UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended January 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-17521
 Zila, Inc.
 (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    86-0619668(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation)
    
    Identification No.)
 16430 North Scottsdale Road, Suite 450, Scottsdale, Arizona, 85254-1770  (Address of Principal Executive Offices) (Zip Code)
 (602) 266-6700  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
Accelerated
filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o
 o þ




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##### 



TABLE OF CONTENTS
    
    PAGEPART I  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of January 31, 2009 (unaudited) and July 31, 2008
    
    2Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended
        January 31, 2009 and 2008
    
    3Unaudited Condensed Consolidated Statement of Shareholders Equity for the Six
        Months Ended January 31, 2009
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended
        January 31, 2009 and 2008
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    33Item 4.
    
    Controls and Procedures
    
    34PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    34Item 1A.
    Risk Factors
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    41Item 3.
    
    Defaults Upon Senior Securities
    
    41Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    41Item 5.
    
    Other Information
    
    42Item 6.
    
    Exhibits
    
    42Signatures
    
    43
  1




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##### 



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ZILA,
INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 January 31,
    
    
    July 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,512,768
    
    
    $
    4,462,328Trade receivables  net of allowances of $271,000 and $229,000
    
    
    4,309,757
    
    
    
    5,252,215Inventories  net
    
    
    3,238,154
    
    
    
    3,107,152Prepaid expenses and other current assets
    
    
    1,332,434
    
    
    
    1,853,373Total current assets
    
    
    11,393,113
    
    
    
    14,675,068Property and equipment  net
    
    
    4,732,356
    
    
    
    5,317,061Goodwill
    
    
    
    
    
    
    10,171,351Purchased technology  net
    
    
    2,338,467
    
    
    
    8,860,475Trademarks and other intangible assets  net
    
    
    2,134,768
    
    
    
    9,533,024Other assets
    
    
    1,387,851
    
    
    
    1,813,512Total assets
    
    $
    21,986,555
    
    
    $
    50,370,491LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,808,820
    
    
    $
    3,843,262Accrued liabilities
    
    
    3,372,206
    
    
    
    4,059,017Deferred gain on sale leaseback
    
    
    
    
    
    
    75,659Short-term borrowings and current portion of long-term debt
    
    
    9,512,023
    
    
    
    71,252Current liabilities of discontinued operations
    
    
    48,486
    
    
    
    67,532Total current liabilities
    
    
    15,741,535
    
    
    
    8,116,722Long-term debt  net of current portion
    
    
    503,319
    
    
    
    8,974,048Total liabilities
    
    
    16,244,854
    
    
    
    17,090,770Shareholders equity:Preferred stock  Series B, $.001 par value  2,500,000 shares authorized,
100,000 shares issued and outstanding, liquidation preference of $650,000
    
    
    462,500
    
    
    
    462,500Common stock, $.001 par value  147,500,000 shares authorized,
10,436,758 and 9,953,818 shares issued and outstanding
    
    
    10,437
    
    
    
    69,677Additional paid-in capital
    
    
    126,496,048
    
    
    
    125,901,682Accumulated deficit
    
    
    (120,545,765
    )
    
    
    (92,471,235
    )Accumulated other comprehensive loss
    
    
    (130,448
    )
    
    
    (131,832
    )Treasury stock, at cost (31,202 common shares)
    
    
    (551,071
    )
    
    
    (551,071
    )Total shareholders equity
    
    
    5,741,701
    
    
    
    33,279,721Total liabilities and shareholders equity
    
    $
    21,986,555
    
    
    $
    50,370,491
  2




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##### 



ZILA, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended January 31,
    
    
    Six Months Ended January 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    8,512,836
    
    
    $
    10,490,657
    
    
    $
    18,153,685
    
    
    $
    21,931,094Cost of products sold
    
    
    3,772,437
    
    
    
    4,244,551
    
    
    
    7,548,439
    
    
    
    8,826,203Gross profit
    
    
    4,740,399
    
    
    
    6,246,106
    
    
    
    10,605,246
    
    
    
    13,104,891Operating costs and expenses:Marketing and selling
    
    
    3,348,322
    
    
    
    5,220,677
    
    
    
    7,719,303
    
    
    
    10,517,274General and administrative
    
    
    1,813,211
    
    
    
    3,128,326
    
    
    
    4,036,253
    
    
    
    6,602,003Impairment of goodwill
and other intangible assets
    
    
    23,192,967
    
    
    
    
    
    
    
    23,192,967
    
    
    
    Research and development
    
    
    77,884
    
    
    
    788,883
    
    
    
    244,406
    
    
    
