ITEM 1.
BUSINESS
Company Background
IGC has two lines of business: 1) infrastructure, and 2) plant and cannabinoid-based products and therapies. The Company’s infrastructure business, based in India and Hong Kong involves (a) the rental of heavy construction equipment like bulldozers, excavators, rollers and pavers, among others; (b) execution of construction contracts; and (c) the purchase and resale of physical commodities used in infrastructure, like steel, marble and tiles (collectively, the “Infrastructure Business”). Our revenue in Fiscal 2019 was primarily derived from this business. Information about our infrastructure products and service offerings is available at www.igcinc.us.
Our second line of business (collectively, the “Plant and Cannabinoid Business”) stems from plant extracts, including cannabinoids, produced by the cannabis plant (“phytocannabinoids”). Our plant and cannabinoid-based products and therapies involve several brands that the Company develops and expects to commercialize. The Company’s flagship branded, patent pending, product is Hyalolex™, a cannabinoid based alternative therapy, aimed at helping improve the quality of life for elderly patients suffering from dementia including Alzheimer’s disease (AD). Other alternative therapies in development include therapies for neuropathic pain, Parkinson’s disease (PD) and other Central Nervous System (CNS) disorders, among others. Hyalolex™ is based on a patent filing made by the University of South Florida for the use of ultra-low doses of cannabinoids for the treatment of AD. Further information is available at www.igcpharma.com and www.hyalolex.com. In addition, the Company, under the brand name Holi Hemp™, sells hemp crude extract, hemp isolate, and hemp distillate, among others. Further information is available at www.holihemp.com.
The cannabis plant includes a variety commonly known as marijuana, and a variety known as hemp. These plants all produce, in varying degrees, molecules such as Tetrahydrocannabinol (THC), a molecule that mimics anandamide, a cannabinoid naturally produced by the human body, that creates a sense of euphoria. THC is the psychoactive molecule in cannabis. The cannabis plant also produces many other cannabinoids. Among them, cannabidiol (CBD) is a non-psychoactive molecule, which is the target of medical research. Under the Agriculture Improvement Act of 2018 (the 2018 Farm Bill), Hemp is classified as a cannabis plant that has THC below 0.3% by dry weight and marijuana is classified as a cannabis plant that has THC above 0.3% by dry weight.
As of March 31, 2019, the Company had the following direct operating subsidiaries: Techni Bharathi Private Limited (TBL), IGCare LLC, Holi Hemp LLC and IGC Pharma LLC. The Company’s fiscal year is the 52- or 53-week period that ends on March 31. The Company is a Maryland corporation established in 2005. The Company’s filings are available on www.sec.gov.
Business Strategy
Our strategy for the Infrastructure Business is to a) continue to rent heavy equipment to agricultural and construction contractors; b) invest in and competitively bid on constructions contracts, for example to build roads, bridges, and other civil works in Kerala India; and c) buy and sell infrastructure commodities. The Company expects to expand this line of business with the purchase of heavy equipment, bank guarantees, and an increase in employees and consultants.
With respect to the Company’s second line of business, the Company’s strategy is to create, build, and manage several brands of plant and cannabinoid-based therapies, such as Hyalolex™, Serosapse™, Natrinol™ and products under Holi Hemp™, among others. As part of this strategy, the Company expects to secure its supply chain by setting up facilities that grow, process and extract hemp. If market demand for cannabinoids, such as CBD and full spectrum hemp oil (an extraction of the whole plant), grows, as predicted by some analysts, we expect to sell these products on a retail and wholesale basis. In addition, we are also exploring acquisitions, investments, or the creation of joint ventures with competitive and complementary businesses, products and technologies. The Company believes that ongoing and expanded investment in clinical trials, Research and Development (R&D), facilities, marketing and advertising, as well as the acquisition of products and businesses supporting our Plant and Cannabinoid Business, is critical to the development and delivery of innovative products and best in class patient experience. Our strategy for plant and cannabinoid-based alternative therapy and products is to leverage our R&D and our intellectual property, to develop unique products that are best in class, well differentiated and backed by science through planned pre-clinical and clinical trials. This strategy in some cases may lead to perceived improvements in existing products and the creation of new products in others, which, based on scientific study and research, we expect may offer positive results for the treatment of certain conditions, symptoms and/or side effects. Our longer-term strategy is to seek pharmaceutical status for our therapies by filing Investigative New Drug Applications (INDA) with the Food and Drug Administration (FDA) and conducting large medical trials.
F
iscal
2019
H
ighlights
● On October 12, 2018, the Company filed a provisional patent with the United States Patent and Trademark Office (“USPTO”) for a CBD-infused energy drink titled “Method and Composition for Relieving Fatigue and Restoring Energy”. There can be no guarantee that the USPTO will grant the patent.
● On October 29, 2018, the NYSE suspended trading of IGC’s common stock and commenced proceedings to delist the Company’s stock from trading on the Exchange. The Company challenged the proposed delisting through the NYSE’s appeal procedures. On February 20, 2019, a unanimous review panel set aside the decision to delist IGC’s stock. On February 26, 2019 IGC’s stock was relisted on the NYSE American.
● During Fiscal 2019, the Company completed the development of its Quick Response (QR) code-based, Hyperledger-blockchain-based Product Identification and Assurance system (PIA). We expect to deploy the PIA system on our products in Fiscal 2020 to help with product identification, product origin assurance, collection of customer feedback, and surveying of customers.
● On November 6, 2018, the Company received notification from the United States Patent and Trademark Office (USPTO) of the patent issuance (#10,117,891) for its cannabinoid method and composition for the treatment of neuropathic pain in patients with Psoriatic Arthritis, Fibromyalgia, Scleroderma and other conditions. The formulation consists of the cannabinoids THC and CBD as well as other ingredients. The formulation for relieving pain is expected to be marketed under the brand Natrinol™.
● In Fiscal 2019, the Company completed a public offering of 5,898,656 shares listed on the NYSE American. The net proceeds from this transaction after underwriting discounts and commissions were approximately $28.5 million. The Company also issued 869,565 shares amounting to approximately $1 million pursuant to a private placement.
● In Fiscal 2019, we incorporated three wholly owned U.S. based subsidiaries: IGC Pharma LLC, that will own our intellectual property, and conduct R&D and medical trials; and IGCare LLC, that will commercialize; and Holi Hemp LLC, that will wholesale and retail, certain plant and cannabinoid-based products and therapies.
● On March 23, 2019, we sold our Malaysian subsidiary Cabaran Ultima and received back 80,000 shares of IGC common stock from the buyer of Cabaran. There was no operating activity or gain and loss in the subsidiary in Fiscal 2019.
● Based on the passage of the 2018 Farm Bill in December 2018, which legalized hemp in the U.S., the Company launched certain hemp products and therapies.
o On March 22, 2019, the Company launched its website for hemp-derived products such as, hemp crude extract, hemp distillate, and hemp isolate under the brand Holi Hemp™.
o On March 27, 2019, Hyalolex™, became available for purchase in select dispensaries in San Juan, Puerto Rico.
Products
& Services
Infrastructure
Business
Our Infrastructure Business, based in India and Hong Kong, involves:
a. The rental of heavy construction equipment including bulldozers, excavators, rollers, and pavers, to contractors. This business involves a fleet of equipment that TBL owns, maintains and operates. The business is seasonal and is primarily active during the non-monsoon season. The business is dependent on infrastructure projects that the government implements;
b. Bidding and execution of construction contracts; Our subsidiary TBL, with over 30 years of experience with infrastructure projects, recently began work on building and modifying a road in Kerala, India. In January 2019, TBL received a construction contract for the building of a National Highway Authority of India (“NHAI”)-sponsored local highway for approximately $0.6 million. This is a line that the Company expects to expand with the purchase of heavy equipment, bank guarantees, and an expanded team. TBL is currently executing this contract and expects to recognize revenue in Fiscal 2020;
c. The purchase and resale of physical commodities used in infrastructure including steel, marble and tiles.
Plant and
Cannabinoid Business
:
We focus on the development and commercialization of plant and cannabinoid-based products and therapies. None of our plant and cannabinoid-based products or therapies are FDA-approved pharmaceuticals. Cannabinoids are chemical compounds that, based on various scientific studies and research, show various effects on the body and behavior. For example, a study
1
by Prof. Krista Lanctot presented at Neurology Live-2018, in Chicago, showed that synthetic THC exerts a range of effects on behavior, including improvement in agitation and cognitive behavior, in patients suffering from AD. Several other studies have indicated that cannabinoids exhibit anti-inflammatory properties and, may alleviate diarrhea, abdominal pain, and loss of appetite.
