The purpose of this Management's Discussion and Analysis ("MD&A") is to provide an understanding of the Company's consolidated financial condition, and results of operations and cash flows, and should be read in conjunction with our unaudited condensed financial statements and related notes that appear elsewhere in this Quarterly Report on Form 10-Q for the three months and the six months endedSeptember 30, 2020 , and the Annual Report on Form 10-K for the fiscal year endedMarch 31, 2020 , filed with theSEC onJuly 13, 2020 (the "2020 Form 10-K"). The Company's actual results could differ materially from those discussed here. Factors that could cause differences include those discussed in the "Forward-Looking Statements" and "Risk Factors" sections, as well as discussed elsewhere in this report. The risks and uncertainties can cause actual results to differ significantly from those in our forward-looking statements or implied in historical results and trends. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of theSEC , to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements. Company Background At IGC, our aim is to pioneer the future of pharmaceuticals and wellness products through groundbreaking, innovative research in cannabinoid sciences. Devastating diseases such as Alzheimer's, Parkinson's, Epilepsy, and chronic pain collectively affect over a billion people worldwide. We believe life-altering solutions are within reach by combining creative concepts, dedicated research and development, with a passion for community, and wellness empowerment. We believe that wellness and access to affordable naturally derived medicine is a human right. Since 2014, our team has been committed to researching the application of cannabinoid-based therapies as viable alternatives to many current medications. Early anecdotal evidence suggests cannabinoid and hemp sciences may open doors to the discovery and development of novel treatments for numerous diseases currently believed to be incurable. Driven by cutting edge research and technology, we are committed to our goal to make cannabinoid-based formulations accessible to the masses and to continue to change the dialogue and current stigmas around cannabis so that cannabis-based products, including medicines, can be made more widely available to the people who need them most. We are also committed to our business operations inAsia , including (a) the execution of construction contracts, (b) the purchase and resale of physical commodities used in infrastructure, and (c) the rental of heavy construction equipment.. Although COVID-19 continues to impact this business line, IGC looks forward to increasing these operations as the COVID-19 pandemic allows. COVID-19 Update We continue to monitor the impact of the COVID-19 pandemic and from restrictions imposed by governmental entities related thereto, on our financial condition, liquidity, operations, suppliers, industry, and workforce. Revenue from the infrastructure segment continues to be adversely affected as we are unable to fully deploy our workforce. In response to the evolving circumstances, we supplemented our facilities to manufacture, label, and distribute FDA-registered alcohol-based hand sanitizers and hand rubs. While there is a general lack of visibility, we anticipate drastically reduced revenue from Infrastructure, and also unpredictable revenue from the Life Sciences segment as the world economy remains impacted by the COVID-19 pandemic. During the six months endedSeptember 30, 2020 :
1. Our revenue from the infrastructure business remains adversely affected
with increased expenses. However, in compliance with applicable laws and regulations, we have commenced limited operations for the completion of the road building contract that we have been awarded.
2. A majority of our hemp processing and distillation equipment is sourced
from
certification of the equipment continues to be delayed. The commissioning
of our large-scale processing and distillation equipment is delayed.
