Lifecell 10-Q 03-31-2006

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. þ Yes oNo

	March 31,			December 31,
	2006			2005
ASSETS
Current assets
Cash and cash equivalents	$	18,646		$	21,272
Short-term investments		28,931			26,795
Receivables, less allowance of $232 in 2006 and $156 in 2005		18,671			15,786
Inventories		14,568			12,536
Prepayments and other		640			885
Deferred tax assets		13,086			10,660
Total current assets		94,542			87,934

Investments in marketable securities		4,719			--
Fixed assets, net		10,181			9,271
Deferred tax assets		5,146			8,057
Other assets, net		1,726			1,736
Total assets	$	116,314		$	106,998

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	8,417		$	6,680
Accrued liabilities		5,871			8,248
Total current liabilities		14,288			14,928

Commitments and contingencies

Stockholders’ equity
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; 33,348,000 and 32,841,000 shares issued and outstanding in 2006 and 2005		33			33
Additional paid-in capital		124,380			118,473
Accumulated other comprehensive income (loss)		(8	)		5
Accumulated deficit		(22,379	)		(26,441	)
Total stockholders’ equity		102,026			92,070
Total liabilities and stockholders’ equity	$	116,314		$	106,998

	Three months ended March 31,
	2006		2005
Revenues:
Product revenues	$	30,523	$	19,714
Research grant revenues		142		166
Total revenues		30,665		19,880

Costs and expenses:
Cost of products sold		8,981		6,184
Research and development		3,455		2,026
General and administrative		4,315		2,412
Selling and marketing		7,283		5,860
Total costs and expenses		24,034		16,482

Income from operations		6,631		3,398

Interest and other income, net		488		121

Income before income taxes		7,119		3,519

Income tax provision, net		3,056		1,390

Net income	$	4,063		2,129

Net income per common share:
Basic	$	0.13	$	0.07
Diluted	$	0.12	$	0.07

Shares used in computing net income per common share:
Basic		32,476,000		29,237,000
Diluted		33,532,000		32,156,000

	Three months ended March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	4,063		$	2,129
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		676			676
Deferred taxes		2,875			1,360
Excess tax benefit from stock-based compensation		(2,379	)		-
Stock-based compensation		1,999			-
Provision for bad debt		80			40
Inventory net realizable value provision		147			36
Loss on disposal of fixed assets		4			-
Changes in operating assets and liabilities:

Receivables		(2,965	)		(2,059	)
Inventories		(2,179	)		(1,726	)
Prepayments and other		245			(149	)
Accounts payable and accrued liabilities		(641	)		917

Net cash provided by operating activities		1,925			1,224

Cash flows from investing activities:
Proceeds from maturities and sale of investments		2,031			2,188
Purchases of investments		(8,910	)		(325	)
Capital expenditures		(1,580	)		(319	)

Net cash provided by (used in) investing activities		(8,459	)		1,544

Cash flows from financing activities:
Proceeds from exercise of common stock options		1,529			398
Excess tax benefit from stock-based compensation		2,379			-

Net cash provided by financing activities		3,908			398

Net increase (decrease) in cash and cash equivalents		(2,626	)		3,166
Cash and cash equivalents at beginning of period		21,272			10,084

Cash and cash equivalents at end of period	$	18,646		$	13,250

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	-		$	3
Cash paid during the period for income taxes	$	10		$	40

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, 2005.

The unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments) which in the opinion of management are necessary for a fair statement 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.

Prior to January 1, 2006, the Company accounted for share-based compensation in accordance with Accounting Principles Board Opinion No. 25, (“APB 25”) “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. As a result, no expense was recognized for options to purchase the Company’s common stock that were granted with an exercise price equal to fair market value at the day of the grant. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS 123R”) “Share-Based Payment,” which establishes accounting for equity instruments exchanged for services. Under the provisions of SFAS 123R, share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company elected to adopt the modified prospective transition method as provided by SFAS 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation.