Phytocannabinoids are cannabinoids that occur naturally in the cannabis plant. Phytocannabinoids are abundant in the viscous resin produced by glandular structures called trichomes. There are over 480 different compounds in the cannabis plant. Many of them have been identified as cannabinoids. Of these, THC is the main psychoactive component in the plant with many believed therapeutic uses. The other broadly pursued non-psychoactive phytocannabinoid is CBD. Both THC and CBD are pleiotropic i.e. studies indicate they may influence multiple pathways in humans, dogs and cats, and are believed to provide relief to a variety of symptoms including pain, seizures, and eating disorders. In medical applications, cannabinoids are extracted from the plant using a variety of well-established technologies, including using solvents such as CO2, Butane, and alcohol, among others. The refined extracted material is isolated for specific active ingredients, such as THC and CBD, among others, and is used in formulations as the primary or secondary active ingredient.
Hyalolex
™
Hyalolex™
is not approved by the FDA, and it is not considered a pharmaceutical drug.
The name Hyalolex™, is based on the Greek roots
hyalo
and
lex
that broadly mean clear, clarity and/or glass-like, and words and/or reading, respectively. In AD cell lines, AD animal models, and in some human studies, the active ingredients in Hyalolex™ have been shown to alleviate many of the symptoms associated with AD.
2
Patients with AD may suffer from a variety of symptoms, including anxiety, agitation, dementia, and sleep disorder, among others. These symptoms often result in hard-to-manage patients and caregiver distress.
1
Hasenoehrl C., et al. 2017.
2
Cao, et al. “The Potential Therapeutic Effects of THC on Alzheimer’s Disease.”
Journal of Alzheimer’s Disease.
(2014)
Our research into plant and cannabinoid-based combination therapies led us to studies performed at the University of South Florida (USF) using cannabinoids on AD. The professor working on this approach was featured on CNN on Dr. Sanjay Gupta’s show Weed 3. The work, specifically, reported several findings that were subsequently filed as a patent that we refer to as IGC-AD1. In Fiscal 2017, we acquired exclusive rights to the data and the patent filing from USF. The research reported that micro-dosing of the cannabinoid THC, in combination with other naturally occurring compounds, works synergistically to reduce the buildup of plaques and tangles, through allegedly new pathways. These results were shown using Alzheimer’s cell lines. Plaques and tangles are hallmarks of AD. Studies have demonstrated that patients get plaques and tangles around 15 to 20 years before any AD related symptoms such as dementia manifest. The studies further showed, on Alzheimer’s cell lines, that micro dosing of cannabinoids in combination with other naturally occurring compounds can increase the functioning of mitochondria. The findings are unique as previous research into cannabinoids showed the opposite effect at higher doses, for example, loss of mitochondrial functioning.
We believe that the novelty is two-fold: first, that micro dosing of THC affects the brain differently from higher dosing that is prescribed (FDA-approved Dronabinol, for example) or consumed by individuals; and second, that micro doses of THC can work synergistically with other naturally occurring compounds to increase efficacy and reduce side effects. For example, the research showed that at these therapeutic micro-doses, THC is non-toxic to neurons, a finding contrary to other research and data showing that THC is neuro-toxic at higher ingestion levels. The research was extended to include a Morris Water Maze test for measuring spatial memory impairment on transgenic Alzheimer’s mice. The research indicated that transgenic Alzheimer’s mice treated with cannabinoids at certain doses were significantly better at negotiating the water maze than untreated transgenic Alzheimer’s mice. As expected, neither group were anywhere close to the performance of healthy mice. Preliminary findings have also reported that low doses of THC can play a role in triggering neurogenesis, the growth and development of neuronal tissue.
3
After further research and experiments, our team created Hyalolex™, an oral formulation as a syrup.
QR code-based blockchain PIA
Through consultancy relationships, the Company has developed, completed and expects to deploy a QR code-based, Hyperledger-blockchain-based PIA system that allows patients to access a website with information on our products, including where to buy the products. As the number of states in which the product is available increases, we hope to expand the information populating the backend to inputs directly from growers, processors and dispensaries. This information is intended to collectively display product identification and product origination by providing the patient with information regarding the origin, chemicals and processes used to manufacture the product.
Serosapse
™
and Natrinol
™
Other products that we are developing include Serosapse™ designed to assist in the treatment of certain indications of PD and other CNS disorders; and Natrinol™ designed to assist in the treatment of certain indications of neuropathic pain. The Company filed a patent application for Serosapse™ in March 2018. The Company received a patent for the formulation in Natrinol™ in November 2018. Neither of these products are FDA-approved, and they are not considered to be pharmaceutical drugs.
Holi Hemp
™
We buy hemp crude extract, outsource the refinement of extract, and sell refined extracts such as hemp distillate and hemp isolate through our brand Holi Hemp™. The Company expects to secure its supply chain in Fiscal 2020 and beyond by investing in facilities that grow, process, and extract hemp.
3
Bilkei-Gorzo, et al. A chronic low dose of Δ
9
-tetrahydrocannabinol (THC) restores cognitive function in old mice.
Nature Medicine.
(2017).
Markets and Distribution
Infrastructure
Business
For (a) the equipment rental business, we rent heavy equipment to construction companies, mostly located in Kerala, India. With respect to (b) bidding and executing of construction contracts; our subsidiary TBL, with over 30 years of experience with infrastructure projects recently began work on building and modifying a road in Kerala, India. In January 2019, TBL received a construction contract for the building of a National Highway Authority of India (“NHAI”) sponsored local highway for approximately $0.6 million. This is a line that the Company expects to expand with the purchase of heavy equipment, bank guarantees, and the retention of additional employees and consultants. TBL is currently executing this contract and expects to recognize revenue in Fiscal 2020, and with respect to (c) the purchase and resale of physical commodities, we purchase infrastructure materials and resell them. We neither hedge nor take long term positions on infrastructure commodities, and we limit our financial exposure by contractually ensuring that purchases have vetted buyers and settlement dates.
In Fiscal 2019, we have a total of 5 customers and 3 suppliers of infrastructure materials, which account for over 10% of sales and cost of sales. In Fiscal 2019, our suppliers are companies based in India and Hong Kong. For the level of business, and the value of each trade, we believe that the number of customers we have does not constitute inordinate customer risk. The total revenue from our Infrastructure Business is less than 1% based on revenue of the rental, construction and infrastructure commodities markets.
Plant and Cannabinoid Business
Hyalolex
™
AD has been referred to as America’s most expensive disease. The estimated cost to Medicare and Medicaid of AD and other dementias, as per the Alzheimer’s Association, is projected to be about $290
4
billion in 2019. It is estimated that there are currently over 5.8 million
4
Americans with AD and around 50 million
5
worldwide. The cost of AD is skyrocketing as the baby-boomers age: the number of AD patients is expected to double over the next 20 years, and the direct costs are expected to exceed $450 billion in the next 12 years. Although the rate of progression can vary, the average life expectancy following diagnosis is believed to be between three and nine years. It is the most common cause of dementia among older adults. Currently, no treatment can stop or reverse the progression of the disease, and there is still no accepted cure for AD. After launching Hyalolex™ in Puerto Rico, we expect to launch in other countries and certain states in the U.S. where we can legally enter the market.
Hyalolex™ is formulated for a dose of 1 ml either two or three times a day. It is currently available in 30 ml bottles.
To ensure compliance and product assurance, we propose to deploy a QR code-based, Hyperledger-blockchain-based, PIA system that will track the product and allow patients to access information about the product and provide feedback.
Our plans for Hyalolex™ in Fiscal 2020 are to file an INDA with the FDA and commence to conduct a pivotal phase 2 trial using a protocol that currently targets measuring Behavioral and Psychological Symptoms of Dementia (BPSD) in patients suffering from AD. The Filing of an INDA with the FDA is no guarantee that the FDA will approve the application.
4
Alzheimer’s Association. “2019 Alzheimer’s disease facts and figures.” (2019)
5
https://www.brightfocus.org/alzheimers/article/alzheimers-disease-facts-figures
Serosapse
™
and Natrinol
™
The pain management market represents a significant component of the healthcare system. In September 2012,
The Journal of Pain
reported that the annual estimated national cost of pain ranges from $560 billion to $635 billion. This figure exceeds the entire cost of the nation’s priority health conditions. Additionally, the American Pain Society recommends that pain be made more visible and be categorized as the fifth vital sign, recognizing that terminal illnesses are often accompanied by unbearable levels of pain that are so severe and difficult to treat that death seems preferable. According to the Arthritis Foundation, arthritis has been particularly problematic for women. Since 1999 there has been a 22% increase in the number of women who attribute their disability to arthritis. Current treatment protocols such as the utilization of opioid-based drug therapies present several challenges and may result in debilitating consequences that affect patients’ day-to-day functioning and patients’ productivity. Commonly reported side effects include hallucinations, constipation, sedation, nausea, respiratory depression and dysphoria. Our patent filing is based on therapy that uses extracts from the cannabinoids plant for the treatment of psoriatic arthritis and scleroderma pain. The therapy uses a cream that is applied to the joints using a variety of delivery mechanisms, including a bio-adhesive patch.
