##### Table of Contents



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 April 30, 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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##### 



ZILA, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 30, 2007
TABLE OF CONTENTS
 PagePart I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of April 30, 2007 and July 31, 2006
    
    
    3Consolidated Statements of Operations for the three and nine month periods ended April 30,
2007 and 2006
    
    
    4Consolidated Statements of Cash Flows for the nine month periods ended April 30, 2007 and 2006
    
    
    5Consolidated Statements of Shareholders Equity for the nine month periods ended April 30,
2007 and 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31Part II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38Item 3. Defaults upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    39SIGNATURES
    
    
    41EX-10.2EX-10.3EX-10.5EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited).
 ZILA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 Unaudited
 April 30,
    
    
    July 31,2007
    
    
    2006ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    9,652,256
    
    
    $
    3,958,190Trade receivables  net of allowances of $130,000 and $9,000
    
    
    4,078,218
    
    
    
    254,786Inventories  net
    
    
    3,964,477
    
    
    
    1,845,773Prepaid expenses and other current assets
    
    
    2,429,767
    
    
    
    1,513,462Current assets of discontinued operations
    
    
    972,496
    
    
    
    15,397,949Total current assets
    
    
    21,097,214
    
    
    
    22,970,160Property and equipment  net
    
    
    6,100,348
    
    
    
    1,684,017Purchased technology  net
    
    
    10,139,902
    
    
    
    2,552,937Goodwill  net
    
    
    10,169,969
    
    
    
    Trademarks and other intangible assets  net
    
    
    12,238,752
    
    
    
    3,842,448Other assets
    
    
    1,392,122
    
    
    
    2,721,885Long-term assets of discontinued operations
    
    
    4,065,690
    
    
    
    22,592,498Total Assets
    
    $
    65,203,997
    
    
    $
    56,363,945LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    3,026,680
    
    
    $
    2,088,479Accrued liabilities
    
    
    5,029,797
    
    
    
    1,791,906Warrant liability
    
    
    
    
    
    
    2,369,965Short-term borrowings
    
    
    91,698
    
    
    
    30,347Current portion of deferred gain on sale leaseback
    
    
    152,976
    
    
    
    152,976Current portion of long-term debt and capital lease obligations
    
    
    77,800
    
    
    
    18,067,681Current liabilities of discontinued operations
    
    
    421,681
    
    
    
    5,322,862Total current liabilities
    
    
    8,800,632
    
    
    
    29,824,216Deferred gain on sale leaseback
    
    
    113,903
    
    
    
    228,635Long-term debt and capital lease obligations  net of current portion
    
    
    6,701,128
    
    
    
    527,874Long-term liabilities of discontinued operations
    
    
    
    
    
    
    2,532,137Total liabilities
    
    
    15,615,663
    
    
    
    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; 62,329,083 shares and 46,007,593 shares
issued and outstanding
    
    
    62,329
    
    
    
    46,008Capital in excess of par value
    
    
    123,331,380
    
    
    
    85,305,331Accumulated other comprehensive loss
    
    
    (119,282
    )
    
    
    (82,678
    )Accumulated deficit
    
    
    (73,597,522
    )
    
    
    (61,929,007
    )Common stock in treasury, at cost (218,411 shares)
    
    
    (551,071
    )
    
    
    (551,071
    )Total shareholders equity
    
    
    49,588,334
    
    
    
    23,251,083Total Liabilities and Shareholders Equity
    
    $
    65,203,997
    
    
    $
    56,363,945
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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Unaudited
 Three months ended April 30,
    
    
    Nine months ended April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net revenues
    
    $
    10,749,840
    
    
    $
    1,217,797
    
    
    $
    18,146,762
    
    
    $
    2,700,672Cost of products sold
    
    
    4,230,900
    
    
    
    709,777
    
    
    
    7,757,354
    
    
    
    1,566,239Gross profit
    
    
    6,518,940
    
    
    
    508,020
    
    
    
    10,389,408
    
    
    
    1,134,433Operating costs and expenses:Marketing and selling
    
    
    4,325,998
    
    
    
    1,781,784
    
    
    
    9,247,708
    
    
    
    4,088,107General and administrative
    
    
    2,682,130
    
    
    
    2,650,452
    
    
    
    9,566,765
    
    
    
    7,599,896Research and development
    
    
    2,388,298
    
    
    
    2,451,936
    
    
    
    5,740,536
    
    
    
    5,738,801Depreciation and amortization
    
    
    909,085
    
    
    
    369,294
    
    
    
    1,997,486
    
    
    
    1,025,11410,305,511
    
    
    
    7,253,466
    
    
    
    26,552,495
    
    
    
    18,451,918Loss from operations
    
    
    (3,786,571
    )
    
    
    (6,745,446
    )
    
    
    (16,163,087
    )
    
