ALCIDE CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2002
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

Delaware		22-2445061
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)
8561 154th Avenue North East, Redmond WA		98052
(Address of principal executive offices)		(Zip Code)
Registrant's telephone number, including area code		(425) 882-2555

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 the number of shares outstanding of each of the issuer's classes of common stock, as of November 30, 2002: 2,656,167, net of Treasury Stock.

ALCIDE CORPORATION

INDEX

		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets—November 30, 2002 and May 31, 2002	3
	Condensed Consolidated Statements of Operations—For the three and six months ended November 30, 2002 and November 30, 2001	4
	Condensed Consolidated Statements of Shareholders' Equity	5
	Condensed Consolidated Statements of Cash Flows—For the six months ended November 30, 2002 and November 30, 2001	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
Item 4.	Evaluation of Disclosure Controls and Procedures	15
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 6.	Exhibits and Reports on Form 8-K	16
SIGNATURE		17

ALCIDE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

				November 30, 2002			May 31, 2002
Assets:
	Current assets:
		Cash and cash equivalents		$	2,240,456		$	2,847,581
		Accounts receivable—trade			4,140,841			2,849,103
		Inventory			1,955,211			1,823,691
		Deferred and prepaid income taxes			246,813			434,200
		Spare parts			826,573			652,620
		Prepaid expenses and other current assets			217,830			412,118

			Total current assets		9,627,724			9,019,313

	Equipment and leasehold improvements:
		SANOVA plant assets			16,450,310			14,376,961
		Construction in progress			2,254,881			3,009,716
		Office equipment			562,812			553,539
		Laboratory, manufacturing equipment and vehicles			520,761			451,824
		Leasehold improvements			73,483			73,483
		Less: Accumulated depreciation and amortization			(7,889,826	)		(6,118,278	)

			Total equipment and leasehold improvements, net		11,972,421			12,347,245
	Goodwill				478,807			478,807
	Other assets				16,430			19,968

Total Assets				$	22,095,382		$	21,865,333

Liabilities and Shareholders' Equity:
	Current liabilities:
		Accounts payable		$	461,174		$	743,514
		Accrued expenses			390,816			626,953
		Line of credit payable			2,000,000			2,000,000

			Total current liabilities		2,851,990			3,370,467
	Deferred tax liability				379,840			94,837
	Other long-term liabilities				—			26,346

Total Liabilities					3,231,830			3,491,650

	Commitments and Contingencies
	Redeemable Class "B" Preferred Stock—noncumulative convertible $.01 par value: authorized 10,000,000 shares; issued and outstanding: November 30, 2002—63,675; May 31, 2002—68,425				167,145			179,614

	Shareholders' equity:
	Class "A" Preferred Stock—no par value, authorized 1,000 shares; issued and outstanding: November 30, 2002—138; May 31, 2002—138				18,636			18,636
	Common Stock—$.01 par value; authorized 100,000,000 shares; issued: November 30, 2002—3,032,126; May 31, 2002—3,031,292				30,321			30,313
	Common treasury stock at cost November 30, 2002—375,959; May 31, 2002—375,959				(7,144,721	)		(7,144,721	)
	Additional paid-in capital				21,392,164			21,386,417
	Retained earnings				4,400,007			3,903,424

Total Shareholders' Equity					18,696,407			18,194,069

Total Liabilities and Shareholders' Equity				$	22,095,382		$	21,865,333

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

			For the Three Months Ended November 30,						For the Six Months Ended November 30,
			2002			2001			2002			2001
Revenue:
	Net sales		$	5,547,795		$	5,731,980		$	10,563,590		$	11,131,810
	License revenue			230,757			—			260,154			—

		Total revenue		5,778,552			5,731,980			10,823,744			11,131,810
Expenditures:
	Cost of goods sold			3,086,117			2,959,125			5,891,395			5,729,825
	Research and development expense			563,334			863,894			1,153,959			1,403,814
	Consulting expense to related parties			15,000			19,000			30,000			44,000
	Selling, general and administrative expense			1,444,043			1,239,395			2,979,417			2,819,565

