**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  November 30, 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                         .** |
|                                                                                                                                                                                                                                                                                                                                 |        |                                                                                                      |  |

 

 

**CommissionFile 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 reportsrequired to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling 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’sclasses of common stock, as of November 30, 2003:  2,655,038, net of Treasury Stock.

 

 

----

 

**ALCIDE CORPORATION**

 

**INDEX**

 
| PART I.                                                                                                   | FINANCIAL INFORMATION                                                                                                                    |   |
|-----------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      |                                                                                                                                     |   |
|                                                                                                      |                                                                                                                                     |   |
| Item 1.   Financial Statements (unaudited)                                                           |                                                                                                                                     |
|                                                                                                      |                                                                                                                                     |   |
|                                                                                                      | Condensed Consolidated Balance Sheets –  November 30, 2003 and May 31, 2003                                               |   |
|                                                                                                      |                                                                                                                                     |   |
|                                                                                                      | Condensed Consolidated Statements of  Operations - For the three and six months ended November 30, 2003 and  November 30, 2002 |   |
|                                                                                                      |                                                                                                                                     |   |
|                                                                                                      | Condensed Consolidated Statements of  Shareholders’ Equity                                                                          |   |
|                                                                                                      |                                                                                                                                     |   |
|                                                                                                      | Condensed Consolidated Statements of Cash Flows - For the six months  ended November 30, 2003 and November 30, 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 4.  Submission of Matters to a Vote  of Security Holders                                        |                                                                                                                                     |
|                                                                                                      |                                                                                                                                     |   |
| Item 6.  Exhibits and Reports  on Form 8-K                                                           |                                                                                                                                     |
|                                                                                                      |                                                                                                                                     |   |
|                                                                                                      |                                                                                                                                     |   |
| SIGNATURE                                                                                                 |                                                                                                                                     |   |

 

2

----

 

**ALCIDE CORPORATION UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                  |   | **November 30, 2003** |           | **May 31, 2003** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|----------------|-----------------------|------------|
| **Assets:**                                                                                                                                                           |   |                       |           |                  |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Current  assets:                                                                                                                                                      |   |                       |           |                  |       |
| Cash and cash equivalents                                                                                                                                             |   | $                          | 2,969,633      |                  | $          | 2,286,641 |   |
| Accounts receivable – trade, net                                                                                                                                 |   | 4,276,906                  |           | 3,831,527             |       |
| Inventory                                                                                                                                                             |   | 1,923,595                  |           | 2,097,097             |       |
| Deferred and prepaid income taxes                                                                                                                                     |   | 372,502                    |           | 243,413               |       |
| Spare parts                                                                                                                                                           |   | 1,042,552                  |           | 884,226               |       |
| Prepaid expenses and other current assets                                                                                                                             |   | 332,795                    |           | 468,863               |       |
| Total current assets                                                                                                                                                  |   | 10,917,983                 |           | 9,811,767             |       |
| Equipment and leasehold improvements:                                                                                                                                 |   |                       |           |                  |       |
| SANOVA plant assets                                                                                                                                                   |   | 17,753,908                 |           | 17,037,502            |       |
| Construction in progress                                                                                                                                              |   | 2,666,772                  |           | 2,596,332             |       |
| Office equipment                                                                                                                                                      |   | 664,985                    |           | 567,158               |       |
| Laboratory, manufacturing equipment and vehicles                                                                                                                      |   | 577,916                    |           | 523,718               |       |
| Leasehold improvements                                                                                                                                                |   | 77,089                     |           | 73,483                |       |
| Less:  Accumulated  depreciation and amortization                                                                                                                |   | (11,392,199                | )              | (9,790,948            | )          |
| Total equipment and leasehold improvements, net                                                                                                                       |   | 10,348,471                 |           | 11,007,245            |       |
| Goodwill                                                                                                                                                              |   | 478,807                    |           | 478,807               |       |
| Other assets                                                                                                                                                          |   | 70,885                     |           | 70,885                |       |
| **Total Assets**                                                                                                                                                      |   | **$**                      | **21,816,146** | ** **            | **$**      | **21,368,704** | ** ** |
|                                                                                                                                                                  |   |                       |           |                  |       |
| **Liabilities  and Shareholders’ Equity:**                                                                                                                       |   |                       |           |                  |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Current liabilities:                                                                                                                                                  |   |                       |           |                  |       |
| Accounts payable                                                                                                                                                      |   | $                          | 742,961        |                  | $          | 686,391 |   |
| Accrued expenses                                                                                                                                                      |   | 583,058                    |           | 501,578               |       |
| Income taxes payable                                                                                                                                                  |   | 115,300                    |           | 115,300               |       |
| Total current liabilities                                                                                                                                             |   | 1,441,319                  |           | 1,303,269             |       |
| Deferred tax liability                                                                                                                                                |   | 731,351                    |           | 565,287               |       |
| Other long-term liabilities                                                                                                                                           |   | —                     |           | 8,140                 |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| **Total Liabilities**                                                                                                                                                 |   | **2,172,670**              | ** **     | **1,876,696**         | ** ** |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Commitments  and Contingencies                                                                                                                                        |   |                       |           |                  |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Redeemable Class “B” Preferred Stock - $.01 par value;  authorized 10,000,000 shares; issued and outstanding:                                               |   |                       |           |                  |       |
| November 30, 2003 – 60,663; May 31, 2003 – 63,675                                                                                                 |   | 159,239                    |           | 167,145               |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Shareholders’ equity:                                                                                                                                            |   |                       |           |                  |       |
| Class “A” Preferred Stock - no par value, authorized 1,000 shares;  issued and outstanding November 30, 2003 – 138;  May 31, 2003 - 138 |   | 18,636                     |           | 18,636                |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Common Stock - $.01 par value; authorized 10,000,000 shares; issued:                                                                                                  |   |                       |           |                  |       |
| November 30, 2003 – 3,040,997;   May 31, 2003 – 3,040,597                                                                                    |   | 30,410                     |           | 30,406                |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Common treasury stock at cost                                                                                                                                         |   |                       |           |                  |       |
| November 30, 2003 – 385,959; May 31, 2003 - 385,959                                                                                                    |   | (7,260,041                 | )              | (7,260,041            | )          |
|                                                                                                                                                                  |   |                       |           |                  |       |
| Additional paid-in capital                                                                                                                                            |   | 21,507,938                 |           | 21,502,828            |       |
| Retained earnings                                                                                                                                                     |   | 5,187,294                  |           | 5,033,034             |       |
| **Total  Shareholders’ Equity**                                                                                                                                  |   | 19,484,237                 |           | 19,324,863            |       |
|                                                                                                                                                                  |   |                       |           |                  |       |
| **Total  Liabilities and Shareholders’ Equity**                                                                                                                  |   | **$**                      | **21,816,146** | ** **            | **$**      | **21,368,704** | ** ** |

 

See notes to Unaudited Condensed ConsolidatedFinancial Statements.