    
    (17,317,485
    )Other income (expense):Interest income
    
    
    120,067
    
    
    
    63,550
    
    
    
    396,693
    
    
    
    201,552Interest expense
    
    
    (877,636
    )
    
    
    (622,149
    )
    
    
    (6,479,659
    )
    
    
    (640,445
    )Derivative income (expense)
    
    
    
    
    
    
    (97,526
    )
    
    
    1,058,873
    
    
    
    (97,526
    )Other expense
    
    
    (47,412
    )
    
    
    (247,041
    )
    
    
    (29,150
    )
    
    
    (315,098
    )(804,981
    )
    
    
    (903,166
    )
    
    
    (5,053,243
    )
    
    
    (851,517
    )Loss from continuing operations before income
taxes
    
    
    (4,591,552
    )
    
    
    (7,648,612
    )
    
    
    (21,216,330
    )
    
    
    (18,169,002
    )Income tax (expense) benefit
    
    
    190,809
    
    
    
    
    
    
    
    4,000,948
    
    
    
    (3,600
    )Loss from continuing operations
    
    
    (4,400,743
    )
    
    
    (7,648,612
    )
    
    
    (17,215,382
    )
    
    
    (18,172,602
    )Gain (loss) from disposal of operations
    
    
    (19,741
    )
    
    
    (1,625
    )
    
    
    10,973,697
    
    
    
    (5,727
    )Income (loss) from operations of discontinued
operations
    
    
    303,257
    
    
    
    (424,621
    )
    
    
    (407,620
    )
    
    
    (2,144,500
    )Income tax expense
    
    
    (190,809
    )
    
    
    
    
    
    
    (4,067,809
    )
    
    
    Income (loss) from discontinued operations
    
    
    92,707
    
    
    
    (426,246
    )
    
    
    6,498,268
    
    
    
    (2,150,227
    )Net loss
    
    
    (4,308,036
    )
    
    
    (8,074,858
    )
    
    
    (10,717,114
    )
    
    
    (20,322,829
    )Preferred stock dividends
    
    
    9,750
    
    
    
    9,750
    
    
    
    29,250
    
    
    
    29,250Net loss attributable to common shareholders
    
    $
    (4,317,786
    )
    
    $
    (8,084,608
    )
    
    $
    (10,746,364
    )
    
    $
    (20,352,079
    )Basic and diluted net income (loss) per common
share:Loss from continuing operations
    
    $
    (0.07
    )
    
    $
    (0.17
    )
    
    $
    (0.32
    )
    
    $
    (0.40
    )Income (loss) from discontinued operations
    
    
    0.00
    
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    (0.05
    )Net loss attributable to
common shareholders
    
    $
    (0.07
    )
    
    $
    (0.18
    )
    
    $
    (0.20
    )
    
    $
    (0.45
    )Weighted average shares outstanding
    
    
    62,117,309
    
    
    
    45,734,371
    
    
    
    54,411,050
    
    
    
    45,683,925
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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Unaudited
 Nine months ended April 30,2007
    
    
    2006Operating activities:Net loss
    
    $
    (10,717,114
    )
    
    $
    (20,322,829
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    2,344,741
    
    
    
    2,216,775Amortization of deferred financing costs
    
    
    2,378,592
    
    
    
    203,604Amortization of debt discounts
    
    
    3,046,165
    
    
    
    114,064Non-cash interest on term loan
    
    
    201,940
    
    
    
    76,759Gain from sale of discontinued operations
    
    
    (10,972,694
    )
    
    
    Non-cash derivative (income) expense
    
    
    (1,058,873
    )
    
    
    97,526Non-cash stock-based employee compensation expense
    
    
    1,424,598
    
    
    
    329,041Non-cash charge for options issued to outside parties
    
    
    29,141
    
    
    
    63,064Other non-cash items  net
    
    
    (35,758
    )
    
    
    (282,256
    )Change in assets and liabilities:Receivables  net
    
    
    225,490
    
    
    
    3,863,702Inventories
    
    
    20,789
    
    
    
    (1,844,551
    )Prepaid expenses and other assets
    
    
    844,896
    
    
    
    (386,452
    )Accounts payable and accrued liabilities
    
    
    2,494,993
    
    
    
    (521,919
    )Net cash used in operating activities
    
    
    (9,773,094
    )
    
    
    (16,393,472
    )Investing activities:Additions to property and equipment
    
    
    (440,780
    )
    
    
    (942,982
    )Additions to intangible assets
    
    
    (463,959
    )
    
    
    (956,387
    )Restricted cash returned from (deposited to) collaterized letter of credit
    
    
    3,610,950
    
    
    
    (3,072,023
    )Net proceeds from disposition of discontinued operations
    
    
    34,705,077
    
    
    
    Acquisition of business
    
    
    (35,554,421
    )
    
    
    Proceeds from disposition of assets
    
    
    
