An earlier version of this article incorrectly said the NYSE had issued nine late-filing notices to IGC in the past three years. The company itself told the SEC nine times since 2015 that it could not file its quarterly report on time. The article has been corrected.
This article was first published on October 4.
Investors who purchased shares of cannabis play India Globalization Capital Inc., or IGC, in the past month are likely pleased with the stock’s more than 500% surge, but can it hold those gains?
A review of the company’s /zigman2/quotes/205797879/composite IGC +0.62% history and regulatory filings has uncovered an alarming number of red flags that undermine some of the claims made by the company and demonstrate the importance of due diligence when investing.
The stock’s move came after the company announced its plan for a line of CBD-infused drinks, or those containing cannabinoids, ingredients in cannabis that are said to have health benefits. With Canada gearing up for full legalization of cannabis for adult recreational use on Oct. 17, the sector has become a hot market for speculators, with investors jumping on every announcement of a planned product, alliance, distribution agreement or deal.
IGC has benefited — its market capitalization has ballooned to $295 million on Thursday from just $78 million on Sept. 25, the day before the drinks announcement.
In its most recent quarterly earnings report , IGC posted a loss of $512,296 on revenue of $1.5 million for the three months to end June. Cost of revenue came to $1.4 million, while SG&A costs came to $553,645, which exceed its revenue.
“Marijuana or any form of products including CBD oil is illegal in Malaysia.”
Erny Sabrina Mohd Noor, counselor for agriculture, Malaysian Embassy, Washington, D.C.,
MarketWatch has spent several days calling and emailing IGC, its executives and the scientists whom it names as advisers on its website. Founder and Chief Executive Ram Mukunda returned a call on Wednesday, before asking for time to read the questions we had emailed him with the promise he would call back. On Thursday, the company said it would provide answers to our questions. It has not done so at this time.
Here are 10 potential red flags for investors to be aware of:
Made in Malaysia?
In the release announcing the plan for CBD-infused drinks, IGC indicates it will work with a manufacturer in Malaysia,
but that country has a mandatory death sentence for cannabis possession
and has no medical-marijuana program.
“Marijuana or any form of products including CBD oil is illegal in Malaysia,” Erny Sabrina Mohd Noor, counselor for agriculture at the Malaysian Embassy in Washington, D.C., told MarketWatch.
History of pivots
IGC, which started life in 2005 as a blank-check company, has a history of pivoting to new businesses as they become popular and releasing press releases to highlight those business-plan shifts.
The company’s IPO prospectus said that it aimed to acquire or merge with businesses operating in India, to take advantage of the potential of that market. In 2007, it began to acquire infrastructure assets in Asia and later started trading commodities such as steel and iron ore, leasing heavy construction equipment and managing real estate in Malaysia, according to its website. Today, the SEC-registered area of business is described as “wholesale electronic parts and equipment.”
In 2013, the company started to look into the cannabis industry, where it now claims to be working on treatments for serious diseases including Alzheimer’s and Parkinson’s, as well as anxiety and sleep disorders.
However, a review of its regulatory filings reveals that it has assigned very little funding to research and development — roughly $150,000 a year — and none to clinical studies or any of the other steps needed to win U.S. Food and Drug Administration approval.
A look at press releases from the last year shows a clear pattern of repeatedly entering the latest hot market. In late 2017, that was blockchain, while last month it was cannabis that helped push or support the stock above the $1 threshold. The latest announcement appeared to be timed with a sale of shares.
The strategy-pivot approach to capturing investor interest was used most dramatically by Long Island Iced Tea Corp., which caused a stir on Dec. 21, 2017, by announcing it was changing its name to Long Blockchain Corp. , sending the stock up 183%. The news came three days after bitcoin futuresstarted trading, at prices above $20,000.
From the MarketWatch archives: Nasdaq to delist Long Blockchain Corp., underlining fading bitcoin fervor
Less than a week later, IGC followed with its own blockchain initiative, saying it would use the technology to address “issues” in areas such as product identification. The stock shot up 91% to $1.26 on Dec. 26, the first close above the $1 mark since July 2014.
On Dec. 29, a proposal to approve the grant of 1.9 million shares of stock to “current and new employees, advisers, directors and consultants by the board of directors” passed a shareholder vote.
In mid-September, Level Brands Inc.’s stockmore than doubled in four days, just before the company announced on Sept. 21 the online launch of five new cannabidiol (CBD) products under the Kathy Ireland Health & Wellness brand. The stock ran up as much 24% during the day of the announcement, before reversing course to close the session down 12%.
Four days later, IGC said it was entering the market for CBD-infused energy drinks, with “plans to create a branded hemp/CBD-infused version of the formulation that addresses market demand for energy drinks with the inclusion of healthy properties derived from hemp including CBD.” In other words, the product, called “Nitro-G,” was still in the planning stages. Still, the news helped kick off a near sixfold rise — the stock ran up 458% — over the next five sessions.
On cue, the company disclosed late Tuesday it had completed its at-the-market offering of 5.65 million shares at a weighted average price of $5.30, which was more than double the closing price of $2.33 on Sept. 25, when the offering commenced. Coincidentally, Sept. 25 was the day IGC said it was entering the market for CBD-infused energy drinks.
The stock tumbled 32% in afternoon trade Friday, putting it on track for the biggest one-day selloff since going public in April 2006. It has plummeted 66% the past three sessions.
A history with the SEC
IGC went public on May 13, 2005 , led by Ram Mukunda , who has since served as chairman of the board, CEO and president. Mukunda was previously founder and CEO of a company called Startec Global Communications, according to a biography on his company website. The bio fails to disclose that Startec went bankrupt in 2001, having defaulted on a $9.6 million interest payment.
IGC started in 2005 with $200,000 in assets, a $100,000 loan payable to Mukunda and an obligation to pay Mukunda’s company, Integrated Global Network LLC, an administrative fee of $7,500 a month for office space and general and administrative services. John Cherin, an Arthur Andersen alumnus, served as chief financial officer until he was replaced by Rohit Goel and Shajy Mathilakathu as co-principal accounting officers on Sept. 29, 2017.
Claudia Grimaldi became the company’s “principal financial officer” in May 2018.
The company has attracted a lot correspondence from the SEC. In March 2017, the SEC wrote to ask about a 2009 transaction with Bricoleur Capital Management , an investment adviser. The loan from Bricoleur to IGC has been renegotiated several times.
IGC’s financial statements filed with the SEC as of June 30, 2017, said the company had issued 90,000 shares valued at $36,600 to Bricoleur Partners L.P. against the outstanding $1.8 million promissory note as repayment of interest. Bricoleur’s SEC registration was terminated in December 2012, and its license was revoked by the state of Florida in 2015.