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Edited Transcript of AYTU earnings conference call or presentation 14-Nov-19 9:30pm GMT

Q1 2020 Aytu BioScience Inc Earnings Call

ENGLEWOOD Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Aytu BioScience Inc earnings conference call or presentation Thursday, November 14, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David A. Green

Aytu BioScience, Inc. - CFO, Secretary & Treasurer

* Joshua R. Disbrow

Aytu BioScience, Inc. - Chairman & CEO

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Conference Call Participants

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* Carl Edward Byrnes

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for joining us for the Aytu BioScience First Quarter Fiscal 2020 Business Update Call. With me this afternoon are Aytu's Chairman and Chief Executive Officer, Josh Disbrow; and Chief Financial Officer, Dave Green. Aytu Bioscience issued a press release this afternoon with details of the company's operational and financial results. A copy of the press release is available on the news page of the company's website at aytubio.com.

I'd like to remind everyone that today's call is being recorded. A replay of today's call will be available by using the telephone numbers and conference ID provided in the earnings press release. In addition, a webcast will be accessible live and archived on Aytu BioScience's website within the Investors section under Events and Presentations at aytubio.com.

Finally, I'd also like to call your attention to the customary safe harbor disclosure regarding forward-looking information. The conference call today will contain certain forward-looking statements, including statements regarding the goals, strategies, beliefs, expectations and future potential operating results of Aytu BioScience.

Although management believes these statements are reasonable based on estimates, assumptions and projections as of today, November 14, 2019, these statements are not guarantees of future performance. Time-sensitive information may no longer be accurate at the time of any telephonic or webcast replay. Actual results may differ materially as a result of risks, uncertainties and other factors, including, but not limited to, the factors set forth in the company's filings with the SEC. Aytu undertakes no obligation to update or revise any of these forward-looking statements.

I'd now like to turn the call over to Aytu's CEO, Josh Disbrow.

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [2]

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Thank you, Jess. Good afternoon. Thanks for joining us for today's Q1 fiscal 2020 business update call. Q1 was a very productive quarter for the company, during which we continued the transformation of Aytu BioScience. The actions we took this quarter serve to set the new Aytu BioScience up for the future and position us for where we believe the company is headed after a transformational 3-month period.

This call will help to more fully describe the new go-forward Aytu and frame where we believe we can go following the multiple transactions we've recently announced. From the end of June to the end of September and into October, we've conducted multiple transactions leading to significant growth of the company. This transformative growth has been accomplished through one planned acquisition and another closed acquisition, the launch of 3 co-promotions, 1 for each of our 3 heritage Rx products, the readout of Natesto clinical data and the addition of Natesto to 2 major payer formularies.

Further, there were several corporate highlights during the quarter, including the addition of Aytu to the Russell Microcap Index at the start of the quarter and the closing of a private placement with 2 health care institutions that came just after quarter end. It has been a productive 3 months to say the very least.

It was also a solid quarter from a financial performance perspective in that we posted increased product revenue year-over-year in the face of the continuing transition of the Natesto patient support program, while cutting the cash used in operations sequentially. We continue to feel a slight Natesto script slowdown related to our transition to Natesto at home, but we fully expect to see prescription growth going forward, and this quarter is off to a good start.

Also, ZolpiMist scripts are up 20% from quarter-to-quarter, and we're now moving back into cough and cold season, such that we expect to see a Tuzistra uptick as well, but the big discussion points around our transformation to a $40 million plus revenue company. So to that end, I'll highlight the key strategic transactions we've undertaken in the last 3 or so months that served to build the new Aytu BioScience.

First, we announced the planned acquisition of Innovus Pharmaceutical. Innovus is a publicly traded specialty pharmaceutical company focused on consumer health, and Innovus generated approximately $23 million in revenue for the 4 quarters ending September 30. With this acquisition and the closing of the Cerecor commercial portfolio acquisition, Aytu's combined pro forma revenue for the quarter ending September 30 was $10.6 million, representing more than 400% growth over Aytu's same quarter last year.

For the 12 months ending September 30, the combined pro forma revenue was nearly $43 million. The acquisition of Innovus is exciting and allows for increased scale through the addition of over 30 consumer products and a company that operates near breakeven on a cash basis. Further, it enables Aytu to gain entry into the $40 billion consumer health care segment to further diversify our product portfolio and our offerings to patients.

