Zila, Inc. (Nasdaq:ZILA) released results for its third quarter of
fiscal 2006 that ended April 30, 2006. Highlights of those results,
compared with the third quarter of fiscal 2005 ended April 30,
2005, are as follows: -- Net revenues for the third quarter of
fiscal 2006 were $6.8 million, a decrease of 44%, compared to net
revenues of $12.0 million. Zila Pharmaceuticals revenues increased
$1.5 million, or 98%. Zila Nutraceuticals revenues decreased $6.8
million, or 65%. Several months ago, Zila, Inc. began a process to
evaluate the feasibility of divesting Zila Nutraceuticals in order
to focus on its high potential pharmaceutical and biotechnology
products. Sales by Zila Nutraceuticals were negatively affected
during the third quarter because several of our customers, among
others, were involved in this process and reduced or eliminated
product purchases while they evaluated their strategic interest in
acquiring the business. -- Gross margins decreased to 56% in the
third quarter of fiscal 2006 from 67% in the prior year period
driven primarily by a decline at Zila Nutraceuticals due to
promotional discounts offered for new SKU introductions. Gross
profit dollars decreased by $4.3 million, or 53%, to $3.8 million
from $8.1 million. -- Marketing and selling expenses in the third
quarter of fiscal 2006 decreased by approximately 12%, to $4.0
million, from $4.6 million. While we reduced Zila Nutraceuticals'
spending for advertising and promotion, Zila Pharmaceuticals'
marketing efforts and spending increased in support of the
ViziLite(R) Plus product launch. -- Research and development
spending, primarily in connection with Zila's OraTest(R) program,
increased by approximately 62%, to $2.7 million from $1.6 million,
as we advanced the OraTest Phase III clinical trial. -- General and
administrative costs were flat at $3.4 million despite one-time
charges related to our evaluation of the Zila Nutraceuticals
divestiture and other business development activities. -- Net loss
for the quarter increased to $8.1 million, or $0.18 per share,
compared to a loss of $2.2 million, or $0.05 per share. -- The
Company also closed a $40 million credit facility with Black
Diamond Commercial Finance consisting of a $20 million two-year
term loan that was funded at close (on March 24, 2006) and a $20
million expansion facility, which the Company may utilize subject
to meeting certain conditions. Zila used the proceeds to refinance
its existing debt, to provide additional liquidity and for other
general corporate purposes. "Several years ago we established a
strategy to grow our highest potential business: our oral cancer
detection products and technologies within our Pharmaceutical and
Biotechnology units. In order to achieve this objective, we
aggressively invested and grew our Nutraceutical business and
generated the cash required to get our Pharmaceutical and
Biotechnology businesses off the ground and to a point where the
potential for market approvals and acceptance was far more certain.
The plan has worked and we believe we have reached a point where it
is prudent to evaluate a more targeted focus on the company's
highest potential products," said Zila Chairman, President and CEO
Douglas D. Burkett, Ph.D. "We are exploring the possibility of
aligning Zila's revenue and infrastructure with our high potential
cancer detection business. Over the last few quarters we have
systematically achieved the critical milestones within our oral
cancer detection businesses that were determining events in our
plan. These include, among others, the following: -- FDA clearance
of TBlue630 -- Sustained growth of ViziLite and now ViziLite Plus
through distributors and through favorable metrics achieved by our
own sales representatives -- Insurance reimbursement nationally by
a leading national dental insurer: CIGNA Dental -- The Special
Protocol Assessment ("SPA") Agreement with FDA for the OraTest
Phase III clinical trial -- The conduct to date of the OraTest
clinical trial These events have led us to explore the divestiture
of Zila Nutraceuticals to enable us to effectively focus on our
cancer detection business. We have received several competitive
offers and as part of this process, we are currently negotiating
with one party. It is our intent to either close a transaction with
that party or continue our negotiations with other interested
bidders to determine whether we are able to close a transaction
under acceptable terms. If we choose to not divest the business in
the near term, we believe it will return to a positive EBITDA
performance within the next several months although no assurance
can be given in this regard. We have previously discussed the
possibility of a strategic alliance or acquisition to increase our
ability to deliver ViziLite Plus and OraTest into the dental
marketplace. We believe that in order to establish our oral cancer
detection products as the standard of care, our sales capability
must be dramatically grown, preferably by also including the
addition of synergistic products. We continue to work toward this
goal." Zila Nutraceuticals Net revenues for Zila Nutraceuticals for
the three months ended April 30, 2006 decreased 65% to $3.6 million
compared to $10.4 million for the three months ended April 30,
2005. The revenue decline was driven largely by a decrease in sales
to several of our customers during an ongoing evaluation period
regarding their strategic interest, and others, in acquiring the
business unit. Ester-C sales at retail remained strong during the
quarter with the latest 12 week data showing no losses in market
share and 52 week data showing modest market share gains. Gross
margins for Zila Nutraceuticals decreased to 63% for the three
months ended April 30, 2006 compared to 70% for the three months
ended April 30, 2005. Zila Nutraceuticals continued expanding the
international presence of Ester-C by signing an agreement with
distributor Lohaspia in Korea and Taiwan and Gee Lawson in the EU.
