IGC

Business Context and Reporting Period

Company: India Globalization Capital, Inc. (IGC)

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: December 31, 2008

Business Overview: IGC operates through two Indian subsidiaries, Sricon Infrastructure Private Limited (63% owned) and Techni Bharathi Limited (77% owned). Core businesses include highway and heavy construction, mining and quarrying, and civil construction for high-temperature plants. The company is a non-accelerated filer and is not a shell company.

Key Financial Metrics

Debt Structure: Short-term borrowings and current portion of long-term debt totaled $2,754,023. Long-term debt (net of current portion) was $1,483,154. Significant notes payable include $3,000,000 to Oliveira Capital, LLC and $1,278,642 to Oliveira Trust.

Material Changes vs. Prior Period

• Revenue Decline (Q3): Revenue for the three months ended Dec 31, 2008, dropped to $3.8 million from $11.8 million in the comparable 2007 period. Management attributed this to a proactive curtailment of contracts due to global credit tightening and liquidity constraints.
• Revenue Growth (9 Months): For the nine-month period, revenue increased 47% to $32.3 million compared to $21.9 million in 2007, driven by the inclusion of acquired subsidiaries (Sricon and TBL) post-March 2008.
• Operating Loss (Q3): The company reported an operating loss of $1.4 million in Q3 2008, a reversal from the $2.5 million operating income in Q3 2007. This was driven by approximately $1.5 million in one-time expenses related to contract cancellations, warrant tender offers, and legal costs.
• Cash Flow: Net cash used in operating activities was $8.4 million for the nine months ended Dec 31, 2008, compared to $2.8 million provided in the prior year. This shift was due to operating expenses and one-time legal costs.
• Foreign Exchange: The strengthening of the U.S. dollar against the Indian Rupee contributed to approximately $300,000 in losses for the quarter.

Guidance, Outlook, and Risks

Liquidity and Capital Resources: Management states that current cash balances and anticipated operating cash flows are inadequate to sustain rapid growth. Bank lines in India are frozen at current borrowing levels due to the global credit crisis and erosion in the value of pledged real estate assets. The company is constraining growth plans to match available liquidity.

Strategic Actions:

• Creating a new subsidiary (IGC-IMT) to pledge assets for a senior secured credit facility.
• Subcontracting existing contracts and canceling new ones to reduce working capital needs.
• Pursuing delay claims against previously executed contracts.

Risks and Contingencies:

• Arbitration: Sricon has filed claims totaling $8.16 million and $5.27 million against the National Highway Authority of India (NHAI) regarding contract escalations and variations. These amounts are not recognized on the books pending arbitration.
• Debt Repayment: Failure to repay a $17.9 million note related to the Sricon acquisition could result in IGC having to tender shares to repay the debt, reducing its ownership stake.
• Warrant Tender Offer: A tender offer for outstanding warrants expired in January 2009, resulting in the issuance of 1,311,064 new shares and raising $297,698.50 in cash.

Investor Verification Checklist

• Liquidity Status: Verify the current status of frozen bank lines in India and the progress of restructuring efforts with lenders.
• Debt Obligations: Confirm the repayment schedule and terms for the $17.9 million Sricon acquisition note and the $3 million Oliveira Capital note.
• Arbitration Outcomes: Monitor the status of the pending arbitration claims against NHAI totaling over $13 million, as these represent potential contingent assets.
• Warrant Exercise: Review the final impact of the warrant tender offer on share dilution and cash proceeds.
• Contract Portfolio: Assess the extent of contract cancellations and subcontracting and their long-term impact on revenue visibility.