##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 Form 10-Q
 QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 For the Fiscal Quarter Ended
October 31, 2005
    
    Commission File Number
0-17521
 ZILA, INC .
 (Exact Name of Registrant as Specified in its Charter)
 Delaware(State or Other Jurisdiction of
Incorporation)
    
    86-0619668(I.R.S. Employer
Identification No.)
 5227 North 7th Street, Phoenix, Arizona 85014-2800  (Address of Principal Executive Offices)
 (602) 266-6700
  þ o
  þ o
  o þ




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##### Table of Contents



ZILA, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 2005
TABLE OF CONTENTS
  
 PagePart I. FINANCIAL INFORMATION (UNAUDITED)Item 1. Financial StatementsConsolidated Balance Sheets as of October 31, 2005 and July 31, 2005
    
    
    3Consolidated Statements of Operations and Comprehensive Loss for the three-month periods ended
October 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows for the three-month periods ended October 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    23Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    24INDEX TO EXHIBITS
    
    
    25Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
 2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 
 ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 October 31,
    
    
    July 31,2005
    
    
    2005(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    10,305,073
    
    
    $
    12,937,517Restricted cash collateral
    
    
    532,558
    
    
    
    527,783Trade receivables  net of allowances of $154,000 and $150,000
    
    
    9,125,499
    
    
    
    11,422,743Inventories  net
    
    
    7,191,828
    
    
    
    6,024,266Prepaid expenses and other current assets
    
    
    2,225,381
    
    
    
    1,726,778Total current assets
    
    
    29,380,339
    
    
    
    32,639,087Property and equipment  net
    
    
    9,969,348
    
    
    
    9,691,686Purchased technology  net
    
    
    2,911,944
    
    
    
    3,031,613Goodwill  net
    
    
    6,930,192
    
    
    
    6,930,192Trademarks and other intangible assets  net
    
    
    12,552,125
    
    
    
    12,652,564Other assets
    
    
    460,159
    
    
    
    473,095Total Assets
    
    $
    62,204,107
    
    
    $
    65,418,237LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    6,905,659
    
    
    $
    5,397,213Accrued liabilities
    
    
    3,838,668
    
    
    
    3,717,630Short-term borrowings
    
    
    319,503
    
    
    
    154,335Deferred revenue
    
    
    221,726
    
    
    
    221,726Current portion of long-term debt and capital lease obligations
    
    
    309,735
    
    
    
    323,758Total current liabilities
    
    
    11,595,291
    
    
    
    9,814,662Deferred revenue and deferred gain on sale leaseback
    
    
    498,054
    
    
    
    553,486Long-term debt and capital lease obligations  net of current portion
    
    
    3,254,410
    
    
    
    3,328,139Total liabilities
    
    
    15,347,755
    
    
    
    13,696,287Commitments and contingencies (Note 12)Shareholders equity:Preferred stock  Series B, $.001 par value - 2,500,000 shares authorized,
100,000 shares issued and outstanding
    
    
    462,500
    
    
    
    462,500Common stock, $.001 par value - 65,000,000 shares authorized,
45,896,550 shares and 45,864,050 shares issued and outstanding
    
    
    45,897
    
    
    
    45,864Capital in excess of par value
    
    
    84,518,380
    
    
    
    84,372,257Accumulated other comprehensive loss
    
    
    (63,755
    )
    
    
    (63,924
    )Accumulated deficit
    
    
    (37,555,599
    )
    
    
    (32,543,676
    )Common stock in treasury, at cost (218,411 shares)
    
    
    (551,071
    )
    
    
    (551,071
    )Total shareholders equity
    
    
    46,856,352
    
    
    
    51,721,950Total Liabilities and Shareholders Equity
    
    $
    62,204,107
    
    
    $
    65,418,237
  3




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ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
 Three months ended October 31,2005
    
    
    2004Net revenues
    
    $
    9,681,448
    
    
    $
    9,875,812Cost of products sold
    
    
    4,024,419
    
    
    
    3,470,101Gross profit
    
    
    5,657,029
    
    
    
    6,405,711Operating costs and expenses:Marketing and selling
    
    
    4,780,857
    
    
    
    4,279,106General and administrative
    
    
    3,363,115
    
    
    
    2,717,385Research and development
    
    
    1,817,799
    
    
    
