form10q.htm

10-Q 1 form10q.htm LIFECELL 10-Q 6-30-2007 form10q.htm

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

o	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 incorporation or organization)		(IRS Employer Identification No.)

One Millennium Way, Branchburg, New Jersey 08876

(Address of principal executive office) (Zip code)

(908) 947-1100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

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. þYes oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes þNo

As of July 23, 2007, there were outstanding 33,953,000 shares of common stock, par value $.001, of the registrant.

Part I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

LIFECELL CORPORATION

BALANCE SHEETS

(dollars in thousands)

(unaudited)

	June 30,		December 31,
	2007		2006
ASSETS
Current assets
Cash and cash equivalents	$	11,762	$	10,000
Short-term investments		69,240		60,972
Receivables, less allowance for bad debts of $333 in 2007 and $279 in 2006		25,584		22,286
Inventories, net		32,864		23,801
Prepayments and other		2,171		1,309
Deferred tax assets		2,052		4,165
Total current assets		143,673		122,533

Investments in marketable securities		4,526		6,874
Fixed assets, net		21,790		19,914
Deferred tax assets		7,558		6,102
Other assets, net		1,679		1,698
Total assets	$	179,226	$	157,121

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	16,655	$	15,181
Accrued liabilities		11,676		12,641
Total current liabilities		28,331		27,822

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; 33,959,000 and 33,709,000 shares issued and outstanding in 2007 and 2006		34		34
Additional paid-in capital		142,958		135,214
Accumulated other comprehensive income		3		23
Retained earnings (accumulated deficit)		7,900		(5,972	)
Total stockholders’ equity		150,895		129,299
Total liabilities and stockholders’ equity	$	179,226	$	157,121

The accompanying notes are an integral part of these financial statements.

LIFECELL CORPORATION

STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Revenues:
Product revenues	$	47,630	$	35,684	$	90,374	$	66,207
Research grant revenues		351		437		569		579
Total revenues		47,981		36,121		90,943		66,786

Costs and expenses:
Cost of products sold		13,834		10,329		26,250		19,310
Research and development		5,812		3,976		10,980		7,431
General and administrative		5,417		4,709		10,245		9,024
Selling and marketing		10,515		8,519		20,639		15,802
Total costs and expenses		35,578		27,533		68,114		51,567

Income from operations		12,403		8,588		22,829		15,219

Interest and other income, net		1,048		637		2,017		1,125

Income before income taxes		13,451		9,225		24,846		16,344

Income tax provision		5,789		4,117		10,757		7,173

Net income	$	7,662	$	5,108	$	14,089	$	9,171

Net income per common share:
Basic	$	0.23	$	0.16	$	0.43	$	0.28
Diluted	$	0.22	$	0.15	$	0.41	$	0.27

Shares used in computing net income per common share:
Basic		33,250		32,724		33,090		32,601
Diluted		34,738		33,904		34,200		33,738

The accompanying notes are an integral part of these financial statements

LIFECELL CORPORATION

STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

	Six months ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	14,089		$	9,171
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,948			1,391
Deferred taxes		2,173			6,605
Excess tax benefit from stock-based compensation		(1,483	)		(3,528	)
Stock-based compensation		4,606			3,842
Provision for bad debt		160			121
Inventory net realizable value provision		556			128
Loss on disposal of fixed assets		26			4
Changes in operating assets and liabilities:
Receivables		(3,458	)		(4,459	)
Inventories		(9,509	)		(3,959	)
Prepayments and other		(862	)		477
Accounts payable and accrued liabilities		292			2,929

Net cash provided by operating activities		8,538			12,722

Cash flows from investing activities:
Proceeds from maturities and sale of investments		11,431			2,593
Purchases of investments		(17,388	)		(17,910	)
Capital expenditures		(3,831	)		(4,895	)

Net cash used in investing activities		(9,788	)		(20,212	)

Cash flows from financing activities:
Proceeds from exercise of common stock options		1,529			2,314
Excess tax benefit from stock-based compensation		1,483			3,528

Net cash provided by financing activities		3,012			5,842

Net increase (decrease) in cash and cash equivalents		1,762			(1,648	)
Cash and cash equivalents at beginning of period		10,000			21,272

Cash and cash equivalents at end of period	$	11,762		$	19,624

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	11,495		$	15

The accompanying notes are an integral part of these financial statements.

