##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 Form 10-Q/A
 
 (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, 2007
 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.)
 
 5227 North 7th Street, Phoenix, Arizona 85014-2800  (Address of Principal Executive Offices and Zip Code)  (602) 266-6700  (Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### Table of Contents



Explanatory Paragraph
 
 
  
 
  
 1.
    
    Part I. Item 1. Financial Statements.
 
 a.
    
    The consolidated balance sheet as of July 31, 2006 was reclassified, along with
related footnote disclosures, to separately state the assets and liabilities of
discontinued operations. As discussed in Note 4, following approval of our shareholders,
we completed the sale of our Nutraceuticals Business Unit on October 2, 2006. In our
Original Filing, we reflected only the results of operations of the Nutraceuticals
Business Unit as discontinued operations under the requirements of Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144);b.
    
    The disclosure for the liquidation preference for our Series B Preferred Stock in
the consolidated balance sheets was changed from a per share amount to an aggregate
amount of $650,000.c.
    
    A paragraph was added to Note 6 Intangible Assets, to present the weighted
average useful lives of each category of intangible assets.
 
 2.
    
    Part I. Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations.
 
 a.
    
    Under the section entitled EBITDA, the table under the caption, Reconciliation
of GAAP Measures to Non-GAAP Measures, was revised to reconcile EBITDA (earnings before
interest, taxes, depreciation and amortization) to the net cash used from operating
activities in the Statement of Changes in Cash flows and to delete references to EBITDA
as a measure of operating performance.
 
 
  
 2




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##### 



ZILA, INC.
QUARTERLY REPORT ON FORM 10-Q/A
FOR THE QUARTER ENDED JANUARY 31, 2007
TABLE OF CONTENTS
 
 PagePart I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of January 31, 2007 and July 31, 2006
    
    
    3Consolidated Statements of Operations for the three and six month periods ended January 31, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the three and six month periods ended January 31, 2007 and 2006
    
    
    5Consolidated Statements of Shareholders Equity for the six month periods ended January 31, 2007 and 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    38SIGNATURES
    
    
    40EX-31.1EX-31.2EX-32.1EX-32.2EX-31.1EX-31.2EX-32.1EX-32.2
 
  3




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited).
 ZILA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 Unaudited
 January 31,
    
    
    July 31,2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    13,367,360
    
    
    $
    3,958,190Trade receivables  net of allowances of $335,000 and $61,000
    
    
    5,307,902
    
    
    
    1,131,190Inventories  net
    
    
    4,318,109
    
    
    
    2,019,628Prepaid expenses and other current assets
    
    
    2,397,941
    
    
    
    1,715,196Current assets of discontinued operations
    
    
    
    
    
    
    14,145,956Total current assets
    
    
    25,391,312
    
    
    
    22,970,160Property and equipment  net
    
    
    6,120,261
    
    
    
    1,704,021Purchased technology  net
    
    
    10,414,877
    
    
    
    2,552,937Goodwill  net
    
    
    14,195,440
    
    
    
    4,033,266Trademarks and other intangible assets  net
    
    
    12,586,186
    
    
    
    3,878,937Other assets
    
    
    1,437,191
    
    
    
    2,721,885Long-term assets of discontinued operations
    
    
    
    
    
    
    18,502,739Total Assets
    
    $
    70,145,267
    
    
    $
    56,363,945LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    3,015,655
    
    
    $
    2,278,955Accrued liabilities
    
    
    6,375,430
    
    
    
    2,068,834Warrant liability
    
    
    
    
    
    
    2,369,965Short-term borrowings
    
    
    181,643
    
    
    
    30,347Current portion of deferred gain on sale leaseback
    
    
    152,976
    
    
    
    152,976Current portion of long-term debt and capital lease obligations
    
    
    1,157,022
    
    
    
    18,067,681Current liabilities of discontinued operations
    
    
    
    
    
    
    4,855,458Total current liabilities
    
    
    10,882,726
    
    
    
    29,824,216Deferred gain on sale leaseback
    
    
    152,147
    
    
    
    228,635Long-term debt and capital lease obligations  net of current portion
    
    
    6,160,540
    
    
    
    527,874Long-term liabilities of discontinued operations
    
    
    
    
    
    
    2,532,137Total liabilities
    
    
    17,195,413
    
    
    
    33,112,862Commitments and contingencies (Note 12)Shareholders 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 and 65,000,000
shares authorized; 62,039,355 shares and 46,007,593 shares
issued and outstanding
    
    
    62,039
    
    
    
    46,008Capital in excess of par value
    
    
    122,365,221
    
    
    
    85,305,331Accumulated other comprehensive loss
    
    
    (109,099
    )
    
    
    (82,678
    )Accumulated deficit
    
    
    (69,279,736
    )
    
    
    (61,929,007
    )Common stock in treasury, at cost (218,411 shares)
    
    
    (551,071
    )
    
    
    (551,071
    )Total shareholders equity
    
    
    52,949,854
    
    
    
    23,251,083Total Liabilities and Shareholders Equity
    
    $
    70,145,267
    
    
    $
    56,363,945
 
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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Unaudited
 Three months ended January 31,
    
    
    Six months ended January 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues
    
    $
    8,328,517
    
    
    $
    1,641,355
    
    
    $
    9,706,556
    
    
    $
    3,341,032Cost of products sold
    
    
    3,425,092
    
    
    
    806,493
    
    
    
    4,263,683
    
    
    
    1,458,414Gross profit
    
    
    4,903,425
    
    
    
    834,862
    
    
    
    5,442,873
    
    
    
    1,882,618Operating costs and expenses:Marketing and selling
    
    
    3,612,912
    
    
    
    1,448,834
    
    
    
    5,161,775
    
    
    
    2,696,105General and administrative
    
    
    3,975,081
    
    
    
    2,585,019
    
    
    
    7,158,036
    
    
    
    5,214,983Research and development
    
    
    1,817,546
    
    
    
    1,606,813
    
    
    
    3,352,238
    
    
    
    3,286,865Depreciation and amortization
    
    
    700,733
    
    
    
    355,935
    
    
    
    1,092,609
    
    
    
    685,43610,106,272
    
    
    
    5,996,601
    
    
    
    16,764,658
    
    
    
    11,883,389Loss from operations
    
    
    (5,202,847
    )
    
    
    (5,161,739
    )
    
    
    (11,321,785
    )
    
    
    (10,000,771
    )Other income (expense):Interest income
    
    
    180,997
    
    
    
    58,352
    
    
    
    276,626
    
    
    
    138,002Interest expense
    
    
    (790,893
    )
    
