Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2020, the first quarter of fiscal 2021. Comparative December 2019 results and September 30, 2020 balances are identified as restated. Cemtrex operates Advanced Technologies (AT), including Vicon security systems and virtual/augmented reality activities, and Industrial Services (IS), providing industrial installation and maintenance services.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020, restated |
|---|---|---|
| Revenue | $8.84 million | $12.22 million |
| Gross profit / margin | $4.01 million / 45% | $5.35 million / 44% |
| Operating income (loss) | ($2.05 million) | $397,490 |
| Net income (loss), consolidated | ($1.73 million) | $139,293 |
| Net income (loss) attributable to Cemtrex shareholders | ($1.69 million) | ($55,618) |
| Basic and diluted loss per share | ($0.09) | ($0.01) |
| Cash used in operating activities | $135,129 | $1.05 million |
Revenue fell 28%. AT revenue declined 35% to $4.67 million, while IS revenue declined 17% to $4.16 million. Gross profit dollars decreased with sales, although gross margin improved by one percentage point. General and administrative expense rose 18% to $5.42 million, and research and development expense increased to $634,225. Other income, net, was $342,047, versus net other expense of $258,197 in the prior-year quarter.
Liquidity, cash flow and debt
- At December 31, 2020, current assets were $33.28 million and current liabilities $12.87 million; reported working capital was $20.40 million. Cash and equivalents were $15.87 million, with restricted cash of $1.80 million.
- Cash, cash equivalents and restricted cash declined $3.38 million during the quarter. Investing activities used $1.62 million, including $900,000 invested in Virtual Driver Interactive (VDI) and $500,000 in MasterpieceVR. Financing activities used $1.63 million, primarily for debt repayments.
- Total liabilities were $28.61 million. Reported long-term balances included $1.60 million of bank loans, $5.33 million of notes payable, $2.33 million of mortgage payable and $2.76 million of PPP loans. The balance sheet also reports $6.31 million of short-term liabilities; the filing text does not provide a clear breakdown of that line item.
- The company reported no balance outstanding on its $3.5 million Fulton Bank line of credit and stated it was compliant with applicable bank-loan covenants at quarter-end.
Material changes, outlook and risks
- Management attributed lower sales to COVID-19-related shutdowns and operating limitations. It reported bookings in both segments were affected by more than 20%, delays to orders and product launches, and component shortages that could increase costs and pressure margins. The future financial impact remained uncertain.
- Management said available cash and operating cash generation were expected to cover current operations through fiscal 2021, but noted that sales growth—particularly from new products—could require substantial capital and that future cash flow or external financing may not meet expansion and working-capital needs.
- On October 26, 2020, Cemtrex acquired VDI for $1.34 million: $900,000 cash and a $439,774 note bearing 5% interest. The company also invested $500,000 in MasterpieceVR through a SAFE.
- Subsequent to quarter-end, Cemtrex reached a February 26, 2021 settlement with former executive Aron Govil relating to approximately $7.1 million of disputed historical transfers and unsupported accounting. The settlement provides for $7.1 million of total consideration, including surrendered company securities valued for the agreement at $5.57 million and a secured promissory note for the balance, bearing 9% interest. The company expected to recognize a one-time $7.1 million gain in a later reporting period; it was not included in this quarter’s results.
- The company restated prior-period figures after identifying unsupported advertising expense and intangible-asset and R&D entries, as well as an incorrect accounting treatment for Series 1 preferred dividends. Management said it considered the adjustments immaterial to the years originally reported and that prior reports remained reliable; the filing describes the investigation and restatement adjustments.
- Management identified 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. It said it was seeking additional accounting personnel and working to remediate the weakness.
- Other subsequent events included additional PPP funding and forgiveness of $3.16 million of first-round PPP loans, and a January 2021 CFO change. The filing lists no legal proceedings.
Important facts for investors to verify
- Review the restatement disclosures and the underlying accounting issues, including the status and collectability of the Govil settlement note and the fair value of surrendered securities.
- Track whether the reported internal-control material weakness is remediated and whether subsequent filings describe effective controls.
- Assess cash generation, the composition and terms of short-term liabilities, debt maturities, PPP loan forgiveness and continued covenant compliance.
- Monitor COVID-19 effects on bookings, customer orders, supply availability, product-launch timing and gross margins across both segments.
- Consider dilution and preferred-stock obligations: common shares outstanding increased during the quarter, and Series 1 preferred dividends were paid in additional preferred shares.