As a result of adopting SFAS 123R on January 1, 2006, our income before taxes and net income for the three month period ended March 31, 2006, is $900,000 and $726,000 million lower than had we continued to account for stock-based compensation under APB No. 25. Basic and diluted net income per share for the three month period ended March 31, 2006 would have been $0.02 higher, had we not adopted SFAS 123R, compared to reported basic and diluted net income per share of $0.13 and $0.12, respectively. The adoption of SFAS 123R changed the way tax benefits related to stock compensation are reported in the statement of cash flows resulting in a reduction in cash provided by operating activities and an increase in cash provided by financing activities by $2.4 million. The adoption of SFAS 123R also resulted in a cumulative effect adjustment for estimated forfeitures for awards with compensation cost recognized in the financial statements prior to adoption. The adjustment was not material to the financial statements.

The Company has elected the alternative transition method described in FSP FAS 123(R)-3—“Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” to account for the tax effects of share-based payment awards. When utilizing tax attributes relating to items such as net operating losses and windfall tax benefits, the Company utilizes tax law ordering.

	Three Months Ended
	March 31,2005
(dollars in thousands, except per share data)
Net income, as reported	$	2,129
Less: Total stock-based compensation expense expense determined under fair value based method for all awards, net of related tax effects		(469	)
Net Income, Pro forma	$	1,660

Basic net income per common share
As reported	$	0.07
Pro forma	$	0.06

Diluted net income per common share
As reported	$	0.07
Pro forma	$	0.05

The historical pro forma impact of applying the fair value method prescribed by SFAS 123 is not representative of the impact that may be expected in the future due to changes resulting from additional grants in future years and changes in assumptions such as volatility, interest rates and expected life used to estimate fair value of the grants in future years.

The tax provision for the three months ended March 31, 2006 and 2005 represents Federal and state income taxes. The Company's effective rate of 43.1% and 39.5%, respectively, differs from the U.S. Federal statutory rate due to the impact of stock-based compensation, which cannot be recognized for tax purposes unless the stock options are exercised as a disqualifying disposition, and state income taxes, net of the federal benefit. In the three months ended March 31, 2006 and 2005, the Company recognized $2.4 million and $324,000, respectively, of deferred tax assets related to the exercise of employee stock options, which were recorded as a direct credit to stockholder’s equity and therefore had no impact on the Company’s tax provision.

The LifeCell Corporation Equity Compensation Plan (“Plan”) was adopted by the Company’s board of directors in June 2005 and was approved by its stockholders in July 2005. The Compensation Committee of the Company’s board of directors administers the plan. The Plan authorizes the issuance of various forms of stock-based awards including incentive and non-statutory stock options, stock purchase rights, stock appreciation rights, and restricted and unrestricted stock awards. Stock-based awards for employees generally vest over four years and have a ten year life, except for awards to non-employee board of director which generally vest over one year. A total of 5,850,000 shares may be issued under the Plan through March 1, 2010. At March 31, 2006, there were 1,989,000 shares available for future awards under the Plan.

	Number of shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2005		2,257,000		$	6.71
Granted		352,000		$	19.36
Exercised		(413,000	)	$	3.71			$	7,089
Forfeited or canceled		(5,000	)	$	9.34

Outstanding at March 31, 2006		2,191,000		$	9.30		7.8 years	$	29,013

Exercisable at March 31. 2006		704,000		$	4.59		6.7 years	$	12,650

The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Company estimated volatility by considering both implied volatility derived from publicly traded options to purchase LifeCell common stock and historical stock volatility. As allowed by Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, the Company elected to use the simplified method for estimating expected term equal to the midpoint between the vesting period and the contractual term. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in determining the estimated fair value of the Company’s stock options granted in the three months ended March 31, 2006 and 2005. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

In January 2006, the Company’s Board of Directors awarded 93,000 shares of restricted (non-vested) common stock to certain executive officers and senior managers. The shares, with a fair value of $1.8 million at the grant date, are subject to forfeiture to the extent that the recipient’s service is terminated prior to the shares becoming vested. The Company will recognize compensation expense on a straight-line basis over the four year vesting period for each award. None of the outstanding restricted stock vested during the three months ended March 31, 2006.