    1,990,668Depreciation and amortization
    
    
    610,931
    
    
    
    943,711
    
    
    
    1,534,800
    
    
    
    1,858,724Total operating costs and expenses
    
    
    29,043,315
    
    
    
    10,081,597
    
    
    
    36,727,729
    
    
    
    20,968,669Loss from operations
    
    
    (24,302,916
    )
    
    
    (3,835,491
    )
    
    
    (26,122,483
    )
    
    
    (7,863,778
    )Other income (expense):Interest income
    
    
    
    
    
    
    73,319
    
    
    
    15,816
    
    
    
    197,501Interest expense
    
    
    (893,926
    )
    
    
    (800,819
    )
    
    
    (1,816,317
    )
    
    
    (1,567,527
    )Derivative  expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,600
    )Other expense
    
    
    (42,289
    )
    
    
    (25,812
    )
    
    
    (90,110
    )
    
    
    (3,040
    )Other expense  net
    
    
    (936,215
    )
    
    
    (753,312
    )
    
    
    (1,890,611
    )
    
    
    (1,396,666
    )Loss from continuing operations before income taxes
    
    
    (25,239,131
    )
    
    
    (4,588,803
    )
    
    
    (28,013,094
    )
    
    
    (9,260,444
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (13,197
    )
    
    
    (11,592
    )Loss from continuing operations
    
    
    (25,239,131
    )
    
    
    (4,588,803
    )
    
    
    (28,026,291
    )
    
    
    (9,272,036
    )Loss from discontinued operations,
net of income tax expense of nil
    
    
    (17,504
    )
    
    
    (146,765
    )
    
    
    (28,739
    )
    
    
    (319,034
    )Net loss
    
    
    (25,256,635
    )
    
    
    (4,735,568
    )
    
    
    (28,055,030
    )
    
    
    (9,591,070
    )Preferred stock dividends
    
    
    9,750
    
    
    
    9,750
    
    
    
    19,500
    
    
    
    19,500Net loss attributable to common shareholders
    
    $
    (25,266,385
    )
    
    $
    (4,745,318
    )
    
    $
    (28,074,530
    )
    
    $
    (9,610,570
    )Basic and diluted net loss per common share:Loss from continuing operations
    
    $
    (2.43
    )
    
    $
    (0.52
    )
    
    $
    (2.76
    )
    
    $
    (1.05
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.04
    )Net loss attributable to common shareholders
    
    $
    (2.43
    )
    
    $
    (0.54
    )
    
    $
    (2.76
    )
    
    $
    (1.09
    )Weighted average common shares
outstanding  basic and diluted
    
    
    10,398,407
    
    
    
    8,782,660
    
    
    
    10,171,558
    
    
    
    8,777,346
  3




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##### 



ZILA, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the Six Months Ended January 31, 2009
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Stock
    
    
    EquityBalance  July 31, 2008
    
    
    100,000
    
    
    $
    462,500
    
    
    
    9,953,818
    
    
    $
    69,677
    
    
    $
    125,901,682
    
    
    $
    (92,471,235
    )
    
    $
    (131,832
    )
    
    $
    (551,071
    )
    
    $
    33,279,721Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    50,475
    
    
    
    211
    
    
    
    319,676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,887Common shares withheld
for income taxes
    
    
    
    
    
    
    
    
    
    
    (13,675
    )
    
    
    (51
    )
    
    
    (32,561
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,612
    )Issuance of common stock
under employee stock
purchase plan
    
    
    
    
    
    
    
    
    
    
    11,057
    
    
    
    47
    
    
    
    2,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,518Effect of reverse stock
split approved on
September 12, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59,882
    )
    
    
    59,882
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares issued for payment
of interest
    
    
    
    
    
    
    
    
    
    
    435,083
    
    
    
    435
    
    
    
    244,898
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    245,333Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,384
    
    
    
    
    
    
    
    1,384Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,500
    )
    
    
    
    
    
    
    
    
    
    
    (19,500
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,055,030
    )
    
    
    
    
    
    
    
    
    
    
    (28,055,030
    )Balance  January 31, 2009
    
    
    100,000
    
    
    $
    462,500
    
    
    
    10,436,758
    
    
    $
    10,437
    
    
    $
    126,496,048
    
    
    $
    (120,545,765
    )
    
    $
    (130,448
    )
    
    $
    (551,071
    )
    
    $
    5,741,701
  4




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##### 



ZILA, INC. AND SUBSIDIARIES
 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months Ended January 31,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (28,055,030
    )
    
    $
    (9,591,070
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation and amortization
    
    
    1,762,678
    
    
    
