Zila Inc F1Q09 (Qtr End 11/01/08) Earnings Call Transcript

Zila Inc. (ZILA)

F1Q09 Earnings Call

December 8, 2008 4:30 pm ET

Executives

David Bethune - Chairman and Chief Executive Officer

Diane Klein - Vice President of Finance

Robert Jaffe - Investor Relations

Analysts

Harvey Cappitski - Maloney Securities

Ruthanne Roussel - The Robins Group

Tim Lynch - Stonepine Capital

Presentation

Operator

Good afternoon ladies and gentleman, thank you for standing by. Welcome to the Zila fiscal 2009 first quarter financial results conference call. (Operator Instructions)

I would now like to turn the conference over to Robert Jaffe, Investor Relations for Zila Inc; please go ahead sir.

Robert Jaffe

Thank you, operator and good afternoon everyone. Welcome to Zila’s fiscal 2009 first quarter conference call. On the call today are David Bethune, Zila’s Chairman and Chief Executive Officer and Diane Klein, Vice President of Finance.

Before we get started, I need to remind everyone that this telephone conference call 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, intend, estimate, plan and other expressions that are predictions of or that indicate future events and trends that do not relate to historical matters, identify these as forward-looking statements.

The forward-looking statements are largely based on Zila’s expectations or forecasts or future events and can be affected by inaccurate assumptions. They are subject to various business risks and unknown and known uncertainties, a number of which are beyond the company’s control. Therefore, actual results could differ materially from the forward-looking statements contained in this call.

A wide variety of factors could cause or contribute to such differences and there can be no assurances that the forward-looking statements will in fact transpire or prove to be accurate. For a more detailed description of the cautionary factors that may affect Zila’s future, please refer to our SEC filings, including the Annual Report on 10-K and Quarterly Reports on Form 10-Q. As a reminder this teleconference is being recorded.

I would now like to turn the call over to David Bethune. Dave.

David Bethune

Thank you, Robert and good afternoon. We appreciate all of you joining us today to disuses our 2009 first quarter financial results. By now most of you have seen our results for the quarter, which were impacted by two major factors. The first was the major cost reduction measures we have implemented in the second half of fiscal 2008, that significantly lowered our operating expenses, and the second is the most recent economic revenue that has negatively impacted revenues.

Our business is sensitive to general economic conditions, because our products are somewhat discretionary in nature. The end losses have deferred the purchase of equipment, capital equipment especially, such as the Pro-Select Platinum scalers, dental patients postpone certain visits, unfortunately including some oral cancer screening testing.

Sales of ViziLite Plus in the first quarter were $3.2 million. Although we added more than 800 new ViziLite customers during the first quarter, we saw a 10% decline in the number of reorders due to the decreased adult patient traffic reported by our customers. That is, those patients had come into the office and were getting treatment and [Inaudible] they’ve gotten a ViziLite test. We certified an additional 193 practices for a total of 3,515 certified ViziLite plus practices in the U.S.

Week economic conditions continued and we expect them to continue in the near future. Accordingly we are looking for additional ways to further reduce expenses over these next several quarters. However on the positive side, we did make progress on several key operational areas since our last conference call two months ago. In early September, November; as a matter of fact late September, October, we received reports of approval by Essex Dental Benefits, by offering coverage for ViziLite.

Essex Dental Benefits will make all cancer screening at benefit to approximately 185,000 covered lives, primarily in the mid-west area of the U.S. More recently Sun Life and Always Care Dental were added to the growing list of dental plans offering ViziLite Plus exam coverage, bringing the estimated total covered lives in the U.S. to over 24 million.

We believe the prospect for adding additional planned coverage in calendar 2009 is also strong; however, the rate of ViziLite Plus adoption among the providers of these interest plans continues to lag. Our sales and marketing team is actively working with insurance companies to increase awareness among providers and motivate these folks to use ViziLite with their patients and we were just talking about that with the marketing team today.

In late October we received an indefinite renewal of the marketing authorization for OraTest, our proprietary oral cancer diagnostic kit, from the U.K. Medicines and Healthcare Products Regulatory Agency. Under the European Union to Mutual Recognition Process, we expect to receive renewal licenses for Finland, Greece, Luxemburg, the Netherlands, Belgium, the U.K. and Portugal by the end of this month. The combined population of these seven countries exceeds $100 million.

OraTest adds to our international product portfolio and provides the opportunity to expand the potential market for our oral cancer screening and testing product franchise. We are currently seeking marketing partners in these European Union countries.

Also in October, 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 with photodynamic therapies for our oral dysplasia and oral cancel. However, due to inadequate funding at the current time, we are postponing any further clinical trials, including a needed human trial.

I’m pleased to welcome Wade Brooksby to the company’s Board of Directors. He will serve on the audit committee. Wade is currently Chief Financial Officer of a publicly traded drug development company and he has extensive operational experience and adds great depth to our board. Now with the appointment of Wade to the Audit Committee of the Board of Directors, we are now in compliance with NASDAQ’s Audit Committee requirement, Marketplace Rule 4350. The appointment increased the board to six members, five of whom are non-employee directors.

