Jaguar Health, Inc. — Q3 2018 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2018. Jaguar operates human-health and animal-health segments. Its human-health business commercializes Mytesi (crofelemer), FDA-approved for noninfectious diarrhea in adults with HIV/AIDS receiving antiretroviral therapy; its animal-health business sells Neonorm products. Napo became a wholly owned subsidiary in July 2017, so prior-year comparisons include Napo for only part of the 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1.13 million | $1.10 million | $2.82 million | $2.82 million |
| Operating loss | $6.51 million | $7.34 million | $18.71 million | $13.57 million |
| Net income (loss) | $(6.14) million | $4.76 million | $(19.49) million | $(1.76) million |
| Cash used in operations | Not separately stated for the quarter | $17.83 million | $4.49 million |
- Revenue mix: Nine-month product revenue was $2.64 million, including $2.55 million from Mytesi; collaboration revenue was $0.18 million. Mytesi revenue grew versus the partial-year 2017 comparison, while Elanco collaboration revenue declined after Elanco terminated its Canalevia agreement in January 2018. The 2017 nine-month comparison included $2.24 million of collaboration revenue.
- Margins and spending: Product gross profit was approximately $0.83 million, or 31.5% of product revenue, for the first nine months (2017: approximately $0.33 million, or 57.5%). Operating expenses rose 31% to $21.53 million, notably sales and marketing to $7.12 million from $0.94 million and R&D to $3.84 million from $3.03 million. Sales and marketing growth primarily reflected expanded Mytesi promotion and staffing.
- Other results: Nine-month interest expense increased to $2.19 million from $0.80 million. Q3 results included a $1.20 million gain from the Valeant-related settlement. The 2017 nine-month net loss was reduced by a $12.19 million income-tax benefit; there was no comparable 2018 benefit.
- Balance sheet at September 30: Cash was $0.73 million; current assets were $7.50 million against current liabilities of $16.14 million (current ratio approximately 0.46). Total assets were $46.12 million, total liabilities $26.80 million, and accumulated deficit $81.90 million. Reported debt, net of discounts, was approximately $16.25 million, including $10.66 million of long-term convertible debt and $5.59 million of current convertible and other notes payable.
- Financing and dilution: Nine-month financing cash inflows were $17.80 million, principally from equity and debt financing. In March, the company raised approximately $9.0 million through Series A convertible preferred stock and $5.0 million through common stock. On October 4, 2018, after quarter-end, it completed an offering that generated $8.3 million net cash, issuing 11.6 million common shares and 3.4 million pre-funded warrants.
Material changes, outlook, and risks
- Management said existing cash was insufficient for the next 12 months and the operating plan through April 2019. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern. Jaguar expects further losses and says additional financing, partnerships, or revenue growth will be needed; funding may not be available on acceptable terms.
- CVP debt amendments extended certain note maturities and constrained monthly redemptions. An October 2018 standstill required a $1.5 million payment by November 20 to suspend specified redemptions through February 2019; otherwise CVP could seek additional redemptions. The filing does not establish whether that payment was made.
- The Mytesi exclusive distributor agreement with Mission was amended to end January 31, 2019. Jaguar was negotiating with a replacement sales agent. Three distributors represented 81% of nine-month net revenue, creating material customer concentration; drug substance and drug product each came from a single supplier.
- Jaguar entered a 15-year exclusive Canada and Israel licensing and supply agreement with Knight Therapeutics. Knight may owe regulatory and sales milestone payments totaling up to approximately $18 million over the initial term; these are contingent, not assured proceeds.
- Series A preferred stock is convertible and has a liquidation preference. Under specified conditions at a future measurement date, holders may require redemption at $2.3057 per share; triggers include Mytesi revenue below $22 million for the six months ended March 31, 2021 or a 30-day average share VWAP below $1.00.
- On November 9, 2018, Nasdaq notified Jaguar that its bid price had been below $1.00 for 30 consecutive business days. The company had until May 8, 2019 to regain compliance, with potential further time subject to conditions.
- A shareholder class action was amended after the initial complaint was dismissed; defendants moved to dismiss the amended complaint. The company said any potential loss was not reasonably estimable and was not considered probable at the financial-statement date.
- Management reported ineffective disclosure controls due to a material weakness in income-tax provision review, and said it planned remediation. A CVP debt-accounting error was corrected through a Q3 out-of-period adjustment; the company deemed it immaterial to the first and second quarters.
- Goodwill and intangible assets remain exposed to impairment risk if expectations or market conditions deteriorate. The filing reports no 2018 goodwill impairment; a $16.83 million goodwill impairment was recorded in 2017.
Important facts for investors to verify
- Cash runway after the October offering, including subsequent operating burn and debt repayments.
- Status and terms of CVP redemptions, including whether the required $1.5 million payment was made and the outstanding debt balances.
- Progress toward replacing Mission as Mytesi sales agent and the effect of distributor concentration on sales and collections.
- Mytesi commercial growth, net pricing and product gross margin, and the conditions attached to preferred-stock redemption rights.
- Nasdaq bid-price compliance, the shareholder litigation, and remediation of the tax-control material weakness.