IGC Pharma, Inc.: Form 10-Q for the period ended Sep 30, 2022

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. It 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 six months ended September 30, 2022, and the Annual Report on Form 10-K for the fiscal year ended March 31, 2022, filed with the SEC on June 23, 2022 (the “2022 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 and 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. Accordingly, 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 expressly 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 outlined in the forward-looking statements.

Overview

IGC has two segments: Life Sciences and Infrastructure.

Life Sciences Segment

The Life Sciences segment operates primarily through wholly owned subsidiaries including IGC Pharma LLC, a clinical-stage biopharmaceutical company based in Maryland. The purpose of IGC Pharma LLC is to effectively treat Alzheimer’s patients and alleviate caregiver burden. Over the past eight years we have developed a deep knowledge of cannabinoid science including its extraction, isolation, purification, and development. Our strategy is to leverage our unique platform to develop a class-leading program to treat neurodegenerative diseases such as Alzheimer’s.

We currently have two main investigational drug assets in various stages of development:

1) IGC-AD1 our lead therapeutic candidate is in Phase 2 trials for treating agitation in dementia from Alzheimer’s; and

2) TGR-63, an enzyme inhibitor shown in pre-clinical trials to reduce neurotoxicity in Alzheimer's cell lines.

IGC-AD1 and TGR-63 both small molecules have shown in Alzheimer’s cell lines that they can potentially suppress or ameliorate a key protein responsible for Aβ plaques, a key hallmark of Alzheimer’s disease.

The Company controls eight patents and seven applications including two each for IGC-AD1 and TGR-63 and their use in Alzheimer’s.

IGC-AD1 is an investigational new drug candidate that is currently in a multi-site, randomized, double blind, Phase 2 clinical trial for agitation in dementia from Alzheimer’s. Currently, there are no FDA approved drugs for treating agitation in Alzheimer’s. About 76% of Alzheimer’s patients suffer from agitation as rated by the CMAI (Van der Mussele et al., 2015).

IGC-AD1 is a cannabis-based compound that relies on micro doses of THC (tetrahydrocannabinol), a psychoactive cannabinoid and another compound as active agents. The Phase 2 trial is a first in human trial with natural THC as an active agent for treating agitation in Alzheimer’s. The second molecule, TGR-63, is an enzyme inhibitor shown in pre-clinical trials to reduce neurotoxicity in Alzheimer’s cell lines. Neurotoxicity causes cell dysfunction and death in Alzheimer’s disease. If shown to be efficacious in halting this process through further trials, testing, and research, TGR-63 can potentially treat Alzheimer's disease by ameliorating Aβ plaques.

The Life Sciences segment also includes the development of over-the-counter personal care products, operated by certain of the Company’s subsidiaries under various brands. We have created a cannabinoid-based women’s wellness brand, Holief™ available through online channels and a CBD-caffeine-infused energy drink, Sunday Seltzer™, available through wholesale channels.

• Holief™ is a vegan, non-GMO, cruelty free, paraben free, lab verified, CBD infused line of OTC products with plant based ingredients aimed at supporting menstrual cramp (dysmenorrhea) discomforts and other premenstrual symptoms (“PMS”).
• Sunday Seltzer™ is a vegan, organic, lightly carbonated energy drink with natural caffeine from green tea extract, CBD, vitamin B and vitamin C, with no added sugars, and no preservatives. The energy drink is available in two flavors, pomegranate-lemon and peach-ginger. In addition, Sunday Seltzer™ is also available in four other flavors with no caffeine.

Both Holief™ and Sunday Seltzer™ are compliant with applicable federal, state, and local laws, and regulations.

Infrastructure Segment

The Infrastructure segment involves the execution of construction contracts and the rental of heavy construction equipment. Since our inception, the Company has operated its Infrastructure segment from India.

