Edgar Filing: Jaguar Health, Inc.

jagx_Current_Folio_10Q

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-36714

JAGUAR HEALTH, INC.

(Exact name of registrant as specified in its charter)

Delaware		46-2956775
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

201 Mission Street, Suite 2375

San Francisco, California 94105

(Address of principal executive offices, zip code)

(415) 371-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☒
			Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 14, 2018, there were 24,603,104 shares of voting common stock, par value $0.0001 per share, outstanding, 40,301,237 shares of non-voting common stock, par value $0.0001 per share, outstanding, and 5,524,926 shares of convertible preferred stock outstanding, par value $0.0001 per share.

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	Page No.
PART I. — FINANCIAL INFORMATION (Unaudited)	1
Item 1. Unaudited Condensed Consolidated Financial Statements	1
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017	1
Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2018 and 2017	2
Condensed Consolidated Statement of Changes in Convertible Preferred Stock and Stockholders' Equity for the period from December 31, 2017 through September 30, 2018	3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	4
Notes to the Condensed Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3. Quantitative and Qualitative Disclosures About Market Risk	48
Item 4. Controls and Procedures	48
PART II. — OTHER INFORMATION	50
Item 1. Legal Proceedings	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6. Exhibits	51
SIGNATURE	52

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PART I. — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

JAGUAR HEALTH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2018		December 31, 2017
	(Unaudited)
Assets
Current assets:
Cash	$	726,129	$	520,698
Restricted cash		—		239,169
Accounts receivable		1,028,670		467,658
Other receivable		176,391		1,380
Inventory		2,550,034		2,072,817
Deferred offering costs		1,255,554		—
Prepaid expenses and other current assets		1,765,234		497,373
Total current assets		7,502,012		3,799,095
Land, property and equipment, net		775,975		1,222,068
Goodwill		5,210,821		5,210,821
Intangible assets, net		32,132,222		33,397,222
Other assets		501,120		—
Total assets	$	46,122,150	$	43,629,206

Liabilities, Convertible Preferred Stock and Stockholders' Equity
Current liabilities:
Accounts payable	$	6,450,354	$	7,354,932
Deferred collaboration revenue		—		177,389
Accrued expenses		4,050,006		2,204,133
Warrant liability		48,240		103,860
Derivative liability		—		11,000
Conversion option liability		—		111,841
Convertible notes payable, net of discount		1,055,992		2,672,215
Notes payable, net of discount		4,531,952		1,141,153
Current portion of long-term debt		—		1,609,244
Total current liabilities		16,136,544		15,385,767
Convertible long-term debt, net of discount		10,661,026		10,982,437
Total liabilities	$	26,797,570	$	26,368,204

Commitments and contingencies (See Note 6)

Series A convertible preferred stock: $0.0001 par value, 10,000,000 shares authorized at September 30, 2018 and December 31, 2017; 5,524,926 and 0 shares issued and outstanding at September 30, 2018 and December 31, 2017; (liquidation preference of $9,199,002 at September 30, 2018)		9,000,002		—

Stockholders' Equity:
Common stock: $0.0001 par value, 150,000,000 shares and 250,000,000 authorized at September 30, 2018 and December 31, 2017, respectively; 9,603,103 and 4,180,484 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.		960		418
Common stock - non-voting: $0.0001 par value, 50,000,000 shares authorized at September 30, 2018 and December 31, 2017; 40,301,237 and 42,617,893 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively.		4,030		4,262
Additional paid-in capital		92,216,482		79,661,044
Accumulated deficit		(81,896,894)		(62,404,722)
Total stockholders' equity		10,324,578		17,261,002
Total liabilities, convertible preferred stock and stockholders' equity	$	46,122,150	$	43,629,206

