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 JUNE 30, 2004
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 WAY 08876
BRANCHBURG, 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 July 21, 2004, there were outstanding 28,442,394 shares of common stock,
par value $.001, of the registrant.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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LIFECELL CORPORATION
BALANCE SHEETS
(dollars in thousands)
(unaudited)
June 30, December 31,
2004 2003
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ASSETS
Current assets
Cash and cash equivalents $ 10,883 $ 7,387
Short-term investments 10,866 4,398
Receivables, less allowance of $53 in 2004 and $54 in 2003 8,909 5,876
Inventories 7,981 8,830
Prepayments and other 218 317
Deferred tax assets 2,666 2,067
---------- --------------
Total current assets 41,523 28,875
Investments in marketable securities -- 6,735
Fixed assets, net 7,660 7,508
Deferred tax assets 13,409 14,589
Other assets, net 548 566
---------- --------------
Total assets $ 63,140 58,273
========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,464 $ 1,260
Accrued liabilities 5,181 4,332
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Total current liabilities 6,645 5,592
Deferred revenue -- 130
Other liabilities 194 172
Commitments and contingencies
Stockholders' equity
Series B preferred stock, $.001 par value, 182,205 shares authorized;
none and 67,601 shares issued and outstanding in 2004 and 2003 -- --
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; 28,442,294
and 25,592,475 shares issued and outstanding in 2004 and 2003 28 26
Common stock warrants, 2,000,000 outstanding in 2004 and 2003 3,412 3,412
Additional paid-in capital 96,616 94,610
Accumulated comprehensive loss (15) --
Accumulated deficit (43,740) (45,669)
---------- --------------
Total stockholders' equity 56,301 52,379
---------- --------------
Total liabilities and stockholders' equity $ 63,140 $ 58,273
========== ==============
The accompanying notes are an integral part of these financial statements.
2
LIFECELL CORPORATION
STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share data)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ------------------------------
2004 2003 2004 2003
--------------- --------------- ------------- ---------------
Revenues:
Product revenues $ 14,453 $ 9,143 $ 27,798 $ 17,728
Research grant revenues 650 537 1,058 947
--------------- --------------- ------------- ---------------
Total revenues 15,103 9,680 28,856 18,675
--------------- --------------- ------------- ---------------
Costs and expenses:
Cost of products sold 4,509 2,820 8,627 5,360
Research and development 1,922 1,224 3,303 2,483
General and administrative 1,873 1,457 3,757 2,778
Selling and marketing 5,097 3,704 10,038 7,201
--------------- --------------- ------------- ---------------
Total costs and expenses 13,401 9,205 25,725 17,822
--------------- --------------- ------------- ---------------
Income from operations 1,702 475 3,131 853
Interest and other income (expense), net 41 (20) 84 (34)
--------------- --------------- ------------- ---------------
Income before income taxes 1,743 455 3,215 819
Income tax provision (benefit), net 697 75 1,286 (123)
--------------- --------------- ------------- ---------------
Net income $ 1,046 $ 380 $ 1,929 $ 942
=============== =============== ============= ===============
Net income per common share:
Basic $ 0.04 $ 0.02 $ 0.07 $ 0.04
=============== =============== ============= ===============
Diluted $ 0.03 $ 0.01 $ 0.06 $ 0.04
=============== =============== ============= ===============
Shares used in computing net income
per common share:
Basic 27,405 21,336 26,555 21,313
=============== =============== ============= ===============
Diluted 32,037 25,467 31,628 25,077
=============== =============== ============= ===============
The accompanying notes are an integral part of these financial statements
3
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six months ended June 30,
-------------------------------
2004 2003
-------------- ---------------
Cash flows from operating activities:
Net income $ 1,929 $ 942
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 1,138 842
Deferred taxes 1,227 (56)
Receivable allowance 4 -
Deferred revenues (130) (110)
Deferred rent expense 22 68
Increase (decrease) in cash from working capital:
Receivables (3,037) (193)
Inventories 849 (1,377)
Prepayments and other 99 (4)
Accounts payable and accrued liabilities 1,053 360
-------------- ---------------
Net cash provided by operating activities 3,154 472
-------------- ---------------
Cash flows from investing activities:
Proceeds from maturities and sale of investments 4,118 -
Purchases of investments (3,875) -
Capital expenditures (1,272) (1,573)
-------------- ---------------
Net cash provided by (used in) investing activities (1,029) (1,573)
-------------- ---------------
Cash flows from financing activities:
Proceeds from exercise of common stock options 1,371 -
Proceeds from issuance of long-term debt - 1,451
Principal payments on long-term debt - (1,093)
-------------- ---------------
Net cash provided by financing activities 1,371 358
-------------- ---------------
Net increase (decrease) in cash and cash equivalents 3,496 (743)
Cash and cash equivalents at beginning of period 7,387 5,202
-------------- ---------------
Cash and cash equivalents at end of period $ 10,883 $ 4,459
============== ===============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 8 $ 41
============== ===============
Cash paid during the period for income taxes $ 60 $ 182
============== ===============
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, 2003.