    
    
    
    8,463Net cash provided by (used in) investing activities
    
    
    1,856,867
    
    
    
    (4,962,929
    )Financing activities:Short-term borrowings (repayments), net
    
    
    61,351
    
    
    
    (62,860
    )Financing costs
    
    
    (2,528,004
    )
    
    
    (2,273,192
    )Proceeds from issuance of common stock
    
    
    15,971,481
    
    
    
    216,479Proceeds from convertible notes payable
    
    
    24,075,000
    
    
    
    Proceeds from long-term borrowings
    
    
    
    
    
    
    20,000,000Dividends paid to preferred stockholders
    
    
    (29,250
    )
    
    
    (29,250
    )Principal payments on long-term debt
    
    
    (23,940,285
    )
    
    
    (258,366
    )Net cash provided by financing activities
    
    
    13,610,293
    
    
    
    17,592,811Net increase (decrease) in cash and cash equivalents
    
    
    5,694,066
    
    
    
    (3,763,590
    )Cash and cash equivalents at beginning of period
    
    
    3,958,190
    
    
    
    12,937,517Cash and cash equivalents at end of period
    
    $
    9,652,256
    
    
    $
    9,173,927
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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)
    
    
    EquityNine months
Ended April 30,
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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,250
    )
    
    
    
    
    
    
    
    
    
    
    (29,250
    )Issuance of common
stock under
employee stock
purchase plan
    
    
    
    
    
    
    
    
    
    
    18,557
    
    
    
    19
    
    
    
    52,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,331Exercise of common
stock options and
warrants
    
    
    
    
    
    
    
    
    
    
    82,395
    
    
    
    82
    
    
    
    171,859
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171,941Stock-based
compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,247
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    321,247Options for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,064Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,789
    )
    
    
    (10,789
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,322,829
    )
    
    
    
    
    
    
    
    
    
    
    (20,322,829
    )BALANCE AT
APRIL 30, 2006
    
    
    100,000
    
    
    $
    462,500
    
    
    
    45,965,002
    
    
    $
    45,965
    
    
    $
    84,980,740
    
    
    $
    (52,895,755
    )
    
    $
    (551,071
    )
    
    $
    (74,713
    )
    
    $
    31,967,666Nine months Ended
April 30, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,250
    )
    
    
    
    
    
    
    
    
    
    
    (29,250
    )Issuance of common
stock
    
    
    
    
    
    
    
    
    
    
    9,100,000
    
    
    
    9,100
    
    
    
    7,674,815
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,683,915Issuance of stock
purchase warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,888,348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,888,348Conversion of
unsecured debt
    
    
    
    
    
    
    
    
    
    
    6,900,000
    
    
    
    6,900
    
    
    
    4,445,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,452,348Beneficial
conversion feature
of secured debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,397,050
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,397,050Issuance of shares
in settlement of
liability
    
    
    
    
    
    
    
    
    
    
    289,728
    
    
    
    290
    
    
    
    659,710
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660,000Issuance 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,423,929
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,423,929Options for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,141Foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36,604
    )
    
    
    (36,604
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,717,114
    )
    
    
    
    
    
    
    
    
    
    
    (10,717,114
    )BALANCE AT
APRIL 30, 2007
    
    
    100,000
    
    
    $
    462,500
    
    
    
    62,329,083
    
    
    $
    62,329
    
    
    $
    123,331,380
    
    
    $
    (73,597,522
    )
    
    $
    (551,071
    )
    
    $
    (119,282
    )
    
    $
    49,588,334
  6




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##### Table of Contents



ZILA, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 1. Description of Business
  ® ® ® ® ® ® ® ®
 ® ®
 2. Summary of Significant Accounting Policies
 Basis of Presentation and Continuance of Operations
   ®
 7




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##### Table of Contents



Computation of Net Income per Share
     Reclassifications
 ®
 Business Concentration
    Recent Accounting Pronouncements
  8




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##### Table of Contents



3. Acquisition
    9




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##### 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
    
    
    10,170Total assets acquired
    
    
    38,491Liabilities assumed
    
    
    2,930Net assets acquired
    
    $
    35,561
    Three months ended
    
    Nine months endedApril 30,
    
    April 30,2007
    
    2006
    
    2007
    
    2006Net revenues
    
    $
    10,750
    
    
    $
    10,243
    
    
    $
    29,574
    
    
    $
    29,095Loss from continuing operations
    
    $
    (4,401
    )
    
    $
    (7,847
    )
    
    $
    (17,304
    )
    
    $
    (17,786
    )Primary and diluted earnings
per share from continuing
operations
    
    $
    (0.07
    )
    
    $
    (0.17
    )
    
    $
    (0.39
    )
    
