Zila, Inc. F1Q08 (Qtr End 10/31/07) Earnings Call Transcript

Zila, Inc. (ZILA)

F1Q08 Earnings Call

December 10, 2007 4:30 pm ET

Executives

Robert Jaffe – Investor Relations

Frank Bellizzi – Executive Vice President & President of Pharmaceuticals

Diane E. Klein – Vice President of Finance & Treasurer

Analysts

Matthew Dolan – Roth Capital Partners

Marc Robins – The Robins Group

[Robert Nyewic] – Kentenna Capital]

Steven Becker – Greenway Capital Limited

Ruthanne Roussel – The Robins Group

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to theZila Fiscal 2008 First Quarter Financial Results Conference Call. (Operator Instructions) This conference is being recorded today, Monday, December 10, 2007. I would now like to turn the conference call over to Mr. Robert Jaffe, Investor Relations for Zila. Please go ahead, sir.

Robert Jaffe

Thank you operator and good afternoon everyone. Welcome to Zila’s fiscal 2008 first quarter conference call. On the call today are Dr. Frank Bellizzi, Zila’s Executive Vice President and President of its Pharmaceuticals division and Diane Klein, Vice President of Finance.

Before we get started I need to remind everyone that this telephone conference 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 expression 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 of 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 Form 10K and quarterly reports on Form 10Q. As a reminder, this teleconference is being recorded. I would now like to turn the call over to Frank Bellizzi. Frank?

Frank Bellizzi

Thank you Robert. Good afternoon and thank you for joining us for a presentation of Zila’s 2008 first quarter results. Over the past three months we have been extremely business executing a strategy to achieve success for our shareholders. We are pleased to be able to share with you the tangible progress we are making as evidenced by our first quarter financial results. For those of you new to our story, Zila is a growth oriented oral diagnostic company with a vertically integrated and highly scalable operational platform. We are focused on two important disease states, oral cancer and periodontal disease. Both of which demand new and better solutions for patients.

ViziLite Plus, our flagship product addresses the global deficiency in comprehensive screening for oral cancer, the fifth leading cause of cancer world wide with more than 400,000 cases diagnosed annually and a five year survival rate of only 57%. The key to better outcomes is early detection. As the first medical device cleared by the FDA for adjunctive oral cancer screening, ViziLite Plus enhances the standard of care for patients by enabling the detection of oral abnormalities by dental professionals before they progress to cancer. The screening exam is pain free, takes three to five minutes to perform and in a recent clinical study demonstrated sensitivity and negative predictive value of 100% as will be published in the January, 2008 Oral Oncology Journal and is currently available online.

In less than one year of selling directly through our national sealed sale organization, sales of ViziLite Plus have climbed to an annualized revenue run rate of more than $12 million, based on our most recently completed quarter. We expect that the annualized revenue run rate for ViziLite plus will exceed $20 million in the fourth quarter of this year. The annual market potential for this product in the US alone is estimated at more than a billion dollars. In addition, with over 90% of the reported cases of oral cancer occurring outside the United States, international expansion represents a significant untapped opportunity for Zila.

We also manufacturer and sell two proprietary best of class products. The Rota-dent powered toothbrush and the Pro-Select Platinum scaler which are used for the prevention and treatment of periodontal disease. All of our products are marketed and sold in the United States and Canada primarily through our direct sealed sales force and telemarketing organization. This year, we expect to achieve unit growth across all of our major brands.

From an operating perspective Zila is financially stable with a fully funded operating plan for FY08 that does not require the company to raise capital in order to execute on its plan. There are four major themes which capture our core focus and frame our operating objectives. You can expect to continue to hear these themes on a recurring basis in future calls. We are one, accelerating ViziLite Plus growth in the United States. Two, expanding ViziLite Plus internationally. Three, driving towards profitability with a goal to achieve positive EBITDA for the fourth quarter of FY08. And, four, developing a robust type line of oral cancer diagnosis and treatment technologies.