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Table of Contents Overview While our primary source of revenue for the three months and the six months endedSeptember 30, 2019 , is from our Infrastructure segment, our primary source of revenue for the three months endedSeptember 30, 2020 is from our Infrastructure segment and for the six months endedSeptember 30, 2020 , is from our Life Sciences segment, which produced wellness products, including alcohol-based hand sanitizers, among others. The Company operates both segments in compliance with applicable state, national, and local laws and regulations and only in locations and regions where it is legal to do so. Further information on the Company highlights in the six months endedSeptember 30, 2020 , can be found in Part I, Item 1, Note 1 - Business Description, "Business updates". Expanding Sales Strategy In the Life Sciences segment, we view our desire to be vertically integrated in the hemp industry as providing us with several profit opportunities that we expect to focus on throughout the rest of Fiscal 2021. The Company has been working on branded products, under the Herbo™, Hyalolex™, Holief™ and Sunday Seltzer™ product lines, and expects to launch online sales during Fiscal 2021 or early Fiscal 2022. Our strategy for the Infrastructure segment is to continue investing in and competitively bidding on construction contracts, for example to build roads, bridges, and other civil works inKerala, India , and to opportunistically buy and sell infrastructure and other commodities. FDA Clinical Trials OnJuly 30, 2020 , IGC received a notice from the FDA to proceed with a 12-subject Phase 1 human clinical trial ("removal of full clinical hold") on its INDA, submitted under Section 505(i) of the Federal Food, Drug, and Cosmetic Act, for IGC-AD1. The Phase 1 trial is proposed to involve a randomized placebo-controlled MAD study to evaluate safety and tolerability of IGC-AD1 in subjects with mild to severe dementia due to Alzheimer's disease. In addition, the study will evaluate PK and collect data on other factors. The Company's IGC-AD1 formulation is based on a patent filed by the USF that uses a cannabinoid as one of the active ingredients. The Company has exclusive rights to the patent filing. The Company's flagship product Hyalolex Drops of Clarity™, currently available in select dispensaries inPuerto Rico , is modeled around this formulation. For further information on the FDA trial process, please refer the Item 1, Business in Part I of the 2020 Form 10-K. Alzheimer's disease According to theNational Institute of Health's National Institute on Aging (NIA), Alzheimer's is an irreversible, progressive brain disorder that destroys memory and thinking skills, and, eventually, the ability to carry out the simplest tasks. Symptoms, for most people, may first appear for individuals in their mid-60s.1 Some experts believe that Alzheimer's is the third leading cause of death just behind heart disease and cancer. Alzheimer's is believed to cause about 70% of dementia, which is the loss of cognitive functioning that includes thinking, remembering, reasoning, and behavioral abilities.2 Alzheimer's is named after Dr.Alois Alzheimer , who, in 1906, based on a histopathological study, found that the brain tissue of a women who died of unusual mental illness had abnormal clumps and tangled bundles of fiber. Her symptoms included memory loss, language problems and unpredictable behavior. The clumps are now called beta-amyloid plaques (plaques) and the bundles are now called neurofibrillary or tau tangles (tangles). These plaques and tangles are considered the main features, or hallmarks, of Alzheimer's disease, another being the loss of connection between nerve cells.3
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1 https://www.nia.nih.gov/health/alzheimers-disease-fact-sheet
2 https://www.who.int/news-room/fact-sheets/detail/dementia
3 https://www.nia.nih.gov/health/alzheimers-disease-fact-sheet
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While some researchers view Alzheimer's as a spectrum disease, the NIA categorizes Alzheimer's in three stages: mild, moderate, and severe. Broadly, in mild Alzheimer's, problems can include wandering, getting lost, not remembering the way home for example, trouble handling money and paying bills, repeating questions, and personality and behavior changes. In moderate Alzheimer's there is damage to the areas of the brain that control language, reasoning, sensory processing, and conscious thought. Problems can include carrying out multistep tasks such as dancing, getting dressed, and more behavior changes including hallucinations, delusions, paranoia and impulsive behavior. By the time severe Alzheimer's sets in, plaques and