    $
    (0.39
    )
  4. Dispositions
  Nutraceuticals Disposition
  10




---



##### Table of Contents



Three months ended
    
    Nine months endedApril 30,
    
    April 30,2007
    
    2006
    
    2007
    
    2006Net revenues
    
    $
    
    
    
    $
    3,612
    
    
    $
    1,629
    
    
    $
    18,266Gain on disposition
    
    
    3
    
    
    
    
    
    
    
    11,025
    
    
    
    Income (loss) from operations
    
    $
    (179
    )
    
    $
    (774
    )
    
    $
    (1,216
    )
    
    $
    (2,676
    )
  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 ® ®
  ®
  11




---



##### Table of Contents



Three months ended
    
    Nine months endedApril 30,
    
    April 30,2007
    
    2006
    
    2007
    
    2006Net revenues, net of intercompany eliminations
    
    $
    1,114
    
    
    $
    1,920
    
    
    $
    3,540
    
    
    $
    5,046Loss on disposition
    
    
    (23
    )
    
    
    
    
    
    
    (51
    )
    
    
    Income (loss) from operations
    
    $
    483
    
    
    $
    348
    
    
    $
    808
    
    
    $
    526
 5. Balance Sheet Information
  April 30,
    
    
    July 31,2007
    
    
    2006InventoriesFinished goods
    
    $
    1,511
    
    
    $
    1,088Work in process
    
    
    471
    
    
    
    281Raw materials
    
    
    2,281
    
    
    
    533Inventory reserves
    
    
    (299
    )
    
    
    (56
    )Total inventories  net
    
    $
    3,964
    
    
    $
    1,846Property, Plant and EquipmentLand
    
    $
    529
    
    
    $
    Building and improvements
    
    
    2,525
    
    
    
    Furniture and equipment
    
    
    3,258
    
    
    
    1,789Leasehold improvements and other assets
    
    
    1,184
    
    
    
    2,533Production and warehouse equipment
    
    
    7,247
    
    
    
    894Total property and equipment
    
    
    14,743
    
    
    
    5,216Less accumulated deprecation and amortization
    
    
    (8,643
    )
    
    
    (3,532
    )Property and equipment  net
    
    $
    6,100
    
    
    $
    1,684Accrued LiabilitiesAccrued professional and consulting fees
    
    $
    3,148
    
    
    $
    1,201Accrued employee compensation and related taxes
    
    
    1,026
    
    
    
    347Other
    
    
    856
    
    
    
    244Total accrued liabilities
    
    $
    5,030
    
    
    $
    1,792
 6. Intangible Assets
  April 30, 2007
    
    
    July 31, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortizable intangibles:Purchased technology rights
    
    $
    15,592
    
    
    $
    5,452
    
    
    $
    10,140
    
    
    $
    7,419
    
    
    $
    4,866
    
    
    $
    2,553Trademarks and other intangibles:Trademarks
    
    
    128
    
    
    
    10
    
    
    
    118
    
    
    
    104
    
    
    
    7
    
    
    
    97Patents
    
    
    2,820
    
    
    
    375
    
    
    
    2,445
    
    
    
    2,483
    
    
    
    209
    
    
    
    2,274Licensing costs
    
    
    2,685
    
    
    
    1,417
    
    
    
    1,268
    
    
    
    2,737
    
    
    
    1,266
    
    
    
    1,471Other intangibles
    
    
    3,492
    
    
    
    533
    
    
    
    2,959
    
    
    
    
    
    
    
    
    
    
    
    Total trademarks and
other intangible assets
    
    
    9,125
    
    
    
    2,335
    
    
    
    6,790
    
    
    
    5,324
    
    
    
    1,482
    
    
    
    3,842
 12




---



##### Table of Contents



April 30, 2007
    
    
    July 31, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountTotal amortizable intangibles
    
    
    24,717
    
    
    
    7,787
    
    
    
    16,930
    
    
    
    12,743
    
    
    
    6,348
    
    
    
    6,395Unamortizable intangible:Trademarks
    
    
    5,449
    
    
    
    
    
    
    
    5,449
    
    
    
    
    
    
    
    
    
    
    
    Goodwill
    
    
    10,170
    
    
    
    
    
    
    
    10,170
    
    
    
    
    
    
    
    
    
    
    
    Total unamortizable intangibles
    
    
    15,619
    
    
    
    
    
    
    
    15,619
    
    
    
    
    
    
    
    
    
    
    
    Total intangibles assets
    
    $
    40,336
    
    
    $
    7,787
    
    
    $
    32,549
    
    
    $
    12,743
    
    
    $
    6,348
    
    
    $
    6,395
 ®
  Range of
    
    Weighted average remaining useful livesUseful lives
    
    April 30, 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
  April 30,
    
    
    July 31,2007
    
    
    2006Short-term borrowings:Installment note payable on insurance policies
    
    $
    92
    
    
    $
    30Current portion of long-term debt:Secured term loan, net of discount
    
    $
    
    
    
