Zila, Inc. F3Q08 (Qtr End 04/30/2008) Earnings Call Transcript

Zila, Inc. (ZILA)

F3Q08 Earnings Call

June 9, 2008 4:30 pm ET

Executives

Robert Jaffe – Investor Relations, PondelWilkinson

David R. Bethune - Executive Chairman and Interim Chief Executive Officer

Diane Klein - Vice President, Finance

Analysts

Neal Goldman - Goldman Capital Management

Matt Dolan - Roth Capital

Marc Robins - The Robins Group

Presentation

Operator

Welcome to the Zila’s fiscal 2008 third quarter financial results conference call. (Operator Instructions) I would now like to turn the conference over to Robert Jaffe, Investor Relations for Zila, Inc.

Robert Jaffe

Welcome to Zila’s fiscal 2008 third quarter conference call. On the call today are Dave Bethune, Zila’s Chairman and recently named 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 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 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 Dave Bethune.

David R. Bethune

Well thank you, Robert, and we appreciate what you have done for us, here at PondelWilkinson and helping us with our current shareholders and our future shareholders. We appreciate all of you joining us today to discuss our third quarter ‘08 financial results and our plans for the remainder of this year and I’ll remind you that our fourth quarter ends July 31.

We made solid progress toward our immediate goal of addressing constraints on capital. We are now setting plans to focus on building this company to one that we can all be proud of.

During the quarter, we grew revenues, reduced expenses and narrowed our operating loss. Our direct field sales force is now fully trained on our entire product portfolio and continues to focus on driving North American sales growth and building our customer base. And we certainly appreciate all the work that Jeff Mazzarella, our Vice President of Sales is doing to make these things happen for us with growing this revenue and building the profitability of this company.

We are expanding programs to strengthen our first class telemarketing sales organization as an adjunct to our direct sales force as well. This past quarter, marked the seventh consecutive quarter that sales of ViziLite Plus have increased. The current annualized revenue run-rate for ViziLite climbed to more than $14 million.

ViziLite platform is the star growth driver for our company and we believe the product has solid growth potential in the years ahead. We continue to closely monitor expenses and have recently implemented additional needed cost reductions.

Among other things, executive salaries were reduced for the near term by 10% and automobile allowances were eliminated, and last week we announced further reductions in headcount, non-critical marketing and general administrative costs. And it’s always difficult to cut staff but these cuts were necessary to better align our costs with our current revenue levels.

Over the past few months, we have achieved a number of important milestones and I’d like to share some of these with you. We have recently revised the agreement with the holders of our senior secured convertible notes to modify the EBITDA and minimum cash balance covenants. Under the new terms, the minimum cash balance has been lowered by $1 million and the EBITDA requirement has been moved to July 31, 2009.

However, I’d like to remind everybody, we have set up a budget and strategy to fully implement our current program, our current budget to make the covenants in July 31 of ‘08. That’s what our goal is.

We have developed a comprehensive plan to market ViziLite Plus to U.S. and overseas medical facilities at our U.S. military installations and U.S. veteran’s clinics and hospitals through the five-year U.S. Federal Supply Schedule contract. I’d like to add that we are currently underway with both the top down and bottom ups effort to sale the veterans and military on this outstanding product.

I have recently been to Washington to talk to many of the people in the military and the veterans supply and as well as our sales reps and managers are calling on the VA hospitals in all of the areas around the United States.

In May, we selected Panadent to be the exclusive marketer of ViziLite in the UK Panadent specializes in selling dental products to dentists and hygienists through educational, technical expertise and service, which we believe will make them an effective marketer of ViziLite Plus.

Panadent introduced ViziLite at the British Dental Conference and Exhibition, the British Dental Associations’ annual conference on May 1. The UK, with a population of over 60 million, is a good market and helps us to establish a foothold for the rest of the important countries in Europe.