		Total expenditures		5,108,494			5,081,414			10,054,771			9,997,204

Operating income				670,058			650,566			768,973			1,134,606
Interest income				6,201			24,317			14,068			52,133
Interest expense				(16,805	)		(21,854	)		(37,853	)		(46,958	)
Other income				9,645			21,689			18,784			28,939

Income before provision for income taxes				669,099			674,718			763,972			1,168,720
Provision for income taxes				234,185			236,150			267,390			409,051

Net income			$	434,914		$	438,568		$	496,582		$	759,669

Basic earnings per common share			$	.16		$	.17		$	.19		$	.29

Diluted earnings per common share and equivalents			$	.16		$	.16		$	.19		$	.28

Weighted average common stock and dilutive potential common stock outstanding:
	Basic			2,656,167			2,642,535			2,656,094			2,636,298
	Diluted			2,677,684			2,717,691			2,683,300			2,727,872

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Class "A" Preferred Stock								Common Treasury Stock
				Common Stock
				Common Stock			Additional Paid-in Capital							Retained Earnings		Total Shareholders' Equity
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Shares		Amount			Retained Earnings		Total Shareholders' Equity
Balance May 31, 2002	138	$	18,636	3,031,292	$	30,313	$	21,386,417	(375,959	)	$	(7,144,721	)	$	3,903,424	$	18,194,069
Exercise of stock options				834		8		5,747									5,755
Net income															61,669		61,669

Balance August 31, 2002	138	$	18,636	3,032,126	$	30,321	$	21,392,164	(375,959	)	$	(7,144,721	)	$	3,965,093	$	18,261,493
Net income															434,914		434,914

Balance November 30, 2002	138	$	18,636	3,032,126	$	30,321	$	21,392,164	(375,959	)	$	(7,144,721	)	$	4,400,007	$	18,696,407

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

				For the Six Months Ended November 30
				2002			2001
Cash Flows from Operating Activities:
Net income				$	496,582		$	759,669
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation			1,783,149			1,279,929
		Amortization of investment premiums			—			483
		Tax benefit from exercise of stock options			—			73,262
		Deferred income taxes			267,390			359,008
		Common stock issued to employee stock ownership plan			—			138,444
		Decrease (increase) in assets:
			Accounts receivable—trade		(1,291,738	)		(1,382,318	)
			Inventory		(131,520	)		(38,047	)
			Prepaid income taxes		205,000			72,380
			Spare parts		(173,953	)		(136,556	)
			Prepaid expenses and other current assets		194,288			182,486
			Other assets		3,539			13,954
		Increase (decrease) in liabilities:
			Accounts payable		(282,340	)		413,992
			Accrued expenses		(236,137	)		(96,637	)
			Other long-term liabilities		(26,346	)		—

		Net cash provided by operating activities			807,914			1,640,049

Cash Flows from Investing Activities:
	Sale of investments				—			500,770
	Acquisition of equipment, net				(1,408,325	)		(3,521,262	)

	Net cash used in investing activities				(1,408,325	)		(3,020,492	)

Cash Flows from Financing Activities:
	Redemption of Class "B" Preferred Stock				(12,469	)		(10,763	)
	Borrowing on line of credit				—			1,000,000
	Exercise of stock options				5,755			80,782

	Net cash (used in) provided by financing activities				(6,714	)		1,070,019

	Net decrease in cash and cash equivalents				(607,125	)		(310,424	)
	Cash and cash equivalents at beginning of period				2,847,581			839,103

	Cash and cash equivalents at end of period			$	2,240,456		$	528,679

Supplemental Disclosures of Cash Flow Information:
	Cash paid during the period for income taxes				—		$	10,000
	Cash paid during the period for interest			$	37,853		$	46,958

See notes to Unaudited Condensed Consolidated Financial Statements.

ALCIDE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.: Basis of Presentation

In the opinion of management, the accompanying unaudited financial statements of Alcide Corporation (the "Company") for the three and six-month periods ended November 30, 2002 and 2001 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 year ended May 31, 2002. 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.