    $
    18,044Capital lease obligations, current portion
    
    
    78
    
    
    
    24Total current portion of long-term debt
    
    $
    78
    
    
    $
    18,068Long-term debt:6% Senior Secured Convertible Notes
    
    $
    12,000
    
    
    $
    Less  unamortized discount
    
    
    (5,924
    )
    
    
    Secured term loan
    
    
    
    
    
    
    19,884Less  unamortized discount on term loan
    
    
    
    
    
    
    (1,840
    )PharmaBio
    
    
    500
    
    
    
    500Capital lease obligations
    
    
    203
    
    
    
    52Total long-term debt
    
    
    6,779
    
    
    
    18,596Less current portion
    
    
    78
    
    
    
    18,068Long-term portion
    
    $
    6,701
    
    
    $
    528
 Short-term Borrowing
 Private Placement
 13




---



##### 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
became 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).
       14




---



##### Table of Contents



a.
    
    at the end of each fiscal quarter commencing with the fiscal quarter ending April 30, 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
  15




---



##### Table of Contents



Long-term
    
    
    Capital
    
    
    TotalDebt
    
    
    Leases
    
    
    DebtRemaining 2007
    
    $
    
    
    
    $
    20
    
    
    $
    202008
    
    
    347
    
    
    
    78
    
    
    
    4252009
    
    
    12.153
    
    
    
    71
    
    
    
    12,224342010
    
    
    
    
    
    
    34
    
    
    
    342011 and thereafter
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    12,500
    
    
    
    203
    
    
    
    12,703Less discount
    
    
    5,924
    
    
    
    
    
    
    
    5,924Less current portion
    
    
    
    
    
    
    78
    
    
    
    78Long-term portion
    
    $
    6,576
    
    
    $
    125
    
    
    $
    6,701
 8. Stock Options and Warrants
 Stock Options and Awards
   WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Exercise
    
    Contractual
    
    Intrinsicof Shares
    
    Price
    
    Term
    
    ValueBalance outstanding at July 31, 2006
    
    
    3,235
    
    
    $
    3.54
    
    
    
    7.0
    
    
    $
    878Granted
    
    
    1,299
    
    
    
    2.47Exercised
    
    
    (30
    )
    
    
    1.43Forfeited/expired
    
    
    (549
    )
    
    
    4.03Balance outstanding at April 30, 2007
    
    
    3,955
    
    
    $
    3.13
    
    
    
    6.4
    
    
    $
    331Options exercisable at April 30, 2007
    
    
    2,359
    
    
    $
    3.28
    
    
    
    5.3
    
    
    $
    331
    16




---



##### Table of Contents



WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Grant
    
    Contractual
    
    Intrinsicof Shares
    
    Value
    
    Term
    
    ValueUnvested balance outstanding at July 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Granted
    
    
    275
    
    
    
    2.50Vested
    
    
    (75
    )
    
    
    2.58Forfeited
    
    
    Unvested balance outstanding at April 30, 2007
    
    
    200
    
    
    $
    2.30
    
    
    
    2.5
    
    
    $
    398
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateNumber
    
    Purchase
    
    Contractual
    
    Intrinsicof Shares
    
    Price
    
    Term
    
    ValueUnvested balance outstanding at July 31, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Granted
    
    
    100
    
    
    
    0.00Vested
    
    
    Forfeited
    
    
    Unvested balance outstanding at April 30, 2007
    
    
    100
    
    
    $
    0.00
    
    
    
    2.5
    
    
    $
    100
  Nine months ended April 30,2007
    
    
    2006Selling and marketing
    
    $
    119
    
    
    $
    19General and administrative
    
    
    1,287
    
    
    
    344Research and development
    
    
    8
    
    
    
    6Cost of products sold
    
    
    15
    
    
    
    4$
    1,429
    
    
    $
    373
   Nine months ended April 30,2007
    
    2006Expected stock price volatility
    
    
    62
    %
    
    
    66
    %Expected life of options
    
    5.8 years
    
    4.7 yearsRisk-free interest rate
    
    
    4.8
    %
    
    
    3.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
  17




---



##### Table of Contents



Warrants
   WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicShares
    
    Price
    
    Term
    
    ValueOutstanding at July 31, 2006
    
    
    1,302
    
    
    $
    2.16
    
    
    
    4.4
    
    
    $
    383Granted
    
    
    11,636
    
    
    $
    2.21Exercised
    
    
    Forfeited/expired
    
    
    Outstanding at April 30, 2007
    
    
    12,938
    
    
    $
    2.20
    
    
    
    4.5
    
    
    $
    89Warrants exercisable at April 30, 2007
    
    
    7,535
    
    
    $
    2.20
    
    
    
    4.5
    
    
    $
    89
   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
    
    
    1,21911,636
 
 (1)
    