There are over one million adults suffering from PD in the U.S. PD is the second most common neurodegenerative disorder worldwide with an estimated 1% of adults over 60 suffering from the disease. The market for curing the disease is very large. We are testing products for end points associated with PD such as REM (Rapid Eye Movement) sleep disorder, anxiety, and dyskinesia. The PD treatment market is expected to reach $5.69 billion by 2022 from $4.24 billion in 2017, at a CAGR of 6.1%
6
. The market is being driven by the growth in aging population and the associated increase in the prevalence of PD and government funding for research.
Approximately 50 million people worldwide are affected by epilepsy
7
. Epilepsy is thought to be due to multiple factors that include the alteration of many ion channels such as sodium, potassium, NMDA (N-Methyl-d-aspartate) and neurotransmitters such as GABA (gamma amino butyric acid). It is believed, for example, that to maximally control epilepsy, modulation of one or more of these channels and receptors is required and that monotherapy is adequate in up to 25% of patients. The onset of epileptic seizures can be life threatening and lead to long-term implications
8
such as mental health problems, cognitive deficits and morphological changes.
9
The onset of epilepsy also greatly affects lifestyle as sufferers may live in fear of consequential injury or the inability to perform daily tasks.
10
The scientific community
11
has shown that CBD has anti-convulsive properties in humans. Other studies
12
have shown that micro-doses of THC can also help reduce seizures. Three of our patent filings involving therapies use phytocannabinoid extracts from cannabinoids, in combination with other generic drugs, to treat medical refractory epilepsy in humans and seizures in dogs and cats.
Cachexia is a condition that accompanies severe illness, such as cancer, and may result in the weakness of the body. Cachexia may physically weaken patients to the extent that response to standard treatments is poor. In the U.S., it is estimated that a population of approximately 1.4 million
13
is experiencing cachexia associated with cancer, multiple sclerosis, PD, HIV/AIDS, and other progressive illnesses. Cachexia is secondary to an underlying disease such as cancer or AIDS and is a positive risk factor for death. As an example, cancer induced anorexia cachexia is responsible for about 20% of all cancer deaths. Our patent filing involves a therapy that uses phytocannabinoids in an effort to stimulate senses (smell and taste) with a combination of drugs to stimulate appetite. Our approach addresses the veterinarian market, as dogs and cats also suffer from pain, epilepsy, and cachexia, and getting a product to market for the veterinarian industry is significantly less time consuming than getting products approved for human healthcare. There are around 185 million domesticated dogs and cats in the U.S., and about 1% of dogs and 2% of cats suffer from seizures.
14
6
https://www.marketsandmarkets.com/PressReleases/parkinson-disease-treatment.asp
7
World Health Organization. 2019
8
Lutz, 2004
9
Swann, 2004, Avoli et. al., 2005
10
Fisher et. al., 2000
11
1980 Cunha et. al., 1986 Ames, 1990 Trembly et. al. recent testing by GW Pharmaceuticals, among others
12
Davis and Ramsey
13
Cachexia, survival and the acute phase response. Stephens NA, Skipworth RJ, Fearon KC. Current Opinion Support Palliative Care. 2008 Dec; 2(4):267-74.
14
Review Cancer anorexia-cachexia syndrome: current issues in research and management. (Inui A CA Cancer J Clin. 2002 Mar-Apr; 52(2):72-91.)
and
Norleena P. Gulletta, Vera Mazurakb, Gautam Hebbarc, and Thomas R. Ziegler, Nutritional Interventions for Cancer-induced Cachexia. Curr Probl Cancer. 2011; 35(2): 58–90.
Holi Hemp
™
The Company intends to sell its plant and cannabinoid-based products including hemp oil, hemp distillate and isolate, among others under the brand name Holi Hemp™. Since the legal hemp industry in the U.S. is new, we neither have a major supplier nor dependence on a major customer. For the level of business and the value of each trade, the number of customers we have is adequate and does not constitute inordinate customer risk. Revenue from our Holi Hemp™ products is less than 1% based on revenue of markets.
Research and Development
In Fiscal 2019 and Fiscal 2018, IGC identified combinations of micro-doses of THC and the non-psychoactive compound CBD to address symptoms of PD and other diseases. The costs associated with this work is mostly internal research, such as, looking for combinations of plant extracts that could work and data to support the claims that certain combinations and formulations can alleviate symptoms associated with diseases.
In Fiscal 2019 we incorporated IGC Pharma LLC to consolidate and continue to conduct R&D. The amount spent for R&D is approximately $1.3 million and $137 thousand in Fiscal 2019 and Fiscal 2018, respectively. All R&D costs are expensed in the period in which they are incurred.
Competition
Some of the markets for the Company’s products and services are highly competitive, and some are not, as described below:
1. Infrastructure
Business
: This business is currently limited to India and Hong Kong. The infrastructure industry is highly competitive, and we believe our differentiation is based primarily on price and industry knowledge of construction and commodity requirements for infrastructure projects. In Fiscal 2019, apart from working capital, the Company invested $300 thousand in TBL, to bid on construction contracts. While competition is strong, we expect demand for infrastructure projects to again increase with the newly elected Indian government once again focusing on infrastructure.
2. Plant and
Cannabinoid Business
:
In the U.S., there is very little widespread research on phytocannabinoids, with most of the research concentrated in Israel and Canada. This is largely because the U.S. Drug Enforcement Administrating (DEA) classifies phytocannabinoid extracts such as THC as a Schedule 1 drug. This means that phytocannabinoids are characterized as substances with “high potential for abuse” and with “no currently accepted medical use.” We believe our differentiation from our competitors, for example, in the use of phytocannabinoids for the treatment of AD, is based primarily on our data, patent filings, experienced team, and early-mover advantage.
Core
b
usiness
c
ompetencies
and advantages
Our core competencies include the following:
• a network of doctors, PhDs, and intellectual property legal experts that have a sophisticated understanding of drug discovery, research, FDA filings, intellectual protection and product formulation;
• knowledge of various cannabinoids strains, their phytocannabinoid profile, extraction methodology and impact on various pathways;
• knowledge of plant and cannabinoid-based combination therapies;
• knowledge of research and development in the field; and
• Patent IGC-501 for cannabinoids and pain has been issued.
Technology, Cybersecurity and Intellectual Property
The success of most of our product candidates will depend in large part on our ability to:
• penetrate and create a market for our products,
• obtain and maintain patent and other legal protections for the proprietary technology, inventions and improvements we consider important to our business;
• prosecute our patent applications and defend our issued patents;
• preserve the confidentiality of our trade secrets; and
• operate without infringing the patents and proprietary rights of third parties.
On October 12, 2018, the Company filed a provisional patent with the USPTO for a CBD-infused energy drink titled “Method and Composition for Relieving Fatigue and Restoring Energy.” There can be no guarantee that the USPTO will grant the patent.
We intend to continue to seek appropriate patent protection for certain of our product candidates, drug delivery systems, and molecular modifications, as well as other proprietary technologies and their uses, by filing patent applications in the U.S. and selected other countries. We intend for these patent applications to cover, where possible, claims for medical uses, processes for preparation, processes for delivery and formulations.
We have intellectual property attorneys that file patents or provisional patent applications, copyrights, trademark and trade secret laws of general applicability, employee confidentiality and invention assignment agreements. We also expect to deploy a QR code-based PIA and other intellectual property protection methods to safeguard our technology and research and development. All our data, except accounting data, is stored in the cloud on multiple servers that helps us mitigate the overall risk of losing data. We have a cybersecurity policy in place and are in the process of implementing tighter cybersecurity measures to safeguard against hackers. We expect to implement these measures in Fiscal 2020. The Company holds all rights to the patents that have been filed by us with the USPTO. Although, the Company believes the registration of patents is an important part of its business strategy and its success depends in part on such registration, the Company cannot guarantee that such patent filings will result in a successful registration with the USPTO. Please see Item 1A, Risk Factors- “We may not successfully register the provisional patents with the USPTO”.
