Item 2. Management’s Discussion and Analysis
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 and the nine months ended December 31, 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 “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 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.
Overview
Our primary source of revenue for the three months and the nine months ended December 31, 2019, is from our Infrastructure segment, as was our primary source of revenue for the three months ended December 31, 2020. For the nine months ended December 31, 2020, our primary revenue 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 nine months ended December 31, 2020, can be found in Part I, Item 1, Note 1 - Business Description, “Business updates”.
Sales Strategy
We have a two-pronged strategy for our Life Sciences, biotech component: the initial prong is to investigate IGC-AD1 for efficacy in managing the symptoms of Alzheimer’s disease. This involves conducting Phase 1 through Phase 3 trials on IGC-AD1 over the next several years, with the anticipated goal of demonstrating efficacy and potentially obtaining FDA approval for IGC-AD1 as a cannabinoid-based formulation that can help manage some symptoms for patients suffering from Alzheimer’s disease. The second prong is to investigate the potential efficacy of IGC-AD1 on memory and/or decreasing or managing plaques and tangles, some of the hallmarks of Alzheimer’s disease.
Our pipeline of investigational cannabinoid formulations include pain creams and tinctures for pain relief. We believe that the biotech portion of our Life Sciences strategy will take several years and involves considerable risk; however, we believe it may involve greater defensible growth potential and first-to-market advantage.
Our shorter-term strategy also includes becoming vertically integrated in the hemp industry as we believe this may afford us the opportunity to create the right processes, quality and replicability for eventually creating pharmaceutical grade formulations. We also believe this may provide us with several profit opportunities, all conducted in accordance with applicable laws and regulations, and only in locations where it is legal to do so, such as:
●
sale of our products, under the Herbo™, Hyalolex™, Holief™, and Sunday Seltzer™ brand lines, among others;
●
white labelling of products such as CBD infused lotions, creams, and oils for other brands;
●
wholesale of hemp extracts including hemp crude extract and hemp isolate;
●
processing of hemp biomass and crude oil for farmers in the Northwest U.S. and Canada; and
●
using our manufacturing and trading platform for trading in infrastructure commodities to assist in delivering emergency products such as hand sanitizers, gloves, and other personal protection equipment for the length of the COVID-19 pandemic.
We believe that the additional investment in clinical trials, research and development (“R&D”), facilities, marketing and advertising, as well and the acquisition of products and businesses supporting our Life Sciences segment, are likely to be critical to the development and delivery of innovative products and positive patient and customer experiences. Part of our strategy is to leverage our R&D and our intellectual property, to develop products that we believe are likely to be well differentiated and supported by science through planned pre-clinical and clinical trials. We believe this strategy has the potential to improve existing products and lead to the creation of new products, which, based on scientific study and research, may offer positive results for the management of certain conditions, symptoms and side effects.
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Our strategy for the Infrastructure segment is to invest in and competitively bid on construction contracts, for example to build roads, bridges and other civil works in Kerala, India, and to opportunistically buy and sell infrastructure and other commodities, as well as personal protection equipment. We are currently experiencing a lack of certainty in this business segment due to the COVID-19 pandemic and stay-at-home and shelter in place orders.
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. We anticipate 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 nine months ended December 31, 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 China. While we took delivery of the equipment, the commissioning and certification of the equipment continues to be delayed.
Results of Operations for the Three Months Ended
December 31 , 2020 and December 31 , 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 December 31, 2020 and December 31, 2019:
Statement of Operations (in thousands, unaudited)
Three months ended December 31 ,
2020
($)
2019
($)
Change
($)
Percent
Change
Revenue
108
573
(465
)
(81
%)
Cost of revenue
(94
)
(543
)
449
(83
%)
Gross Profit
14
30
(16
)
(53
%)
Selling, general and administrative expenses
(2,186
)
(1,413
)
(773
)
55
%
Research and development expenses
(154
)
(295
)
141
(48
%)
Operating loss
(2,326
)
(1,678
)
(648
)
39
%
Other income, net
3
75
(72
)
(96
%)
Loss before income taxes
(2,323
)
(1,603
)
(720
)
45
%
Tax expense
-
-
-
-
%
Net Loss
(2,323
)
(1,603
)
(720
)
45
%
Revenue – Revenue in the quarter ended December 31, 2020 and December 31, 2019, was $108 thousand and $573 thousand respectively. The decrease in revenue is from infrastructure and is primarily due to restrictions imposed by the COVID-19 pandemic.
Revenue in the Infrastructure segment was approximately $52 thousand and $568 thousand for the three months ended December 31, 2020 and 2019 respectively. The revenue is from the execution of construction contract.