    The Roth Warrants were issued on February 20, 2007.    18




---



##### Table of Contents



.
 19




---



##### Table of Contents



9. Income Taxes
 ®
  10. Supplemental Cash Flow Information
  Nine months ended April 30,2007
    
    2006Interest paid
    
    $
    957
    
    
    $
    393Income taxes paid
    
    $
    164
    
    
    $
    102Capital lease obligations for new equipment
    
    $
    181
    
    
    $
    65Conversion of Unsecured Notes
    
    $
    4,452
    
    
    $
    Value of warrant issued with debt
    
    $
    
    
    
    $
    2,331
 11. Comprehensive Income (Loss)
  Three months ended April 30,
    
    
    Nine months ended April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (4,308
    )
    
    $
    (8,075
    )
    
    $
    (10,717
    )
    
    $
    (20,323
    )Foreign currency translation adjustments
    
    
    (10
    )
    
    
    (12
    )
    
    
    (37
    )
    
    
    (11
    )Comprehensive loss
    
    $
    (4,318
    )
    
    $
    (8,087
    )
    
    $
    (10,754
    )
    
    $
    (20,334
    )
  12. Commitments and Contingencies
 FDA approval of the OraTest ® product
 ®
 20




---



##### Table of Contents



®
 ® ®
 ®
 Litigation
   ® ®
  21




---



##### Table of Contents



13. Subsequent Events
 Peridex ® Disposition
 ® ®
  ® ®
 Resignation
of President and Chief Executive Officer
  
    
    we will pay to Dr. Burkett a $90,000 severance payment
and pay for COBRA coverage for Dr. Burkett for six months
following resignation;
    
    all vested and unvested options to purchase shares of
Zilas common stock terminated upon resignation; provided,
however, that 200,000 options that vested prior to the resignation
and that are exercisable at $0.76 per share will survive resignation
and remain exercisable for two years; and
    
    Dr. Burkett will retain 100,000 shares of restricted
stock previously awarded to him, of which 66,666 shares were unvested.
  22




---



##### 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
  ®
 ®
 Disposition of Peridex ®
 ® ®
 Private Placement
  23




---



##### Table of Contents



Product Development
 ® ® ® OraTest®.
 Results of Operations
  Three months ended April 30,Percent of
    
    
    
    
    
    
    Percent ofNet
    
    
    
    
    
    
    Net2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    ChangeNet revenues
    
    $
    10,750
    
    
    
    100
    %
    
    $
    1,218
    
    
    
    100
    %
    
    
    783
    %Cost of products sold
    
    
    4,231
    
    
    
    39
    
    
    
    710
    
    
    
    58
    
    
    
    496Gross profit
    
    
    6,519
    
    
    
    61
    
    
    
    508
    
    
    
    42
    
    
    
    1,183Operating Costs and Expenses:Marketing & selling
    
    
    4,326
    
    
    
    40
    
    
    
    1,782
    
    
    
    146
    
    
    
    142General & administrative
    
    
    2,682
    
    
    
    25
    
    
    
    2,651
    
    
    
    218
    
    
    
    1Research & development
    
    
    2,389
    
    
    
    22
    
    
    
    2,452
    
    
    
    201
    
    
    
    (3
    )Depreciation & amortization
    
    
    909
    
    
    
    9
    
    
    
    369
    
    
    
    30
    
    
    
    14610,306
    
    
    
    96
    
    
    
    7,254
    
    
    
    595
    
    
    
    42Loss from operations
    
    
    (3,787
    )
    
    
    (35
    )
    
    
    (6,746
    )
    
    
    (553
    )
    
    
    (44
    )Other income (expense), net
    
    
    (805
    )
    
    
    (8
    )
    
    
    (903
    )
    
    
    (74
    )
    
    
    (11
    )Loss before income taxes
    
    
    (4,592
    )
    
    
    (43
    )
    
    
    (7,649
    )
    
    
    (627
    )
    
    
    (40
    )Income tax benefit (expense)
    
    
    191
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Net loss from continuing operations
    
    $
    (4,401
    )
    
    
    (41
    )
    
    $
    (7,649
    )
    
    
    (627
    )
    
    
    (43
    )
  24




---



##### Table of Contents



Nine months ended April 30,Percent of
    
    
    
    
    
    
    Percent ofNet
    
    
    
    
    
    
    Net2007
    
    
    Revenues
    
    
    2006
    
    
    Revenues
    
    
    ChangeNet revenues
    
    $
    18,147
    
    
    
    100
    %
    
    $
    2,701
    
    
    
    100
    %
    
    
    572
    %Cost of products sold
    
    
    7,758
    
    
    
    43
    
    
    
    1,566
    
    
    
    58
    
    
    
    395Gross profit
    
    
    10,389
    
    
    
    57
    
    
    