    1,930,055Depreciation and amortization
    
    
    708,854
    
    
    
    658,04210,670,625
    
    
    
    9,584,588Loss from operations
    
    
    (5,013,596
    )
    
    
    (3,178,877
    )Other income (expense):Interest income
    
    
    83,983
    
    
    
    52,694Interest expense
    
    
    (52,064
    )
    
    
    (47,798
    )Gain (loss) on sale of assets
    
    
    185
    
    
    
    (1,444
    )Other expense
    
    
    (13,938
    )
    
    
    (25,504
    )18,166
    
    
    
    (22,052
    )Loss from continuing operations before income taxes
    
    
    (4,995,430
    )
    
    
    (3,200,929
    )Income tax expense
    
    
    (3,600
    )
    
    
    (1,955
    )Loss from continuing operations
    
    
    (4,999,030
    )
    
    
    (3,202,884
    )Income (loss) from operations of discontinued Zilactin product line
    
    
    (3,143
    )
    
    
    490,992Net loss
    
    
    (5,002,173
    )
    
    
    (2,711,892
    )Preferred stock dividends
    
    
    9,750
    
    
    
    9,750Net loss attributable to common shareholders
    
    $
    (5,011,923
    )
    
    $
    (2,721,642
    )Basic and diluted net income (loss) per common share:Loss from continuing operations
    
    $
    (0.11
    )
    
    $
    (0.07
    )Income (loss) from operations of discontinued Zilactin product line
    
    
    
    
    
    
    0.01Net loss
    
    $
    (0.11
    )
    
    $
    (0.06
    )Weighted average shares outstanding
    
    
    45,659,928
    
    
    
    45,500,890Net loss
    
    $
    (5,002,173
    )
    
    $
    (2,711,892
    )Foreign currency translation adjustments
    
    
    169
    
    
    
    (1,625
    )Comprehensive loss
    
    $
    (5,002,004
    )
    
    $
    (2,713,517
    )
  4




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ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months ended October 31,2005
    
    
    2004Operating activities:Net loss
    
    $
    (5,002,173
    )
    
    $
    (2,711,892
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization continuing operations
    
    
    708,854
    
    
    
    658,042Depreciation and amortization discontinued operations
    
    
    
    
    
    
    18,324Amortization of deferred financing costs
    
    
    10,331
    
    
    
    12,977Noncash stock based compensation expense
    
    
    81,222
    
    
    
    5,683Options issued for services
    
    
    6,064
    
    
    
    Deferred revenue and other
    
    
    83,578
    
    
    
    (49,882
    )Change in assets and liabilities:Receivables  net
    
    
    2,297,244
    
    
    
    (531,638
    )Inventories
    
    
    (1,167,562
    )
    
    
    (196,672
    )Prepaid expenses and other assets
    
    
    (510,200
    )
    
    
    (81,734
    )Accounts payable and accrued liabilities
    
    
    1,518,621
    
    
    
    1,301,253Net cash used in operating activities
    
    
    (1,974,021
    )
    
    
    (1,575,539
    )Investing activities:Additions to property and equipment, net
    
    
    (628,466
    )
    
    
    (277,615
    )Additions to intangible assets, net
    
    
    (151,718
    )
    
    
    (310,868
    )Restricted cash deposited to collaterize letter of credit
    
    
    (4,775
    )
    
    
    (1,486
    )Net cash used in investing activities
    
    
    (784,959
    )
    
    
    (589,969
    )Financing activitites:Net proceeds from short-term borrowings
    
    
    165,168
    
    
    
    301,004Proceeds from issuance of common stock
    
    
    58,870
    
    
    
    15,469Dividends paid to preferred stockholders
    
    
    (9,750
    )
    
    
    (39,000
    )Principal payments on long-term debt
    
    
    (87,752
    )
    
    
    (85,666
    )Net cash provided by financing activities
    
    
    126,536
    
    
    
    191,807Net decrease in cash and cash equivalents
    
    
    (2,632,444
    )
    
    
    (1,973,701
    )Cash and cash equivalents at beginning of period
    
    
    12,937,517
    
    
    
    3,679,915Cash and cash equivalents at end of period
    
    $
    10,305,073
    
    
    $
    1,706,214
  5




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ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. ORGANIZATION AND BASIS OF PRESENTATION
  Advanced Protection
    2. STOCK-BASED COMPENSATION
  Accounting for Stock-Based Compensation Accounting
for Stock Issued to Employees
 Share-Based Payment
 6




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WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Exercise
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Price
    
    
    Term
    
    
    ValueBalance outstanding at July 31, 2005
    
    
    2,345
    
    
    $
    3.58Granted
    
    
    577
    
    
    
    3.62Exercised.
    