Other Developments

On September 20, 2022, the USPTO granted a second patent (#11,446,276) for the treatment of Alzheimer’s disease titled “Extreme low dose THC as a therapeutic and prophylactic agent for Alzheimer’s disease.” The original patent application was initiated by the University of South Florida (“USF”) and filed on August 1, 2016. On May 25, 2017, the Company entered into an exclusive license agreement with USF with respect to the patent application and the associated research conducted on Alzheimer’s disease. IGC-AD1, described above, is based on some of this research.

Strategy

The Life Sciences segment strategy includes:

1. Subject to FDA approval, developing IGC-AD1 as a drug for treating agitation in dementia due to Alzheimer’s and investigating and developing TGR-63 for the potential treatment of Alzheimer’s disease.

2. Marketing Holief™, Sunday Seltzer™, and white label services.

We believe developing a drug for either treatment of symptoms or as a disease modifying agent has considerable risk due to the need for multi-year trials and FDA approval. However, there could be a considerable upside and significant value creation to the extent we obtain a first-to-market advantage, of which there can be no assurance. If we were to obtain a first-to-market advantage, such an advantage could result in significant growth when an approved drug is marketed. Our HoliefTM strategy includes expanding the line of products and developing online services that connect women with healthcare professionals who can help with PMS and dysmenorrhea, more specifically. Building an online community that brings women together can create brand equity and loyalty.

We believe that additional investment in clinical trials, R&D, facilities, marketing, advertising, and acquisition of complementary products and businesses will be critical to the ongoing growth of the Life Sciences segment. We believe these investments will fuel the development and delivery of innovative products that drive positive patient and customer experiences. We hope to leverage our R&D and intellectual property to develop ground-breaking, science-based products that are proven effective through clinical trials, subject to FDA approval. While there can be no assurance, we believe this strategy can improve our existing products and lead to the creation of new hemp-based products that can provide treatment options for multiple conditions, symptoms, and side effects.

Our Infrastructure segment strategy includes winning and executing competitively bid construction contracts, such as building roads, bridges, and other civil works in Kerala, India.

COVID-19 Update

Our infrastructure business is based in the state of Kerala, India, which is among the Indian states most affected by COVID-19, and Hong Kong with strict quarantine and travel restrictions. The restrictions continue to adversely impact our infrastructure business, financial condition, liquidity, and operations. We have limited visibility into when economic conditions will recover in India and Hong Kong for the infrastructure business.

Results of Operations for the Three Months Ended September 30, 2022, and September 30, 2021

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 September 30, 2022, and September 30, 2021:

Statement of Operations (in thousands, unaudited)

Revenue – Revenue was approximately $202 thousand and $56 thousand for the three months ended September 30, 2022, and September 30, 2021, respectively. Revenue in both quarters was primarily derived from our Life Sciences segment, which involved providing white label manufactured products, sales of holistic women’s health care products and beverages including the Company’s energy drink, among others. The increase in sales was primarily related to increased sales of the Company’s services and products. The Infrastructure segment revenue was impacted by the slow recovery from the COVID-19 pandemic, and the onset of the monsoon season in India, which hampers construction activity.

Cost of revenue – The cost of revenue amounted to approximately $67 thousand for the three months ended September 30, 2022, compared to $18 thousand in the three months ended September 30, 2021, this represents gross margins of 67% and 68%, respectively. The change in the cost of revenue is primarily attributable to the cost of raw materials required to produce our products. There is a lack of visibility in the cost of revenue moving forward due to overall inflationary pressures.

*Selling, general and administrative expenses (“*SG&A”) – SG&A expenses were approximately $1.9 million and $4.1 million for the three months ended September 30, 2022 and September 30, 2021 respectively. The decrease of $2.2 million is attributed to an adjustment of one-time expenses, and a reduction of legal and marketing expenses. SG&A 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 advance if any.