We are currently working on a plan to obtain a license marketer and distributor in Germany, very important country for dentists and dental products and France and Italy, as well as some of the smaller countries, but important countries, such as Switzerland. Dental health in Switzerland is very, very high, and we believe we have a good distributor there as well.

We are in the process of identifying distributors for ViziLite all over the Pacific Rim as well and we are focusing on some of the more important countries where oral cancer is a big issue.

We also have entered into a distribution agreement for a Rotadent powered toothbrush in the UK with another marketer and distributor, and we expect to make an announcement sometime in the near future concerning the details of this.

In the U.S., ViziLite Plus sales grew 13% on the strength of an 18% increase in reorder volume and a 5% increase in the number of new trials over the levels achieved last quarter. Sales growth compared to the same period last year was a robust 41%. We also added more than 1,500 new ViziLite customers during the quarter, and we continue to see our reorders outpacing trial volume.

In April, Humana and United Healthcare began extending coverage of ViziLite. With these two major dental insurance providers making oral cancer screening a benefit, more than 21 million lives are now covered. And of course now our job is to get these dentists to offer this to all of those covered lives.

Humana and United Healthcare join a growing list of premiere and national insurance plans that provide coverage for ViziLite which include Cigna, Guardian, Safe Guard, as well as a number of regional plans and some self insured employers.

Also in April, we received FDA clearance to market ViziLite Eyewear. ViziLite Eyewear is the reusable filtered eyewear that eliminates ambient light and helps the healthcare professional administer ViziLite in less than ideal lighting environments.

Well now I’ll turn it over to Diane to present the financial results from the third quarter.

Diane Klein

Earlier today, we filed our quarterly report on Form 10-Q for the third quarter ended April 30 and we also issued a news release regarding those financial results right after the market closed. You can find the Form 10-Q and the news release on our website www.zila.com under the Investors and news sections.

Before reviewing our third quarter results, I would like to clarify a few items in our financial presentation. Also, please note, that Zila’s financial results are reported on a fiscal year end that ends on July 31.

For comparative purposes in our Form 10-Q 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 quarter’s respectively.

In addition, Zila completed the acquisition of Pro-Dentec on November 28, 2006 which was in the company’s second quarter of fiscal 2007. Accordingly, fiscal 2007 year-to-date results include only five months of Pro-Dentec’s results of operation.

Now, to the results for our fiscal 2008 third quarter, net revenues increased 7% to $11.3 million compared with net revenues of $10.5 million for the second quarter fiscal 2008, and increased 3% compared with $10.9 million for the prior year third quarter. Sales of ViziLite Plus grew 13% to $3.6 million, compared with the proceeding quarter and 41% compared with the third quarter of fiscal 2007. This marks the seventh consecutive quarter of revenue growth.

During the quarter ended April 30, 2008, Zila’s reengineered sales and marketing team completed training on the company’s entire product offering. As a result of these actions, net revenues for the last month of the quarter increased 24% over the same month in the prior year.

Gross profit grew to $6.8 million or 61% of net revenues from $6.7 million or 61% of net revenue in the third quarter of fiscal 2007, due to higher sales of ViziLite Plus. Marketing and selling expense increased to $6 million compared with $4.5 million in the third quarter of fiscal 2007, reflecting additional national sales representatives, the expansion of our seminar programs, as well as a $500,000 charge for the termination of a marketing contract.

General and administrative expense was $3.3 million compared with $2.5 million for the third quarter of fiscal 2007. The increase was due primarily to a reversal of accrued bonuses in the third quarter of the prior year. Increased costs related to Pro-Dentec’s operations including professional fees incurred for Sarbanes-Oxley compliance and investment banking expenses that were incurred to explore financing alternatives.

Research and development expense was $247,000 compared with $2.4 million for the third quarter of fiscal 2007. R&D in last year’s third quarter was primarily comprised of cost associated with the OraTest regulatory program.

In the first quarter of fiscal 2008, the company closed enrollment in the OraTest clinical trial and reduced expenditures for the regulatory program.