    2,084,687Non-cash amortization of financing costs
    
    
    451,694
    
    
    
    196,190Non-cash amortization of debt discounts
    
    
    897,342
    
    
    
    898,160Non-cash interest
    
    
    245,333
    
    
    
    245,334Non-cash derivative (income) expense
    
    
    
    
    
    
    23,600Non-cash stock-based compensation expense
    
    
    320,494
    
    
    
    976,382Impairment of goodwill and other intangible assets
    
    
    23,192,967
    
    
    
    Other non-cash items  net
    
    
    (15,232
    )
    
    
    18,026Changes in operating assets and liabilities:Trade receivables
    
    
    942,458
    
    
    
    (1,522,957
    )Inventories
    
    
    (131,002
    )
    
    
    (273,475
    )Prepaid expenses and other assets
    
    
    688,443
    
    
    
    65,565Accounts payable and accrued liabilities
    
    
    (1,769,165
    )
    
    
    194,859Net cash used in operating activities
    
    
    (1,469,020
    )
    
    
    (6,684,699
    )Cash flows from investing activities:Additions to property and equipment
    
    
    (150,614
    )
    
    
    (549,234
    )Additions to intangible assets
    
    
    (197,844
    )
    
    
    (205,510
    )Proceeds from sale of assets
    
    
    6,344
    
    
    
    462Net cash used in investing activities
    
    
    (342,114
    )
    
    
    (754,282
    )Cash flows from financing activities:Principal payments on debt
    
    
    (120,837
    )
    
    
    (127,400
    )Payment of obligation to repurchase common stock and warrants
    
    
    
    
    
    
    (1,399,993
    )Dividends paid to preferred stockholders
    
    
    (19,500
    )
    
    
    (19,500
    )Proceeds from issuance of common stock
    
    
    1,911
    
    
    
    11,200Net cash used in financing activities
    
    
    (138,426
    )
    
    
    (1,535,693
    )Net decrease in cash and cash equivalents
    
    
    (1,949,560
    )
    
    
    (8,974,674
    )Cash and cash equivalents  beginning of period
    
    
    4,462,328
    
    
    
    14,859,159Cash and cash equivalents  end of period
    
    $
    2,512,768
    
    
    $
    5,884,485
  5




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##### 



ZILA, INC. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. Description of Business and Basis of Presentation
 Nature of Business Activities and Basis of Presentation
 ® ® ® ® ® ®
     6




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##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Three Months Ended January 31,
    
    Six Months Ended January 31,2009
    
    2008
    
    2009
    
    2008Options and warrants to purchase common shares
    
    
    2
    
    
    
    44
    
    
    
    6
    
    
    
    62Common stock awards
    
    
    20
    
    
    
    51
    
    
    
    7
    
    
    
    52Convertible preferred stock
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    100Total potentially dilutive securities
    
    
    122
    
    
    
    195
    
    
    
    113
    
    
    
    214
  Liquidity
 ® ®
   7




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##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
      2. Recently Issued Accounting Pronouncements and Adopted Accounting
 Fair Value Measurements
     8




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##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Business Combinations
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
 Determination of
the Useful Life of Intangible Assets
 Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)
 9




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##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 3. Inventories
  January 31,
    
    
    July 31,2009
    
    
    2008(Unaudited)Finished goods
    
    $
    852
    
    
    $
    675Work-in-process
    
    
    421
    
    
    
    396Raw materials
    
    
    2,536
    
    
    
    2,470Inventory reserves
    
    
    (571
    )
    
    
    (434
    )Total inventories
    
    $
    3,238
    
    
    $
    3,107
 4. Property and Equipment
  January 31,
    
    
    July 31,2009
    
    
    2008(Unaudited)Land
    
    $
    529
    
    
    $
    529Building and improvements
    
    
    2,150
    
    
    
    2,132Furniture and equipment
    
    
    3,282
    
    
    
    3,408Leasehold improvements and other assets
    
    
    803
    
    
    
    823Production, laboratory and warehouse equipment
    
    
    4,582
    
    
    
    4,582Total property and equipment
    
    
    11,346
    
    
    
    11,474Less: Accumulated depreciation and amortization
    
    
    (6,614
    )
    
    
    (6,157
    )Property and equipment  net
    
    $
    4,732
    
    
    $
    5,317
  10




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##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 5. Goodwill and Other Intangible Assets
  January 31, 2009 (Unaudited)
    
    
    July 31, 2008Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangible assets:Purchased technology
    
    $
    9,517
    
    
    $
    (7,179
    )
    
    $
    2,338
    
    
    $
    15,592
    
    
    $
    (6,732
    )
    