The table below provides a status of our patent filings:
Formulation
|
Indication
|
Provisional Filing
|
PCT Filing
|
Subsequent Activity
|
IGC-501
|
Pain
|
9/16/14
|
9/16/15
|
Patent notification received on 11/6/2018 (#10,117,891)
|
IGC-502
|
Seizures
|
1/25/15
|
1/14/16
|
U.S. National Case Filed on 6/15/16
|
IGC-503
|
Seizures
|
4/1/15
|
3/25/16
|
PCT Application Published on 10/6/16
|
IGC-504
|
Eating Disorders
|
8/12/15
|
8/11/16
|
U.S. and National Filing on 2/12/18
|
IGC-505
|
Seizures
|
6/15/16
|
6/15/16
|
U.S. National Filing Anticipated on in 2019
|
IGC-506
|
Eating Disorders
|
2/28/17
|
2/27/18
|
U.S. and National Filing Anticipated on 8/28/19
|
IGC-507
IGC-AD1
|
Alzheimer’s Disease
|
7/30/15
|
Anticipated in 2019
|
U.S. and National Filing Anticipated in 2019
|
IGC-508
|
CNS Disorders
|
3/29/18
|
Anticipated in 2019
|
U.S. and National Filing Anticipated in 2019
|
IGC-511
|
Fatigue and energy restoration
|
10/4/18
|
Anticipated in 2019
|
U.S. and National Filing Anticipated in 2019
|
IGC-510
|
Stammering, Tourette’s syndrome
|
5/23/19
|
Anticipated in 2020
|
U.S. and National Filing Anticipated in 2020
|
The table below summarizes the nature of activity, type of license required and held, and encumbrances in obtaining permits for each location where the company operated through its subsidiaries in Fiscal 2019:
Location
|
|
Nature of Activity
|
|
Type of License Required
|
|
Type of License held
|
|
Encumbrances in
Obtaining Permit
|
U.S.
|
|
Plant and cannabinoid-based products and General Management
|
|
General business. License to grow and process hemp.
|
|
General business licenses. Applied for a license to grow and process hemp.
|
|
None.
|
India
|
|
Infrastructure Contract, Rental of heavy equipment and land
|
|
General business license
|
|
Business registrations with tax authorities in various states in India
|
|
None.
|
Hong Kong
|
|
Purchase and Resale of physical commodities
|
|
General business license
|
|
General business license
|
|
None.
|
Governmental Regulations
In the U.S. we are subject to oversight and regulations, for some or all of our activities, by the following agencies: SEC, state regulators, NYSE, and the FDA. As mentioned above, the cannabis plant consists of several strains or varieties. Hemp and Marijuana are both cannabis plants. Under the 2018 Farm Bill, Hemp is classified as a cannabis plant that has THC below 0.3% by dry weight. Marijuana is classified as a cannabis plant that has THC above 0.3% by dry weight.
Marijuana remains illegal under federal law, including in those states in which the use of marijuana has been legalized for medical and or recreational use. On the other hand, on December 12, 2018, the Senate and the House approved the 2018 Farm Bill that the President signed into law. It contains provisions that make industrial hemp legal. Although, effective January 1, 2019, hemp is legal at the federal level, most states are only now creating appropriate licensing and testing processes for the growing, processing, and sale of hemp and hemp-derived products.
For our business we must apply for licenses in states where we desire to grow and process hemp, for example, in the state of Arizona, where we plan on growing and processing hemp, we are required to apply for licenses and register with the state the geo-location of all our operations, including the land on which hemp is grown and the facilitates where hemp will be processed. These regulations are evolving, differ from jurisdiction to jurisdiction, and are subject to change.
FDA Approval Process
In the U.S., pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug and Cosmetic Act, or the FDC Act, and other federal and state statutes and regulations, govern the research, development, testing, manufacturing, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and importing and exporting of pharmaceutical products, among other things. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as imposition of clinical holds, FDA refusal to approve pending New Drug Applications (NDA), warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, restitution, disgorgement, civil penalties and criminal prosecution.
Pharmaceutical product development in the U.S. typically involves pre-clinical laboratory and animal tests and the submission to the FDA of an Investigational New Drug (IND), which must become effective before clinical testing may commence. For commercial approval, the sponsor must submit adequate tests by all methods reasonably applicable to show that the drug is safe for use under the conditions prescribed, recommended or suggested in the proposed labeling. The sponsor must also submit substantial evidence, generally consisting of adequate, well-controlled clinical trials to establish that the drug will have the effect it purports or is represented to have under the conditions of use prescribed, recommended or suggested in the proposed labeling. In certain cases, the FDA may determine that a drug is effective based on one clinical study plus confirmatory evidence. Satisfaction of FDA premarket approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity of the product or disease.
Pre-clinical tests include laboratory evaluation of product chemistry, and formulation and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacy of the product. The conduct of the pre-clinical tests must comply with federal regulations and requirements, including the FDA’s good laboratory practices regulations and the U.S. Department of Agriculture’s (USDA’s) regulations implementing the Animal Welfare Act. The results of pre-clinical testing are submitted to the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long-term pre-clinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
A 30-day waiting period after the submission of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not imposed a clinical hold on the IND or otherwise commented or questioned the IND within this 30-day period, the clinical trial proposed in the IND may begin.
Clinical trials involve the administration of the investigational new drug to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i) in compliance with federal regulations, (ii) in compliance with Good Clinical Practice (GCP), an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators and monitors, and (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.
The FDA may order the temporary, or permanent, discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The trial protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board, or IRB, for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements or may impose other conditions.
Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In general, in Phase 1, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses and, if possible, early evidence on effectiveness. Phase 2 usually involves trials in a limited patient population to determine the effectiveness of the drug for a particular indication, dosage tolerance and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase 2 evaluations, Phase 3 trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug and to provide adequate information for the labeling of the drug. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug. The FDA may, however, determine that a drug is effective based on one clinical study plus confirmatory evidence. Only a small percentage of investigational drugs complete all three phases and obtain marketing approval. In some cases, the FDA may require post-market studies, known as Phase 4 studies, to be conducted as a condition of approval in order to gather additional information on the drug’s effect in various populations and any side effects associated with long-term use. Depending on the risks posed by the drugs, other post-market requirements may be imposed. After completion of the required clinical testing, an NDA is prepared and submitted to the FDA. The FDA approval of the NDA is required before marketing of the product may begin in the U.S. The NDA must include the results of all pre-clinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls.
The cost of preparing and submitting an NDA is substantial. Under federal law, the submission of most NDAs is additionally subject to a substantial application user fee, for Fiscal 2019 $2,588,478, and the manufacturer and/or sponsor under an approved NDA are also subject to annual program fees, for Fiscal 2019 $309,915.
The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review. Under the statute and implementing regulations, the FDA has 180 days (the initial review cycle) from the date of filing to issue either an approval letter or a complete response letter, unless the review period is adjusted by mutual agreement between the FDA and the applicant or as a result of the applicant submitting a major amendment. In practice, the performance goals established pursuant to the Prescription Drug User Fee Act have effectively extended the initial review cycle beyond 180 days. The FDA’s current performance goals call for the FDA to complete review of 90 percent of standard (non-priority) NDAs within 10 months of receipt and within six months for priority NDAs, but two additional months are added to standard and priority NDAs for a new molecular entity (NME).
The FDA may also refer applications for novel drug products, or drug products that present difficult questions of safety or efficacy, to an advisory committee, which is typically a panel that includes clinicians and other experts, for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve the product unless compliance with current GMP is satisfactory and the NDA contains data that provide substantial evidence that the drug is safe and effective in the indication studied.
After the FDA evaluates the NDA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing 90 percent of resubmissions within two to six months depending on the type of information included.
An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require a risk evaluation and mitigation strategy, or REMS, to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for health care professionals, and elements to assure safe use, or ETASU. ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
Disclosure of Clinical Trial Information
Sponsors of clinical trials of certain FDA-regulated products, including prescription drugs, are required to register and disclose certain clinical trial information on a public website maintained by the U.S. National Institutes of Health. Information related to the product, patient population, phase of investigation, study sites and investigator, and other aspects of the clinical trial is made public as part of the registration. Under a new rule, effective January 18, 2017, sponsors are also obligated to disclose the results of these trials after completion. Disclosure of the results of these trials can be delayed for up to two years if the sponsor certifies that it is seeking approval of an unapproved product or that it will file an application for approval of a new indication for an approved product within one year. Competitors may use this publicly available information to gain knowledge regarding the design and progress of our development programs.
The Hatch-Waxman Act
Orange Book Listing
In seeking approval for a drug through an NDA, applicants are required to list with the FDA each patent the claims of which cover the applicant’s product. Upon approval of a drug, each of the patents listed in the application for the drug is then published in the FDA’s Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the Orange Book. Drugs listed in the Orange Book can, in turn, be cited by potential generic competitors in support of approval of an abbreviated new drug application, or ANDA. An ANDA provides for marketing of a drug product that has the same active ingredients in the same strengths and dosage form as the listed drug and has been shown through bioequivalence testing to be bioequivalent to the listed drug. Other than the requirement for bioequivalence testing, ANDA applicants are not required to conduct, or submit results of, pre-clinical or clinical tests to prove the safety or effectiveness of their drug product. Drugs approved in this way are considered to be therapeutically equivalent to the listed drug, are commonly referred to as “generic equivalents” to the listed drug, and can often be substituted by pharmacists under prescriptions written for the original listed drug in accordance with state law.