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, 2006.

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.

2.	Accounting Policies

The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” on January 1, 2007. As a result of the adoption of Interpretation 48, the Company recognized a $217,000 liability for uncertain tax positions, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. The liability, related to potential state tax exposure, included $73,000 for the unrecognized tax liabilities and $144,000 for accrued penalties and interest. A reconciliation of the beginning and ending amount of the accrual for unrecognized tax liabilities is as follows:

(dollars in thousands)
Balance at January 1, 2007	$	73
Additions based on tax positions related to the current year		-
Balance at June 30, 2007	$	73

During the six months ended June 30, 2007, the Company recognized approximately $72,000 in interest and penalties for a total liability for penalties and interest of $216,000 at June 30, 2007. Interest related to potential tax liabilities is included in interest expense, whereas penalties are included in general and administrative expense.

3.	Inventories, net

Inventories consist of the following:

	June 30,		December 31,
	2007		2006
	(dollars in thousands)
Unprocessed tissue and materials	$	18,299	$	14,259
Tissue products in-process		4,875		2,412
Tissue products available for distribution		9,690		7,130
Total inventories	$	32,864	$	23,801

4.	Fixed Assets

Fixed assets consist of the following:

	June 30,			December 31,
	2007			2006
	(dollars in thousands)
Machinery and equipment	$	12,428		$	11,177
Leasehold improvements		19,354			17,764
Computer hardware, furniture and fixtures		4,952			4,315
Computer software		2,535			2,214
		39,269			35,470
Accumulated depreciation and amortization		(17,479	)		(15,556	)
Fixed assets, net	$	21,790		$	19,914

5.	Income Taxes

The tax provision represents Federal and state income taxes. The Company's effective income tax rate was 43.0% and 44.6%, respectively, for the three months ended June 30, 2007 and 2006, and was 43.3% and 43.9%, respectively, for the six months ended June 30, 2007 and 2006. The effective tax rate differs from the U.S. Federal statutory tax rate primarily due to the impact of stock-based compensation which cannot currently be recognized for tax purposes, and state income taxes, net of the Federal tax benefit. In the six months ended June 30, 2007 and 2006, the Company recognized $1.5 million and $3.5 million, respectively, of deferred tax assets related to the exercise of employee stock options and vesting of restricted stock. These tax assets were recorded as a direct credit to stockholder’s equity, and therefore, had no impact on the Company’s tax provision.

6.	Share-Based Compensation

The LifeCell Corporation Equity Compensation 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. A total of 5,850,000 shares were authorized to be issued under the Plan through March 1, 2010. At June 30, 2007, there were 1,557,000 shares available for future awards under the Plan.

The Company recognizes share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards No. 123R, (‘SFAS 123R”) “Share-Based Payment”. Share-based compensation expense was $2.1 million and $2.0 million for the three months ended June 30, 2007 and 2006, respectively and $4.3 million and $3.8 million for the six months ended June 30, 2007 and 2006, respectively. As of June 30, 2007, $14.8 million of total unrecognized compensation costs related to non-vested stock options and restricted stock is expected to be recognized over a weighted average period of 1.7 years.

Stock Options

A summary of stock option activity for the six months ended June 30, 2007 is as follows:

	Number of shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2006		1,900,000		$	11.47
Granted		453,000		$	24.23
Exercised		(262,000	)	$	5.92		$	5,460
Forfeited or canceled		(84,000	)	$	16.97
Outstanding at June 30, 2007		2,007,000		$	14.85	7.6 years	$	31,483

Exercisable at June 30, 2007		818,000		$	8.96	6.6 years	$	17,653

Stock option awards issued by the Company generally vest over four years and have a ten year life. The Company estimates the fair value of stock options using the Black-Scholes option-pricing model and records the compensation expense ratably over the service period.