 

3

----

 

**ALCIDE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                                             |   | **For the Three Months Ended  November 30,** |      | **For the Six Months Ended  November 30,** |   |
|----------------------------------------------------------------------------------|--------|---------------------------------------------------|-----------|-------------------------------------------------|--------|
|                                                                             |   | **2003**                                          |      | **2002**                                        |   | **2003** |   | **2002** |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Revenue:                                                                         |   |                                              |      |                                            |   |   |   |   |   |
| Net sales                                                                        |   | $                                                 | 5,942,174 |                                            | $      | 5,547,795 |   | $ | 10,830,499 |   | $ | 10,563,590 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| License revenue                                                                  |   | 287,143                                           |      | 230,757                                         |   | 595,414 |   | 260,154 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Total revenue                                                                    |   | 6,229,317                                         |      | 5,778,552                                       |   | 11,425,913 |   | 10,823,744 |   |
| Expenditures:                                                                    |   |                                              |      |                                            |   |   |   |   |   |
| Cost of goods sold, exclusive of impairment charges                              |   | 3,550,985                                         |      | 3,086,656                                       |   | 6,587,098 |   | 5,891,934 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Impairment of SANOVA plant assets                                                |   | 328,870                                           |      | 53,301                                          |   | 337,816 |   | 53,301 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Research and development expense                                                 |   | 470,177                                           |      | 563,334                                         |   | 949,591 |   | 1,153,959 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Consulting expense to related parties                                            |   | 15,000                                            |      | 15,000                                          |   | 30,000 |   | 30,000 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Selling, general and administrative expense                                      |   | 1,785,128                                         |      | 1,390,203                                       |   | 3,313,040 |   | 2,925,577 |   |
| Total expenditures                                                               |   | 6,150,160                                         |      | 5,108,494                                       |   | 11,217,545 |   | 10,054,771 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Operating income                                                                 |   | 79,157                                            |      | 670,058                                         |   | 208,368 |   | 768,973 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Interest income                                                                  |   | 4,176                                             |      | 6,201                                           |   | 8,263 |   | 14,068 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Interest expense                                                                 |   | —                                            |      | (16,805                                         | )      | — |   | (37,853 | ) |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Other income                                                                     |   | 11,273                                            |      | 9,645                                           |   | 20,693 |   | 18,784 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Income before provision for income taxes                                         |   | 94,606                                            |      | 669,099                                         |   | 237,324 |   | 763,972 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Provision for income taxes                                                       |   | 33,113                                            |      | 234,185                                         |   | 83,064 |   | 267,390 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Net income                                                                       |   | $                                                 | 61,493    |                                            | $      | 434,914 |   | $ | 154,260 |   | $ | 496,582 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Basic earnings per common share                                                  |   | $                                                 | .02       |                                            | $      | .16 |   | $ | .06 |   | $ | .19 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Diluted earnings per common share                                                |   | $                                                 | .02       |                                            | $      | .16 |   | $ | .06 |   | $ | .19 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Weighted average common stock and dilutive potential common shares  outstanding: |   |                                              |      |                                            |   |   |   |   |   |
| Basic                                                                            |   | 2,654,805                                         |      | 2,656,167                                       |   | 2,654,721 |   | 2,656,094 |   |
|                                                                             |   |                                              |      |                                            |   |   |   |   |   |
| Diluted                                                                          |   | 2,675,662                                         |      | 2,677,684                                       |   | 2,666,634 |   | 2,683,300 |   |

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

4

----

 

**ALCIDE CORPORATIONUNAUDITED 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 |   |
|                                        |   |                                     |   |             |   |                             |      |                      |   |                   |       |                                    |       |   |   |   |   |   |   |
| Exercise  of stock options                  |   |                                     |   |             |   | 400                              |      | 4                         |   | 4,771                  |       |                                    |       |   |   |   |   | 4,775 |   |
|                                        |   |                                     |   |             |   |                             |      |                      |   |                   |       |                                    |       |   |   |   |   |   |   |
| Tax  benefit from exercise of stock options |   |                                     |   |             |   |                             |      |                      |   | 339                    |       |                                    |       |   |   |   |   | 339 |   |
|                                        |   |                                     |   |             |   |                             |      |                      |   |                   |       |                                    |       |   |   |   |   |   |   |
| Net  income                                 |   |                                     |   |             |   |                             |      |                      |   |                   |       |                                    |       |   |   | 61,493 |   | 61,493 |   |
|                                        |   |                                     |   |             |   |                             |      |                      |   |                   |       |                                    |       |   |   |   |   |   |   |
| Balance  November 30, 2003             |   | 138                                      |   | $                | 18,636 |                             | 3,040,997 |                      | $      | 30,410                 |       | $                                       | 21,507,938 |   | (385,959 | ) | $ | (7,260,041 | ) | $ | 5,187,294 | ) | $ | 19,484,237 |   |

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

5

----

 