The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAGUAR HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Product revenue	$	1,132,067	$	445,665	$	2,642,880	$	581,654
Collaboration revenue		—		654,549		177,389		2,237,491
Total revenue		1,132,067		1,100,214		2,820,269		2,819,145
Operating expenses
Cost of product revenue		736,733		206,228		1,808,918		247,135
Research and development		1,481,166		851,608		3,843,918		3,033,851
Sales and marketing		2,716,752		663,765		7,119,204		943,908
General and administrative		2,703,628		3,070,702		8,761,776		8,512,195
Impairment of goodwill		—		3,648,000		—		3,648,000
Total operating expenses		7,638,279		8,440,303		21,533,816		16,385,089
Loss from operations		(6,506,212)		(7,340,089)		(18,713,547)		(13,565,944)
Interest expense		(872,044)		(464,684)		(2,185,868)		(800,885)
Other income (expense), net		9,540		(14,876)		322,244		(13,428)
Change in fair value of warrants and conversion option liability		26,231		388,800		(119,134)		636,121
Gain on Valeant settlement		1,204,133		—		1,204,133		—
Loss on extinguishment of debt		—		—		—		(207,713)
Net loss before income tax		(6,138,352)		(7,430,849)		(19,492,172)		(13,951,849)
Income tax benefit		—		12,190,693		—		12,190,693
Net income (loss)		(6,138,352)		4,759,844		(19,492,172)		(1,761,156)
Deemed dividend attributable to preferred stock		—		—		(995,000)		—
Net income (loss) attributable to common shareholders	$	(6,138,352)	$	4,759,844	$	(20,487,172)	$	(1,761,156)
Net income (loss) per share, basic	$	(0.51)	$	1.29	$	(1.91)	$	(0.94)
Net income (loss) per share, diluted	$	(0.51)	$	1.11	$	(1.91)	$	(0.94)
Weighted-average common shares outstanding:
Basic:		12,061,672		3,695,660		10,701,977		1,883,115
Diluted:		12,061,672		4,480,235		10,701,977		1,883,115

The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAGUAR HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES

IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(Unaudited)


	Series A			Common			Common							Total
	Preferred Stock			stock - voting			stock - non-voting			Additional		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		paid-in capital		deficit		Equity
Balances - December 31, 2017	—	$	—	4,180,484	$	418	42,617,893	$	4,262	$	79,661,044	$	(62,404,722)	$	17,261,002

Issuance of preferred stock and common stock in a private investment in public entities March 2018	5,524,926		9,000,002	1,960,794		196	—		—		4,999,804		—		5,000,000

Beneficial conversion feature of the series A convertible preferred stock	—		(995,000)	—		—	—		—		995,000		—		995,000

Deemed dividend on the series A convertible preferred stock	—		995,000	—		—	—		—		(995,000)		—		(995,000)

Issuance of common stock in a private investment in public entities with new investors	—		—	716,425		72	—		—		1,305,702		—		1,305,774

Issuance of common stock in a private investment in public entities with existing investors	—		—	478,853		48	—		—		750,052		—		750,100

Issuance of common stock in exchange for redemption of convertible debt	—		—	956,553		96	—		—		1,607,325		—		1,607,421

Issuance of common stock in exchange for services	—		—	3,333		—	—		—		6,425		—		6,425

Issuance of common stock in exchange for payment of interest expense	—		—	285,694		29	—		—		704,696		—		704,725

Conversion of non-voting common stock to voting common stock	—		—	154,443		15	(2,316,656)		(232)		217		—		—

Issuance of common stock in lieu of interest (Kingdon)	—		—	320,743		32	—		—		479,776		—		479,808

Issuance of common stock July 2018	—		—	470,781		47	—		—		624,850		—		624,897

Issuance of common stock in debt financing September 2018	—		—	75,000		7	—		—		47,993		—		48,000

Issuance of warrants in debt financing September 2018	—		—	—			—		—		118,149				118,149

Issuance of warrants in support of Sep. 2018 office lease	—		—	—			—		—		493,688		—		493,688

Fractional common stock shares repurchased	—		—	—		—	—		—		(30)		—		(30)

Stock-based compensation	—		—	—		—	—		—		1,416,791		—		1,416,791

Net loss	—		—	—		—	—		—		—		(19,492,172)		(19,492,172)

Balances - September 30, 2018	5,524,926	$	9,000,002	9,603,103	$	960	40,301,237	$	4,030	$	92,216,482	$	(81,896,894)	$	10,324,578