The fair value of stock options granted during each of the periods was estimated using the following assumptions:

	Six Months Ended June 30,
	2007	2006
Volatility	56.1%	69.6%
Expected term (years)	5.69	5.67 - 6.25
Risk free interest rate	4.3% - 5.0%	4.1% - 5.0%
Expected dividend yield	0.0%	0.0%

The weighted average grant date fair value of stock options granted during the first six months of 2007 was $13.60 per share.

In connection with the stock option exercises during the six months ended June 30, 2007, the Company received proceeds of $1.5 million.

Restricted Stock

The Company grants restricted stock to employees and directors that entitle the holders to receive shares of the Company’s common stock upon the fulfillment of certain service and/or performance conditions. The fair value of restricted stock is based on the market price of the Company’s stock on the date of grant and is recorded as compensation expense ratably over the service period, generally three to four years. For restricted stock awards that also have performance conditions, the compensation expense is based on the expected future performance.

A summary of non-vested restricted stock activity for the six months ended June 30, 2007 is as follows:

	Non-vested Number of shares			Weighted Average Grant-Date Fair Value		Aggregate Intrinsic Value (in thousands)
Balance at December 31, 2006		670,000		$	17.85
Granted		122,000		$	24.65
Vested		(30,000	)	$	22.23	$	772
Forfeited		(17,000	)	$	19.39
Balance at June 30, 2007		745,000		$	18.76

7.	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,
	2007		2006		2007		2006
	(dollars and shares in thousands, except per share data)
Net income	$	7,662	$	5,108	$	14,089	$	9,171

Weighted average common shares outstanding		33,250		32,724		33,090		32,601
Denominator for basic net income per common share		33,250		32,724		33,090		32,601

Effect of dilutive securities:
Common stock		693		931		709		924
Restricted stock		795		249		401		213
Denominator for diluted net income per common share		34,738		33,904		34,200		33,738

Basic net income per common share	$	0.23	$	0.16	$	0.43	$	0.28

Diluted net income per common share	$	0.22	$	0.15	$	0.41	$	0.27

Options outstanding at June 30, 2007 and 2006 to acquire approximately 615,000 and 470,000 shares of common stock, respectively, were excluded from the computation of diluted net income per share for the three months ended June 30, 2007 and 2006, respectively, because their effects would be anti-dilutive. Options outstanding at June 30, 2007 and 2006 to acquire approximately 930,000 shares and 569,000 of common stock, respectively, were excluded from the computation of diluted net income per share for the six months ended June 30, 2007 and 2006, respectively, because their effects would be anti-dilutive.

8.	Comprehensive Income

The components of comprehensive income, net of tax, were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
	(dollars in thousands)
Net income	$	7,662		$	5,108		$	14,089		$	9,171
Other comprehensive income (loss):
Change in net unrealized holding loss on available for sale investments		(23	)		(22	)		(21	)		(35	)
Comprehensive income, net of tax		7,639			5,086			14,068			9,136

9.	Commitments and Contingencies

Litigation

In September 2005, the Company recalled certain human-tissue based products because the organization that recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), did not follow the FDA’s requirements for donor consent and/or screening to determine if risk factors for communicable diseases existed. The Company promptly notified the FDA and all relevant hospitals and medical professionals. The FDA subsequently determined that patients who received tissue implants prepared from BTS donor tissue might be at a heightened risk of communicable disease transmission, and recommended those patients receive appropriate testing. The Company has worked closely with the FDA to execute the product recall and to 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. With the exception of the individual plaintiff cases discussed below, the 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. All of these cases were venued in New Jersey as part of a Multi-District Litigation (“MDL”). The Company has been successful in obtaining a voluntarily dismissal of every such class action, with the exception of one case that purports to only involve LifeCell products (“Watling”).

In addition, two other class actions were filed in Federal Court in Rochester, New York (“Kennedy-McInnis” and “Graves”) that seek compensatory damages from BTS and all processing defendants that received and used BTS-originated tissue, including LifeCell. Plaintiffs are the next-of-kin of the donors who did not authorize BTS to remove the tissue at issue. Those cases have also been transferred to the MDL and are presently the subject of motions to dismiss.