    $
    8,860Trademarks
    
    
    174
    
    
    
    (26
    )
    
    
    148
    
    
    
    168
    
    
    
    (18
    )
    
    
    150Patents
    
    
    757
    
    
    
    (434
    )
    
    
    323
    
    
    
    2,019
    
    
    
    (385
    )
    
    
    1,634Licensing costs
    
    
    2,028
    
    
    
    (1,889
    )
    
    
    139
    
    
    
    2,674
    
    
    
    (1,777
    )
    
    
    897Customer relationships,
covenants not to
compete and other
    
    
    2,591
    
    
    
    (2,585
    )
    
    
    6
    
    
    
    3,556
    
    
    
    (2,153
    )
    
    
    1,403Total amortizable
intangible assets
    
    
    15,067
    
    
    
    (12,113
    )
    
    
    2,954
    
    
    
    24,009
    
    
    
    (11,065
    )
    
    
    12,944Unamortizable trademarks
    
    
    1,519
    
    
    
    
    
    
    
    1,519
    
    
    
    5,449
    
    
    
    
    
    
    
    5,449Total other intangible assets
    
    
    16,586
    
    
    
    (12,113
    )
    
    
    4,473
    
    
    
    29,458
    
    
    
    (11,065
    )
    
    
    18,393Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,171
    
    
    
    
    
    
    
    10,171Total intangible assets
    
    $
    16,586
    
    
    $
    (12,113
    )
    
    $
    4,473
    
    
    $
    39,629
    
    
    $
    (11,065
    )
    
    $
    28,564
  Weighted AverageRange of
    
    Remaining Useful LivesUseful Lives
    
    January 31, 2009
    
    July 31, 2008(Unaudited)Purchased technology
    
    15
    
    
    9.3
    
    
    
    11.5Trademarks
    
    7-10
    
    
    6.2
    
    
    
    6.6Patents
    
    4-17
    
    
    9.4
    
    
    
    7.4Licensing costs
    
    7-10
    
    
    3.0
    
    
    
    3.4Customer relationships, covenants
not to compete and other
    
    2-15
    
    
    2.9
    
    
    
    6.0
 Goodwill and Other Intangible Assets
 11




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    12




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Six Months Ended January 31, 2009Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NetCarrying
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    CarryingAmount -
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    Amortization
    
    
    Amount -Beginning
    
    
    
    
    
    
    
    
    
    
    Prior to
    
    
    Impairment
    
    
    Subsequent to
    
    
    Endof Period
    
    
    Additions
    
    
    Disposals
    
    
    Impairment
    
    
    Charge
    
    
    Impairment
    
    
    of PeriodAmortizable intangible assets:Purchased technology
    
    $
    8,860
    
    
    $
    
    
    
    $
    
    
    
    $
    (426
    )
    
    $
    (6,075
    )
    
    $
    (21
    )
    
    $
    2,338Trademarks
    
    
    150
    
    
    
    9
    
    
    
    (1
    )
    
    
    (7
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    148Patents
    
    
    1,634
    
    
    
    189
    
    
    
    (47
    )
    
    
    (47
    )
    
    
    (1,404
    )
    
    
    (2
    )
    
    
    323Licensing costs
    
    
    897
    
    
    
    
    
    
    
    
    
    
    
    (108
    )
    
    
    (646
    )
    
    
    (4
    )
    
    
    139Customer relationships,
covenants not to
compete and
other
    
    
    1,403
    
    
    
    
    
    
    
    
    
    
    
    (432
    )
    
    
    (965
    )
    
    
    
    
    
    
    6Total amortizable
intangible assets
    
    
    12,944
    
    
    
    198
    
    
    
    (48
    )
    
    
    (1,020
    )
    
    
    (9,092
    )
    
    
    (28
    )
    
    
    2,954Unamortizable trademarks
    
    
    5,449
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,930
    )
    
    
    
    
    
    
    1,519Total other intangible assets
    
    
    18,393
    
    
    
    198
    
    
    
    (48
    )
    
    
    (1,020
    )
    
    
    (13,022
    )
    
    
    (28
    )
    
    
    4,473Goodwill
    
    
    10,171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,171
    )
    
    
    
    
    
    
    Total intangible assets
    
    $
    28,564
    
    
    $
    198
    
    
    $
    (48
    )
    
    $
    (1,020
    )
    
    $
    (23,193
    )
    
    $
    (28
    )
    