Because we are acquiring the entire company, we expect to significantly reduce the Innovus operating expenses by virtue of the removal of public company costs and redundant positions and personnel. We also expect to reduce overhead via outsourcing of logistics and warehousing, downsizing of the Innovus facility and the consolidation of various overlapping functions.

We expect to file the joint S-4 registration statement for review by the SEC by the end of the calendar year. And depending on review time, comments, et cetera, we expect to file the joint proxy statement shortly thereafter.

Along with the Innovus planned acquisition, we're building additional commercial scale through the acquisition of the Cerecor commercial business, which we announced late last quarter and just closed November 1. This commercial portfolio purchase includes the acquisition of 6 prescription products, 5 drugs and a prescription device, that generated over $12 million in revenue for the 4 quarters ending September 30. Further, and as part of the acquisition, we brought over much of the commercial team supporting these products and the growth they've experienced. This is a team, I'll remind you, that is operated at better than breakeven. So we've acquired products and revenue without a corresponding expense drag.

We've already begun the post-acquisition integration process to keep the highest performers from both the Aytu heritage team and the Cerecor heritage team. Already, we've conducted a top-to-bottom review of the sales operation, reviewed performance on a territory-by-territory basis and removed redundant head count and underperforming territories. We also consolidated several commercial functions, again, taking the best from each side. With this, we've already cut several million dollars of expenses that we expect to be realized once we've paid out severance payments from this reduction in head count.

So along with Cerecor asset purchase comes a rationalization plan to enable the strong level of sales support, while removing underperforming territories. And speaking of products, we added several unique products competing in large therapeutic areas, and products that we believe can be effectively cross-sold in primary care, and specifically, in many of the offices we're already visiting. We can increase physician reach and frequency on the core products, and the cross-training and cross-selling of Natesto, in particular, has already started.

With the 3 entities combined, we will scale the top line to over $42 million in revenue based on combined financials for the 4 quarters ending September 30. Specifically, for the quarter ending September 30 on a pro forma basis, combined revenue, as reported yesterday and today by Aytu, Innovus and Cerecor, was right at $11 million, just shy of $11 million.

Once we have the transactions fully integrated, we expect to further grow product sales and synergize operations to realize additional cost savings and accelerate our path to profitability. We have an increasingly clear view to profitability and expect to bring that further into focus following the close of the Innovus transaction. Once we get on the other side of the integration process between the Aytu and Cerecor teams and close the Innovus merger, we expect that by the end of next year, we will have materially cut the cash burn.

By the time we get into the 2 quarters following that, burn should be even smaller based on our expected growth and our go-forward operating expense plan. But prior to getting into our near-term growth plans, I'll hand it over to our CFO, Dave Green, to review the quarter's financials. Dave?

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David A. Green, Aytu BioScience, Inc. - CFO, Secretary & Treasurer [3]

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Thank you, Josh, and thank you all for joining us today. I'll do a brief review of our financial results for this first quarter of our 2020 fiscal year that ended September 30, 2019, and then I'll make a few comments on the newly transformed Aytu.

Top line net revenue for Q1 was $1.44 million, a slight uptick compared with Q1 2019. Q1 gross profit margin was 74%, stronger than the 71% margin reported for Q1 last year. Sales mix and continued strong gross to net performance positively impacted our Q1 gross profit margin.

Reported operating expenses for Q1 were higher than last -- than the year-ago period. But a closer look reveals that Q1 2020 core ongoing operating expenses were actually lower than Q1 operating expenses last year.

When we adjust out noncash operating expenses, such as depreciation and amortization expense, adjust for Q1 2019 timing difference by adding back the FDA PDUFA fee refund to Q1 2019 operating expenses and deduct transaction costs related to the Cerecor and Innovus transactions, the resulting OpEx for Q1 this year is actually more than $100,000 lower than last year.

For another look at cost containment, net cash used in operating activities for Q1 this year was $3 million, which is approximately $500,000 or 14% below our quarterly average of $3.5 million over the preceding 4 quarters. Our bottom line loss was $4.9 million or $0.32 per share and greater than the $3.4 million loss realized in Q1 2019, but much better than the Q4 2019 loss of $14.5 million.

