Business context and reporting period
Cemtrex, Inc. filed this Form 10-Q for its fiscal third quarter and nine months ended June 30, 2019. The company reports Advanced Technologies (AT), Electronics Manufacturing (EM), and Industrial Technology (IT). Results include Vicon Industries, which Cemtrex began consolidating after gaining control; Cemtrex owned approximately 70% of Vicon at June 30. The filing reflects a 1-for-8 reverse stock split effective June 13, 2019.
Financial performance
| Metric | Three months ended June 30, 2019 | Nine months ended June 30, 2019 |
|---|---|---|
| Revenue | $22.45 million, up 17% year over year | $63.34 million, down 12% |
| Gross profit / margin | $8.57 million / 38% | $25.02 million / 39% |
| Operating loss | $0.46 million | $5.06 million |
| Net loss | $1.93 million | $6.09 million |
| Loss available to common shareholders | $2.93 million; $1.59 per share | $8.05 million; $3.86 per share |
| Net cash from operating activities | Not separately reported for the quarter | $2.89 million |
Quarterly revenue growth came primarily from AT, whose revenue rose to $6.53 million from $0.30 million. EM revenue declined 2% to $11.00 million and IT revenue fell 36% to $4.92 million. For the nine months, AT revenue was $13.92 million, EM $33.13 million, and IT $16.29 million.
Liquidity, debt and capital
At June 30, cash and equivalents were $1.57 million and restricted cash was $0.87 million. The cash-flow statement reports ending cash of $2.45 million, including restricted cash. Working capital was $8.62 million, down from $10.01 million at September 30, 2018. Current assets were $39.07 million and current liabilities $30.44 million.
Nine-month operating cash flow of $2.89 million was lower than $7.69 million a year earlier. Investing activities used $1.65 million, mainly for property and equipment; financing activities provided $0.08 million. Total liabilities were $42.39 million. Current short-term liabilities were $14.01 million; the filing does not provide a single clear total for all borrowings. Disclosed obligations include a $5.50 million Vicon term loan, $3.29 million Deutsche Bank loan, and various bank loans, notes and a mortgage. Interest expense was $2.39 million for the quarter and $3.19 million for the nine months.
Changes, outlook and risks
- For the nine months, revenue fell mainly because of lower EM sales after the loss of two customers and weaker IT environmental-product demand. Management attributes the latter partly to relaxed environmental regulations and says it plans to reduce its presence in those markets.
- Quarterly gross margin held at 38%; nine-month gross margin improved from 35% to 39%. However, nine-month G&A rose 26% to $28.94 million, and operating loss widened. Management cites SmartDesk and VR sales and marketing costs and Vicon consolidation.
- Management said cash on hand and operating cash generation should meet current operating needs through fiscal 2019, but cautioned that growth—particularly new products—may require substantial additional capital and that funding is not assured. No quantified earnings or revenue guidance is provided.
- Unusual items included increased interest and other expenses related to debt and equity-settled interest, and a $1.00 million Series B Preferred Stock and warrant litigation settlement; $0.67 million was recorded as a quarterly other loss. Series B securities were canceled. Preferred dividends of $1.97 million for the nine months were paid in Series 1 preferred shares.
- Subsequent events: Cemtrex raised approximately $0.47 million net in a July common-stock offering; issued additional shares to settle notes and interest; and on August 15 sold several ROB subsidiaries for €6.37 million. The filing does not state the net cash proceeds after transaction-related adjustments.
- Management identified a material weakness in internal control over financial reporting due to insufficient qualified accounting personnel and inadequate entity-level review controls. It said it was working to add accounting personnel and remediate the weakness.
Key facts for investors to verify
- Cash availability, restricted-cash limits, near-term debt maturities, and funding needs after the ROB subsidiary sale.
- Actual sale proceeds and the effects of divesting the ROB businesses on future revenue, earnings and debt.
- Progress in addressing the material weakness and the reliability of period-end reporting controls.
- Whether SmartDesk and other AT products can sustain growth and improve operating results amid elevated overhead and financing costs.
- Exposure to declining environmental-product demand, customer concentration in EM, and dilution from shares issued for debt and preferred dividends.