There has also been a series of approximately 20 individual plaintiff cases filed in which those persons also seek compensatory damages for emotional distress and/or future medical monitoring. None of the individual plaintiffs claim any present physical injury. With the exception of four cases that were filed in the State Court in New Jersey and two cases in the State Court in Pennsylvania, all of the individual cases have been or are in the process of being transferred to the MDL.

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, that 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 all of the claims will be covered by the terms of any insurance.

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 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

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.

Forward-looking statements may not be realized due to a variety of factors, including, without limitation:

•

the failure to maintain or increase revenues from the sale of our AlloDerm products;

•

the failure to comply with government regulations, including the FDA;

•

claims for damages by third-parties, including product liability claims;

•

our dependence on a limited number of sources for human cadaveric tissue;

•

negative publicity about the use of donated human tissue in medical procedures;

•

our ability to increase market penetration of our current products and to develop and commercialize new products;

•

changes in third party reimbursement practices;

•

the failure of third party sales representatives and distributors to adequately promote, market and sell our products;

•

our inability to protect our intellectual property;

•

the effects of competition; and

•

the other factors listed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2006 and other reports that we file with the Securities and Exchange Commission.

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 report. 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.

Supervision and Regulation — Securities and Exchange Commission

We maintain a website at www.lifecell.com. 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 through our website. We have also posted policies, codes and procedures that outline our corporate governance principles, including the charters of the board’s audit, compensation, nominating and corporate governance committees, and our Code 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 stockholders who request them in writing. The information contained on our website does not constitute a part of this report.

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.

In the following discussions, most percentages and dollar amounts have been rounded to aid the presentation. As a result, all such figures are approximations.

OVERVIEW

We develop and market innovative tissue repair products for use in reconstructive, orthopedic and urogynecologic surgical procedures. Our current marketed products include: AlloDerm, for plastic reconstructive, general surgical, burn and periodontal procedures; Cymetra, a particulate form of AlloDerm suitable for injection; GraftJacket, for orthopedic applications and lower extremity wounds; AlloCraftDBM, for bone grafting procedures; and Repliform, for urogynecologic surgical procedures. Our research and development initiatives include programs designed to extend the use of our current marketed regenerative tissue matrix products into new surgical applications, as well as leveraging our core technology to other tissues, including non-human tissues, and expanding our product line in the rapidly growing biosurgery market.

Revenue and Expenses

Revenues. We market AlloDerm for plastic reconstructive, general surgical and burn applications through our direct sales organization. AlloDerm is primarily sold to hospitals for use by general and plastic surgeons. Our products for orthopedic and urogynecologic procedures are marketed through independent sales agents and distributors. Our strategic sales and marketing partners include: Wright Medical Group, Inc. for GraftJacket and GraftJacket Xpress; Stryker Corporation for AlloCraftDBM; Boston Scientific for Repliform; and BioHorizons for periodontal applications of AlloDerm. We have experienced significant revenue growth in the past several years and in 2007, we expect our revenues to continue to increase as we further penetrate the reconstructive market.

Share-based compensation. Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”). Share-based compensation is included in the same financial statement captions as an employee’s salary.

Cost of products sold. Cost of products sold consists primarily of fees paid to tissue recovery organizations, tissue procurement support costs, labor, overhead and supplies costs related to the processing of our tissue-based products. Cost of products sold also includes depreciation, freight handling and packaging costs. In 2007, we expect cost of products sold to decrease slightly as a percentage of total revenue due to cost efficiencies achieved through increased processing volume.

Research and development. Research and development, or R&D, expenses consist primarily of personnel costs within our research, product development and clinical functions, as well as the costs of pre-clinical and clinical studies and other product development related costs. We expense all R&D costs in the period incurred. Our R&D 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 non-human tissues. R&D expenditures in 2007 are expected to remain at approximately the same percentage of revenue as in 2006.

