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| ZILA > SEC Filings for ZILA > Form 10-Q on 8-Dec-2008 | All Recent SEC Filings |
8-Dec-2008
Quarterly Report
The initiatives discussed above proved to be effective in satisfying the
Defined EBITDA covenant contained in our Senior Secured Convertible Notes during
the fourth quarter of fiscal 2008. However, we do not expect some of these
initiatives, such as reducing or deferring salaries, benefits and other
operating costs, to be sustainable into future periods. Additionally, we have
recently experienced higher than expected turnover in our sales force. These
factors, coupled with the recent economic downturn in the United States, have
adversely affected our operating results for the first quarter of fiscal 2009
and are likely to cause near term future operating results to be less favorable
than our financial results for the fourth quarter of fiscal 2008 and those
previously anticipated for fiscal 2009. Accordingly, our operating results for
the first quarter of fiscal 2009 were not as favorable as those experienced in
the fourth quarter of fiscal 2008, but were improved over the same period in the
prior year and the third quarter of fiscal 2008. To address the impact of the
economic downturn on our revenues, we continue to identify cost-reduction and
working capital initiatives to reduce the impact on future cash flows from
operations and results of operations. These initiatives include:
(i) Initiating discount programs across our product lines to stimulate sales
and abate the sales declines we are experiencing;
(ii) Further reduced headcount from 367 employees at July 31, 2008 to 296 employees at November 30, 2008, and have implemented other cost reduction programs that should further reduce expenses in the next several quarters; and
(iii) With the assistance of an investment banker, we are working towards a restructuring.
Other Key Operating Initiatives
During November 2008, Essex Dental Benefits began offering coverage for
ViziLite®Plus examinations. Essex Dental Benefits joins the growing list of
premiere and national insurance plans that provide coverage for ViziLite® Plus,
which also includes Humana, United Healthcare, Cigna, Guardian, SafeGuard,
Northeast Delta Dental and a number of regional plans and self-insured
employers. With the addition of Essex Dental Benefits, approximately 24 million
lives are part of dental plans that cover oral cancer screening; however, not
all dental professionals in these plans have made ViziLite® Plus available to
their patients.
During October 2008, the U.K. Medicines and Healthcare products Regulatory
Agency ("MHRA") issued an indefinite renewal of the marketing authorization for
OraTest®, our proprietary oral cancer diagnostic kit. Under the European Union's
("EU") mutual recognition process, we expect to receive renewal licenses for
member states including Finland, Greece, Luxembourg, The Netherlands, Belgium,
the U.K. and Portugal, over the next quarter. We are seeking marketing partners
in the seven EU countries. Adding OraTest to our international product portfolio
provides the opportunity to expand the potential market for our oral cancer
screening and testing product franchise. The OraTest® diagnostic kit and
ViziLite® Plus are complementary products with distinct indications, which will
allow us to market to a more diverse group of healthcare professionals within
the EU.
During October 2008, we announced encouraging results of an in vivo animal
study, which demonstrated evidence of photodestruction of premalignant lesions
and invasive squamous cell carcinoma when Zila's patented pharmaceutical-grade
toluidine blue was used as a photosensitizer and light activated. Due to these
results, we are confident in its clinical efficacy during photodynamic therapy
for oral dysplasia and oral cancer. Due to inadequate funding at the current
time, we are postponing any further clinical studies, including human trial.
During October 2008, we entered into a lease agreement for new corporate
office facilities, which we will be relocating to in the second quarter of
fiscal 2009. The lease agreement is for a term of approximately two years and
calls for monthly rental payments of approximately $26,000.
Results of Operations
The following table summarizes our results of operations and related
statistical information for the three months ended October 31, 2008 and 2007
(dollars in thousands):
For the Three Months Ended October 31,
% of % of %
2008 Revenue 2007 Revenue Change
Net revenues $ 9,641 100.0 % $ 11,440 100.0 % (15.7 )
Cost of products sold 3,776 39.2 4,581 40.0 (17.6 )
Gross profit 5,865 60.8 6,859 60.0 (14.5 )
Operating costs and expenses:
Marketing and selling 4,371 45.3 5,297 46.3 (17.5 )
General and administrative 2,223 23.1 3,473 30.4 (36.0 )
Research and development 167 1.7 1,202 10.5 (86.1 )
Depreciation and amortization 924 9.6 915 8.0 1.0
Loss from operations (1,820 ) (18.9 ) (4,028 ) (35.2 ) (54.8 )
Other expense - net (954 ) (9.9 ) (644 ) (5.6 ) 48.1
Loss from continuing operations
before income taxes (2,774 ) (28.8 ) (4,672 ) (40.8 ) (40.6 )
Income tax expense (13 ) (0.1 ) (11 ) (0.1 ) 18.2
Loss from continuing operations $ (2,787 ) (28.9 )% $ (4,683 ) (40.9 )% (40.5 )
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Net Revenues
Net revenues were $9.6 million and $11.4 million for the three months ended
October 31, 2008 and 2007, respectively, a decrease of $1.8 million or 15.7%.