##### **ALCIDE CORPORATION UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                               |   | **For the Six Months Ended  November 30,** |      |
|------------------------------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                                               |   | **2003**                                        |      | **2002** | ** ** |
| Cash  Flows from Operating Activities:                                             |   |                                            |      |   |   |
| Net  income                                                                        |   | $                                               | 154,260   |   | $ | 496,582 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |   |                                            |      |   |   |
|                                                                               |   |                                            |      |   |   |
| Depreciation                                                                       |   | 1,965,059                                       |      | 1,783,149 |   |
| Asset  impairment charges                                                          |   | 337,816                                         |      | 53,301 |   |
| Loss  on disposal of assets                                                        |   | 16,134                                          |      | — |   |
| Tax  benefit from exercise of stock options                                        |   | 339                                             |      | — |   |
| Deferred  income taxes                                                             |   | 82,725                                          |      | 267,390 |   |
| Decrease  (increase) in assets:                                                    |   |                                            |      |   |   |
| Accounts  receivable – trade, net                                             |   | (445,379                                        | )         | (1,291,738 | ) |
| Inventory                                                                          |   | 173,502                                         |      | (131,520 | ) |
| Prepaid  income taxes                                                              |   | (45,750                                         | )         | 205,000 |   |
| Spare  parts                                                                       |   | (158,326                                        | )         | (173,953 | ) |
| Prepaid  expenses and other current assets                                         |   | 136,068                                         |      | 194,288 |   |
| Other  assets                                                                      |   | —                                          |      | 3,539 |   |
| Increase  (decrease) in liabilities:                                               |   |                                            |      |   |   |
| Accounts  payable                                                                  |   | 56,570                                          |      | (282,340 | ) |
| Accrued  expenses                                                                  |   | 81,480                                          |      | (236,137 | ) |
| Other  long-term liabilities                                                       |   | (8,140                                          | )         | (26,346 | ) |
| Net  cash provided by operating activities                                         |   | 2,346,358                                       |      | 861,215 |   |
|                                                                               |   |                                            |      |   |   |
| Cash  Flows from Investing Activities:                                             |   |                                            |      |   |   |
| Acquisition  of equipment                                                          |   | (1,660,235                                      | )         | (1,461,626 | ) |
|                                                                               |   |                                            |      |   |   |
| Cash  Flows from Financing Activities:                                             |   |                                            |      |   |   |
| Redemption  of Class “B” Preferred Stock                                 |   | (7,906                                          | )         | (12,469 | ) |
| Exercise  of stock options                                                         |   | 4,775                                           |      | 5,755 |   |
| Net  cash used in financing activities                                             |   | (3,131                                          | )         | (6,714 | ) |
|                                                                               |   |                                            |      |   |   |
| Net  increase (decrease) in cash and cash equivalents                              |   | 682,992                                         |      | (607,125 | ) |
| Cash  and cash equivalents at beginning of period                                  |   | 2,286,641                                       |      | 2,847,581 |   |
| Cash  and cash equivalents at end of period                                        |   | $                                               | 2,969,633 |   | $ | 2,240,456 |   |
| Supplemental  Disclosures of Cash Flow Information:                                |   |                                            |      |   |   |
| Cash  paid during the period for income taxes                                      |   | $                                               | 45,750    |   | $ | — |   |
| Cash  paid during the period for interest                                          |   | $                                               | —    |   | $ | 37,853 |   |

 

See notes to Unaudited Condensed ConsolidatedFinancial Statements.

 

6

----

 

ALCIDE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

 

1.                                     Basis of Presentation

 

Inthe opinion of management, the accompanying unaudited condensed consolidatedfinancial statements of Alcide Corporation (the “Company”) for the three andsix month periods ended November 30, 2003 and 2002 have been prepared inaccordance with the instructions to Form 10-Q. Certain information and disclosures normally included in notes tofinancial statements have been condensed or omitted according to the rules andregulations of the Securities and Exchange Commission, although the Company believesthat the disclosures are adequate to make the information presented notmisleading.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe financial statements contained in the Company’s Annual Report on Form 10-Kfor the fiscal year ended May 31, 2003. In the opinion of management, the accompanying unaudited condensedconsolidated financial statements contain all adjustments (consisting of onlynormal recurring accruals) considered necessary for a fair presentation.  Certain reclassifications have been made toprior year financial statements to conform to current year presentation. Theresults of operations for the interim periods are not necessarily indicative ofthe results to be expected for the full year.

 

StockOption Plans

 

TheCompany 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 optionsvest evenly over a five-year period.  Asallowed by Financial Accounting Standards Board Statement No. 123, “Accountingfor Stock-Based Compensation” (SFAS 123) and Statement No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure” (SFAS 148), the Companyaccounts for its stock option plans under the guidelines of AccountingPrinciples Board Opinion No. 25, “Accounting for Stock issued to Employees”(APB 25).

 

Thefollowing table illustrates the effect on net income and earnings per share asif the Company had applied the fair value recognition provisions of SFAS 123.

 
|                                                                                                                                                |   | **Three Months Ended  November 30,** |     | **Six Months Ended  November 30,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|----------|-----------------------------------------|------------|
|                                                                                                                                                |   | **2003**                                  |     | **2002**                                | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                                |   |                                      |     |                                    |       |   |   |   |   |
| Net income, as reported                                                                                                                             |   | $                                         | 61,493   |                                    | $          | 434,914 |   | $ | 154,260 |   | $ | 496,582 |   |
|                                                                                                                                                |   |                                      |     |                                    |       |   |   |   |   |
| Deduct:  Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | 174,500                                   |     | 221,800                                 |       | 326,800 |   | 372,500 |   |
|                                                                                                                                                |   |                                      |     |                                    |       |   |   |   |   |
| Pro forma net (loss)  income                                                                                                                        |   | $                                         | (113,007 | )                                       | $          | 213,114 |   | $ | (172,540 | ) | $ | 124,082 |   |
|                                                                                                                                                |   |                                      |     |                                    |       |   |   |   |   |
| Earnings (loss) per share                                                                                                                           |   |                                      |     |                                    |       |   |   |   |   |
| Basic — as reported                                                                                                                            |   | $                                         | .02      |                                    | $          | .16 |   | $ | .06 |   | $ | .19 |   |
| Basic — pro forma                                                                                                                              |   | (.04                                      | )        | .08                                     |       | (.06 | ) | .05 |   |
|                                                                                                                                                |   |                                      |     |                                    |       |   |   |   |   |
| Diluted — as reported                                                                                                                          |   | .02                                       |     | .16                                     |       | .06 |   | .19 |   |
| Diluted — pro forma                                                                                                                            |   | (.04                                      | )        | .08                                     |       | (.06 | ) | .05 |   |

 

7

----

 

Recentlyissued accounting pronouncements

 

InMay 2003, the EITF issued a final consensus on Issue 01-8, “DeterminingWhether an Arrangement Contains a Lease.” Issue 01-8 provides guidance on determining whether an arrangement is orincludes a lease within the scope of SFAS No. 13 “Accounting for Leases.”  If it is determined that a lease exists, thelease and non-lease components of a combined sales arrangement must beaccounted for separately.  Issue 01-8 iseffective prospectively for arrangements entered into, modified, or acquired infiscal periods beginning after May 28, 2003.