General and administrative. General and administrative, or G&A, expenses consist primarily of salaries and other related costs for personnel serving the executive, finance, information technology, human resources and regulatory affairs functions, as well as legal fees, accounting fees, insurance costs and recruiting fees. In 2007, we expect G&A costs to increase as we add personnel to support our growth, however, we anticipate a slight decrease in G&A costs as a percentage of total revenue.

Selling and marketing. Selling and marketing expenses consist primarily of personnel costs within our sales, marketing and customer support functions, commissions paid to our sales representatives and costs associated with medical education, market research, promotional activities, travel and entertainment. In 2007, we expect sales and marketing expenses to increase due to the expansion of our sales force by 18 at the end of 2006, and marketing costs associated with preparation for the anticipated 2008 launch of Strattice^TM, our porcine-derived tissue matrix.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2007 and 2006

The following table includes information from our Statements of Operations, the relative percentage that those amounts represent to total revenue and the percentage change in those amounts from period to period.

	Three Months Ended				Percentage of						% Increase
	June 30,				Total Revenue						(Decrease)
	2007		2006		2007			2006			2007 vs. 2006
Net Revenues:
Reconstructive revenues	$	42,306	$	31,359		88	%		87	%		35	%
Orthopedic revenues		3,195		2,316		7	%		6	%		38	%
Urogynecologic revenues		2,129		2,009		4	%		6	%		6	%
Product Revenues		47,630		35,684		99	%		99	%		33	%
Research Grant Revenues		351		437		1	%		1	%		-20	%
Total Net Revenues		47,981		36,121		100	%		100	%		33	%

Costs and Expenses:
Cost of Products Sold		13,834		10,329		29	%		29	%		34	%
Research and Development		5,812		3,976		12	%		11	%		46	%
General and Administrative		5,417		4,709		11	%		13	%		15	%
Selling and Marketing		10,515		8,519		22	%		24	%		23	%
Total Costs and Expenses		35,578		27,533		74	%		76	%		29	%

Income from Operations		12,403		8,588		26	%		24	%		44	%

Revenues

Total revenues for the three months ended June 30, 2007 increased by $11.9 million, or 33%, to $48.0 million compared to $36.1 million for the same period in 2006. The increase was primarily attributable to a 33% increase in product revenues to $47.6 million in the current period as compared to $35.7 million in the prior year.

Revenues generated from the use of our products in reconstructive surgical procedures increased by $10.9 million, or 35%, to $42.3 million in the three months ended June 30, 2007 compared to $31.4 million in the same period in 2006. The growth was primarily driven by increased demand for AlloDerm in complex hernia repair and breast reconstruction procedures. AlloDerm revenues increased 36% to $41.4 million in the three months ended June 30, 2007 compared to $30.3 million in the same period of 2006.

Orthopedic product revenue grew by $879,000, or 38%, to $3.2 million in the three months ended June 30, 2007 from $2.3 million in 2006. This revenue growth resulted primarily from increased demand for our GraftJacket products. GraftJacket revenues were $2.6 million in 2007 compared to $1.9 million in the same period in 2006.

Revenues generated from the use of our Repliform product in urogynecologic surgical procedures increased by $120,000, or 6%, to $2.1 million in the three months ended June 30, 2007 compared to $2.0 million for the same period in 2006.

Our independent sales and marketing agents and distributors generated 13% of our total product revenue in the three months ended June 30, 2007 compared to 14% in 2006. Wright Medical Group and Boston Scientific represented 6% and 4%, respectively, of our total product revenues in the three months ended June 30, 2007 compared to 5% and 6%, respectively, for the same period in 2006. No other individual independent sales agent or distributor generated more than 5% of our total product revenues in the three months ended June 30, 2007.

Research grant revenues were $351,000 in the second quarter of 2007 compared to $437,000 in 2006. As of June 30, 2007, approximately $43,000 of approved grant funding was available for future research and development expenses through the end of 2007.

Costs and expenses

Cost of products sold for the three months ended June 30, 2007 was $13.8 million, or 29% of product revenues, compared to cost of products sold of $10.3 million, or 29% of product revenue for the same period in 2006.

