 the Company spent $97,123 in legal expenses to support its patent infringement suit against Biocide International.  While no such expenditures were made during the first quarter of fiscal 2003.  A memorandum of understanding to settle the suit has subsequently been entered on October 2, 2003.

 

•                  Salaries, benefits and travel expenses related to SANOVA entry into the seafood and international markets were approximately $45,000 during the first quarter of 2004 while no such expenses occurred during the first quarter of fiscal 2003.

 

•                  During the first quarter of 2004 equipment from two non-productive SANOVA sites was removed and relocated to two newly contracted sites.  The new sites started early in the second quarter but the $40,000 expenses to remove the equipment occurred during the first quarter.

 

Interest Income

 

Interest income was $4,087 for the quarter ended August 31, 2003 versus $7,867 for the quarter last year.  The decrease was due to lower prevailing short-term interest rates.

 

Interest Expense

 

The Company incurred no interest expense during the quarter ended August 31, 2003 because it has completely repaid a $2,000,000 draw on its line of credit which during the first quarter last year resulted in interest expense of $21,048.

 

Liquidity and Capital Resources

 

The Company’s cash and cash equivalents totaled $2,900,150 on August 31, 2003, as compared to $2,286,641 on May 31, 2003.  During the first quarter of fiscal 2004, the Company generated cash from operating activities

 

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of $1,251,478 and invested $637,969 in the acquisition of new assets to support the expanding SANOVA business.  At this time, the Company expects to fund its existing operations and growth with its current cash balance plus cash generated by operations.  If growth exceeds current expectations, it may be necessary to draw on the Company’s line of credit.

 

Outlook

•                                          SANOVA Food Quality System

Management expects that the size of the Company’s food antimicrobial business will continue to expand. Five new operations were added during the first quarter of fiscal 2003 and one existing customer added a post-chill operation.  Since the end of the fiscal quarter two new poultry customers were added, one red meat grinding operation was started and one existing poultry customer added a post-chill operation.  Management expects to contract and start one to three new SANOVA operations per month during the current fiscal year.

 

•                                          Animal Health and Surface Disinfectant Products

The worldwide dairy herd is decreasing slightly as cows become more productive, partly through increased use of mastitis prevention products such as those marketed by Alcide.  In addition, the Company now faces direct competition from products similar to its products, UDDERgold, UDDERgold Plus and 4XLA^®.  To counter this competitive threat, the Company has introduced advancements to its technology in the form of UDDERgold Platinum^® in Europe and UDDERgold 5-Star, an improved barrier product, in the United States.  The Company’s strategy is to maintain a performance edge over competing products.  However, because the Company sells through distributors, both changes in the distribution network and the introduction of new products can cause the Company’s sales to shift from quarter to quarter as distributors increase or decrease their inventories of Alcide products.  On an ongoing basis, management believes that its distribution network, combined with evolving new product introductions, will enable Alcide to maintain its share of the market.

 

ITEM 3.                             Quantitative and Qualitative Disclosures About Market Risk

 

The Company is not significantly exposed to market risks from changes in interest rates. At its present growth rate, the Company expects to be in a balanced cash position during fiscal 2004.  The Company’s policy is to invest any excess cash resources in low risk, short-term and intermediate-term U.S. Treasury instruments and bank money market funds to minimize market risks.

 

The Company has no direct foreign currency exposure.  All of its present transactions with international distributors are denominated in U.S. dollars.

 

ITEM 4.                             Controls and Procedures

 

a)  The Company’s Chairman and CEO, and President and CFO, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of the end of the period covered by this quarterly report, have concluded that, as of that date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiary would be made known to them by others within those entities.

 

b)  There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s disclosure controls and procedures subsequent to the end of the period covered by this quarterly report.  There were no significant deficiencies or material weaknesses, and therefore, there were no corrective actions taken.

 

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PART II.

 

OTHER INFORMATION

 

ITEM 1.                             Legal Proceedings

 

On October 2, 2003 a memorandum of understanding was entered into by the Company and Biocide International Incorporated to settle the patent infringement lawsuit brought by the Company against Biocide on October 31, 2002.  Under the terms of the settlement, Biocide has agreed to limit its sales in the red meat industry to products having a ph of greater than 5.5, a level at which Alcide management believes such products will not provide a competitive threat to Alcide’s products.  In addition, Biocide agreed to pay Alcide a royalty on future Biocide sales to the red meat industry.

 

ITEM 6.                             Exhibits and Reports on Form 8-K

 

a)  Exhibits:

 

3.2		ByLaws, as amended to date.
10.36		Licensing Agreement by and between the Company and Ferdinand Eimermacher GmbH & Co. KG, dated July 1, 2003, covering the United States and Mexico.
31.1		Certification of Periodic Report by Chairman and Chief Executive Officer of Corporation.
31.2		Certification of Periodic report by President and Chief Financial Officer of Alcide Corporation.
32.1		Certification pursuant to 18 U.S.C. Section 1350.

 

b)  Reports on Form 8-K:

 

Report on Form 8-K dated August 25, 2003 reporting results of operations for the fiscal year ended May 31, 2003.

 

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SIGNATURE

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	ALCIDE CORPORATION
	The Registrant
Date:   October 14, 2003	By  /s/  John P. Richards
	John P. Richards
	President
	Chief Financial Officer

 

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