I’m now going to turn it over to Diane Klein to present the financial results from the first quarter. Diane?

Diane E. Klein

Thanks Frank and good afternoon everyone. Earlier today we filed our quarterly report on Form 10Q for the first fiscal quarter ended October 31, 2007 and we also issued a press release regarding those financial results right after the market closed. You can find theForm 10Q and the press release at our website www.Zila.com under the investors and news sections.

I would like to clarify a few items in our financial presentation before I review our results. Also, please note that Zila’s financial results are reported on a fiscal year that ends on July 31^st. For comparative purposes, in our Form 10Q for all periods presented, financial results exclude results of operations for businesses divested during fiscal 2007 which are now accounted for as discontinued operations. Zila divested its nutraceuticals business unit and its Peridex brand in its last fiscal year in the first and fourth quarters respectively. In addition, Zila completed the acquisition of Pro-Dentec on November 28, 2006 which is in the company’s second quarter of fiscal 2007. Accordingly, prior year’s results for the fiscal 2007 first quarter do not include Pro-Dentec’s results of operations.

Because of the changes in our business, we believe it is useful to compare the financial results for the fiscal 2008 first quarter with the proceeding quarter which is our fiscal 2007 fourth quarter, as well as to compare to the first quarter of the 2007 fiscal year. Now, to the results of our fiscal 2008 first quarter. Net revenues increased to $11.4 million compared to $10.4 million for the fiscal 2007 fourth quarter and $339,000 for the fiscal 2007 first quarter. Net revenues for ViziLite Plus grew to $3.1 million an increase of 15% over the fiscal 2007 fourth quarter and grew 800% from the fiscal 2007 first quarter. Net revenues for our other products grew at 8% to $8.3 million from the proceeding quarter.

Increases in the quarter-over-quarter revenues were driven by the growing awareness of ViziLite Plus among dental professionals and by the continued growth and effectiveness of Zila’s national sales and marketing organization. ViziLite Plus net revenues for the fiscal 2007 first quarter reflect the impact in the change in our sales distribution model as Zila modified its primary channel of distribution in anticipation of the Pro-Dentec acquisition.

Gross profit increased to $6.9 million or 60% of net revenues compared to $6.3 million or 61% of net revenues for the previous quarter. The slight decline in gross profit as a percent of net revenues resulted primarily from promotional discounts offered for sales to dental professionals of the Rota-dent professional powered brush. For the fiscal 2007 first quarter, the company reported negative gross profit of $161,000 which included a reserve for certain inventory items that were reaching expiration.

Marketing and selling expense increased to $5.3 million compared with $4.9 million for the previous quarter and $1.4 million in the fiscal 2007 first quarter due to the added sales representatives and expanded marketing efforts to support the growth in revenues. D&A expenses were $3.5 million compared with $5.6 million for the fiscal 2007 fourth quarter and $3.1 million for the fiscal 2007 first quarter. The fiscal 2007 fourth quarter included $1.9 million of costs related to restructuring and streamlining the company’s operations.

Research and development expenses were $1.2 million compared with $1.7 million for the fiscal 2007 fourth quarter and $1.5 million for the fiscal 2007 first quarter. R&D in these periods was primarily comprised of costs associated with the OraTest regulatory program. The decreased levels of expense in the current quarter was due to the closure of enrollment in the OraTest [inaudible] clinical trial and the cessation of activities in other areas of this regulatory program. While we will continue some level of spending on the OraTest program, we expect that R&D expenditures related to this program will continue to decline over the balance of fiscal 2008.

To summarize, the loss from continuing operations narrowed to $4.7 million or $0.08 per common share. Compared with the loss from continuing operations of $5.8 million or $0.09 per common share for the fiscal 2007 fourth quarter and compared with the loss from continuing operations of $6.4 million or $0.13 per common share the fiscal 2007 first quarter. The losses from continuing operations for the fiscal 2007 fourth and first quarters were reduced by tax benefits of $1.8 million and $3.9 million respectively from the utilization of net operating losses to offset the gains and sales of discontinued business lines in these periods.

