FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 01-19890
LIFECELL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0172936
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
ONE MILLENNIUM WAYBRANCHBURG, 08876
NEW JERSEY (zip code)
(Address of principal executive office)
(908) 947-1100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). YES X NO
--- ---
As of October 23, 2003, there were outstanding 25,436,490 shares of common
stock, par value $.001, and 71,230 shares of Series B preferred stock, par value
$.001 (which are convertible into approximately an additional 2,580,805 shares
of common stock), of the registrant.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
LIFECELL CORPORATION
BALANCE SHEETS
(unaudited)
September 30, December 31,
2003 2002
--------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 18,868,000 $ 5,202,000
Short-term investments 256,000 256,000
Receivables, less allowance for doubtful accounts of
$98,000 and $40,000 in 2003 and 2002 5,244,000 4,332,000
Inventories 8,419,000 6,367,000
Prepayments and other 461,000 257,000
--------------- --------------
Total current assets 33,248,000 16,414,000
Fixed assets, net 7,668,000 7,091,000
Other assets, net 576,000 611,000
--------------- --------------
Total assets $ 41,492,000 $ 24,116,000
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,319,000 $ 1,438,000
Accrued liabilities 4,649,000 3,173,000
Current maturities of long-term debt -- 337,000
--------------- --------------
Total current liabilities 5,968,000 4,948,000
Deferred revenue 185,000 351,000
--------------- --------------
Long-term debt -- 526,000
--------------- --------------
Other liabilities 174,000 94,000
--------------- --------------
Commitments and contingencies
Temporary equity
Common stock, subject to redemption, $.001 par value, 0 and 113,836
shares issued and outstanding in 2003 and 2002 -- 478,000
Stockholders' equity
Series B preferred stock, $.001 par value, 182,205 shares authorized;
71,730 and 74,278 shares issued and outstanding in 2003 and 2002
(liquidation preference at September 30, 2003 of $7,173,000) -- --
Undesignated preferred stock, $.001 par value, 1,817,795 shares
authorized; none issued and outstanding -- --
Common stock, $.001 par value, 48,000,000 shares authorized;
25,414,936 and 21,193,159 shares issued and outstanding in
2003 and 2002 25,000 21,000
Warrants to purchase shares of common stock; 2,084,211 and
2,284,211 outstanding in 2003 and 2002 3,620,000 4,002,000
Additional paid-in capital 94,413,000 78,037,000
Accumulated deficit (62,893,000) (64,341,000)
--------------- --------------
Total stockholders' equity 35,165,000 17,719,000
--------------- --------------
Total liabilities and stockholders' equity $ 41,492,000 $ 24,116,000
=============== ==============
The accompanying notes are an integral part of these financial statements.
2
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Revenues:
Product revenues $ 10,103,000 $ 8,711,000 $ 27,831,000 $ 24,071,000
Research grant revenues 402,000 391,000 1,349,000 1,084,000
--------------- --------------- --------------- ---------------
Total revenues 10,505,000 9,102,000 29,180,000 25,155,000
--------------- --------------- --------------- ---------------
Costs and expenses:
Cost of products sold 2,995,000 2,642,000 8,355,000 7,551,000
Research and development 1,667,000 1,295,000 4,150,000 3,594,000
General and administrative 1,387,000 1,293,000 4,165,000 3,490,000
Selling and marketing 3,816,000 3,401,000 11,017,000 9,555,000
--------------- --------------- --------------- ---------------
Total costs and expenses 9,865,000 8,631,000 27,687,000 24,190,000
--------------- --------------- --------------- ---------------
Income from operations 640,000 471,000 1,493,000 965,000
Interest and other expense, net (9,000) (29,000) (43,000) (121,000)
Income before income taxes 631,000 442,000 1,450,000 844,000
Income tax benefit (provision) (125,000) (98,000) (2,000) 150,000
--------------- --------------- --------------- ---------------
Net income $ 506,000 $ 344,000 $ 1,448,000 $ 994,000
=============== =============== =============== ===============
Net income per common share:
Basic $ 0.02 $ 0.02 $ 0.07 $ 0.05
=============== =============== =============== ===============
Diluted $ 0.02 $ 0.01 $ 0.06 $ 0.04
=============== =============== =============== ===============
Shares used in computing net income
per common share:
Basic 23,323,439 21,306,995 21,602,699 21,131,323
=============== =============== =============== ===============