I remind listeners that Q4 was negatively impacted by a $9.8 million noncash charge related to the expected increase in future contingent consideration. The Q1 loss per share was based on a weighted average share count of approximately 15.33 million shares on September 30.

On the balance sheet, we ended the quarter with approximately $7.3 million of cash. But given the effects of the $10 million private placement we completed mid-October, our September 30 pro forma cash balance was $16.6 million.

Additionally, as of September 30, we recognized a current asset in the amount of $1 million, which represents a loan to Innovus. This note will be folded into the merger with Innovus, lowering the number of shares to be issued to close the transaction. Other than the impacts of cash and the Innovus note, other balance sheet items at the end of Q1 were stable relative to last quarter.

One last note on the balance sheet. Our shareholders' equity balance temporarily fell below the NASDAQ threshold as of the end of the quarter. However, the shareholders' equity balance was back in compliance 2 weeks later when we announced and closed the $10 million private placement. We then added additional cushion to the equity balance on November 1, in connection with the closing of the Cerecor asset acquisition.

So in summary, during Q1, we continue to manage COGS and operating COGS downward, while we set up the next phase of growth for Aytu. Looking ahead, from the quarter end and concurrent with the November 1 addition of Cerecor commercial assets and the commercial team, we substantially reduced legacy Aytu head count as a major first step in reducing operating expenses to accelerate the company toward profitability.

This restructuring of the Aytu legacy commercial team will yield annualized cost savings in the range of $3.25 million to $3.5 million. On top of that, we expect another $1 million plus annual OpEx savings as we consolidate the Cerecor commercial contracts with legacy Aytu contracts and begin to implement the restructured Natesto co-promote arrangement with Acerus.

And with that, let me turn the call back over to Josh for some additional commentary.

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [4]

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Thanks, Dave. So now on to our growth plans as the new Aytu. We expect to grow revenues through multiple avenues going forward. First, we expect to continue to grow our core products organically. We have a solid team of heritage Aytu sales performers, driving sales in Natesto, ZolpiMist and Tuzistra. We also have a team of Cerecor heritage performers driving sales of core products, Karbinal, AcipHex Sprinkle and the prescription vitamin line.

Second, we have a group of already cross-trained reps increasing the Natesto promotional focus in real-time. Several of the top Cerecor heritage reps have already been cross-trained on Natesto. And while they're in their high-prescribing primary care offices, they'll now be promoting Natesto.

Third, we have several co-promotional partnerships underway. We have Acerus Pharmaceuticals getting prepared to launch their U.S. specialty sales team, which we'll number 25. This team will call on urologists and endocrinologists, specifically.

We have Poly Pharmaceuticals' roughly 30 reps now promoting Tuzistra to Poly's primary care physician targets. And we have just announced our co-promotion agreement with Validus Pharmaceuticals, which is now promoting ZolpiMist to psychiatrists.

We've, in essence, grown our promotional footprint to over 100 sales representatives nationwide, with only 35 to 40 of this 100 being Aytu-compensated representatives. We've expanded our footprint without an expansion of OpEx.

Finally, we've released some important Natesto clinical data and reimbursement developments. You may recall our announcement from October that positive Natesto clinical data have been presented. Natesto, in a study conducted by KOL Ranjith Ramasamy from The University of Miami, has been shown to be the only testosterone replacement therapy not impacting fertility parameters. At the American Society for Reproductive Medicine Conference, Dr. Ramasamy and his team conclusively showed that hypogonadal men treated with Natesto over a 6-month period retain their fertility, as demonstrated by the maintenance of sperm concentration, motility and sperm count. No other testosterone treatment has shown this, so this presents a compelling case for Natesto stand-alone in the hypogonadism category. These data were presented by Dr. Ramasamy's group, and we expect a publication in the near term. On the reimbursement front, we signed 2 national payer contracts last July, giving more than 36 million new patients access to Natesto, which is another very positive development for the product. So this is all to say that we're pleased with all of these recent developments. We're happy to have completed the Cerecor transaction and have that implementation well underway. We're also excited to continue with the Innovus merger transaction and hope to have it closed in the coming months. And we're excited to have increased our promotional footprint to the 3 co-promotions. It was a very busy quarter or so, and the new Aytu is now beginning to take shape.