We closed the quarter with cash and cash equivalent of $8.7 million compared to $14.9 million at our fiscal year end July 31, 2007. The primary uses of cash during the quarter were $4.3 million for operating activity, $1.4 million for the repurchase of common stock and warrants which was part of the restructuring of our senior convertible notes and, $500,000 for capital expenditures primarily, for new systems and equipment. Our working capital was $10.9 million compared to $14.3 million on July 31, 2007.

With that, I’ll turn things back to Frank and I’ll be happy to address any questions that you may have after the call, or later in the call, I should say.

Frank Bellizzi

Thank you Diane. As you can see, we’ve had a strong quarter financially. In addition, the key performance indicators that we use to gage and track our progress were also very positive. Let’s discuss these key operating metrics and review how we performed. In the first quarter 1,611 dental practices purchased ViziLite Plus for the first time, up from 1,375 in the previous quarter. For the second straight quarter, the number of units of ViziLite Plus sold to existing customers exceed initial orders. This is a clear indication that ViziLite Plus is being integrated into the daily practice patterns of a growing number of dental practices across the country.

Less than one year ago we launched a ViziLite Plus certification program in which a dental practice must complete a training program and have achieved a minimum threshold of completed ViziLite Plus exams to gain certification. This quarter, the total number of ViziLite Plus certified practices grew to over 1,900, a 30% increase from the previous quarter.

Insurance plan representing 17 million covered lives have agreed to offer ViziLite Plus reimbursement as part of their dental coverage for new or existing insurance. This represents an increase of 1 million covered lives from the previous quarter.

At the end of the first quarter we employed 77 sealed sales representatives in the US, up from 63 at the end of Q4. During fiscal 08 we intend to continue to build both our field sales representatives and internal telemarketing teams. In particular, given our recent launch of ViziLite Plus in Canada, we plan to double our field sales force in that market.

We also achieved a number of important operating milestones and I would like to share some of our more significant developments. In August, terms of the company’s senior secured convertible notes were amended, to among other things, improve liquidity by reducing the required minimum cash, deferring the EBITDA covenant and allowing future interest to be paid in kind with common stock. In September, ViziLite Plus was selected to identify precancerous lesions in a phase II study of Erbitux, a leading cancer therapeutic for head and neck cancer developed by ImClone Systems and distributed by Bristol-Myers Squibb. Also in September, the company introduced its next generation Pro-Select Platinum Ultrasonic Scaling system for periodontal therapy which was included in the new product showcase at the annual meeting of the American Dental Association in San Francisco.

In October, we received clearance to sell in market ViziLite Plus in Canada. Subsequently we launched the product at the Toronto Academy of Dentistry winter meeting, marking the initial launch of ViziLite Plus outside the US and the beginning of a multinational expansion effort. On a broader basis there has also been a palpable increase in national awareness of oral cancer that is just beginning to permeate our national consciences. In its October 22 issue People Magazine ran a feature article on Grant Achatz, Celebrity Chef at Chicago Restaurant Alinea. Grant is a young 33 year old who has never smoked and who had a white lesion on the lateral boarder of his tongue that came back biopsy negative three years ago and which now has advanced to stage four cancer. Grant is currently in the midst of undergoing treatment.

In a recent episode of the popular medical series Grey’s Anatomy, a patient receiving treatment had two-thirds of her tongue removed to treat advanced oral cancer. Colleen Pinter a star on the popular soap opera As the World Turns, since 1978 was diagnosed with oral cancer. She recently gave an interview on CBS The Early Show in order to raise public awareness detailing her ordeal with being diagnosed and treated for stage two oral cancer. And, two weeks ago USA Today ran a feature article on oral cancer and discussed the importance of early detection.