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. STOCK BASED COMPENSATION
The Company follows Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for equity-based awards issued to employees and directors. No
stock-based compensation cost is reflected in net income, as all options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant.
The following table illustrates the effect on net income and net income 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 June 30, Six Months Ended June 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
---------------- --------------- -------------- ---------------
(dollars in thousands, except per share data)
Net income, as reported $ 1,046 $ 380 $ 1,929 $ 942
Less: Total stock-based compensation
expense determined under fair
value based method for all awards,
net of related tax effects (292) (264) (590) (556)
---------------- --------------- -------------- ---------------
Net Income, Pro forma $ 754 $ 116 $ 1,339 $ 386
================ =============== ============== ===============
Basic net income per common share
As reported $ 0.04 $ 0.02 $ 0.07 $ 0.04
================ =============== ============== ===============
Pro forma $ 0.03 $ 0.01 $ 0.05 $ 0.02
================ =============== ============== ===============
Diluted net income per common share
As reported $ 0.03 $ 0.01 $ 0.06 $ 0.04
================ =============== ============== ===============
Pro forma $ 0.02 $ 0.00 $ 0.04 $ 0.02
================ =============== ============== ===============
5
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2004 2003
--------- -------------
(dollars in thousands)
Unprocessed tissue and materials $ 3,491 $ 4,453
Tissue products in-process 1,677 1,592
Tissue products available for distribution. 2,813 2,785
--------- -------------
Total inventories $ 7,981 $ 8,830
========= =============
4. FINANCING ARRANGEMENTS AND LONG-TERM DEBT
In March 2004, the Company extended its credit facility with a financial
institution through March 2005 and increased the borrowing limit on the
revolving line of credit to $4 million. The credit facility is collateralized
by the Company's accounts receivable, inventory, intangible and fixed assets and
intellectual property. 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%. There was no balance outstanding on this credit
facility at June 30, 2004.
5. DEFERRED REVENUE
In February 2004, the Company terminated an agreement with an independent sales
and marketing agent for the distribution of Cymetra(R). At the date of
termination, $110,000 of deferred revenue, representing the unamortized balance
of payments received at the inception of the agreement, was recognized.
6. CAPITAL STOCK, OPTIONS AND WARRANTS
Pursuant to the terms of the Company's certificate of incorporation, the Series
B preferred stock automatically converts into common stock if the closing price
of the Company's common stock averages or exceeds $9.30 per share for 30
consecutive trading days. This condition was met on May 14, 2004, and
accordingly, all of the outstanding shares of Series B Preferred Stock of
LifeCell automatically converted into an aggregate of 1,867,569 shares of the
Company's common stock.
7. INCOME TAXES
Prior to 2004, the Company's tax provision was limited to alternative minimum
taxes and certain state taxes because a full valuation allowance had been
provided on all deferred tax assets. During the fourth quarter of 2003, the
Company re-evaluated the amount of valuation allowance on its deferred tax
assets required in light of profitability achieved in recent years and expected
in future years. As a result, the Company reduced the valuation allowance to
reflect a net asset amount that it expects to realize based on the Company's
assessment of the likelihood of future taxable income coupled with uncertainties
with respect to the realization of certain tax credits and loss carryforwards
due to the potential impact of future stock option exercises and shorter-term
deferred tax asset expiration dates. Accordingly, the tax provision for the six
months ended June 30, 2004 of $1,286,000 represents Federal and state income
taxes at the Company's effective rate of 40%.