    
    (10,550
    )
    
    
    (5,602,022
    )
    
    
    (18,957
    )Derivative income
    
    
    
    
    
    
    
    
    
    
    1,058,872
    
    
    
    Other expense
    
    
    7,131
    
    
    
    (39,132
    )
    
    
    (2,812
    )
    
    
    (51,228
    )(602,765
    )
    
    
    8,670
    
    
    
    (4,269,336
    )
    
    
    67,817Loss from continuing operations before income
taxes
    
    
    (5,805,612
    )
    
    
    (5,153,069
    )
    
    
    (15,591,121
    )
    
    
    (9,932,954
    )Income tax (expense) benefit
    
    
    (54,761
    )
    
    
    
    
    
    
    3,810,139
    
    
    
    (3,600
    )Loss from continuing operations
    
    
    (5,860,373
    )
    
    
    (5,153,069
    )
    
    
    (11,780,982
    )
    
    
    (9,936,554
    )Gain (loss) from disposal of operations
    
    
    (116,132
    )
    
    
    
    
    
    
    10,993,438
    
    
    
    Loss from discontinued operations
    
    
    (174,296
    )
    
    
    (2,092,728
    )
    
    
    (1,744,534
    )
    
    
    (2,311,417
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    (3,877,000
    )
    
    
    Income (loss) from discontinued operations
    
    
    (290,428
    )
    
    
    (2,092,728
    )
    
    
    5,371,904
    
    
    
    (2,311,417
    )Net loss
    
    
    (6,150,801
    )
    
    
    (7,245,797
    )
    
    
    (6,409,078
    )
    
    
    (12,247,971
    )Preferred stock dividends
    
    
    9,750
    
    
    
    9,750
    
    
    
    19,500
    
    
    
    19,500Net loss attributable to common shareholders
    
    $
    (6,160,551
    )
    
    $
    (7,255,547
    )
    
    $
    (6,428,578
    )
    
    $
    (12,267,471
    )Basic and diluted net income (loss) per common
share:Loss from continuing operations
    
    $
    (0.11
    )
    
    $
    (0.11
    )
    
    $
    (0.23
    )
    
    $
    (0.22
    )Income (loss) from discontinued operations
    
    
    (0.01
    )
    
    
    (0.05
    )
    
    
    0.10
    
    
    
    (0.05
    )Net loss attributable to common
shareholders
    
    $
    (0.12
    )
    
    $
    (0.16
    )
    
    $
    (0.13
    )
    
    $
    (0.27
    )Weighted average shares outstanding
    
    
    55,544,636
    
    
    
    45,683,014
    
    
    
    50,671,338
    
    
    
    45,668,127
 
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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Unaudited
 Six months ended January 31,2007
    
    
    2006Operating activities:Net loss
    
    $
    (6,409,078
    )
    
    $
    (12,247,971
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,377,583
    
    
    
    1,448,087Amortization of deferred financing costs
    
    
    2,255,624
    
    
    
    15,183Amortization of debt discounts
    
    
    2,486,423
    
    
    
    Non-cash interest on term loan
    
    
    201,940
    
    
    
    24,893Gain from sale of discontinued operations
    
    
    (10,993,438
    )
    
    
    Non-cash derivative income
    
    
    (1,058,873
    )
    
    
    Non-cash stock-based employee compensation expense
    
    
    870,919
    
    
    
    240,789Non-cash charge for options issued to outside parties
    
    
    207,138
    
    
    
    31,226Other non-cash items  net
    
    
    (56,023
    )
    
    
    21,244Change in assets and liabilities:Receivables  net
    
    
    (173,650
    )
    
    
    1,974,396Inventories
    
    
    (247,804
    )
    
    
    (1,679,905
    )Prepaid expenses and other assets
    
    
    934,490
    
    
    
    (453,765
    )Accounts payable and accrued liabilities
    
    
    2,786,161
    
    
    
    4,040,452Net cash used in operating activities
    
    
    (7,818,588
    )
    
    
    (6,585,371
    )Investing activities:Additions to property and equipment
    
    
    (224,658
    )
    
    
    (898,757
    )Additions to intangible assets
    
    
    (263,831
    )
    
    
    (277,924
    )Restricted cash returned from (deposited to) collaterized letter of credit
    
    
    3,610,950
    
    
    
    (9,708
    )Net proceeds from disposition of discontinued operations
    
    
    34,705,077
    
    
    
    Acquisition of business
    
    
    (35,554,421
    )
    
    
    Proceeds from disposition of assets
    
    
    
    
    
    
    8,413Net cash provided by (used in) investing activities
    
    
    2,273,117
    
    
    
    (1,177,976
    )Financing activities:Short-term borrowings (repayments), net
    
    
    151,296
    
    
    
    25,939Financing costs
    
    
    (2,381,727
    )
    
    
    Proceeds from issuance of common stock
    
    
    15,971,481
    
    
    
    170,449Proceeds from convertible notes payable
    
    
    24,075,000
    
    
    
    Dividends paid to preferred stockholders
    
    
    (19,500
    )
    
    
    (19,500
    )Principal payments on long-term debt
    
    
    (22,841,909
    )
    
    
    (179,036
    )Net cash provided by (used in) financing activities
    
    
    14,954,641
    
    
    
    (2,148
    )Net increase (decrease) in cash and cash equivalents
    
    
    9,409,170
    
    
    
    (7,765,495
    )Cash and cash equivalents at beginning of period
    
    
    3,958,190
    
    
    
    12,937,517Cash and cash equivalents at end of period
    
    $
    13,367,360
    
    
    $
    5,172,022
 
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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Unaudited)
 AccumulatedCommon Stock
    
    
    Capital in
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    
    
    
    
    Par
    
    
    Excess of
    
    
    Accumulated
    
    
    Treasury
    
    
    Comprehensive
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Value
    
    
    Par Value
    
    
    Deficit
    
    
    Stock
    
    
    Income (Loss)
    
    
    EquitySix Months Ended
January 31, 2006BALANCE AT JULY 31, 2005
    
    
    100,000
    
    
    $
    462,500
    
    
    
    45,864,050
    
    
    $
    45,864
    
    
    $
    84,372,257
    
    
    $
    (32,543,676
    )
    
    $
    (551,071
    )
    
    $
    (63,924
    )
    
    $
    51,721,950Dividends on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,500
    )
    
    
    
    
    
    
    
    
    
    
    (19,500
    )Issuance of common
stock under employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    18,557
    
    
    
    19
    
    
    
    52,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,331Exercise of common
stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    55,055
    
    
    
    55
    
    
    