Increasingly, patients are looking to their dental professionals to be the key providers of more comprehensive oral health and for detecting oral cancer earlier. Brian Hill, an oral cancer survivor and founder and president of the Oral Cancer Foundation has stated that, “Zila has contributed immensely to raising the awareness of oral cancer in the United States and specifically to dental professionals who are responsible for identifying the disease at the earliest stages when survival advantage is the greatest.”

The building awareness across the country both among dental professionals and patients fuels our dedication and commitment to leading the charge to get the message out. Awareness and education are the prerequisites to the early detection of oral cancer and to saving lives. With that, I’d like to open the call up for questions.

Question-and-Answer Session

Operator

Thank you sir. We will now begin the question and answer session. As a reminder, if you have a question please press the star followed by the one on your touchtone phone. If you would like to withdraw a question, press star followed by the two. If you’re on a speaker phone you need to pick up the handset before making a selection. Your first question comes from the line of Matt Dolan with Roth Capital. Please go ahead.

Matthew Dolan – Roth Capital Partners

Hi guys, good afternoon.

Frank Bellizzi

Good afternoon Matt.

Matthew Dolan – Roth Capital Partners

Frank, a couple of questions on ViziLite, kind of housekeeping questions. Number one, and I may have missed it, I’m bouncing between two different calls here but, do you have the number of new account ads for ViziLite? As well as, any changing in pricing that you can provide us.

Frank Bellizzi

Sure. First of all, we have had no changing in pricing for the product and we had 1,611 dental practices purchase ViziLite Plus for the first time this quarter, Matt. Up, from 1,375 in the previous quarter.

Matthew Dolan – Roth Capital Partners

So, your total is around 8,500 today?

Frank Bellizzi

Who have purchased the product since it launched? That’s probably in the right zone, yeah.

Matthew Dolan – Roth Capital Partners

Okay. Okay. That’s a good number. Have you, can you give us an idea Frank, as you look to your revenue expectations through the end of the fiscal year, can you give us an idea where utilization could track over the long term? Meaning, you know, your 10 year ViziLite users, what are they doing on a per month or per quarter basis?

Frank Bellizzi

Sure, Matt. As I mentioned in my comments, the number of units sold to existing customers exceed that, for the second quarter now in a row, those of initial orders. We would expect to see that trend continue and certainly, working on increasing utilization among our existing practices is one of our absolute key initiatives. I mean, it is pretty simple. There are two basic ways we grow the business. By getting and introducing ViziLite to new dental practices and by getting those who are using ViziLite Plus to utilize it and offer it to all of their adult recall and new patients. And, we’re seeing that beginning to happen.

Matthew Dolan – Roth Capital Partners

Okay. Very good. Question on the competitive landscape, Frank, can you give us an idea of where things stand today? Are you seeing anything new out of these recent conferences out of VELscope, OralCDx, or another company we came across AdDent?

Frank Bellizzi

No. We’re obviously, aware of all three of those companies and, I guess, if we really wanted to define the competitive landscape very broadly I would include all of those in the umbrella. But, really, of the three the only one that really is competitive in a direct way would be VELscope and we have not seen any increased activity on their part. If anything, we’re feeling very good about how ViziLite Plus has been performing against VELscope. In trade shows, recently at the New York Conference and also at the ADA National Conference we set sales records for our product in both of those conferences, growing sales over 50% from the pervious year’s shows. So, there’s nothing on the competitive landscape we see as an increasing threat. The biggest challenge for us, and our biggest competitor is apathy. You know, making dental professionals aware and then educated about the importance of oral cancer screenings and then, getting them to trial the product and ultimately adopt it in a meaningful way into their dental practice. And, you know, I’m pleased to tell you Matt that we’re really seeing good progress on those fronts.

Matthew Dolan – Roth Capital Partners

Okay. Very good. And then, finally, on the R&D spend with the timing of your new OraTest strategy, can you give us an idea, and maybe Diane, where R&D should kind of bottom out? What type of level should we be looking for here between looking at Q at $1.7, Q1 coming in at $1.2. Where does that end up?