    
    (33
    )
    
    
    1.81Terminated/expired
    
    
    (53
    )
    
    
    3.96Balance outstanding at October 31, 2005
    
    
    2,836
    
    
    $
    3.60
    
    
    
    7.3
    
    
    $
    (1,394
    )Options exercisable at October 31, 2005
    
    
    2,214
    
    
    $
    3.63
    
    
    
    6.9
    
    
    $
    (1,145
    )
   Three Months Ended October 31,2005
    
    
    2004Expected stock price volatility
    
    63% to 68%
    
    
    75
    %Expected life of options
    
    
    3 to 5 Years
    
    
    7 YearsRisk-free interest rate
    
    3.6% to 3.7%
    
    
    3.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
  7




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Three Months EndedOctober 31, 2004Net loss attributable to common shareholders:As reported
    
    $
    (2,722
    )Add: Compensation expense for equity awards recorded at fair value included in the
determination of net loss as reported
    
    
    6Less: Compensation expense determined under fair value based method for all awards, net
of related tax effects
    
    
    (384
    )Pro-forma net loss
    
    $
    (3,100
    )Net loss attributable to common shareholders per basic and diluted share outstanding:As reported
    
    $
    (0.06
    )Pro forma
    
    $
    (0.07
    )
 3. DISCONTINUED OPERATION
    Three Months Ended October 31,2005
    
    
    2004Net revenues
    
    $
    
    
    
    $
    1,692Income (loss) from operations
    
    $
    (3
    )
    
    $
    491
 4. NET LOSS PER COMMON SHARE
  5. INVENTORIES
  October 31,
    
    
    July 31,2005
    
    
    2005Finished goods
    
    $
    1,094
    
    
    $
    732Work in process
    
    
    874
    
    
    
    579Raw materials
    
    
    5,377
    
    
    
    4,853Inventory reserves
    
    
    (153
    )
    
    
    (140
    )Total inventories
    
    $
    7,192
    
    
    $
    6,024
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6. INTANGIBLE ASSETS
  October 31, 2005
    
    
    July 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangibles:Purchased technology rights
    
    $
    7,419
    
    
    $
    4,507
    
    
    $
    2,912
    
    
    $
    7,419
    
    
    $
    4,387
    
    
    $
    3,032Trademarks and other intangible assets:Trademarks
    
    
    11,691
    
    
    
    3,720
    
    
    
    7,971
    
    
    
    11,657
    
    
    
    3,602
    
    
    
    8,055Patents
    
    
    3,271
    
    
    
    705
    
    
    
    2,566
    
    
    
    3,168
    
    
    
    624
    
    
    
    2,544Licensing costs
    
    
    3,162
    
    
    
    1,147
    
    
    
    2,015
    
    
    
    3,162
    
    
    
    1,108
    
    
    
    2,054Total trademarks and other intangible assets
    
    
    18,124
    
    
    
    5,572
    
    
    
    12,552
    
    
    
    17,987
    
    
    
    5,334
    
    
    
    12,653Total amortizable intangible assets
    
    
    25,543
    
    
    
    10,079
    
    
    
    15,464
    
    
    
    25,406
    
    
    
    9,721
    
    
    
    15,685Unamortizable intangible asset:Goodwill
    
    
    12,401
    
    
    
    5,471
    
    
    
    6,930
    
    
    
    12,401
    
    
    
    5,471
    
    
    
    6,930Total intangible assets
    
    $
    37,944
    
    
    $
    15,550
    
    
    $
    22,394
    
    
    $
    37,807
    
    
    $
    15,192
    
    
    $
    22,615
   7. DEBT AND LEASE OBLIGATIONS
  October 31,
    
    
    July 31,2005
    
    
    2005Short-term borrowings:Installment note payable on insurance policies
    
    $
    320
    
    
    $
    154Current portion of long-term debt:IDA bond payable, Series A, current portion
    
    $
    245
    
    
    $
    245Capital lease obligations, current portion
    
    
    50
    
    
    