Total research and development expenses increased by $1.8 million, or 46%, to $5.8 million in the three months ended June 30, 2007 compared to $4.0 million for the same period in 2006. The increase was primarily attributable to: (i) payroll and related expenses associated with increased headcount and annual merit increases, (ii) professional fees and expenses related to pre-clinical studies, (iii) operating supplies, and (iv) share–based compensation expense.

General and administrative expenses increased by $708,000, or 15%, to $5.4 million in the three months ended June 30, 2007 compared to $4.7 million for the same period in 2006. The increase was primarily attributable to: (i) employee recruitment expenses, (ii) franchise taxes, (iii) payroll and related expenses associated with increased headcount and annual merit increases, and (iv) professional fees.

Selling and marketing expenses increased by $2.0 million, or 23%, to $10.5 million for the three months ended June 30, 2007 compared to $8.5 million for the same period in 2006. 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, (ii) an increase in marketing and medical education program expenses for AlloDerm, and (iii) share-based compensation expense. Selling and marketing expenses included agent fees of $976,000 and $928,000, respectively, in each of the three months ended June 30, 2007 and 2006.

Interest and other income, net

Interest and other income, net increased by $411,000, or 65%, to $1.0 million in the three months ended June 30, 2007 compared to $637,000 in the same period in 2006 due to an increase in interest income resulting from a higher level of invested cash and higher rate of return.

Income tax provision

The provision for income taxes increased by $1.7 million, or 41%, to $5.8 million in the three months ended June 30, 2007 compared to $4.1 million in the same period in 2006, reflecting an effective income tax rate of 43.0% and 44.6%, respectively.

Six Months Ended June 30, 2007 and 2006

	Six Months Ended				Percentage of						% Increase
	June 30,				Total Revenue						(Decrease)
	2007		2006		2007			2006			2007 vs. 2006
Net Revenues:
Reconstructive revenues	$	79,964	$	57,628		87	%		86	%		39	%
Orthopedic revenues		6,155		4,497		7	%		7	%		37	%
Urogynecologic revenues		4,255		4,082		5	%		6	%		4	%
Product Revenues		90,374		66,207		99	%		99	%		37	%
Research Grant Revenues		569		579		1	%		1	%		-2	%
Total Net Revenues		90,943		66,786		100	%		100	%		36	%

Costs and Expenses:
Cost of Products Sold		26,250		19,310		29	%		29	%		36	%
Research and Development		10,980		7,431		12	%		11	%		48	%
General and Administrative		10,245		9,024		11	%		14	%		14	%
Selling and Marketing		20,639		15,802		23	%		24	%		31	%
Total Costs and Expenses		68,114		51,567		75	%		77	%		32	%

Income from Operations		22,829		15,219		25	%		23	%		50	%

Revenues

Total revenues for the six months ended June 30, 2007 increased by $24.1 million, or 36%, to $90.9 million compared to $66.8 million for the same period in 2006. The increase was primarily attributable to a 37% increase in product revenues to $90.4 million in the current period as compared to $66.2 million in the prior year.

Revenues generated from the use of our products in reconstructive surgical procedures increased by $22.3 million, or 39%, to $79.9 million in the six months ended June 30, 2007 compared to $57.6 million in the same period in 2006. The growth was primarily driven by increased demand for AlloDerm in complex hernia repair and breast reconstruction procedures. AlloDerm revenues increased 41% to $78.2 million in the six months ended June 30, 2007 compared to $55.6 million in the same period of 2006.

Orthopedic product revenue grew by $1.7 million, or 37%, to $6.2 million in the six months ended June 30, 2007 from $4.5 million in 2006. This revenue growth resulted primarily from increased demand for our GraftJacket products. GraftJacket revenues were $5.2 million in 2007 compared to $3.7 million in the same period in 2006.

Revenues generated from the use of our Repliform product in urogynecologic surgical procedures increased by $173,000, or 4%, to $4.3 million in the six months ended June 30, 2007 compared to $4.1 million for the same period in 2006.