The ANDA applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s Orange Book. Specifically, the applicant must certify that: (i) the required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed by the new product. The ANDA applicant may also elect to submit a section viii statement, certifying that its proposed ANDA labeling does not contain (or carves out) any language regarding the patented method-of-use, rather than certify to a listed method-of-use patent. If the applicant does not challenge the listed patents, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired.
A certification that the new product will not infringe the already approved product’s listed patents, or that such patents are invalid, is called a Paragraph IV certification. If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days of the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months, expiration of the patent, settlement of the lawsuit, or a decision in the infringement case that is favorable to the ANDA applicant. The ANDA application also will not be approved until any applicable non-patent exclusivity listed in the Orange Book for the referenced product has expired.
Exclusivity
Upon NDA approval of a new chemical entity or NCE, which is a drug that contains no active moiety that has been approved by the FDA in any other NDA, that drug receives five years of marketing exclusivity during which time the FDA cannot receive any ANDA or 505(b)(2) application seeking approval of a drug that references a version of the NCE drug. Certain changes to a drug, such as the addition of a new indication to the package insert, are associated with a three-year period of exclusivity during which the FDA cannot approve an ANDA or 505(b)(2) application that includes the change.
An ANDA or 505(b)(2) application may be submitted one year before NCE exclusivity expires if a Paragraph IV certification is filed. If there is no listed patent in the Orange Book, there may not be a Paragraph IV certification and thus no ANDA or 505(b)(2) application may be filed before the expiration of the exclusivity period.
For a botanical drug, the FDA may determine that the active moiety is one or more of the principal components or the complex mixture as a whole. This determination would affect the utility of any five-year exclusivity as well as the ability of any potential generic competitor to demonstrate that it is the same drug as the original botanical drug.
Five-year and three-year exclusivities do not preclude FDA approval of a 505(b)(1) application for a duplicate version of the drug during the period of exclusivity, provided that the 505(b)(1) applicant conducts or obtains a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Patent Term Extension
After NDA approval, owners of relevant drug patents may apply for up to a five-year patent extension. The allowable patent term extension is calculated as half of the drug’s testing phase — the time between IND submission and NDA submission — and all of the review phase — the time between NDA submission and approval up to a maximum of five years. The time can be shortened if the FDA determines that the applicant did not pursue approval with due diligence. The total patent term after the extension may not
exceed 14 years.
For patents that might expire during the application phase, the patent owner may request an interim patent extension. An interim patent extension increases the patent term by one year and may be renewed up to four times. For each interim patent extension granted, the post-approval patent extension is reduced by one year. The director of the PTO must determine that approval of the drug covered by the patent for which a patent extension is being sought is likely. Interim patent extensions are not available for a drug for which an NDA has not been submitted.
Orphan Drugs
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition generally a disease or condition that affects fewer than 200,000 individuals in the U.S. (or affects more than 200,000 in the U.S. and for which there is no reasonable expectation that the cost of developing and making available in the U.S. a drug for such disease or condition will be recovered from sales in the U.S. of such drug). Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the generic identity of the drug and its potential orphan use are disclosed publicly by the FDA. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. The first NDA applicant to receive FDA approval for a particular active ingredient to treat a particular disease with FDA orphan drug designation is entitled to a seven-year exclusive marketing period in the U.S. for that product, for that indication. During the seven-year exclusivity period, the FDA may not approve any other applications to market the same drug for the same disease, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. If the FDA designates an orphan drug based on a finding of clinical superiority, the FDA must provide a written notification to the sponsor that states the basis for orphan designation, including “any plausible hypothesis” relied upon by the FDA. The FDA must also publish a summary of its clinical superiority findings upon granting orphan drug exclusivity based on clinical superiority. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition, or the same drug for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.
Special Protocol Assessment
A company may reach an agreement with the FDA under the Special Protocol Assessment, or SPA, process as to the required design and size of clinical trials intended to form the primary basis of an efficacy claim. According to its performance goals, the FDA is supposed to evaluate the protocol within 45 days of the request to assess whether the proposed trial is adequate, and that evaluation may result in discussions and a request for additional information. A SPA request must be made before the proposed trial begins, and all open issues must be resolved before the trial begins. If a written agreement is reached, it will be documented and made part of the administrative record. Under the FDC Act and FDA guidance implementing the statutory requirement, an SPA is generally binding upon the FDA except in limited circumstances, such as if the FDA identifies a substantial scientific issue essential to determining safety or efficacy after the study begins, public health concerns emerge that were unrecognized at the time of the protocol assessment, the sponsor and the FDA agree to the change in writing, or if the study sponsor fails to follow the protocol that was agreed upon with the FDA.
Employees and Consultants
As of March 31, 2019, we employed 20 full-time employees. These numbers include the Infrastructure Business and the Plant and Cannabinoid Business. We also have contract workers and advisors in the U.S., India, and Hong Kong.
Reclassification, merger, consolidation, or purchase or sale of a significant amount of assets
Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. Certain aged receivables and certain deposits and advances in the amount of approximately $644 thousand have been reclassified to non-current assets from current assets.
In Fiscal 2019, a Note Payable in the amount of $1.8 Million has been paid off. Please see “Note 10 – Loans and Other Liabilities,” in our Notes to Consolidated Financial Statements contained herein for more information.
In Fiscal 2018 we exited our non-operational Hong Kong subsidiary IGC Cleantech Ltd, and in Fiscal 2019 we exited our Malaysian subsidiary Cabaran.
Available Information
The Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are filed with the Securities and Exchange Commission (the “SEC”). The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at www.igcinc.us when such reports are available on the SEC’s website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.
ITEM 1A.
RISK FACTORS
You should carefully consider the following risk factors, together with all other information included in this report in evaluating our company and our common stock.
If any of the following risks and uncertainties develops into actual events, they could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our common stock and other securities also could be adversely affected. We make various statements in this section, which constitute “forward-looking statements.”
See “Forward-Looking Statements.”
Risks Related to Our Business and Expansion Strategy
Our cannabinoid
strategy
makes it difficult to find, retain, and attract management.
The environment we work in is heavily regulated, and while we have experience in regulated industries, it is also heavily scrutinized. This regulatory scrutiny takes a toll on management and makes it very difficult to attract and retain talent. Management spends a great deal of time and money explaining and justifying actions, strategy, and business plans to regulators. A myriad of complex factors including regulations regarding money laundering, inter-state commerce, DOJ, FDA, NYSE, SEC, state laws, among others, affect every decision. Navigating this complex set of regulatory landmines and staying focused on generating shareholder value is an arduous task and there can be no assurance that we will be successful in steering clear of all the potential issues, any of which could adversely impact the stock price or lead to delisting from the NYSE American.
Our
cannabinoid strategy
makes it difficult to raise money as a public company.
Our Plant and Cannabinoid Business is based on: a) R&D on cannabinoids; b) medical trials on the efficacy of cannabinoids; c) licensing our intellectual property; and d) growing, processing and distributing hemp. Despite having no direct involvement in selling any controlled substances, the Company is often considered a “cannabis company” with all the nuances that accompany that label, including being blacklisted by banks, investments banks, and by the largest clearing services company. Due to the near-monopoly nature of some of these institutions such as clearing houses, it makes it very difficult for the Company to raise money, deposit share certificates, or even have investment banking relationships. As we cannot control how others perceive us, there can be no assurance that we will be able to raise enough capital for our planned expansion.
We have a history of operating losses and there can be no assurance that we can again achieve or maintain profitability.
Our short-term focus is to gain market share for our Plant and Cannabinoid Business. However, we have had a history of operating losses. For Fiscal 2019 and Fiscal 2018, we had a net loss of almost $4.1 million and $1.8 million, respectively. Accordingly, there can be no guarantee that our efforts will be successful. If we continue to have losses, we will be required to seek additional financing. No assurance can be given the we can raise any such financing and such financing could be dilutive to our shareholders.
We expect to acquire companies and we are subject to evolving and often expensive corporate governance regulations and requirements.
Our failure to adequately adhere to these requirements, and comply with them with regard to acquired companies, some of which may be non-reporting entities, or the failure or circumvention of our controls and procedures could seriously harm our business and affect our status as a reporting company listed on a national securities exchange.
As a public reporting company whose shares are listed for trading on the NYSE American, we are subject to various regulations. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure on controls and procedures and our internal control over financial reporting. As we have made and continue to make acquisitions in foreign countries, our internal controls and procedures may not be able to prevent errors or fraud in the future. We cannot guarantee that we can establish internal controls over financial reporting immediately on companies that we acquire. Thus, faulty judgments, simple errors or mistakes, or the failure of our personnel to enforce controls over acquired companies or to adhere to established controls and procedures, may make it difficult for us to ensure that the objectives of our control systems are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our ability to continue as a reporting company listed on a national securities exchange.
We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management, and which ultimately may not be successful.