tangles spread throughout the brain, and the brain shrinks significantly. People with severe Alzheimer's are completely dependent on others for care, they cannot communicate, and, near the end, the body shuts down.4 Plaques are believed to be caused by an unhealthy brain's inability to clear a protein called beta amyloid (® amyloid, "A®") that is cleaved, as part of a normal cycle, from a larger protein called Amyloid Precursor Protein (APP).5 These cleaved smaller-length proteins are cleared in healthy brains. However, in Alzheimer's brains, they accumulate, sticking to each other, becoming sticky plaques that are deposited between neurons, affecting neuronal connections and leading, for example, to memory loss. Inside a neuron there are microtubules, analogous to highways, that help transport nutrients from one part of the nerve cell to another. Tau protein helps bind and stabilize the microtubule structures. In Alzheimer's patients, tau detaches from the microtubules and stick together, forming threads that eventually join to form tangles inside the neurons, leading to neuronal death. Essentially, plaques deposit between neurons, and tangles kill neurons from the inside.6 It may be characterized as a near perfect assault on the brain with devastating consequences. There is no cure for Alzheimer's disease.7 Alzheimer's patients manifest Behavior and Psychological Symptoms caused by Dementia (BPSD) that include, among others, depression, agitation, aggression, sleep disturbance (sundown syndrome), delusions, hallucinations, anxiety. These symptoms put a burden on caregivers that leads to caregiver distress.8 IGC-AD1 In 2017, IGC acquired rights to a patent filed by USF on treating Alzheimer's disease using a cannabinoid in combination with another naturally occurring molecule. The research on which the patent application is based showed that in Alzheimer's cell lines, various combinations of the formulation blocked the production of A®, blocked the formation of A® oligomers (plaques), inhibited the hyperphosphorylation of tau, which leads to the destabilization of microtubules, and increases mitochondrial activity, among others. The research also showed improvement in the memory of Alzheimer's induced transgenic mice. Based on this and other data, IGC acquired the patent rights from USF, formulated a liquid investigational medication, and filed an INDA with the FDA. The investigational drug, IGC-AD1, is ready for human trials, which is expected to begin with a Phase 1 MAD, PK trial.
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4 https://www.nia.nih.gov/health/alzheimers-disease-fact-sheet
5
https://www.nia.nih.gov/health/what-happens-brain-alzheimers-disease#:~:text=Amyloid%20Plaques&text=In%20the%20Alzheimer's%20brain%2C%20abnormal,of%20beta-amyloid%20influence%20Alzheimer's.
6
https://www.nia.nih.gov/health/what-happens-brain-alzheimers-disease#:~:text=In%20Alzheimer's%20disease%2C%20however%2C%20abnormal,the%20synaptic%20communication%20between%20neurons.
7 https://www.alz.org/alzheimers-dementia/treatments
8 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5550537/
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Results of Operations for the Three Months Ended
The historical results presented below are not necessarily indicative of the results that may be expected for any future period. The following table presents an overview of our results of operations for the three months endedSeptember 30, 2020 andSeptember 30, 2019 :
Statement of Operations (in thousands, unaudited)
Three months ended September 30, 2020 2019 Change Percent ($) ($) ($) Change Revenue 125 1,821 (1,696 ) (93 %) Cost of revenue (99 ) (1,793 ) 1,694 (94 %) Gross Profit 26 28 (2 ) 7 % Selling, general and administrative expenses (1,483 ) (1,094 ) (389 ) 36 % Research and development expenses (219 ) (222 ) 3 (1 %) Operating loss (1,676 ) (1,288 ) (388 ) 30 % Other income, net 19 109 (90 ) (83 %) Loss before income taxes (1,657 ) (1,179 ) (478 ) 41 % Tax expense - - - - % Net Loss (1,657 ) (1,179 ) (478 ) 41 %
Revenue - Revenue in the quarter ended