    $
    4,473
  Six months ended July 31,
2009
    
    $
    166Fiscal year 2010
    
    
    331Fiscal year 2011
    
    
    331Fiscal year 2012
    
    
    239Fiscal year 2013
    
    
    183Fiscal year 2014
    
    
    174
  6. Accrued Liabilities
  January 31,
    
    
    July 31,2009
    
    
    2008(Unaudited)Accrued research and development
    
    $
    1,154
    
    
    $
    1,154Accrued employee compensation and related
taxes
    
    
    652
    
    
    
    1,000Accrued professional and consulting fees
    
    
    525
    
    
    
    795Other accrued expenses
    
    
    1,041
    
    
    
    1,110Total accrued expenses
    
    $
    3,372
    
    
    $
    4,059
 13




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 7. Debt
  January 31,
    
    
    July 31,2009
    
    
    2008(Unaudited)Short-term borrowings and current portion of long-term debt:Senior Secured Convertible Notes
    
    $
    12,000
    
    
    $
    Unamortized discount  Senior Secured Convertible
Notes
    
    
    (2,663
    )
    
    
    Senior Secured Convertible Notes  net
    
    
    9,337
    
    
    
    Short-term borrowings
    
    
    112
    
    
    
    Current portion of capital lease obligations
    
    
    63
    
    
    
    71Total short-term borrowings and current portion of long-term debt
    
    $
    9,512
    
    
    $
    71Long-term debt:Senior Secured Convertible Notes
    
    $
    
    
    
    $
    12,000Unamortized discount  Senior Secured Convertible
Notes
    
    
    
    
    
    
    (3,560
    )Senior Secured Convertible Notes  net
    
    
    
    
    
    
    8,440PharmaBio
    
    
    500
    
    
    
    500Capital lease obligations
    
    
    66
    
    
    
    105Total long-term debt
    
    
    566
    
    
    
    9,045Less: Current portion
    
    
    (63
    )
    
    
    (71
    )Long-term debt  net of current portion
    
    $
    503
    
    
    $
    8,974
 Short-term Borrowings
  Senior Secured Convertible Notes
  14




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    PharmaBio Development, Inc.
  8. Share-Based Payments
   Six Months Ended January 31,2009

    

    2008Risk-free interest
rate
    
    
    1.1
    %
    
    
    3.5
    %Expected volatility
    
    
    98
    %
    
    
    60
    %Expected term (in years)
    
    
    3.3
    %
    
    
    5.2Dividend yield
    
    
    0
    %
    
    
    0
    %
 15




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Share-Based Payment
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Exercise
    
    Contractual
    
    Intrinsicof Options
    
    Price
    
    Term (Years)
    
    ValueOptions outstanding  beginning of period
    
    
    515
    
    
    $
    11.55
    
    
    
    6.7
    
    
    $
    Granted
    
    
    50
    
    
    
    0.34Exercised
    
    
    
    
    
    
    Expired
    
    
    (69
    )
    
    
    7.94Forfeited
    
    
    (36
    )
    
    
    19.20Options outstanding  end of period
    
    
    460
    
    
    
    10.23
    
    
    
    5.6
    
    
    
    Options vested or expected to vest  end of
period
    
    
    435
    
    
    
    10.43
    
    
    
    5.4
    
    
    
    Options exercisable  end of period
    
    
    273
    
    
    
    12.78
    
    
    
    4.1
    
    
    
    
  WeightedWeighted
    
    AverageAverage
    
    RemainingNumber
    
    Grant
    
    Recognitionof Shares
    
    Value
    
    Period (Years)Unvested balance  beginning of period
    
    
    56
    
    
    $
    7.00
    
    
    
    1.1Granted
    
    
    21
    
    
    
    2.10Vested
    
    
    (50
    )
    
    
    5.29Forfeited
    
    
    (7
    )
    
    
    7.98Unvested balance  end of period
    
    
    20
    
    
    
    5.09
    
    
    
    0.7
  Three Months Ended January 31,
    
    
    Six Months Ended January 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Marketing and selling
expense
    
    $
    34
    
    
    $
    55
    
    
    $
    95
    
    
    $
    110General and administrative
expense
    
    
    81
    
    
    
    460
    
    
    
    180
    
    
    
    856Research and development
expense
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    2Inventory
    
    
    15
    
    
    
    7
    
    
    
    44
    
    
    
    8Total stock-based compensation
    
    $
    130
    
    
    $
    523
    
    
    $
    320
    
    
    $
    976
 16




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  9. Warrants
  10. Convertible Preferred Stock
  11. Treasury Stock
  12. Supplemental Cash Flow Information
  Six Months Ended January 31,2009
    
    2008Interest paid
    
    $
    7
    
    
    $
    235Income taxes paid
    
    
    10
    
    
    
    8Insurance policy financed with short-term
borrowings
    
    
    193
    
    
    