From time to time we may consider strategic transactions, such as acquisitions of companies, asset purchases and out-licensing or in-licensing of products, product candidates, or technologies, particularly those arrangements that seek to leverage other organizations’ internal platforms or competencies for the benefit of our products or potential products. Additional potential transactions that we may consider include a variety of different business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any such transaction may require us to incur non-recurring or other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our management or business, which could adversely affect our operations and financial results. For example, these transactions may entail numerous operational and financial risks, including:
• exposure to unknown or unanticipated liabilities, including foreign laws with which we are unfamiliar;
• disruption of our business and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies;
• incurrence of substantial debt or dilutive issuances of equity securities to pay for acquisitions, which we may not be able to obtain on favorable terms, if at all;
• higher than expected acquisition and integration costs;
• write-downs of assets or goodwill or impairment charges;
• increased amortization expenses;
• difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
• entering into a long-term relationship with a partner that proves to be unreliable or counterproductive;
• impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
• inability to retain key employees of any acquired businesses. Accordingly, although there can be no assurance that we will undertake or successfully complete any transactions of the nature described above, any transactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects if we are unable to execute on the planned objectives or capitalize on the relationship in the manner that was originally contemplated.
We have a limited senior management team size that may hamper our ability to effectively manage a publicly traded company and manage acquisitions and that may harm our business.
Since we operate in several foreign countries, we use consultants, including lawyers and accountants, to help us comply with regulatory requirements and public company compliance on a timely basis. As we expand, we expect to increase the size of our senior management. However, we cannot guarantee that in the interim period our senior management can adequately manage the requirements of a public company and the integration of acquisitions, and any failure to do so could lead to the imposition of fines, penalties, harm our business, status as a reporting company and/or our listing on the NYSE American.
There is a high rate of failure for drug candidates proceeding through clinical trials.
Generally, there is a high rate of failure for drug candidates proceeding through clinical trials. We may suffer significant setbacks in our clinical trials similar to the experience of a number of other companies in the pharmaceutical and biotechnology industries. Further, even if we view the results of a clinical trial to be positive, the FDA or other regulatory authorities may disagree with our interpretation of the data. In the event that we obtain negative results from clinical trials for product candidates or other problems related to potential chemistry, manufacturing and control issues or other hurdles occur and our product candidates are not approved, we may not be able to generate sufficient revenue or obtain financing to continue our operations, our ability to execute on our current business plan may be materially impaired, and/or our reputation in the industry and in the investment community might be significantly damaged. In addition, our inability to properly design, commence and complete clinical trials may negatively impact the timing and results of our clinical trials and ability to seek approvals for our drug candidates.
We may fail to expand our growing and manufacturing capability in time to meet market demand for our products and product candidates, and the FDA may refuse to accept our facilities or those of our contract manufactures as being suitable for the production of our products and product candidates. Any problems in our growing or manufacturing process could have a material adverse effect on our business, results of operations and financial condition.
In addition, before we can begin commercial manufacture of any medicinal product candidates for sale in the U.S., we must obtain FDA regulatory approval for the product, which requires a successful FDA inspection of the manufacturing facilities, which includes the facilities of the processor(s) and quality systems in addition to other product-related approvals. Due to the complexity of the processes used to manufacture our product candidates, we may be unable to initially, or continue to, pass federal, state or international regulatory inspections in a cost-effective manner. If we are unable to comply with manufacturing regulations, we may be subject to fines, unanticipated compliance expenses, recall or seizure of any approved products, total or partial suspension of production and/or enforcement actions, including injunctions, and criminal or civil prosecution. These possible sanctions would adversely affect our business, results of operations and financial condition.
Legal claims could be filed that may have a material adverse effect on our business, operating results and financial condition. We may in the future face risks of litigation and liability claims, the extent of such exposure can be difficult or impossible to estimate and which can negatively impact our financial condition and results of operations.
Our operations are subject to numerous U.S., Indian and Hong Kong laws and regulations relating to the protection of the public and necessary disclosures in regard to financial services. Liability under these laws involves inherent uncertainties. Violations of financial regulation laws are subject to civil, and, in some cases, criminal sanctions. Although we are not aware of any compliance related issues, we may not have been, or may not be, at all times, in complete compliance with all requirements, and we may incur costs or liabilities in connection with such requirements. We may also incur unexpected interruptions to our operations, administrative injunctions requiring operation stoppages, fines and other penalties, which could negatively impact our financial condition and results of operations. As of March 31, 2019, the Company and several of its officers and directors are parties to four (4) shareholder lawsuits. See Item 3, Legal Proceedings of this report for further information. There can also be no assurance that any insurance coverage we take will be adequate or that we will prevail in any future cases. We can provide no assurance that we will be able to obtain liability insurance that would protect us from any such lawsuits. In the event that are not covered by insurance, our management could expend significant time and resources addressing any such issues. And, the legal fees necessary to defend against multiple lawsuits can be significant, impacting the Company’s overall bottom line when not covered by insurance or where the fees exceed the Company’s insurance policy limits.
Continued listing on the NYSE is an operating risk for the Company.
As previously disclosed, on October 29, 2018, NYSE suspended trading of the Company’s common stock and commenced proceedings to delist the Company’s stock from trading on the Exchange. After a successful appeal, the Company’s stock was relisted for trading on the NYSE American on February 26, 2019. However, given the current regulatory environment for hemp-based products, there remains risk with respect to the Company’s ability to maintain its listing with the NYSE. This risk may limit the Company’s ability to pursue other business opportunities.
Our expansion is dependent on laws
and regulations pertaining to hemp and cannabinoids.
We expect to acquire companies and hire management in the areas that we have identified. These include, among others, biopharmaceuticals, with a focus on capitalizing on specific niches within these areas such as cannabinoid-based therapies. Entry into any of these areas requires special knowledge of the industry and products. In the event that we are perceived to be entering the legal marijuana sector, even indirectly or remotely, we could be subject to increased scrutiny by regulators because, among other things, marijuana is a Schedule-1 controlled substance and is illegal under federal law. Our failure to adequately manage the risk associated with these businesses and adequately manage the requirements of the regulators can adversely affect our business, our status as a reporting company and our listing on the NYSE American. Further, any adverse pronouncements from regulators about businesses related to the legal cannabis industry, or the hemp industry could adversely affect our stock price.
Our company is in a very new and highly regulated industry. Significant and unforeseen changes in policy may have material impacts on our business.
Continued development in the phytocannabinoids industry is dependent upon continued state legislative authorization of cannabinoids as well as legislation and regulatory policy at the federal level. The federal Controlled Substances Act currently makes cannabinoids use and possession illegal on a national level. While there may be ample public support for legislative authorization, numerous factors impact the legislative process. Any one of these factors could slow or halt use and handling of cannabinoids in the U.S. or in other jurisdictions, which would negatively impact our development of phytocannabinoid-based therapies and our ability to test and productize these therapies.
Many U.S. state laws are in conflict with the federal Controlled Substances Act. While we do not, and we do not intend, to distribute or sell marijuana in the U.S., it is unclear whether regulatory authorities in the U.S. would object to the registration or public offering of securities in the U.S. by our company, to the status of our company as a reporting company, or even to investors investing in our company, if we engage in legal cannabinoids cultivation and supply pursuant to the laws and authorization of the jurisdiction where the activity takes place. In addition, the status of cannabinoids under the Controlled Substances Act may have an adverse effect on federal agency approval of pharmaceutical use of phytocannabinoid products. Any such objection or interference could delay indefinitely or increase substantially the costs to access the equity capital markets, test our therapies, or create products from these plant and cannabinoid-based therapies.
Our business is dependent on continuing relationships with clients and strategic partners.
Our business requires developing and maintaining strategic alliances with contractors that undertake turnkey contracts for infrastructure development projects and with government organizations. The business and our results could be adversely affected if we are unable to maintain continuing relationships and pre-qualified status with key clients and strategic partners.
Our product candidates may be unable to achieve the expected market acceptance and, consequently, limit our ability to generate revenue from new products.
Even when product development is successful and regulatory approval has been obtained, our ability to generate sufficient revenue depends on the acceptance of our products by customers. We cannot assure you that Hyalolex™
and other products will achieve the expected level of market acceptance and revenue. The market acceptance of any product depends on a number of factors such as, the price of the product, the effect of the product, the taste of the product, reputation of the Company, competition, and marketing and distribution support.
The success and acceptance of a product in one state may not be replicated in other states or may be negatively affected by our activities in another state. Any factors preventing or limiting the market acceptance of our products could have a material adverse effect on our business, results of operations and financial condition.
Business interruptions could delay us in the process of developing our product candidates and could disrupt our product sales.
