Business context and reporting period
India Globalization Capital, Inc. (the issuer named in this filing) filed this Form 10-Q for the quarter ended September 30, 2012, its fiscal second quarter, and the six months then ended. The company operates in India and China in iron ore processing and trading, quarrying, materials supply, and infrastructure construction. Ironman, its China iron-ore business, contributed 86% of reported revenue for the six months; the filing says Ironman’s customers generated 95% of its revenue in the quarter.
Financial performance and position
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 |
|---|---|---|
| Revenue | $1.351 million | $2.619 million |
| Operating loss | $344,000 | $538,000 |
| Net loss attributable to common stockholders | $143,000 | $671,000 |
| Net loss per share, basic and diluted | $0.00 | $0.01 |
- Revenue increased 48% for the quarter and 33% for the six-month period year over year. Cost of revenue, excluding depreciation, was $1.108 million and $2.046 million, respectively. Derived gross margins were approximately 18% and 22%.
- SG&A fell to $342,000 for the quarter and $783,000 for six months; management attributed the reduction to lower overhead after exiting or realigning unprofitable businesses. Depreciation rose to $245,000 and $329,000, respectively, including a one-time write-down of old or damaged equipment in the quarter.
- Interest expense declined year over year to $16,000 for the quarter and $26,000 for six months. Quarterly other income included a reported foreign-exchange gain of about $199,000; the six-month period recorded a foreign-exchange loss of $176,000.
- Cash and cash equivalents were $611,000 at September 30, versus $563,000 at March 31. Current assets were $5.086 million and current liabilities $4.118 million, leaving working capital of about $968,000.
- For six months, operating activities used $236,000, investing activities provided $313,000, and financing activities used $25,000. Cash increased by $48,000. The filing reports no cash paid for interest or taxes during the period.
- Total liabilities were $9.043 million and total equity $15.177 million. Current debt included $1.8 million of notes payable, $177,000 of short-term borrowings, and $222,000 of other loans. The $1.8 million note was exchanged after quarter-end for a replacement note of the same principal amount and common shares.
Material changes versus prior comparable period
Compared with the prior-year quarter and six-month period, revenue rose and net losses narrowed substantially. Lower SG&A and interest expense supported the improvement, partly offset by higher depreciation. Cash used in operations also improved from $814,000 in the prior-year six months to $236,000. The revenue mix shifted markedly: Ironman accounted for 86% of six-month revenue in 2012, while IGC-IMT and IGC-MPL accounted for 83% and 16%, respectively, in the comparable 2011 period.
Outlook, commentary, risks, and unusual items
- Management’s strategy is to expand iron-ore assets and processing, increase shipping hubs and supply, and pursue additional mines, beneficiation plants, and construction contracts. No quantified earnings or revenue guidance is provided.
- The company reported access to about $2.5 million deposited with the Delhi High Court for a TBL arbitration award, including interest. Immediate access requires a letter of credit; the company chose to await the court’s expected December 19, 2012 decision. Only $1.35 million of principal was recorded as a receivable, and collection of the full amount remained uncertain.
- Two Indian customers represented approximately 95% of gross accounts receivable at September 30. Customer concentration, collection of receivables, and dependence on a small number of Ironman customers are significant exposures.
- India’s mining and export restrictions, iron-ore price volatility, competition, currency movements, seasonal monsoons and flooding, licensing, and the availability of working capital may affect operations. The company says it does not hedge commodity prices.
- Pre-acquisition Ironman employee advances were included in prepaid and other current assets; the filing describes advances without formal written agreements and states there is no assurance they will be fully collected.
- After quarter-end, the company reported an agreement under which TBL would become wholly owned. A separate June 2012 settlement concerning the company’s 22% Sricon interest exchanged that interest for approximately five acres of land; the settlement was expected to close by year-end.
- The filing describes ongoing remediation of financial-reporting controls, including manual consolidation across different systems and training of China-based accounting staff. It does not provide a clear current-period conclusion on whether disclosure controls were effective in the supplied text. It also cites prior restatements and a historical material weakness.
Important facts for investors to verify
- Whether and when the Delhi High Court releases the arbitration proceeds, the amount ultimately received, and any letter-of-credit or other conditions.
- Recoverability and aging of receivables, including the concentration among two Indian customers, and collectability of Ironman employee advances.
- Terms and dilution effects of the post-quarter Bricoleur note-and-share transaction, and completion of the TBL ownership transaction.
- Whether the Sricon-for-land settlement closed and the value and legal status of the land received.
- Cash needs and access to working capital given low cash balances, continued operating losses, and the company’s debt and contract-guarantee requirements.
- Current internal-control status, including remediation of consolidation and reporting weaknesses and the reliability of the financial information.