    275
 13. Comprehensive Loss
  Three Months Ended January 31,
    
    
    Six Months Ended January 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (25,257
    )
    
    $
    (4,736
    )
    
    $
    (28,055
    )
    
    $
    (9,591
    )Foreign currency translation adjustment
    
    
    
    
    
    
    24
    
    
    
    1
    
    
    
    11Comprehensive loss
    
    $
    (25,257
    )
    
    $
    (4,712
    )
    
    $
    (28,054
    )
    
    $
    (9,580
    )
 17




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 14. Commitments and Contingencies
 Legal Proceedings
   ® ®
 Indemnifications
  18




---



##### 



ZILA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Registration Payment Arrangements
  FDA Observation Letter
  Corporate Office Lease
  19




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Forward-Looking Statements
  Overview
 Business
 ® ® ® ® ® ®
 Recent Developments and Continuance of Operations
  20




---



##### 



21




---



##### 



Other Key Operating Initiatives
 ® ® ® ® ® ®
 ® ® ® ®
 ® ® ® ® ®
  22




---



##### 



Results of Operations
  For the Three Months Ended January 31,% of
    
    
    
    
    
    
    % of
    
    
    %2009
    
    
    Revenue
    
    
    2008
    
    
    Revenue
    
    
    ChangeNet revenues
    
    $
    8,513
    
    
    
    100.0
    %
    
    $
    10,491
    
    
    
    100.0
    %
    
    
    (18.9
    )%Cost of products sold
    
    
    3,773
    
    
    
    44.3
    
    
    
    4,245
    
    
    
    40.5
    
    
    
    (11.1
    )Gross profit
    
    
    4,740
    
    
    
    55.7
    
    
    
    6,246
    
    
    
    59.5
    
    
    
    (24.1
    )Operating costs and expenses:Marketing and selling
    
    
    3,348
    
    
    
    39.3
    
    
    
    5,221
    
    
    
    49.8
    
    
    
    (35.9
    )General and administrative
    
    
    1,813
    
    
    
    21.3
    
    
    
    3,127
    
    
    
    29.8
    
    
    
    (42.0
    )Impairment of goodwill
and other intangible assets
    
    
    23,193
    
    
    
    272.4
    
    
    
    
    
    
    
    Research and development
    
    
    78
    
    
    
    0.9
    
    
    
    789
    
    
    
    7.5
    
    
    
    (90.1
    )Depreciation and amortization
    
    
    611
    
    
    
    7.3
    
    
    
    944
    
    
    
    9.0
    
    
    
    (35.3
    )Loss from operations
    
    
    (24,303
    )
    
    
    (285.5
    )
    
    
    (3,835
    )
    
    
    (36.6
    )
    
    
    533.7Other expense  net
    
    
    (936
    )
    
    
    (11.0
    )
    
    
    (754
    )
    
    
    (7.1
    )
    
    
    24.1Loss from continuing operations
    
    $
    (25,239
    )
    
    
    (296.5
    )
    
    $
    (4,589
    )
    
    
    (43.7
    )
    
    
    450.0
 For the Six Months Ended January 31,% of
    
    
    
    
    
    
    % of
    
    
    %2009
    
    
    Revenue
    
    
    2008
    
    
    Revenue
    
    
    ChangeNet revenues
    
    $
    18,154
    
    
    
    100.0
    %
    
    $
    21,931
    
    
    
    100.0
    %
    
    
    (17.2
    )%Cost of products sold
    
    
    7,549
    
    
    
    41.6
    
    
    
    8,826
    
    
    
    40.2
    
    
    
    (14.5
    )Gross profit
    
    
    10,605
    
    
    
    58.4
    
    
    
    13,105
    
    
    
    59.8
    
    
    
    (19.1
    )Operating costs and expenses:Marketing and selling
    
    
    7,719
    
    
    
    42.5
    
    
    
    10,517
    
    
    
    48.0
    
    
    
    (26.6
    )General and administrative
    
    
    4,036
    
    
    
    22.2
    
    
    
    6,602
    
    
    
    30.1
    
    
    
    (38.9
    )Impairment of goodwill
and other intangible assets
    
    
    23,193
    
    
    
    127.8
    
    
    
    
    
    
    
    Research and development
    
    
    244
    
    
    
    1.3
    
    
    
    1,991
    
    
    
    9.1
    
    
    
    (87.7
    )Depreciation and amortization
    
    
    1,535
    
    
    
    8.5
    
    
    
    1,859
    
    
    
    8.5
    
    
    
    (17.4
    )Loss from operations
    
    
    (26,122
    )
    
    
    (143.9
    )
    