Loss of our manufacturing facilities, our growing plants, stored inventory or laboratory facilities through fire, theft, natural disasters or other causes, or loss of our botanical raw material due to pathogenic infection or other causes, could have an adverse effect on our ability to meet demand for cannabinoid products or to continue product development activities and to conduct our business. Failure to supply our partners with commercial product may lead to adverse consequences.
Counterfeit versions of our products could harm our business.
Counterfeiting activities and the presence of counterfeit products in market and over the internet continue to be a challenge for maintaining a safe product supply. Counterfeit products are frequently unsafe or ineffective, and can be life-threatening. To distributors and users, counterfeit products may be visually indistinguishable from the authentic version. Reports of adverse reactions to counterfeit drugs along with increased levels of counterfeiting could be mistakenly attributed to the authentic product, affect consumer confidence in the authentic product and harm the business of companies such as ours. If our products were to be the subject of counterfeits, we could incur reputational and financial harm.
We face intense competition, including from generic products. If our
competitors’
market or develop alternative products that are approved more quickly or marketed more effectively than our product candidates or are demonstrated to be safer or more effective than our products, our commercial opportunities will be reduced or eliminated.
The plant and cannabinoid products industry is characterized by advancing technology, competition and a strong emphasis on developing proprietary products. We face competition from a number of sources, some of which may target the same indications as our products or product candidates, such as pharmaceutical companies, including generic drug companies, biotechnology companies, drug delivery companies, and academic and research institutions, many of which have greater financial resources, marketing capabilities, including well-established sales forces, manufacturing capabilities, research and development capabilities, experience in obtaining regulatory approvals for product candidates and other resources than us.
We may not be able to differentiate any products that we may market from those of our competitors, successfully develop or introduce new products that are less costly or offer better performance than those of our competitors, or offer purchasers of our products payment and other commercial terms as favorable as those offered by our competitors. In addition, there are a number of established products already commercially available and under development by other companies that treat the indications that our product candidates are intended to treat.
Currency fluctuations may reduce our assets and profitability.
We have assets located in foreign countries that are valued in foreign currencies. Fluctuation of the U.S. dollar relative to the foreign currency may adversely affect our assets and profit.
Our business relies heavily on our management team and any unexpected loss of key officers may adversely affect our operations.
The continued success of our business is largely dependent on the continued services of our key employees. The loss of the services of certain key personnel, without adequate replacement, could have an adverse effect on our performance. Our senior management, as well as the senior management of our subsidiaries, plays a significant role in developing and executing the overall business plan, maintaining client relationships, proprietary processes and technology. While no one is irreplaceable, the loss of the services of any would be disruptive to our business.
Our quarterly revenue, operating results and profitability will vary.
Factors that may contribute to the variability of quarterly revenue, operating results or profitability include:
• Fluctuations in revenue due to seasonality of the marketplace, which results in uneven revenue and operating results over the year;
• Additions and departures of key personnel; and
• Strategic decisions made by us and our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments and changes in business strategy.
We may not successfully register the provisional patents with the
USPTO
.
We have filed ten provisional patents with the USPTO, in the combination therapy space, for the indications of pain, medical refractory epilepsy, eating disorders, and cachexia as part of our intellectual property strategy focused on the phytocannabinoid-based health care industry. Although, one patent has been issued, there is no guarantee that our remaining applications will result in a successful registration with the USPTO. If we are unsuccessful in registering patents, our ability to create a valuable line of products can be adversely affected. This in turn may have a material and adverse impact on the trading price of our common stock.
We may be unable to protect our intellectual property rights and/or intellectual property rights licensed to us, and may be subject to intellectual property litigation and infringement claims by third parties.
We intend to protect our intellectual property through limited patents and our unpatented trade secrets and know-how through confidentiality or license agreements with third parties, employees and consultants, and by controlling access to and distribution of our proprietary information. However, this method may not afford complete protection, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the U.S. and unauthorized parties may copy or otherwise obtain and use our products, processes or technology. Additionally, there can be no assurance that others will not independently develop similar know-how and trade secrets. We are also dependent upon the owners of intellectual property rights licensed to us under various wholesale license agreements to protect and defend those rights against third party claims. If third parties take actions that affect our rights, the value of our intellectual property, similar proprietary rights or reputation or the licensors who have granted us certain rights under wholesale license agreements, or we are unable to protect the intellectual property from infringement or misappropriation, other companies may be able to offer competitive products at lower prices, and we may not be able to effectively compete against these companies. We also face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, may require us to:
● defend against infringement claims which are expensive and time consuming;
● cease making, licensing or using, either temporarily or permanently, products that incorporate the challenged intellectual property;
● re-design, re-engineer or re-brand our products or packaging; or
● enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
In the event of claims by third parties for infringement of intellectual property rights we license from third parties under wholesale license agreements, we could be liable for costs of defending allegations of infringement, and there are no assurances the licensors will either adequately defend the licensed intellectual property rights or that they would prevail in the related litigation. In that event, we would incur additional costs and may deprived from generating royalties from these agreements.
We may face risks relating to
h
ealth
c
are
p
rivacy and
s
ecurity
l
aws
.
We may be subject to various privacy and security regulations, including but not limited to HIPAA, as amended by HITECH, and their respective implementing regulations, including the related final published omnibus rule. HIPAA mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common health care transactions, as well as standards relating to the privacy and security of individually identifiable health information. These obligations would require the Company to adopt administrative, physical, and technical safeguards to protect such information. Among other things, HITECH makes HIPAA’s privacy and security standards directly applicable to “business associates” — independent contractors or agents of covered entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain circumstances, some of which are more stringent then HIPAA and many of which differ from each other in significant ways and may not have the same effect, thereby complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and criminal penalties.
Some of our lines of business will rely on third-party service providers to host and deliver services and data, and any interruptions or delays in these hosted services, security or privacy breaches,
including cybersecurity attacks,
or failures in data collection could expose us to liability claims, increased costs, reduced revenue, and harm our business and reputation.
Our lines of business and services, but especially our development of cannabinoids-based combination therapies for products, including Hyalolex™, and other products for PD, chronic pain, post-traumatic stress disorder, and eating disorders, and our long-term use and/or development of blockchain technologies to solve critical issues facing the Cannabinoids industry, rely on services hosted and controlled directly by our suppliers and distributors and their third-party service providers. We do not have redundancy for all of our systems; many of our critical applications reside in only one of our data centers, and our disaster recovery planning may not account for all eventualities. These facts could cause reputational harm, loss of customers, or loss of future business, thereby reducing our revenue.
Our suppliers and distributors and their third-party service providers hold customer data, some of which is hosted in third-party facilities. A security incident or cybersecurity attack at those facilities or ours may compromise the confidentiality, integrity or availability of customer data. We have a cybersecurity policy in place, however, unauthorized access to customer data stored on our computers or networks may be obtained through break-ins, breaches of our secure network by an unauthorized party, employee theft or misuse, or other misconduct. It is also possible that unauthorized access to customer data may be obtained through inadequate use of security controls by customers. Accounts created with weak passwords could allow cyber-attackers to gain access to customer data. If there were an inadvertent disclosure of customer information, or if a third party were to gain unauthorized access to the information we possess on behalf of our customers, our operations could be disrupted, our reputation could be damaged, and we could be subject to claims or other liabilities. In addition, such perceived or actual unauthorized disclosure of the information we collect, or breach of our security could damage our reputation, result in the loss of customers, and harm our business.
Hardware or software failures or errors in our systems or those of our suppliers and distributors or their third-party service providers, could result in data loss or corruption, cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant, or cause us to fail to meet committed service levels. Furthermore, our ability to collect and report data may be delayed or interrupted by several factors, including access to the Internet, the failure of our network or software systems or security breaches. In addition, computer viruses or other malware may harm our systems, causing us to lose data, and the transmission of computer viruses or other malware could expose us to litigation. We may also find, on occasion, that we cannot deliver data and reports in near real time because of several factors, including failures of our network or software. If we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed, we could lose customers, or we could be found liable for damages or incur other losses.
All of our data, except accounting data, is stored in the cloud on multiple servers that helps us mitigate the overall risk of losing data. We have a cybersecurity policy in place and are in the process of implementing tighter cybersecurity measures to safeguard against hackers. Complying with these security measures and compliances would incur further costs.
The states in which we and our distributers and suppliers and their service providers operate require that we maintain certain information about our customers and transactions. If we fail to maintain such information, we could be in violation of state laws. Laws and regulations relating to the handling of personal data may impede the adoption of our services or result in increased costs, legal claims, fines against us, or reputational damage.
Risks Related to
o
wnership of
o
ur
c
ommon
s
tock
Our accounting personnel may make unintentional errors.
Given our small size and foreign operations, a small unrectified mistake in the preparation of financial statements and the maintenance of our books and records in accordance with U.S. GAAP and SEC rules and regulations may constitute a material weakness in our internal controls over financial reporting. For more information, please see Item 9A, “Controls and Procedures.”