Frank Bellizzi

Yeah Matt, I’ll take that question because it’s really a situation whereas Diane expressed, we expect over the balance of the year to see the costs associated with the OraTest program to continue to decline. The timing of those costs declines will be based on the close down of the current clinical study and also further steps to that end. So, the timing of it isn’t something I feel comfortable giving you any kind of precise numbers on. But, do know that over the course of the next couple of quarters we will see that spend decrease and, I guess, maybe by way of broad picture, the great majority of the $1.2 million that we currently have is comprised of OraTest.

Matthew Dolan – Roth Capital Partners

Okay. That helps. Thanks a lot guys. Take care.

Frank Bellizzi

Thank you, Matt.

Operator

Thank you. The next question comes from the line of Marc Robins with The Robins Group. Please go ahead.

Marc Robins – The Robins Group

Thank you. I must have gone brain dead or something and I’d appreciate it if Diane would go through the balance sheet items. She mentioned some cash and working capital items and I just didn’t happen to pick them up. Could you repeat that for me please?

Diane E. Klein

I will do that.

Marc Robins – The Robins Group

Thank you.

Diane E. Klein

I’ll go back over it.

Marc Robins – The Robins Group

I really would appreciate it.

Diane E. Klein

No problem. Quarter end cash was $8.7 million.

Marc Robins – The Robins Group

Okay. And, that compared to, I don’t know if you had it?

Diane E. Klein

Yes. $14.9 million at July 31.

Marc Robins – The Robins Group

Oh, thank you.

Diane E. Klein

And, our working capital was $10.9 million and that compares to $14.3 million at July 31.

Marc Robins – The Robins Group

Thank you. Was there any other balance sheet items that you had mentioned before hand?

Diane E. Klein

I talked about from our statement of cash flows, I talked about some of the utilizations of cash during the quarter.

Marc Robins – The Robins Group

Go ahead and give those to me please.

Diane E. Klein

Sure. $4.3 million for operating activities.

Marc Robins – The Robins Group

Okay.

Diane E. Klein

$1.4 million for the repurchase of common stock and that was under the restructuring of the senior convertible notes.

Marc Robins – The Robins Group

Right.

Diane E. Klein

And then, we had for capital expenditures, approximately $500,000 primarily for new systems and equipment.

Marc Robins – The Robins Group

Okay. Alright. Thank you very much. And then, a couple of accomplishments. Let’s talk about the Pro-Select Platinum. I saw that in New York at the big dental conference there. I was wondering, I guess that was introduced in late September/October, has it been introduced to the sales team across the board? And, has there been some introduction to dental practices? And, how’s the reception? It looks like a pretty nifty device to me.

Frank Bellizzi

Yeah. Thanks for the comments Marc.

Marc Robins – The Robins Group

I can hardly wait, you know. I look forward to the next tooth drilling.

Frank Bellizzi

Well, I’ll tell you what’s interesting, your enthusiasms is shared by countless hygienist around the country. I was recently on the road with a number of sales reps and I got very strong feedback about the new Pro-Select Platinum Scaler and in general, we’ve been very, very pleased with the reaction and support for it throughout the dental community. Our sales reps have been selling them quite well and we’re well ahead of plan to date in terms of the units that we’re moving and, we’re just really pleased with how it’s going. The unit, as you may know from having been at the New York show, is completely digital with the best of class feature set which includes a lighted hand piece and the ADA even commented recently on our Ultrasonic Scaler Continuing Education Program that’s being widely distributed in major dental publications. So, we couldn’t be more pleased with the reception and I think the reason we’ve garnered such a good reaction is because, we really listen to our customers and took their feedback to heart as we designed all the new features that were built into this. And so, this wasn’t one of those modest new product introductions with one or two new features, it was really a step function in terms of value for the dental professional.

Marc Robins – The Robins Group

Now, it retails to the dentist office about how much now?

Frank Bellizzi

Well, we’re selling it in packages and the packages range from $3,500 to approximately $5,500. That depends on the feature set, the number of hand pieces and various other add ons that can be purchased.