    1,135
    
    
    
    42
    
    
    
    815Operating Costs and Expenses:Marketing & selling
    
    
    9,248
    
    
    
    51
    
    
    
    4,088
    
    
    
    151
    
    
    
    126General & administrative
    
    
    9,567
    
    
    
    53
    
    
    
    7,600
    
    
    
    281
    
    
    
    26Research & development
    
    
    5,741
    
    
    
    31
    
    
    
    5,739
    
    
    
    213
    
    
    
    Depreciation & amortization
    
    
    1,997
    
    
    
    11
    
    
    
    1,025
    
    
    
    38
    
    
    
    9526,553
    
    
    
    146
    
    
    
    18,452
    
    
    
    682
    
    
    
    44Loss from operations
    
    
    (16,164
    )
    
    
    (89
    )
    
    
    (17,317
    )
    
    
    (640
    )
    
    
    (7
    )Other income (expense), net
    
    
    (5,053
    )
    
    
    (28
    )
    
    
    (852
    )
    
    
    (32
    )
    
    
    (493
    )Loss before income taxes
    
    
    (21,217
    )
    
    
    (117
    )
    
    
    (18,169
    )
    
    
    (672
    )
    
    
    17Income tax benefit (expense)
    
    
    4,001
    
    
    
    22
    
    
    
    (4
    )
    
    
    
    
    
    
    Net loss from continuing operations
    
    $
    (17,216
    )
    
    
    (95
    )
    
    $
    (18,173
    )
    
    
    (672
    )
    
    
    (5
    )
 ® ® ®
 ®
 ® ®
 ®
 ® ®
 25




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##### Table of Contents



®
 Inflation and Seasonality
  Liquidity and Capital Resources
 ®
  ®
  Nine months ended April 30,2007
    
    2006Net cash used in operating activities
    
    $
    (9,773
    )
    
    $
    (16,393
    )Net provided by (used in) investing activities
    
    
    1,857
    
    
    
    (4,963
    )Net cash provided by (used in) by financing activities
    
    
    13,610
    
    
    
    17,593
 26




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##### Table of Contents



April 30, 2007
    
    July 31, 2006Cash and cash equivalents
    
    $
    9,652
    
    
    $
    3,958Working capital
    
    
    12,297
    
    
    
    (6,854
    )Current ratio
    
    
    2.4
    
    
    
    0.8
  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).
  27




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##### Table of Contents



a.
    
    $12,000,000 in aggregate principal amount of 6% Senior
Secured Convertible Notes (the Secured Notes), which
became 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).
       a.
    
    at the end of each fiscal quarter commencing with the fiscal quarter ending April 30, 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.
  28




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##### Table of Contents



Credit Facility
 
 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
    
    $
    
    
    
    $
    12,500
    
    
    $
    
    
    
    $
    
    
    
    $
    12,500Operating leases
    
    
    169
    
    
    
    613
    
    
    
    243
    
    
    
    
    
    
    
    1,025Capital lease obligations
    
    
    20
    
    
    
    149
    
    
    
    34
    
    
    
    
    
    
    
    203Purchase obligations
    
    
    90
    
    
    
    1,970
    
    
    
    
    
    
    
    
    
    
    
    2,060Total
    
    $
    279
    
    
    $
    15,232
    
    
    $
    277
    
    
    $
    
    
    
    $
    15,788
  29




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##### Table of Contents



Summary of Critical Accounting Policies and Estimates
  Accounting for Income Taxes
      EBITDA
  Reconciliation of Non-GAAP Measures to GAAP Measures
Unaudited
(in thousands)
 Nine months ended April 30,2007
    
    
    2006EBITDA
    
    $
    (1,998
    )
    
    $
    (17,435
    )Interest income
    
    
    426
    
    
    
    231Interest expense
    
    
    (6,733
    )
    
    
    (898
    )
 30




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##### Table of Contents



Nine months ended April 30,2007
    
    
    2006Income tax expense
    
    
    (67
    )
    
    
    (4
    )Amortization of deferred financing costs
    
    
    2,379
    
    
    
    204Amortization of debt discounts
    
    
    3,046
    
    
    
    114Non-cash interest on term loan
    
    
    202
    
    
    
    77Gain from sale of discontinued operations
    
    
    (10,973
    )
    
    
    Non-cash derivative (income) expense
    
    
    (1,059
    )
    
    
    97Non-cash stock-based employee compensation expense
    
    
    1,425
    
    
    
    329Non-cash charge for options issued to outside parties
    
    
    29
    
    
    
    63Other non-cash items  net
    
    
    (36
    )
    
    
    (282
    )Change in assets and liabilities:Receivables
    
    
    225
    
    
    
    3,864Inventories
    
    
    21
    
    
    
    (1,845
    )Prepaid expenses and other assets
    
    
    846
    
    
    