    
    (7,864
    )
    
    
    (35.9
    )
    
    
    232.2Other expense  net
    
    
    (1,891
    )
    
    
    (10.4
    )
    
    
    (1,396
    )
    
    
    (6.3
    )
    
    
    35.5Loss from continuing operations
before income taxes
    
    
    (28,013
    )
    
    
    (154.3
    )
    
    
    (9,260
    )
    
    
    (42.2
    )
    
    
    202.5Income tax expense
    
    
    (13
    )
    
    
    (0.1
    )
    
    
    (12
    )
    
    
    (0.1
    )
    
    
    8.3Loss from continuing operations
    
    $
    (28,026
    )
    
    
    (154.4
    )%
    
    $
    (9,272
    )
    
    
    (42.3
    )%
    
    
    202.3
 23




---



##### 



Net Revenues
 ® ® ® ® ®
 Gross Profit
  Marketing and Selling Expense
  General and Administrative Expense
  24




---



##### 



Three Months Ended January 31,
    
    
    Six Months Ended January 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Cash basis salaries and benefits
    
    $
    712
    
    
    $
    1,136
    
    
    $
    1,531
    
    
    $
    2,346Audit, accounting and other professional
fees
    
    
    272
    
    
    
    405
    
    
    
    802
    
    
    
    1,276Investment banking fees and
shareholder related expense
    
    
    160
    
    
    
    165
    
    
    
    296
    
    
    
    243Legal and intellectual property related fees
    
    
    147
    
    
    
    359
    
    
    
    386
    
    
    
    652Insurance
    
    
    114
    
    
    
    119
    
    
    
    224
    
    
    
    248Non-cash stock-based compensation expense
    
    
    81
    
    
    
    460
    
    
    
    180
    
    
    
    856Other general and administrative expense
    
    
    327
    
    
    
    483
    
    
    
    617
    
    
    
    981Total general and administrative expense
    
    $
    1,813
    
    
    $
    3,127
    
    
    $
    4,036
    
    
    $
    6,602
 Impairment of Goodwill and Other Intangible Assets
   Research and Development Expense
  Depreciation and Amortization Expense
  25




---



##### 



Other Expense  Net
  Three Months Ended January 31,
    
    
    Six Months Ended January 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Senior secured convertible
notes
    
    $
    215
    
    
    $
    245
    
    
    $
    460
    
    
    $
    461Amortization of financing costs
    
    
    226
    
    
    
    97
    
    
    
    452
    
    
    
    196Amortization of debt discounts
    
    
    448
    
    
    
    451
    
    
    
    897
    
    
    
    898Capital leases and other
    
    
    5
    
    
    
    8
    
    
    
    7
    
    
    
    13Total interest expense
    
    $
    894
    
    
    $
    801
    
    
    $
    1,816
    
    
    $
    1,568
  Income Taxes
  Inflation and Seasonality
  Liquidity and Capital Resources
 Overview
 ® ®
 ® ®
 26




---



##### 



27




---



##### 



Selected Cash Flow and Working Capital Information
  Six Months Ended January 31,2009
    
    2008Net cash used in operating activities
    
    $
    (1,469
    )
    
    $
    (6,685
    )Net cash used in investing activities
    
    
    (342
    )
    
    
    (754
    )Net cash used in financing activities
    
    
    (138
    )
    
    
    (1,536
    )
 January 31,
    
    July 31,2009
    
    2008Cash and cash equivalents
    
    $
    2,513
    
    
    $
    4,462Working capital
    
    
    (4,348
    )
    
    
    6,558Current ratio
    
    
    0.7
    
    
    
    1.8
  Cash Flows from Operating Activities
  Cash Flows from Investing Activities
  Cash Flows from Financing Activities
  28




---



##### 



Senior Secured Convertible Notes
     PharmaBio Development, Inc.
  29




---



##### 



Convertible Preferred Stock
  Off-Balance Sheet Financing Arrangements
  Summary of Critical Accounting Policies and Estimates
   30




---



##### 



Goodwill and Other
Intangible Assets
    31




---



##### 



Recently Issued Accounting Pronouncements and Adopted Accounting
 Fair Value Measurements
       32




---



##### 



Noncontrolling Interests in Consolidated
Financial Statements  an amendment of ARB No. 51
 Business Combinations
 Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133
 Determination of
the Useful Life of Intangible Assets
 Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
   33




---



##### 



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.
  