In the second quarter of 2004, the Company recognized $637,000 of deferred tax
assets related to the exercise of employee stock options, which were recorded as
a direct credit to stockholder's equity.
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 amount realized was reflected as an
income tax benefit in the statement of operations.
6
8. NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per common share:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -----------------------------
2004 2003 2004 2003
--------------- -------------- ------------- --------------
(dollars and shares in thousands, except per share data)
Net income $ 1,046 $ 380 $ 1,929 $ 942
=============== ============== ============= ==============
Weighted average common shares
outstanding 27,405 21,336 26,555 21,313
--------------- -------------- ------------- --------------
Denominator for basic net income
per common share 27,405 21,336 26,555 21,313
--------------- -------------- ------------- --------------
Effect of dilutive securities:
Series B preferred stock assuming
conversion 914 2,662 1,667 2,685
Warrants 1,527 913 1,449 732
Common stock options 2,191 556 1,957 347
--------------- -------------- ------------- --------------
Denominator for diluted net income
per common share 32,037 25,467 31,628 25,077
--------------- -------------- ------------- --------------
Basic net income per common share $ 0.04 $ 0.02 $ 0.07 $ 0.04
=============== ============== ============= ==============
--------------- -------------- ------------- --------------
Diluted net income per common share $ 0.03 $ 0.01 $ 0.06 $ 0.04
=============== ============== ============= ==============
The calculation of net income per share for the quarters ended June 30, 2004 and
2003 excludes potentially dilutive common stock equivalents of 14,550 in 2004
and 1,962,761 in 2003. The calculation of net income per share for the six
months ended June 30, 2004 and 2003 excludes potentially dilutive common stock
equivalents of 23,950 in 2004 and 2,065,761 in 2003. These common stock
equivalents, which consisted of outstanding warrants and common stock options
outstanding, were not included in the calculation of the net income common per
share because their inclusion would be antidilutive.
9. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, were as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- --------------- -------------- ---------------
(dollars in thousands)
Net income $ 1,046 $ 380 $ 1,929 $ 942
Change in net unrealized holding loss
on available for sale investments (15) - (15) -
-------------- --------------- -------------- ---------------
Comprehensive income 1,031 380 1,914 942
============== =============== ============== ===============
7
10. COMMITMENTS AND CONTINGENCIES
Litigation
- ----------
In November 2003, a complaint was filed in the Circuit Court of Fairfax,
Virginia captioned Sun Hee Jung v. Yongsook Victoria Suh, M.D., Victoria Plastic
Surgery Center, Inc. and LifeCell Corporation. The matter is a product
liability action for personal injury damages allegedly arising from the use of
one of the Company's products. The case is in its beginning stages and the
parties are conducting preliminary discovery. A trial date has been scheduled
for December 2004. The Company intends to vigorously defend against this
action. The likelihood of an unfavorable outcome is unknown at this time
however, the Company believes any potential losses resulting from this action
would be covered by its insurance policies and the Company's insurance carrier
has assumed defense of such action.
The Company maintains insurance coverage for events and in amounts that it deems
appropriate. There can be no assurance that the level of insurance maintained
will be sufficient to cover any claims incurred by the Company or that the type
of claims will be covered by the terms of insurance coverage.
8
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".
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," 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, 2003
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 us or with respect to our
securities with the Securities and Exchange Commission are available free of
charge through our website at www.lifecell.com. The information contained on
----------------
our website does not constitute a part of this report.
GENERAL AND BACKGROUND
We develop and market products made from human (allograft) tissue for use in
reconstructive, urogynecologic and orthopedic surgical procedures. Our patented
tissue processing technology produces a unique regenerative tissue matrix - a
complex three-dimensional structure that contains proteins, growth factor
binding sites 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), regenerative tissue matrix for reconstructive surgical
procedures and skin grafting for burn procedures through our direct sales
organization and for periodontal surgery through BioHorizons, Inc.; Cymetra(R),
a version of AlloDerm in particulate form, through our direct sales
organization; Repliform(R), regenerative tissue matrix for urogynecologic
procedures, through a marketing agreement with Boston Scientific;
GraftJacket(R), regenerative tissue matrix for orthopedic applications, through
a distribution agreement with Wright Medical Group; and AlloCraft(TM) DBM,
regenerative tissue matrix for bone grafting, through a marketing agreement with
Stryker Corporation. Our product development programs include the application
of our tissue matrix technology to vascular and orthopedic tissue repair;
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.