Diluted 28,426,097 24,230,967 25,817,936 24,750,515
=============== =============== =============== ===============
The accompanying notes are an integral part of these financial statements
3
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended September 30,
--------------------------------
2003 2002
--------------- ---------------
Cash flows from operating activities:
Net income $ 1,448,000 $ 994,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,352,000 1,597,000
Provision for bad debt 56,000 -
Deferred revenues (166,000) (165,000)
Deferred rent expense 80,000 18,000
Increase (decrease) in cash from working capital:
Receivables (968,000) (27,000)
Inventories (2,052,000) (1,090,000)
Prepayments and other (204,000) (22,000)
Accounts payable and accrued liabilities 1,357,000 595,000
--------------- ---------------
Net cash provided by operating activities 903,000 1,900,000
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (1,894,000) (439,000)
--------------- ---------------
Net cash used in investing activities (1,894,000) (439,000)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock 15,520,000 -
Proceeds from issuance of long-term debt 1,451,000 -
Principal payments on long-term debt (2,314,000) (997,000)
--------------- ---------------
Net cash provided by (used in) financing activities 14,657,000 (997,000)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 13,666,000 464,000
Cash and cash equivalents at beginning of period 5,202,000 4,650,000
--------------- ---------------
Cash and cash equivalents at end of period 18,868,000 5,114,000
=============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 59,000 $ 170,000
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
LIFECELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations. This
financial information should be read in conjunction with the financial
statements and notes thereto included within the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
The unaudited financial statements reflect all adjustments (consisting only of
normal recurring adjustments) considered necessary by management for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. The financial results for interim periods are not
necessarily indicative of the results to be expected for the full year or future
interim periods.
2. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2003 2002
Tissue and materials . . . . . . . . . . . . . $ 3,697,000 $ 2,940,000
-------------- -------------
Tissue products in-process . . . . . . . . . . 2,408,000 1,446,000
Finished tissue products . . . . . . . . . . . 2,314,000 1,981,000
-------------- -------------
Total inventories. . . . . . . . . . . . . . . $ 8,419,000 $ 6,367,000
============== =============
3. FINANCING ARRANGEMENTS AND LONG-TERM DEBT
In January 2003, the Company secured a $4 million credit facility through a
financial institution consisting of a $2 million revolving line of credit and an
equipment line for up to an additional $2 million. The credit facility is
collateralized by the Company's accounts receivable, inventory, intellectual
property, intangible and fixed assets. The agreement contains certain financial
covenants and a subjective acceleration clause. The revolving line of credit
bears interest at the bank prime rate plus 0.75% and is available through
January 2004. The equipment term note bore interest at the bank prime rate plus
1.5%. In January 2003, the Company received proceeds of $880,000 under the
equipment line portion of the credit facility and used these proceeds to repay
the debt and accrued interest outstanding at December 31, 2002. In March 2003,
the Company received additional proceeds of $571,000 under the equipment line
portion of the credit facility to finance capital expenditures. Advances under
the equipment line were only available through March 31, 2003 and, accordingly,
the unused portion of the equipment line has expired. In September 2003, the
Company repaid the entire outstanding balance on the equipment line. At
September 30, 2003, the Company has remaining availability on the revolving line
of credit of $2 million until January 2004.
4. INCOME TAXES
In January 2003, the Company realized $235,000 through the sale and transfer of
$3.0 million of state tax net operating losses. The sale and transfer was made
through the Technology Business Tax Certificate Program sponsored by the New
Jersey Economic Development Authority. The Company realized $248,000 through
the sale and transfer of $3.2 million of state tax net operating losses in 2002.