The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAGUAR HEALTH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,		September 30,
	2018		2017
Cash Flows from Operating Activities
Net loss	$	(19,492,172)	$	(1,761,156)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		989,116		326,204
Impairment of goodwill		—		3,648,000
Deferred income tax benefit		—		(12,190,693)
Interest paid on the conversion of debt to equity		21,275		—
Common stock issued in exchange for services rendered		6,425		—
Common stock issued in Napo merger for services		—		151,351
Loss on extinguishment of debt		—		207,713
Charge in relation to modification of warrants		—		23,000
Stock-based compensation		1,416,791		630,924
Amortization of debt issuance costs and debt discount		1,461,133		367,891
Change in fair value of warrants, conversion option and derivative liability		(178,461)		(637,121)
Changes in assets and liabilities
Accounts receivable		(561,012)		(457,576)
Other receivable		(175,009)		(17,349)
Inventory		(477,217)		369,155
Prepaid expenses and other current assets		(635,622)		(256,057)
Deferred offering costs		(1,255,554)		(231,253)
Other non-current assets		(289,828)		122,163
Due from former parent		—		(164,647)
Deferred revenue		(177,389)		814,589
Deferred product revenue		—		(6)
Deferred rent		52,665		(1,028)
Accounts payable		(904,577)		4,691,363
Accrued expenses		2,370,682		(130,255)
Total cash used in operations		(17,828,754)		(4,494,788)
Cash Flows from Investing Activities
Purchase of equipment		(6,527)		—
Cash paid in Napo merger, net of cash acquired		—		(1,557,340)
Change in restricted cash		—		11,293
Total cash used in investing activities		(6,527)		(1,546,047)
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt		2,310,000		—
Payments of long-term debt		(1,689,200)		(2,161,262)
Proceeds from issuance of convertible debt		500,000		1,700,000
Proceeds from issuance of common stock (net of $61,781 issuance costs), extension from 2016 financing		—		2,314,374
Proceeds from issuance of common stock, (net of issuance costs of $6,000) June 2017		—		94,000
Proceeds from issuance of common stock July 2017		—		3,000,000
Proceeds from the issuance of common stock through the exercise of common stock warrants		—		363,334
Proceeds from the issuance of common stock through a stock purchase agreement with a new private investor		1,305,774		—
Proceeds from the issuance of common stock		750,100		—
Proceeds from the issuance of common stock March 2018		5,000,000		—
Proceeds from the issuance of convertible preferred stock net of issuance costs		9,000,002		—
Proceeds from issuance of common stock July 2018		624,897
Fractional common stock shares repurchased		(30)		—
Total Cash Provided by Financing Activities		17,801,543		5,310,446
Net decrease in cash and cash equivalents		(33,738)		(730,389)
Cash and restricted cash at beginning of period		759,867		950,979
Cash and restricted cash at end of period	$	726,129	$	220,590

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Cash and Restricted Cash:


	Nine Months Ended
	September 30,		September 30,
	2018		2017
Supplemental Schedule of Non-Cash Financing and Investing Activities
Interest paid on long-term debt	$	19,344	$	201,835
Common stock issued as redemption of Jaguar notes payable and related interest	$	1,153,408	$	—
Common stock issued as redemption of Napo notes payable and related interest	$	1,638,546	$	—
Common stock issued with September 2018 Promissory Notes	$	48,000	$	—
Warrants issued with the September 2018 Promissory Notes	$	118,148	$	—
Deemed dividend attributable to preferred stock	$	995,000	$	—
Fair value of common stock issued in a merger	$	—	$	25,303,859
Fair value of replacement of common stock warrants issued in a merger	$	—	$	630,859
Fair value of replacement restricted stock units issued in a merger	$	—	$	3,300,555
Fair value of replacement stock options issued in a merger	$	—	$	5,691

Cash and Restricted Cash:
	September 30,		December 31,
	2018		2017
Cash	$	726,129	$	520,698
Restricted cash		—		239,169
Total cash and restricted cash	$	726,129	$	759,867

The accompanying notes are an integral part of these condensed consolidated financial statements.

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JAGUAR HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Business

Jaguar Health, Inc. (“Jaguar”, “we” or the “Company”), formerly known as Jaguar Animal Health, Inc., was incorporated on June 6, 2013 (inception) in Delaware. The Company was a majority-owned subsidiary of Napo Pharmaceuticals, Inc. (“Napo” or the “Former Parent”) until the close of the Company's initial public offering on May 18, 2015. The Company was formed to develop and commercialize first-in-class gastrointestinal products for companion and production animals and horses. The Company's first commercial product, Neonorm Calf, was launched in 2014 and Neonorm Foal was launched in the first quarter of 2016. The Company's activities are subject to significant risks and uncertainties, including failing to secure additional funding in order to timely compete the development and commercialization of products.