 

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

 

2.                                       Accounts Receivable – Trade, Net consisted ofthe following:

 
|                                        |   | **November 30,  2003** |      | **May 31,  2003** |   |
|---------------------------------------------|--------|-----------------------------|-----------|-------------------|--------|
| Domestic Distributors                       |   | $                           | 317,872   |              | $      | 372,837 |   |
| International Distributors                  |   | 1,417,525                   |      | 1,402,504         |   |
| SANOVA Customers                            |   | 2,321,465                   |      | 1,888,840         |   |
| Other Receivables                           |   | 220,044                     |      | 167,346           |   |
| Total Accounts Receivable  –Trade, Net |   | $                           | 4,276,906 |              | $      | 3,831,527 |   |

 

TheCompany evaluates impairment of its trade receivables on a regular basis.  The allowance for doubtful accounts was$28,000 as of November 30, 2003 and May 31, 2003, respectively, whichwas estimated based on collection history and known events.

 

3.                                     Inventory consisted of the following:

 
|                                |   | **November  30, 2003** |      | **May 31,  2003** |   |
|-------------------------------------|--------|------------------------|-----------|------------------------|--------|
| Raw Materials                       |   | $                      | 553,236   |                   | $      | 692,480 |   |
| Finished Products                   |   | 486,159                |      | 484,426                |   |
| SANOVA Inventory at  Customer Sites |   | 884,200                |      | 920,191                |   |
| Total Inventory                     |   | $                      | 1,923,595 |                   | $      | 2,097,097 |   |

 

4.                                     Commitments and Contingencies

 

Asof November 30, 2003, the Company had contracts for future startups offour poultry and five red meat processing operations.  These systems are expected to be installed in the third quarterof fiscal 2004 at an approximate total cost of $1,160,000.  As of November 30, 2003, approximately$735,000 of the equipment required for these installations was on hand.

 

5.                                       Earnings Per Share

 

Basic earnings per share is computed by dividing netincome by the weighted average number of common shares outstanding during theperiod.  Diluted earnings per share iscomputed by dividing net income by the weighted average number of common sharesand potential common shares outstanding during the period. Potential commonshares of the Company include the dilutive effect of outstanding stock optionsand warrants. For thethree and six month periods ended November 30, 2003, potential commonshares excluded because of their antidilutive effect were 255,993 and 269,697shares respectively.  For the three andsix month periods ended November 30, 2002, 267,392 and 247,892 shares wereexcluded, respectively.

 

8

----

 

Basic and diluted earnings per share were calculated as follows:

 
|                                                                                                                                                                      |   | **Three Months Ended  November 30,** |   | **Six Months Ended  November 30,** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|------------|
|                                                                                                                                                                      |   | **2003**                                  |   | **2002**                                | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                                                                                                      |   |                                      |   |                                    |       |   |   |   |   |
| Net income                                                                                                                                                                |   | $                                         | 61,493 |                                    | $          | 434,914 |   | $ | 154,260 |   | $ | 496,582 |   |
| Weighted  average number of common shares outstanding                                                                                                                     |   | 2,654,805                                 |   | 2,656,167                               |       | 2,654,721 |   | 2,656,094 |   |
|                                                                                                                                                                      |   |                                      |   |                                    |       |   |   |   |   |
| Basic  earnings per share                                                                                                                                                 |   | $                                         | .02    |                                    | $          | .16 |   | $ | .06 |   | $ | .19 |   |
| 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 |   | 20,857                                    |   | 21,517                                  |       | 11,913 |   | 27,206 |   |
| Weighted  average common shares outstanding and dilutive potential common shares                                                                                          |   | 2,675,662                                 |   | 2,677,684                               |       | 2,666,634 |   | 2,683,300 |   |
|                                                                                                                                                                      |   |                                      |   |                                    |       |   |   |   |   |
| Diluted  earnings per share                                                                                                                                               |   | $                                         | .02    |                                    | $          | .16 |   | $ | .06 |   | $ | .19 |   |

 

6.                                       Ordersfor Future Delivery

 

At November 30, 2003 and 2002, the Company hadorders for future delivery of $406,940 and $474,296, respectively.  The $406,940 orders for future delivery arescheduled for shipment during the period December 2003 throughJanuary 2004.  Data for both yearsexcludes expected sales of SANOVA because contracts with SANOVA customers donot require placement of purchase orders for future delivery.

 

7.                                       SegmentInformation

 

The Company follows the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise andRelated Information” and reports segment information in the same format asreviewed by the Company’s management (the “Management Approach”), which isorganized around differences in products and services.  Management has determined the Company hastwo reportable segments, Animal Health and Surface Disinfectants and SANOVAFood Antimicrobial Products.

 

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

 

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

 

9

----

 