CRITICAL ACCOUNTING POLICIES
For the period ended June 30, 2004, there were no changes to our critical
accounting policies as identified in our annual report of Form 10-K for the year
ended December 31, 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Total revenues for the three months ended June 30, 2004 increased 56% to $15.1
million compared to $9.7 million for the same period in 2003. The increase was
attributable to a 58% increase in product revenues to $14.5 million in the
current period as compared to $9.1 million in the prior year.
Revenues generated from the use of our products in reconstructive surgical
procedures increased 72% to $11.2 million in the three months ended June 30,
2004 compared to $6.5 million in 2003. The growth was driven by increased
demand for AlloDerm, primarily for use in the repair of complex hernias. The
increase was partially offset by a decrease in revenues from other
reconstructive products. AlloDerm revenues increased 89% to $10.3 million in
the three months ended June 30, 2004 compared to $5.5 million in 2003.
9
Revenues generated from the use of our Repliform product in urogynecologic
surgical procedures decreased 21% to $1.8 million in the three months ended June
30, 2004 compared to $2.3 million for the same period in 2003. Demand for
Repliform in the treatment of stress urinary incontinence has been negatively
affected by competition from synthetic alternatives and we anticipate this
negative trend to continue for the balance of 2004.
Orthopedic product revenue grew to $1.5 million in the quarter ended June 30,
2004 from $353,000 for the same period in 2003. This revenue growth resulted
from our Graft Jacket product, which was launched in the first quarter of 2003,
and AlloCraft DBM, which was introduced on a limited basis in the fourth quarter
of 2003. Graft Jacket and AlloCraft DBM revenues were $975,000 and $512,000,
respectively, in the quarter compared to $353,000 and $0 in 2003.
Our independent sales and marketing agents and distributors generated 28% of our
total product revenue in the three months ended June 30, 2004 compared to 39% in
the same period in 2003. Boston Scientific and Wright Medical represented 13%
and 7%, respectively, of our total product revenues in the second quarter of
2004 compared to 25% and 4%, respectively, for the same period in 2003. No
other individual independent sales agent or distributor generated more than 5%
of our total product revenues in the three months ended June 30, 2004.
Total revenues also include research grant revenues, which totaled $650,000 in
the three months ended June 30, 2004 compared to $537,000 in the same period in
2003. As of June 30, 2004, approximately $2.4 million of approved grant funding
was available to fund future research and development expenses through 2005.
Cost of products sold for the three months ended June 30, 2004 was $4.5 million,
or 31% of product revenues, compared to cost of products sold of $2.8 million,
or 31% of product revenue for the same period in 2003.
Total research and development expenses increased 57% to $1.9 million in the
three months ended June 30, 2004 compared to $1.2 million for the same period in
2003. The increase was primarily attributable to professional fees, expenses
related to animal studies and increased research and development headcount.
General and administrative expenses increased 29% to $1.9 million in the three
months ended June 30, 2004 compared to $1.5 million for the same period in 2003.
The increase was primarily attributable to an increase in professional fees,
payroll and related expenses associated with increases in headcount and annual
merit increases and depreciation expense associated with a new fully integrated
computer software system.
Selling and marketing expenses increased 38% to $5.1 million for the three
months ended June 30, 2004 compared to $3.7 million for the same period in 2003.
The increase in 2004 was primarily attributable to higher selling expenses,
principally payroll, commissions and travel and entertainment associated with
the expansion of our direct sales force and an increase in marketing and medical
education expenses for AlloDerm. Our independent sales and marketing agents are
paid agency fees based on the amount of product revenues they generate for us.
Selling and marketing expenses included agent fees of $1.1 million and $1.2
million, respectively, in the quarters ended June 30, 2004 and 2003. The
decrease in agency fees resulted from the decrease in revenue generated through
our independent sales and marketing agents.
Interest and other income (expense), net increased $61,000 in the three months
ended June 30, 2004 compared to 2003. The net increase was due to a $46,000
increase in interest income earned on investments and a $15,000 decrease in
interest expense resulting from pay-off of outstanding debt in the third quarter
of 2003.
