Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2023, the second quarter of Cemtrex’s fiscal 2023. The company operates Security (Vicon), Industrial Services (AIS), and Corporate segments. During the quarter, it had completed the sale of its Cemtrex Advanced Technologies and Cemtrex XR subsidiaries to CEO Saagar Govil.
Financial performance and condition
| Metric | Three months ended March 31, 2023 | Six months ended March 31, 2023 | Prior-year comparable |
|---|---|---|---|
| Revenue | $16.07 million | $28.04 million | $11.75 million and $21.16 million |
| Gross profit / margin | $7.34 million / 45.7% | $12.38 million / 44.2% | $3.77 million / 32.1%; $6.99 million / 33.0% |
| Operating income (loss) | $0.40 million | $(1.55) million | $(2.89) million; $(6.19) million |
| Net loss | $(0.54) million | $(6.88) million | $(4.80) million; $(9.33) million |
| Operating cash flow | Not presented for the quarter | $(2.89) million total; continuing operations used $5.38 million | $(7.46) million total |
Revenue and gross profit improved materially year over year. In the quarter, Security revenue rose 47% and Industrial Services revenue rose 23%. Management attributed higher margins to Security pricing changes and lower Industrial Services subcontractor costs. Six-month research and development expense increased 39% to $3.45 million; general and administrative expense declined 2% to $10.48 million.
At March 31, cash and equivalents were $6.63 million and restricted cash was $0.65 million, versus $9.90 million and $1.58 million at September 30, 2022. Current assets were $26.12 million and current liabilities $25.74 million; the balance-sheet-derived working capital was $0.38 million. The debt schedule reported $20.74 million of lines of credit and secured liabilities, including $16.44 million of current maturities. Total liabilities were $32.33 million. Six-month cash, cash equivalents, and restricted cash declined by $4.07 million to $7.28 million.
Material changes, outlook, and risks
- Going concern and liquidity: Management stated that the company did not have adequate cash to meet short- or long-term needs and that substantial doubt existed about its ability to continue as a going concern. It cited continuing losses, current debt obligations, and limited working capital. Management expects cost reductions, brand divestitures, improved Vicon margins, and potential equity financing or debt-for-equity settlements to help fund operations, but cautioned there is no assurance these plans will succeed. Equity issuance or debt settlement in shares could dilute shareholders. No formal financial guidance was provided.
- Debt and financing: A January standstill temporarily deferred Streeterville Capital redemptions through April 12, 2023, while increasing note balances by $451,422, recorded as interest expense. The NIL loan was amended to mature December 31, 2024, at 11.5% interest. On May 3, after quarter-end, Streeterville extended a note’s maturity to June 30, 2024, in exchange for a fee added to the balance.
- Divestiture and unusual items: The November 2022 sale of the former technology brands resulted in a $2.46 million loss in the six-month period. Consideration included cash, royalties, and a SAFE; the company valued the SmartDesk royalty and SAFE at zero, and recorded $678,330 of discounted royalties receivable for Cemtrex XR. The quarter’s other expense was partly offset by a one-time $416,502 employee retention credit. The sale was to the CEO, who abstained from the board vote.
- Controls: Management concluded disclosure controls were not effective and reported a material weakness in internal control over financial reporting, citing insufficient accounting personnel, inadequate review controls, and untimely account reconciliations. Software changes and third-party review support were initiated, but remediation had not been fully evaluated.
- Listing and share changes: The company completed a 35-for-1 common-stock reverse split in January 2023 and reported regaining Nasdaq common-stock bid-price compliance in February. Series 1 preferred stock still had a bid-price deficiency and an extension to July 24, 2023, to regain compliance. Common shares issued to settle debt and pay for services contributed to dilution.
- Other risks: Management cited economic and competitive conditions, pricing pressure, manufacturing or supplier problems, and the ability to maintain sufficient credit arrangements. Inflation affected operations; the company said it used price increases and cost-saving measures to mitigate it.
Important facts for investors to verify
- Reconcile the filing’s working-capital figures: the balance sheet and MD&A indicate $383,939, while the going-concern discussion states $108,939.
- Check the quarter’s revenue figure: the financial statements and segment table report $16,073,397, while MD&A states $16,073,789.
- Assess near-term debt maturities, repayment capacity, amendments and fees, and the company’s dependence on refinancing, equity issuance, or debt settlement in shares.
- Review progress toward resolving the going-concern uncertainty, remediating the material weakness, and regaining preferred-stock Nasdaq bid-price compliance.
- Evaluate the collectability and terms of related-party receivables and royalties, including amounts due from businesses sold to the CEO.