Jaguar Health, Inc. quarterly report, Q2 FY2019

Business context and reporting period

Jaguar Health, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company operates human-health and animal-health businesses. Its principal commercial product is Mytesi (crofelemer), FDA-approved for noninfectious diarrhea in adults with HIV/AIDS receiving antiretroviral therapy; animal products include Neonorm Calf and Neonorm Foal.

Key financial metrics

At June 30, 2019, cash was $1.61 million; current assets were $7.35 million against current liabilities of $20.84 million. Total assets were $36.07 million, total liabilities $28.71 million, and stockholders’ deficit $1.64 million. Accumulated deficit was $119.58 million. Notes payable, net of discounts, totaled $11.32 million; the balance sheet also reported a $5.18 million warrant liability. Series A preferred stock had a reported carrying amount of $9.00 million and redemption/liquidation value of $12.74 million.

Material changes versus comparable periods

• Q2 revenue rose 93% year over year, driven by Mytesi. Six-month revenue increased 95%; Mytesi revenue was $3.23 million versus $1.44 million. Neonorm revenue was $67,574 for the first half, down from $73,374.
• Revenue growth did not prevent wider losses: Q2 net loss increased by $9.06 million, and six-month net loss increased by $11.67 million. Higher interest expense and debt-extinguishment losses, plus a $4.00 million intangible-asset impairment, were major factors.
• Six-month operating cash use improved to $8.77 million from $15.02 million, while financing provided $7.82 million. Cash nevertheless declined by $0.96 million during the period.
• In June, the company impaired $4.00 million of in-process research and development assets; net intangible assets fell to $26.87 million from $31.71 million at year-end 2018.
• The company completed a 1-for-70 reverse split of voting common stock effective June 7, 2019. Per-share comparisons reflect reverse-split adjustments and should be interpreted in that context.

Outlook, risks and unusual items

• Going concern and funding: Management said cash, even supplemented by approximately $14.3 million net proceeds from the July 2019 offering, was not sufficient to fund the operating plan through one year from August 14, 2019. The filing states substantial doubt about the company’s ability to continue as a going concern within one year. Additional financing may be needed; availability and terms are uncertain.
• Post-quarter financing and dilution: The company closed a July 23, 2019 public offering for $16.56 million gross, before fees. It issued common stock and Series B preferred stock and warrants covering up to 16.56 million common shares. The offering proceeds were intended for pipeline and business-development activities, debt repayment, working capital and general corporate purposes.
• Debt and collateral: March–June bridge notes totaled $5.05 million, carried 12% interest and originally matured July 18, 2019; the maturity was extended to July 31. In July, holders of $3.55 million principal exchanged their notes for common stock. The May CVP refinancing extended certain secured notes to December 31, 2020 at 10% interest; substantially all company and subsidiary assets were pledged, subject to stated conditions. The filing reports substantial debt-related expenses and losses.
• Commercial concentration: One distributor accounted for 100% of Q2 Mytesi revenue and 89% of first-half revenue; it represented 99.6% of accounts receivable at June 30. The company also relies on a single supplier for drug substance and a single supplier for drug product.
• Management plans: Management expected research and development spending to increase, while consolidating Mytesi sales territories and seeking partnerships. In August, after quarter-end, the company reduced its sales force by up to 10 representatives, about half the sales force, with approximately $120,000 in aggregate severance.
• Other risks and unusual items: A shareholder class action concerning 2017 merger-related disclosures survived a motion to dismiss; discovery was to proceed, and the company said any potential loss was not reasonably estimable. Nasdaq notified the company in June that it had regained compliance with the minimum bid-price requirement. The company disclosed ineffective disclosure controls and a material weakness in financial reporting related to accounting staffing and review of complex transactions; remediation efforts were underway. The CFO resigned effective August 9, 2019.
• No quantified financial guidance was provided. Management cautioned that future results depend on product development, commercialization, regulatory outcomes and access to financing.

Important facts for investors to verify

• Whether the July offering’s net proceeds, debt exchanges and subsequent financing actions materially extend the company’s cash runway; management expressly said funding was still inadequate for a full year.
• The remaining principal, maturity dates, interest, collateral and repayment or conversion terms of CVP and other debt, including the consequences of the bridge-note exchanges.
• Whether Mytesi revenue growth can persist despite heavy distributor concentration, discounts, rebates and product-return exposure, and whether gross margins improve.
• The status and commercial or development implications of the $4.00 million IPR&D impairment and any risk of further impairment.
• The terms and potential dilution from Series B preferred stock and the large warrant issuance, as well as the Series A preferred stock’s redemption provisions.
• Progress in remediating the material weakness, the status and potential exposure of the shareholder litigation, and any effects of the sales-force reduction or CFO transition.