Research and Development expenses – R&D expenses were attributed to our Life Sciences segment. The R&D expenses increased by approximately $492 thousand, or 178%, to $768 thousand during the three months ended September 30, 2022, from approximately $276 thousand during the three months ended September 30, 2021. The increase is primarily attributable to the progression of Phase 2 trials on IGC-AD1 and pre-clinical studies on TGR-63. We anticipate increased R&D expenses as development of TGR-63 and the Phase 2 trial on Alzheimer’s pick up more momentum.

Other income, net – Other net income increased by approximately $42 thousand or 1,050% during the three months ended September 30, 2022. The total other income for the three months ended September 30, 2022, and 2021 is approximately $46 thousand and $4 thousand, respectively. Other income includes interest and rental income, dividend income, profit from sale of assets, unrealized gains from investments, net income, and income from the sale of scrap.

Results of Operations for the Six Months Ended September 30, 2022, and September 30, 2021

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 ended September 30, 2022, and September 30, 2021:

Statement of Operations (in thousands, unaudited)

Revenue – Revenue was approximately $414 thousand and $133 thousand for the six months ended September 30, 2022, and September 30, 2021, respectively. Revenue in both quarters was primarily derived from our Life Sciences segment, which involved providing white label manufactured products, sales of holistic women’s health care products and beverages including the Company’s energy drink, among others. The increase in sales was primarily related to increased sales of the Company’s services and products. The Infrastructure segment revenue was impacted by the slow recovery from the COVID-19 pandemic, and the onset of the monsoon season in India, which hampers construction activity..

Cost of revenue – The cost of revenue amounted to approximately $137 thousand for the six months ended September 30, 2022, compared to $69 thousand in the six months ended September 30, 2021, this represents gross margins of 67% and 48%, respectively. The change in cost of revenue is primarily attributable to the cost of raw materials required to produce our products. While gross margins increased, year over year, there is lack of visibility moving forward due to overall inflationary pressures.

Selling, general and administrative expenses – SG&A expenses were approximately $3.4 million and $5.8 million for the six months ended September 30, 2022 and September 30, 2021 respectively. The decrease of $2.4 million is attributed to an adjustment of one-time expenses, and a reduction of legal and marketing expenses. SG&A 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 advance if any.

Research and Development expenses – R&D expenses were attributed to our Life Sciences segment. The R&D expenses increased by approximately $1.4 million or 200% to $2.1 million during the six months ended September 30, 2022, from approximately $720 thousand during the six months ended September 30, 2021. The increase is primarily attributable to the progression of Phase 2 trials on IGC-AD1 and pre-clinical studies on TGR-63. We anticipate additional R&D expenses as the Phase 2 trial commences with patient sign-ups.

Impairment of investment – During the six months ended September 30, 2022, there was no investment impairment. However, during the six months ended September 30, 2021, the Company decided to dispose of its holding in and exit the acquisition of Evolve I, Inc. As a result, Company impaired the investment of $37 thousand in the six months ended September 30, 2021.

Other income, net – Other net income decreased by approximately $384 thousand or 86% during the six months ended September 30, 2022. As a result, the total other income for the six months ended September 30, 2022, and 2021 is approximately $63 thousand and $447 thousand, respectively. During the six months ended September 30, 2021, the other income included a one-time income of approximately $430 thousand related to the forgiveness of the PPP Note. Other income includes interest and rental income, dividend income, profit from sale of assets, unrealized gains from investments, net income, and income from scrap sales.

Liquidity and Capital Resources

Our sources of liquidity are cash and cash equivalents, funds raised through the ATM offering, cash flows from operations, short-term and long-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”, Note 11, “Loans and Other Liabilities” and Note 9, “Leases” in Item 1 of this report for further information on Company commitments and contractual obligations.