The amount realized in each period has been reflected as an income tax benefit
in the statement of operations.
5
To date the Company has provided a full valuation allowance against its net
deferred tax assets due to its lack of historical profitability. However, the
third quarter of 2003 was the Company's eighth consecutive profitable quarter
and once the Company achieves cumulative profitability over a three-year period,
it will assess whether to recognize some or all of these deferred tax assets.
The reversal of all or a portion of the valuation allowance would lead to a
significant tax benefit being recorded.
5. CAPITAL STOCK, OPTIONS AND WARRANTS
Common stock, subject to redemption
In July 2003, the Company received notification that the investor holding shares
of the Company's common stock that were subject to redemption sold the remainder
of all such shares and accordingly, the redemption rights terminated. As a
result, such shares were reclassified to common stock as of June 30, 2003.
Common stock
In August 2003, the Company sold 3,294,113 shares of its common stock at $4.25
per share in a private placement to a group of institutional investors. In
connection with the private placement, in September 2003, the Company sold an
additional 395,856 shares of its common stock at $4.25 per share to several
holders of LifeCell's Series B preferred stock, including one of the Company's
directors. These shares were sold pursuant to a contractual right of the holders
of the Series B preferred stock to participate in the August 2003 private
placement. In addition, the Company has registered for resale all of the shares
of common stock sold in the private placement. The net proceeds of the private
placement were approximately $14.7 million after deducting offering costs.
Options
In May 2003, the Company's shareholders approved an amendment to the Company's
2000 Stock Option Plan (the "2000 Plan") increasing the number of shares
reserved for issuance under the 2000 Plan by 2,000,000 shares, from 1,500,000 to
3,500,000.
In May 2003, the Company's shareholders approved the LifeCell Corporation 2003
Non-Employee Director Stock Option Plan (the "2003 Directors Plan"). Under the
2003 Directors Plan, options may be granted to purchase up to 750,000 shares of
the Company's common stock through March 2013. Options granted will vest on the
first anniversary and will have a maximum term of ten years. The 2003 Directors
Plan is intended to replace the Second Amended and Restated 1993 Non-Employee
Director Stock Option Plan, which terminated in July 2003.
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net income, as reported $ 506,000 $ 344,000 $ 1,448,000 $ 994,000
Less: Total stock-based compensation
expense determined under fair
value based method for all awards,
net of related tax effects (245,000) (293,000) (800,000) (944,000)
--------------- --------------- --------------- ---------------
Net Income, Pro forma $ 261,000 $ 51,000 $ 648,000 $ 50,000
=============== =============== =============== ===============
Income per common share - basic
As reported $ 0.02 $ 0.02 $ 0.07 $ 0.05
=============== =============== =============== ===============
Pro forma $ 0.01 $ 0.00 $ 0.03 $ 0.00
=============== =============== =============== ===============
Income per common share - diluted
As reported $ 0.02 $ 0.01 $ 0.06 $ 0.04
=============== =============== =============== ===============
Pro forma $ 0.01 $ 0.00 $ 0.03 $ 0.00
=============== =============== =============== ===============
6
6. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per share:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2003 2002 2003 2002
---------------- --------------- -------------- ---------------
Net income $ 506,000 $ 344,000 $ 1,448,000 $ 994,000
================ =============== ============== ===============
Weighted average common shares
outstanding 23,323,439 21,306,995 21,602,699 21,131,323
---------------- --------------- -------------- ---------------
Denominator for basic net income
per share 23,323,439 21,306,995 21,602,699 21,131,323
---------------- --------------- -------------- ---------------
Effect of dilutive securities:
Series B preferred stock assuming
conversion 2,612,291 2,691,240 2,674,936 2,866,914
Warrants 1,179,878 206,506 892,857 564,476
Common stock options 1,310,489 10,905 647,444 172,481
Assumed deemed dividend on
common stock subject to redemption - 15,321 - 15,321
---------------- --------------- -------------- ---------------
Denominator for diluted net income
per share 28,426,097 24,230,967 25,817,936 24,750,515
---------------- --------------- -------------- ---------------
Basic net income per share $ 0.02 $ 0.02 $ 0.07 $ 0.05
================ =============== ============== ===============
---------------- --------------- -------------- ---------------
Diluted net income per share $ 0.02 $ 0.01 $ 0.06 $ 0.04
================ =============== ============== ===============
The calculation of net income per share for the quarters ended September 30,
2003 and 2002 excludes potentially dilutive common stock equivalents of 286,350
in 2003 and 3,260,855 in 2002. The calculation of net income per share for the
nine months ended September 30, 2003 and 2002 excludes potentially dilutive
common stock equivalents of 1,264,661 in 2003 and 2,467,230 in 2002. These
common stock equivalents, which consisted of outstanding warrants and common
stock options, were not included in the calculation of the net income per share
because their inclusion would be antidilutive.
7. COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
In June 2002, a complaint was filed in the Superior Court of California, Los
Angeles County, Central District, captioned Joan Savitt, individually and on
behalf of others similarly situated, v. Doheny Eye & Tissue Bank, et al. The
complaint alleged among other things, the Company, by engaging in the storing,
processing and distribution of human tissue, violates the public policy and laws
of the state of California in various ways.
In June 2003, the plaintiff and the Company entered into a mutual release and
dismissal of the complaint.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
-------------
The following discussion of our results of operations and financial condition
should be read in conjunction with the Financial Statements and Notes included
in Part I. "Financial Information". In the following discussions, most
percentages and dollar amounts have been rounded to aid the presentation. As a
result, all such figures are approximations.
This report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements typically are identified by use of terms such as
"may," "will," "should," "plan," "expect," "anticipate," "estimate," "believe"
and similar words, although some forward-looking statements are expressed
differently. Forward-looking statements represent our management's judgment
regarding future events. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. All statements other than
statements of historical fact included in this report regarding our financial
position, business strategy, products, products under development and clinical
trials, markets, budgets, plans, or objectives for future operations are
forward-looking statements. We cannot guarantee the accuracy of the
forward-looking statements, and you should be aware that our actual results
could differ materially from those contained in the forward-looking statements
due to a number of factors, including the statements under "Risk Factors" and
"Critical Accounting Policies" detailed in our annual report on form 10-K for
the year ended December 31, 2002 and other reports filed with the Securities and
Exchange Commission.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all other documents filed by the Company or with respect to its
securities with the Securities and Exchange Commission are available free of
charge through our website at www.lifecell.com. Information on our website does
----------------
not constitute a part of this report.
OVERVIEW
We develop and market biological products for the repair and replacement of
damaged or inadequate human tissue in numerous different clinical applications.
Our patented tissue processing methods produce a unique matrix - a complete
three-dimensional structure that contains proteins, growth factors and vascular
channels - that provides a complete template for the regeneration of normal
human tissue. We currently market a broad range of products: AlloDerm(R)
acellular tissue matrix for skin grafting for burn and cancer patients as well
as reconstructive surgical procedures and periodontal surgery; Repliform(R), an
acellular tissue matrix for urologic and gynecologic procedures; Cymetra(R), a
version of AlloDerm in particulate form for non-surgical correction of soft
tissue defects; and Graft Jacket(TM), an acellular tissue matrix for orthopedic
applications. We also distribute cryopreserved allograft skin for use as a
temporary dressing in the treatment of burns. Our development programs include
the potential application of our tissue matrix technology to vascular, nerve and
orthopedic tissues; investigation of human tissues as carriers for therapeutics;
ThromboSol(TM), a formulation for extended storage of platelets and technologies
to enhance the storage of red blood cells for transfusion.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Total revenues for the three months ended September 30, 2003 increased 15% to
$10.5 million compared to $9.1 million for the same period in 2002. The
increase was primarily attributable to a 16% increase in product revenues to
$10.1 million in the current period as compared to $8.7 million in the prior
year. The increase in product revenues was largely due to increased demand for
AlloDerm. AlloDerm revenues increased 38% to $6.4 million in the three months
ended September 30, 2003 compared to $4.7 million in the same period in 2002.