So with our prepared comments complete, we'll open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll move first to Jeffrey Cohen at Ladenburg Thalmann.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [2]

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So you closed on Cerecor November 1. So in theory, 2/3 of the quarter for the coming quarter will hit. So if that's a flat $3.4 million, we should expect about $2.2 million in Q2. Is that a good guesstimate?

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David A. Green, Aytu BioScience, Inc. - CFO, Secretary & Treasurer [3]

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That's in the range of reasonableness, Jeff.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [4]

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Okay, got it. And then can you talk a little further about timing of Innovus closing, as best you can at the moment.

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [5]

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Yes, absolutely. Happy to. So we are working through some, I would say, finishing touches on the S4 that obviously is filed jointly. We would expect to get that and are optimistic that we could have that filed by the end of the calendar year, potentially sooner than that, but we think squarely within calendar 2019. Obviously, dependent upon SEC review and their comments, we'll quickly, thereafter, follow with the filing of the proxy. And we think it's realistic that in the first calendar quarter of 2020 to have the transaction closed. So we would expect our first full quarter with Innovus to be the June quarter. Optimistic that we can push things forward. But I think, a base case for our planning purposes, as we think about how we integrate and how we grow the top line that realistically, the June quarter will be the quarter that we have Innovus fully under wraps.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [6]

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Okay. So you don't expect anything for Q3, but something may show up if you close earlier than the end of March?

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [7]

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I think -- yes, I think if it shows up, it's going to be late in Q3. We could get something done in March. But yes, I think realistically, we're planning internally on kind of an April 1 start would be sort of an ideal setup. Again, faster if we can get it done, but obviously, we'll be holding to the SEC's review and just the timing therein.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [8]

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Okay. And remind us, if you will, that's 4.2 million shares that you'll be adding at that time plus the CVRs?

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David A. Green, Aytu BioScience, Inc. - CFO, Secretary & Treasurer [9]

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Yes, 4.2 million common, yes.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [10]

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Okay, got it. And then lastly, could you walk us through an update as far as your discussion with payers on Natesto? And what kind of feedback you're getting? What they'd like to see further data presentations, et cetera?

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [11]

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Yes. So a couple of pieces there. So one of the encouraging aspects of the Natesto data is just that, that it actually brought some payers to the floor that hadn't actually really been willing to engage in any meaningful way. So what I can say, sort of generally speaking, as the discussions continue, we continue to pique interest in almost all cases. It's interest that wasn't otherwise there. So there's very clearly a differentiator here for the first time. While Natesto has a lot of clinical differentiators, this is one that we think can put it over the top. And so while I can't give specifics just because payers are going to move at their own pace, but we certainly feel good about the progress that's being made. Obviously, we announced a couple of big PBMs, adding it to their formularies, totaling now 36 million lives.

What I can say, in the relative early going with that now under our belts, we look at our couponing rates and we look at the deductions from growth that we do by virtue of coupons, very early, but we're seeing some indications in the couponing data through the data that we mine that the buydowns in some institutes are not as high as they were, so that's encouraging. And so we would expect, really, even without expanding the payer base. By just virtue of these 2 PBMs that we brought on board, we would expect to do less couponing and potentially realize an improved gross to net on those prescriptions.

And then finally, I'll say, with Acerus entering the U.S. here in real time, we would expect to really be able to get their help and really double our efforts with respect to interfacing with the payers. They're excited to get arm and arm with us to take the story further and really just expand our reach to get to additional payers around the country. So a lot of positives that are really percolating at the moment for Natesto.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [12]

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Okay. And then lastly for me, could you just give us a current snapshot as far as our total FTEs and FTEs associated with your commercial organization?

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [13]

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So we are roughly about 70 FTEs across the organization, and we have essentially, at the moment, in the neighborhood of 35 to 40 territories. So still working through some rationalization, potentially a few areas that will backfill in the context of territories that are vacant. But realistically, we're kind of in the 40 to 45 range realistically in terms of the commercial team.

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Operator [14]

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We'll go next to Carl Byrnes, Northland Capital Markets.

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Carl Edward Byrnes, Northland Capital Markets, Research Division - MD & Senior Research Analyst [15]

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I'm just wondering what you can add in terms of marketing initiatives around the spermatogenesis data that's now available. Obviously, you're expecting that to get picked up and published. But what might we see in terms of marketing with that in hand? And how do you think that might affect formulary and performance in Natesto over the coming quarters? And then I have a follow-up question to that as well.

