Jaguar Animal Health, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The filing is unaudited. The company develops and commercializes animal-health gastrointestinal products, including Neonorm Calf and Neonorm Foal, and is developing Canalevia for dogs and SB-300 for horses.
Financial performance and liquidity
| Metric | Q2 2016 | Six months 2016 | Prior comparable period |
|---|---|---|---|
| Revenue | $24,143 | $62,289 | $63,142 and $125,529, respectively, in 2015 |
| Cost of revenue | $8,641 | $27,009 | $16,957 and $51,255, respectively, in 2015 |
| Gross profit / approximate gross margin | $15,502 / 64.2% | $35,280 / 56.6% | Derived from reported revenue and cost of revenue |
| Research and development | $1,953,647 | $3,705,388 | $1,751,288 and $3,174,331, respectively, in 2015 |
| Total operating expenses | $3,432,497 | $7,155,404 | $3,231,628 and $5,972,959, respectively, in 2015 |
| Operating loss | $(3,408,354) | $(7,093,115) | $(3,168,486) and $(5,847,430), respectively, in 2015 |
| Net loss | $(3,657,475) | $(7,641,679) | $(5,262,675) and $(9,200,058), respectively, in 2015 |
| Net loss per share, basic and diluted | $(0.35) | $(0.78) | $(1.00) and $(2.30), respectively, in 2015 |
- Revenue fell 62% in Q2 and 50% for the first half year over year, reflecting lower unit sales of Neonorm products. Revenue recognition is deferred until distributor sell-through to end customers.
- First-half operating expenses rose 19.8%. R&D increased 16.7%, mainly due to personnel and consulting costs; general and administrative expense increased 33.9%, including public-company, staffing, and facility costs. Sales and marketing expense declined 38.4%, primarily with lower headcount.
- First-half net loss improved by $1.56 million versus 2015, despite higher operating loss. Lower interest expense and the absence of the prior-year warrant fair-value charge more than offset increased operating costs. The prior-year interest expense included substantial debt-discount amortization and conversion-related charges.
- Cash and cash equivalents were $3.875 million at June 30, down from $7.698 million at December 31, 2015. Restricted cash was $1.144 million. Current assets were $5.021 million and current liabilities $2.946 million.
- First-half cash used in operations was $8.303 million, compared with $7.031 million in 2015. Investing activities provided $1.757 million, largely from restricted cash released in connection with debt repayment, net of equipment purchases. Financing activities provided $2.723 million, including $4.130 million from the February offering and $449,000 from the initial private-investor purchase, offset by $1.856 million of debt repayment.
- At June 30, net long-term debt was $4.151 million, plus $150,000 of convertible notes payable. The long-term loan carries a 9.9% contractual rate and a stated 15.0% effective rate, includes a $560,000 end-of-term payment, and was amended to provide interest-only payments from May through August 2016.
Material changes and financing
- In February 2016, the company issued 2.0 million shares at $2.50 per share in a follow-on offering, receiving $4.1 million net.
- In June, it entered a common-stock purchase agreement providing for up to $15 million of purchases over approximately 30 months. At signing, it sold 222,222 shares for $500,000 gross proceeds and issued 456,667 additional shares as consideration for the agreement.
- After quarter-end, the company reported three additional sales of 100,000 shares each under that agreement, for cash proceeds of approximately $507,000 in total. It also extended the $150,000 note repayment from July 31 to October 31, 2016.
- Common shares outstanding were 10,821,408 at June 30 and 11,121,408 at August 15, 2016. Additional equity issuance could dilute existing holders.
Outlook, risks, and unusual items
- Management said existing cash was not expected to fund anticipated requirements for the next 12 months or the operating plan through June 2017. The filing identifies substantial doubt about the company’s ability to continue as a going concern; additional financing is needed, with no assurance it will be available on acceptable terms or on time.
- The company expects losses and expenditures to increase as it advances product development, clinical studies, manufacturing capabilities, and commercialization. Management also expects increased R&D, sales and marketing, and general and administrative spending; no specific earnings or revenue guidance was provided.
- Canalevia’s pivotal field study for acute diarrhea in dogs was underway. Canalevia has a MUMS designation for chemotherapy-induced diarrhea in dogs. Neonorm Foal launched in Q1 2016, and management reported positive reception. The company also described a term sheet with a potential China partner for Neonorm distribution; a completed partnership was not reported.
- Commercialization, clinical and regulatory progress, manufacturing arrangements, product sales, and access to financing are key uncertainties. The company also disclosed future operating lease payments of $789,055 and a manufacturing-contract liability of $165,480 at quarter-end; the final €150,000 manufacturer bonus was paid after quarter-end.
- The company reported no material pending litigation, no off-balance-sheet arrangements, and effective disclosure controls and procedures.
Important facts for investors to verify
- Cash runway, financing needs, and the terms and actual availability of proceeds under the $15 million stock purchase agreement.
- Potential dilution from future share sales, the agreement’s consideration shares, outstanding options, and warrants.
- Canalevia pivotal-trial results and regulatory milestones, and whether Neonorm sell-through improves.
- Debt repayment requirements, lender restrictions, and the $560,000 end-of-term payment.
- The timing and costs of manufacturing commitments and whether any China distribution arrangement is finalized.