    125,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,912Stock-based
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264,221
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264,221Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,049
    
    
    
    1,049Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,247,971
    )
    
    
    
    
    
    
    
    
    
    
    (12,247971
    )BALANCE AT JANUARY 31, 2006
    
    
    100,000
    
    
    $
    462,500
    
    
    
    45,937,662
    
    
    $
    45,938
    
    
    $
    84,814,647
    
    
    $
    (44,811,147
    )
    
    $
    (551,071
    )
    
    $
    (62,875
    )
    
    $
    39,897,992Six Months Ended January
31, 2007BALANCE AT JULY 31, 2006
    
    
    100,000
    
    
    $
    462,500
    
    
    
    46,007,593
    
    
    $
    46,008
    
    
    $
    85,305,331
    
    
    $
    (61,929,007
    )
    
    $
    (551,071
    )
    
    $
    (82,678
    )
    
    $
    23,251,083Cumulative-effect
adjustment of adopting
FSP No. EITF 00-19-2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,460,489
    
    
    
    (922,151
    )
    
    
    
    
    
    
    
    
    
    
    1,538,338Dividends on preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,500
    )
    
    
    
    
    
    
    
    
    
    
    (19,500
    )Issuance of common
stock
    
    
    
    
    
    
    
    
    
    
    9,100,000
    
    
    
    9,100
    
    
    
    7,692,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,701,831Issuance of stock
purchase warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,888,348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,888,348Conversion of
unsecured debt
    
    
    
    
    
    
    
    
    
    
    6,900,000
    
    
    
    6,900
    
    
    
    4,496,766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,503,666Beneficial conversion
feature of secured
debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,397,050
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,397,050Issuance of common
stock under employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    1,762
    
    
    
    1
    
    
    
    4,474
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,475Exercise of common
stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    30,000
    
    
    
    30
    
    
    
    42,645
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,675Stock-based
compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,077,387
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,077,387Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,421
    )
    
    
    (26,421
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,409,078
    )
    
    
    
    
    
    
    
    
    
    
    (6,409,078
    )BALANCE AT JANUARY 31, 2007
    
    
    100,000
    
    
    $
    462,500
    
    
    
    62,039,355
    
    
    $
    62,039
    
    
    $
    122,365,221
    
    
    $
    (69,279,736
    )
    
    $
    (551,071
    )
    
    $
    (109,099
    )
    
    $
    52,949,854
  7




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. Description of Business
  ® ® ® ® ® ® ® ® ®
 
 ® ® ® ® ® ® Disclosures about Segments of an Enterprise and Related
Information SFAS No. 131
 
 2. Summary of Significant Accounting Policies
 Basis of Presentation
   Computation of Net Income per Share
  Earnings per Share
 8




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##### Table of Contents



Reclassifications
 
 Accounting for the Impairment or Disposal of Long-Lived Assets
 
 Business Concentration
    Recent Accounting Pronouncements
 The Fair Value Option for Financial Assets and Financial Liabilities  Including an Amendment
of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities SFAS No. 159 Fair Value Measurements.
 
 Accounting for Registration Payment
Arrangements EITF 00-19-2 Accounting for Contingencies
 
 9




---



##### Table of Contents



Fair Value Measurements SFAS
No. 157
 Considering the Effects of Prior Year Misstatement when Quantifying
Misstatements in Current Year Financial Statements SAB No. 108
 Accounting for Uncertainty in
Income Taxes  An Interpretation of FASB Statement No. 109 FIN 48 Accounting for Income Taxes
 3. Acquisition
 ® ® ® ® ® ® ® ®
 
 ® ® ® ®
 
 ® ® ®
 ® ® ®
 ®
 10




---



##### Table of Contents



Assets acquired:Current assets
    
    $
    6,688Property, plant and equipment
    
    
    4,518Intangibles not subject to amortization:Trademarks
    
    
    5,449Intangibles subject to amortization:Purchased technology  proprietary know-how
    
    
    8,173Covenants not to compete
    
    
    2,304Customer lists and relationships
    
    
    1,187Other assets
    
    
    2Goodwill
    
    
    10,163Total assets acquired
    
    
    38,484Liabilities assumed
    
    
    2,930Net assets acquired
    
    $
    35,554
  
  
 ®
 Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2007
    
    2006
    
    2007
    
    2006Net revenues
    
    $
    10,936
    
    
    $
    9,968
    
    
    $
    21,133
    
    
    $
    20,202Loss from continuing operations
    
    $
    (5,986
    )
    
    $
    (5,827
    )
    
    $
    (11,868
    )
    
    $
    (11,098
    )Primary and diluted earnings
per share from continuing
operations
    
    $
    (0.11
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
    
    $
    (0.24
    )
  4. Dispositions
  
 Nutraceuticals Disposition
 
  11




---



##### Table of Contents



Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2007
    
    2006
    
    2007
    
    2006Net revenues
    
    $
    
    
    
    $
    7,240
    
    
    $
    1,629
    
    
    $
    14,654Gain on disposition
    
    
    (114
    )
    
    
    
    
    
    
    11,021
    
    
    
    Income (loss) from operations
    
    $
    (282
    )
    
    $
    (1,998
    )
    
    $
    (1,036
    )
    
    $
    (1,902
    )
 
  
 Current assets :Accounts receivable
    
    $
    2,633Inventory
    
    
    7,679Restricted cash collateral
    
    
    3,611Other current assents
    
    
    223Total current assets
    
    
    14,146Property, plant and equipment
    
    
    6,707Goodwill
    
    
    2,897Patents, trademarks and other intangibles
    
    
    8,675Other assets
    
    
    224Total assets
    
    $
    32,649Current liabilities
    
    $
    4,856Bonds and capital lease obligationslong term
    
    
    2,532Total liabilities
    
    $
    7,388
 
 
  
 Pharmaceuticals Dispositions
 ®
  Three months ended
    
    Six months endedJanuary 31,
    
    January 31,2007
    
    2006
    
    2007
    
    2006Net revenues, net of intercompany eliminations
    
    $
    
    
    
    $
    739
    
    
    $
    
    
    
    $
    1,268Loss on disposition
    
    
    (2
    )
    
    
    
    
    
    
    (27
    )
    
    
    Income (loss) from operations
    
    $
    108
    
    
    $
    (94
    )
    
    $
    (709
    )
    
    $
    (409
    )
 12




---



##### Table of Contents



5. Balance Sheet Information
  January 31,
    
    
    July 31,2007
    
    
    2006InventoriesFinished goods
    
    $
    1,792
    
    
    $
    1,262Work in process
    
    
    486
    
    
    