While the Company believes its existing balances of cash, cash equivalents and short term investments, and other short-term liquidity arrangements will be sufficient to satisfy its working capital needs, capital asset purchases, debt repayments, investments, including but not limited to, mutual funds, treasury bonds, cryptocurrencies, and other asset classes, clinical trials 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. The Company continues to utilize the ATM to raise capital. Management is actively monitoring the impact of COVID-19 on the Company’s financial condition, liquidity, operations, suppliers, industry, legal expenses, and workforce.

Please refer to Item 1A “Risk Factors” of the Company’s 2022 Form 10-K for further information on the risks related to the Company.

(in thousands, unaudited)

Cash and cash equivalents

Cash and cash equivalents decreased by approximately $3.8 million to $6.6 million in the six months ended September 30, 2022, from $10.4 million as of March 31, 2022, a decrease of approximately 37%.

Summary of Cash flows

(in thousands, unaudited)

| September 30, 2022, Form 10-Q

Operating Activities

Net cash used in operating activities for the six months ended September 30, 2022, was approximately $3.8 million. It consists of a net loss of approximately $5.2 million, a positive impact on cash due to non-cash expenses of approximately $2.2 million, and a negative change in operating assets and liabilities of approximately $808 thousand. Non-cash expenses consist of an amortization/depreciation charge of approximately $332 thousand, stock-based expenses of approximately $1.8 million, and net loss on the sale of a fixed asset of approximately $45 thousand. In addition, changes in operating assets and liabilities had a negative impact of approximately $808 thousand on cash, of which approximately $65 thousand is due to a decrease in accounts receivables, approximately $524 thousand decrease in accounts payable, and approximately $219 thousand decrease in other net current assets and liabilities.

Net cash used in operating activities for the six months ended September 30, 2021, was approximately $4.1 million. It consists of a net loss of approximately $6 million, a positive impact on cash due to non-cash expenses of approximately $2.2 million, and a negative change in operating assets and liabilities of approximately $215 thousand. Non-cash expenses consist of an amortization/depreciation charge of approximately $320 thousand, stock-based expenses of approximately $549 thousand, and a gain due to forgiveness of the PPP Note of $430 thousand. In addition, changes in operating assets and liabilities had a negative impact of approximately $215 thousand on cash, of which approximately $150 thousand is due to a decrease in deposits and advances, approximately $56 thousand decrease in accounts payable, and approximately $9 thousand decrease in other net current assets and liabilities.

Investing Activities

Net cash provided by investing activities for the six months ended September 30, 2022, was approximately $24 thousand, which comprised proceeds from the sale of property, plant, and equipment of approximately $277 thousand, adjusted with cash expenses of approximately $60 thousand for the acquisition and filing expenses related to patents and approximately $193 thousand of a short-term investment.

Net cash used in investing activities for the six months ended September 30, 2021, was approximately $140 thousand, which comprised expenses of approximately $15 thousand for the acquisition and filing expenses related to patents and purchase of property, plant, and equipment of approximately $125 thousand.

Financing Activities

Net cash provided by financing activities from the issuance of equity stock through our ATM offering, net of all expenses related to the issuance of stock, was approximately $101 thousand and $4.1 million for the six months ended September 30, 2022, and 2021, respectively.

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.

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 2022 Form 10-K, as well as Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2022 Form 10-K, for a discussion of all our critical and significant accounting policies.

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASUs) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. Newly issued ASUs not listed are expected to have no impact on the Company’s consolidated financial position and results of operations, because either the ASU is not applicable, or the impact is expected to be immaterial. Recent accounting pronouncements which may be applicable to us are described in Note 2, “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 2022 Form 10-K.

Evaluation of Disclosure Controls and Procedures

Our management maintains disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Principal Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.

Our management, including the Chief Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed in the reports filed or submitted by us under the Exchange Act was recorded, processed, summarized and reported within the requisite time periods and that such information was accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Our management, including our Chief Executive Officer and Principal Financial Officer, evaluated our “internal control over financial reporting” as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the three months ended September 30, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there were no changes in our internal control over financial reporting during the three months ended September 30, 2022, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.