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, 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 October 21, 2004, there were outstanding 28,490,970 shares of common
stock, par value $.001, of the registrant.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
---------------------
LIFECELL CORPORATION
BALANCE SHEETS
(dollars in thousands)
(unaudited)
September 30, December 31,
2004 2003
-------------- -------------
ASSETS
Current assets
Cash and cash equivalents $ 12,089 $ 7,387
Short-term investments 10,939 4,398
Receivables, less allowance of $50 in 2004 and $54 in 2003 8,505 5,876
Inventories 8,422 8,830
Prepayments and other 437 317
Deferred tax assets 2,901 2,067
-------------- -------------
Total current assets 43,293 28,875
Investments in marketable securities 1,073 6,735
Fixed assets, net 8,182 7,508
Deferred tax assets 12,638 14,589
Other assets, net 538 566
-------------- -------------
Total assets $ 65,724 $ 58,273
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,613 $ 1,260
Accrued liabilities 6,319 4,332
-------------- -------------
Total current liabilities 7,932 5,592
Deferred revenue -- 130
Other liabilities 205 172
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; 28,477,101
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 96,784 94,610
Accumulated comprehensive loss (10) --
Accumulated deficit (42,627) (45,669)
-------------- -------------
Total stockholders' equity 57,587 52,379
-------------- -------------
Total liabilities and stockholders' equity $ 65,724 $ 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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- ---------- --------- ----------
Revenues:
Product revenues $ 14,947 $ 10,103 $ 42,745 $ 27,831
Research grant revenues 670 402 1,728 1,349
--------- ---------- --------- ----------
Total revenues 15,617 10,505 44,473 29,180
--------- ---------- --------- ----------
Costs and expenses:
Cost of products sold 4,444 2,995 13,071 8,355
Research and development 2,260 1,667 5,563 4,150
General and administrative 1,896 1,387 5,653 4,165
Selling and marketing 5,214 3,816 15,252 11,017
--------- ---------- --------- ----------
Total costs and expenses 13,814 9,865 39,539 27,687
--------- ---------- --------- ----------
Income from operations 1,803 640 4,934 1,493
Interest and other income (expense), net 52 (9) 136 (43)
--------- ---------- --------- ----------
Income before income taxes 1,855 631 5,070 1,450
Income tax provision (benefit), net 742 125 2,028 2
--------- ---------- --------- ----------
Net income $ 1,113 $ 506 $ 3,042 $ 1,448
========= ========== ========= ==========
Net income per common share:
Basic $ 0.04 $ 0.02 $ 0.11 $ 0.07
========= ========== ========= ==========
Diluted $ 0.03 $ 0.02 $ 0.10 $ 0.06
========= ========== ========= ==========
Shares used in computing net income
per common share:
Basic 28,448 23,323 27,191 21,603
========= ========== ========= ==========
Diluted 32,042 28,426 31,753 25,818
========= ========== ========= ==========
The accompanying notes are an integral part of these financial statements
3
LIFECELL CORPORATION
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Nine months ended September 30,
------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income $ 3,042 $ 1,448
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 1,748 1,352
Deferred taxes 1,802 -
Receivable allowance 4 56
Deferred revenues (130) (166)
Deferred rent expense 33 80
Loss on disposal of fixed assets 8 -
Increase (decrease) in cash from working capital:
Receivables (2,633) (968)
Inventories 408 (2,052)
Prepayments and other (120) (204)
Accounts payable and accrued liabilities 2,340 1,357
-------------- --------------
Net cash provided by operating activities 6,502 903
-------------- --------------
Cash flows from investing activities:
Proceeds from maturities and sale of investments 6,138 -
Purchases of investments (7,034) -
Capital expenditures (2,402) (1,894)
-------------- --------------
Net cash provided by (used in) investing activities (3,298) (1,894)
-------------- --------------
Cash flows from financing activities:
Proceeds from exercise of common stock options 1,498 -
Proceeds from issuance of common stock - 15,520
Proceeds from issuance of long-term debt - 1,451
Principal payments on long-term debt - (2,314)
-------------- --------------
Net cash provided by financing activities 1,498 14,657
-------------- --------------
Net increase (decrease) in cash and cash equivalents 4,702 13,666
Cash and cash equivalents at beginning of period 7,387 5,202
-------------- --------------
Cash and cash equivalents at end of period $ 12,089 $ 18,868
============== ==============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 13 $ 59
============== ==============
Cash paid during the period for income taxes $ 220 $ 306
============== ==============
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 Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------- ------------- --------------
(dollars in thousands except per share data)
Net income, as reported $ 1,113 $ 506 $ 3,042 $ 1,448
Less: Total stock-based compensation
expense determined under fair
value based method for all awards,
net of related tax effects (365) (245) (1,068) (800)
------------ ------------- ------------- --------------
Net Income, Pro forma $ 748 $ 261 $ 1,974 $ 648
============ ============= ============= ==============
Basic net income per common share
As reported $ 0.04 $ 0.02 $ 0.11 $ 0.07
============ ============= ============= ==============
Pro forma $ 0.03 $ 0.01 $ 0.07 $ 0.03
============ ============= ============= ==============
Diluted net income per common share
As reported $ 0.03 $ 0.02 $ 0.10 $ 0.06
============ ============= ============= ==============
Pro forma $ 0.02 $ 0.01 $ 0.06 $ 0.03
============ ============= ============= ==============
5
3. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2004 2003
-------------- -------------
(dollars in thousands)
Unprocessed tissue and materials $ 3,245 $ 4,453
Tissue products in-process 1,990 1,592
Tissue products available for distribution 3,187 2,785
-------------- -------------
Total inventories $ 8,422 $ 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 September 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 converted into common stock if the closing price
of the Company's common stock averaged or exceeded $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 on such date 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
three months and nine months ended September 30, 2004 represents Federal and
state income taxes at the Company's effective rate of 40%.