Future sales of common stock by us could cause our stock price to decline and dilute your ownership in our company.
The Company has 11,672,178 outstanding public warrants (IGC: IW) to purchase 1,167,217 shares of common stock by surrendering 10 warrants and a payment of $5.00 in exchange for each share of common stock. We have 91,472 units outstanding that can be separated into common stock and warrants. Ten units may be separated into one share of common stock and 20 warrants (IGC: IW). The unit holders are requested to contact the Company or our transfer agent, Continental Stock Transfer & Trust, to separate their units into common stock and warrants. The warrants expire on March 8, 2021. We also have outstanding options to purchase 270,000 shares, expiring between calendar years 2022 and 2024 with a weighted average exercise price of $0.45 per share. We are not restricted from issuing additional shares of our common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock by us in the market or the perception that such sales could occur. If we raise funds by issuing additional securities in the future or the outstanding warrants or stock options to purchase our common stock are exercised, the newly-issued shares will also dilute your percentage ownership in our company.
The market price for our common stock may be volatile.
The trading volume in our common stock may fluctuate and cause significant price variations to occur. Fluctuations in our stock price may not be correlated in a predictable way to our performance or operating results. Our stock price may fluctuate as a result of a number of events and factors such as those described elsewhere in this “Risk Factors” section, events described in this report, and other factors that are beyond our control. In addition, the stock market, in general, has historically experienced significant price and volume fluctuations. Our common stock has also been volatile, with our 52-week price range being at a low of $0.25 and a high of $14.58 per share. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may cause declines in the market price of our common stock. In addition, it is possible, given our current trading price, that we may fail to comply with the minimum trading price required to trade our shares on the NYSE American.
Our publicly-filed reports are subject to review by the SEC, and any significant changes or amendments required as a result of any such review may result in material liability to us and may have a material adverse impact on the trading price of our common stock.
The reports of publicly-traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements, and the SEC is required to undertake a comprehensive review of a company’s reports at least once every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. We could be required to modify, amend, or reformulate information contained in prior filings as a result of an SEC review, as well as state in filings that we have inadequate control or expertise over financial reporting. Any modification, amendment, or reformulation of information contained in such reports could be significant and result in material liability to us and have a material and adverse impact on the trading price of our common stock
We do not anticipate declaring any cash dividends on our common stock.
We have never declared or paid cash dividends on our common stock and do not plan to pay any cash dividends in the near future. Our current policy is to retain all funds and earnings for use in the operation and expansion of our business.
Maryland anti-takeover provisions and certain anti-takeover effects of our Charter and Bylaws may inhibit a takeover at a premium price that may be beneficial to our stockholders.
Maryland anti-takeover provisions and certain anti-takeover effects of our charter and bylaws may be utilized, under some circumstances, as a method of discouraging, delaying or preventing a change of control of our company at a premium price that would be beneficial to our stockholders. For more detailed information about these provisions, please see “Anti-takeover Law, Limitations of Liability and Indemnification” as follows:
Business Combinations
Under the Maryland General Corporation Law, some business combinations, including a merger, consolidation, share exchange or, in some circumstances, an asset transfer or issuance or reclassification of equity securities, are prohibited for a period of time and require an extraordinary vote. These transactions include those between a Maryland corporation and the following persons (a “Specified Person”):
• an interested stockholder, which is defined as any person (other than a subsidiary) who beneficially owns 10% or more of the corporation’s voting stock, or who is an affiliate or an associate of the corporation who, at any time within a two-year period prior to the transaction, was the beneficial owner of 10% or more of the voting power of the corporation’s voting stock; or an affiliate of an interested stockholder.
A person is not an interested stockholder if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. The board of directors of a Maryland corporation also may exempt a person from these business combination restrictions prior to the time the person becomes a Specified Person and may provide that its exemption be subject to compliance with any terms and conditions determined by the board of directors. Transactions between a corporation and a Specified Person are prohibited for five years after the most recent date on which such stockholder becomes a Specified Person. After five years, any business combination must be recommended by the board of directors of the corporation and approved by at least 80% of the votes entitled to be cast by holders of voting stock of the corporation and two-thirds of the votes entitled to be cast by holders of shares other than voting stock held by the Specified Person with whom the business combination is to be effected, unless the corporation’s stockholders receive a minimum price as defined by Maryland law and other conditions under Maryland law are satisfied.
A Maryland corporation may elect not to be governed by these provisions by having its board of directors exempt various Specified Persons, by including a provision in its charter expressly electing not to be governed by the applicable provision of Maryland law or by amending its existing charter with the approval of at least 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and two-thirds of the votes entitled to be cast by holders of shares other than those held by any Specified Person. Our Charter does not include any provision opting out of these business combination provisions.
Control Share Acquisitions
The Maryland General Corporation Law also prevents, subject to exceptions, an acquirer who acquires sufficient shares to exercise specified percentages of voting power of a corporation from having any voting rights except to the extent approved by two-thirds of the votes entitled to be cast on the matter not including shares of stock owned by the acquiring person, any directors who are employees of the corporation and any officers of the corporation. These provisions are referred to as the control share acquisition statute.
The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction, or to acquisitions approved or exempted prior to the acquisition by a provision contained in the corporation’s charter or bylaws. Our Bylaws include a provision exempting us from the restrictions of the control share acquisition statute, but this provision could be amended or rescinded either before or after a person acquired control shares. As a result, the control share acquisition statute could discourage offers to acquire our common stock and could increase the difficulty of completing an offer.
Board of Directors
The Maryland General Corporation Law provides that a Maryland corporation which is subject to the Exchange Act and has at least three outside directors (who are not affiliated with an acquirer of the company) under certain circumstances may elect by resolution of the board of directors or by amendment of its charter or bylaws to be subject to statutory corporate governance provisions that may be inconsistent with the corporation’s charter and bylaws. Under these provisions, a board of directors may divide itself into three separate classes without the vote of stockholders such that only one-third of the directors are elected each year. A board of directors classified in this manner cannot be altered by amendment to the charter of the corporation. Further, the board of directors may, by electing to be covered by the applicable statutory provisions and notwithstanding the corporation’s charter or bylaws:
• provide that a special meeting of stockholders will be called only at the request of stockholders entitled to cast at least a majority of the votes entitled to be cast at the meeting,
• reserve for itself the right to fix the number of directors,
• provide that a director may be removed only by the vote of at least two-thirds of the votes entitled to be cast generally in the election of directors, and
• retain for itself sole authority to fill vacancies created by an increase in the size of the board or the death, removal or resignation of a director.
In addition, a director elected to fill a vacancy under these provisions serves for the balance of the unexpired term instead of until the next annual meeting of stockholders. A board of directors may implement all or any of these provisions without amending the charter or bylaws and without stockholder approval. Although a corporation may be prohibited by its charter or by resolution of its board of directors from electing any of the provisions of the statute, we have not adopted such a prohibition. We have adopted a staggered board of directors with three separate classes in our charter and given the board the right to fix the number of directors, but we have not prohibited the amendment of these provisions. The adoption of the staggered board may discourage offers to acquire our common stock and may increase the difficulty of completing an offer to acquire our stock. If our Board chose to implement the statutory provisions, it could further discourage offers to acquire our common stock and could further increase the difficulty of completing an offer to acquire our common stock.
Effect of Certain Provisions of our Charter and Bylaws
In addition to the Charter and Bylaws provisions discussed above, certain other provisions of our Bylaws may have the effect of impeding the acquisition of control of our company by means of a tender offer, proxy fight, open market purchases or otherwise in a transaction not approved by our Board of Directors. These provisions of Bylaws are intended to reduce our vulnerability to an unsolicited proposal for the restructuring or sale of all or substantially all of our assets or an unsolicited takeover attempt, which our Board believes is otherwise unfair to our stockholders. These provisions, however, also could have the effect of delaying, deterring or preventing a change in control of our company.
Our Bylaws provide that with respect to annual meetings of stockholders, (i) nominations of individuals for election to our Board of Directors and (ii) the proposal of business to be considered by stockholders may be made only pursuant to our notice of the meeting, by or at the direction of our Board of Directors, or by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our Bylaws.
Special meetings of stockholders may be called only by the chief executive officer, the board of directors or the secretary of our company (upon the written request of the holders of a majority of the shares entitled to vote). At a special meeting of stockholders, the only business that may be conducted is the business specified in our notice of meeting. With respect to nominations of persons for election to our Board of Directors, nominations may be made at a special meeting of stockholders only pursuant to our notice of meeting, by or at the direction of our Board of Directors, or if our Board of Directors has determined that directors will be elected at the special meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in our Bylaws.
These procedures may limit the ability of stockholders to bring business before a stockholders meeting, including the nomination of directors and the consideration of any transaction that could result in a change in control and that may result in a premium to our stockholders.