Marc Robins – The Robins Group

And then, the various solutions and different add ons and so forth, those would be disposables or add ons that you would sell over the course of time?

Frank Bellizzi

That’s right. Those are consumable medicaments that can be used. As you know, the scaler has three separate vessels to be able to supply three different oral medicaments, liquid medicaments and so, that’s part of the equation as well.

Marc Robins – The Robins Group

Okay. And then, I guess I understood that there was going to be some, have you said anything about updating the Rota-dent? Or, is that something that was slipped over the transom at the show that I shouldn’t say anything about?

Frank Bellizzi

A little bit of both, I guess.

Marc Robins – The Robins Group

Okay.

Frank Bellizzi

You haven’t really made any public announcements about a new and improved Rota-dent. Clearly, we’re working on and adding new features and coming out with a new version but, there’s nothing that I’m going to, you know, at this time be able to share with you in terms of timetable. But, obviously, we continue, as we did with the scaler, look to make improvements across all of our products. I will share with you one thing that we did announce at the New York show and that you may be recalling which is we’ve announced a and launched a rediscover Rota-dent marketing program to increase utilization and it’s targeted to patients with significant restorative and cosmetic treatment plans. And, as you know, the Rota-dent offers the unique ability to reach and clean between teeth, blow the gums, achieving superior efficacy in half the time of other power brushes. But, also, it’s been clinically shown to be the equivalent of brushing and flossing. So, as part of these high costs treatment plans, to include a Rota-dent to insure that the patient outcome is what it should be, really makes a lot of sense. And, again, in this case we’re only a few weeks into it but, the initial feedback and the reception has been very strong.

Marc Robins – The Robins Group

So, this is a new marketing plan or tool that your people are using?

Frank Bellizzi

It’s really expanding the indication of use, if you will, practically speaking for a dentist to not only think about it as an adjunctive treatment for those patients with periodontal disease and extending the care into the home. That’s been traditionally the positioning for the scaler, I’m sorry for the Rota-dent. And, this is just expanding it in a very logical manner, and again, one that is initially meeting with good reception.

Marc Robins – The Robins Group

One of the things that I thought was interesting that I learned at the presentation at the New York Press Show, was that your change over in the Pro-Dentec staff, sales staff, essentially was completed in July, initiated in January/February and continued into July. So, this is essentially the first quarter where you weren’t fighting against, I will call it shifting sand, where you were letting some people go and adding some people at the same time. Yes, you were training folks as they were coming aboard but, we should start seeing the new Pro-Dentec/Zila, this is the quarter that is really the base quarter by which we should set the future quarters. Is that not right? Do you want to say anything about that?

Frank Bellizzi

Yes, Marc I do. First, I would agree that this quarter does represent the direction we intend to continue to make progress towards. I would characterize kind of the evolution of our sales field organization has been one that has had many different components. I mean, we’ll always continue to be looking to build and maintain the strongest sales association we can. There was, obviously, a very big imperative and initiative to train and immerse all of the sales rep into the new products suite and really, with a focus on ViziLite Plus. So, this quarter probably also really represents the first quarter we’re we’ve been able to truly portfolio sell and you’ll continue to see that across the year. But, in terms, the other thing that we did was also structurally, more than anything, we changed the way the sales organization was laid out in that historically, the Pro-Dentec sales organization had been laid out with a central capability and we created a national regional structure. So, we now have regional management and sales across the company that allows for us to better train, support and get out and interface with customers.

Marc Robins – The Robins Group

I’ll get in back in the queue. Thank you.

Frank Bellizzi

Thank you, Marc.

Operator

Thank you. Ladies and gentlemen if there are any additional questions, please press the star followed by the one at this time. As a reminder, if you are on a speaker phone you need to pick up the handset before making a selection. Our next question comes from the line of [Robert Nyewic with Kentenna Capital]. Please go ahead

[Robert Nyewic – Kentenna Capital]

Hi. Good afternoon. I apologize if everybody else on the call is up to speed on this already but, I’m new. I’d love to hear more about your funding plan for the year just given the burn rate you’re still at.