In the nine months ended September 30, 2004, the Company recognized $678,000 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 Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
(dollars and shares in thousands, except per share data)
Net income $ 1,113 $ 506 $ 3,042 $ 1,448
============= ============= ============= ============
Weighted average common shares
outstanding 28,448 23,323 27,191 21,603
------------- ------------- ------------- ------------
Denominator for basic net income
per common share 28,448 23,323 27,191 21,603
------------- ------------- ------------- ------------
Effect of dilutive securities:
Series B preferred stock assuming
conversion - 2,612 1,107 2,675
Warrants 1,502 1,180 1,468 893
Common stock options 2,092 1,311 1,987 647
------------- ------------- ------------- ------------
Denominator for diluted net income
per common share 32,042 28,426 31,753 25,818
------------- ------------- ------------- ------------
Basic net income per common share $ 0.04 $ 0.02 $ 0.11 $ 0.07
============= ============= ============= ============
------------- ------------- ------------- ------------
Diluted net income per common share $ 0.03 $ 0.02 $ 0.10 $ 0.06
============= ============= ============= ============
The calculation of net income per share for the quarters ended September 30,
2004 and 2003 excludes potentially dilutive common stock equivalents of 66,800
in 2004 and 286,350 in 2003. The calculation of net income per share for the
nine months ended September 30, 2004 and 2003 excludes potentially dilutive
common stock equivalents of 208,650 in 2004 and 1,264,661 in 2003. These common
stock equivalents, which consisted of outstanding warrants and common stock
options, 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 Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2004 2003 2004 2003
------------ ----------- ------------- -----------
(dollars in thousands)
Net income $1,113 $ 506 $3,042 $ 1,448
Change in net unrealized holding loss
on available for sale investments 5 - (10) -
------------ ----------- ------------- -----------
Comprehensive income 1,118 506 3,032 1,448
============ =========== ============= ===========
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 are a leader in the development and commercialization of human-derived tissue
based products for use in reconstructive, urogynecologic and orthopedic surgical
procedures. Our patented technology produces a unique regenerative human tissue
matrix -- a complex three-dimensional structure that contains an array of
proteins, growth factor binding sites and vascular channels -- that provides a
complete template for the regeneration of normal human tissue. Our current
products include: AlloDerm(R), for plastic reconstructive, general surgical,
burn and periodontal procedures; Cymetra(R), a particulate form of AlloDerm
suitable for injection; Repliform(R), for urogynecologic surgical procedures;
GraftJacket(R), for orthopedic surgical procedures; and AlloCraft(TM)DBM, for
bone grafting procedures. We market AlloDerm for plastic reconstructive,
general surgical and burn applications through our direct sales organization.
Our strategic sales and marketing partners include: Boston Scientific for
Repliform, Wright Medical Group, Inc. for GraftJacket, Stryker Corporation for
AlloCraftDBM and BioHorizons for periodontal applications of AlloDerm. Our
ongoing research and product development strategy is focused on extending the
utilization of our regenerative tissue matrix into new markets and the
application of our core technology to other tissues.
CRITICAL ACCOUNTING POLICIES
For the period ended September 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 SEPTEMBER 30, 2004 AND 2003
Total revenues for the three months ended September 30, 2004 increased 49% to
$15.6 million compared to $10.5 million for the same period in 2003. The
increase was attributable to a 48% increase in product revenues to $14.9 million
in the current period as compared to $10.1 million in the prior year.
Revenues generated from the use of our products in reconstructive surgical
procedures increased 55% to $11.9 million in the three months ended September
30, 2004 compared to $7.7 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 71% to $11.0 million in
the three months ended September 30, 2004 compared to $6.4 million in 2003.