    50Note payable for equipment
    
    
    15
    
    
    
    29Total current portion of long-term debt
    
    $
    310
    
    
    $
    324Long-term debt:IDA bond payable, Series A
    
    $
    2,905
    
    
    $
    2,967PharmaBio
    
    
    500
    
    
    
    500Capital lease obligations
    
    
    144
    
    
    
    156Note payable for equipment
    
    
    15
    
    
    
    29Total long-term debt
    
    
    3,564
    
    
    
    3,652Less current portion
    
    
    310
    
    
    
    324Long-term portion
    
    $
    3,254
    
    
    $
    3,328
  9




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Long-term
    
    
    Capital
    
    
    TotalDebt
    
    
    Leases
    
    
    DebtRemaining 2006
    
    $
    199
    
    
    $
    37
    
    
    $
    2362007
    
    
    245
    
    
    
    52
    
    
    
    2972008
    
    
    245
    
    
    
    43
    
    
    
    2882009
    
    
    745
    
    
    
    12
    
    
    
    7572010
    
    
    246
    
    
    
    
    
    
    
    2462011 and thereafter
    
    
    1,740
    
    
    
    
    
    
    
    1,740Total
    
    
    3,420
    
    
    
    144
    
    
    
    3,564Less current portion
    
    
    260
    
    
    
    50
    
    
    
    310Long-term portion
    
    $
    3,160
    
    
    $
    $94
    
    
    $
    3,254
 10




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8. INCOME TAXES
   9. ACCRUED LIABILITIES
  October 31,
    
    
    July 31,2005
    
    
    2005Accrued professional and consulting fees
    
    $
    1,420
    
    
    $
    1,248Accrued advertising
    
    
    993
    
    
    
    433Accrued employee compensation and related taxes
    
    
    824
    
    
    
    712Accrued royalties
    
    
    209
    
    
    
    815Other
    
    
    393
    
    
    
    510Total accrued liabilities
    
    $
    3,839
    
    
    $
    3,718
 10. SUPPLEMENTAL CASH FLOW INFORMATION
  Three Months Ended October 31,2005
    
    
    2004Interest paid
    
    $
    41
    
    
    $
    30Income taxes paid
    
    $
    102
    
    
    $
    
 11. SEGMENT INFORMATION
 : Advanced Protection
  Nutraceuticals
    
    
    Pharmaceuticals
    
    
    Biotechnology
    
    
    Corporate
    
    
    TotalNet revenues from continuing operations:2005
    
    $
    7,414
    
    
    $
    2,266
    
    
    $
    1
    
    
    $
    
    
    
    $
    9,6812004
    
    
    8,721
    
    
    
    1,155
    
    
    
    
    
    
    
    
    
    
    
    9,876Income (loss) from continuing operations
before income taxes:2005
    
    
    96
    
    
    
    (978
    )
    
    
    (2,136
    )
    
    
    (1,977
    )
    
    
    (4,995
    )2004
    
    
    1,347
    
    
    
    (701
    )
    
    
    (2,316
    )
    
    
    (1,531
    )
    
    
    (3,201
    )Identifiable assets from continuing operations:October 31, 2005
    
    
    32,796
    
    
    
    10,588
    
    
    
    14,034
    
    
    
    4,786
    
    
    
    62,204July 31, 2005
    
    
    34,083
    
    
    
    10,867
    
    
    
    19,076
    
    
    
    1,392
    
    
    
    65,418Depreciation and amortization:2005
    
    
    302
    
    
    
    170
    
    
    
    185
    
    
    
    52
    
    
    
    7092004
    
    
    281
    
    
    
    150
    
    
    
    173
    
    
    
    54
    
    
    
    658
 11




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12. COMMITMENTS AND CONTINGENCIES
 FDA approval of the OraTest® product
    ViziLite®
  Litigation
    12




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13. RECENT ACCOUNTING PRONOUNCEMENTS
 Practical
Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R
 Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards Accounting for Stock-Based Compensation.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 ZILA, INC. AND SUBSIDIARIES
 COMPANY OVERVIEW
   630
   13




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630
   RESULTS OF OPERATIONS
  Three months ended October 31, 2005 and 2004Percent of
    
    
    
    
    
    
    Percent ofNet
    
    
    
    
    