Repliform revenues decreased 19% to $2.1 million in the three months ended
September 30, 2003 compared to $2.6 million for the same period in 2002.
Repliform revenues have been negatively affected by competition from synthetic
alternatives for the treatment of stress urinary incontinence. We expect this
negative trend to continue for the balance of the year. Other product revenue,
which includes Cymetra, cryopreserved allograft skin and Graft Jacket, increased
7%, contributing $1.6 million in the third quarter of 2003 compared to $1.5
million for the same period in 2002. The increase was primarily due to higher
8
demand for Graft Jacket and cryopreserved allograft skin, partially offset by a
decrease in Cymetra revenues. Cymetra revenues have been negatively impacted by
competitive products and we expect this trend to continue for the balance of the
year. In August of 2003, we discontinued our marketing agreement with Harvest
Technologies for the distribution of Harvest's SmartPReP(TM) Platelet
Concentration System. The discontinuance of this agreement will not have a
material negative impact on our future revenues since revenues from the
distribution of the SmartPReP(TM) system were not material in 2003.
For the three months ended September 30, 2003, our sales and marketing agents
and distributors generated 31% of our total product revenue. Boston Scientific
Corporation is our exclusive worldwide sales and marketing representative for
Repliform for use in the urologic and gynecologic markets and OMP, Inc. is our
exclusive sales and marketing representative for Cymetra for office-based
dermatologists and plastic surgeons. During the three months ended September
30, 2003, sales of our products through Boston Scientific Corporation and OMP
represented 21% and 2%, respectively, of our total product revenues compared to
29% and 8%, respectively, for the same period in 2002. Both Boston Scientific
and OMP are paid agency fees based on the amount of product revenues they
generate for us. Such fees are recorded as selling and marketing expenses. No
other individual distributor generated more than 5% of our total product
revenues in the three months ended September 30, 2003 or 2002.
Research grant revenues increased 3% to $402,000 in 2003 compared to $391,000 in
2002. This increase was primarily due to an increase in research spending on
projects funded by approved research grants, since research grant revenues are
recognized as qualified expenses are incurred. During the third quarter of
2003, we were awarded a research grant from the National Institute of Health
totaling $1.1 million. As of September 30, 2003, $3.7 million of approved
research grant funding was available to fund future research and development
expenses through 2005.
Cost of products sold for the three months ended September 30, 2003 was $3.0
million, or 30% of product revenues, compared to cost of products sold of $2.6
million, or 30% of product revenue for the same period in 2002.
Total research and development expenses increased 29% to $1.7 million in the
three months ended September 30, 2003 compared to $1.3 million in the same
period in 2002. The increase was primarily attributable to higher development
expenses associated with AlloCraft(TM) DBM, a human tissue based bone grafting
product.
General and administrative expenses increased 7% to $1.4 million in the three
months ended September 30, 2003 compared to $1.3 million in the same period in
2002. The increase was primarily attributable to an increase in professional
fees and payroll and related expenses.
Selling and marketing expenses increased 12% to $3.8 million for the three
months ended September 30, 2003 compared to $3.4 million in the same period in
2002. Such amounts include marketing agent fees of $1.1 million and $1.4
million in 2003 and 2002. The increase in 2003 was primarily attributable to
higher selling expense associated with the increase in product revenues and an
increase in marketing expenses.
Interest and other income (expense), net decreased $20,000 in the three months
ended September 30, 2003 compared to 2002. The net decrease was due to a
$27,000 decrease in interest expense resulting from a decrease in debt
outstanding, partially offset by a $7,000 decline in interest income resulting
from lower average interest rates during the period.