Revenue in the Life Sciences segment for the three months ended December 31, 2020, was $56 thousand as compared to $5 thousand for the three months ended December 31, 2019, albeit with a change in product mix. Primarily due to the COVID-19 pandemic, we have limited visibility on when either of our segments will stabilize, generate significant revenue 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.
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Cost of revenue – Cost of revenue amounted to approximately $94 thousand for the three months ended December 31, 2020, compared to $543 thousand in the three months ended December 31, 2019. The cost of revenue for the three months ended December 31, 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 $773 thousand or 55% to $2,186 thousand for the three months ended December 31, 2020, from $1,413 thousand for the three months ended December 31, 2019.
The increase of approximately $773 thousand is related to increased overheads, marketing and professional expenses, one-time SEC settlement expense of $175 thousand, one-time $245 thousand inventory related adjustments, and $124 thousand of increased depreciation expenses, among others.
Research and Development expenses – R&D expenses were attributed to our Life Sciences segment. The R&D expenses for the three months ended December 31, 2020, are approximately $154 thousand and approximately $295 thousand for the three months ended December 31, 2019. The R&D expenses, in part, relate to 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 $72 thousand or 96% during the three months ended December 31, 2020. The total other income for the three months ended December 31, 2020 and 2019 is approximately $3 thousand and $75 thousand, respectively. Other income includes interest income, rental income, dividend income and unrealized gain from marketable securities, net, and income from sale of scrap, among others.
Results of Operations for the Nine Months Ended
December 31 , 2020 and December 31 , 2019
The historical results presented below are not necessarily indicative of the results that may be expected for any future period. The following table presents an overview of our results of operations for the nine months ended December 31, 2020 and December 31, 2019:
Statement of Operations (in thousands, unaudited)
Nine months ended December 31 ,
2020
($)
2019
($)
Change
($)
Percent
Change
Revenue
817
4,043
(3,226
)
(80
%)
Cost of revenue
(731
)
(3,944
)
3,213
(81
%)
Gross Profit
86
99
(13
)
(13
%)
Selling, general and administrative expenses
(5,424
)
(3,756
)
(1,668
)
44
%
Research and development expenses
(595
)
(764
)
169
(22
%)
Operating loss
(5,933
)
(4,421
)
(1,512
)
34
%
Other income, net
71
260
(189
)
(73
%)
Loss before income taxes
(5,862
)
(4,161
)
(1,701
)
41
%
Tax expense
-
-
-
-
%
Net Loss
(5,862
)
(4,161
)
(1,701
)
41
%
Revenue – Revenue in the nine months ended December 31, 2020, was primarily derived from our Life Sciences segment, which involved sales of products such as alcohol-based hand sanitizers, among others. In the nine months ended December 31, 2019, our revenue was primarily derived from the infrastructure segment. Revenue was approximately $817 thousand and $4,043 thousand for the nine months ended December 31, 2020 and 2019, respectively.
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Revenue in the Life Sciences segment in the nine months ended December 31, 2019, was $384 thousand as compared to $698 thousand in the nine months ended December 31, 2020, albeit with a change in product mix. At the same time, revenue in our Infrastructure segment for the nine months ended December 31, 2019, was $3,659 thousand and $119 thousand in the nine months ended December 31, 2020. Such revenue relates to execution of construction contract respectively. Primarily due to COVID-19, we have limited visibility on when either of our segments will stabilize, generate significant revenue 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 $731 thousand for the nine months ended December 31, 2020, compared to $3,944 thousand in the nine months ended December 31, 2019. The cost of revenue in the nine months ended December 31, 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 $1,668 thousand or 44% to $5,424 thousand for the nine months ended December 31, 2020, from $3,756 thousand for the nine months ended December 31, 2019. The increase of approximately $1,668 thousand is attributed to one-time settlement expenses of approximately $225 thousand, $342 thousand inventory related adjustments, compensation expenses attributed to increased head count and associated employee-related expenses, marketing and professional expenses related to expansion of brands and depreciation expense related to increase in Property, Plant and Equipment.
Research and Development expenses – R&D expenses were attributed to our Life Sciences segment. The R&D expenses for the nine months ended December 31, 2020, are approximately $595 thousand and approximately $764 thousand for the nine months ended December 31, 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 $189 thousand or 73% during the nine months ended December 31, 2020. The total other income for the nine months ended December 31, 2020 and 2019 is approximately $71 thousand and $260 thousand, respectively. Other income includes interest income, rental income, dividend income and unrealized gains from marketable securities, net, and income from sale of scrap, among others.