On July 31, 2017, Jaguar completed a merger with Napo pursuant to the Agreement and Plan of Merger dated March 31, 2017 by and among Jaguar, Napo, Napo Acquisition Corporation (“Merger Sub”), and Napo's representative (the “Merger Agreement”). In accordance with the terms of the Merger Agreement, upon the completion of the merger, Merger Sub merged with and into Napo, with Napo surviving as our wholly-owned subsidiary (the “Merger” or “Napo Merger”). Immediately following the Merger, Jaguar changed its name from “Jaguar Animal Health, Inc.” to “Jaguar Health, Inc.” Napo now operates as a wholly-owned subsidiary of Jaguar focused on human health and the ongoing commercialization of Mytesi, a Napo drug product approved by the U.S. FDA for the symptomatic relief of noninfectious diarrhea in adults with HIV/AIDS on antiretroviral therapy.

The Company manages its operations through two segments—human health and animal health and is headquartered in San Francisco, California.

Reverse stock-split

On May 18, 2018, the stockholders of Jaguar approved at the 2018 Annual Meeting of Stockholders of the Company and the Board approved, in accordance with the authority granted by the Company's stockholders at the Annual Meeting, a 1‑for‑15 reverse stock split of the Company's issued and outstanding shares of Common Stock, effective June 1, 2018. The reverse split has been reflected in all voting common stock, warrants, and common stock option shares disclosed in these financial statements. The non-voting common stock and the convertible preferred stock were excluded from the reverse split.

Liquidity and Going Concern

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred recurring operating losses since inception and has an accumulated deficit of $81.9 million as of September 30, 2018. The Company expects to incur substantial losses in future periods. Further, the Company's future operations are dependent on the success of the Company's ongoing development and commercialization efforts, as well as the securing of additional financing. There is no assurance that profitable operations, if ever achieved, could be sustained on a continuing basis.

The Company plans to finance its operations and capital funding needs through equity and/or debt financing, collaboration arrangements with other entities, as well as revenue from future product sales. However, there can be no assurance that additional funding will be available to the Company on acceptable terms on a timely basis, if at all, or that the Company will generate sufficient cash from operations to adequately fund operating needs or ultimately achieve profitability. If the Company is unable to obtain an adequate level of financing needed for the long-term development and commercialization of its products, the Company will need to curtail planned activities and reduce costs. Doing so will likely have an adverse effect on the Company's ability to execute on its business plan. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern within one year after the

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issuance date of the financial statements. The accompanying financial statements do not include any adjustments that might result from the outcome of these uncertainties.

October 2018 Equity Financing

In September 2018, the Company announced plans to complete a public offering of common shares and pre-funded warrants. This offering closed on October 4, 2018, pursuant to which the Company issued and sold an aggregate of 11,575,001 shares of its common stock and 3,425,000 pre-funded warrants to purchase shares of common stock. The common stock was sold at a purchase price of $0.60 per share for gross proceeds of $7.0 million, and the pre-funded warrants were sold at a purchase price of $0.59 per share for gross proceeds of $2.0 million. Actual cash received after deducting fees and expenses in connection with the offering was $8.3 million.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and on a basis consistent with the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair presentation of the periods presented. These interim financial results are not necessarily indicative of the results to be expected for the year ending December 31, 2018, or for any other future annual or interim period. These interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in our Annual Report on Form 10‑K for the year ended December 31, 2017.

There have been no material changes to the Company's significant accounting policies during the three and nine months ended September 30, 2018, as compared to the significant accounting policies described in Note 2 of the “Notes to Financial Statements” in the Company's Annual Report on Form 10‑K for the year ended December 31, 2017 except for the adoption of the new revenue recognition standard pursuant to ASC 606 as of January 1, 2018 as described in more detail below.

Principles of Consolidation

The condensed consolidated condensed financial statements have been prepared in accordance with US GAAP and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of the Company and its wholly owned subsidiary. All inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of the accompanying condensed financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed financial statements, and the reported amounts of revenue and expenses during the periods reported. Actual results could differ from those estimates.

Deferred Offering Costs

Deferred offering costs are costs incurred in filings of registration statements with the Securities and Exchange Commission. These deferred offering costs are offset against proceeds received upon the closing of the offerings. Deferred costs as of September 30, 2018, represent $1.3 million in legal, accounting, printer and filing fees associated with the Company's October 2018 offering in which the Company issued common stock and pre-funded warrants as registered on Form S-1. The offering closed on October 4, 2018, at which time these deferred offering costs were charged to stockholders’ equity.

