Jaguar Health, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. The unaudited filing covers the quarter and nine months ended September 30, 2019. Jaguar operates in human health, led by FDA-approved Mytesi for noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy, and animal health, including Neonorm products. The company remains development- and commercialization-stage and has not achieved profitability.
Key financial metrics
- Revenue: Q3 revenue was $972,779, down 14.1% from $1.13 million. Nine-month revenue was $4.27 million, up 51.3% from $2.82 million; all 2019 revenue was product revenue, with no collaboration revenue. Nine-month Mytesi revenue rose to $4.18 million from $2.55 million.
- Profitability and margins: Q3 operating loss was $6.73 million and net loss was $7.56 million, versus $6.51 million and $6.14 million, respectively, in Q3 2018. Nine-month operating loss was $23.12 million and net loss was $32.58 million, versus $18.71 million and $19.49 million. Gross margin, calculated as revenue less cost of product revenue, was approximately 2.6% for Q3 and 28.0% for the nine months.
- Cash flow and liquidity: Nine-month operating cash use was $17.32 million, compared with $17.83 million in 2018; financing provided $16.82 million. Cash fell to $2.07 million from $2.57 million at year-end 2018. Current assets were $7.55 million and current liabilities $8.57 million.
- Debt and capital: Notes payable totaled $6.68 million, reported as long-term at quarter-end; current convertible debt was zero, compared with $11.24 million at year-end 2018. The July public offering generated $16.56 million gross proceeds, or about $14.05 million net. Accumulated deficit was $127.13 million.
Material changes versus prior comparable periods
- Nine-month revenue growth reflected higher Mytesi sales following distribution-channel changes and increased sales presence. Q3 net revenue nevertheless declined, partly because a $336,934 prior-period product donation incorrectly recorded as revenue was corrected in the quarter.
- Nine-month operating expenses rose 27.2%, including a $4.0 million impairment of in-process research and development and a $640,000 Tempesta royalty settlement accrual. Interest expense increased to $5.56 million from $2.19 million; debt-extinguishment losses were $4.94 million.
- Sales and marketing expense declined 23.6% for the nine months, while R&D rose 15.2% and general and administrative expense rose 12.0%.
- Debt was substantially restructured or settled during 2019, including exchanges of debt for common stock and issuance of new CVP notes. The July offering and conversions also materially expanded potential dilution: 19.42 million warrants were outstanding at September 30.
Outlook, risks and unusual items
- Going concern: Management states existing capital is insufficient to fund the operating plan for one year from issuance of the statements; substantial doubt exists about the company’s ability to continue as a going concern. Additional equity, debt, collaboration or licensing funding is needed, with no assurance it will be available on acceptable terms.
- Management expects continued losses and increased expenditures for development and commercialization. It expects sales and marketing expense to decline as Mytesi territories are consolidated, and G&A to remain broadly stable; no quantified financial guidance is provided.
- Mytesi revenue and receivables are highly concentrated: one distributor represented 100% of Q3 and 90% of nine-month revenue, and 99.6% of receivables at September 30. The company also relies on a single supplier for drug substance and a single supplier for drug product.
- The Tempesta royalty dispute was settled after quarter-end: $50,000 cash, a $550,000 unsecured note and 40,000 common shares, in exchange for ending future royalties. The quarter-end $640,000 accrual reflected the expected settlement.
- A shareholder class action related to the 2017 merger vote survived a motion to dismiss; discovery was to proceed, and an adverse ruling could materially affect the company. Management reported disclosure controls were ineffective due to a material weakness in financial-reporting staffing and review of complex accounting matters; remediation was underway but not assured.
- Subsequent events included about $1.75 million gross proceeds from Series 1 warrant exercises in October and an approximately $1.8 million November offering of pre-funded warrants, before expenses.
Investor facts to verify
- Whether the company obtained sufficient subsequent financing to address the stated one-year funding shortfall and going-concern uncertainty.
- Mytesi net sales, distributor concentration, chargebacks and receivable collection, particularly after the 2019 distribution transition.
- The terms, maturity and security of CVP notes and the dilution impact of outstanding warrants, preferred-stock conversions and other equity instruments.
- Progress and financial consequences of the class action, the Tempesta settlement payments, and remediation of the material weakness.
- The assumptions supporting the $4.0 million IPR&D impairment and the potential for further impairment or other nonrecurring charges.