ViziLite® Plus net revenues increased to $3.2 million for the three months ended
October 31, 2008, an increase of 5.2% from the same period in the previous year,
which is primarily a result of an increased utilization of ViziLite® Plus and an
expansion of our international programs, the number of sales representatives and
the number of insurance companies reimbursing for the ViziLite® Plus
examination. Offsetting this increase were declines in revenue from our
Rotadent®Professional Powered Brush and Pro-Select Platinum® ultrasonic scalers.
As discussed above, our business is sensitive to general economic conditions
since our products are somewhat discretionary in nature. Accordingly, the recent
economic downturn in the United States has had a negative impact on our
revenues.
Gross Profit
Gross profit was $5.9 million and $6.9 million for the three months ended
October 31, 2008 and 2007, respectively, a decrease of $1.0 million or 14.5%.
Gross profit as a percentage of net revenues was 60.8% and 60.0% for the three
months ended October 31, 2008 and 2007, respectively. Our gross profit margin
for the three months ended October 31, 2008 was favorably affected by strategic
actions to reduce cost of goods that were implemented during the second half of
fiscal 2008 and selective price increases. These improvements were offset by
selective discounting programs that were implemented during the first quarter of
fiscal 2009 to stimulate sales and abate the revenue declines discussed above.
Marketing and Selling Expense
Marketing and selling expense was $4.4 million and $5.3 million for the three
months ended October 31, 2008 and 2007, respectively, a decrease of $0.9 million
or 17.5%. The decline in marketing and selling expense for the three months
ended October 31, 2008 results from the reduction in the level of commissions
and bonuses for the sales force as a result of reduced sales levels and the
reductions in expenditures in non-direct selling related expenses.
General and Administrative Expense
General and administrative expense was $2.2 million and $3.5 million for the
three months ended October 31, 2008 and 2007, respectively, a decrease of
$1.3 million or 36.0%. The decrease in general and administrative expense
primarily relates to profitability initiatives that were implemented during the
second half of fiscal 2008 and during the first quarter of fiscal 2009. These
profitability initiatives included reducing headcount in our non-selling
workforce by over 15% in the first quarter of fiscal 2009, temporarily reducing
the salaries of our management employees, reducing certain other employee
benefits and reducing, deferring or eliminating non-critical programs across the
organization. General and administrative expense consists of the following for
the three months ended October 31, 2008 and 2007 (in thousands):
Three Months Ended October 31,
2008 2007
Cash basis salaries and benefits $ 819 $ 1,210
Audit, accounting and other professional fees 529 870
Legal and intellectual property related fees 239 292
Investment banking fees and shareholder related expense 136 79
Insurance 110 129
Non-cash stock-based compensation expense 99 396
Other general and administrative expense 291 497
Total general and administrative expense $ 2,223 $ 3,473
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Research and Development Expense
Research and development expense was $0.2 million and $1.2 million for the
three months ended October 31, 2008 and 2007, respectively, a decrease of
$1.0 million or 86.1%. In the first quarter of fiscal 2008 we closed enrollment
in a clinical trial related to an oral cancer diagnostic drug and ceased
expenditures for CMC and non-clinical aspects of the regulatory program. The
curtailment of the regulatory program is the primary driver of the overall
decrease in research and development expense.
Depreciation and Amortization Expense
Depreciation and amortization expense was consistent at $0.9 million for the
three months ended October 31, 2008 and 2007. Depreciation and amortization of
recently acquired property and equipment and amortizable intangible assets was
offset by some of our other long-lived assets becoming fully depreciated or
amortized over the past year.
