ZILA Zila (MM)

Zila, Inc. (Nasdaq: ZILA) today reported financial results for its fiscal 2009 second quarter ended January 31, 2009.

�We are making every effort to conserve our cash,� said David Bethune, chairman and chief executive officer of Zila. �We have, among other things, continued salary reductions for a number of management personnel, further reduced headcount throughout the organization, eliminated the employee stock purchase plan and its associated costs, furloughed certain manufacturing production personnel, reduced the number of seminar programs and streamlined the cost structure of these programs, and reduced tradeshow expenditures. As a result of these cost cutting efforts, we substantially narrowed our operating loss, excluding a non-cash impairment charge for goodwill and other intangible assets recorded in the fiscal 2009 second quarter.�

Bethune continued: �In order to continue as an on-going business and fund our operations over the next twelve months, we will require additional funds and need to restructure our senior secured convertible notes. We have had discussions with a number of potential investors, all of whom have required, as a condition of their investment, that the senior secured convertible notes be repaid from the funds provided by the investor(s) and that this repayment be at a substantial discount from the $12.0 million principal outstanding to reflect what they believe to be the current market value of those notes.

�Our business and its value have, in some measure, deteriorated because of the lack of an agreement by the holders of the company�s senior secured convertible notes as to the value of the notes. In addition, we have been unable obtain their approval to pursue a working capital line of credit secured by our inventory and accounts receivable, even though the note agreements provide that such approval is �not to be unreasonably withheld.��

Fiscal 2009 Second Quarter Financial Results

• Net revenues were $8.5 million compared with $10.5 million for the second quarter of fiscal 2008. Sales of ViziLite� Plus were $2.7 million compared with $3.2 million for the second quarter of fiscal 2008. The company attributed the decline in revenues primarily to the global economic downturn and customer concern about our viability as an ongoing business.
• Gross profit was $4.7 million, or 56% of net revenues, compared with $6.2 million, or 60% of net revenues, in the second quarter of fiscal 2008.
• Marketing and selling expense decreased 36% to $3.3 million from $5.2 million in the second quarter of fiscal 2008. The decrease reflects a lower level of commissions and bonuses for the sales force on reduced sales levels, reduced sales force headcount and reductions in expenditures in non-direct selling related expenses.
• General and administrative expense decreased 42% to $1.8 million from $3.1 million for the second quarter of fiscal 2008, primarily due to headcount and salary reductions, as well as the reduction, deferral or elimination of certain employee benefits and non-critical programs across the organization.
• The company recorded a non-cash impairment of goodwill and other intangible assets charge of $23.2 million in connection with the company�s impairment analysis required under U.S. Generally Accepted Accounting Principles and as more fully described in the company�s Form 10-Q for the quarterly period ended January 31, 2009.
• Research and development (R&D) expense was $78,000, compared with $789,000 for the second quarter of fiscal 2008. The decrease in R&D is due to the curtailment of the OraTest� regulatory program.
• Including the non-cash impairment charge of $23.2 million, equal to $2.23 per share, net loss attributable to common stockholders was $25.3 million, or $2.43 per share, compared with $4.7 million, or $0.54 per share, for the second quarter of fiscal 2008.
• Cash and cash equivalents at January 31, 2009 were $2.5 million compared with $4.5 million at July 31, 2008. The decrease primarily reflects cash used in operations of $1.5 million, of which $0.3 million resulted from working capital changes.

The company has retained financial and legal advisors to assist in restructuring its senior secured convertible notes, raise capital and explore other strategic opportunities. If the company is unable to obtain a solution to its debt, it will likely be forced to file for protection under Chapter 11 of the Federal Bankruptcy Code.

The company has made timely interest payments under the terms of the senior secured convertible notes and is otherwise in compliance with the terms of the notes, except for the interest payment due January 31, 2009, which has not been made. The company was unable to issue shares for the January 31, 2009 interest payment because the issuance of the required number of shares would have required shareholder approval under applicable NASDAQ rules. In addition, given the company�s current level of cash and cash equivalents and the impact of the global economic downturn on its business, the company may not have sufficient cash available to pay its future quarterly interest payments due under the senior secured convertible notes. The failure to make this payment is an event of default under the senior secured convertible notes. Although the company has not received a notice of default or acceleration from the note holders, the company has reclassified the senior secured convertible notes to current liabilities.

As a result of the technical default and sales declines, the company has substantial doubt about its ability to continue as a going concern.

Recent Events

During the second quarter of fiscal 2009, the company completed the first phase of the global rollout of its proprietary oral cancer screening product, ViziLite� Plus. Zila now markets ViziLite Plus in all 50 states of the U.S., as well as Puerto Rico and Canada. Since May 2008, the company expanded to Western Europe by forming strategic alliances to distribute ViziLite Plus in a number of European markets. Currently, the product is available in the United Kingdom, Ireland, Germany, Spain, Portugal, France and Greece. In the next phase of its expansion, the company has entered in distribution agreements in other international markets, including China, India, Russia and Belarus, where product registration is in process. These markets will form the bulk of the company�s continued global expansion for ViziLite Plus.