	Three Months Ended March 31,
	2006		2005
	(dollars in thousands, except per share data)
Net income	$	4,063	$	2,129

Weighted average common shares outstanding		32,476,000		29,237,000
Denominator for basic net income per share		32,476,000		29,237,000

Effect of dilutive securities:
Common stock options		948,000		1,798,000
Common stock warrants		-		1,121,000
Restricted stock		108,000		-
Denominator for diluted net income per common share		33,532,000		32,156,000

Basic net income per common share	$	0.13	$	0.07

Diluted net income per common share	$	0.12	$	0.07

The calculation of net income per common share for the quarters ended March 31, 2006 and 2005 excludes potentially dilutive common stock of 505,000 in 2006 and 478,000 in 2005. Other potential common stock, which consisted of common stock options and common stock warrants outstanding, were not included in the calculation of net income per common share because their inclusion would be antidilutive.

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 was dismissed without prejudice in December 2004 when the plaintiff elected to take a voluntary non-suit in this action. The plaintiff had six months from the date of the Order of Non-Suit to re-file the case, otherwise the case would have been dismissed with prejudice and forever barred. The complaint was re-filed in May 2005. 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. As a result, the Company does not believe that an unfavorable outcome will have a material adverse effect on the results of operations, cash flows and financial position.

In September 2005, the Company recalled products containing human tissue because the facility which recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), did not follow FDA requirements for donor screening to determine if risk factors for communicable diseases existed. The Company promptly notified FDA and all relevant hospitals and medical professionals. FDA subsequently determined that patients who received tissue implants prepared from BTS donors might be at a heightened risk of communicable disease transmission, and recommended those patients receive appropriate testing. The Company has worked closely with FDA to execute a product recall and set up a LifeCell-sponsored testing program. The Company has not received any donor tissue from BTS after September 2005.

The Company has been named, along with BTS and many other defendants, in several lawsuits that relate to this matter which were filed during the fourth quarter of 2005 and the first quarter of 2006. With the exception of two cases (discussed below), those suits purport to serve as class actions for persons receiving transplants who are not physically injured, but instead seek medical monitoring and/or damages for emotional distress. The Company was successful in obtaining a voluntarily dismissal in one case which specifically identified another company’s product being at issue. Thereafter, another defendant filed a series of motions to consolidate all class action cases in one venue as a Multi District Litigation (“MDL”). The MDL motion should be decided shortly.

There is one case filed in a Superior Court of North Carolina, Guilford County (“Sanders”) which specifically identifies the Company’s product and additionally names as defendants those medical professionals and hospitals involved in the transplant. Plaintiff in Sanders also seeks medical monitoring and damages for emotional distress, but does not seek any class remedy.

Recently, another type of class action was filed in Federal Court in Rochester, New York (“Kennedy-McInnis”) which seeks compensatory damages from BTS and all defendants, including LifeCell, which received and used BTS-originated tissue. Plaintiffs, are the next-of-kin of the donors who did not authorize BTS to remove the tissue at issue. Presently, it is unclear if this case will become part of the MDL litigation.

The Company intends to vigorously defend each case. The Company will pursue dismissal of all class action cases which do not identify its product being at issue. The Company believes it is not currently possible to estimate the likelihood of an unfavorable outcome and/or the impact, if any, the ultimate resolution of these cases could have on the Company’s operations, financial position or cash flow. 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 the claims or that the all of the claims will be covered by the terms of any insurance.

Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “can” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential,” and other similar words and expressions of the future.

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this prospectus or the date of the document incorporated by reference into this prospectus. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.

We maintain a website at www.lifecell.com. We make available free of charge on our website all electronic filings with the SEC (including proxy statements and reports on Forms 8-K, 10-K and 10-Q and any amendments to these reports) as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The SEC maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

We have also posted policies, codes and procedures that outline our corporate governance principles, including the charters of the board’s audit and nominating committees, and oure of Ethics covering directors and all employees and the Code of Ethics for senior financial officers on our website. These materials also are available free of charge in print to shareholders who request them in writing. The information contained on our website does not constitute a part of this report.

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.

