Zila, Inc. (Nasdaq:ZILA) released results for its second quarter of
fiscal 2006 that ended January 31, 2006. Highlights of those
results, compared with the second quarter of fiscal 2005 ended
January 31, 2005, are as follows: -- Net revenues for the second
quarter of fiscal 2006 were $9.6 million, a decrease of 12%,
compared to net revenues of $10.9 million. Zila Pharmaceuticals
revenues increased $1.3 million, or 111%. Zila Nutraceuticals
revenue decreased $2.6 million, or 26%. While Nutraceuticals
factory sales declined during the quarter, Ester-C(R) sales at
retail (actual sales to consumers at the cash register) rebounded
during the quarter and posted record sales as the brand gained
market share. -- Gross margin decreased to 58% in the second
quarter of fiscal 2006 from 66%, in the prior year period, driven
primarily by discounts offered in an effort to stimulate Ester-C
factory sales. Gross profit dollars decreased by $1.7 million, or
23%, to $5.6 million from $7.3 million. -- Marketing and selling
expense in the second quarter of fiscal 2006 increased by
approximately 42%, to $6.9 million, from $4.9 million, driven
largely by Zila Nutraceuticals spending for advertising and
promotion in support of the Ester-C business as well as by Zila
Pharmaceuticals' marketing efforts and increased spending in
support of the ViziLite(R) Plus product launch. -- Research and
development spending, primarily in connection with Zila's
OraTest(R) program, increased by nearly 7%, to $1.7 million from
$1.6 million. -- General and administrative costs increased 21% to
$3.4 million from $2.8 million due to increased professional and
consulting fees, the addition of personnel in support of our
Pharmaceutical business and stock compensation expense recognized
as we implemented SFAS 123R (expensing of stock options). -- Net
loss for the quarter increased to $7.2 million, or sixteen cents
per share, compared to a loss of $2.7 million, or six cents per
share. In addition to these financial results, we made significant
progress on a number of strategic fronts: -- Zila Pharmaceuticals
again produced impressive revenue gains this quarter led by
ViziLite sales and the launch of ViziLite Plus with TBlue(630).
ViziLite Plus is the most advanced technology in the marketplace
for early detection of oral abnormalities in patients at increased
risk for oral cancer. Zila also announced today that CIGNA Dental
will begin reimbursing for ViziLite Plus in some of its plans. --
Zila Nutraceuticals expanded the international presence of Ester-C
by signing agreements with distributors Asahi Godo in Japan and
Cederroth International and Bringwell AB in Europe. Sales into
Japan are expected to commence later this summer. Zila
Nutraceuticals also announced that a new domestic customer has
advanced its effort to launch new product offerings that have the
potential to make them our largest purchaser of Ester-C. -- Zila
Biotechnology reached agreement with the United States Food and
Drug Administration (FDA) under its Special Protocol Assessment
program (SPA) on the design and size of its Phase III clinical
trial for OraTest, our oral cancer detection drug. Enrollment in
the trial, which, is expected to require fewer than 4,000
high-risk, readily available patients has begun. The study will
generally require a single visit and will be conducted at
approximately 13 investigative sites. The study is advancing on
schedule and will take less than one year to complete. -- On March
10, 2006, we obtained a commitment from a financial institution for
a secured credit facility of up to $40 million. The facility calls
for $20 million to be funded no later than March 31, 2006, and the
balance to be made available thereafter, if required, for specific
future corporate needs. The facility remains subject to the
completion of final documentation and certain conditions to
closing. Zila's Chairman, President and CEO, Douglas D. Burkett,
Ph.D., said, "While we are disappointed by the short-term
performance of our Nutraceuticals Business Unit, we are encouraged
by Ester-C's turnaround performance at retail. We invested heavily
in marketing Ester-C during the quarter based on our successful
history of generating strong consumer demand for our premium value
product through advertising. Sales of Ester-C at retail returned to
growth during the quarter and generated record sales as the brand
gained market share, which we believe must eventually translate
into a return to factory sales growth. We are also encouraged by
several new growth opportunities both domestically and