    281Raw materials
    
    
    2,397
    
    
    
    533Inventory reserves
    
    
    (357
    )
    
    
    (56
    )Total inventories  net
    
    $
    4,318
    
    
    $
    2,020Property, Plant and EquipmentLand
    
    $
    529
    
    
    $
    Building and improvements
    
    
    2,609
    
    
    
    Furniture and equipment
    
    
    3,296
    
    
    
    1,995Leasehold improvements and other assets
    
    
    7,114
    
    
    
    915Production and warehouse equipment
    
    
    1,152
    
    
    
    2,539Total property and equipment
    
    
    14,701
    
    
    
    5,449Less accumulated deprecation and amortization
    
    
    (8,580
    )
    
    
    (3,745
    )Property and equipment  net
    
    $
    6,120
    
    
    $
    1,704Accrued LiabilitiesAccrued professional and consulting fees
    
    $
    3,990
    
    
    $
    1,234Accrued employee compensation and related taxes
    
    
    1,589
    
    
    
    433Accrued advertising
    
    
    66
    
    
    
    135Accrued royalties
    
    
    6
    
    
    
    1Other
    
    
    724
    
    
    
    266Total accrued liabilities
    
    $
    6,375
    
    
    $
    2,069
 
 6. Intangible Assets
  January 31, 2007
    
    
    July 31, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangibles:Purchased technology rights
    
    $
    15,592
    
    
    $
    5,177
    
    
    $
    10,415
    
    
    $
    7,419
    
    
    $
    4,866
    
    
    $
    2,553Trademarks and other intangibles:Trademarks
    
    
    128
    
    
    
    8
    
    
    
    120
    
    
    
    114
    
    
    
    7
    
    
    
    107Patents
    
    
    2,746
    
    
    
    342
    
    
    
    2,404
    
    
    
    2,510
    
    
    
    209
    
    
    
    2,301Licensing costs
    
    
    2,685
    
    
    
    1,349
    
    
    
    1,336
    
    
    
    2,737
    
    
    
    1,266
    
    
    
    1,471Other intangibles
    
    
    3,492
    
    
    
    214
    
    
    
    3,278
    
    
    
    
    
    
    
    
    
    
    
    Total trademarks and
other intangible assets
    
    
    9,051
    
    
    
    1,913
    
    
    
    7,138
    
    
    
    5,361
    
    
    
    1,482
    
    
    
    3,879Total amortizable intangibles
    
    
    24,643
    
    
    
    7,090
    
    
    
    17,553
    
    
    
    12,780
    
    
    
    6,348
    
    
    
    6,432Unamortizable intangible:Trademarks
    
    
    5,449
    
    
    
    
    
    
    
    5,449
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    18,775
    
    
    
    4,580
    
    
    
    14,195
    
    
    
    8,613
    
    
    
    4,580
    
    
    
    4,033Total unamortizable intangibles
    
    
    24,224
    
    
    
    4,580
    
    
    
    19,644
    
    
    
    8,613
    
    
    
    4,580
    
    
    
    4,033Total intangibles assets
    
    $
    48,867
    
    
    $
    11,670
    
    
    $
    37,197
    
    
    $
    21,393
    
    
    $
    10,928
    
    
    $
    10,465
 
 13




---



##### Table of Contents



®
 
 
  
 Range of
    
    Weighted average remaining useful livesUseful lives
    
    January 31, 2007
    
    July 31, 2006Purchased technology rights
    
    
    15
    
    
    
    15
    
    
    
    5.3Trademarks
    
    
    7-10
    
    
    
    7.6
    
    
    
    9.2Patents
    
    
    4-17
    
    
    
    6.2
    
    
    
    6.4Licensing costs
    
    
    7-10
    
    
    
    4.4
    
    
    
    5.4Other
    
    
    2-10
    
    
    
    2.1
    
    
    
    
 
 
  
  7. Debt
  January 31,
    
    
    July 31,2006
    
    
    2006Short-term borrowings:Installment note payable on insurance policies
    
    $
    182
    
    
    $
    30Current portion of long-term debt:Notes payable
    
    $
    1,080
    
    
    $
    Secured term loan, net of discount
    
    
    
    
    
    
    18,044IDA bond payable, Series A, current portion
    
    
    
    
    
    
    Capital lease obligations, current portion
    
    
    77
    
    
    
    24Total current portion of long-term debt
    
    $
    1,157
    
    
    $
    18,068Long-term debt:6% Senior Secured Convertible Notes
    
    $
    12,000
    
    
    $
    Less  unamortized discount
    
    
    (6,483
    )
    
    
    Secured term loan
    
    
    
    
    
    
    19,884Less  unamortized discount on term loan
    
    
    
    
    
    
    (1,840
    )Notes payable
    
    
    1,080
    
    
    
    PharmaBio
    
    
    500
    
    
    
    500Capital lease obligations
    
    
    220
    
    
    
    52Total long-term debt
    
    
    7,317
    
    
    
    18,596Less current portion
    
    
    1,157
    
    
    
    18,068Long-term portion
    
    $
    6,160
    
    
    $
    528
 
 Short-term Borrowing
 Private Placement ®
 14




---



##### Table of Contents



a.
    
    9,100,000 shares of our common stock for $1.75 per share (the Shares);b.
    
    $12,075,000 in aggregate principal amount of 12% Unsecured Convertible
Notes, which converted into 6,900,000 shares of our common stock at a
conversion price of $1.75 per share on December 14, 2006 following
approval by our shareholders (the Unsecured Notes);c.
    
    Warrants to purchase approximately 5,403,000 shares of our common
stock, which are exercisable starting in May 2007 for five years at an
exercise price of $2.21 per share (the Initial Warrants); andd.
    
    Warrants to purchase approximately 3,105,000 shares of our common
stock, which are exercisable for five years at an exercise price of
$2.21 per share following approval by our shareholders on December 14,
2006 (the Additional Warrants).
  a.
    
    $12,000,000 in aggregate principal amount of 6% Senior Secured
Convertible Notes (the Secured Notes) which are convertible into
5,454,546 shares of our common stock at a conversion price of $2.20
following approval by our shareholders on December 14, 2006; andb.
    
