Jaguar Health, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Jaguar is a commercial-stage gastrointestinal products company, reporting human-health and animal-health segments. Its wholly owned subsidiary Napo commercializes FDA-approved Mytesi for noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy. Comparisons with Q1 2017 are affected by the July 2017 Napo merger; Napo was not included in the prior-year reported results.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / December 31, 2017 |
|---|---|---|
| Total revenue | $804,356 | $822,410 in Q1 2017 |
| Product revenue | $626,967 | $74,544 in Q1 2017 |
| Collaboration revenue | $177,389 | $747,866 in Q1 2017 |
| Operating expenses | $5,932,617 | $4,698,012 in Q1 2017 |
| Loss from operations | $(5,128,261) | $(3,875,602) in Q1 2017 |
| Net loss | $(5,696,637) | $(4,715,358) in Q1 2017 |
| Net loss attributable to common shareholders | $(6,691,637), including a $995,000 deemed preferred-stock dividend | $(4,715,358) in Q1 2017 |
| Basic and diluted loss per share | $(0.05) | $(0.33) in Q1 2017 |
| Cash and cash equivalents | $7,808,324 | $520,698 at December 31, 2017 |
| Current assets / current liabilities | $10,867,402 / $9,384,395 | Working capital: approximately $1.48 million |
| Total assets / total liabilities | $50,267,342 / $20,259,695 | At March 31, 2018 |
| Debt, carrying value | Approximately $15.22 million: $10.88 million long-term convertible debt and $4.35 million current convertible and other notes | At March 31, 2018 |
Product revenue less product cost of revenue was approximately $163,000, or about 26% of product revenue; this is not a consolidated gross margin measure because collaboration revenue is also reported. Interest expense was $602,022, versus $180,072 in Q1 2017. Cash used in operating activities was $9,621,693, compared with $288,720 in Q1 2017; investing activities used $6,527. Financing activities provided $16,676,677, and cash increased by $7,048,457 during the quarter.
Material changes versus Q1 2017
- Total revenue declined 2.2%: Mytesi contributed $583,269 of product revenue, while collaboration revenue fell 76.3% and animal-health revenue was lower.
- Operating expenses rose 26.3%. Sales and marketing increased to $1,712,190, primarily reflecting Mytesi promotion and added personnel; research and development declined to $757,866, partly due to reduced clinical activity and an FDA fee waiver.
- Net loss increased 20.8%. Loss attributable to common shareholders increased 41.9%, also reflecting the $995,000 non-cash deemed dividend. Loss per share decreased from $(0.33) to $(0.05), while weighted-average shares increased from 14.2 million to 129.5 million, substantially affecting per-share comparison.
- Operating cash use rose sharply, in part because accounts payable and accrued expenses were paid down. The company raised substantial equity and debt financing, repaid its Hercules loan, and converted or repaid certain other debt.
Outlook, risks, contingencies, and unusual items
- Going concern and funding: Management said existing cash was not expected to fund anticipated requirements for the next 12 months and that capital was insufficient to fund its operating plan through March 2019. The filing states that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance. Additional financing may not be available on acceptable terms; reductions in planned activity could impair execution.
- Financing and dilution: March financings included $5.0 million from common stock and approximately $9.0 million from Series A convertible preferred stock. The preferred shares are initially convertible into approximately 49.7 million common shares, subject to ownership limits and required stockholder approval. As of May 15, 2018, 171.4 million common shares were outstanding, including voting and non-voting shares. The filing also reports significant outstanding options, warrants, restricted stock units, and convertible securities.
- Debt terms: CVP notes carry 8% stated interest and substantial original issue discounts, redemption rights, security provisions, and restrictive covenants. The notes and related redemption limits warrant review; the Hercules loan was repaid in March 2018. Long-term Napo convertible debt has a 10% coupon and matures in December 2019.
- Collaboration termination: Elanco’s agreement terminated effective January 30, 2018, and rights reverted to Jaguar. Potential milestone payments of up to $61 million, future expense reimbursements, and royalties under that agreement ended. The company expects to fund further development and commercialization itself or through new arrangements.
- Business and asset risks: Jaguar expects continuing losses and increased development, manufacturing, and commercialization spending. A $16.8 million goodwill impairment was recorded in 2017; management cautioned that further impairment could occur if market capitalization or business expectations weaken. The filing also discloses a $2.3 million 2017 impairment after discontinuing the C. difficile program.
- Legal and controls: A putative shareholder class action concerning the 2017 merger vote remains pending; Jaguar disputes the claims, and the potential loss was not estimable. Management reported ineffective disclosure controls due to a material weakness in controls over review of the tax provision and said remediation was planned, with no assurance it would be sufficient.
- Other commitments: The company reported $1.3 million of non-cancelable purchase orders, revenue-sharing obligations related to Equilevia, and a commitment to share certain proceeds with Glenmark under the Mytesi asset-transfer agreement.
- Guidance: The filing provides no quantified revenue, earnings, or cash-flow guidance. Management expects losses and increased research and development, sales and marketing, and general and administrative spending.
Most important facts for investors to verify
- Cash runway and near-term funding needs, including actual spending after quarter-end and access to additional financing.
- Current CVP note balances, redemption schedules, covenant compliance, collateral terms, and the effect of debt discounts on effective borrowing costs.
- Mytesi sales trajectory, net realized revenue, distribution economics, product returns, and sales and marketing efficiency.
- Plans, funding, and timelines for crofelemer development following Elanco’s termination, and prospects for replacement partners or licensing revenue.
- Potential dilution from preferred-stock conversion, outstanding equity awards and warrants, and common shares issued for debt and interest.
- Progress in remediating the tax-control material weakness and developments in the shareholder litigation and other commitments.
Note: The filing’s MD&A gives a stockholders’ equity figure of $30.0 million, while the balance sheet reports stockholders’ equity of $21.0 million and separately presents $9.0 million of convertible preferred stock. Investors should confirm the intended classification and reconciliation.