We intend to utilize net operating loss carryforwards to offset our estimated
federal tax liability and as a result, have only provided for the federal
alternative minimum tax. We were unable to utilize net operating loss
carryforwards to offset our state tax liability in 2003 because the State of New
Jersey enacted tax legislation in July 2002 suspending the use of loss
carryforwards to offset taxable income in 2002 and 2003. To date we have
provided a full valuation allowance against our net deferred tax assets due to
our lack of historical profitability, however, we anticipate recognizing some or
all of our deferred tax assets in the fourth quarter of 2003 when we expect to
achieve cumulative profitability over a three-year period. The reversal of all
or a portion of the valuation allowance would lead to a significant tax benefit
being recorded.
Net income for the three months ended September 30, 2003 was $506,000,
representing a 47% improvement from the $344,000 net income for the same period
in 2002. The improvement in net income in 2003 was principally due to the
positive contribution from higher product revenues, partially offset by
increased operating expenses. Basic and diluted net income per common share in
the three months ended September 30, 2003 were $0.02 per share, compared to
$0.02 and $0.01 basic and diluted net income per share in the same period in
2002.
9
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Total revenues for the nine months ended September 30, 2003 increased 16% to
$29.2 million compared to $25.2 million for the same period in 2002. The
increase was primarily attributable to a 16% increase in product revenues to
$27.8 million in the current period as compared to $24.1 million in the prior
year. The increase in product revenues was largely due to increased demand for
AlloDerm. AlloDerm revenues increased 33% to $16.7 million in the nine months
ended September 30, 2003 compared to $12.5 million in the same period in 2002 as
a result of competition discussed above. Repliform revenues decreased 8% to
$6.8 million in the nine months ended September 30, 2003 compared to $7.4
million for the same period in 2002. Other product revenue, which includes
Cymetra, cryopreserved allograft skin and Graft Jacket increased 6%,
contributing $4.4 million in the first nine months of 2003 compared to $4.2
million for the same period in 2002. The increase was primarily due to higher
demand for Graft Jacket and cryopreserved allograft skin, partially offset by a
decrease in Cymetra revenues. As discussed above, we expect the negative trend
in Repliform and Cymetra revenues to continue for the balance of the year.
For the nine months ended September 30, 2003, our sales and marketing agents and
distributors generated 36% of our total product revenue. During the nine months
ended September 30, 2003, sales of our products through Boston Scientific
Corporation and OMP represented 24% and 4%, respectively, of our total product
revenues compared to 31% and 9%, respectively, for the same period in 2002. No
other individual distributor generated more than 5% of our total product
revenues in the nine months ended September 30, 2003 or 2002.
Total revenues were also favorably impacted by a 24% increase in research grant
revenues, which totaled $1.3 million in 2003 compared to $1.1 million in 2002.
This increase was primarily due to an increase in research spending on projects
funded by approved research grants, since research grant revenues are recognized
as qualified expenses are incurred.
Cost of products sold for the nine months ended September 30, 2003 was $8.4
million, or 30% of product revenues, compared to cost of products sold of $7.6
million, or 31% of product revenue for the same period in 2002. The cost of
products sold decreased as a percentage of product revenues due to efficiencies
realized in our processing operation, as a result of volume increases and
process improvements.
Total research and development expenses increased 15% to $4.2 million in the
nine months ended September 30, 2003 compared to $3.6 million for the same
period in 2002. The increase was primarily associated with higher spending on
research focused on the potential application of our tissue matrix technology to
vascular tissue, which is funded through a grant from the Department of Defense,
and increased development spending on AlloCraft DBM and other product
development programs.
General and administrative expenses increased 19% to $4.2 million in the nine
months ended September 30, 2003 compared to $3.5 million in the same period in
2002. The increase was primarily attributable to an increase in professional
fees and payroll and related expenses.