For those who may have missed it, ABC’s Good Morning America recently added a segment on the link between Oral Cancer and HPD Virus. The program helped generate awareness about Oral Cancer and the importance of early detection.

Now I will turn the program over to Diane to present the financial results from the third quarter. Diane.

Diane Klein

Thanks Dave and good afternoon everyone. Earlier today we filed our quarterly report on Form 10-Q for our first fiscal quarter ended October 31 and we issued a news release regarding those financial results right after the market closed. You can find the Form 10Q and the new release at our website www.zila.com, under the Investors, in the Press Release section.

Before reviewing our first quarter results, I would like to note that on September 12, 2008 Zila’s share holders approved a one for seven reverse split of the company’s common stock. The reverse split has been retroactively applied to all financial information presented in the news release and in the financial statements.

Now to the results for our fiscal 2009 first quarter; Net revenues were $9.6 million, compared with $11.4 million for the first quarter of fiscal 2008. As Dave mentioned sales of ViziLite Plus were $3.2 million, compared with $3.1 million for the first quarter of the prior fiscal year. Gross profit was $5.9 million or 61% of net revenues from $6.9 million or 60% of net revenues in the first quarter of the prior fiscal year.

Marketing and selling expense decreased to $4.4 million compared with $5.3 million in the first quarter of the prior fiscal year. This decrease reflects a lower level of commissions and bonuses for the sale force on reduced sales level. It also reflects reductions in expenditure and non-direct selling related expenses.

G&A expense decreased to $2.2 million from $3.5 million for the first quarter of the prior fiscal year, primarily due to recent head count and salary reductions, as well as deferral or elimination of non-critical programs across the organization.

Research and development expense was $167,000 compared with $1.2 million for the first quarter of the prior fiscal year. R&D in last year’s first quarter was primarily comprised of costs associated with the OraTest regulatory program. In the first quarter of fiscal 2008, the company closed enrollment in the OraTest clinical trial and reduced related expenditures.

Net loss for the quarter significantly narrowed to $2.8 million or $0.28 per share from a net loss of $4.9 million or $0.55 per share for the first quarter of the prior fiscal year. Adjusted EBITDA loss for the quarter was $623,000, a significant reduction from the $2.8 million loss from the first quarter of the prior fiscal year. The reconciliation of this non-GAAP measure to net income and cash flows from operation can be found in our news release which is posted on our website as I mentioned earlier.

Cash and cash equivalents at October 31, 2008 were $3.2 million compared with $4.5 million at July 31, 2008. The decrease primarily reflects cash used in operations of $990,000 of which $367,000 resulted from working capital changes for the decline in accounts payable and accrued liabilities. Working Capital was $5.7 million at October 31, compared to $6.6 million at July 31, 2008.

I will now turn things back over to Dave.

David Bethune

Thanks Diane and finally I’d like to make one other point or so. We continue to look for and evaluate strategic business opportunities that will sustain and grow our business; however, this will require additional funding and we have been constrained by the challenging debt and equity markets.

Additionally our know-how’ers have not yet agreed to give us a working capital line of credit. We believe that our cash and cash equivalents, along with the cash flows generated from operation in working capital management will allow us to maintain our operations over the next 12 months. This assumes no unforeseen events occur to reduce our cash below $1 million. We remain focused on growing the market opportunity for our products, for writing for our capital structure and building a sustainable and growing enterprise.

Now for the time available, I’ll be happy to answer any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Harvey Cappitski - Maloney Securities.

Harvey Cappitski - Maloney Securities

Why do you think your lenders are not being well cooperative with you? I mean you seem to have been successful in the past, you seem to know what you’re doing; is there any special reason they don’t seem to want to cooperate?

David Bethune

Well, they’ve got an agreement, kind of a set that establishes the collateralized loan in the fashion that is there and in the use of the high times, my assumption is and I can’t speak for them, but I assume that they feel like they need to hold on to all the collateral that they have to do the best they can to have that note be valuable as they’ve got it set up to be. It’s hard to answer that.

I know that on the equity side if we did have the funding to expand and get ourselves kind of at neutral at end of year, so that we can capitalize and grow our business and had a line of credit that would allow us to do that with the bank, that would be a good thing on the equity side, but on the debt side, perhaps they just feel that they want to hold onto all the collateral that they have in their loan at the moment. Diane would you add to that in any way; I guess it’s all speculation as to how they feel, but that’s kind of…

Diane Klein

Exactly. I mean continue to have discussion with them and we’ll see where that comes out over the next few weeks.

David Bethune

Yes, we are having talks with the team over there in that group.

Harvey Cappitski - Maloney Securities

Can you tell us who those are or are those confidential?

David Bethune

Well, let me ask my lawyer. Yes, well it’s [Bale Affine] and [Bizium] are the two funds that have loaned this money to Zila.