The Company also developed a new and improved form of its Ester-C
product, which extends patent protection for this new form of
Ester-C until 2019. Ester-C is the most widely recognized branded
nutraceutical ingredient in the United States. The new product
offers all the benefits of Zila's traditional Ester-C plus an
additional metabolite designed to enhance its antioxidant and
immune enhancing potential. Zila Pharmaceuticals Net revenues for
Zila Pharmaceuticals for the three months ended April 30, 2006
increased 98%, to $3.1 million, compared to $1.6 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 206% increase in ViziLite sales to $1.2
million. Additionally, sales for the IST subsidiary (net of
intercompany sales) were $0.8 million compared to $0.2 million last
year and Peridex(R) sales increased 21% to $1.2 million. Gross
margins for Zila Pharmaceuticals decreased slightly to 48% in the
third quarter of fiscal 2006 from 49% in the third quarter of
fiscal 2005. Dr. Frank Bellizzi, was recently appointed President
of the Pharmaceutical division as well as EVP of Business
Development of Zila, Inc. He brings over 15 years of experience,
within and beyond the Life Science industry, focusing on
operations, finance, strategic business development and investment
banking. Zila Biotechnology Total operating expenses for Zila
Biotechnology were $3.1 million for the three months ended April
30, 2006, a 48% increase over the $2.1 million for the three months
ended April 30, 2005. Earlier in the year, we received an SPA from
the FDA for our Phase III clinical trial of OraTest, which 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 of OraTest, our oral
cancer detection drug. We expect enrollment to be complete in less
than one year. The study advanced ahead of schedule in the third
quarter as we have now enrolled over 1,000 patients in the trial.
An interim analysis is expected to occur this summer. Nine Months
Ended April 30, 2006 Net sales for the nine months ended April 30,
2006 decreased 21% to $26.1 million compared to $32.8 million for
the comparable period of fiscal 2005. The decline was the result of
a decline in sales of $10.7 million within our Nutraceuticals
Business Unit which more than offset the $3.9 million increase in
sales that was produced by our Pharmaceuticals Business Unit. As a
result, gross profit decreased to $15.0 million for the nine months
ended April 30, 2006 from $21.8 million in the comparable prior
year period. Net loss attributable to common shareholders increased
to $20.4 million from $7.5 million in the comparable period of the
prior year, due to the sales and gross margin changes described
above, as well as increased marketing and selling costs, general
and administrative costs and research and development 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;
1:30 p.m. PT. Domestic participants may dial 877-407-8031 and ask
for the Zila conference call. Participants calling from outside the
United States should dial 201-689-8031. A taped 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 205312. 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, the potential of our
pharmaceutical and biotechnology products, the potential
divestiture of Zila Nutraceuticals, the future EBITDA performance
of Zila Nutraceuticals 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-Q for its fiscal quarter ended April 30, 2006, 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 Nine months ended ended April 30,
April 30, ------------------------------ 2006 2005 2006 2005
-------------- --------------- Net revenues $ 6,751 12,020 $ 26,052
32,826 Cost of products sold 2,969 3,910 11,038 11,060
-------------- --------------- Gross profit 3,782 8,110 15,014
21,766 Operating costs and expenses: Marketing and selling 4,029
4,579 15,734 13,741 General and administrative 3,376 3,383 10,116
8,893 Research and development 2,654 1,636 6,211 5,197 Depreciation
