IGC Pharma, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 ended June 30, 2020, and the Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on July 13, 2020. 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 the SEC, 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. COVID-19 Update We continue to monitor the impact from restrictions imposed by the COVID-19 pandemic 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. During the three months ended June 30, 2020: 1. Our revenue from the infrastructure business remains adversely affected with increased expenses. However, as soon as we can safely do so, and in compliance with applicable laws and regulations, we expect to engage in the infrastructure business including completing the road building contract that we have been awarded. 2. A majority of our hemp processing and distillation equipment is sourced from China. While we took delivery of the equipment, the commissioning and certification of the equipment is delayed as it requires Chinese technicians to commission the equipment. The commissioning of our large-scale processing and distillation equipment is delayed. Delivery of some of our equipment, such as the bottling machine is delayed indefinitely as the factory is impacted by an outbreak of COVID-19. Overview While our primary source of revenue for the three months ended June 30, 2019, is from our Infrastructure segment, our primary source of revenue for the three months ended June 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 three months ended June 30, 2020, can be found in Part I, Item 1, Note 1 - Business Description, “Business updates”. | June 30, 2020 Form 10-Q 25 Table of Contents Results of Operations for the three months ended June 30, 2020 and June 30, 2019 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 ended June 30, 2020 and June 30, 2019: Statement of Operations (in thousands, unaudited) Three months ended June 30, 2020 ($) 2019 ($) Change ($) Percent Change Revenue 584 1,649 (1,065 ) (65 %) Cost of revenue (538 ) (1,608 ) 1,070 (67 %) Gross Profit 46 41 5 12 % Selling, general and administrative expenses (1,755 ) (1,249 ) (506 ) 41 % Research and development expenses (222 ) (247 ) 25 (10 %) Operating loss (1,931 ) (1,455 ) (476 ) 33 % Other income, net 49 76 (27 ) (36 %) Loss before income taxes (1,882 ) (1,379 ) (503 ) 36 % Tax expense - - - - % Net Loss (1,882 ) (1,379 ) (503 ) 36 % Revenue – Revenue in the quarter ended June 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 quarter ended June 30, 2019, our revenue was primarily derived from the infrastructure segment. Revenue was approximately $584 thousand and $1,649 thousand for the three months ended June 30, 2020 and 2019, respectively. Revenue in the Life Sciences segment in the quarter ended June 30, 2019, was $104 thousand as compared to $584 thousand in the quarter ended June 30, 2020, albeit with a change in product mix. At the same time, revenue in our Infrastructure segment for the quarter ended June 30, 2019, was $1,545 thousand and zero in the quarter ended June 30, 2020. 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 $538 thousand for three months ended June 30, 2020, compared to $1,608 thousand in three months ended June 30, 2019. The cost of revenue in the quarter ended June 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 $506 thousand or 41% to $1,755 thousand for three months ended June 30, 2020, from $1,249 thousand for three months ended June 30, 2019. The year over year increase of $0.5 million is attributed to a one-time settlement of all derivative lawsuits at $200 thousand, a payroll accrual of $200 thousand and increased legal expenses of around $100 thousand. We expect general and administrative expenses to decrease as one-time legal and other one-time expenses are expected 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 ended June 30, 2020, is about $222 thousand and about $247 thousand for three months ended June 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 as we begin 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 $27 thousand or 36% during three months ended June 30, 2020. The total other income for three months ended June 30, 2020 and 2019 is approximately $49 thousand and $76 thousand, respectively. During the three months ended June 30, 2020, such amount includes interest income, rental income and approximately $10 thousand dividend income and approximately $7 thousand unrealized gain from marketable securities, net. | June 30, 2020 Form 10-Q 26 Table of Contents Liquidity and Capital Resources Our sources of liquidity are cash and cash equivalents, cash flows from operations, short-term borrowings, and short-term liquidity arrangements. The Company continues to evaluate various financing sources and options to raise working capital to help fund current research and development programs and operations. The Company does not have any material long-term