    (386
    )Accounts payable and accrued liabilities
    
    
    2,494
    
    
    
    (522
    )Net cash used in operating activities
    
    $
    (9,773
    )
    
    $
    (16,393
    )
 Recent Accounting Pronouncements
  
 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.
 ®
 31




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##### Table of Contents



Part II  Other Information
 
 Item 1. Legal Proceedings.
   ® ®
    32




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##### Table of Contents



Item 1A. Risk Factors.
  33




---



##### Table of Contents



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.
 ® ®
 ® ® ® ® ® ®
 ®
 ® ®
 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.
 ® ®
 ®
  34




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##### Table of Contents




    
    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 acquisition of Pro-Dentec .
  Historically we have been dependent on a few key products and our future growth is dependent on the
development of new products.
 ® ® ® ®
 35




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##### Table of Contents



® ®
 ®
   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.
  36




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##### Table of Contents



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.
    We require certain raw materials for our manufacturing processes that may only be acquired through
limited sources.
  37




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##### Table of Contents



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.
   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.
  38




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##### Table of Contents



Item 3. Defaults upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information.
    
 Item 6. Exhibits.
  ExhibitNumber
    
    Description3.1
    
    Certificate of Correction and Certificate of Incorporation (incorporated by reference to Exhibit 3-A
filed with the Companys Form 10-K for the year ended July 31, 1999)3.2
    
    Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3-B filed
with the Companys Form 10-K for the year ended July 31, 2005)3.3
    
    Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 4.3 filed
with the Companys Form S-3 Registration Statement No. 333-139698 on December 28, 2006)3.4
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3-B filed with the Companys Form 10-K
for the year ended July 31, 2002)4.1
    
    Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (incorporated
by reference to Exhibit 3-D filed with the Companys Form 10-K for the year ended July 31, 2001)4.2
    
    Warrant, dated February 20, 2007, issued to Roth Capital Partners, LLC (incorporated by reference to
Exhibit 4.1 of Form 8-K filed February 23, 2007)10.1
    
    Asset Purchase Agreement, dated September May 31, 2007, by and between Zila, Inc., Zila Pharmaceuticals,
Inc., 3M and 3M Innovative Properties Company (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed June 6, 2007)10.2*
    
    Employment Agreement between Zila, Inc. and Gary V. Klinefelter, dated as of March 31, 2007 (1)10.3*
    
    Employment Agreement between Zila, Inc. and Diane E. Klein, dated as of March 31, 2007 (1)10.4
    
    Offer letter between Zila, Inc. and
Lawrence A. Gyenes (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed March 13, 2007) (1)
 39




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##### Table of Contents



ExhibitNumber
    
    Description10.5*
    
    Form of Restricted Stock Award Agreement (1)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
 
 (1)
    
    Management contract or compensatory plan or arrangement*
    
    Filed herewith**
    
    Furnished herewith 40




---



##### Table of Contents



SIGNATURES
  Zila, Inc.Date: June 18, 2007
    By:
    /s/ Lawrence A. GyenesLawrence A. GyenesChief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer) 41




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##### Table of Contents



ExhibitNumber
    
    Description3.1
    
    Certificate of Correction and Certificate of Incorporation (incorporated by reference to Exhibit 3-A
filed with the Companys Form 10-K for the year ended July 31, 1999)3.2
    
    Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3-B filed
with the Companys Form 10-K for the year ended July 31, 2005)3.3
    
    Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 4.3 filed
with the Companys Form S-3 Registration Statement No. 333-139698 on December 28, 2006)3.4
    
    Amended and Restated Bylaws (incorporated by reference to Exhibit 3-B filed with the Companys Form 10-K
for the year ended July 31, 2002)4.1
    
    Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock (incorporated
by reference to Exhibit 3-D filed with the Companys Form 10-K for the year ended July 31, 2001)4.2
    
    Warrant, dated February 20, 2007, issued to Roth Capital Partners, LLC (incorporated by reference to
Exhibit 4.1 of Form 8-K filed February 23, 2007)10.1
    
    Asset Purchase Agreement, dated September May 31, 2007, by and between Zila, Inc., Zila Pharmaceuticals,
Inc., 3M and 3M Innovative Properties Company (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed June 6, 2007)10.2*
    
    Employment Agreement between Zila, Inc. and Gary V. Klinefelter, dated as of March 31, 2007 (1)10.3*
    
    Employment Agreement between Zila, Inc. and Diane E. Klein, dated as of March 31, 2007 (1)10.4
    
    Offer letter between Zila, Inc. and
Lawrence A. Gyenes (incorporated by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed March 13, 2007) (1)10.5*
    
    Form of Restricted Stock Award Agreement (1)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
 
 (1)
    
    Management contract or compensatory plan or arrangement*
    
    Filed herewith**
    
    Furnished herewith 42