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.

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 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.

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.

Disaggregation of Product Revenue

Human

Sales of Mytesi are recognized as revenue when the products are delivered to the wholesalers. Net revenues from the sale of Mytesi were $1,107,682 and $2,545,121 in the three and nine months ended September 2018, and $364,054 in the three and nine months ended September 30, 2017. The merger with Napo closed July 31, 2017. The Company did not recognize revenue for Mytesi sales prior to the merger with Napo.

Animal

The Company recognized Neonorm revenues of $24,386 and $33,611 for the three months ended September 30, 2018 and 2017, and $97,760 and $139,600 for the nine months ended September 30, 2018 and 2017, respectively. Botanical Extract revenues were nil and $48,000 in the three months ended September 30, 2018 and 2017, and nil and $78,000 in the nine months ended September 30, 2018 and 2017, respectively. Revenues are recognized upon shipment which is when title and control is transferred to the buyer . Sales of Neonorm Calf and Foal to distributors are made under agreements that may provide distributor price adjustments and rights of return under certain circumstances.

Collaboration Revenue

On January 27, 2017, the Company entered into a licensing, development, co-promotion and commercialization agreement with Elanco US Inc. (“Elanco”) to license, develop and commercialize Canalevia, the Company's drug product candidate under investigation for treatment of acute and chemotherapy-induced diarrhea in dogs, and other drug product formulations of crofelemer for treatment of gastrointestinal diseases, conditions and symptoms in cats and other companion animals. Under the terms of the agreement, the Company received an initial non-refundable upfront payment of $2,548,689, inclusive of reimbursement of past product and development expenses of $1,048,689, which was recognized as revenue ratably over the estimated development period of one year resulting in revenue of zero and $637,200 in the three months ended September 30, 2018 and 2017, respectively, and zero and $1,734,100 in the nine months ended September 30, 2018 and 2017, respectively.

On November 1, 2017, the Company received a letter from Elanco serving as formal notice of their decision to terminate the agreement by giving the Company 90 days written notice. According to the agreement, termination became effective on January 30, 2018.

On September 24, 2018, the Company entered into a Distribution, License and Supply Agreement ("License Agreement") with Knight Therapeutics, Inc. ("Knight"). The License Agreement has a term of 15 years (with automatic renewals) and provides Knight with an exclusive right to commercialize current and future Jaguar human health products (including Crofelemer, Lechlemer, and any product containing a proanthocyanidin or with an anti-secretory mechanism) in Canada and Israel. In addition, Knight was granted a right of first negotiation for expansion to Latin America. Under the License Agreement, Knight is responsible for applying for and obtaining necessary regulatory approvals in the territory of Canada and Israel, as well as marketing, sales and distribution of the licensed products. Knight will pay a transfer price for all licensed products, and upon achievement of certain regulatory and sales milestones, Jaguar may receive payments from Knight in an aggregate amount of up to approximately $18 million payable throughout the initial 15-year term of the agreement.

Comprehensive Income (Loss)

For all periods presented, the comprehensive income (loss) was equal to the net income (loss); therefore, a separate statement of comprehensive income (loss) is not included in the accompanying interim condensed consolidated financial statements.

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016‑02, Leases. Under this guidance, lessees will be required to recognize substantially all leases on the balance sheet as a right-of-use asset and recognize a corresponding lease liability. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statement of Operations. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Entities have the option to use certain practical expedients. Full retrospective application is prohibited. In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases." These amendments affect narrow aspects of the guidance issued in the amendments in ASU 2016-02 including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease, and failed sale and leaseback transactions. The Company plans to adopt Topic 842 on January 1, 2019. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements and accompanying footnotes. The Company anticipates that implementation of Topic 842 will result in an increase in assets and liabilities and additional disclosures. The effect of adoption will depend on our current lease portfolio at time of adoption; however, upon adoption, we anticipate that our reported assets and liabilities will increase in connection with the recognition of any right-of-use assets and lease liabilities, such as the operating lease on our corporate headquarters.

In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features. This new guidance addresses narrow issues identified as a result of the complexity associated with accounting for certain financial instruments with characteristics of liabilities and equity, including accounting for Down Round features. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of this accounting standard on our financial position, results of operation and cash flows.

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this ASU expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This new guidance is effective for the Company in fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently assessing the impact of this new guidance.