Jaguar Health, Inc. annual report, FY2018

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Jaguar Health, Inc. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter report; the filing does not provide a clear standalone Q4 income statement.

Business context

Jaguar is a commercial-stage gastrointestinal therapeutics company. Its principal human product, Mytesi (crofelemer), is FDA-approved for symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS taking antiretroviral therapy. The company is also developing Mytesi for additional indications and lechlemer for cholera, while maintaining a smaller animal-health business that includes Canalevia, Neonorm and Equilevia.

Financial performance and liquidity

  • Revenue: $4.42 million, versus $4.36 million in 2017. Product revenue was $4.24 million; collaboration revenue was $0.18 million.
  • Product economics: Cost of product revenue was $2.77 million, implying product gross profit of about $1.47 million and a gross margin of about 35%. This excludes collaboration revenue and other operating expenses.
  • Expenses and loss: Operating expenses were $35.24 million and operating loss was $30.82 million. Net loss was $32.15 million, compared with $21.97 million in 2017; basic and diluted loss per share was $2.19.
  • Cash flow: Cash used in operations was $22.73 million; investing used $0.01 million; financing provided $24.55 million. Cash increased to $2.57 million at year-end from $0.52 million, with restricted cash of $0.24 million at the prior year-end.
  • Balance sheet and liquidity: Current assets were $8.15 million, against current liabilities of $26.66 million. Total assets were $41.04 million, total liabilities $26.66 million, and stockholders’ equity $5.38 million. Accumulated deficit was $94.55 million.
  • Debt: At year-end, current convertible debt, net of discounts, was $11.24 million and notes payable, net, were $4.85 million; no long-term debt remained. The company’s debt arrangements included secured CVP notes and repeated amendments and standstill arrangements.
  • Concentration: Three U.S. pharmaceutical distributors generated 89% of 2018 net revenue; they also represented 86% of year-end accounts receivable.

Changes versus 2017

  • Product revenue rose 185% to $4.24 million, principally because 2018 included a full year of Mytesi sales, while 2017 included only post-merger sales beginning July 31. Neonorm revenue declined.
  • Collaboration revenue fell from $2.88 million to $0.18 million after Elanco’s Canalevia collaboration terminated in January 2018.
  • Sales and marketing expense increased to $9.83 million from $3.08 million as Jaguar expanded its commercial team and promotion of Mytesi. Research and development expense rose to $5.15 million from $4.27 million.
  • Operating loss improved to $30.82 million from $34.25 million, partly reflecting lower impairment charges. However, net loss increased because 2017 included a $13.18 million income-tax benefit that did not recur in 2018.
  • The remaining $5.21 million goodwill balance was fully impaired in 2018, following a $16.83 million impairment in 2017. A $1.20 million Valeant-related settlement was recorded as a one-time gain.

Outlook, risks and unusual items

  • Going concern: The auditor’s report and management state that substantial doubt exists about Jaguar’s ability to continue as a going concern. Management said year-end cash was insufficient to fund operations for the next 12 months and expected additional financing to be necessary. The financial statements contain no adjustments for the outcome of this uncertainty.
  • Financing and dilution: The company depends on equity, debt, collaborations and product sales; future funding may be unavailable or costly and could dilute shareholders. After year-end, Jaguar reported equity-line sales to Oasis, additional planned or issued notes, and exchanges of CVP debt for common shares. Series A preferred stock also carries conversion and potential redemption provisions; its terms were amended in March 2019.
  • Pipeline and commercial plans: Jaguar described a planned pivotal Mytesi trial for cancer therapy-related diarrhea, with FDA protocol discussions held in March 2019; interim investigator-trial data were anticipated in the first half of 2019. For Canalevia, the company expected to file the remaining target-animal-safety section in Q2 2019 and, if approved, anticipated a 2020 launch. These are forward-looking plans, not assured outcomes. The filing provides no consolidated numerical revenue or earnings guidance.
  • Execution and regulatory risks: Mytesi’s commercial uptake, payer access, clinical-trial results, FDA decisions, manufacturing capacity and access to plant-derived raw materials are material uncertainties. Jaguar also relies on a small number of distributors and suppliers.
  • Controls and reporting: Management concluded disclosure controls and internal control over financial reporting were not effective at year-end because of an accounting-staffing material weakness. Issues included review of accruals, warrant classification and complex debt modifications. The company reported a prior-year tax-control weakness as remediated.
  • Accounting and other items: Jaguar corrected an out-of-period CVP debt-accounting error in Q3 2018, reporting that it had understated first-quarter other expense by about $0.80 million and second-quarter other expense by about $0.32 million. The company said the quarterly error was not material. A stockholder demand-letter matter was settled in March 2019 without material settlement costs; a separate merger-related shareholder suit remained pending, with potential loss not reasonably estimable.

Important facts for investors to verify

  • Current cash runway, the amount and terms of financing raised after year-end, and the extent of additional capital required.
  • Outstanding debt, collateral and maturity terms, CVP exchange activity, and potential conversion or redemption dilution from preferred stock and other securities.
  • Mytesi’s net sales trajectory, commercial margins, distributor concentration, payer and ADAP access, and the economics of its distribution and co-promotion arrangements.
  • Clinical and regulatory milestones for Mytesi follow-on indications and Canalevia, including whether expected studies and filings occurred and whether they are funded.
  • Progress in remediating the material weakness in financial reporting controls and any further effects of the identified debt-accounting error.