We develop and market human-derived tissue-based products for use in reconstructive, orthopedic and urogynecologic surgical procedures to repair soft tissue defects. Our patented technology produces a unique regenerative human tissue matrix -- a complex three-dimensional structure that contains vascular channels, proteins and growth factor binding sites -- that provides a template for the regeneration of normal human tissue. Our current products include: AlloDerm®, for plastic reconstructive, general surgical, burn and periodontal procedures; Cymetra®, a particulate form of AlloDerm suitable for injection; GraftJacket® and GraftJacket® Xpress, for orthopedic applications and lower extremity wounds; AlloCraft™DBM, for bone grafting procedures; and Repliform®, for urogynecologic surgical 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 and GraftJacket Xpress; Stryker Corporation for AlloCraftDBM; and BioHorizons for periodontal applications of AlloDerm. Our research and development initiatives include programs designed to extend the use of our current regenerative tissue matrix products into new surgical applications, as well as leveraging our core technology to other tissues, including tissues recovered from non-human sources. We have a variety of research and development programs designed to expand our product line in the rapidly growing biologic market. Such programs include the investigation of novel biologics, alone or in combination with our regenerative tissue matrix.

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) which establishes accounting for equity instruments exchanged for employee service. We utilize the Black-Scholes option pricing model to estimate the fair value of employee stock based compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life. Further, as required under SFAS 123R, we now estimate forfeitures for options granted, which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. When estimating fair value, some of the assumptions will be based on, or determined from, external data and other assumptions may be derived from our historical experience with stock-based payment arrangements. The appropriate weight to place on historical experience is a matter of judgment, based on relevant facts and circumstances.

We estimated volatility by considering both implied volatility derived from publicly traded options to purchase LifeCell common stock and historical stock volatility. As allowed by Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, we have opted to use the simplified method for estimating expected term equal to the midpoint between the vesting period and the contractual term. We estimate forfeitures using historical employee turn-over rates. Our estimates of forfeitures will be adjusted over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, form their estimate.

Revenues generated from the use of our products in reconstructive surgical procedures increased 63% to $26.2 million in the three months ended March 31, 2006 compared to $16.1 million in 2005. The growth was primarily driven by increased demand for AlloDerm in complex hernia repair and breast reconstruction procedures. AlloDerm revenues increased 69% to $25.3 million in the three months ended March 31, 2006 compared to $14.9 million in the same period of 2005.

Our independent sales and marketing agents and distributors generated 17% of our total product revenue in the three months ended March 31, 2006 and 22% in 2005. Boston Scientific and Wright Medical represented 7% and 6%, respectively, of our total product revenues in 2006 compared to 9% and 7%, respectively, for the same period in 2005. No other individual independent sales agent or distributor generated more than 5% of our total product revenues in the three months ended March 31, 2006.

Research grant revenues, which totaled $142,000 in the first quarter of 2006 compared to $166,000 in 2005, decreased 14%. This decrease was primarily due to a decrease in research spending on projects funded by approved research grants, since research grant revenues are recognized when qualified expenses are incurred. As of March 31, 2006, approximately $1.7 million of approved grant funding was available to fund future research and development expenses through the end of 2006.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including stock options and restricted stock based on estimated fair values. We elected to adopt the modified prospective transition method as provided by SFAS 123R and, accordingly, prior year results have not be restated. Stock-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2006 was $1.8 million. The following is the detail of the stock-based compensation expense by financial statement caption including the stock-based compensation as a percentage of revenue:

Cost of products sold for the three months ended March 31, 2006 was $9.0 million, or 29% of product revenues, compared to cost of products sold of $6.2 million, or 31% of product revenue for the same period in 2005. The decrease in cost of products sold as a percentage of revenue was due to efficiencies gained through increased processing volume.

Total research and development expenses increased 71% to $3.5 million in the three months ended March 31, 2006 compared to $2.0 million for the same period in 2005. The increase was primarily attributable to: (i) payroll and related expenses associated with increased headcount and annual merit increases, (ii) stock-based compensation expense, and (iii) professional fees and expenses related to animal studies. Our research and development initiatives include programs designed to extend the use of our current regenerative tissue matrix products into new surgical applications, as well as leveraging our core technology to other tissues, including tissues recovered from non-human sources. A significant amount of our research in 2006 will be focused on the development of an animal-based version of our human-based regenerative tissue products. We expect to complete pre-clinical evaluation this year and plan to seek FDA approval to commence clinical evaluation in 2007. We also have a variety of research and development programs designed to expand our product line in the rapidly growing biologic market. Such programs include the investigation of novel biologics, alone or in combination with our regenerative tissue matrix.