The loss from continuing operations for the quarter was $4.4 million or $0.07 per common share, essentially unchanged from the third quarter of fiscal 2007. The loss for the current quarter included approximately $800,000 of costs related to the termination of the marketing contract, investment banking expenses incurred to explore financing alternatives and severance. While the prior year quarter benefited from the reversal of accrued bonuses of $800,000 that did not recur in the current quarter.

The EBITDA loss from continuing operations narrowed to $2.6 million compared to $2.8 million for the preceding quarter and $2.9 million for the third quarter of fiscal 2007. The company closed the quarter with cash and cash equivalents at April 30, 2008 at $3.5 million compared to $14.9 million at July 31, 2007.

The decrease over the first nine months of fiscal 2008 reflects cash used in operations of $8.8 million, the repurchase of $1.4 million of common stock and warrants related to the restructuring of the company’s senior convertible notes in August 2007, $300,000 of principle payments on debt, and $900,000 for investing activities, primarily related to capital expenditures for new systems and equipment. Working capital was $5.9 million at April 30, compared with $14.3 million at July 31.

On June 3, the company’s senior note financial covenants were modified to reduce the required quarterly cash balance to $1 million and to provide for one quarter of positive EBITDA no later than July 31, 2009. This amendment coupled with other factors addressed the substantial doubt about the company’s ability to continue as a going concern and allowed the removal of the going concern language that appeared in our Form 10-Q for the second quarter of fiscal 2008.

With that I’ll turn things back to Dave.

David R. Bethune

Well, one final comment before we take on any questions you might have. As evidenced by the recent actions I want to let everyone know that this company is moving away from discussing a lot of objectives to actually making results that you’d be able to see.

With the time we got available, we’d like to address any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Neal Goldman - Goldman Capital Management.

Neal Goldman - Goldman Capital Management

Do you believe that you have sufficient capital on hand that you won’t need to refinance further until you achieve cash flow breakeven?

David R. Bethune

The short answer, Neal, is yes. We will not be asking for additional or trying to seek additional money for finances for any financial reasons. However, I’ll just add that obviously when you have a lot of great ideas, and I believe we do have a lot of good ideas and great projects. As we move down the line and later moment we will be looking to obviously try to leverage those opportunities with additional capital to speed up the growth of this company. But that’s not in the immediate plans.

Neal Goldman - Goldman Capital Management

What level of sales do you need to be at cash flow breakeven assuming the majority of the gross coming from ViziLite?

Diane Klein

We’re looking at probably in the range of about another million and a half in sales and that over a quarter. And that will help us to turn the quarter that coupled with the cost reductions that we’ve undertaken during this quarter.

Neal Goldman - Goldman Capital Management

Are the margins the same on both? If you sign a deal for European distribution of Pro-Dentec and you have some success there, are the margins similar to the ViziLite margins?

David R. Bethune

Well, I think they are very close. Obviously, we got a situation in Europe where we sell our product in U.S. dollars, and we sell it in a way that allows them to spend a certain amount of agreed upon funding for marketing and selling, so that we have a net dollar that we sell. So the margin would be somewhat lower. But it would equate to a net dollar at the bottom of the expense report.

Operator

Your next question comes from Matt Dolan - Roth Capital.

Matt Dolan - Roth Capital

First question on ViziLite, can you breakout how many new accounts you added during the quarter?

David R. Bethune

Dave, we had close to 1,500 new customers. So that’s pretty good progress I would say, given the fact that our sales force is now only in the last month fully trained in all of our product line and in our selling skills area.

Matt Dolan - Roth Capital

And then following-up on the question of getting to breakeven that million and a half of incremental revenue, I am assuming that primarily comes from ViziLite. Beyond the sales force continuing to penetrate the market, David, can you give us an idea of how the recent expansion in reimbursement has helped? Are you proportionally getting more reimbursed patients involved? And secondly, how should this VA contract affect your revenue over the next few quarters here?

