Cemtrex, Inc. — Form 10-Q summary
Reporting period: Quarter ended June 30, 2012 (the company’s fiscal third quarter), with year-to-date results for the nine months ended June 30, 2012. The filing’s MD&A inconsistently refers to six-month periods; the financial statements present nine-month results.
Business context
Cemtrex and its subsidiary Griffin Filters design, assemble and sell emissions-monitoring instruments, air-filtration equipment and environmental-control systems. Demand is influenced by environmental regulation and industrial investment. The company reported 39,822,862 common shares outstanding as of July 31, 2012.
Financial performance
| Metric | Quarter ended June 30, 2012 | Quarter ended June 30, 2011 | Nine months ended June 30, 2012 | Nine months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $3,672,005 | $6,001,792 | $7,365,477 | $11,077,595 |
| Gross profit / margin | $359,834 / 9.8% | $817,742 / 13.6% | $1,546,957 / 21.0% | $2,035,398 / 18.4% |
| Operating income / margin | $109,026 / 3.0% | $447,390 / 7.5% | $691,787 / 9.4% | $863,909 / 7.8% |
| Net income / margin | $64,654 / 1.8% | $428,452 / 7.1% | $423,687 / 5.8% | $813,553 / 7.3% |
| Basic and diluted EPS | $0.01 | $0.01 | $0.01 | $0.02 |
Quarterly revenue declined about 39% year over year; management attributed the decrease mainly to smaller Griffin Filters contracts. Quarterly gross margin fell, which management attributed to a less favorable mix of lower-margin jobs. For the nine-month period, gross margin improved, but revenue and net income were lower year over year. General and administrative expense was $250,808 for the quarter and $855,170 year to date.
Cash flow, balance sheet and liquidity
- Cash: $72,522 at June 30, 2012, down from $415,369 at September 30, 2011.
- Cash flow: The cash-flow statement reports $745,995 provided by operating activities for the nine months ended June 30, 2012, versus $262,259 used in the comparable 2011 period. Financing activities used $1,088,842, principally from net repayment of related-party notes; investing cash flow was zero. The filing does not provide quarterly cash-flow figures.
- Working capital: $247,247, compared with $443,533 at September 30, 2011; current assets were $825,518 and current liabilities $578,271. Management cited inventory purchases and vendor prepayments as a reason for the working-capital decline.
- Debt and liabilities: Total liabilities were $1,009,607. The balance sheet shows $431,336 of shareholder notes payable, down from $1,520,178 at September 30, 2011. The notes describe the shareholder loan as unsecured, bearing 5% interest and having no due date. No balance was reported on the bank line of credit.
- Assets and equity: Total assets were $1,527,780, down from $2,429,119; stockholders’ equity was $518,173, up from $94,486.
Related parties, outlook and risks
- Ducon Technologies, Inc. is a related party. Cemtrex reported sales to Ducon of $3,329,925 for the quarter and $4,971,425 for the nine months ended June 30, 2012, and material purchases of $825,000 year to date. The filing reports $614,786 due from related parties at June 30; the related-party note describes receivables from Ducon.
- Management said cash on hand and operating cash generation should meet current operating needs through fiscal 2012, but significant sales growth, particularly in new products, could require substantial capital. No quantified earnings or revenue guidance was provided.
- Management described demand prospects as fairly strong, citing emissions regulation and interest in air-quality and energy-efficiency products. A Green DCV installation agreement in India was still in preliminary planning, with no revenue recognized. The company also expressed plans to pursue acquisitions and investments.
- Risks cited include stronger, better-resourced competitors; uncertain market data and customer demand; product obsolescence; strategy execution; and working-capital or capital needs. The company said it lacked a bank credit line to support bid or performance bonds, limiting its ability to bid on some contracts, and did not carry product-liability insurance.
- The company reported no current material litigation. A previously disclosed arbitration dispute was settled without payment by either party; a $488,237 amount due from the counterparty had been written off in 2010. Management concluded disclosure controls were effective and reported increased controls over recording common-stock sales.
Important facts for investors to verify
- Period and earnings presentation: The MD&A repeatedly labels comparisons as six-month periods, while the statements show nine-month results. It also calls $103,634 quarterly and $682,967 year-to-date “net profit”; those are pre-tax income figures. Reported net income is $64,654 for the quarter and $423,687 for the nine months.
- Related-party exposure: Verify the nature, collectability and terms of the amounts due from Ducon, and the concentration represented by Ducon sales (about 91% of quarterly revenue and 68% of nine-month revenue, based on the reported figures).
- Shareholder loan reconciliation: Reconcile the balance-sheet shareholder-note figure with the note’s separate reference to $1,518,274 at December 31, 2011, and confirm repayment timing and obligations.
- Liquidity and cash flow: Assess whether reduced cash and working capital are sufficient for operations, given the reported cash use from financing and management’s expectation that additional growth may require capital.
- Outlook execution: Track the India Green DCV project and any acquisitions or new-product expansion; the filing provides no recognized revenue from that agreement or quantified guidance.