    Warrants to purchase approximately 1,909,091 shares of our common
stock, which are exercisable for five years at an exercise price of
$2.21 per share following approval by our shareholders on December 14,
2006 (the Secured Note Warrants).
   Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios Application of Issue No. 98-5 to Certain Convertible
Instruments
    15




---



##### Table of Contents



a.
    
    at the end of each fiscal quarter commencing with the fiscal quarter ending January 31, 2007, an unrestricted
balance of cash (including cash equivalents and excluding cash from any working capital line of credit) of
not less than $4,500,000, or $10,500,000 in the event our Peridex® product line is
divested;b.
    
    for each of the fiscal quarters ending January 31, 2008 and April 30, 2008, EBITDA of at least $1, excluding
certain costs associated with the development and marketing of OraTest; provided, however, that if our
Peridex® product line is divested the EBITDA target will be reduced by $1,500,000 on an
annualized basis;c.
    
    for the fiscal quarter ended July 31, 2008, GAAP net income of at least $1, excluding certain costs
associated with the development and marketing of OraTest; provided, however, that if our Peridex® product line is divested
the net income target will be reduced by $1,500,000 on an annualized
basis; andd.
    
    for each fiscal quarter commencing with the fiscal quarter ending October 31, 2008, net income of at least $1.
    Secured Term Loan
 
 PharmaBio Development ®
 
 Capital Leases Accounting for Leases SFAS No. 13
  Long-term
    
    
    Capital
    
    
    TotalDebt
    
    
    Leases
    
    
    DebtRemaining 2007
    
    $
    1,080
    
    
    $
    38
    
    
    $
    1,1182008
    
    
    347
    
    
    
    77
    
    
    
    4242009
    
    
    12,153
    
    
    
    71
    
    
    
    12,2242010
    
    
    
    
    
    
    34
    
    
    
    342011 and thereafter
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    13,580
    
    
    
    220
    
    
    
    13,800Less discount
    
    
    6,483
    
    
    
    
    
    
    
    6,483Less current portion
    
    
    1,080
    
    
    
    77
    
    
    
    1,157Long-term portion
    
    $
    6,017
    
    
    $
    143
    
    
    $
    6,160
 
 16




---



##### Table of Contents



8. Stock Options and Warrants
 Stock Options
   WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Exercise
    
    Contractual
    
    Intrinsicof Shares
    
    Price
    
    Term
    
    ValueBalance outstanding at July 31, 2006
    
    
    3,235
    
    
    $
    3.54
    
    
    
    7.0
    
    
    $
    878Granted
    
    
    1,064
    
    
    $
    2.54Exercised
    
    
    (30
    )
    
    $
    1.43Forfeited/expired
    
    
    (323
    )
    
    $
    3.65Balance outstanding at January 31, 2007
    
    
    3,946
    
    
    $
    3.25
    
    
    
    6.6
    
    
    $
    412Options exercisable at January 31, 2007
    
    
    2,453
    
    
    $
    3.39
    
    
    
    5.4
    
    
    $
    410
 
   Fair ValueNumber of
    
    At DateShares
    
    of GrantBalance outstanding at July 31, 2006
    
    
    
    
    
    $
    Granted
    
    
    225
    
    
    
    2.58Vested
    
    
    (75
    )
    
    
    2.58Forfeited
    
    
    Balance outstanding at January 31, 2007
    
    
    150
    
    
    $
    2.58
  Six months ended January 31,2007
    
    
    2006Selling and marketing
    
    $
    93
    
    
    $
    8General and administrative
    
    
    983
    
    
    
    202Research and development
    
    
    2
    
    
    
    10Cost of Products Sold
    
    
    9
    
    
    
    3$
    1,087
    
    
    $
    223
  17




---



##### Table of Contents



Six months ended January 31,2007
    
    2006Expected stock price volatility
    
    
    60.5
    %
    
    
    66.4
    %Expected life of options
    
    5.1 years
    
    4.8 yearsRisk-free interest rate
    
    
    5.1
    %
    
    
    3.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
   Warrants
   WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    ValueOutstanding at July 31, 2006
    
    
    1,302
    
    
    $
    2.16
    
    
    
    4.4
    
    
    $
    383Granted
    
    
    11,626
    
    
    $
    2.21Exercised
    
    
    Forfeited/expired
    
    
    Outstanding at January 31, 2007
    
    
    12,928
    
    
    $
    2.20
    
    
    
    4.7
    
    
    $
    742Warrants exercisable at January 31, 2007
    
    
    6,316
    
    
    $
    2.20
    
    
    
    4.7
    
    
    $
    411
   Warrants
    
    Exercisable
    
    Common SharesInitial Warrants
    
    May 28, 2007
    
    
    5,403Additional Warrants
    
    December 14, 2006
    
    
    3,105Secured Notes Warrants
    
    December 14, 2006
    
    
    1,909Roth Warrants (1)
    
    February 20, 2007
    
    
    1,21911,626
 
 (1)
    
    The Roth Warrants were issued on February 20, 2007.  18




---



##### Table of Contents



Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Companys Own Stock EITF 00-19
  19




---



##### Table of Contents



Accounting for Registration Payment
Arrangements .
   9. Income Taxes
   10. Supplemental Cash Flow Information
  Six months ended January 31,2007
    
    2006Interest paid
    
    $
    759
    
    
    $
    86Income taxes paid
    
    $
    139
    
    
    $
    102Capital lease obligations for new equipment
    
    $
    181
    
    
    $
    63Conversion of Unsecured Notes
    
    $
    4,497
    
    
    $
    
 11. Comprehensive Income (Loss)
  Three months ended January 31,
    
    
    Six months ended January 31,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (6,151
    )
    
    $
    (7,246
    )
    
    $
    (6,409
    )
    
    $
    (12,248
    )Foreign currency translation adjustments
    
    
    (17
    )
    
    
    1
    
    
    
    (26
    )
    
    
    1Comprehensive loss
    
    $
    (6,168
    )
    
    $
    (7,245
    )
    
    $
    (6,435
    )
    
    $
    (12,247
    )
 
  12. Commitments and Contingencies
 FDA approval of the OraTest ® product
 ®
 20




---



##### Table of Contents



®
 ® ®
 ®
 ViziLite Plus ®
 ® ®
 Litigation
    21




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
 
  
 Company Overview
  ® 630 ® ® ® ® ® ® ® ®
 Acquisition of Pro-Dentec ®
 ® ®
 ® ® ®
 ® ®
 Private Placement
 ®
 Product Development
  22




---



##### Table of Contents



® ®
 Results of Operations
  Three months ended January 31,Percent of
    
    
    
    
    
    
    Percent ofNet
    
    
    
    
    
    
    Net2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    ChangeNet revenues
    
    $
    8,328
    
    
    
    100
    %
    
    $
    1,641
    
    
    
    100
    %
    
    
    408
    %Cost of products sold
    
    
    3,425
    
    
    
    41
    
    
    
    806
    
    
    
    49
    
    
    