Frank Bellizzi

Sure. Good afternoon Robert. We are in a position where we don’t need to raise any additional capital. We have sufficient working capital currently to execute on our plans. So, I made this comment in my opening statement, I guess, it’d be worth underscoring that we don’t have any current plans to raise capital, nor do we have any need to do so. Now, obviously, if an extraordinary opportunity were to present itself to us, we would certainly look at that. But, at our current plan it is not our intention to raise capital at this time.

[Robert Nyewic – Kentenna Capital]

Okay. And, I’m just curious, why don’t you need to raise capital if you’ve got a $5 million quarterly burn rate and $9 million in cash?

Frank Bellizzi

Well, the burn rate from operations, I think, was actually closer to Diane?

Diane E. Klein

$4.3.

Frank Bellizzi

$4.3 million and its narrowing and it will continue to narrow. So, we expect to have a comfortable base line from which to operate the business. Obviously, to the degree that that changes, we would need to reconsider things. But, we’re on our plan and executing towards it and feel good about where we are.

[Robert Nyewic – Kentenna Capital]

Okay. So, it’s just the ramp rates on revenue and expenses keep you in the black?

Frank Bellizzi

Yeah. And, we expect, as I also mentioned in my opening comments to be EBITDA positive which is a reasonable proxy for cash flow positive.

[Robert Nyewic – Kentenna Capital]

Sure.

Frank Bellizzi

By the fourth quarter.

[Robert Nyewic – Kentenna Capital]

Okay. Thank you.

Frank Bellizzi

Thank you.

Operator

Thank you. Our next question comes from Steven Becker with Greenway Capital. Please go ahead.

Steven Becker – Greenway Capital Limited

Hey, Frank how are you?

Frank Bellizzi

Hi. Good afternoon, Steve.

Steven Becker – Greenway Capital Limited

You mentioned that in the fourth quarter you’d be doing $5 million in ViziLite sales?

Frank Bellizzi

That’s correct, yes.

Steven Becker – Greenway Capital Limited

You said $20 million run rate so I’m assuming $5. Can you walk us through the math, if you were EBITDA positive that quarter, can you walk us through the math that would get us there? In other words, at the gross margin or at, you know, plus the core Pro-Dentec business. And then, what the cost structure would have to look like at that point in time for you to break even?

Frank Bellizzi

Sure, Steve. I guess, it’s pretty simple. As Diane indicated, where we are right now, in terms of bridging the gap to become EBITDA positive is going to entail the growth of ViziLite Plus. So, in this quarter we reported revenues of?

Diane E. Klein

$3.1.

Frank Bellizzi

Of $3.1 and we’re expecting those to grow to at least $5 million in the fourth quarter with the gross margins of ViziLite Plus, that will get us part of the way there.

Steven Becker – Greenway Capital Limited

And that’s about 70%?

Frank Bellizzi

6070% range is a good number to use.

Steven Becker – Greenway Capital Limited

Okay.

Frank Bellizzi

And then, with the growth of, unit growth of all our other products we expect, again, if you look at our gross margin overall, I think that’s probably the most constructive way to look at it, we’re about 60-61%. We expect to improve gross margin but, at the current state you can extrapolate the growth of ViziLite Plus and then the growth of our other core product along with the decreasing spend on the OraTest program, that’s a third factor. And then, the fourth factor would be simply the cost cutting that we put in place in Q4 that will continue to have an impact across the year.

Steven Becker – Greenway Capital Limited

So, if your burn, you said $4.3 was the operating burn and if I’m assuming that ViziLite Plus goes from $3.1 to $5, that’s $1.9 million dollar gain and I’m just going to use 70% for simplicity sake, that generates $1.3 million in gross margin. So, that still gives you a $3 million hole to fill. Part of that comes from the winding down of the study and part of that comes from cost cutting.