General and administrative expenses increased 79% to $4.3 million in the three months ended March 31, 2006 compared to $2.4 million for the same period in 2005. The increase was primarily attributable to (i) stock-based compensation expense, (ii) increases in payroll and related expenses associated with increased headcount and annual merit increases, (iii) franchise taxes and (iv) an increase in insurance expense.

Selling and marketing expenses increased 24% to $7.3 million for the three months ended March 31, 2006 compared to $5.9 million for the same period in 2005. The increase was primarily attributable to: (i) higher selling expenses, principally payroll, commissions and travel and entertainment resulting from the expansion of our direct sales force and increased revenues, (ii) an increase in marketing and medical education expenses for AlloDerm and (iii) stock-based compensation expense. 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 $1.0 million in each of the three months ended March 31, 2006 and 2005.

The provision for income taxes was $3.1 million in the quarter ended March 31, 2006 compared to $1.4 in the same period in 2005 resulting in an effective income tax rate of a 42.9% and 39.5%, respectively. The increase in the effective tax rate is primarily due to the recognition of stock-based compensation expense for incentive stock options, which cannot not be recognized for tax purposes until the stock options are exercised. Although we recorded a tax provision in the first quarter of 2006 and 2005 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. As of March 31, 2006, we had a net operating loss carryforward (“NOL”) for federal income tax purposes of approximately $42.6 million .

At March 31, 2006, we had $18.6 million in cash and cash equivalents, $28.9 million in short-term marketable securities and $4.7 million in long-term marketable securities. Working capital increased to $80.3 million at March 31, 2006 from $73.2 million at December 31, 2005. The increase in working capital resulted primarily from increases in short-term investments, accounts receivable, inventories and current deferred taxes, a decrease in accounts payable and accrued liabilities, partially offset by a decrease in cash and cash equivalents.

We generated $1.9 million of cash from operating activities for the three months ended March 31, 2006 compared to $1.2 million for the same period in 2005. The increase in cash from operating activities in 2006, as compared to 2005, was principally due to increases in net income after adjustments for non-cash items. Such increases were partially offset by a planned increase in inventories to support anticipated growth and a normal increase in receivables associated with higher revenue. Although we recorded a tax provision in 2006 and 2005, 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.

Our financing activities generated $3.9 million for the three months ended March 31, 2006 compared to $398,000 for the same period in 2005. In 2006, the cash generated from financing activities resulted from cash proceeds received from the exercise of common stock options and the related excess tax benefits realized. In 2005, the cash generated from financing activities resulted from cash proceeds received from the exercise of common stock options and warrants.

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Although we have entered into contracts for services, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.

We believe that our current cash resources together with anticipated product revenues and committed research and development grant funding 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, including to complete potential acquisitions. We have no commitments for any future funding and there can be no assurance that we will be able to obtain additional funding in the future through debt or equity financings, 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.

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 March 31, 2006 or 2005.

During the first quarter of 2006, our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC. These disclosure controls and procedures have been designed to ensure that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by other of our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC’s rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

Based on their evaluation as of March 31, 2006, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to reasonably ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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 our products. The case was dismissed without prejudice in December 2004 when the plaintiff elected to take a voluntary non-suit in this action. The plaintiff had six months from the date of the Order of Non-Suit to re-file the case, otherwise the case would have been dismissed with prejudice and forever barred. The complaint was re-filed in May 2005. We intend to vigorously defend against this action. The likelihood of an unfavorable outcome is unknown at this time however, we believe any potential losses resulting from this action would be covered by its insurance policies. As a result, we do not believe that an unfavorable outcome will have a material adverse effect on the results of operations, cash flows and financial position.

In September 2005, we recalled products containing human tissue because the facility which recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), did not follow FDA requirements for donor screening to determine if risk factors for communicable diseases existed. We promptly notified FDA and all relevant hospitals and medical professionals. FDA subsequently determined that patients who received tissue implants prepared from BTS donors might be at a heightened risk of communicable disease transmission, and recommended those patients receive appropriate testing. We have worked closely with FDA to execute a product recall and set up a LifeCell-sponsored testing program. We have not received any donor tissue from BTS after September 2005.