Operator

Your next question comes from Ruthanne Roussel – The Robins Group.

Ruthanne Roussel – The Robins Group

I’m trying to get my head around what would be needed in order for the ViziLite sales to ramp. Is it strictly that there is a cash constraint, that there is just not enough working capital to move enough of the product through what’s to come. It sounds like a rather expensive distribution system or is there more to it than that?

David Bethune

No, I think that’s certainly a large part of it. We’ve got a number of marketing plans that would help expand the opportunity to reach out to more dentists. Right now with the 60 some reps you have that limitation. There is over 80,000 dentists in the United States and certainly with the capabilities of the sales force we have, we are calling on what we believe to be the highest level dentists, but calling on over 8,000 or 9,000 of those 80,000 is probably not possible.

So we have programs that we could use, calls programs, mail campaign programs, marketing campaigns of various sorts to reach out further. With those additional funding opportunities, we could do a lot of things to reach out and improve I believe the ViziLite program.

We were just talking today about insurance carriers. Unfortunately a lot of the insurance folks use ViziLite as a great marketing point and they sell to the people, they are insuring on the idea that here is a company that pays for cancer detection, but then after they get the provider signed up, the interest in getting the product used is not very high.

So we’re doing things now trying to motivate the carrier and the dentist to say, “Let’s use this product, it costs the patient nothing. The patient in effect is paying for it with the premiums or the company that is doing the insuring is paying with the premiums.” So let’s utilize those opportunities to have this product used without having to do any persuasion in the dentist’s office.

So there’s just a number of things we could do with the proper funding and I’m looking at other distribution methods of course as one of them that gives us an opportunity to reach out there as we said beyond those 8,000 to 10,000 dentists that we currently call.

Ruthanne Roussel – The Robins Group

And also I’m thinking now of the many international opportunities that you must have from all of the various…

David Bethune

Well exactly; you got a good point here. We got the product in these countries here again. We’re getting the feet on the street, but we’re not currently having the funding to do the symposia. The CME programs that the U.K. has, they have them in Germany. We did hire two advocates and interestingly enough, ViziLite was presented in the house in parliament in U.K. when they had a cancer detection week and we were asked to come and make a presentation on ViziLite.

So the interest levels there, it’s just building awareness and having some funding to supplement and support the efforts going on in the street as we move forward with promotional programs and of course we are still working to get one of the very largest countries for demo opportunities in Italy and we’ve got some interviews to go with some marketing partners over there and get the exact program started as well.

Operator

Your next question comes from Tim Lynch - Stonepine Capital.

Tim Lynch - Stonepine Capital

You mentioned an active pursuit of strategic options and some of those might involve extra cash needs or financing for the company, but your also pursuing strategic alternatives that may not require extra cash and not to throw out a leading question with things like mergers of equals and things of that sort, that could really just give you the critical mass on the business operations to turn the quarter a little more strongly on profitability.

David Bethune

Well, absolutely. There are opportunities and we do have a banker that’s helping us in that regard and we certainly are looking at every single thing that comes forward. There’s been people who contacted us directly, that are interested in some mergers and some acquisition things and nothing is being disregarded.

We are looking at everything very seriously and any opportunity that can benefit the share holders, whether it be short term or not. I mean we are in business to grow this company long term; however, if something came along that the board wanted us to consider, we would certainly do the required work and bring it forward, even if it was a short term opportunity to help the share holder.

Tim Lynch - Stonepine Capital

Okay thank and the reason I ask is just the inherent value in the business is in my mind so much greater than where its trading and just financially you’re so close to be able to have the metrics on profitability with some more critical mass to kind of defy that a little bit more emphatically in terms of how the stock trades and show some profitability and it would be great if you guys could find an opportunity like that to really increase the number of the value added products you have by one or two like ViziLite and it could really be an exciting business that would certainly defy the stock price. So we certainly encourage you if things are out there like that to pursue that and I’m glad to hear you are; so thank you.

David Bethune

Yes sir.

Well, if there are no other questions, we certainly do appreciate you taking the time, joining us this afternoon and as always we appreciate your support and interest in our company. If anyone has any further questions, don’t hesitate our sales directly here or Robert Jaffe at PondelWilkinson at 310-279-5969. Robert will be happy to answer questions. Those that he wants to refer; he will refer it forward to us.

This concludes our call, but I will remind you that in closing, please complete your proxy and vote your shares for the election of our Directors and our Auditors coming up. We’re having our share holder meeting on Thursday and we look forward to having all of the proxy’s in by then and your votes to be counted. So thanks again and we look forward to talking to you in the future.

Operator

Thank you. Ladies and gentlemen that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, you may dial N2303-590-3000 or 1800-405-2236 and enter the access code of 11123210#.

We do thank you again for your participation and at this time you may disconnect. Have a nice day.

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Comments

[devassocx:]

This company obviously has a failed business model, a failed product line and
a failed management. I see good reasons why they cannot get financing...they are bad candidates. I see no hope for their survival.

2008 Dec 09 07:06 PM