David R. Bethune

Well, the opportunity with these dental insurance plans, the coverage is tremendous but it’s a challenging goal to get all of those patients knowledgeable enough to make sure that they ask for a ViziLite test when they go visit the dentist. So, our goal is to work with the dental insurers to facilitate the knowledge base for those patients walking into the dentist office to ask for the product.

Now, on the VA, it’s just a massively wonderful opportunity but a lot of hard work when you are working with the Federal government. I’m going to Washington again next week to talk to some very important executives in the Veterans Administration. In fact, we are working hard to see if we can visit with at the cabinet post position, Dr. Peake, who is a Bush appointee as head of the VA administration.

We’re trying to get in the front door and talk to him, so we start at the very top, we have our sales reps and our managers, our sales manager and all of our folks working at the bottom level to call on the individual VAs.

Once we crack some of those and it just very exciting to think that the VA is starting to use this routinely. It turns out, that VA patients have the very highest incidents of oral cancer because of their past habits, their personal habits. The things that some of us all have done in the past, alcohol and smoking and that sort of thing.

So we are really excited and it’s something that we’re working with some of the political people, too, the politicians, senators and congressmen especially here from Arizona, we’re asking them to help us because it’s really the right thing to do for a veteran, a soldier that’s supported this country. It’s a right thing to do test them and help identify a dysplasia and hopefully a early stage cancer that can be corrected before it gets too far down the line.

And it’s just a good story just to talk about this product ViziLite. I get excited when I go to Washington and talk about a medical device that can save lives and save money. Because everybody knows that when someone has a serious cancer that could cost anywhere from to $30, $40, $50 to $100,000 of chemotherapy and often times the result is not a very happy one.

Matt Dolan - Roth Capital

And then following on your announcement from last week, you pointed to a number of additional cost reduction measures, can you help us quantify this path to breakeven in profitability. How much cost reduction was implemented in the prior round and how much you are expecting to pull out of the P&L for the second round?

David R. Bethune

We had preferred not to go through excruciating detail for that if you will forgive us for that, Matt, but I can tell you that we’ve got a very, very tight plan. I know it’s hard to believe looking at the history of the company and where we are even in the third quarter but we really do believe we have a plan in place.

There are some what ifs, there are some revenue issues and obviously we think that our revenue is going to be able to make it. We got everybody is committed strongly to making these revenue numbers but our cost reduction program is in place, our revenue enhancement program such as what I just talked about with the VA and the military and these sort of things. They are all in place and our job is to just make sure we can execute on this plan.

And being able to do that we are going to end up with, in my belief, we’ll be positive EBITDA on the fourth quarter and we’ll maintain our cash requirement covenant as well. As I say, we got this covenant modification for insurance but we really hope that we won’t need this insurance. We’re going to try to make this darn thing without having to utilize the benefit of the easier covenant relief program.

Matt Dolan - Roth Capital

When you said fourth quarter that’s fiscal?

David R. Bethune

July 31, 2008, coming up fast here, we are already a third of the way home and running fast.

Operator

Your next question comes from Marc Robins - The Robins Group.

Marc Robins - The Robins Group

Dave, how many people do we actually have out there selling now, what’s the nose count?

David R. Bethune

Marc, we have 76 reps right at the moment out there and all pretty much fully trained.

Marc Robins - The Robins Group

And we’re going to stay at that level at this point for a while?

David R. Bethune

We are, we’re going to stay at 76, get those individuals with that experience curve hopefully going up there for us. And then we’ll take a look at that situation on headcount and so forth on that when the latter part of this year and see what we need to do in regards to possibly adding. But right now we think 76 is the right number.

Marc Robins - The Robins Group

Can you give us an update on how the Platinum Pro-Select is going, that was pretty good sighting piece of equipment that was added September a year ago, is the reception of that is good as it was planned originally or how’s that moving in the market?