2.: Accounts Receivable—Trade consisted of the following:

	November 30, 2002		May 31, 2002
Domestic Distributors	$	510,219	$	349,942
International Distributors		1,429,567		813,155
SANOVA Customers		2,016,490		1,580,444
Other Receivables		184,565		105,562

Total Accounts Receivable—Trade	$	4,140,841	$	2,849,103

The Company evaluates impairment of its trade receivables on a regular basis. No allowance has been made for doubtful accounts as the Company believes all receivables are collectible. This belief is consistent with collection history.

3.: Inventory consisted of the following:

	November 30, 2002		May 31, 2002
Raw Materials	$	461,228	$	307,922
Finished Products		577,791		630,517
SANOVA Inventory at Customer Sites		916,192		885,252

Total Inventory	$	1,955,211	$	1,823,691

4.: Line of Credit Payable

In September 2002, the Company extended its $10,000,000 unrestricted line of credit with US Bank. The new expiration date is September 30, 2004.

Two advances of $1,000,000 each have been taken on the line of credit. Currently, both advances are due in March 2003. The interest rates are approximately 3.1% for the first advance and 3.0% for the second. Interest is paid monthly. Management believes the Company was in full compliance with all bank covenants as of November 30, 2002.

5.: Commitments and Contingencies

As of November 30, 2002, the Company had contracts for future startups of five meat processing operations. It is estimated that 65% to 75% of the assets required for such installations have already been purchased and are classified on the balance sheet as construction in progress.

6.: Taxes

The income tax provisions were as follows:

	Three Months Ended November 30,				Six Months Ended November 30,
	2002		2001		2002		2001
Federal Income Taxes	$	224,047	$	225,928	$	255,815	$	391,344
State Income Taxes		10,138		10,222		11,575		17,707

Total Income Tax Provisions	$	234,185	$	236,150	$	267,390	$	409,051

7.: 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. For the three and six-month periods ended November 30, 2002, potential common shares excluded because of their antidilutive effect were 267,392 and 247,892 shares, respectively. For the three and six-month periods ended November 30, 2001, 96,790 and 94,790 shares were excluded, respectively.

Basic and diluted earnings per share were calculated as follows:

	Three Months Ended November 30,				Six Months Ended November 30,
	2002		2001		2002		2001
Net income	$	434,914	$	438,568	$	496,582	$	759,669
Weighted average number of common shares outstanding		2,656,167		2,642,535		2,656,094		2,636,298
Basic earnings per share	$	.16	$	.17	$	.19	$	.29
Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options		21,517		75,156		27,206		91,574

Weighted average common shares outstanding and dilutive potential common shares		2,677,684		2,717,691		2,683,300		2,727,872

Diluted earnings per share	$	.16	$	.16	$	.19	$	.28

8.: Recently Issued Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board ("FASB") issued Standard of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001 (effective for the Company on June 1, 2002). This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and replaces the provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of

Segments of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of segments of a business. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed of by sale. Under SFAS No. 144, long-lived assets are measured at the lower of carrying amount of fair value less cost to sell. The Company adopted this standard June 1, 2002 and following its provisions has not had a material effect on the Company's financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," which is effective for fiscal years ending after December 15, 2002 (effective for the Company in fiscal 2003). This Statement amends SFAS 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the Statement amends the disclosure requirements of Statement 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As the Company is still evaluating its opinion to change to the fair value based method of accounting for stock-based employee compensation, management is still assessing the potential impact of this Statement on its financial position and results of operations.

9.: Orders for Future Delivery

At November 30, 2002 and 2001, the Company had orders for future delivery of $474,296 and $479,564, respectively. The $474,296 orders for future delivery are scheduled for shipment during the period December 2002 through January 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.

10.: Segment Information

The Company follows the provisions of 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 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.

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

		Three Months Ended November 30,				Six Months Ended November 30,
		2002		2001		2002		2001
Animal Health and Surface Disinfectants
	License Revenue—U.S.	$	230,757		—	$	260,154		—
	Net Sales—U.S.	$	667,137	$	1,502,877	$	1,505,420	$	2,982,951
	Net Sales—International	$	1,337,586	$	1,322,268	$	2,160,712	$	2,554,660