internationally and are working to return the Ester-C franchise to
the growth trajectory it has experienced over the past several
years. "Our Pharmaceuticals Business Unit achieved record growth
during the quarter. ViziLite sales continue their impressive
growth, with a 28% increase compared to the first quarter of fiscal
2006 and a 317% increase compared to the prior year period. With
CIGNA Dental now beginning to provide insurance reimbursement for
ViziLite, we look forward to the growth that may be realized from
this consumer benefit. The added liquidity that will be provided by
the new credit facility will assist us in achieving our future
growth plans." Zila Nutraceuticals Net revenues for Zila
Nutraceuticals for the three months ended January 31, 2006
decreased 26% to $7.2 million compared to $9.8 million for the
three months ended January 31, 2005. The revenue decline was driven
largely by a decrease in sales to one large customer and was
partially offset by increased sales to other customers. Gross
margins for Zila Nutraceuticals decreased to 63% for the three
months ended January 31, 2006 compared to 68% for the three months
ended January 31, 2005. The reduction in our gross margin resulted
primarily from sales discounts offered to our customers to incent
sales. Zila Pharmaceuticals Net revenues for Zila Pharmaceuticals
for the three months ended January 31, 2006 increased 111%, to $2.4
million, compared to $1.1 million in the prior year period. The
increase in net revenues in the Pharmaceuticals Business Unit was
driven by increases in all product lines, led by a 317% increase in
ViziLite sales to $0.8 million. Additionally, sales for the IST
subsidiary (net of intercompany sales) were $739,000 compared to
$115,000 last year and Peridex sales increased 1% to $0.8 million.
Gross margins for Zila Pharmaceuticals decreased to 42% in the
second quarter of fiscal 2006 from 50% in the second quarter of
fiscal 2005, due to a decline in ViziLite gross margins that was
driven by one time product launch related manufacturing validation
costs and by discounted pricing of ViziLite in order to clear
remaining inventories as we made the transition to the new ViziLite
Plus product offering. Gross margins for the other products within
Pharmaceuticals increased during the quarter when compared to the
prior year period. Zila Biotechnology Total operating expenses for
Zila Biotechnology were $2.2 million for the three months ended
January 31, 2006, an 8% increase over the $2.0 million for the
three months ended January 31, 2005. We previously announced that
we have received a Special Protocol Assessment (SPA) from the FDA
for our Phase III clinical trial of OraTest, our oral cancer
detection drug. The SPA process allows for official FDA evaluation
of a Phase III clinical trial and provides trial sponsors with a
binding written agreement that the design and analysis of the study
are adequate to support a license application submission if the
study is performed according to the SPA. During the second quarter
of fiscal 2006, we commenced the enrollment of patients in the
Phase III clinical study. The study is on schedule have enrolled
over 10% of the patients that are expected to be required. We
expect enrollment to be complete in less than one year. Six Months
Ended January 31, 2006 Net sales for the six months ended January
31, 2006 decreased 7% to $19.3 million compared to $20.8 million
for the comparable period of fiscal 2005. The decline was the
result of a decline in sales of $3.9 million within our
Nutraceuticals Business Unit which more than offset the $2.4
million increase in sales that was produced by our Pharmaceuticals
Business Unit. As a result, gross profit decreased to $11.2 million
for the six months ended January 31, 2006 from $13.7 million in the
comparable prior year period. Net loss attributable to common
shareholders increased to $12.3 million from $5.4 million in the
comparable period of the prior year, due to the sales and gross
margin changes described above, as well as increased spending for
marketing and selling costs and general and administrative costs in
the fiscal 2006 period. Conference Call Zila, Inc. will host a
conference call to discuss these results today at 4:30 p.m. ET;
2:30 p.m. MT. Domestic participants may dial 877-407-8031 up to ten
minutes before the scheduled start time and ask for the Zila
conference call. Participants calling from outside the United
States should dial 201-689-8031. A tape replay of the call will be
available for 48 hours beginning two hours after the conclusion of