Six Months Ended January 31, 2009

Net revenues were $18.2 million compared with $21.9 million for the first six months of fiscal 2008. Gross profit was $10.6 million, or 58% of net revenues, compared with $13.1 million, or 60% of net revenues, in the comparable period of fiscal 2008. Net loss attributable to common shareholders, which includes a non-cash impairment charge of $23.2 million, equal to $2.28 per share, was $28.1 million, or $2.76 per share, compared with $9.6 million, or $1.09 per share, in the year ago period.

About Zila, Inc.

Zila, Inc., headquartered in Scottsdale, Arizona, is a diagnostic company dedicated to the prevention, detection and treatment of oral cancer and periodontal disease. Zila manufactures and markets ViziLite� Plus with TBlue� (�ViziLite� Plus�), the company�s flagship product for the early detection of oral abnormalities that could lead to cancer. ViziLite� Plus is an adjunctive medical device cleared by the FDA for use in a population at increased risk for oral cancer. In addition, Zila designs, manufactures and markets a suite of proprietary products sold exclusively and directly to dental professionals for periodontal disease, including the Rotadent� Professional Powered Brush, the Pro-Select Platinum� ultrasonic scaler and a portfolio of oral pharmaceutical products for both in-office and home-care use. All of Zila�s products are marketed and sold in the United States and Canada primarily through the company�s direct field sales force and telemarketing organization. The company�s products are marketed and sold in other international markets through the direct sales forces of third party distributors. Zila�s marketing programs reach most U.S. dental offices.

This press release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based largely on Zila's expectations or forecasts of future events, can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond the Company's control. Therefore, actual results could differ materially from the forward-looking statements contained herein. A wide variety of factors could cause or contribute to such differences and could adversely affect revenue, profitability, cash flows and capital needs. There can be no assurance that any forward-looking statements contained in this press release will, in fact, transpire or prove to be accurate. For a more detailed description of these and other cautionary factors that may affect Zila's future results, please refer to Zila's Form 10-K for its fiscal year ended July 31, 2008 and Form 10-Q for the quarter ended January 31, 2009.

For more information about the Company and its products, please visit www.zila.com.

ZILA, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (in thousands - except for per share data) � � � �

Three Months Ended January 31,

Six Months Ended January 31,

2009 2008 2009 2008 � Net revenues $ 8,513 $ 10,491 $ 18,154 $ 21,931 Cost of products sold � 3,773 � � 4,245 � � 7,549 � � 8,826 � � Gross profit 4,740 6,246 10,605 13,105 � Operating costs and expenses: Marketing and selling 3,348 5,221 7,719 10,517 General and administrative 1,813 3,127 4,036 6,602

Impairment of goodwill and other intangible assets

23,193 - 23,193 - Research and development 78 789 244 1,991 Depreciation and amortization � 611 � � 944 � � 1,535 � � 1,859 � � Total operating costs and expenses � 29,043 � � 10,081 � � 36,727 � � 20,969 � � Loss from operations � (24,303 ) � (3,835 ) � (26,122 ) � (7,864 ) � Other income (expense): Interest income - 73 16 198 Interest expense (894 ) (801 ) (1,816 ) (1,568 ) Derivative expense - - - (24 ) Other expense � (42 ) � (26 ) � (91 ) � (2 ) � Other expense - net � (936 ) � (754 ) � (1,891 ) � (1,396 ) � Loss from continuing operations before income taxes (25,239 ) (4,589 ) (28,013 ) (9,260 ) Income tax expense � - � � - � � (13 ) � (12 ) � Loss from continuing operations (25,239 ) (4,589 ) (28,026 ) (9,272 ) Loss from discontinued operations � (18 ) � (147 ) � (29 ) � (319 ) � Net loss (25,257 ) (4,736 ) (28,055 ) (9,591 ) Preferred stock dividends � 9 � � 9 � � 20 � � 20 � � Net loss attributable to common shareholders $ (25,266 ) $ (4,745 ) $ (28,075 ) $ (9,611 ) � Basic and diluted net loss per common share: Loss from continuing operations $ (2.43 ) $ (0.52 ) $ (2.76 ) $ (1.05 ) Loss from discontinued operations � - � � (0.02 ) � - � � (0.04 ) � Net loss attributable to common shareholders $ (2.43 ) $ (0.54 ) $ (2.76 ) $ (1.09 ) � Weighted average common shares outstanding - basic and diluted � 10,398 � � 8,783 � � 10,172 � � 8,777 � � ZILA, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands) � � January 31, July 31, 2009 2008 (Unaudited) � Current assets $ 11,393 $ 14,675 Property and equipment - net 4,733 5,317 Goodwill and other intangible assets - net 4,473 28,565 Other assets � 1,388 � 1,813 � Total assets $ 21,987 $ 50,370 � Current liabilities $ 15,742 $ 8,116 Long-term liabilities 503 8,974 Shareholders' equity � 5,742 � 33,280 � Total liabilities and shareholders' equity $ 21,987 $ 50,370