IGC

Business Context and Reporting Period

Company: India Globalization Capital, Inc. (IGC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2012
Business Overview: IGC operates in India and China, focusing on infrastructure, mining, quarrying, and construction. Core activities include the supply of iron ore and rock aggregate, and the execution of civil construction projects. The company recently acquired a 95% interest in "Ironman" (PRC Ironman) in China to expand its iron ore beneficiation capabilities.

Key Financial Metrics

Liquidity: Cash used in operating activities was $80,504 for the quarter. Investing activities provided $248,500, primarily from the purchase of short-term investments. Financing activities provided $8,808.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased by approximately 19.6% year-over-year, driven largely by the inclusion of PRC Ironman, which accounted for 82% of total revenue in the current quarter compared to 0% in the prior year.
• Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased significantly from $733,141 to $440,775, attributed to efforts to curtail non-mining expenses. Interest expense dropped from $300,768 to $10,557 following the settlement of a high-interest note.
• Foreign Exchange Impact: The company reported a significant foreign exchange loss of $374,749 included in "Other income, net," compared to a gain in the prior year. This was due to the re-measurement of intercompany receivables denominated in Indian Rupees against the US Dollar.
• Net Loss Improvement: Despite the FX loss, the consolidated net loss improved from $870,954 to $540,754.

Guidance, Outlook, and Risks

Management Commentary:

• Integration: The company is in the process of fully integrating Ironman. Once complete, revenue from beneficiation plants is expected to commence.
• Asset Recovery: IGC has access to approximately $2.5 million (INR 140 million) held by the High Court in Delhi following an arbitration award won by subsidiary TBL. The company expects to access these funds upon providing a letter of credit.
• Settlement: On June 21, 2012, IGC entered a settlement to exchange its 22% minority interest in Sricon Infrastructure for approximately 5 acres of land in Nagpur.

Risks and Contingencies:

• Customer Concentration: Five major customers accounted for 98% of Ironman's revenue. Six customers accounted for 95% of gross accounts receivable in India.
• Regulatory and Operational: Operations in India and China are subject to strict environmental and labor regulations. The company faces risks related to the availability of mining licenses and the impact of monsoon seasons on construction and logistics.
• Internal Controls: The company disclosed a material weakness in internal controls over financial reporting related to previous audit qualifications and restatements. Management is implementing remediation measures, including hiring external experts and training staff.
• Currency Risk: A stronger US dollar decreases reported earnings due to the translation of Indian Rupee and Renminbi revenues.

Investor Verification Checklist

• Cash Position: Verify the status of the $2.5 million arbitration award held by the Delhi High Court and the timeline for accessing these funds.
• Debt Settlement: Confirm the final status of the Bricoleur note restructuring and the dispute regarding the share entitlement of the Oliveira note holder.
• Revenue Quality: Assess the sustainability of revenue from PRC Ironman, given the high concentration of customers (98% from five clients).
• Internal Controls: Monitor progress on remediation of the material weakness in internal controls to ensure future reporting reliability.
• Asset Valuation: Review the valuation and legal status of the 5 acres of land in Nagpur received in the Sricon settlement.