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

 
|                                     |   | **Three Months Ended  November 30,** |    | **Six Months Ended  November 30,** |       |
|------------------------------------------|--------|-------------------------------------------|---------|-----------------------------------------|------------|
|                                     |   | **2003**                                  |    | **2002**                                | ** ** | **2003** | ** ** | **2002** | ** ** |
| Animal  Health and Surface Disinfectants |   |                                      |    |                                    |       |   |   |   |   |
| License Revenue – U.S.              |   | $                                         | 287,143 |                                    | $          | 230,757 |   | $ | 595,414 |   | $ | 260,154 |   |
| Net Sales - U.S.                         |   | 973,799                                   |    | 667,137                                 |       | 1,498,794 |   | 1,505,420 |   |
| Net Sales - International                |   | 1,186,186                                 |    | 1,337,586                               |       | 2,021,885 |   | 2,160,712 |   |
| Total Revenue                            |   | 2,447,128                                 |    | 2,235,480                               |       | 4,116,093 |   | 3,926,286 |   |
| Gross Margin                             |   | 1,471,414                                 |    | 1,345,178                               |       | 2,516,256 |   | 2,258,616 |   |
|                                     |   |                                      |    |                                    |       |   |   |   |   |
| Assets (at end of period)                |   | 3,483,528                                 |    | 3,571,146                               |       | 3,483,528 |   | 3,571,146 |   |
| Fixed Asset Additions                    |   | —                                    |    | —                                  |       | — |   | — |   |
| Depreciation Expense                     |   | 1,344                                     |    | 1,344                                   |       | 2,688 |   | 2,688 |   |
|                                     |   |                                      |    |                                    |       |   |   |   |   |
| SANOVA  Food Antimicrobial Products      |   |                                      |    |                                    |       |   |   |   |   |
| Net Sales - U.S.                         |   | 3,782,189                                 |    | 3,543,072                               |       | 7,309,820 |   | 6,897,458 |   |
| Gross Margin, before  impairment         |   | 1,206,918                                 |    | 1,346,718                               |       | 2,322,559 |   | 2,673,194 |   |
| Gross Margin, after  impairment          |   | 878,048                                   |    | 1,293,417                               |       | 1,984,743 |   | 2,619,893 |   |
|                                     |   |                                      |    |                                    |       |   |   |   |   |
| Assets (at end of period)                |   | 14,302,385                                |    | 15,478,942                              |       | 14,302,385 |   | 15,478,942 |   |
| Fixed Asset Additions                    |   | 979,796                                   |    | 278,838                                 |       | 1,590,807 |   | 1,383,416 |   |
| Depreciation Expense                     |   | 964,674                                   |    | 890,849                                 |       | 1,899,609 |   | 1,723,938 |   |
|                                     |   |                                      |    |                                    |       |   |   |   |   |
| Not Segment Related                      |   |                                      |    |                                    |       |   |   |   |   |
| Assets (at end of period)                |   | 4,030,233                                 |    | 3,045,294                               |       | 4,030,233 |   | 3,045,294 |   |
| Fixed Asset Additions                    |   | 42,470                                    |    | 22,212                                  |       | 69,428 |   | 78,210 |   |
| Depreciation Expense                     |   | 32,523                                    |    | 29,096                                  |       | 62,762 |   | 56,523 |   |
|                                     |   |                                      |    |                                    |       |   |   |   |   |
| Total                                    |   |                                      |    |                                    |       |   |   |   |   |
| License Revenue                          |   | 287,143                                   |    | 230,757                                 |       | 595,414 |   | 260,154 |   |
| Net Sales                                |   | 5,942,174                                 |    | 5,547,795                               |       | 10,830,499 |   | 10,563,590 |   |
| Total Revenue                            |   | 6,229,317                                 |    | 5,778,552                               |       | 11,425,913 |   | 10,823,744 |   |
| Gross Margin                             |   | 2,349,462                                 |    | 2,638,595                               |       | 4,500,999 |   | 4,878,509 |   |
|                                     |   |                                      |    |                                    |       |   |   |   |   |
| Assets (at end of period)                |   | 21,816,146                                |    | 22,095,382                              |       | 21,816,146 |   | 22,095,382 |   |
| Fixed Asset Additions                    |   | 1,022,266                                 |    | 301,050                                 |       | 1,660,235 |   | 1,461,626 |   |
| Depreciation Expense                     |   | 998,541                                   |    | 921,289                                 |       | 1,965,059 |   | 1,783,149 |   |
|                                          |        |                                           |         |                                         |            |  |  |  |  |  |  |  |  |

 

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

 

10

----

PARTI

 

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

 

Introduction

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

 

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

 

The Company reports andcontrols its business through two business segments:

 

•      Animal Health andSurface Disinfectants.  This segmentincludes products sold to the dairy industry for prevention of mastitisinfections in dairy cows under the trade names UDDERgold® UDDERgold Plus®, UDDERgold Platinum®, UDDERgold5-Star, 4XLA® and Pre-Gold®.  All of the Company’s Animal Health revenue is generated throughsales to distributors who re-sell directly to dairy farmers and farmcooperatives.

 

Thisbusiness segment also includes a line of sterilants and disinfectants under thetrade names of Exspor® and LD® sold predominantly to thehealth care industry to reduce the potential for disease transmission viacontaminated surfaces.

 

•      SANOVA Food Antimicrobial Products.  SANOVA is an antimicrobial solution sold topoultry and meat slaughter operations and food processing companies for controlof food borne pathogens such as *Salmonella, E-coli*015787, *Listeria*,and *Campylobacter.*  All SANOVA sales to date have been direct tothe end customer/user.  Typically, theSANOVA components are delivered to the customer’s site in bulk concentrate formthen, at the time of use, the components are automatically mixed, diluted anddispensed through a PLC controlled mixing apparatus supplied and owned byAlcide.

 

Risk and Uncertainties

 

This report includesforward looking statements which involve risk and uncertainty including,without limitation, risk of dependence on patents, trademarks, third partysuppliers, market acceptance of and demand for the Company’s products,distribution capabilities and the development of technology and governmentalregulatory approval thereof.

 

Sentences or phrases thatuse words such as “believes”, “anticipates”, “hopes”, “plans”, “may”, “can”,“will”, “expects” and others are often used to flag such forward lookingstatements, but their absence does not necessarily mean a statement is notforward looking.  Such statements reflectmanagement’s current opinion and are designed to help readers understandmanagement’s thinking.  By their verynature, however, such statements are subject to certain risks and uncertaintiesthat could cause actual results to differ materially from those expected orprojected.  Readers are cautioned not toplace undo reliance on these forward looking statements which speak only as ofthe date hereof.  The Company undertakesno obligation to release publicly any revisions to these forward lookingstatements that may be made to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

Risks and uncertaintiesthat may affect the Company’s operating results and business performanceinclude:  the Company’s ability toprotect its patents and other proprietary rights; the volume and timing ofproduct sales; pricing; market acceptance of its products; the costs andeffects of complying with laws and regulations relating to the environment andto the manufacture, storage, distribution and labeling of the Company’sproducts; the ability to develop and maintain distribution and supplyarrangements; the effect of the Company’s accounting policies; changes in tax,fiscal and governmental and regulatory policies; economic factors such as theworldwide economy, interest rates, currency rates and currency movements;changes in the capital markets affecting the Company’s ability to raisecapital; the occurrence of litigation or claims; the loss or insolvency of amajor customer, distributor or supplier; losses of or changes in executivemanagement; the

 

11

----

 

Company’s ability to continue product introductionsand technological innovations; and other uncertainties and risks reported fromtime to time in our reports filed with the Securities and ExchangeCommission.  In addition, the Companynotes that its stock price can be affected by fluctuations in quarterlyearnings.  There can be no assurancethat the Company’s earnings level will meet investors’ expectations.