debt, capital lease obligations or other long-term liabilities, except as disclosed in this report. Please refer to Note 12, “Commitments and Contingencies” and Note 9, “Leases” in Item I of this report for further information on Company commitments and contractual obligations. While, the Company believes its existing balances of cash, cash equivalents and marketable securities and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, share repurchases, debt repayments, investments and other liquidity requirements, if any, associated with its existing operations over the next 12 months, it expects to raise money when it is able to do so. Management is actively monitoring the impact of COVID-19 on the Company’s financial condition, liquidity, operations, suppliers, industry, legal expenses, and workforce. This liquidity and capital resources discussion compares the unaudited consolidated Company financials. (in thousands, unaudited) As of June 30, 2020 ($) As of March 31, 2020 ($) Change Percent Change Cash, cash equivalents and marketable securities 2,703 7,258 (4,555 ) (63 )% Working capital 13,683 15,811 (2,128 ) (13 )% Cash and cash equivalents Cash and cash equivalents decreased by approximately $4,555 thousand to $2,703 thousand in the three months ended June 30, 2020, from $7,258 thousand as of March 31, 2020, a decrease of approximately 63%. The major decrease in three months ended June 30, 2020, was due to $944 thousand in purchase of property, plant, and equipment and $2,277 thousand investment in inventory. Summary of Cash flows (in thousands, unaudited) Three months ended June 30, 2020 2019 Change Percent Change Cash (used in) operating activities (3,988 ) (2,872 ) (1,116 ) 39 % Cash (used in) investing activities (1,136 ) (6,186 ) 5,050 (82 )% Cash provided by financing activities 580 - 580 100 % Effects of exchange rate changes on cash and cash equivalents (11 ) 2 (13 ) (650 )% Net increase/(decrease) in cash and cash equivalents (4,555 ) (9,056 ) 4,501 (50 )% 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 2,703 16,554 (13,851 ) (84 )% | June 30, 2020 Form 10-Q 27 Table of Contents Operating Activities Net cash used in operating activities for the three months ended June 30, 2020, was approximately $4 million. This consists of a net loss of approximately $1.9 million and non-cash items totaling approximately $243 thousand, which in turn consist of an amortization/depreciation charge of approximately $77 thousand and stock-based expenses totaling approximately $166 thousand. Changes in operating assets and liabilities had a negative impact of approximately $2.35 million on cash, of which approximately $2.28 million was due to increase in inventory. Net cash used in operating activities for the three months ended June 30, 2019, was approximately $2.9 million. Cash was consumed from continuing operations, with the net loss of approximately $1.4 million, non-cash items totaling approximately $225 thousand, consisting of a depreciation charge of approximately $17 thousand and stock-based expenses totaling approximately $208 thousand and changes in working capital accounts had a negative impact of approximately $1,718 thousand on cash. Investing Activities Net cash used in investing activities for the three months ended June 30, 2020, was $1.1 million, which is comprised of approximately $26 thousand for the acquisition and filing expenses related to patents and trademarks, purchase of property, plant and equipment of $944 thousand and investments of approximately $149 thousand in non-marketable securities and $17 thousand in marketable securities. Net cash used in investing activities during the three months ended June 30, 2019, was $6.2 million, which is comprised of approximately $1,173 thousand for purchase of office space, plant and equipment among others, $5,009 thousand for investment in a money market mutual fund and $4 thousand of acquisition and filing of patents. Financing Activities Net cash provided by financing activities was $580 thousand for the three months ended June 30, 2020, consisting of proceeds from loans. Please refer Note 11 - “Loans and Other Liabilities” for further information. There were no financing activities during the three months ended June 30, 2019. 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 three months ended June 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 Part II of our Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the SEC on July 13, 2020, as well as Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the same annual report, for a discussion of all our critical and significant accounting policies. | June 30, 2020 Form 10-Q 28 Table of Contents 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 ended March 31, 2020, filed with the SEC on July 13, 2020. Item 3. Quantitative and Qualitative Disclosures about Market Risk Item 3 does not apply to us because we are a smaller reporting company.