9
Revenues generated from the use of our Repliform product in urogynecologic
surgical procedures decreased 27% to $1.5 million in the three months ended
September 30, 2004 compared to $2.1 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 $1.6 million in the quarter ended September
30, 2004 from $371,000 for the same period in 2003. This revenue growth
resulted from increased demand for 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 $1.1 million and $464,000, respectively, in the quarter compared
to $371,000 and $0 in 2003. (See Part II, Item 5. Other Information.)
-----------------
Our independent sales and marketing agents and distributors generated 26% of our
total product revenue in the three months ended September 30, 2004 compared to
36% in the same period in 2003. Boston Scientific and Wright Medical
represented 10% and 7%, respectively, of our total product revenues in the third
quarter of 2004 compared to 21% 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 September 30,
2004.
Total revenues also include research grant revenues, which totaled $670,000 in
the three months ended September 30, 2004 compared to $402,000 in the same
period in 2003. As of September 30, 2004, approximately $1.7 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 September 30, 2004 was $4.4
million, or 30% of product revenues, compared to cost of products sold of $3.0
million, or 30% of product revenue for the same period in 2003.
Total research and development expenses increased 36% to $2.3 million in the
three months ended September 30, 2004 compared to $1.7 million for the same
period in 2003. The increase was primarily attributable to increased research
and development headcount, professional fees and expenses related to animal
studies.
General and administrative expenses increased 37% to $1.9 million in the three
months ended September 30, 2004 compared to $1.4 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 37% to $5.2 million for the three
months ended September 30, 2004 compared to $3.8 million for the same period in
2003. The increase in 2004 was primarily attributable to: (i) higher selling
expenses, principally payroll, commissions and travel and entertainment
resulting from increased revenues and the expansion of our direct sales force
and (ii) 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 $873,000 and $1.1 million, respectively, in the quarters
ended September 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 September 30, 2004 compared to 2003. The net increase was due to a
$59,000 increase in interest income earned on investments and a $10,000 decrease
in interest expense resulting from pay-off of outstanding debt in the third
quarter of 2003. The increase was partially offset by an $8,000 loss on the
disposal of fixed assets.
The provision for income taxes was $742,000 in the quarter ended September 30,
2004 compared to $125,000 for the quarter ending September 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 third quarter of 2003 was for Federal alternative
minimum taxes and state income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Total revenues for the nine months ended September 30, 2004 increased 52% to
$44.5 million compared to $29.2 million for the same period in 2003. The
increase was attributable to a 54% increase in product revenues to $42.7 million
in the current period as compared to $27.8 million in the prior year.
10
Revenues generated from the use of our products in reconstructive surgical
procedures increased 65% to $33.3 million in the nine months ended September 30,
2004 compared to $20.1 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 83% to $30.5 million in
the nine months ended September 30, 2004 compared to $16.7 million in 2003.
Revenues generated from the use of our Repliform product in urogynecologic
surgical procedures decreased 23% to $5.2 million in the nine months ended
September 30, 2004 compared to $6.8 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 $4.3 million in the nine months ended
September 30, 2004 from $931,000 for the same period in 2003. This revenue
growth resulted from increased demand for 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 $2.9 million and $1.4 million, respectively, in the nine
months compared to $931,000 and $0 in 2003. (See Part II, Item 5. Other
-----
Information.)
- -----------
Our independent sales and marketing agents and distributors generated 28% of our
total product revenue in the nine months ended September 30, 2004 compared to
40% in the same period in 2003. Boston Scientific and Wright Medical
represented 12% and 7%, respectively, of our total product revenues in the first
nine months of 2004 compared to 24% 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 nine months ended September 30,
2004.
Total revenues also include research grant revenues, which totaled $1.7 million
in the nine months ended September 30, 2004 compared to $1.3 million in the same
period in 2003.
Cost of products sold for the nine months ended September 30, 2004 was $13.1
million, or 31% of product revenues, compared to cost of products sold of $8.4
million, or 30% of product revenue for the same period in 2003.
Total research and development expenses increased 34% to $5.6 million in the
nine months ended September 30, 2004 compared to $4.2 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 36% to $5.7 million in the nine
months ended September 30, 2004 compared to $4.2 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 $15.3 million for the nine
months ended September 30, 2004 compared to $11.0 million for the same period in
2003. The increase was primarily attributable to: (i) higher selling expenses,
principally payroll, commissions and travel and entertainment resulting from
increased revenues and the expansion of our direct sales force and (ii) 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 $3.0 million and $3.6 million, respectively, in the nine
months ended September 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 $179,000 in the nine months
ended September 30, 2004 compared to 2003. The net increase was due to a
$146,000 increase in interest income earned on investments and a $41,000
decrease in interest expense resulting from pay-off of outstanding debt in the
third quarter of 2003. The increase was partially offset by an $8,000 loss on
the disposal of fixed assets.