and amortization 769 701 2,217 2,016 -------------- ---------------
10,828 10,299 34,278 29,847 -------------- --------------- Loss
from operations (7,046)(2,189) (19,264)(8,081) Other income
(expense),net (951) (40) (972) (93) -------------- ---------------
Loss before income taxes (7,997)(2,229) (20,236)(8,174) Income tax
expense - - (4) (2) -------------- --------------- Loss from
continuing operations (7,997)(2,229) (20,240)(8,176) Income (loss)
from operations of discontinued Zilactin product line (78) 78 (83)
657 -------------- --------------- Net loss (8,075)(2,151)
(20,323)(7,519) Preferred stock dividends 10 10 29 29
-------------- --------------- Net loss attributable to common
shareholders $(8,085)(2,161)$(20,352)(7,548) ==============
=============== Basic and diluted net income (loss) per common
share: Loss from continuing operations $ (0.18) (0.05)$ (0.45)
(0.18) Income from discontinued operations (0.00) 0.00 (0.00) 0.01
-------------- --------------- Net loss $ (0.18) (0.05)$ (0.45)
(0.17) ============== =============== Weighted average shares
outstanding - basic and diluted 45,734 45,600 45,684 45,551
============== =============== EBITDA (a)
$(6,601)(1,429)$(17,435)(5,437) (a) EBITDA is defined as
Earnings(loss) Before net Interest, Taxes (income), Depreciation
and Amortization. EBITDA Reconciliation (in thousands) Three months
Nine months ended ended April 30, April 30,
------------------------------ 2006 2005 2006 2005 --------------
--------------- Adjusted EBITDA $(6,481)(1,429)$(17,043)(5,437)
Noncash FAS 123 compensation expense (88) - (329) - Noncash
consulting expenses (32) - (63) - -------------- ---------------
EBITDA $(6,601)(1,429)$(17,435)(5,437) Interest income 83 35 231
129 Interest expense (788) (44) (898) (144) Depreciation and
amortization (769) (713) (2,217)(2,065) Income tax benefit
(expense) - - (4) (2) -------------- --------------- Net loss
$(8,075)(2,151)$(20,323)(7,519) ============== ===============
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 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 the 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. Further, Adjusted EBITDA is presented because it is a
financial measure that is reported to the lender under our new
Credit Facility and is used as a gauge for compliance with a
financial covenant under the Credit Facility. Net Revenues by
Business Unit (in thousands) Three months ended Nine months ended
April 30, April 30, ---------------------- -----------------------
2006 2005 % Change 2006 2005 % Change ----------------------
----------------------- Nutraceuticals $3,612 10,432 -65% $18,266
28,953 -37% Pharmaceuticals 3,139 1,588 98% 7,786 3,873 101%
------------- -------------- Total company $6,751 12,020 -44%
$26,052 32,826 -21% ============= ============== Pharmaceuticals
Unit Gross Profit (in thousands) Three months Nine months ended
ended April 30, April 30, ------------------------------ Net
Revenues: 2006 2005 2006 2005 ------------- ----------------
Pharmaceuticals $ 3,139 1,588 $ 7,786 3,873 IST 765 222 2,071 531
------------- -------------- Pharmaceuticals, excluding IST $ 2,374
1,366 $ 5,715 3,342 ============= ============== Gross Profit:
Pharmaceuticals $ 1,511 778 $ 3,571 1,791 IST 178 (135) 352 (277)
------------- -------------- Pharmaceuticals, excluding IST $ 1,333
913 $ 3,219 2,068 ============= ============== Gross margin,
excluding IST 56% 67% 56% 62% ============= ==============
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) April July 30, 31, ------- ------- 2006
2005 ------- ------- Current assets $30,362 $32,639 Property, net
9,532 9,692 Intangibles, net 22,416 22,614 Other 2,502 473 -------
------- Total assets $64,812 $65,418 ======= ======= Current
liabilities $11,477 $ 9,815 Long-term debt 21,100 3,328 Other 267
553 Equity 31,968 51,722 ------- ------- Total liabilities and
equity $64,812 $65,418 ======= ======= *T
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