Revenue in the Infrastructure segment was approximately$67 thousand and$1,547 thousand for the three months endedSeptember 30, 2020 and 2019 respectively. The revenue is from the execution of construction contract and sales of infrastructure related physical commodities. Revenue in the Life Sciences segment for the three months endedSeptember 30, 2020 , was$58 thousand as compared to$274 thousand for the three months endedSeptember 30, 2019 , albeit with a change in product mix. Primarily due to COVID-19, we have limited visibility on when either of our segments will stabilize and become predictable. We expect volatility in both segments in the foreseeable future. We expect to be opportunistic in providing personal protection equipment as the country reopens from the pandemic. Cost of revenue - Cost of revenue amounted to approximately$99 thousand for the three months endedSeptember 30, 2020 , compared to$1,793 thousand in the three months endedSeptember 30, 2019 . The cost of revenue for the three months endedSeptember 30, 2020 , is primarily attributable to raw materials that are required to produce our products. Selling, general and administrative expenses - Selling, general and administrative expenses consist primarily of employee-related expenses, sales commission, professional fees, legal fees, marketing, other corporate expenses, allocated general overhead and provisions, depreciation and write-offs relating to doubtful accounts and advances, if any. Selling, general and administrative expenses increased by approximately$389 thousand or 36% to$1,483 thousand for the three months endedSeptember 30, 2020 , from$1,094 thousand for the three months endedSeptember 30, 2019 . The increase of approximately$0.4 million is attributed to a one-time settlement expense of approximately$50 thousand , compensation expenses attributed to increased head count and associated employee-related expenses, marketing expense related to expansion of brands and depreciation expense related to increase in Property, Plant and Equipment. We expect general and administrative expenses to decrease as one-time legal and other one-time expenses continue to abate over the rest of this year. Research and Development expenses - R&D expenses were attributed to our Life Sciences segment. The R&D expenses for the three months endedSeptember 30, 2020 , is approximately$219 thousand and approximately$222 thousand for the three months endedSeptember 30, 2019 . The cost associated with this work is mostly research comprising of plant extracts that could be productized and data to support the efficacy of the extracts, including preparing for potential FDA trials, product research, designing, formulating and market analysis. We expect R&D expenses to increase with Phase 1 trials on IGC-AD1. All research and development costs are expensed in the quarter in which they are incurred.
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Other Income, net - Other net income decreased by approximately$90 thousand or 83% during the three months endedSeptember 30, 2020 . The total other income for the three months endedSeptember 30, 2020 and 2019 is approximately$19 thousand and$109 thousand , respectively. Other income includes interest income, rental income, dividend income and unrealized gain from marketable securities, net, and income from sale of scrap, among others.
Results of Operations for the Six Months Ended
The historical results presented below are not necessarily indicative of the results that may be expected for any future period. The following table presents an overview of our results of operations for the six months endedSeptember 30, 2020 andSeptember 30, 2019 :
Statement of Operations (in thousands, unaudited)
Six months ended September 30, 2020 2019 Change Percent ($) ($) ($) Change Revenue 709 3,470 (2,761 ) (80 %) Cost of revenue (637 ) (3,401 ) 2,764 (81 %) Gross Profit 72 69 3 4 % Selling, general and administrative expenses (3,238 ) (2,343 ) (895 ) 38 % Research and development expenses (441 ) (469 ) 28 (6 %) Operating loss (3,607 ) (2,743 ) (864 ) 31 % Other income, net 68 185 (117 ) (63 %) Loss before income taxes (3,539 ) (2,558 ) (981 ) 38 % Tax expense - - - - % Net Loss (3,539 ) (2,558 ) (981 ) 38 % Revenue - Revenue in the six months endedSeptember 30, 2020 , was primarily derived from our Life Sciences segment, which involved sales of products such as alcohol-based hand sanitizers, among others. In the six months endedSeptember 30, 2019 , our revenue was primarily derived from the infrastructure segment. Revenue was approximately$709 thousand and$3,470 thousand for the six months endedSeptember 30, 2020 and 2019, respectively. Revenue in the Life Sciences segment in the six months endedSeptember 30, 2019 , was$379 thousand as compared to$642 thousand in the six months endedSeptember 30, 2020 , albeit with a change in product mix. At the same time, revenue in our Infrastructure segment for the six months endedSeptember 30, 2019 , was$3,091 thousand and$67 thousand in the six months endedSeptember 30, 2020 , relating to sales of infrastructure related physical commodities and execution of construction contract respectively. Primarily due to COVID-19, we have limited visibility on when either of our segments will stabilize and become predictable. We expect volatility in both segments in the foreseeable future. We expect to be opportunistic in providing personal protection equipment, including hand sanitizers, as