    325Gross profit
    
    
    4,903
    
    
    
    59
    
    
    
    835
    
    
    
    51
    
    
    
    487Operating Costs and Expenses:Marketing & selling
    
    
    3,613
    
    
    
    43
    
    
    
    1,449
    
    
    
    88
    
    
    
    149General & administrative
    
    
    3,975
    
    
    
    48
    
    
    
    2,585
    
    
    
    158
    
    
    
    54Research & development
    
    
    1,818
    
    
    
    22
    
    
    
    1,607
    
    
    
    98
    
    
    
    13Depreciation & amortization
    
    
    700
    
    
    
    8
    
    
    
    356
    
    
    
    22
    
    
    
    9710,106
    
    
    
    121
    
    
    
    5,997
    
    
    
    366
    
    
    
    69Loss from operations
    
    
    (5,203
    )
    
    
    (62
    )
    
    
    (5,162
    )
    
    
    (315
    )
    
    
    1Other income (expense), net
    
    
    (603
    )
    
    
    (7
    )
    
    
    9
    
    
    
    
    
    
    
    (6,800
    )Loss before income taxes
    
    
    (5,806
    )
    
    
    (69
    )
    
    
    (5,153
    )
    
    
    (315
    )
    
    
    (13
    )Income tax benefit (expense)
    
    
    (55
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Net loss from continuing operations
    
    $
    (5,861
    )
    
    
    (70
    )
    
    $
    (5,153
    )
    
    
    (315
    )
    
    
    (14
    )
  Six months ended January 31,Percent of
    
    
    
    
    
    
    Percent ofNet
    
    
    
    
    
    
    Net2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    ChangeNet revenues
    
    $
    9,706
    
    
    
    100
    %
    
    $
    3,341
    
    
    
    100
    %
    
    
    191
    %Cost of products sold
    
    
    4,264
    
    
    
    44
    
    
    
    1,458
    
    
    
    44
    
    
    
    193Gross profit
    
    
    5,442
    
    
    
    56
    
    
    
    1,883
    
    
    
    56
    
    
    
    180Operating Costs and Expenses:Marketing & selling
    
    
    5,162
    
    
    
    53
    
    
    
    2,696
    
    
    
    81
    
    
    
    92General & administrative
    
    
    7,158
    
    
    
    74
    
    
    
    5,215
    
    
    
    156
    
    
    
    37Research & development
    
    
    3,352
    
    
    
    35
    
    
    
    3,287
    
    
    
    98
    
    
    
    2Depreciation & amortization
    
    
    1,092
    
    
    
    11
    
    
    
    685
    
    
    
    21
    
    
    
    5916,764
    
    
    
    173
    
    
    
    11,883
    
    
    
    356
    
    
    
    41Loss from operations
    
    
    (11,322
    )
    
    
    (117
    )
    
    
    (10,000
    )
    
    
    (300
    )
    
    
    13Other income (expense), net
    
    
    (4,269
    )
    
    
    (44
    )
    
    
    68
    
    
    
    3
    
    
    
    (6,378
    )Loss before income taxes
    
    
    (15,591
    )
    
    
    (161
    )
    
    
    (9,932
    )
    
    
    (297
    )
    
    
    (57
    )Income tax benefit (expense)
    
    
    3,810
    
    
    
    39
    
    
    
    (4
    )
    
    
    
    
    
    
    95,350Net loss from continuing operations
    
    $
    (11,781
    )
    
    
    (122
    )
    
    $
    (9,936
    )
    
    
    (297
    )
    
    
    (19
    )
 23




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##### Table of Contents



® ® ® ® ® ® ®
 
 ® ® ® ®
 ® ® ® ®
 ® ®
 ® ® ®
 ®
    24




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##### Table of Contents



Inflation and Seasonality
  Liquidity and Capital Resources
 ®
 ® ® ® ® ® ® ® ®
 ® ® ® ®
    Six months ended January 31,2007
    
    2006Net cash used in operating activities
    
    $
    (7,819
    )
    
    $
    (6,585
    )Net provided by (used in) investing activities
    
    
    2,273
    
    
    
    (1,178
    )Net cash provided by (used in) by financing activities
    
    
    14,955
    
    
    
    (2
    )
 January 31, 2007
    
    July 31, 2006Cash and cash equivalents
    
    $
    13,367
    
    
    $
    3,958Working capital
    
    
    14,509
    
    
    
    (6,854
    )Current ratio
    
    
    2.3
    
    
    
    0.8
  25




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##### Table of Contents



Operating Activities
  Investing Activities
 ®
 Financing Activities
  Private Placement
 ®
  a.
    
    9,100,000 shares of our common stock for $1.75 per share (the Shares);b.
    
    $12,075,000 in aggregate principal amount of 12% Unsecured Convertible
Notes, which converted into 6,900,000 shares of our common stock at a
conversion price of $1.75 per share on December 14, 2006 following
approval by our shareholders (the Unsecured Notes);c.
    
    Warrants to purchase approximately 5,403,000 shares of our common
stock, which are exercisable starting in May 2007 for five years at an
exercise price of $2.21 per share (the Initial Warrants); andd.
    
    Warrants to purchase approximately 3,105,000 shares of our common
stock, which are exercisable for five years at an exercise price of
$2.21 per share following approval by our shareholders on December 14,
2006 (the Additional Warrants).
  a.
    
    $12,000,000 of 6% Senior Secured Convertible Notes (the
Secured Notes) which are convertible into 5,454,546
shares of our commons stock at a conversion price of $2.20;
andb.
    
    Warrants to purchase approximately 1,909,000 shares of our
common stock, which are exercisable for five years at an
exercise price of $2.21 per share following approval by our
shareholders on December 14, 2006 (the Secured Note
Warrants).
   
 Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios Application of Issue No. 98-5 to Certain Convertible
Instruments
 
 26




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##### Table of Contents



a.
    
    at the end of each fiscal quarter commencing with the fiscal quarter ending January 31, 2007, an unrestricted
balance of cash (including cash equivalents and excluding cash from any working capital line of credit) of
not less than $4,500,000, or $10,500,000 in the event our Peridex® product line is
divested;b.
    
    for each of the fiscal quarters ending January 31, 2008 and April 30, 2008, EBITDA of at least $1, excluding
certain costs associated with the development and marketing of OraTest; provided, however, that if our
Peridex® product line is divested the EBITDA target will be reduced by $1,500,000 on an
annualized basis;c.
    
    for the fiscal quarter ended July 31, 2008, GAAP net income of at least $1, excluding certain costs
associated with the development and marketing of OraTest; provided, however, that if our Peridex® product line is divested the net income target will be reduced by $1,500,000 on an
annualized
basis; andd.
    
    for each fiscal quarter commencing with the fiscal quarter ending October 31, 2008, net income of at least $1.
    Credit Facility
  27




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##### Table of Contents



Industrial Development Revenue Bonds
 
  
 PharmaBio Investment
 ®
 Off-Balance Sheet Financing Arrangements
  Disclosures about Contractual Obligations and Commercial Commitments
  Remaining2007
    
    
    2008 & 2009
    
    
    2010 & 2011
    
    
    Thereafter
    
    
    TotalLong-term debt
    
    $
    1,080
    
    
    $
    12,500
    
    
    $
    
    
    
    $
    
    
    
    $
    13,580Operating leases
    
    
    169
    
    
    
    613
    
    
    
    243
    
    
    
    
    
    
    
    1,025Capital lease obligations
    
    
    38
    
    
    
    148
    
    
    
    34
    
    
    
    
    
    
    
    220Purchase obligations
    
    
    180
    
    
    
    1,970
    
    
    
    
    
    
    
    
    
    
    
    2,150Total
    
    $
    1,467
    
    
    $
    15,231
    
    
    $
    277
    
    
    $
    
    
    
    $
    16,975
   Summary of Critical Accounting Policies and Estimates
  Accounting for Income Taxes
   28




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##### Table of Contents



EBITDA
 
  
 
 Reconciliation of Non-GAAP Measures to GAAP Measures
Unaudited
(in thousands)
 
 Six months ended January 31,2007
    
    
    2006EBITDA
    
    $
    585
    
    
    $
    (10,834
    )Interest income
    
    
    305
    
    
    
    148Interest expense
    
    
    (5,854
    )
    
    
    (110
    )Income tax expense
    
    
    (67
    )
    
    
    (4
    )Amortization of deferred financing costs
    
    
    2,256
    
    
    
    15Amortization of debt discounts
    
    
    2,486
    
    
    
    Non-cash interest on term loan
    
    
    202
    
    
    
    25Gain from sale of discontinued operations
    
    
    (10,993
    )
    
    
    Non-cash derivative income
    
    
    (1,059
    )
    
    
    Non-cash stock-based employee compensation expense
    
    
    871
    
    
    
    241Non-cash charge for options issued to outside parties
    
    
    207
    
    
    
    31Other non-cash items  net
    
    
    (56
    )
    
    
    21Change in assets and liabilities:Receivables
    
    
    (174
    )
    
    
    1,974Inventories
    
    
    (248
    )
    
    
    (1,680
    )Prepaid expenses and other assets
    
    
    934
    
    
    
    (453
    )Accounts payable and accrued liabilities
    
    
    2,786
    
    
    
    4,041Net cash used in operating activities
    
    $
    (7,819
    )
    
    $
    (6,585
    )
 
 Recent Accounting Pronouncements
  29




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk.
   
 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.
    30




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##### Table of Contents



Item 1A. Risk Factors.
  Trends, Risks and Uncertainties Related to Our Business
 We may be unable to obtain FDA approval, or to establish a market, for
OraTest ® in the United States and obtaining regulatory approval for
OraTest ® and other products is costly and uncertain.
 ® ®
 ® ® ® ® ® ®
 ®
 ® ®
 31




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##### Table of Contents



If we are unable to obtain adequate funds on acceptable terms, we may not be able to develop and
market our present and potential products.
 ® ®
 Our lack of earnings history could adversely affect our financial health and prevent us from
fulfilling our payment obligations.
    
    
    making it more difficult for us to satisfy our obligations with respect to the Secured 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.
 Our debt instruments contain restrictive covenants that could adversely affect our business by
limiting our flexibility.
  We may fail to realize the anticipated cost savings, revenue enhancements, product focus, or other
benefits expected from our recent disposition of the Nutraceuticals Business Unit and subsequent
acquisition of Pro-Dentec ® .
  32




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##### Table of Contents



®
 We have incurred substantial expenses and committed valuable time related to the recent disposition
of our Nutraceuticals Business Unit and our ability to successfully execute our business plan is
dependent on our ability to obtain adequate financing.
  Historically we have been dependent on a few key products and our future growth is dependent on the
development of new products.
 ® ® ® ® ® ® ® ®
 
 ® ®
 
   Our proprietary rights may prove difficult to enforce.
  33




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##### Table of Contents



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 the use of our technology is determined to infringe on the intellectual property rights of
others, our business could be harmed.
  34




---



##### Table of Contents



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.
  Trends, Risks and Uncertainties Related to Our Capital Stock
 The Private Placement 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.
  35




---



##### Table of Contents



We may take actions which could dilute current equity ownership or prevent or delay a change in our
control.
   
 Item 2. Unregistered Sales of Securities and Use of Proceeds.
  
 Investor
 
  36




---



##### Table of Contents



Item 3. Defaults upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders
   Number of SharesName
    
    For
    
    WithheldDavid R. Bethune
    
    
    40,982,364
    
    
    
    796,889Douglas D. Burkett, Ph.D.
    
    
    40,980,353
    
    
    
    798,900Leslie H. Green
    
    
    40,926,473
    
    
    
    852,780Christopher D. Johnson
    
    
    41,043,133
    
    
    
    736,120Kurt R. Krauss
    
    
    41,048,289
    
    
    
    730,964Hazel L. Meyer
    
    
    41,033,329
    
    
    
    745,924David Sidransky, M.D.
    
    
    41,034,761
    
    
    
    744,492
   For
    
    Against
    
    Abstain39,418,498
    
    2,050,725
    
    
    310,030
   For
    
    Against
    
    Abstain21,171,626
    
    1,353,309
    
    
    263,162
  For
    
    Against
    
    Abstain41,154,613
    
    355,179
    
    
    269,461
  For
    
    Against
    
    Abstain36,367,504
    
    4,862,707
    
    
    549,042
  For
    
    Against
    
    Abstain35,698,437
    
    5,698,534
    
    
    382,282
  
 Item 5. Other Information.
  37




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##### Table of Contents



Item 6. Exhibits.
  ExhibitNumber
    
    Description3.1
    
    
    Certificate of Incorporation (incorporated by reference to
Exhibit 3-A to the Companys Annual Report on Form 10-K for
fiscal year ended July 31, 1999)3.2
    
    
    Certificate of Amendment to Certificate of Incorporation
(incorporated by reference to Exhibit 3-B to the Companys
Annual Report on Form 10-K for fiscal year ended July 31,
2005)3.3
    