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Concentrations

Cash is the financial instrument that potentially subjects the Company to a concentration of credit risk as cash is deposited with a bank and cash balances are generally in excess of Federal Deposit Insurance Corporation insurance limits. The carrying value of cash approximates fair value at September 30, 2018 and December 31, 2017.

In the nine months ended September 30, 2018, substantially all of the Company’s revenue has been derived from the sale of Mytesi. The Company earned Mytesi revenue primarily from three major pharmaceutical distributors in the United States, each of whom amounted to a percentage of total net revenue of at least 10%. Revenue earned from each as a percentage of total net revenue follows:

Through September 30, 2018, substantially all of the Company's product revenue has been derived from the sale of Mytesi. The Company earned Mytesi revenue primarily from three major pharmaceutical distributors in the United States, each of which amounted to a percentage of total net revenue of at least 10%. Revenue earned from each as a percentage of total net revenue follow: [OPEN will get updated percentages from Veronica]
Consolidated (percentage of total net sales)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Customer 1	34	%	11	%	28	%	4	%
Customer 2	28	%	9	%	28	%	3	%
Customer 3	25	%	12	%	25	%	5	%
	88	%	32	%	81	%	13	%

The Company is subject to credit risk from its accounts receivable related to its sales. The Company generally does not perform evaluations of customers' financial condition and generally does not require collateral. The Company's significant pharmaceutical distributors and their related accounts receivable balance as a percentage of total accounts receivable were as follows:


	As of		As of
	September 30,		December 31,
	2018		2017
Customer 1	35	%	30	%
Customer 2	29	%	31	%
Customer 3	26	%	35	%

No other customer represented more than 10% of the Company's accounts receivable balances as of those dates.

The Company is subject to credit risk from its inventory suppliers. The Company sources drug substance from a single supplier and drug product from a single supplier.

Prepaids and other current assets and other long-term assets

The $1,267,861 increase in prepaids and other current assets between December 31, 2017 and September 30, 2018 includes $777,380 of raw materials having a useful life greater than one year which will be used in future production and $225,147 of deferred rent for the Company’s office lease. The $501,120 increase in other long-term assets between December 31, 2017 and September 30, 2018 includes $289,828 of these raw materials and $211,292 in deferred rent.

Goodwill and Indefinite-lived Intangible Assets

Goodwill is tested for impairment on an annual basis and in between annual tests if events or circumstances indicate that an impairment loss may have occurred. The test is based on a comparison of the reporting unit's book value to its estimated fair market value. The Company performs the annual impairment test during the fourth quarter of each fiscal year using the opening consolidated balance sheet as of the first day of the fourth quarter, with any resulting impairment recorded in the fourth quarter of the fiscal year.

If the carrying value of a reporting unit's net assets exceeds its fair value, the goodwill would be considered impaired and would be reduced to its fair value. The goodwill was entirely allocated to the human health reporting unit

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as the goodwill relates to the Napo Merger. The Company recorded an impairment of goodwill in the three months and nine months ended September 30, 2017. The decline in market capitalization during the three months ended September 30, 2017 was determined to be a triggering event for potential goodwill impairment. Accordingly, the Company performed the goodwill impairment analysis. The Company utilized the market capitalization plus a reasonable control premium in the performance of its impairment test. The market capitalization was based on the outstanding shares and the average market share price for the 30 days prior to September 30, 2017. The Company’s analysis did not result in an impairment of goodwill in the three months and nine months ended September 30, 2018. If the market capitalization decreases in the future, a reasonable possibility exists that goodwill could be impaired in the near term and that such impairment may be material to the financial statements.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of individual reporting units and indefinite-lived intangible assets requires the Company to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors. If current expectations of future growth rates are not met or market factors outside of the Company’s control, such as discount rates, change significantly, this may lead to a further goodwill impairment in the future.

