Jaguar Health, Inc. quarterly report, Q3 FY2017

Jaguar Health, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2017. The unaudited results include Napo Pharmaceuticals only from the July 31, 2017 merger closing, except where pro forma figures are specifically identified.

Business context

Jaguar combined its animal-health business with Napo, adding human-health products and Mytesi, FDA-approved for noninfectious diarrhea in adults with HIV/AIDS receiving antiretroviral therapy. The company reports human-health and animal-health segments and remains focused on developing products while expanding commercialization.

Financial results and liquidity

Metric	Three months ended September 30, 2017	Nine months ended September 30, 2017	Comparable 2016 period
Total revenue	$1.10 million	$2.82 million	$50,357 quarterly; $112,646 nine months
Net income (loss)	$4.76 million	$(1.76) million	$(3.42) million quarterly; $(11.06) million nine months
Operating loss	$(7.34) million	$(13.57) million	$(3.18) million quarterly; $(10.27) million nine months
Cash used in operating activities	$(4.49) million for nine months	$(11.69) million for nine months

Nine-month revenue included $581,654 of product revenue and $2.24 million of collaboration revenue. Product revenue included $364,054 of Mytesi sales recorded after the merger; the filing reports no Mytesi revenue in 2016.
The quarter’s net income was driven by a $12.19 million income-tax benefit associated with a partial release of the valuation allowance after acquiring Napo. Despite that benefit, the nine-month pretax loss was $13.95 million.
Product revenue less product cost was approximately $334,519 for the nine months (about 57.5%); this is not a consolidated operating margin and excludes collaboration revenue and other expenses.
At September 30, cash and cash equivalents were $220,590, with $500,000 also reported as restricted cash. Current assets were $4.24 million and current liabilities $16.03 million. Stockholders’ equity was $31.81 million, versus a deficit of $2.45 million at year-end 2016.
Reported debt included $14.37 million of net convertible notes and $1.80 million of current long-term debt. Accounts payable were $7.86 million.
Nine-month investing cash outflow was $1.55 million, principally merger-related; financing provided $5.31 million. Cash declined by $730,389 during the period.

Material changes versus prior period

The July 31 Napo merger substantially changed the company’s scale and business mix. It added Mytesi and acquired intangible assets of $36.4 million and goodwill initially recorded at $22.0 million.
Goodwill was written down by $3.65 million in the quarter after a decline in market capitalization triggered an impairment test. Management cautioned that further impairment could occur if market capitalization falls.
Nine-month revenue rose from $112,646 to $2.82 million, largely reflecting Elanco collaboration revenue and the post-merger inclusion of Mytesi. Operating expenses increased 57.8% to $16.39 million, including impairment and merger-related costs; R&D fell 46.5% to $3.03 million.
Common shares outstanding rose materially through merger consideration, financings and other issuances. The filing reports 90,836,710 voting and non-voting shares outstanding as of November 20, 2017.

Outlook, risks and unusual items

Going concern: Management said existing cash was insufficient for anticipated needs over the next 12 months and that additional financing was required. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Management anticipated further losses and increased development, sales and administrative spending.
Elanco termination: After quarter-end, Elanco gave notice on November 1, 2017 to terminate the Canalevia collaboration, effective January 30, 2018. The associated licenses are to revert to Jaguar. This is a significant change to the collaboration outlook and potential milestone, royalty and commercialization plans.
Subsequent financing: In October 2017, Jaguar sold 21.25 million shares at $0.20 per share and reported $3.55 million in net proceeds. Underwriters exercised an additional 437,500-share option on November 1, generating approximately $87,500 gross; aggregate offering gross proceeds were reported at approximately $4.3 million before expenses and underwriting discounts.
Management cited potential Mytesi U.S. gross annual sales of approximately $100 million and anticipated approximately $7.0 million in revenue through April 2018 for its approved indication. These are company estimates, not reported results. The filing also described plans for a Canalevia launch in the first half of 2018 and an Equilevia launch in fourth-quarter 2017; development timing was funding-dependent, and the Elanco termination changes the Canalevia context.
Other material risks include reliance on future equity, debt or partnership funding; potential dilution and debt repayment obligations; product development, regulatory, manufacturing and commercialization uncertainty; possible further goodwill impairment; and a shareholder class action alleging proxy-statement omissions or misstatements. Jaguar said it believed the claims were without merit and intended to contest them.
The filing disclosed a Nasdaq minimum-bid-price deficiency notice, with a stated compliance period ending November 13, 2017. The supplied filing text does not establish the outcome of that period.
Disclosure controls and procedures were reported effective at the reasonable-assurance level; management reported no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Current cash, restricted-cash availability, cash burn and financing runway, including the net proceeds and use of the October/November offering funds.
Whether Jaguar regained Nasdaq’s minimum bid-price compliance and the status of any subsequent listing notices.
Operational and financial consequences of Elanco’s termination, including the timing and cost of resuming Canalevia development and commercialization.
Current debt balances, maturities, conversion and redemption terms, collateral, and potential dilution from convertible notes, warrants, options and non-voting shares.
Mytesi sales trajectory, reimbursement and market access, and whether management’s stated revenue expectations were achieved.
Final merger purchase-price accounting and the sensitivity of goodwill and acquired intangible values to operating performance and market capitalization.