    
    Certificate of Amendment to Certificate of Incorporation
(incorporated by reference to Appendix A of the Companys
Proxy Statement on Schedule 14A filed November 24, 2006)3.4
    
    
    Amended and Restated Bylaws (as amended through September 26,
2002) (incorporated by reference to Exhibit 3-B to the
Companys Annual Report on Form 10-K for fiscal year ended
July 31, 2002)4.1
    
    
    Form of 12% Unsecured Note due May 2007 (incorporated by
reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K filed December 4, 2006)4.2
    
    
    Form of 6% Senior Secured Note due November 2009 (incorporated
by reference to Exhibit 4.2 to the Companys Current Report on
Form 8-K filed December 4, 2006)4.3
    
    
    Form of Initial Warrant (incorporated by reference to Exhibit
4.3 to the Companys Current Report on Form 8-K filed December
4, 2006)4.4
    
    
    Form of Additional Warrant (incorporated by reference to
Exhibit 4.4 to the Companys Current Report on Form 8-K filed
December 4, 2006)4.5
    
    
    Form of Secured Note Warrant (incorporated by reference to Exhibit 4.5 to the Companys Current Report on
Form 8-K filed December 4, 2006)4.6
    
    
    Registration Rights Agreement for the Shares, Unsecured Notes, Initial Warrants and Additional Warrants,
dated November 28, 2006, by and among Zila, Inc. and the investor parties thereto (incorporated by
reference to Exhibit 4.6 to the Companys Current Report on Form 8-K filed December 4, 2006)4.7
    
    
    Registration Rights Agreement for the Secured Notes and Secured Note Warrants, dated November 28, 2006,
by and among Zila, Inc. and the investor parties thereto (incorporated by reference to Exhibit 4.7 to the
Companys Current Report on Form 8-K filed December 4, 2006)10.1
    
    
    Purchase Agreement for the Shares, Unsecured Notes, Initial Warrants and Additional Warrants, dated
November 13, 2006, by and among Zila, Inc. and the investors thereto (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed November 17, 2006)10.2
    
    
    Purchase Agreement for the Secured Notes and Secured Note Warrants, dated November 13, 2006, by and among
Zila, Inc. and the investors thereto (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed November 17, 2006)10.3
    
    
    Pledge and Security Agreement, dated November 28, 2006, by and among Zila, Inc., Zila Biotechnology,
Inc., Zila Pharmaceuticals, Inc., Zila Technical, Inc., Zila Limited, Balyasny Asset Management, L.P. and
the investor parties thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed December 4, 2006)10.4
    
    
    Agreement and Plan of Merger, dated November 13, 2006, by and among Zila, Inc., Zila Merger, Inc.,
Professional Dental Technologies, Inc. and certain stockholders thereto (incorporated by reference to
Exhibit 10.3 to the Companys Current Report on Form 8-K filed November 17, 2006)
 
 38




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##### Table of Contents



ExhibitNumber
    
    Description31.1*
    
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    
    Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1**
    
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2**
    
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 *
    
    Filed herewith**
    
    Furnished herewith 39




---



##### Table of Contents



SIGNATURES
  
 Date: April 5, 2007
    By:
    /s/ Lawrence A. GyenesLawrence A. GyenesChief Financial Officer
     (Principal Financial and Accounting Officer) 
 40




---



##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description3.1
    
    
    Certificate of Incorporation (incorporated by reference to Exhibit 3-A to the Companys Annual Report on
Form 10-K for fiscal year ended July 31, 1999)3.2
    
    
    Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3-B to the
Companys Annual Report on Form 10-K for fiscal year ended July 31, 2005)3.3
    
    
    Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Appendix A of the
Companys Proxy Statement on Schedule 14A filed November 24, 2006)3.4
    
    
    Amended and Restated Bylaws (as amended through September 26, 2002) (incorporated by reference to Exhibit
3-B to the Companys Annual Report on Form 10-K for fiscal year ended July 31, 2002)4.1
    
    
    Form of 12% Unsecured Note due May 2007 (incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K filed December 4, 2006)4.2
    
    
    Form of 6% Senior Secured Note due November 2009 (incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed December 4, 2006)4.3
    
    
    Form of Initial Warrant (incorporated by reference to Exhibit 4.3 to the Companys Current Report on Form
8-K filed December 4, 2006)4.4
    
    
    Form of Additional Warrant (incorporated by reference to Exhibit 4.4 to the Companys Current Report on
Form 8-K filed December 4, 2006)4.5
    
    
    Form of Secured Note Warrant (incorporated by reference to Exhibit 4.5 to the Companys Current Report on
Form 8-K filed December 4, 2006)4.6
    
    
    Registration Rights Agreement for the Shares, Unsecured Notes, Initial Warrants and Additional Warrants,
dated November 28, 2006, by and among Zila, Inc. and the investor parties thereto (incorporated by
reference to Exhibit 4.6 to the Companys Current Report on Form 8-K filed December 4, 2006)4.7
    
    
    Registration Rights Agreement for the Secured Notes and Secured Note Warrants, dated November 28, 2006,
by and among Zila, Inc. and the investor parties thereto (incorporated by reference to Exhibit 4.7 to the
Companys Current Report on Form 8-K filed December 4, 2006)10.1
    
    
    Purchase Agreement for the Shares, Unsecured Notes, Initial Warrants and Additional Warrants, dated
November 13, 2006, by and among Zila, Inc. and the investors thereto (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed November 17, 2006)10.2
    
    
    Purchase Agreement for the Secured Notes and Secured Note Warrants, dated November 13, 2006, by and among
Zila, Inc. and the investors thereto (incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed November 17, 2006)10.3
    
    
    Pledge and Security Agreement, dated November 28, 2006, by and among Zila, Inc., Zila Biotechnology,
Inc., Zila Pharmaceuticals, Inc., Zila Technical, Inc., Zila Limited, Balyasny Asset Management, L.P. and
the investor parties thereto (incorporated by reference to Exhibit 10.1 to the Companys Current Report
on Form 8-K filed December 4, 2006)
 41




---



##### Table of Contents



ExhibitNumber
    
    Description10.4
    
    
    Agreement and Plan of Merger, dated November 13, 2006, by and among Zila,
Inc., Zila Merger, Inc.,
Professional Dental Technologies, Inc. and certain stockholders thereto (incorporated by
reference to
Exhibit 10.3 to the Companys Current Report on Form 8-K
filed November 17, 2006)31.1*
    
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 200231.2*
    
    
    Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1**
    
    
    Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2**
    
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 *
    
    Filed herewith**
    
    Furnished herewith 42