Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; filed August 14, 2020. The company operates Advanced Technologies (AT), including Vicon security products, and Industrial Services (IS). The prior-year comparisons reflect the company’s business portfolio before the 2019 exits of electronics manufacturing and environmental products.
Financial performance
| Metric | Three months ended June 30, 2020 | Nine months ended June 30, 2020 |
|---|---|---|
| Revenue | $8.44 million, down 23% year over year | $32.77 million, up 16% |
| Gross profit / margin | $3.28 million / 39% | $13.97 million / 43% |
| Operating loss | $2.66 million | $3.33 million |
| Loss from continuing operations | $4.49 million | $6.51 million |
| Net loss attributable to Cemtrex shareholders | $4.45 million | $8.74 million, including $2.09 million of preferred dividends |
| Continuing-operations loss per share, basic and diluted | $0.41 | $1.22 |
| Operating cash flow | Used $2.23 million in the nine-month period |
Quarterly revenue fell in both segments: AT was $4.98 million, down 24%, and IS was $3.46 million, down 21%. For the nine-month period, AT revenue rose 32% to $18.39 million, primarily reflecting Vicon’s consolidation beginning in fiscal 2019; IS revenue was nearly flat at $14.39 million. Nine-month gross margin improved from 39% to 43%, while quarterly gross margin increased from 38% to 39%.
Liquidity, cash flow and debt
- At June 30, cash and equivalents were $12.94 million, restricted cash was $1.33 million, and short-term investments were $1.78 million. Working capital was $17.17 million, versus $3.24 million at September 30, 2019; management attributed the improvement primarily to June equity offerings.
- Nine-month investing cash outflow was $6.65 million, including $4.54 million for property and equipment and $1.37 million for marketable securities. Financing provided $20.18 million, including equity offering proceeds and borrowings. Cash, cash equivalents and restricted cash totaled $14.27 million at period-end.
- Total liabilities were $29.31 million. Reported borrowings included $2.01 million of long-term bank loans, $4.44 million of long-term notes payable, and a $2.37 million long-term mortgage; current liabilities also included $6.33 million classified as current portions of long-term liabilities. Lease liabilities totaled $2.54 million.
- The company received $3.47 million in Paycheck Protection Program loans at 2% interest and expected to apply for forgiveness; forgiveness was not established in the filing. Management stated cash on hand and operating cash generation should cover current operations through fiscal 2020, while warning that growth may require additional capital.
Changes, outlook and risks
- Third-quarter revenue and continuing-operations results were adversely affected by COVID-19-related shutdowns, customer order delays, and restricted operations. Management reported IS bookings down more than 50%; AT experienced a comparatively smaller slowdown. Supply-chain delays pushed new product and software launches back several months. Management said the pandemic’s future effects could not be reliably estimated, while noting increased opportunities for Vicon video surveillance products.
- Nine-month revenue growth did not translate into improved continuing-operations earnings: the loss increased 15% year over year. The third-quarter operating loss widened as revenue declined and general and administrative expense increased 38% to $5.61 million, which management attributed partly to higher salaries.
- Cash from operations shifted from a $3.36 million inflow in the comparable nine-month 2019 period to a $2.23 million outflow. Inventory, net of a $4.67 million obsolescence allowance, rose to $6.59 million from $5.21 million at September 30, 2019; the company cited inventory acquired for bookings not shipped during the quarter.
- Common shares outstanding rose from 3.96 million at September 30, 2019 to 16.26 million at June 30, 2020; 16.74 million were outstanding as of August 11. Issuances included equity financing and shares used to settle notes and interest. The company also issued 100,000 Series C preferred shares to its CFO, carrying enhanced voting rights, and invested $500,000 in a company controlled by that officer.
- A material weakness in internal control over financial reporting remained, attributed to insufficient accounting personnel and inadequate entity-level review of period-end reporting, accounting policies and disclosures. Management said it was seeking additional accounting personnel and working on remediation.
- Other notable items include $6.93 million of notes payable settled with shares during the nine months, $1.06 million of Series 1 dividends paid in preferred shares, and a new $2.48 million mortgage associated with a property purchase. The filing reported no legal proceedings. Management’s outlook was qualified; it provided no specific revenue or earnings guidance.
Important facts for investors to verify
- Whether COVID-19-related order, booking and product-launch delays eased after June 30, particularly in Industrial Services.
- Subsequent operating cash flow, inventory utilization and the adequacy of the inventory obsolescence allowance.
- Debt maturities, loan covenant compliance, financing needs, and whether PPP loans were ultimately forgiven.
- The effects of substantial common-stock issuance and preferred-stock voting and dividend rights on dilution and governance.
- Progress in hiring accounting personnel and remediating the disclosed material weakness in internal controls.
- Terms, valuation and governance safeguards for the related-party investment and other transactions involving the CFO.