 

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

 

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

 

Alcide’s SANOVA FoodAntimicrobial products participate in a rapidly evolving marketplace which byits nature attracts innovation and competing technologies.  The Company’s SANOVA sales are based onperformance, price and convenience. Introduction of competitive products better meeting these customer needscan have a material impact on the Company’s ability to sell and expand the useof its SANOVA products.

 

The Company’s businessmodel for its SANOVA business involves a capital investment ranging from$20,000 to $500,000 for each user plant site depending on the size of theoperation.  The capital investments aredepreciated over a five-year life while customer contracts range from one tofour years.  If a substantial number ofcustomers elect not to renew their contracts, non-productive assets would existuntil new customers are found.

 

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

 

The economic vitality ofthe industries served by the Company’s products can have an impact on Alcide’sability to sell its products, expand sales and maintain product pricelevels.  Within the Animal Health businesssegment, the Company’s products are premium priced consistent with theirsuperior performance.  However, as dairyindustry product margins are compressed, some farmers may discontinue the useof Alcide products in favor of lower priced competitors’ products.  Likewise, the Company’s ability to sell andexpand sales of its Food Safety products may be impacted by economic conditionswithin the poultry and red meat industries.

 

CriticalAccounting Policies

 

•               Revenue Recognition

Revenue from sales of SANOVAis recognized based on the terms of the Company’s contracts with individualcustomers.  For customers using morethan 15,000 gallons of SANOVA per month, Alcide provides bulk shipments ofinventory to the customer and the customer is invoiced at month-end withrevenue recognized based on the amount of product processed or gallons ofSANOVA used.  All other customers areinvoiced and revenue is recognized at the time SANOVA is shipped to theirfacilities.  Payment in either case isdue fifteen to thirty days after billing.

 

Animal Health and SurfaceDisinfectant sales are recognized at the time of shipment to distributors or toend users.  The Company provides alimited warranty to its distributors which limits the Company’s obligation toreplacement of defective product.  Suchreplacements have, for the past several years, been less than .1% of netsales.  The distributors have nocontractual right to return unsold product. Payment terms are generally sixty days for international distributorsand thirty days for domestic distributors.

 

12

----

 

•               Depreciation andBook Value of SANOVA Plant Assets

Capital investments forSANOVA plant assets are depreciated over a five-year life, while customercontracts range from one year to four years. As the SANOVA food antimicrobial business has been in existence for onlyfive years, the Company has a limited, practical basis on which to assigndepreciable life.  Management believes,however, based on five years experience in three plants, that well-maintainedassets will be operational beyond five years and, further, that if customersdecide not to renew their contracts major portions of the assets can berelocated to new customer sites.  As ofNovember 30, 2003, plant assets from three installations have beensuccessfully redeployed to new sites. The cost to maintain the assets is charged to operations.

 

In the event that a SANOVAcontract is terminated prior to the end of the asset’s five-year depreciablelife, a portion of the cost related to placing the asset in operation would beexpensed as “impairment costs.”

 

Commitments andContingencies

 

Leases: The Company leases certain property under non-cancelable operatingleases that expire through July 2009. Insurance, utilities and maintenance expenses are borne by theCompany.  There are no contingentrentals or subleased rentals.

 

SANOVA Agreements:  The Company has signed contracts with poultry and beef processingplants for SANOVA systems to be installed in the third quarter of FY 2004 whichwill cost approximately $1,160,000.  Asof November 30, 2003, $735,000 of the equipment required was on hand forthese installations.

 

Employment Agreements:  One officer has a one year, automaticallyrenewable, employment agreement which currently obligates the Company to a basesalary of $287,929 per year.  Bonuscompensation of 100% of base pay can be earned at the discretion of the Boardof Directors.

 

Redeemable Class “B”Preferred Stock:  On September 30thof each year, the Company redeems a portion of its outstanding Series 2 Class“B” Preferred Stock.  The amountredeemed 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 onSeptember 30, 2003 for $7,906. This leaves a total of $159,239 of Class “B” Preferred Stock to beredeemed in subsequent fiscal years. The amounts to be redeemed subsequent to September 2003 depend uponfuture net income and are not yet known.

 

The following table summarizes the abovecommitments:

 
|                           |   | **Less than 1 year** |    | **FY 2005** |   | **FY 2006** |   | **FY 2007** |    | **FY 2008** |   | **FY 2009** |   |
|--------------------------------|--------|----------------------|---------|-------------|--------|-------------|--------|-------------|---------|-------------|--------|-------------|--------|
| Operating Leases               |   | $                    | 125,294 |        | $      | 135,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |
|                           |   |                 |    |        |   |        |   |        |    |        |   |        |   |
| SANOVA Agreements              |   | 425,000              |    | —      |   | —      |   | —      |    | —      |   | —      |   |
|                           |   |                 |    |        |   |        |   |        |    |        |   |        |   |
| Employment  Agreements         |   | 287,929              |    | —      |   | —      |   | —      |    | —      |   | —      |   |
|                           |   |                 |    |        |   |        |   |        |    |        |   |        |   |
| Total  Contractual Commitments |   | $                    | 838,223 |        | $      | 135,544     |   | $           | 137,999 |        | $      | 140,946     |   | $ | 141,437 |   | $ | 23,573 |   |

 

FinancialCondition and Results of Operations

 

ManagementOverview

 

Earningsfor the quarter and six month periods ended November 30, 2003 wereadversely affected by two occurrences:

 

13

----

 

1.     The Company expensed $360,357 during thequarter and $402,480 during the six month periods ended November 30, 2003to remove and write down the value of SANOVA assets idled during the economicdownturn and subsequent consolidation that occurred within the poultry industryduring the past 18 months.  During thisperiod, one SANOVA customer switched to a lower-priced competitor’s product,three customers ceased using antimicrobials altogether for economic reasons andthree customers closed their plants and consolidated operations primarily inother plants served by SANOVA.  TheSANOVA assets from three of these sites have now been redeployed and are againrevenue generating. Nonproductive assets were also removed from one red meatplant.  The initial cost to install andput these assets in service has been expensed as SANOVA plant asset impairmentcharges.  This expense has no cash flowimpact.