the country reopens from the pandemic. Cost of revenue - Cost of revenue amounted to approximately$637 thousand for the six months endedSeptember 30, 2020 , compared to$3,401 thousand in the six months endedSeptember 30, 2019 . The cost of revenue in the six months endedSeptember 30, 2020 , is primarily attributable to raw materials that are required to produce our products. Selling, general and administrative expenses - Selling, general and administrative expenses consist primarily of employee-related expenses, sales commission, professional fees, legal fees, marketing, other corporate expenses, allocated general overhead and provisions, depreciation and write-offs relating to doubtful accounts and advances, if any. Selling, general and administrative expenses increased by approximately$895 thousand or 38% to$3,238 thousand for the six months endedSeptember 30, 2020 , from$2,343 thousand for the six months endedSeptember 30, 2019 . The increase of approximately$0.9 million is attributed to a one-time settlement expense of approximately$50 thousand , a payroll accrual of approximately$200 thousand , compensation expenses attributed to increased head count and associated employee-related expenses, marketing expense related to expansion of brands and depreciation expense related to increase in Property, Plant and Equipment. We expect general and administrative expenses to decrease as one-time legal and other one-time expenses continue to abate over the rest of this year.
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Research and Development expenses - R&D expenses were attributed to our Life Sciences segment. The R&D expenses for the six months endedSeptember 30, 2020 , is approximately$441 thousand and approximately$469 thousand for the six months endedSeptember 30, 2019 . The cost associated with this work is mostly research comprising of plant extracts that could be productized and data to support the efficacy of the extracts, including preparing for potential FDA trials, product research, designing, formulating and market analysis. We expect R&D expenses to increase with Phase 1 trials on IGC-AD1. All research and development costs are expensed in the quarter in which they are incurred. Other Income, net - Other net income decreased by approximately$117 thousand or 63% during the six months endedSeptember 30, 2020 . The total other income for the six months endedSeptember 30, 2020 and 2019 is approximately$68 thousand and$185 thousand , respectively. Other income includes interest income, rental income, dividend income and unrealized gain from marketable securities, net, and income from sale of scrap, among others.
Liquidity and Capital Resources
Our sources of liquidity are cash and cash equivalents, cash flows from operations, short-term borrowings, and short-term liquidity arrangements. The Company continues to evaluate various financing sources and options to raise working capital to help fund current research and development programs and operations. The Company does not have any material long-term debt, capital lease obligations or other long-term liabilities, except as disclosed in this report. Please refer to Note 12, "Commitments and Contingencies" and Note 9, "Leases" in Item I of this report for further information on Company commitments and contractual obligations. While, the Company believes its existing balances of cash, cash equivalents and marketable securities and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, share repurchases, debt repayments, investments and other liquidity requirements, if any, associated with its existing operations over the next 12 months, it expects to raise money when it is able to do so.
Management is actively monitoring the impact of COVID-19 on the Company's financial condition, liquidity, operations, suppliers, industry, legal expenses, and workforce.
This liquidity and capital resources discussion compares the unaudited consolidated Company financials.
(in thousands, unaudited) As ofSeptember 30 , As of 2020March 31, 2020 ($) ($) Change Percent Change
Cash and cash equivalents 1,151 7,258 (6,107 ) (84 )% Working capital 11,789 15,811 (4,022 ) (25 )% Cash and cash equivalents Cash and cash equivalents decreased by approximately$6,107 thousand to$1,151 thousand in the six months endedSeptember 30, 2020 , from$7,258 thousand as ofMarch 31, 2020 , a decrease of approximately 84%. A major decrease in our cash and cash equivalents in the six months endedSeptember 30, 2020 , was due to$1,229 thousand used in purchase of property, plant, and equipment and a$2,439 thousand investment in inventory. In addition, cash and cash equivalents decreased as a result of our net losses of approximately$3,539 thousand during the six months endedSeptember 30, 2020 .