Frank Bellizzi

As well as the growth of our other products as well. We expect to show unit growth with the Rota-dent and the scaler as well.

Steven Becker – Greenway Capital Limited

Terrific. Okay. Thank you very much. I appreciate it.

Frank Bellizzi

Thank you, Steve.

Operator

Thank you. Our next question comes from the line of Ruthanne Roussel with The Robins Group. Please go ahead.

Ruthanne Roussel – The Robins Group

Good afternoon, Frank.

Frank Bellizzi

Hi. Good afternoon, Ruthanne.

Ruthanne Roussel – The Robins Group

Some of my questions have been addressed already but, I would like to better understand what we might see in terms of the sales force and its cost going forward. We’ve got a team now of 75 people, is that including the telesales group as well? Or, is that just the field sales people?

Frank Bellizzi

That’s just the field sales. We have about a dozen and a half or so of telesales. And, as I mentioned in my opening comments we’ll be looking to selectively expand both of those teams as well as our sales force in Canada as well.

Ruthanne Roussel – The Robins Group

How big is the Canada team now?

Frank Bellizzi

It is approximately four.

Ruthanne Roussel – The Robins Group

Okay, so double to eight?

Frank Bellizzi

Correct.

Ruthanne Roussel – The Robins Group

Okay. And, are we thinking of maybe adding, I don’t know 5%, 10% over the course of the year in terms of bodies?

Frank Bellizzi

Really, I’d rather probably not get into any specifics yet because, part of our growth plan will be based on how we are continuing to perform and where we see there to be priority opportunities but we do have a plan to add additional bodies. I certainly can tell you we’re not going to grow to 100 or 120. That’s certainly not our plan as of today. Now, that could change but, today we’re not looking at growing it dramatically from where we are. But, we do plan to grow it as we see opportunities present themselves as we can.

Ruthanne Roussel – The Robins Group

Alright. In other words, we shouldn’t be looking for the costs to go down? We should be looking for it to go up a little?

Frank Bellizzi

Correct.

Ruthanne Roussel – The Robins Group

Okay. Thanks very much, Frank.

Frank Bellizzi

Thank you, Ruthanne.

Operator

Thank you. There are no further questions in the queue. I turn it back over to management for closing remarks.

Frank Bellizzi

Thank you. Thank you for joining us today. Our next call which will address Zila’s second quarter fiscal year 08 is currently scheduled for early April. In the meantime, over the course of the next few months David Bethune, our Executive Chairman and I will be meeting with the investment community in various cities around the country. If you are interested in scheduling a meeting, please feel free to contact me or Robert Jaffe in our investor relations team.

We are building a high growth financially vibrant oral cancer diagnostic company. We intend to accomplish this by accelerating the market penetration of ViziLite Plus in the US, expanding ViziLite Plus internationally, growing our core periodontal product portfolio and developing a robust pipeline of prevention, diagnosis and treatment technologies for oral disease. We have made significant progress along a number of fronts that now places us in a position to build a company of value for our shareholders, our employees, our customers and for the tens of thousands of patients who lives our products can improve and in many cases save. This progress does not come without a tremendous effort by our team and I would like to take this opportunity to thank each and every Zila employee who has worked tireless to help place us in the position we are in today.

Today, Zila has a leadership team of a disciplined operating philosophy and a vertically integrated business that is poised for continued growth. While much work still remains, fiscal year 2008 promises to be a special year for Zila. We have started the year strong and intend to build on this momentum. We believe that we have the financial means and confidence to continually and consistently deliver results, reach our goals and create significant shareholder value. We look forward to sharing the result with you throughout the course of the year. Thank you for participating in the call and good afternoon.

Operator

Thank you. Ladies and gentlemen this concludes theZila fiscal 2008 first quarter results conference call. If you’d like to listen to a replay of today’s conference please dial 303-590-3000 or 800-405-2236, enter the passcode 11104216. We’d like to thank you for your participation, you may now disconnect.

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