 

2.     The Company incurred legal expenses of$312,667 for the quarter and $409,790 for the six month period endedNovember 30, 2003 related to its patent infringement lawsuit against Bio-CideInternational.  The suit was settledthrough a negotiated agreement on October 2, 2003 and Bio-Cide has agreednot to market products to the red meat industry at less than pH 5.5 and to payAlcide a royalty on Bio-Cide products sold to the red meat industry.  Bio-Cide also agreed to restrictions onproducts sold to other food processing industries.

 

Thereis no assurance that similar expenses will not occur in the future as theCompany is certainly dependent on the economic vitality of the industries itserves and Alcide will aggressively defend its Intellectual Property againstinfringement.  However, Alcide has nopatent infringement lawsuit activity ongoing or contemplated at present.  Further, the Company has modified itscontracts to mitigate the impact of future economic downturns to the extentthat most new agreements contain minimum payment provisions and/or require thecustomer to be responsible for installation costs.

 

Adjustedfor these occurrences, both of the Company’s business segments are growing,profitable, cash positive and expanding their share of market.  In the SANOVA Food Safety business segment,Alcide continues to expand at the rate of one to two new operations per month.  Since the beginning of the year, the Companyhas started six new poultry operations and eight new red meat operations.  In addition, its Chilean distributor hasstarted one new small poultry operation and one new produce operation.

 

TheAnimal Health and Surface Disinfectant business unit has been helped by improvingU.S. milk prices and strong performance by the Company’s ancillary productlines.  In the second quarter, UDDERgoldPlatinum, the next generation UDDERgold product, was launched in Italy and theUnited Kingdom.  Also, UDDERgold Dry, anew product developed for use on dairy cows at dry-off, was launched in NorthAmerica and Northern Europe.

 

Alcide’snet cash provided by operating activities was $2,346,358 for the half-yearended November 30, 2003 versus $861,215 for the equivalent six monthperiod last year.  The Company has nodebt and its cash and cash equivalents on November 30, 2003 were$2,969,633 an improvement of $682,992 since May 31, 2003.  The Company expects to fund its existingoperations and growth with its current cash balance plus cash generated byoperations.  If growth exceeds currentexpectations, it may be necessary to draw on the Company’s line of credit.

 

NetSales

 

Netsales and license revenue totaling $6,229,317 for the quarter endedNovember 30, 2003, were 8% higher than the equivalent quarter lastyear.  Fiscal 2003 first half net salesand license revenue of $11,425,913 were 6% higher than first half sales infiscal 2002.

 

Salesof SANOVA food antimicrobial to the food processing industries totaled$3,782,189 for the quarter ended November 30, 2003 an amount $239,117 or7% higher than for the second fiscal quarter last year.  SANOVA sales during the six months endedNovember 30, 2003 were $7,309,820 an amount $412,362 or 6% higher than thefirst half last year.

 

TheCompany’s Animal Health and Surface Disinfectant revenues for the quarter endedNovember 30, 2003 were $2,447,128 including $287,143 in licenserevenue.  During the second quarter lastfiscal year, Animal Health and Surface Disinfectant revenues were $2,235,480including $230,757 in license revenue. During the fiscal first half, the Company’s Animal Health and SurfaceDisinfectant revenues were $4,116,093 including

 

14

----

 

$595,414in license revenue as compared to fiscal 2003 first half revenue of $3,926,286which included $260,154 in license revenue.

 

Costof Goods Sold, Exclusive of Impairment Charges

 

Thecost of goods sold before SANOVA plant asset impairment charges was 57% oftotal revenue for the quarter and 58% of total revenue for the six month periodended November 30, 2003 as compared to 53% for the quarter and 54% for thecorresponding six month period one year ago.

 

Costof goods sold before impairment for the SANOVA business segment was 68% for thequarter ended November 30, 2003, as compared to 62% of net sales for thesame period last year.  The six pointincrease in costs of goods as a percentage of sales was caused by threefactors.  SANOVA raw material usageincreased in four plants concurrent with a transition to post-chill dipoperations. Secondly, the unabsorbed depreciation expense related to theunder-utilization of equipment idled at five sites late in the first quarter of2003 continued into the first quarter of 2004 and lastly, capital investments madeto transition into post-chill operations added to the depreciation expensecomponent of cost of goods.

 

Costof goods before impairment during the six month period ended November 30,2003 was 68% of sales as compared to 61% for the first half in fiscal 2003, forthe reasons noted above.

 

Costof goods sold for the Animal Health and Surface Disinfectant business unitsegment was 45% of net sales (excluding license revenue) for both the quarterand six month period ended November 30, 2003 as compared to 44% of netsales for the quarter and 45% for the six month period last year.

 

Impairmentof SANOVA Plant Assets

(Seeexplanation at the top of page 14)

 

Researchand Development Expense

 

Reflectingthe conclusion of development activities related to the Company’s new AnimalHealth products and reduction in the scope of SANOVA process validation trials,research and development expenses for the quarter ended November 30, 2003were $470,177 an amount $93,157 lower than for the equivalent period a year ago.  R&D expenses for the first half offiscal 2004 were $949,591 or $204,368 lower than first half expenses in fiscal2003.

 

Selling,General and Administrative Expense

 

Fiscal2004 second quarter expenses of $1,785,128 were $394,925 higher than secondquarter expenses in fiscal 2003.  Firsthalf expenses of $3,313,040 were $387,463 higher than for the first half lastyear.  The expense increases for boththe quarter and first half were caused predominantly by the patent infringementlawsuit against Bio-Cide International ($312,667 for the quarter and $409,790for the six month period).