Liquidity and Capital Resources
Our sources of liquidity are cash and cash equivalents, cash flows from operations, short-term borrowings, and short-term liquidity arrangements. The Company continues to evaluate various financing sources and options to raise working capital to help fund current research and development programs and operations. The Company does not have any material long-term debt, capital lease obligations or other long-term liabilities, except as disclosed in this report. Please refer to Note 12, “Commitments and Contingencies” and Note 9, “Leases” in Item I of this report for further information on Company commitments and contractual obligations.
While, the Company believes its existing balances of cash, cash equivalents and marketable securities and other short-term liquidity arrangements, will be sufficient to satisfy its working capital needs, capital asset purchases, share repurchases, debt repayments, investments and other liquidity requirements, if any, associated with its existing operations over the next 12 months, it will raise money as and when it is able to do so.
Management is actively monitoring the impact of COVID-19 on the Company’s financial condition, liquidity, operations, suppliers, industry, legal expenses, and workforce.
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This liquidity and capital resources discussion compares the unaudited consolidated Company financials.
(in thousands, unaudited)
As of
December 31, 2020
($)
As of
March 31, 2020
($)
Change
Percent Change
Cash and cash equivalents
968
7,258
(6,290
)
(87
)%
Working capital
9,503
15,811
(6,308
)
(40
)%
Cash and cash equivalents
Cash and cash equivalents decreased by approximately $6,290 thousand to $968 thousand in the nine months ended December 31, 2020, from $7,258 thousand as of March 31, 2020, a decrease of approximately 87%.
Part of the decrease in our cash and cash equivalents in the nine months ended December 31, 2020, was due to a $1,381 thousand investment in the purchase of property, plant, and equipment, a $911 thousand investment in inventory (net of $1.74 million inventory accounted in Deposits and advances). In addition, we had proceeds of approximately $3,081 thousand from marketable securities and cash and cash equivalents losses of approximately $5,862 thousand during the nine months ended December 31, 2020.
Summary of Cash flows
(in thousands, unaudited)
Nine months ended December 31 ,
2020
2019
Change
Percent Change
Cash used in operating activities
(8,295
)
(6,684
)
(1,611
)
24
%
Cash provided by/ (used in) investing activities
1,459
(8,806
)
10,265
(117
%)
Cash provided by financing activities
530
18
512
2,844
%
Effects of exchange rate changes on cash and cash equivalents
16
(9
)
25
(278
%)
Net decrease in cash and cash equivalents
(6,290
)
(15,481
)
9,191
(59
%)
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
968
10,129
(9,161
)
(90
%)
Operating Activities
Net cash used in operating activities for the nine months ended December 31, 2020, was approximately $8,295 thousand. This consists of a net loss of approximately $5,862 thousand and non-cash items totaling approximately $835 thousand, which in turn consist of an amortization/depreciation charge of approximately $312 thousand and stock-based expenses totaling approximately $523 thousand. Changes in operating assets and liabilities had a negative impact of approximately $3,268 thousand on cash, of which approximately a $911 thousand is due to investment in inventory (net of $1.74 million inventory accounted in Deposits and advances).
Net cash used in operating activities for the nine months ended December 31, 2019, was $6,684 thousand. Cash was consumed from continuing operations, with the net loss of $4,161 thousand, non-cash items totaling $593 thousand, consisting of a depreciation and amortization charge of $69 thousand and stock-based expenses totaling $524 thousand and changes in working capital accounts had a negative impact of $3,116 thousand on cash.
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Investing Activities
Net cash from investing activities for the nine months ended December 31, 2020, was approximately $1,459 thousand, which is comprised of expenses of approximately $92 thousand for the acquisition and filing expenses related to patents and trademarks, purchase of property, plant and equipment of approximately $1,381 thousand and investments of approximately $149 thousand in non-marketable securities and proceeds of $3,081 thousand from marketable securities.
Net cash used in investing activities during the nine months ended December 31, 2019, was $8,806 thousand which was comprised of approximately $3,675 thousand for purchase of office space, plant and equipment among others, $5,063 thousand for investment in a money market mutual fund and $68 thousand for the acquisition and filing of patents.
Financing Activities
Net cash provided by financing activities was $530 thousand for the nine months ended December 31, 2020, which is comprised of proceeds from borrowings.
Cash provided by financing activities of approximately $18 thousand during the nine months ended December 31, 2019, consisted of stock options exercised by an advisor.
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 have taken cybersecurity measures that we expect are likely to safeguard the Company against breaches. There were no impactful breaches in cybersecurity during the nine months ended December 31, 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 ended March 31, 2020, filed with the SEC on July 13, 2020.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 3 does not apply to us because we are a smaller reporting company.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.