the call, by dialing 877-660-6853 (or 201-612-7415 for
international callers) and providing the pass code 286 and
conference ID 194295. In addition, the call will be broadcast over
the Internet and can be accessed at http://www.zila.com. Investors
should visit the website prior to the call to download any
necessary audio software. About Zila Zila, Inc., headquartered in
Phoenix, is an innovator in preventive healthcare technologies and
products, focusing on enhanced body defense and the detection of
pre-disease states. Zila has three business units: -- Zila
Biotechnology, a research, development and licensing business
specializing in pre-cancer/cancer detection through its patented
Zila Tolonium Chloride and OraTest(R) technologies. -- Zila
Pharmaceuticals, a manufacturer and marketer of products to promote
oral health and prevent oral disease, including ViziLite(R) Plus
oral examination kits and Peridex(R) prescription periodontal
rinse. -- Zila Nutraceuticals, manufacturer and marketer of
Ester-C(R) and Ester-E(R), branded, highly effective forms of
Advanced Protection vitamins C and E. For more information about
Zila, visit www.zila.com. This press release contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. The words, "believe," "expect," "anticipate,"
"estimate," "will" and other similar statements of expectation
identify forward-looking statements. Forward looking statements
contained herein include, but are not limited to, statements
regarding the OraTest regulatory effort, sales in Japan, the new
Ester-C customer and the credit facility. These forward-looking
statements speak only as of the date the statements were made and
are based upon management's current expectations and beliefs and
are subject to a number of risks and uncertainties, some of which
cannot be predicted or quantified. Furthermore, these
forward-looking statements are based largely on Zila's expectations
or forecasts of future events, can be affected by inaccurate
assumptions and are subject to various business risks and known and
unknown uncertainties, a number of which are beyond the Company's
control. Therefore, actual results could differ materially from the
forward-looking statements contained herein. A wide variety of
factors could cause or contribute to such differences and could
adversely impact revenues, margins, profitability, cash flows and
capital needs, the ability of the Company to maintain required cash
flows and cash availability to implement its business plan and
appreciation in the market value of Zila's common stock. Such
factors include, but are not limited to: increased competition from
current competitors and new market entrants; the Company's ability
to maintain, expand, or in certain cases, regain distribution
within new or existing channels of trade for its products; and the
market acceptance of the ViziLite(R) Plus and Ester-E(R) products
and the future gross margins for such products. A wide variety of
factors will impact the length, size and expense of the OraTest(R)
clinical program; the FDA's ultimate decision regarding the
OraTest(R) clinical program and product; the limitations on the
indicated uses for the OraTest(R) product; and the ultimate market
reception of the OraTest(R) product. There can be no assurance that
the forward-looking statements contained in this press release
will, in fact, transpire or prove to be accurate. For a more
detailed description of these and other cautionary factors that may
affect Zila's future results, please refer to Zila's Report on Form
10-K for its fiscal year ended July 31, 2005, filed with the
Securities and Exchange Commission. -0- *T ZILA, INC. AND
SUBSIDIARIES Income Statement (Unaudited) (in thousands - except
for per share data) Three months ended Six months ended January 31,
January 31, ------------------ ------------------ 2006 2005 2006
2005 ---- ---- ---- ---- Net Revenues $9,620 10,931 $19,301 20,807
Cost of Products Sold 4,045 3,680 8,069 7,150 ------------------
------------------ Gross Profit 5,575 7,251 11,232 13,657 Operating
Costs and Expenses: Marketing and selling 6,925 4,883 11,706 9,163
General and administrative 3,376 2,793 6,739 5,510 Research and
development 1,739 1,631 3,557 3,561 Depreciation and amortization
739 657 1,448 1,315 ------------------ ------------------ 12,779
9,964 23,450 19,549 ------------------ ------------------ Loss from
operations (7,204) (2,713) (12,218) (5,892) Other income (expense),
net (40) (31) (21) (53) ------------------ ------------------ Loss
before income taxes (7,244) (2,744) (12,239) (5,945) Income tax
expense - - (4) (2) ------------------ ------------------ Loss from