 

InterestIncome

 

Interestincome was $4,176 for the quarter and $8,263 for the six month period endedNovember 30, 2003 versus $6,201 and $14,068 for the quarter and six monthperiod last year.  The decrease was dueto lower prevailing short-term interest rates.

 

InterestExpense

 

TheCompany incurred no interest expense for either the quarter or six month periodended November 30, 2003.

 

Outlook

 

•               Animal Health andSurface Disinfectant Products

The worldwide dairy herd is decreasing slightly ascows become more productive, partly through use of mastitis prevention productssuch as those marketed by Alcide.  Inaddition, the Company faces direct competition from products similar to itsproducts, UDDERgold, UDDERgold Plus, UDDERgold 5-Star,

 

15

----

 

UDDERgold Platinum and 4XLA.  The Company’s strategy is to maintain aperformance edge over competing products. However, because the Company sells through distributors, both changes inthe distribution network and the introduction of new products can cause theCompany’s sales to shift from quarter to quarter as distributors increase ordecrease their inventories of Alcide products. On an ongoing basis, management believes that its distribution network,combined with Alcide’s evolving new product introductions, will enable theCompany to maintain its share of market. In the short-term, the recently improved pricing for milk products is apositive business factor for the Company’s premium priced products.  The recent “mad cow” incident couldconceivably, negatively impact the dairy industry if the problem becomeswidespread.  However, at this point theproblem appears to be isolated to a few cows born several years ago.

 

•               SANOVA

Managementexpects that the size of the Company’s food antimicrobial business willcontinue to expand. The poultry industry has continued to recover from lastyear’s economic downturn and as a result Alcide has been able to redeploySANOVA systems from three of the idled sites to new customer operations. Duringthe six months ended November 30, 2003, the Company started four newpoultry operations and five new red meat operations.  Subsequent to November 30, 2003, two new poultry operationsand one new red meat operation have been added.  Contracts are in-hand to start four additional new operationswithin the next two months.  Managementexpects to contract and start one to two new SANOVA operations per month duringthe current fiscal year.

 

Managementdoes not believe that the recent mad cow incident will have a lasting negativeimpact on development of the Company’s SANOVA business.  The prompt USDA and industry reaction to theincident appears to be mitigating potential damage to the industry and theindustry reports that thus far, there has been very little impact on U.S. redmeat demand although a number of countries to which U.S. beef is exported havetemporarily closed their borders to U.S. beef. It is management’s belief that if there were a decreased demand for redmeat, there would be a corresponding increase in demand for poultry products, asector in which SANOVA enjoys stronger market share as an antimicrobialintervention.

 

ITEM 3.                  Quantitative and Qualitative DisclosuresAbout Market Risk

 

The Company is notsignificantly exposed to market risks from changes in interest rates. At itspresent growth rate, the Company expects to be in a balanced cash positionduring fiscal 2004.  The Company’spolicy is to invest any excess cash resources in low risk, short-term andintermediate-term U.S. Treasury instruments and bank money market funds tominimize market risks.

 

The Company has no directforeign currency exposure.  All of itspresent 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 evaluatingthe effectiveness of the Company’s “disclosure controls and procedures” (as defined in the SecuritiesExchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of the end of theperiod covered by this quarterly report, have concluded that, as of that date,the Company’s disclosure controls and procedures were adequate and designed toensure that material information relating to the Company and its consolidatedsubsidiary would be made known to them by others within those entities.

 

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

 

16

----

 

PART II

 

OTHER INFORMATION

 

ITEM4.                  Submission of Matters to a Vote of Security Holders

 

Shareholdersvoted on three proposals at the Annual Meeting of stockholders onOctober 21, 2003 as described in the Company’s proxy statement.

 

1.              Votes for election of Directors of theCorporation for the ensuing year were as follows:

 
|               |   | **FOR**   |   | **WITHHELD  AUTHORITY** |   |
|--------------------|--------|-----------|--------|-------------------------|--------|
|               |   |      |   |                    |   |
| Thomas L. Kempner  |   | 2,022,041 |   | 336,516                 |   |
| Charles A. Baker   |   | 2,209,649 |   | 148,908                 |   |
| Joseph A. Sasenick |   | 2,032,351 |   | 424,576                 |   |
| William G. Spears  |   | 2,163,858 |   | 194,699                 |   |

 

2.              Votes for the ratification of the Board’sselection of KPMG LLP as independent auditors of the Company for the fiscalyear ended May 31, 2004.

 
|   |   | **FOR**   |   | **AGAINST** |   | **ABSTAIN** |   |
|--------|--------|-----------|--------|-------------|--------|-------------|--------|
|   |   |      |   |        |   |        |   |
|   |   | 2,315,007 |   | 22,865      |   | 67,157      |   |

 

3.              The Baxter proposal on executive compensationfor which 488,161 shares were cast in favor, representing approximately 20% ofthe shares present in person or by Proxy at the meeting.  Since this is not a majority of the sharesrepresented and entitled to vote on this matter, the proposal was not approved.

 
|   |   | **FOR** |   | **AGAINST** |   | **ABSTAIN** |   | **NOT VOTED** |   |
|--------|--------|---------|--------|-------------|--------|-------------|--------|---------------|--------|
|   |   |    |   |        |   |        |   |          |   |
|   |   | 488,161 |   | 1,194,355   |   | 69,645      |   | 652,868       |   |

 

ITEM6.                  Exhibits and Reports on Form 8-K

 

a)   Exhibits:

 

31.1         Certification of Periodic Report by Chairman and Chief ExecutiveOfficer of Corporation.

 

31.2         Certification of Periodic report by President and Chief FinancialOfficer of Alcide Corporation.

 

32.1         Certification pursuant to 18 U.S.C. Section 1350.

 

b)   Reports on Form 8-K:

 

Reporton Form 8-K dated October 15, 2003 reporting results of operations for thequarter ended August 31, 2003.

 

17

----

#### ** **

#### **SIGNATURE**

#### ** **

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

 
|                                         | ALCIDE CORPORATION                  |
|----------------------------------------------|-------------------------------------|
|                                         | The Registrant                      |
|                                         |                                |
|                                         |                                |
| Date:  January  13, 2004 | By  /s/  John P. Richards |   |
|                                         | John P. Richards                    |
|                                         | President                           |
|                                         | Chief Financial Officer             |

 

18

----