Other Expense - Net
Other expense, net was $1.0 million and $0.6 million for the three months
ended October 31, 2008 and 2007, respectively. Other expense primarily consists
of interest expense, which is summarized as follows:
Three Months Ended October 31,
2008 2007
Senior secured convertible notes $ 245 $ 216
Amortization of financing costs 226 99
Amortization of debt discounts 449 447
Capital leases and other 2 5
Total interest expense $ 922 $ 767
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The increase in interest expense primarily relates to our paying interest on our Senior Secured Convertible Notes in kind with shares of our common stock during the first quarter of fiscal 2009 and in cash in the first quarter of fiscal 2008, as well as increased amortization of financing costs, which relates to costs incurred in connection with amendments to our Senior Secured Convertible Notes during fiscal 2008.
Income Taxes
Income tax expense for the three months ended October 31, 2008 and 2007 was
less than $0.1 million and primarily relates to state income taxes.
Inflation and Seasonality
We do not believe that inflation has a unique or material effect on the
operations or financial condition of our businesses. However, we are sensitive
to general economic conditions since our products are somewhat discretionary in
nature. Sales for the dental industry are generally affected by holiday and
vacation related seasonality, which impacts the number of available selling days
in each fiscal quarter. We sell directly to dental professionals in the United
States and Canada and accordingly, our sales are subject to these seasonal
trends.
Liquidity and Capital Resources
Overview
Our revenues during the first quarter of fiscal 2009 have been negatively
impacted as a result of the severity of the economic downturn in the United
States. We have historically sustained recurring losses and negative cash flows
from operations as we changed our strategic direction to focus on the growth and
development of ViziLite® Plus and our periodontal product lines. Our liquidity
needs have typically arisen from the funding of our research and development
program and the launch of our new products, such as ViziLite® Plus, working
capital and debt service requirements, and strategic initiatives. In the past,
we have met these cash requirements through our cash and cash equivalents,
working capital management, the sale of non-core assets and proceeds from
certain private placements of our securities.
Previously, our research and development program for our oral cancer
diagnostic drug required the commitment of substantial resources to conduct the
time-consuming research and development, clinical studies and regulatory
activities necessary to bring any potential product to market and to establish
production, marketing and sales capabilities. We believe that in order to
maximize shareholder value our resources must be directed to those products and
programs with the greatest probability of financial return. We believe that our
greatest potential lies with our continued development and commercialization of
our already existing oral cancer screening product, ViziLite® Plus. The
incremental market potential of the oral cancer diagnostic drug, considering the
availability of ViziLite® Plus, did not justify the cost, time and uncertain
study outcomes associated with continuing the program in its current form. In
order to pursue our strategy with our currently available funds, during fiscal
2008 we curtailed activity and spending related to the oral cancer diagnostic
drug program. We have continued this strategy into fiscal 2009. As a result of
this curtailment, research and development expenditures decreased during fiscal
2008 over historic levels, and have continued to decrease into fiscal 2009. We
believe that our level of expenditures for research and development in fiscal
2009 will be reduced further from our historic levels.
To reduce operating losses, we have taken steps to reduce costs through
discontinuing research and development projects and have implemented profit
enhancement initiatives during the second half of fiscal 2008. As a result of
these steps, during the fourth quarter of fiscal 2008 we achieved positive cash
flow from operations and achieved compliance with the Defined EBITDA covenant
contained in our Senior Secured Convertible Notes, which is discussed in further
detail elsewhere herein. The profit enhancement initiatives undertaken in the
second half of fiscal 2008 included, among other things: (i) completing the
hiring of the targeted level of sales representatives and completing their
training across the full-portfolio of our products; (ii) improving revenues and
gross profit through the implementation of selective price increases and
implementing initiatives to reduce our cost of goods; (iii) reducing headcount
in our non-selling workforce, temporarily reducing the salaries of our
management employees and reducing certain other employee benefits; and
(iv) reducing, deferring or eliminating non-critical programs across the
organization while maintaining key selling initiatives. In addition to these
profit enhancement initiatives, we undertook actions to improve our working
capital position through the reduction of the number of days our sales are
outstanding and through the reduction of inventory levels. As a result of the
strategic actions taken in the second half of fiscal 2008, we were able to
improve profitability to satisfy our Defined EBITDA covenant in the fourth
quarter of fiscal 2008 and provide the foundation for compliance with our
financial covenants in the future.