Selling and marketing expenses increased 15% to $11.0 million for the nine
months ended September 30, 2003 compared to $9.6 million in the same period in
2002. Such amounts include marketing agent fees of $3.6 million and $4.2
million in 2003 and 2002. The increase in 2003 was primarily attributable to
higher selling expense associated with the increase in product revenues and an
increase in marketing expenses.
Interest and other income (expense), net decreased $78,000 in the nine months
ended September 30, 2003 compared to 2002. The net decrease was due to a
$102,000 decrease in interest expense resulting from a decrease in debt
outstanding, partially offset by a $24,000 decline in interest income resulting
from lower average interest rates during the period.
In the nine months ended September 30, 2003, we recorded a net tax provision of
$2,000 consisting of a provision for federal alternative minimum tax and state
income taxes of $237,000, offset by proceeds of $235,000 from the sale of state
net operating losses. The sale was made through the Technology Business Tax
Certificate Program sponsored by the New Jersey Economic Development Authority.
No federal provision for regular income taxes has been recorded as we intend to
utilize net operating loss carryforwards to offset our estimated federal tax
liability. We were unable to utilize net operating loss carryforwards to offset
our state tax liability in 2003 because the State of New Jersey enacted tax
legislation in July 2002 suspending the use of loss carryforwards to offset
taxable income in 2002 and 2003. To date we have provided a full valuation
allowance against our net deferred tax assets due to our lack of historical
profitability, however, we anticipate recognizing some or all of our deferred
tax assets in the fourth quarter of 2003
10
when we expect to achieve cumulative profitability over a three-year period.
The reversal of all or a portion of the valuation allowance would lead to a
significant tax benefit being recorded.
Net income for the nine months ended September 30, 2003 was $1.4 million,
representing a 46% improvement from the $1.0 million net income for the same
period in 2002. The improvement in net income in 2003 was principally due to
the positive contribution from higher product revenues, partially offset by
increased operating expenses. Basic and diluted net income per common share in
the nine months ended September 30, 2003 were $0.07 and $0.06 per share,
respectively, compared to $0.05 and $0.04 basic and diluted net income per share
in the same period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, we had cash and cash equivalents and short-term
investments of $19.1 million compared to $5.5 million at December 31, 2002.
Working capital increased to $27.3 million at September 30, 2003 from $11.5
million at December 31, 2002. The increase resulted principally from the $14.7
million of net proceeds from the private placement of stock in the third quarter
2003 and $800,000 of proceeds from the exercises of common stock warrants and
options.
Our operating activities generated net cash of $903,000 for the nine months
ended September 30, 2002 compared to $1,900,000 for the same period in 2002.
Although net income increased in the first nine months of 2003 compared to the
same period in 2002, net cash provided by operating activities decreased due to
lower non-cash charges and higher cash used to fund the net increase in working
capital. Accounts receivable increased $856,000 from December 31, 2002 due to
the higher revenues in the third quarter of 2003 versus the fourth quarter of
2002. Inventories increased by $2.1 million in the first nine months of 2003
due to higher receipts of tissue from our tissue banks and a planned increase in
our in-process and processed tissue products to support the increase in demand.
Our investing activities, which consist of purchases of capital equipment, used
net cash of $1,894,000 for the nine months ended September 30, 2003 compared to
$439,000 for the same period in 2002. The increase in 2003 resulted principally
from the purchase of hardware and software for a new enterprise resources
planning (ERP) system and production equipment.