David R. Bethune

And the unit, let me just explain, is completely digital. It’s a best in its class feature set which includes a lighted hand piece, the ABA commended Zila in its recent Ultrasonic Scalar Continuing Education Program that was widely distributed in a major dental publications.

Our sales thus far have frankly not matched our expectations and let me give you a little bit of a reasoning behind that. We got a very tight budget right now, we want to expand the effort behind the scalar, and the way we plan to do that is we’re going to talk to some distributors to supplement the effort of these 76 reps so that we could really take advantage of a broader range of net of coverage for this product. This product deserves to have a lot more market share than it has, very honestly.

And we are going to put that in place as soon as we can get past some of our financial constraints. To build this up like we need to, to market it in a very, very broad range will require a big inventory build and we are going to start doing that as soon as we can squeeze through some of our financial loops that we are doing right now. But I can tell you that’s another great opportunity for Zila to get this product out there broader base coverage than with our fine group of 76 reps.

Marc Robins - The Robins Group

You gave us a number of new customers, new dentists that are using ViziLite, could you breakdown the amount of resales or reorders versus new sales? That’s been done in the past.

David R. Bethune

I really don’t have anything Marc, I am going have to call you and give you that information back. I’ll look that up and get back to you.

Marc Robins - The Robins Group

Going forward you said there was a second round of cost reductions, I was curious if in the fourth, in the July quarter, we should look forward to termination costs or some of those extra items that would be in the income statement that would arise from the round that was taken last week?

David R. Bethune

Well, I think we have pretty much taken care of all of those things. There’s right now, I think we have saved not any additional costs that we haven’t identified. Diane, would that be accurate?

Diane Klein

That’s fair. This current quarter, Q3, had some separation cost in there and we’re not anticipating that in Q4.

Marc Robins - The Robins Group

So we would expect some lower, we would expect some lower costs to transition through into the fourth-quarter but nothing out of the unusual or one time nature?

David R. Bethune

We will see substantial lower costs in this fourth quarter.

Marc Robins - The Robins Group

Let’s go to the opportunity with the Veterans Administration and the military. Are we going to be able to sell ViziLite to them at roughly the same price as we do the dentists or are they getting a pretty good discount?

David R. Bethune

Well, the Federal government always gets a pretty good discount. We are not atypical in that regard. We have a cost structure there that’s quite low but our margins will be good. Its just that it’s when you set a government contract it has to be the lowest that you’re selling your product anywhere in the world. I believe that’s the Federal government requirement.

So we do have a lower cost and somewhat lower margins but the potential for the product, the volume opportunity is quite large. And so one could say it’s comparable with our best group insurance and group dental accounts.

Marc Robins - The Robins Group

So like a group account you could package it in such a way that it maybe a lower cost, but you still might be able to maximize your gross margin given the way you put it together, package it and deliver it?

David R. Bethune

Yes, sir. I think it’s just such a wonderful opportunity for us to have that supply schedule contract because when you call on any Federal facility they can order outside of a Federal contract, but it’s always very, very complicated for them to do so. So just having it on the contract alone gives the sales reps and gives our salesmen when we go to Washington an opportunity to talk to these government officials, and they quickly understand that it’s a much easier proposition for them to be acquiring our product.

Operator

Your next question is a follow up from Matt Dolan - Roth Capital.

Matt Dolan - Roth Capital

In the April quarter, Diane, what were the severance costs in that period, can you strip that out for us?

Diane Klein

Matt, I don’t have those separately here. They were in excess of $100,000.

David R. Bethune

Some of those costs were consultant shift and that sort of thing. So we didn’t have really any severance costs in regards to that, correct, Diane?

Diane Klein

We’ve eliminated a number of positions in manufacturing that were open and then we have had severance costs for employees that were terminated during the quarter. So and the other part of the savings is that we have taken a broad reduction at the director level of the company in terms of reduction of salary, elimination of car allowances. That’s just a straight salary expense or an expense reduction if you will with no severance attached to that.