    
    Net2005
    
    
    Revenues
    
    
    2004
    
    
    Revenues
    
    
    ChangeNet revenues
    
    $
    9,681
    
    
    
    100
    %
    
    $
    9,876
    
    
    
    100
    %
    
    
    (2
    )%Cost of products sold
    
    
    4,024
    
    
    
    42
    
    
    
    3,470
    
    
    
    35
    
    
    
    (16
    )Gross profit
    
    
    5,657
    
    
    
    58
    
    
    
    6,406
    
    
    
    65
    
    
    
    (12
    )Operating Costs and Expenses:Marketing & selling
    
    
    4,781
    
    
    
    49
    
    
    
    4,279
    
    
    
    43
    
    
    
    (12
    )General & administrative
    
    
    3,363
    
    
    
    35
    
    
    
    2,718
    
    
    
    28
    
    
    
    (24
    )Research & development
    
    
    1,817
    
    
    
    19
    
    
    
    1,930
    
    
    
    19
    
    
    
    6Depreciation & amortization
    
    
    709
    
    
    
    7
    
    
    
    658
    
    
    
    7
    
    
    
    (8
    )10,670
    
    
    
    110
    
    
    
    9,585
    
    
    
    97
    
    
    
    (11
    )Loss from operations
    
    
    (5,013
    )
    
    
    (52
    )
    
    
    (3,179
    )
    
    
    (32
    )
    
    
    (58
    )Other income (expense), net
    
    
    18
    
    
    
    
    
    
    
    (22
    )
    
    
    
    
    
    
    182Loss before income taxes
    
    
    (4,995
    )
    
    
    (52
    )
    
    
    (3,201
    )
    
    
    (32
    )
    
    
    (56
    )Income tax expense
    
    
    (4
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (100
    )Net loss from continuing operations
    
    $
    (4,999
    )
    
    
    (52
    )
    
    $
    (3,203
    )
    
    
    (32
    )
    
    
    (56
    )
 14




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##### Table of Contents



Nutraceuticals Business Unit
  Three months ended October 31,2005
    
    2004
    
    ChangeNet revenues
    
    $
    7,414
    
    
    $
    8,721
    
    
    
    (15
    )%Gross profit
    
    
    4,598
    
    
    
    5,955
    
    
    
    (23
    )Gross profit %
    
    
    62
    %
    
    
    68
    %Income from operations before income taxes
    
    
    96
    
    
    
    1,347
    
    
    
    (93
    )
  15




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##### Table of Contents



Pharmaceuticals Business Unit
  Three months ended October 31,2005
    
    2004
    
    ChangeNet revenues
    
    $
    2,266
    
    
    $
    1,155
    
    
    
    96
    %Gross profit
    
    
    1,060
    
    
    
    455
    
    
    
    133Gross profit %
    
    
    47
    %
    
    
    39
    %Loss from continuing operations before income taxes.
    
    
    (978
    )
    
    
    (701
    )
    
    
    (40
    )
   630
 Biotechnology Business Unit
  Three months ended October 31,2005
    
    
    2004
    
    
    ChangeNet revenues
    
    $
    1
    
    
    $
    Research and development
    
    
    1,680
    
    
    
    1,854
    
    
    
    (9
    )%Loss from operations before income taxes
    
    
    (2,136
    )
    
    
    (2,316
    )
    
    
    8
 16




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##### Table of Contents



Inflation and Seasonality
  LIQUIDITY AND CAPITAL RESOURCES
   Three months ended October 31,2005
    
    2004Net cash used in operating activities
    
    $
    (1,974
    )
    
    $
    (1,576
    )Net used in investing activities
    
    
    (785
    )
    
    
    (590
    )Net cash provided by financing activities
    
    
    127
    
    
    
    192
 October 31, 2005
    
    July 31, 2005Cash and cash equivalents
    
    $
    10,305
    
    
    $
    12,938Working capital
    
    
    17,785
    
    
    
    22,824Current ratio.
    