continuing operations (7,244) (2,744) (12,243) (5,947) Income
(loss) from discontinued operations (2) 88 (5) 579
------------------ ------------------ Net loss (7,246) (2,656)
(12,248) (5,368) Preferred stock dividends 10 10 20 20
------------------ ------------------ Net loss attributable to
common shareholders $(7,256) (2,666) $(12,268) (5,388)
================== ================== Basic and diluted net income
(loss) per common share: Loss from continuing operations $(0.16)
(0.06) $(0.27) (0.13) Income from discontinued operations (0.00)
0.00 (0.00) 0.01 ------------------ ------------------ Net loss
$(0.16) (0.06) $(0.27) (0.12) ================== ==================
Weighted Average Shares Outstanding: Basic and Diluted 45,683
45,558 45,668 45,529 ================== ================== EBITDA
(a) $(6,513) (1,969) $(10,834) (4,008) (a) EBITDA is defined as
Earnings (loss) Before net Interest, Taxes (income), Depreciation
and Amortization. EBITDA Reconciliation (in thousands) Three months
ended Six months ended January 31, January 31, ------------------
---------------- 2006 2005 2006 2005 ---- ---- ---- ---- EBITDA
$(6,513) (1,969) (10,834) (4,008) Interest income 64 41 148 94
Interest expense (58) (52) (110) (100) Depreciation and
amortization (739) (676) (1,448) (1,352) Income tax benefit
(expense) - - (4) (2) ----------------------------------- Net
income (loss) $(7,246) (2,656) (12,248) (5,368)
=================================== EBITDA is utilized by
management as one measure of the performance of our business units.
We define "EBITDA" as earnings (loss) before interest, taxes
(income), depreciation and amortization. Other companies may define
such term differently. We consider EBITDA to be a meaningful
measure of our ongoing operations that assists us in assessing our
ability to fund our regulatory program and debt service and to
finance the growth of our core businesses. We also believe that
this non-GAAP financial measure is useful to provide stockholders
and potential investors transparency with respect to supplemental
information used by management in its financial and operational
decision making. Although we use EBITDA as a financial measure to
assess the performance of our business, we do not use EBITDA alone
because it does not consider certain material costs, expenses and
other items necessary to operate our business. These items include
debt service costs and non-cash depreciation and amortization
expense associated with long-lived assets. Because EBITDA does not
consider these items, a stockholder, potential investor or other
user of our financial information should also consider net income
as an important measure of our financial performance in that it
provides a more complete measure of our performance. Net Revenues
by Business Unit (in thousands) Three months ended Six months ended
January 31, January 31, ---------------------------
-------------------------- 2006 2005 % Change 2006 2005 % Change
---- ---- -------- ---- ---- -------- Nutraceuticals $7,240 9,801
-26% $14,654 18,522 -21% Pharmaceuticals 2,380 1,130 111% 4,647
2,285 103% --------------- ---------------- Total Company $9,620
10,931 -12% $19,301 20,807 -7% =============== ================
Pharmaceuticals Unit Gross Profit (in thousands) Three months ended
Six months ended January 31, January 31, ------------------
------------------ Net Revenues: 2006 2005 2006 2005 ---- ---- ----
---- Pharmaceuticals $2,380 1,130 $4,647 2,285 IST 739 115 1,307
309 ----------------- ---------------- Pharmaceuticals, excluding
IST $1,641 1,015 $3,340 1,976 ================= ================
Gross Profit: Pharmaceuticals $1,002 561 $2,061 1,012 IST 164 (45)
175 (141) ----------------- ---------------- Pharmaceuticals,
excluding IST $838 606 $1,886 1,153 =================
================ Gross margin, excluding IST 51% 60% 56% 58%
================= ================ Management believes that it is
helpful to investors to understand the impact that IST's low
margins have on the gross profit generated by the Pharmaceutical
Unit as a whole. Balance Sheet Data (Unaudited) (in thousands)
January 31, July 31, ----------- -------- 2006 2005 ---- ----
Current assets $24,969 $32,639 Property, net 9,880 9,692
Intangibles, net 22,131 22,614 Other 453 473 ------- ------- Total
assets $57,433 $65,418 ======= ======= Current liabilities $13,871
$9,815 Long-term debt 3,221 3,328 Other 443 553 Equity 39,898
51,722 ------- ------- Total liabilities and equity $57,433 $65,418
======= ======= *T
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