Cemtrex, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2021. The company operates in Advanced Technologies (AT) and Industrial Services (IS). Comparative 2020 figures were restated.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $10.33 million, up 22% from $8.44 million | $28.42 million, down 13% from $32.77 million |
| Gross profit / margin | $4.13 million / 40%, versus $3.28 million / 39% | $12.06 million / 42%, versus $13.97 million / 43% |
| Operating loss | $2.30 million, versus $2.40 million | $6.31 million, versus $2.52 million |
| Net income (loss) attributable to Cemtrex shareholders | $1.10 million, versus a $4.20 million loss | $1.86 million, versus a $5.85 million loss |
| Basic and diluted EPS | $0.06, versus $(0.38) | $0.10, versus $(0.82) |
| Operating cash flow | Not provided as a quarterly figure | $(6.18) million, versus $(3.39) million |
Quarterly revenue rose in both segments: AT increased 17% to $5.85 million and IS increased 29% to $4.48 million. For the nine-month period, AT revenue declined 13% to $16.01 million and IS declined 14% to $12.42 million. Management attributed the quarter-on-quarter-year recovery to improved economic conditions following COVID-19 disruptions; it attributed the nine-month declines to shutdowns and limited operations in the first two fiscal quarters.
Reported net income was supported by substantial other income, not operating profitability. Nine-month other income included $3.67 million from a related-party settlement, $3.35 million from PPP loan forgiveness, $736,899 of employee retention credits, and approximately $2.41 million of realized and unrealized marketable-securities gains. The quarter included $3.35 million of PPP forgiveness and $538,281 of securities gains.
Liquidity, balance sheet and capital
- At June 30, 2021, current assets were $32.60 million and current liabilities were $14.42 million, or working capital of approximately $18.18 million. Cash and equivalents were $12.88 million; restricted cash was $1.69 million.
- Cash, cash equivalents and restricted cash totaled $14.57 million at period-end, down $6.20 million from the start of the fiscal year. The cash flow statement reports $14,570,151; MD&A cites $14,570,345, a difference the filing text does not explain.
- Investing activities provided $154,326, including marketable-securities transactions, while financing activities used $180,219. The company invested in Virtual Driver Interactive and MasterpieceVR and spent $1.11 million on property and equipment.
- Long-term liabilities totaled $13.07 million. Disclosed balances included $1.05 million of bank loans, $3.08 million of notes payable, $2.28 million of mortgage payable and $2.87 million of PPP loans. Current liabilities also include $6.38 million of “short-term liabilities”; the filing does not clearly reconcile this line to current debt.
- Inventory increased 28% to $8.67 million, which management attributed to purchases for products expected to ship later. Trade receivables declined 22% to $5.23 million.
- The company reported 18.71 million common shares outstanding on June 30 and 20.78 million as of August 13. It disclosed issuing 2.07 million shares in July to satisfy $2.84 million of notes payable and accrued interest.
Restatement, outlook and risks
- Restatement and settlement: The board identified approximately $7.1 million of disputed transfers involving former executive and controlling shareholder Aron Govil’s company, First Commercial, relating to fiscal 2017 and 2018. The review also identified unsupported advertising expenses and unsubstantiated intangible assets and R&D expenses. Cemtrex restated comparative financial information and reversed prior Series 1 preferred dividend accruals. Management concluded the adjustments were not material to the years in which they occurred and said prior reports remain reliable.
- Under a February 2021 settlement, Govil returned preferred shares and forfeited options; Cemtrex recognized a $3.67 million gain for surrendered securities. Govil also issued a secured $1.53 million note bearing 9% interest and due in two years. Cemtrex did not recognize the gain associated with that note until it is paid. The company said it believes the note is collectible.
- Outlook: Management said cash on hand and operating cash generation should be sufficient for current operations through fiscal 2021, but stated that significant sales growth, particularly from new products, may require substantial capital. It gave no numerical revenue or earnings guidance.
- Operating risks: COVID-19 caused order and development delays, and supply-chain shortages were increasing component costs, potentially pressuring margins. Management said the future effect of the pandemic was uncertain. Other stated risks include competition, supplier or manufacturing problems, and access to adequate credit and capital.
- Controls: Management disclosed a material weakness in internal control over financial reporting due to insufficient accounting personnel and inadequate entity-level review of period-end reporting, accounting policies and disclosures. The company said it was seeking additional accounting personnel and working on remediation.
- Related-party receivable: Cemtrex reported $1.52 million due from Ducon Technologies, including $500,000 for the Griffin Filters sale that was due in February 2021. The company said it was negotiating a payment agreement.
- The company stated that it was in compliance with applicable bank loan covenants as of June 30, 2021. It reported no legal proceedings in this filing.
Most important facts for investors to verify
- Reconcile reported earnings to recurring operations, given operating losses and significant one-time gains and credits.
- Review the restatement details, settlement consideration, collectability and payment status of Govil’s secured note, and the status of the Ducon receivable.
- Assess cash burn, short-term liabilities, debt maturities, covenant compliance and the funding needed to execute growth plans.
- Track remediation of the material weakness and whether subsequent filings demonstrate effective financial reporting controls.
- Confirm post-quarter share issuance and resulting dilution, including the July debt-for-equity settlement.
- Monitor inventory conversion, product shipment timing, COVID-19 and supply-chain effects on bookings, costs and margins.