The provision for income taxes was $2.0 million in the nine months ended
September 30, 2004 compared to a $2,000 tax provision for the nine months ending
September 30, 2003. In the nine months ended September 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 provision recorded in the
first nine months of 2003 arose from Federal alternative minimum taxes and state
income taxes, partially offset by the sale of state net operating losses.
11
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had $12.1 million in cash and cash equivalents, $10.9
million in short-term marketable securities and $1.1 million in long-term
marketable securities. Working capital increased to $35.4 million at September
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 $6.5 million of cash from operating activities for the nine months
ended September 30, 2004 compared to $903,000 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 payable and accrued liabilities was primarily associated with higher
accrued employee compensation and benefits. 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 $2.4 million in the first nine months of 2004 and
consisted primarily of manufacturing equipment and computer hardware, software
and related implementation costs.
Our financing activities generated $1.5 million for the nine months ended
September 30, 2004 compared to $14.7 million 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 common stock, partially offset by the retirement
of all outstanding debt. At September 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 September 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
September 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 $ 5,618 $ 875 $ 1,833 $1,838 $ 1,072
--------- -------- -------- ------ -------
Total contractual cash obligations $ 5,618 $ 875 $ 1,833 $1,838 $ 1,072
========= ======== ======== ====== =======
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 September 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 4. Submission of Matters to A Vote of Security Holders.
------------------------------------------------------------
An Annual Meeting of Stockholders was held on July 15, 2004. The directors
elected at the annual meeting were: Paul G. Thomas, Michael E. Cahr, David
Fitzgerald, James G. Foster and Martin P. Sutter. All directors of the Company
hold office until the next annual meeting of stockholders or until their
respective successors are duly elected and qualified or their earlier
resignation or removal.
The only matter voted upon at the Annual Meeting and the results of the voting
are set forth below:
(i) With respect to the election of Directors the persons named below
received the following number of votes:
Name Votes For Votes Withheld
---------------- ---------- --------------
Paul G. Thomas 23,517,543 619,369
Michael E. Cahr 23,514,201 622,711
David Fitzgerald 23,508,049 628,863
James G. Foster 23,515,275 621,637
Martin P. Sutter 23,523,965 612,947
Item 5. Other Information.
-------------------
ALLOCRAFT DBM
As previously disclosed, at the end of 2003, we commenced commercial
distribution of AlloCraftDBM without obtaining United States Food and Drug
Administration ("FDA") pre-market clearance or approval based on the belief that
AlloCraftDBM is eligible for regulation solely as a human tissue. In late
September 2004, the FDA notified us by written decision that after reviewing
promotional materials for AlloCraftDBM, they believe that it does not meet the
criteria for regulation as a human tissue. However, the FDA has not requested
that we cease marketing AlloCraftDBM. In their letter to us, the FDA requested
that we promptly file a Request for Designation, or RFD, to initiate a
proceeding in which the FDA would determine the proper classification and
associated pre-market requirements. We intend to file the RFD taking the
position that AlloCraftDBM is properly regulated as a human tissue. If the FDA
does not agree, AlloCraftDBM may be subject to regulation as a medical device, a
biologic or a drug. The FDA could also require us to cease marketing and / or
recall product already sold until FDA clearance or approval is obtained. The FDA
could also seek to impose enforcement sanctions against us for marketing this
product without such prior FDA authorization.
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VASCULAR GRAFT
Earlier this year, we disclosed that the FDA did not approve our IDE application
for an acellular umbilical vein graft intended for use as an AV access graft.
We have been involved in discussions with the FDA as to the requirements for
securing IDE approval as well as the design of the clinical trials that would be
required to obtain product approval. Although we believe that our acellular
umbilical vein graft potentially represents a unique approach of dealing with
many of the issues associated with AV access, the recent change in regulatory
pathway has forced us to reevaluate this program. We believe that the FDA would
like us to complete additional animal work that would delay the approval of an
IDE for at least one year and assuming that human clinical trials could commence
in 2006, we would not expect to obtain final approval and launch a product until
2008. The change in regulatory pathway has significantly impacted the expected
time to market as well as the development cost and potentially the cost to
produce the final product. After careful consideration of each of these factors
as well as the associated risks, we have decided to discontinue development of
the umbilical vein graft as a medical device.
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 announcing
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.
14
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 22, 2004 By: /s/ Paul G. Thomas
---------------------
Paul G. Thomas
Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Date: October 22, 2004 By: /s/ Steven T. Sobieski
-------------------------
Steven T. Sobieski
Vice President, Finance
Chief Financial Officer and Secretary
(Principal Financial Officer)
Date: October 22, 2004 By: /s/ Bradly C. Tyler
----------------------
Bradly C. Tyler
Controller
(Principal Accounting Officer)
15