The initiatives discussed above proved to be effective in our meeting the
Defined EBITDA covenant contained in our Senior Secured Convertible Notes during
the fourth quarter of fiscal 2008. However, we do not expect some of these
initiatives, such as reducing or deferring salaries, benefits and other
operating costs, to be sustainable into future periods. Additionally, since the
time of our acquisition of Pro-Dentec in November 2006, we have experienced
higher than expected turnover in our sales force and have continued to
experience turnover throughout fiscal 2008 and into the first quarter of fiscal
2009. We would expect these factors, coupled with the recent economic downturn
in the United States and its impact on discretionary spending for our products,
to cause near term future operating results to be less favorable than our
financial results for the fourth quarter of fiscal 2008 and those previously
anticipated for fiscal 2009. Accordingly, our operating results for the first
quarter of fiscal 2009 were not as favorable as those experienced in the fourth
quarter of fiscal 2008, but were improved over the same period in the prior year
and the third quarter of fiscal 2008. To address the impact of the economic
downturn on our revenues, we continue to identify cost-reduction and working
capital initiatives to reduce the impact on future cash flows from operations
and results of operations.
Strategic business opportunities to grow our business will require additional
funding. The Senior Secured Convertible Notes, which are discussed more fully
elsewhere herein, provide us with the opportunity to obtain a working capital
line of credit secured by our inventory and accounts receivable. However, we
have been unable to obtain the approval of the majority holder of the Senior
Secured Convertible Notes even though the note agreements provide that such
approval is "not to be unreasonably withheld." Recently we retained a financial
advisor to assist us in our continuing efforts to raise capital by exploring
capital restructuring opportunities. However, in today's capital markets, and
without the cooperation of the majority holder of the Senior Secured Convertible
Notes, there can be no assurance that we will be successful in obtaining
sufficient replacement financing or that any funding will be obtainable on terms
that are favorable to us before the Senior Secured Convertible Notes become due
on July 31, 2010.
Key elements to the success of our operating plans for fiscal 2009 are
sustaining our planned product line revenues during the economic downturn in the
United States and executing our cost reduction measures. Based on our operating
plans, we believe that our cash and cash equivalents along with cash flows
generated from operations and working capital management will allow us to fund
our operations over the next 12 months.
Selected Cash Flow and Working Capital Information
Selected cash flow and working capital information is summarized as follows
(dollars in thousands):
Three Months Ended October 31,
2008 2007
Net cash used in operating activities $ (990 ) $ (4,327 )
Net cash used in investing activities (229 ) (455 )
Net cash used in financing activities (30 ) (1,417 )
October 31, July 31,
2008 2008
Cash and cash equivalents $ 3,213 $ 4,462
Working capital 5,677 6,558
Current ratio 1.8 1.8
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As of October 31, 2008, our primary sources of liquidity included cash and cash equivalents of $3.2 million compared to $4.5 million as of July 31, 2008. Our working capital was $5.7 million as of October 31, 2008 compared to $6.6 million as of July 31, 2008. The decrease in working capital primarily relates to our decreased cash balance, offset by a decline in accounts payable and other accrued expenses. Our current ratio remained consistent at 1.8 as of October 31, 2008 and July 31, 2008 as our decline in cash and other current assets was offset by payments made to reduce accounts payable and other accrued expenses.
Cash Flows from Operating Activities
Cash used in operating activities was $1.0 million and $4.3 million for the
three months ended October 31, 2008 and 2007, respectively. The improvement in
cash used in operating activities relates to the recent profit enhancement
initiatives undertaken and the curtailment of activity and spending related to
the oral cancer diagnostic drug program. Also contributing to the lower amount
of cash used in operating activities was a decrease in cash used for changes in
working capital, which was $0.4 million and $1.5 million for the three months
ended October 31, 2008 and 2007, respectively, or a $1.1 million reduction.
Working capital changes for the three months ended October 31, 2008 primarily
relate to a decline in accounts payable and accrued liabilities of $1.1 million
for payments made on these balances, offset by a reduction in our accounts
receivable balances of $0.7 million, which in part relates to our decline in
revenue from the fourth quarter of fiscal 2008 to the first quarter of fiscal
2009.
Cash Flows from Investing Activities
Cash used in investing activities was $0.2 million and $0.5 million for the
three months ended October 31, 2008 and 2007, respectively, and consists
. . .
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