Acquired in-process research and development (IPR&D) are intangible assets initially recognized at fair value and classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. During the development period, these assets will not be amortized as charges to earnings; instead these assets will be tested for impairment on an annual basis or more frequently if impairment indicators are identified. We booked an impairment of $2,300,000 in the year ended December 31, 2017. The impairment loss is measured based on the excess of the carrying amount over the asset's fair value. The loss resulted from the Company's termination of the clostridium dificil infection program.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), which was adopted on January 1, 2018, using the modified retrospective method, which was elected to apply to all active contracts as of the adoption date. Application of the modified retrospective method did not impact amounts previously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company's method of recognizing revenue under ASC 606 yielded similar results to the method utilized immediately prior to adoption. Accordingly, there was no effect to each financial statement line item as a result of applying the new revenue standard.

Practical Expedients, Elections, and Exemptions

The Company recognizes revenue in accordance with the core principle of ASC 606 or when there is a transfer of control of promised goods or services to customers in an amount that reflects the consideration that the Company expects to be entitled to in exchange for those goods or services.

The Company used a practical expedient available under ASC 606‑10‑65‑1(f)4 that permits it to consider the aggregate effect of all contract modifications that occurred before the beginning of the earliest period presented when identifying satisfied and unsatisfied performance obligations, transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.

The Company also used a practical expedient available under ASC 606‑10‑32‑18 that permits it to not adjust the amount of consideration for the effects of a significant financing component if, at contract inception, the expected period between the transfer of promised goods or services and customer payment is one year or less.

The Company has elected to treat shipping and handling activities as fulfillment costs.

Additionally, the Company elected to record revenue net of sales and other similar taxes.

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Contracts

Napo entered into a Marketing and Distribution Agreement (“M&D Agreement”) with BexR Logistix, LLC (“BexR” or “Mission Pharmacal” or “Mission”), in April 2016 to appoint BexR as its distributor with the right to market and sell, and the exclusive right to distribute Mytesi (formerly Fulyzaq) in the US. Napo sells Mytesi through Mission, who then sells Mytesi to its distributors and wholesalers — McKesson, Cardinal Health, AmerisourceBergen Drug Corporation (“ABC”), HD Smith, Smith Drug and Publix (together “Distributors”). Mission sells Mytesi to its Distributors, on behalf of Napo, under agreements executed by Mission with these Distributors and Napo abides by the terms and conditions of sales agreed to between Mission and their Distributors. Health care providers order Mytesi through pharmacies who obtain Mytesi through Mission's Distributors. Napo considers Mission as the sales agent and the Distributors of Mission as its customers. Napo retains control of Mytesi held at Mission.

Mission's Distributors are our customers with respect to purchase of Mytesi. The M&D Agreement with Mission, Mission's agreement with the Distributors and the related purchase order will together meet the contract existence criteria under ASC 606‑10‑25‑1. This M&D Agreement with Mission was amended on August 15, 2018, with a termination date of January 31, 2019. Mission agreed to continue to serve as the exclusive distributor for Mytesi on a transition basis until this date. The Company is in negotiations with another agent to replace Mission as the sales agent.

Jaguar's Neonorm and Botanical extract products are primarily sold to distributors, who then sell the products to the end customers. Since 2014, the Company has entered into several distribution agreements with established distributors such as Animart, Vedco, VPI, RJ Matthews, Henry Schein, and Stockmen Supply to distribute the Company's products in the United States, Japan, and China. The distribution agreements and the related purchase order together meet the contract existence criteria under ASC 606‑10‑25‑1. Jaguar sells directly to its customers without the use of an agent.

Performance obligations

For the products sold by each of Napo and Jaguar, the single performance obligation identified above is the Company's promise to transfer the Company's product Mytesi to Distributors based on specified payment and shipping terms in the arrangement. Product warranties are assurance type warranties that does not represent a performance obligation.

Transaction price

For both Jaguar and Napo, the transaction price is the amount of consideration to which the Company expects to collect in exchange for transferring promised goods or services to a customer. The transaction price of Mytesi and Neonorm is the Wholesaler Acquisition Cost (“WAC”), net of discounts, returns, and price adjustments. The transaction price of the products represents a form of variable consideration for which the Company uses the expected value method to calculate the expected consideration the Company is entitled to. Historical results and management experience in estimating returns and discounts allows the Company to overcome the variable consideration constraints in its calculation of the expected consideration.

Allocate transaction price

For both Napo and Jaguar, the entire transaction price is allocated to the single performance obligation contained in each contract.

Point in time recognition

For both Napo and Jaguar, a single performance obligation is satisfied at a point in time, upon the free on board (“FOB”) terms of each contract when control, including title and all risks, has transferred to the customer.