    
    2.53
    
    
    
    3.33
    Operating Activities
  17




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##### Table of Contents



Investing Activities
  Financing Activities
  Bank Financing
   PharmaBio Investment
  Long-Term Debt Financing
  18




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##### Table of Contents



DISCLOSURES ABOUT CONTRACTUAL OBLIGATION AND COMMERCIAL COMMITMENTS
  SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Revenue Recognition
   Use of Estimates
     19




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##### Table of Contents



Goodwill, Intangibles and Other Long-Lived Assets
   Zila Pharmaceuticals Goodwill
 Zila Nutraceuticals Goodwill
 OraTest®
 Income Taxes 
 20




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##### Table of Contents



FORWARD-LOOKING INFORMATION
  
    
    Obtaining regulatory approvals for our products is costly and full of uncertainty.
    
    We may be unable to obtain FDA approval, or to establish a market, for OraTest® in the United States.
    
    We are dependent on a few key products and our growth is dependent on the development of new products.
    
    We are dependent on a few key customers.
    
    We are dependent on our senior management and other key personnel.
    
    We and our products are subject to regulatory oversight that could substantially interfere with our ability to do business.
    
    We are at risk with respect to product liability claims.
    
    We face significant competition that could adversely affect our results of operation and financial condition.
    
    If we fail to secure and then enforce patents and other
intellectual property rights underlying our technologies, or if the
use of our technology is determined to infringe on the intellectual
property rights of others, our business could be
harmed.
    
    We require certain raw materials for our manufacturing processes that may only be acquired through limited sources.
    
    If we are unable to obtain adequate funds, we may not be able to develop and market our present and potential products.
    
    In the past, we have experienced volatility in the market price of our common stock and we may experience such volatility
in the future.
    
    Our Board of Directors may unilaterally issue Preferred Stock which could dilute our ownership and prevent or delay
a change in our control.
    
    If we use environmentally hazardous materials in a manner that causes injury, we may be liable for damages.
    
    We have, in the past, received minor deficiencies from regulatory agencies related to our manufacturing facilities.
  21




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##### Table of Contents



EBITDA
   Reconciliation of GAAP Measures to Non-GAAP Measures
Unaudited
(in thousands)
 Three months ended October 31,2005
    
    
    2004EBITDA
    
    $
    (4,321
    )
    
    $
    (2,038
    )Interest income
    
    
    84
    
    
    
    52Interest expense
    
    
    (52
    )
    
    
    (48
    )Depreciation and amortization
    
    
    (709
    )
    
    
    (676
    )Income tax expense
    
    
    (4
    )
    
    
    (2
    )Net loss
    
    $
    (5,002
    )
    
    $
    (2,712
    )
 RECENT ACCOUNTING PRONOUNCEMENTS
 Practical
Accommodation to the Application of Grant Date as Defined in FASB Statement No. 123R
 Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards, Accounting for Stock-Based Compensation.
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
   22




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##### Table of Contents



Item 4.
Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
   Changes in Internal Control over Financial Reporting
  
 Part II  Other Information
 
 Item 1.
Legal Proceedings.
 Legal Proceedings,
 
 Item 2. Unregistered Sales of Securities and Use of Proceeds.
  
 Item 3. Defaults upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders
  23




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##### Table of Contents



Item 5.
Other Information.
  
 Item 6.
Exhibits.
 Exhibit Number
    
    Description10.1(A)
    
    Third Amendment to Credit and Security Agreement dated October 27, 2005 between Zila
Nutraceuticals, Inc., Zila Biotechnology, Inc., Zila Pharmaceuticals, Inc., Zila Swab
Technologies, Inc. and Wells Fargo Business Credit31.1*
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)31.2*
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith)32.1**
    
    Certification of the Chief Executive Officer and the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)32.2**
    
    Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished herewith)*
    
    Filed herewith**
    
    Furnished herewith(A)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed November 2, 2005
 
 SIGNATURES
  Date: December 8, 2005
    By:
    /s/Andrew A. StevensAndrew A. StevensVice President and Chief Financial Officer
(Principal Financial Officer) 24




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit Number
    
    Description10.1(A)
    
    Third Amendment to Credit and Security Agreement dated October 27, 2005 between Zila Nutraceuticals,
Inc., Zila Biotechnology, Inc., Zila Pharmaceuticals, Inc., Zila Swab Technologies, Inc. and Wells
Fargo Business Credit31.1*
    
    Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 200231.2*
    
    Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 200232.1**
    
    Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act of 200232.2**
    
    Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act 0f 2002*
    
    Filed herewith**
    
    Furnished herewith(A)
    
    Incorporated by reference to the Companys Current Report on Form 8-K filed November 2, 2005
 25