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [16]

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So in terms of -- good question, Carl. So again, this will be something that we do in lockstep with our partners at Acerus as they come into the U.S. and help us really further guide strategy as it relates to both the clinical data as well as how that feeds into the payer strategy.

But again, from a marketing to payers perspective, obviously, we've got more latitude than we do with physician promotion. So we've already begun the process of introducing or reintroducing, in some cases, these data to the payers. And again, are getting good reaction. Obviously, this is something that led to being added to the large formularies.

In terms of rep promotion, it's a little bit more strategic in that it's going to be -- because it's not something that's squarely in the label at this moment. So it's something that we'll obviously be able to engage in the context of physicians that are engaging with our medical department, specifically our medical affairs personnel. It is being presented in real time, though, to physicians in various venues. So the reps are in varying levels of -- have varying levels of involvement with this promotion, but it's not over promotion as you would have once the product -- once this -- if this gets into the label. We, obviously, would expect to accelerate that promotion if and when we can get this data worked into the label.

Still too early to give any clear guidance on exactly what that might look like because, again, we're working with our partners at Acerus and we'll, of course, be subject to FDA review. But that's certainly something we planned in the near-term to get it more formally promotable, if you will, in the field so we can really maximize it.

But we're certainly utilizing it to the degree that we can with payers, certainly. In the thought leader community, it's gotten a lot of buzz. And I can tell you, just as recently as having been at the American Society for Reproductive Medicine Conference here, just very recently, a tremendous amount of attention was paid to the late-breaking presentation that Dr. Ramasamy and his team gave was to the full contingent, it was to the full audience, very well received. Some audience members expressing a significant surprise, very impressed. And I will say that there's -- there are plans to have that data sort of further elucidated, not just the publication, but potentially other upcoming conferences that are still to be determined. But in real-time, invites and so forth, have started to come forward to Dr. Ramasamy.

So I think there's a lot of opportunity to continue to get the word out around the spermatogenesis piece.

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Carl Edward Byrnes, Northland Capital Markets, Research Division - MD & Senior Research Analyst [17]

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Great. And then one -- a question on cash balances. It looks like on a pro forma for the private placement, you're at $16.6 million. Do you have any guidance with respect to how many -- how far out that would fund the operations at this juncture? And given the costs and severance associated with the Innovus transaction and, obviously, the acquired Cerecor assets?

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [18]

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Yes. So I can't give specific guidance other than to say we're adequately capitalized and feel good about where we are from a cash position standpoint. What I will say is, bringing on Cerecor, we brought on a commercial infrastructure that really doesn't burn cash. So we've actually helped ourselves tremendously by boosting the top line without a commensurate drag with respect to the OpEx. So that really doesn't, in any way, impact our cash balance. And the severance, while there is severance, it is pretty small, to say the least. We did have terminations, but we didn't have terminations of senior-level people, it was really reps and their managers. So we're not talking 6- and 12-month separation packages that were offered. So there wasn't a tremendous amount there. So yes, all in all, we're in a good cash spot. Again, we don't -- we're typically not in the habit of saying, here's exactly how long we expect. But as I said in my prepared remarks, Carl, we are certainly looking to reduce the cash burn here once we get on the other side of these transactions. It won't happen immediately, I don't want to set that expectation. But certainly, as we get to the end of next calendar year, we expect to have made a substantial dent and really work it down from there. It is dependent upon top line growth. But as David shared, we actually made a pretty aggressive stand on our expense reduction coming right out of the chute at -- right at the closing of a transaction, and we'll continue to be smart about how we operate territories and, certainly, about how we spend going forward. So we're in a good spot cash-wise.

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Operator [19]

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There appear to be no further questions at this time. Mr. Disbrow, I'll turn the conference back to you for any additional or closing remarks.

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Joshua R. Disbrow, Aytu BioScience, Inc. - Chairman & CEO [20]

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Great. Thank you. Thanks for the questions, and thanks to everyone for joining this afternoon's call. We look forward to next quarter's call and look forward to sharing our progress at that time. Thanks again for dialing in. Have a good evening.

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Operator [21]

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Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time, and have a great day.