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Table of Contents Summary of Cash flows (in thousands, unaudited) Six months ended September 30, 2020 2019 Change Percent Change Cash (used in) operating activities (6,450 ) (4,444 ) (2,006 ) 45 % Cash (used in) investing activities (195 ) (7,111 ) 6,916 (97 %) Cash provided by financing activities 530 18 512 2,844 % Effects of exchange rate changes on cash and cash equivalents 8 (10 ) 18 (180 %) Net increase/(decrease) in cash and cash equivalents (6,107 ) (11,547 ) 5,440 (47 %) Cash and Cash Equivalents at the beginning of period 7,258 25,610 (18,352 ) (72 %) Cash and cash equivalents at the end of the period 1,151 14,063 (12,912 ) (92 %) Operating Activities Net cash used in operating activities for the six months endedSeptember 30, 2020 , was approximately$6 million . This consists of a net loss of approximately$3.5 million and non-cash items totaling approximately$550 thousand , which in turn consist of an amortization/depreciation charge of approximately$185 thousand and stock-based expenses totaling approximately$365 thousand . Changes in operating assets and liabilities had a negative impact of approximately$3.5 million on cash, of which approximately$2.4 million was due to an increase in inventory.. Net cash used in operating activities for the six months endedSeptember 30, 2019 was$4.4 million . Cash was consumed from continuing operations, with the net loss of$2.6 million , non-cash items totaling$406 thousand , consisting of a depreciation charge of$45 thousand and stock-based expenses totaling$361 thousand and changes in working capital accounts had a negative impact of$2.3 million on cash. Investing Activities Net cash used in investing activities for the six months endedSeptember 30, 2020 , was$195 thousand , which is comprised of approximately$48 thousand for the acquisition and filing expenses related to patents and trademarks, purchase of property, plant and equipment of$1.2 million and investments of approximately$149 thousand in non-marketable securities and proceeds of$1.2 million from marketable securities. Net cash used in investing activities during the six months endedSeptember 30, 2019 was$7.1 million which is comprised of approximately$2 million for the purchase of office space, plant and equipment among others,$5 million for investment in a marketable securities and$23 thousand for the acquisition and filing of patents. Financing Activities
Net cash provided by financing activities was
Cash provided by financing activities of approximately$18 thousand during the six months endedSeptember 30, 2019 consisted of share options previously issued to advisor.
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Off-Balance Sheet Arrangements
We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
Critical Accounting Policies
While all accounting policies impact the financial statements, certain policies may be viewed as critical. Critical accounting policies are those that are both most important to the portrayal of financial condition and results of operations and that require Management's most subjective or complex judgments and estimates. Our Management believes the policies that fall within this category are the policies on revenue recognition, inventory, accounts receivable, foreign currency translation, impairment of long-lived assets and investments, stock-based compensation, and cybersecurity. We have a cybersecurity policy in place and tighter cybersecurity measures to safeguard against hackers. There were no impactful breaches in cybersecurity during the six months endedSeptember 30, 2020 . Please see our disclosures in Note 2 - Summary of Significant Accounting Policies to the Notes to the Unaudited Condensed Consolidated Financial Statements in this report, in the Notes to the Audited Consolidated Financial Statements in the 2020 Form 10-K, as well as Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2020 Form 10-K, for a discussion of all our critical and significant accounting policies.
Recent Accounting Pronouncements
The recent accounting pronouncements are discussed in Note 2 - Summary of Significant Accounting Policies to the Notes to the Unaudited Condensed Consolidated Financial Statements in this report and in the Notes to the Audited Consolidated Financial Statements in Part II of our Annual Report on Form 10-K for fiscal year endedMarch 31, 2020 , filed with theSEC onJuly 13, 2020 .
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