Matt Dolan - Roth Capital

On ViziLite, looks like you’ve doubled your accounts year-over-year. David, do you have any anecdotal feedback on reorder rates? I know you are going to get back to us with the numbers, but how long is it taking for them to work through the initial kits that they buy and then are you generally getting reorders once you leave that office?

David R. Bethune

Well yes, we are and now that’s something we are trying to pay a close attention to, but right now it’s running at 30% plus reorder rate, which I think is a good one. It’s just a matter of continuing to get the word out that this is just the right thing to do ethically and morally for the patient.

The dentist needs to get that in his head real clearly. And that’s the hard work, the heavy lifting we need to do to get the message out there how great this product is to help to improve the visual observation of these dysplasia and early stage cancers. And that’s what we are focused on right now.

Operator

Your final question is a follow-up from Marc Robins - The Robins Group.

Marc Robins - The Robins Group

David, as I said to you in a conference just not too many months ago that and you mentioned this first that we are aiming for profitability, and we’ve been waiting a long time here. Let’s talk about what you see this company doing for shareholders, and I’m not talking about the next two, three months or the next two, three quarters but maybe the next two, three years.

Do you see a reverse split? Do you see buying back stock? And of course you have to get your balance sheet into better condition so that you can finance the scalar and some of these other growth areas that you want to go. What would you like to see this company be doing in two, three, five years for the shareholders?

David R. Bethune

I think I have a realistic vision although it’s quite energetic and quite optimistic. This is a great little company, and we get through with these financial woes and that sort of thing and get moving forward, I think we have a wonderful opportunity to build a real value oriented company. I think this is a company that can grow solidly.

I’ve got belief that we can add technologies down the road. We can add things. There’s not many oral cancer treatment or oral cancer prevention companies out there. We’ve got this wonderful product with ViziLite Plus. We need to demonstrate the opportunity there. I believe this product deserves to be looked at outside of dentistry. In fact, I’ve spent sometime here again in Washington and talking with the medical profession.

The ENT, there are just too many opportunities to look at almost but I believe that once our shareholders and I think would be shareholders see that there is value there then it, we know what we are doing here and we can build this company. I think our stock will respond favorably.

Certainly I believe it’s a very undervalued situation right now by great stretches, and we look to really build this company. Look at the global expansion, just that alone is a great opportunity. We’ve got an opportunity to get out there in the Far East, I don’t know if you know this, but the number one per population percentage of oral cancers is in India. The Indian folks chew this beetle nut. So the beetle nut actually causes some oral cancer to a great degree.

So, I have got some friends from a past life that have some contacts over there in India and we are currently investigating to find us a way to get that marketed over there in India. That would be a wonderful thing because there is a good percentage of population of India that can afford a test like this and that would be a great thing to do.

So we are just full of opportunities, full of ways to grow this company and everyday that passes we have folks that we talk with that say, “Hey, what about this, what about that?” So we have got plenty to do here to build a high value company for our shareholders.

Well thank you and I would like to thank all of you for joining us this afternoon. We certainly appreciate your support and interest in this new Zila, I’ll call it. If anyone has any further questions, please do not hesitate to contact Robert Jaffe at PondelWilkinson or myself directly. I spend a good bit of time talking to investors and would be investors.

I’ll need to spend lot of time working on the company but I do like to talk to investors and tell them about this company. I think it’s a good opportunity for everyone and we certainly appreciate your joining us today and thank you for participating.

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Comments

[vegas:]

this is a well run corporation.stock going to $100.00

2008 Jun 12 04:28 AM

[devassocx:]

Surely you are kidding...unless something has drastically changed
this company has snatched defeat out of the jaws of success.

Seems to me that they threw away their only viable franchise, ester C
only to sink funds into the oral cancer detector that has yet to find
any sort of acceptance.

The stated major goal of the company is to find some way out
of not having any cash and who is now circling the drain is sure
not a good message that stockholders want to hear.

I would give a prediction as to their future but its so dismal I will
decline.

2008 Jun 13 12:49 AM