 Item 1A. Risk Factors.
 You should consider carefully the risk factors described below, and all other information
contained in this filing and our other filings made with the SEC, before deciding to invest in our
common stock. If any of the following risks actually occur, they may materially harm our business,
financial condition, operating results or cash flow. As a result, the market price of our common
stock could decline, and you could lose all or part of your investment. Additional risks and
uncertainties that are not yet identified or that we think are immaterial may also materially harm
our business, operating results or financial condition and could result in a complete loss of your
investment.
 Trends, Risks and Uncertainties Related to Our Business
 We are in default with respect to our Senior Secured Convertible Notes.
  34




---



##### 



Adverse economic conditions could negatively affect our business and operating results.
 ®
 Our lack of earnings history could adversely affect our financial health and prevent us from
fulfilling our payment obligations, and if we are unable to generate funds or obtain funds on
acceptable terms, we may not be able to develop and market our present and potential products.
 ® ®
     35




---



##### 




    
    making it more difficult for us to satisfy our obligations with respect to our Senior
Secured Convertible Notes;
    
    increasing our vulnerability to general adverse economic and industry conditions;
    
    limiting our flexibility in planning for, or reacting to, changes in our business and
our industry;
    
    restricting us from making strategic acquisitions, introducing new products or
exploiting business opportunities;
    
    requiring us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, which will reduce the amount of our cash flow available for
other purposes, including capital expenditures and other general corporate purposes;
    
    requiring us to sell debt securities or to sell some of our core assets, possibly on
unfavorable terms;
    
    limiting our ability to obtain additional financing; and
    
    placing us at a possible competitive disadvantage compared to our competitors that may
have greater financial resources.
 We may not be able to maintain compliance with our debt covenants in the future.
   36




---



##### 



The restrictive covenants contained in our senior debt could adversely affect our business by
limiting our flexibility.
   Historically we have been dependent on a few key products and our future growth is dependent on the
growth of ViziLite ® Plus and on the development and/or acquisition of new products.
 ® ® ® ® ® ®
 ®
 ®
 37




---



##### 




    
    difficulties in the production process, controlling the costs to produce, market and
distribute the product on a commercial scale, and our ability to do so with favorable gross
margins and otherwise on a profitable basis;
    
    the inherent difficulty of gaining market acceptance for a new product;
    
    competition from larger, more established companies with greater resources;
    
    changes in raw material supplies that could result in production delays and higher raw
material costs;
    
    difficulties in promoting consumer awareness for the new product;
    
    adverse publicity regarding the industries in which we market our products; and
    
    the cost, timing and ultimate results of regulatory program studies that we undertake.
 Our proprietary rights may prove difficult to enforce.
  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.
  38




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We face significant competition that could adversely affect our results of operation and financial
condition.
  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.
  We have, in the past, received minor deficiencies from regulatory agencies related to our
manufacturing facilities.
  39




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Trends, Risks and Uncertainties Related to Our Capital Stock
 The Private Placements and other financing arrangements or corporate events could significantly
dilute existing ownership.
    In the past, we have experienced volatility in the market price of our common stock and we may
experience such volatility in the future.
   We may take actions which could dilute current equity ownership or prevent or delay a change in our
control.
  40




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Failure to maintain NASDAQ Marketplace Rules could materially and adversely affect our business.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Number of SharesName
    
    For
    
    WithheldDavid R. Bethune
    
    
    7,129,338
    
    
    
    595,409J. Steven Garrett
    
    
    6,817,301
    
    
    
    907,446Wade R. Brooksby
    
    
    7,193,853
    
    
    
    530,894Leslie H. Green
    
    
    6,790,530
    
    
    
    934,217O.B. Parrish
    
    
    6,711,762
    
    
    
    1,012,985George J. Vuturo
    
    
    6,866,647
    
    
    
    858,100
  For
    
    Against
    
    Abstain7,587,768
    
    95,049
    
    41,930
 41




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##### 



Item 5. Other Information.
  
 Item 6. Exhibits.
 ExhibitNumber
    
    Description31.1
    
    
    Section 302 Certification of the Principal Executive Officer31.2
    
    
    Section 302 Certification of the Principal Financial Officer32.1
    
    
    Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer
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##### 



SIGNATURES
  Date: March 17, 2009
    Zila, Inc.By:
    /s/ DAVID R. BETHUNEDavid R. BethuneChairman and Interim Chief Executive Officer
(Principal Executive Officer)By:
    /s/ DIANE E. KLEINDiane E. KleinVice President  Finance and Treasurer
(Principal Financial Officer) ExhibitNumber
    
    Description31.1
    
    
    Section 302 Certification of the Principal Executive Officer31.2
    
    
    Section 302 Certification of the Principal Financial Officer32.1
    
    
    Section 1350 Certification of the Principal Executive Officer and Principal Financial Officer
 43