The provision for income taxes was $697,000 in the quarter ended June 30, 2004
compared to $75,000 for the quarter ending June 30 2003. In 2004, we started
reporting fully taxed earnings since reversing the valuation allowance related
to our deferred tax assets in the fourth quarter of 2003. Although we recorded
a tax provision in the current quarter at a 40% effective rate, we are not
required to pay regular federal income taxes until such time as our net
operating losses and tax credit carryforwards are exhausted or expire. The net
provision recorded in the second quarter of 2003 was for Federal alternative
minimum taxes and state income taxes.
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Total revenues for the six months ended June 30, 2004 increased 55% to $28.9
million compared to $18.7 million for the same period in 2003. The increase was
attributable to a 57% increase in product revenues to $27.8 million in the
current period as compared to $17.7 million in the prior year.
10
Revenues generated from the use of our products in reconstructive surgical
procedures increased 72% to $21.4 million in the six months ended June 30, 2004
compared to $12.5 million in 2003. The growth was driven by increased demand
for AlloDerm, partially offset by a decrease in revenues from other
reconstructive products. AlloDerm revenues increased 90% to $19.5 million in
the six months ended June 30, 2004 compared to $10.2 million in 2003.
Revenues generated from the use of our Repliform product in urogynecologic
surgical procedures decreased 22% to $3.7 million in the six months ended June
30, 2004 compared to $4.7 million for the same period in 2003. Demand for
Repliform in the treatment of stress urinary incontinence has been negatively
affected by competition from synthetic alternatives.
Orthopedic product revenue grew to $2.7 million in the six months ended June 30,
2004 from $561,000 for the same period in 2003. This revenue growth resulted
from our Graft Jacket product, which was launched in the first quarter of 2003,
and AlloCraft DBM, which was introduced on a limited basis in the fourth quarter
of 2003. Graft Jacket and AlloCraft DBM revenues were $1.8 million and
$881,000, respectively, in the quarter compared to $561,000 and $0 in 2003.
Our independent sales and marketing agents and distributors generated 29% of our
total product revenue in the six months ended June 30, 2004 compared to 42% in
the same period in 2003. Boston Scientific and Wright Medical represented 13%
and 7%, respectively, of our total product revenues in the first six months of
2004 compared to 26% and 3%, respectively, for the same period in 2003. No
other individual independent sales agent or distributor generated more than 5%
of our total product revenues in the six months ended June 30, 2004.
Total revenues also include research grant revenues, which totaled $1.1 million
in the six months ended June 30, 2004 compared to $947,000 in the same period in
2003.
Cost of products sold for the six months ended June 30, 2004 was $8.6 million,
or 31% of product revenues, compared to cost of products sold of $5.4 million,
or 30% of product revenue for the same period in 2003.
Total research and development expenses increased 33% to $3.3 million in the six
months ended June 30, 2004 compared to $2.5 million for the same period in 2003.
The increase was primarily attributable to increased professional fees, research
and development headcount and expenses for animal studies.
General and administrative expenses increased 35% to $3.8 million in the six
months ended June 30, 2004 compared to $2.8 million for the same period in 2003.
The increase was primarily attributable to an increase in professional fees,
depreciation expense associated with a new fully integrated computer software
system and payroll and related expenses associated with increases in headcount
and annual merit increases.
Selling and marketing expenses increased 39% to $10.0 million for the six months
ended June 30, 2004 compared to $7.2 million for the same period in 2003. The
increase was primarily attributable to higher selling expenses, principally
payroll, commissions and travel and entertainment associated with the expansion
of our direct sales force and an increase in marketing and medical education
expenses for AlloDerm. Our independent sales and marketing agents are paid
agency fees based on the amount of product revenues they generate for us.
Selling and marketing expenses included agent fees of $2.2 million and $2.5
million, respectively, in the six months ended June 30, 2004 and 2003. The
decrease in agent fees resulted from the decrease in revenue generated through
our independent sales and marketing agents.
Interest and other income (expense), net increased $118,000 in the six months
ended June 30, 2004 compared to 2003. The net increase was due to an $87,000
increase in interest income earned on investments and a $31,000 decrease in
interest expense resulting from pay-off of outstanding debt in the third quarter
of 2003.
