IGC 10-Q Summary
Reporting period: India Globalization Capital, Inc. (now identified in the request as IGC Pharma) filed this quarterly report for the three and six months ended September 30, 2011. The company operated materials and construction businesses, principally in India, with iron-ore trading and exports to China. The filing describes the period as the second quarter of its fiscal year.
Financial performance
| Metric | Three months ended Sep. 30, 2011 | Three months ended Sep. 30, 2010 | Six months ended Sep. 30, 2011 | Six months ended Sep. 30, 2010 |
|---|---|---|---|---|
| Revenue | $912,121 | $1,681,586 | $1,972,368 | $2,809,997 |
| Operating loss | $719,398 | $795,810 | $1,417,844 | $1,328,119 |
| Net loss attributable to common stockholders | $789,253 | $856,260 | $1,658,455 | $1,447,434 |
| Basic and diluted loss per share | $0.04 | $0.06 | $0.08 | $0.11 |
- For the quarter, revenue fell about 46% year over year; six-month revenue fell about 30%. Management attributed the decline mainly to Karnataka’s iron-ore mining and export restrictions and related mine and port disruptions.
- Cost of revenue was approximately 99% of quarterly revenue, versus 96% a year earlier. The company cited fixed costs that did not decline in line with sales. Quarterly operating loss narrowed, but the six-month operating loss widened.
- Six-month net loss increased from $1.45 million to $1.67 million. The prior-year period included a $455,014 income-tax benefit; no tax benefit was recorded in 2011 because of continuing losses and a full valuation allowance on deferred tax assets.
- Six-month interest expense was $449,733, versus $410,709 in 2010; the filing states much of the interest expense was non-cash. The separate amortization of debt discount was zero in 2011 versus $356,436 in 2010.
- Six-month operating cash use improved to $813,813 from $1,811,219. Investing activities provided $38,349; financing activities provided no cash. Cash declined to $766,829 from $1,583,284 at March 31, 2011.
Financial position and liquidity
- At September 30, 2011, current assets were $5.78 million and current liabilities $5.98 million, a working-capital deficit of approximately $205,000. Total assets were $16.09 million; total liabilities were $6.72 million, excluding $3.08 million presented separately for shares potentially subject to rescission rights.
- Debt included $818,468 of secured short-term borrowings and $3.49 million of notes payable. The secured borrowing collateral includes materials, work in progress, receivables and property; director guarantees and property mortgages also support it.
- Restricted cash was $1.71 million and accounts receivable, net, were $2.38 million. Management said liquidity depended in part on collecting claims and releasing restricted cash; it warned that failure to do so could result in a working-capital deficit. Bank lines in India had been reduced to amounts already borrowed.
- Management said existing cash, expected operating cash flow and potential claim proceeds were adequate to sustain operations, but not rapid growth. It was exploring receivable settlements, bank lines, equity, convertible debentures and debt, with no assurance of obtaining additional financing.
Material changes, outlook and risks
- Revenue mix shifted substantially: iron-ore trading accounted for 83% of six-month revenue, compared with 57% in the prior-year period; TBL construction fell to 1% from 37%. Aggregate operations contributed 16%, versus 5%.
- Two government-related arbitration receivables of $2.21 million were more than a year old. The company kept them classified as current and unimpaired, while noting collection could take 30 days to two years. These are distinct from a $3.11 million receivable due from Sricon, an affiliate, which the company fully provided for amid a dispute and intended to pursue legally.
- Two notes payable remained outstanding. The Oliveira note carried 30% annual interest, matured March 24, 2012, and allowed principal and interest payments in shares at the company’s option. Shareholder approval for up to 5 million settlement shares was obtained October 28, 2011. The Bricoleur note was due June 30, 2011; restructuring negotiations were ongoing at the filing date.
- Approximately 4.87 million shares could be subject to rescission rights tied to the company’s prior SEC filing and registration-statement issues. Successful rescission claims could reduce cash available for operations; the company also faced possible regulatory action, penalties or fines.
- Management could not conclude disclosure controls were effective as of September 30, 2011. The filing cites a material weakness related to prior financial-statement filings and notes that prior statements were restated. The company described remediation steps but continued to rely on manual consolidation processes.
- On October 14, 2011, the company agreed to acquire Hong Kong-based H&F Ironman Limited, which owns 95% of a Chinese iron-ore processing business. Completion remained subject to conditions, including SEC proxy review and shareholder approval. The company warned that the pending deal was using resources and could adversely affect results if not completed.
- Other risks include monsoon-season disruption, exposure to a concentrated customer base, commodity and labor costs, foreign-currency translation, limited capital for contract bidding and execution, and dependence on mining and quarrying licenses held by partners. No quantified financial guidance was provided.
Important facts for investors to verify
- Collection timing and recoverability of the aged $2.21 million government-related arbitration receivables, and the treatment of the disputed Sricon balance.
- Status, maturity, interest, repayment and restructuring terms of the Oliveira and Bricoleur notes, including any share-based settlements.
- Potential rescission claims and resulting cash exposure associated with the 4.87 million shares identified in the filing.
- Progress in remediating disclosure-control weaknesses and the accuracy and timeliness of subsequent SEC filings.
- Whether the Ironman acquisition closed, its financing and consideration, and its effect on liquidity and operating results.