Our financing activities generated $14.7 million for the nine-month period ended
September 30, 2003 compared to $1.0 million used for principal payments on
long-term debt in 2002. In the first nine months of 2003, we received net
proceeds of $15.5 million from the private placement of stock and the exercise
of warrants and common stock options. During the third quarter of 2003, we
utilized $1.1 million to retire our outstanding long-term debt. At September
30, 2003, we had no debt outstanding under our borrowing arrangements compared
to $863,000 outstanding at December 31, 2002, and we had remaining availability
on a revolving credit line of $2 million until January 2004. The following
table reflects a summary of our contractual cash obligations as of September 30,
2003:
Payments Due by Period
-------------------------------------------------------------
Less than One to Four to After
Total one year three years five years five years
---------- --------- ------------ ----------- -----------
Operating leases $6,451,000 $ 833,000 $ 1,789,000 $ 1,839,000 $ 1,990,000
---------- --------- ------------ ----------- -----------
Total contractual
cash obligations $6,451,000 $ 833,000 $ 1,789,000 $ 1,839,000 $ 1,990,000
========== ========= ============ =========== ===========
We believe that our current cash resources together with anticipated product
revenues, committed research and development grant funding and remaining
availability under our credit facility will be sufficient to finance our planned
operations, research and development programs and fixed asset requirements in
the foreseeable future. However, we may seek additional funding to increase our
working capital or to meet the needs of our long-term strategic plan. There can
be no assurance that we will be able to obtain additional funding from either
debt or equity financing, collaborative arrangements or other sources on terms
acceptable to us, or at all. Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve significant
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require us to relinquish our rights to certain of our
technologies, products or marketing territories.
11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
We are exposed to changes in interest rates primarily from our debt arrangements
and, secondarily, from our investments in certain securities. Although our
short-term investments are available for sale, we generally hold such
investments until maturity. We do not utilize derivative instruments or other
market risk sensitive instruments to manage exposure to interest rate changes.
We believe that a hypothetical 100 basis point adverse move in interest rates
along the entire interest rate yield curve would not materially affect the fair
value of our interest sensitive financial instruments at September 30, 2003.
Item 4. Controls and Procedures.
-----------------------
a. DISCLOSURE CONTROLS AND PROCEDURES.
As of the end of the period covered by this Quarterly Report on
Form 10-Q, we carried out an evaluation, with the participation
of our management, including our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures pursuant to Securities Exchange Act Rule
13a-15. Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in ensuring that
information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported, within the time periods
specified in the SEC's rules and forms.
b. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING.
There have been no changes in our internal control over financial
reporting that occurred during our last fiscal quarter to which
this Quarterly Report on Form 10-Q relates that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------------
In August 2003, we sold 3,294,113 shares of our common stock at $4.25 per share
in a private placement to a group of institutional investors. In connection with
the private placement, in September 2003, we sold an additional 395,856 shares
of our common stock at $4.25 per share to several holders of our Series B
preferred stock, including one director. These shares were sold pursuant to a
contractual right of the holders of our Series B preferred stock to participate
in the August 2003 private placement. In addition, we have registered for resale
all of the shares of common stock sold in the private placement.
These securities were issued in a transaction not involving a public offering
and therefore were exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------------
a. EXHIBITS
31.1 Certifications of our Chief Executive Officer, Paul G.
Thomas, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of our Chief Financial Officer, Steven T.
Sobieski, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of our Chief Executive Officer, Paul G. Thomas
and Chief Financial Officer, Steven T. Sobieski, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
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b. REPORTS ON FORM 8-K
On August 11, 2003, the Company announced that it entered into
definitive purchase agreements with a group of institutional
investors for the private placement of 3,294,113 newly issued
shares of common stock at $4.25 per share.
On September 26, 2003, the Company announced that it had sold an
additional 395,856 shares of its common stock at $4.25 per share
to several holders of its Series B preferred stock. These shares
were sold pursuant to the right of the holders of its Series B
preferred stock to participate in the August 2003 private
placement.
On October 20, 2003, we issued a press release regarding results
for the three months and nine months ended September 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFECELL CORPORATION
Date: October 27, 2003 By: /s/ Paul G. Thomas
---------------------
Paul G. Thomas
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 27, 2003 By: /s/ Steven T. Sobieski
-------------------------
Steven T. Sobieski
Vice President, Finance
Chief Financial Officer and Secretary
(Principal Financial Officer)
Date: October 27, 2003 By: /s/ Bradly C. Tyler
----------------------
Bradly C. Tyler
Controller
(Principal Accounting Officer)
13