Our independent sales and marketing agents and distributors generated 13% of our total product revenue in the six months ended June 30, 2007 compared to 16% in 2006. Wright Medical Group and Boston Scientific represented 6% and 5%, respectively, of our total product revenues in the first six months of 2007 compared to 6% each for the same period in 2006. No other individual independent sales agent or distributor generated more than 5% of our total product revenues in the six months ended June 30, 2007.

Research grant revenues were $569,000 in the first six months of 2007 compared to $579,000 in 2006. As of June 30, 2007, approximately $43,000 of approved grant funding was available for future research and development expenses through the end of 2007.

Costs and expenses

Cost of products sold for the six months ended June 30, 2007 was $26.3 million, or 29% of product revenues, compared to cost of products sold of $19.3 million, or 29% of product revenue for the same period in 2006.

Total research and development expenses increased by $3.6 million, or 48%, to $11.0 million in the six months ended June 30, 2007 compared to $7.4 million for the same period in 2006. The increase was primarily attributable to: (i) payroll and related expenses associated with increased headcount and annual merit increases, (ii) professional fees and expenses related to pre-clinical studies, (iii) operating supplies, and (iv) share–based compensation expense.

General and administrative expenses increased by $1.2 million, or 14%, to $10.2 million in the six months ended June 30, 2007 compared to $9.0 million for the same period in 2006. The increase was primarily attributable to: (i) professional fees, (ii) employee recruitment expenses and, (iii) payroll and related expenses associated with increased headcount and annual merit increases.

Selling and marketing expenses increased by $4.8 million, or 31%, to $20.6 million for the six months ended June 30, 2007 compared to $15.8 million for the same period in 2006. 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, (ii) an increase in marketing and medical education program expenses for AlloDerm, and (iii) share-based compensation expense. Selling and marketing expenses included agent fees of $2.0 million and $1.9 million, respectively, in the six months ended June 30, 2007 and 2006.

Interest and other income, net

Interest and other income, net increased by $892,000, or 79%, to $2.0 million in the six months ended June 30, 2007 compared to $1.1 million in the same period in 2006 due to an increase in interest income resulting from a higher level of invested cash and higher rate of return.

Income tax provision

The provision for income taxes increased by $3.6 million, or 50%, to $10.8 million in the six months ended June 30, 2007 compared to $7.2 million in the same period in 2006, reflecting an effective income tax rate of 43.3% and 43.9%, respectively.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2007, we had $11.8 million in cash and cash equivalents, $69.2 million in short-term marketable securities and $4.5 million in long-term marketable securities. Working capital increased to $115.3 million at June 30, 2007 from $94.7 million at December 31, 2006. The increase in working capital resulted primarily from increases in short-term investments, cash and cash equivalents, inventories, and a decrease in accrued liabilities, partially offset by a decrease deferred tax assets.

We generated $8.6 million of positive cash flow from operating activities for the six months ended June 30, 2007 compared to $12.7 million for the same period in 2006. The positive cash flow from operating activities in 2007 was principally due to higher net income after adjustments for non-cash items, partially offset by a planned increase in inventories to support anticipated growth, and a decrease in accounts payable and accrued liabilities.

Capital expenditures were $3.8 million and $4.9 million, respectively, in the six moths ended June 30, 2007 and 2006. Capital expenditures in 2007 consisted primarily of facility expansion costs and purchases of manufacturing and computer equipment.

Our financing activities generated $3.0 million for the six months ended June 30, 2007 compared to $5.8 million for the same period in 2006. In both periods 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.

The following table reflects a summary of our contractual cash obligations as of June 30, 2007:

	Payments Due by Period
(dollars in thousands)	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Operating leases	$	3,898	$	1,141	$	2,282	$	475	$	-
Licensing agreement		1,750		250		500		500		500
Total contractual cash obligations	$	5,648	$	1,391	$	2,782	$	975	$	500

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 most purchase orders 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 have also entered into employment agreements with certain executive officers that provide for potential payments and benefits upon employment termination. Such payments and benefits have not been included in the table above since potential payments are contingent upon uncertain future events.

