Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. The filing was signed May 20, 2019. Cemtrex operates in Advanced Technologies, Electronics Manufacturing, and Industrial Technology; the statements also consolidate Vicon Industries as a variable interest entity despite Cemtrex holding approximately 46% of its shares.
Financial performance and liquidity
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 |
|---|---|---|
| Revenue | $23.61 million | $40.89 million |
| Gross profit / margin | $9.45 million / 40% | $16.44 million / 40% |
| Operating income (loss) | $(2.97) million | $(4.60) million |
| Net income (loss) available to common shareholders | $(1.98) million | $(5.12) million |
| Basic and diluted loss per share | $(0.14) | $(0.38) |
| Operating cash flow | Not presented for the quarter | $0.57 million |
At March 31, cash and equivalents were $1.71 million and restricted cash was $1.23 million. Working capital was $6.86 million, down from $10.01 million at September 30, 2018. Current assets were $40.47 million and current liabilities were $33.61 million. Total liabilities were $44.41 million. Cash-flow statement cash at period-end was $2.94 million, including restricted cash.
Six-month investing cash use was $0.87 million and financing cash use was $0.44 million. The company reported $1.36 million of positive foreign-exchange effects on cash. Cash paid for interest was $0.61 million. Specific debt balances disclosed include a $5.35 million Vicon term loan, a $3.44 million secured Deutsche Bank loan, and $2.03 million drawn on revolving lines; the filing does not provide a single clear total for all borrowings.
Changes versus prior comparable periods
- Second-quarter revenue increased 16% from $20.41 million. Advanced Technologies contributed $6.93 million, including $0.64 million of SmartDesk sales; Electronics Manufacturing rose 2% to $11.10 million, while Industrial Technology fell 42% to $5.58 million.
- Second-quarter gross margin was reported at 40%, versus 36% a year earlier. Higher operating expenses and interest costs contributed to a quarterly loss, compared with prior-year net income of $0.42 million.
- Six-month revenue declined 23% from $52.80 million. Electronics Manufacturing revenue fell 29% and Industrial Technology revenue fell 47%; Advanced Technologies contributed $7.40 million, with no comparable prior-year segment revenue.
- Six-month operating cash flow decreased to $0.57 million from $6.75 million. The company attributed the decline mainly to inventory and other asset investment.
Outlook, risks, and notable items
- Management stated that cash on hand and cash generated from operations should meet capital needs for fiscal 2019, but warned that higher sales, particularly of new products, may require substantial investment and that insufficient capital could constrain growth.
- Management cited SmartDesk and virtual/augmented-reality sales and marketing, research and development, Vicon consolidation, weaker environmental-product demand, competition, manufacturing or supplier problems, and access to credit as relevant risks. No quantified revenue or earnings guidance was provided.
- On March 22, 2019, Cemtrex issued $500,000 gross proceeds of Series B preferred financing; net proceeds were $475,000. The preferred shares carry a 7.5% annual dividend, with the rate increasing upon specified trigger or default events, and mature after one year. The filing also describes common-stock and warrant issuance.
- Subsequent to quarter-end, the company reported issuing 811,166 common shares to settle $275,000 of notes and 1,384,485 shares to convert 700 Series B preferred shares. Common shares outstanding were 16,737,009 as of May 13, 2019, compared with 14,487,284 at March 31.
- Management identified a material weakness in internal control over financial reporting, citing insufficient qualified accounting personnel and inadequate entity-level review of period-end reporting, accounting policies, and disclosures. It said it was seeking additional qualified personnel.
- Two securities-related matters were reported settled for a combined $725,000, subject to final court approval; the filing says the settlements are to be paid by the company’s insurer.
Important facts for investors to verify
- Reconcile the filing’s six-month revenue figures: the financial statements report $40.892 million, while MD&A gives $40.894 million in one passage.
- Check the conflicting prior-year second-quarter gross-profit amounts: the income statement and MD&A report $7.383 million, while the segment table reports $7.844 million.
- Review the debt maturities, borrowing availability, and financing terms, including the Series B conversion and dilution provisions and the substantial post-quarter share issuances.
- Assess cash conversion and working-capital exposure, particularly the increase in inventory to $17.57 million and accounts receivable to $15.60 million.
- Monitor remediation of the disclosed material weakness and the final court approval and insurance coverage for the litigation settlements.