The provision for income taxes was $1.3 million in the six months ended June 30,
2004 compared to a $123,000 tax benefit for the six months ending June 30, 2003.
In the six months ended June 30, 2004 we recorded a tax provision at a 40%
effective rate, although we are not required to pay regular federal income taxes
until such time as our net operating losses and tax credit carryforwards are
exhausted or expire. The net benefit recorded in the first six months of 2003
arose from the sale of state net operating losses, partially offset by Federal
alternative minimum taxes and state income taxes.
11
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had $10.9 million in cash and cash equivalents and $10.9
million in short-term marketable securities. Working capital increased to $34.9
million at June 30, 2004 from $23.3 million at December 31, 2003. The increase
in working capital resulted primarily from increases in cash and cash
equivalents, short-term investments and accounts receivable, partially offset by
a decrease in inventories and an increase in accounts payable and accrued
liabilities.
We generated $3.2 million of cash from operating activities for the six months
ended June 30, 2004 compared to $472,000 for the same period in 2003. The
increase in 2004 was principally due to higher net income and non-cash charges,
an increase in accounts payable and accrued liabilities and a decrease in
inventories, net of an increase in accounts receivable. The increase in
accounts receivable and the decrease in inventories resulted from the
significant increase in demand for our products in 2004.
Capital expenditures were $1.3 million in the first six months of 2004 and
consisted primarily of manufacturing equipment and computer hardware, software
and related implementation costs.
Our financing activities generated $1.4 million for the six months ended June
30, 2004 compared to $358,000 for the same period in 2003. In 2004, the cash
generated from financing activities resulted from the exercise of common stock
options, while in 2003 cash generated by financing activities resulted from the
issuance of long-term debt, net of principal payments. At June 30, 2004, we had
no debt outstanding under our borrowing arrangements. In March 2004, the
borrowing limit on our revolving line of credit was increased to $4 million and
the expiration was extended through March 2005. The credit facility is
collateralized by our accounts receivable, inventory, intellectual property,
intangible and fixed assets and contains certain financial covenants and a
subjective acceleration clause. As of June 30, 2004, we were in compliance with
the covenants of our credit facility.
The following table reflects a summary of our contractual cash obligations as of
June 30, 2004:
Payments Due by Period
----------------------------------------------
Less than 1 to 3 4 to 5 After 5
Total one year years years years
------ ---------- ------- ------- --------
(dollars in thousands)
Operating leases $5,826 $ 861 $ 1,825 $ 1,838 $ 1,302
------ ---------- ------- ------- --------
Total contractual cash obligations $5,826 $ 861 $ 1,825 $ 1,838 $ 1,302
====== ========== ======= ======= ========
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 need additional funds to meet our
long-term strategic objectives. Any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve significant
restrictive covenants and we cannot assure that such financing will be extended
on terms acceptable to us or at all.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
We are exposed to changes in interest rates primarily from our investments in
certain marketable securities, consisting principally of fixed income debt
securities. Although our investments are available for sale, we generally hold
such investments to maturity. Our investments are stated at fair value, with
net unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in shareholders' equity. Net unrealized gains and
losses were not material at June 30, 2004 or 2003.
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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 6. Exhibits and Reports on Form 8-K.
--------------------------------------
a. EXHIBITS
31.1 Certification 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
b. REPORTS ON FORM 8-K
On May 24, 2004, we filed a current report on Form 8-K annonucing that
on May 14, 2004 all of the outstanding shares of Series B Preferred
Stock of LifeCell automatically converted into an aggregate of
1,867,569 shares of common stock of LifeCell.
On July 22, 2004, we furnished a current report on Form 8-K regarding
results for the six months ended June 30, 2004 and certain other
maters.
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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: July 22, 2004 By: /s/ Paul G. Thomas
---------------------
Paul G. Thomas
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: July 22, 2004 By: /s/ Steven T. Sobieski
-------------------------
Steven T. Sobieski
Vice President, Finance
Chief Financial Officer and Secretary
(Principal Financial Officer)
Date: July 22, 2004 By: /s/ Bradly C. Tyler
----------------------
Bradly C. Tyler
Controller
(Principal Accounting Officer)
14