At the end of 2005, we commenced a multi-year facility expansion at our Branchburg, New Jersey facility to increase office space, research labs and processing capacity. Capital expenditures associated with the ongoing facility project are estimated to be approximately $7.4 million in 2007. In addition, we estimate spending a total of $8.0 million for production, research and development, and computer equipment in 2007.

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 capital expenditure requirements in the foreseeable future. However, we may need additional funds to meet our long-term strategic objectives, including the completion of 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.

Critical Accounting Policies / Estimates

We adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” on January 1, 2007. As a result of the adoption of Interpretation 48, we recognized a $217,000 liability for uncertain tax positions, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. The liability, related to potential state tax exposure, included $73,000 for the unrecognized tax liabilities and $144,000 for accrued penalties and interest. During the six months ended June 30, 2007, we recognized approximately $72,000 in interest and penalties for a total liability for penalties and interest of $216,000 at June 30, 2007.

For the period ended June 30, 2007, there were no other changes to our critical accounting policies as identified in our annual report of Form 10-K for the year ended December 31, 2006.

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, 2007 or 2006.

Item 4.

Controls and Procedures.

Disclosure controls and procedures.

During the first six months of 2007, 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 June 30, 2007, 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.

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 1.

Legal Proceedings

In September 2005, we recalled certain human-tissue based products because the organization that recovered the tissue, Biomedical Tissue Services, Ltd. (“BTS”), did not follow the FDA’s requirements for donor consent and/or screening to determine if risk factors for communicable diseases existed. We promptly notified the FDA and all relevant hospitals and medical professionals. The FDA subsequently determined that patients who received tissue implants prepared from BTS donor tissue might be at a heightened risk of communicable disease transmission, and recommended those patients receive appropriate testing. We have worked closely with the FDA to execute the product recall and to 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. With the exception of the individual plaintiff cases discussed below, the 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. All of these cases were venued in New Jersey as part of a Multi-District Litigation (“MDL”). We have been successful in obtaining a voluntarily dismissal of every such class action, with the exception of one case that purports to only involve our products (“Watling”).

In addition, two other class actions were filed in Federal Court in Rochester, New York (“Kennedy-McInnis” and “Graves”) that seek compensatory damages from BTS and all processing defendants that received and used BTS-originated tissue, including us. Plaintiffs are the next-of-kin of the donors who did not authorize BTS to remove the tissue at issue. Those cases have also been transferred to the MDL and are presently the subject of motions to dismiss.

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.

Item 1a.

Risk Factors

There were no material changes in any risk factors previously disclosed in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2007.

Item 4.

Submission of Matters to a Vote of Security Holders.

An Annual Meeting of Stockholders was held on June 28, 2007. The directors elected at the annual meeting were: Paul G. Thomas, Michael E. Cahr, David Fitzgerald, James G. Foster, Michael R. Minogue, Robert P. Roche, Jr. and Martin P. Sutter. All of our directors 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 matters 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	28,465,276	853,658
Michael E. Cahr	28,475,574	843,360
David Fitzgerald	28,765,582	553,352
James G. Foster	28,473,691	845,243
Michael R. Minogue	28,773,574	545,360
Robert P. Roche, Jr.	28,786,875	532,059
Martin P. Sutter	28,774,429	544,505

(ii)

With respect to a proposal to ratify the appointment of Pricewaterhouse Coopers LLP as our independent registered public accounting firm for the year ending December 31, 2007, the votes cast were; 29,237,385 voted in favor, 39,881 voted against, and 41,668 votes abstained from voting on the proposal.

Item 6.

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

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 25, 2007		By: /s/ Paul G. Thomas
		Paul G. Thomas
		Chairman of the Board,
		President and Chief Executive Officer
		(Principal Executive Officer)


Date: July 25, 2007		By: /s/ Steven T. Sobieski
		Steven T. Sobieski
		Vice President, Finance
		Chief Financial Officer and Secretary
		(Principal Financial Officer)



Date: July 25, 2007		By: /s/ Bradly C. Tyler
		Bradly C. Tyler
		Controller
		(Principal Accounting Officer)