We have been named, along with BTS and many other defendants, in several lawsuits that relate to this matter, which were filed during the fourth quarter of 2005 and the first quarter of 2006. With the exception of two cases (discussed below), those suits purport to serve as class actions for persons receiving transplants who are not physically injured, but instead seek medical monitoring and/or damages for emotional distress. We were successful in obtaining a voluntarily dismissal in one case which specifically identified another company’s product being at issue. Thereafter, another defendant filed a series of motions to consolidate all class action cases in one venue as a Multi District Litigation (“MDL”). The MDL motion should be decided shortly.

There is one case filed in a Superior Court of North Carolina, Guilford County (“Sanders”) which specifically identifies our product and additionally names as defendants those medical professionals and hospitals involved in the transplant. Plaintiff in Sanders also seeks medical monitoring and damages for emotional distress, but does not seek any class remedy.

We intend to vigorously defend each case. We will pursue dismissal of all class action cases which do not identify our product being at issue. We believe it is not currently possible to estimate the likelihood of an unfavorable outcome and/or the impact, if any, the ultimate resolution of these cases could have on our operations, financial position or cash flow. We maintain 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 the claims or that the all of the claims will be covered by the terms of any insurance.

	LIFECELL CORPORATION




Date: April 28, 2006	By:/s/ Paul G. Thomas
	Paul G. Thomas
	Chairman of the Board,
	President and Chief Executive Officer
	(Principal Executive Officer)


Date: April 28, 2006	By: /s/ Steven T. Sobieski
	Steven T. Sobieski
	Vice President, Finance
	Chief Financial Officer and Secretary
	(Principal Financial Officer)


Date: April 28, 2006	By: /s/ Bradly C. Tyler
	Bradly C. Tyler
	Controller
	(Principal Accounting Officer)

Delaware		76-0172936
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

	Three Months Ended March 31,
	2006
	(dollars in thousands)
Cost of products sold	$	56
Research and development		434
General and administrative		957
Selling and marketing		379
Stock-based compensation expense, before tax		1,826

Income tax benefit		(553	)
Net compensation expense	$	1,273

	March 31,		December 31,
	2006		2005
	(dollars in thousands)
Unprocessed tissue and materials	$	9,004	$	7,730
Tissue products in-process		2,021		1,688
Tissue products available for distribution		3,543		3,118
Total inventories	$	14,568	$	12,536

	March 31,			December 31,
	2006			2005
	(dollars in thousands)
Machinery and equipment	$	8,456		$	7,864
Leasehold improvements		9,241			8,346
Computer equipment, furniture and fixtures		5,594			5,505
		23,291			21,715
Accumulated depreciation and amortization		(13,110	)		(12,444	)
Fixed assets, net	$	10,181		$	9,271

	Three Months Ended March 31,
	2006		2005
Volatility		69.6%		80.0%-81.0%
Expected term (years)		6.25		6.25
Risk free interest rate		4.1% - 4.7%		3.7% - 4.4%
Expected dividend yield		0.0%		0.0%

	LifeCell Corporation
	(Exact name of registrant as specified in its charter)

	One Millennium Way, Branchburg, New Jersey 08876
	(Address of principal executive office) (Zip code)

	Non-vested Number of shares		Weighted Average Grant-Date Fair Value
Balance at December 31, 2005		647,000	$	17.03
Granted		93,000	$	19.25
Balance at March 31, 2006		740,000	$	17.31

	2006					2005
(dollars in thousands)	Dollars		%			Dollars		%
Cost of products sold	$	8,981		29	%	$	6,184		31	%
Research and development		3,455		11	%		2,026		10	%
General and administrative		4,315		14	%		2,412		12	%
Selling and marketing		7,283		24	%		5,860		30	%
Total costs and expenses	$	24,034		79	%	$	16,482		84	%

	Payments Due by Period
	Total		Less than one year		1 to 2 years		3 to 4 years		After 5 years
Operating leases	$	4,289	$	919	$	1,838	$	1,532	$	-
Licensing agreement		2,000		250		500		500		750
Total contractual cash obligations	$	6,289	$	1,169	$	2,338	$	2,032	$	750