Business context and reporting period
India Globalization Capital, Inc. (IGC; the filing entity named in this 10-Q) reported its fiscal third quarter and nine months ended December 31, 2011. IGC operates infrastructure-materials, mining and construction businesses in India and China. On December 31, 2011, it acquired 100% of Hong Kong-based HK Ironman, which owns 95% of China-based PRC Ironman, a low-grade iron-ore beneficiation business. Ironman’s results were not included in reported operating results for the period because control was obtained on the final day of the quarter.
Financial performance and position
Amounts below are in U.S. dollars. Parentheses indicate losses or cash outflows.
| Metric | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $986,799 | $2,959,167 |
| Gross profit (loss), before depreciation and amortization | $(38,018) | $56,517 |
| Gross margin on that basis | (3.9%) | 1.9% |
| Operating loss | $(1,049,268) | $(2,467,113) |
| Net loss | $(1,913,944) | $(3,583,115) |
| Net loss attributable to common stockholders | $(1,901,375) | $(3,559,831) |
| Loss per share, basic and diluted | $(0.09) | $(0.17) |
For the nine months, operating cash flow was $(1,198,618), investing cash flow was $4,229,538 and financing cash flow was $8,201. Cash increased $2,861,688 to $4,444,972; restricted cash was $182,619. At December 31, current assets were $14,563,434 and current liabilities were $12,952,846, or working capital of approximately $1.61 million. Total assets were $35,098,619 and total liabilities were $17,936,766.
Reported borrowings included $764,871 of short-term borrowings and $3,485,254 of notes payable. The company also reported $3,085,107 of taxes payable and $1,764,816 of other taxes payable; Ironman’s acquisition accounting and tax exposure are significant context for these balances. The filing does not provide a single total debt figure that clearly separates debt from other obligations.
Material changes versus the prior comparable period
- Quarterly revenue increased to $986,799 from $484,106, which management attributed mainly to increased domestic steel trading and comparison with a prior-year period affected by Karnataka’s iron-ore export ban. Nine-month revenue declined to $2,959,167 from $3,294,103, primarily because of curtailed iron-ore operations.
- Quarterly cost of revenue rose faster than revenue, producing a gross loss before depreciation; management cited lower steel-trading margins and fixed costs. Nine-month operating loss narrowed to $2,467,113 from $2,817,914, but net loss widened to $3,583,115 from $3,212,467.
- Quarterly other expense included a $716,364 loss, primarily unrealized foreign-exchange losses on rupee-denominated intercompany balances. For the nine months, management identified $818,876 of unrealized exchange differences in the cash-flow reconciliation.
- Cash used in operations improved from $2,206,667 to $1,198,618, which management attributed largely to collections of receivables and other deposits. Cash from financing fell from $2,823,586 in the prior-year period to $8,201.
- The Ironman acquisition added significant assets and liabilities and was funded with stock and cash/earn-out consideration. The company issued 31.5 million shares for the acquisition; common shares outstanding were 47,591,843 at December 31 and 52,460,433 as of February 15, 2012.
Outlook, commentary, risks and unusual items
Management expects Ironman to provide a China operating base and potential synergies, but gave no quantified revenue, earnings or cash-flow guidance. Management said existing cash, anticipated operating cash flow and potential claim proceeds should sustain the company, but not fund rapid growth. It warned liquidity could become deficient if aged receivables are not collected, restricted cash is not released, or receivables are treated as long term. The company was exploring collections, bank lines, equity, convertible debentures and debt; access to additional financing was not assured.
- Acquisition and tax exposure: The purchase-price allocation was preliminary. The filing describes Ironman as delinquent in China for prior-period underreported income and says resolution with tax authorities was uncertain. Acquisition-related consideration included $1 million payable subject to post-closing conditions and an estimated $3 million earn-out; the filing’s acquisition consideration and equity valuation disclosures are preliminary.
- Receivables and concentration: $1.95 million of aged receivables from India’s NHAI and Cochin International Airport had been outstanding for over a year and were subject to arbitration awards; collection timing could range from 30 days to two years. Five Ironman customers represented 92% of its 2011 revenue, according to the filing.
- Operating risks: Karnataka export restrictions, possible further Indian export limits or duties, iron-ore price volatility, customer concentration, weather/flooding, logistics, foreign-exchange movements, Chinese currency-transfer restrictions, licensing and environmental requirements could impair operations. Flooding in 2011 had halted Ironman operations for more than four months; operations had resumed.
- Unusual items: Management cited $400,000 of one-time Ironman acquisition charges, $818,000 of foreign-exchange losses and $235,000 of stock-option expense in explaining nine-month results. The quarter also included a $34,000 share-of-loss from an affiliate/joint venture; its separately reported revenue is not consolidated.
- Controls and legal matters: Management could not conclude that disclosure controls were effective at December 31, 2011, citing a prior SEC-identified reporting deficiency and continuing control weaknesses. The company also disclosed a pending dispute with Sricon and potential rescission rights related to prior securities offerings. It reported 4,868,590 potentially affected shares at quarter-end; the rights lapsed on January 28, 2012, and management expected to reverse the related balance-sheet reserve.
Important facts for investors to verify
- Whether Ironman’s unpaid-tax exposure, provisional acquisition accounting and earn-out obligations are resolved or revised, and the actual cash cost of integration.
- Collections and impairment assumptions for the aged government receivables, the disputed $3.1 million Sricon receivable (already fully provided for), and other customer balances.
- Current liquidity after acquisition-related payments, the status of financing options, and whether cash generated in China can be transferred or used as planned.
- Whether Ironman maintains its licenses, customers and operations, and whether it can recover from weather interruptions while managing customer concentration and commodity-price risk.
- Progress remediating disclosure and financial-reporting control weaknesses, including the company’s ability to meet SEC reporting requirements following the acquisition.
- Post-quarter share count, dilution from acquisition and other share issuances, and the accounting reversal associated with expired rescission rights.