Cemtrex, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013; comparative period is the year ended September 30, 2012. The October 31, 2013 acquisition of ROB Group occurred after the reporting period and is not reflected in the year-end financial statements.
Business context
Cemtrex provides electronics manufacturing services, industrial emissions monitoring and process instruments, and industrial air-filtration and environmental-control systems. Its principal businesses at year-end included the Monitoring Instruments and Products division and Griffin Filters. The company completed its acquisition of Germany-based ROB Group after year-end, adding electronics design, manufacturing, assembly and cabling operations in Germany and Romania.
Financial performance and position
| Metric | FY2013 / Sep. 30, 2013 | FY2012 / Sep. 30, 2012 |
|---|---|---|
| Revenue | $13.674 million | $12.162 million |
| Gross profit / margin | $1.145 million / 8.37% | $1.376 million / 11.31% |
| Operating income | $346,847 | $692,756 |
| Net income | $288,497 | $648,199 |
| Diluted EPS | $0.01 | $0.02 |
| Cash from operating activities | Used $622,958 | Provided $941,396 |
| Cash and cash equivalents | $66,963 | $333,045 |
| Working capital | $1,870,968 | $1,212,407 |
| Total assets | $2,873,776 | $1,678,374 |
| Total liabilities | $1,742,594 | $835,689 |
| Stockholders’ equity | $1,131,182 | $842,685 |
Revenue increased 12.4%, which management attributed to higher bookings, project execution and market demand. Gross profit fell 16.8% as the company completed lower-margin projects; operating expenses rose 16.8% to $798,135. Net income declined 55.5%. The filing reports $45,850 of interest expense for FY2013.
At year-end, current assets were $2.506 million and current liabilities were $635,110. Long-term notes payable to a related party were $1.107 million; the note accrues interest at 5%, is unsecured and has no stated due date. Operating cash use, coupled with a large increase in related-party receivables, reduced cash despite higher working capital.
Material changes, outlook and risks
- Related-party concentration: Sales to Ducon Technologies, controlled by Chairman Arun Govil, were $10.800 million, or 78.9% of FY2013 revenue, compared with $7.260 million, or 62.7%, in FY2012. Amounts due from Ducon were $1.206 million at year-end; the company also reported $432,131 of related-party prepaid inventory deposits.
- Post-year-end acquisition: ROB Group was acquired October 31, 2013 for €4.2 million (reported as approximately $5.609 million), plus €495,000 (approximately $661,073) of acquisition expenses. Disclosed financing included a €2.011 million loan from Ducon, a €3 million Sparkasse Bank loan at 4.95% due October 30, 2021, and a €1 million Sparkasse overdraft facility at 4.0% due October 30, 2015. These transactions are subsequent to the reported balance sheet.
- Funding outlook: Management said existing cash and operating cash generation might be sufficient for FY2014, but gave no quantified forecast. It warned that higher sales or a large contract could require substantial additional capital. The filing also cautions that credit arrangements may not be renewed and future financing may not be available on acceptable terms.
- Business and market risks: Risks include lower customer demand, volatile project margins, limited production forecasts from electronics customers, competition from larger businesses, changing environmental rules, product obsolescence, and dependence on qualified personnel and financing. The company carries no product-liability insurance.
- Other disclosures: The company reported no legal proceedings. Management judged disclosure controls effective, but the auditor did not express an opinion on internal control over financial reporting. No cash dividends were anticipated.
Most important facts for investors to verify
- Terms, balances, collectability and arm’s-length basis of Ducon-related sales, receivables, prepaid amounts and loans; Ducon is controlled by the Chairman and represents nearly four-fifths of reported revenue.
- ROB acquisition closing statements, purchase accounting, actual borrowing and overdraft usage, repayment requirements, and the acquired group’s post-close performance and integration costs.
- Whether operating cash flow can recover, particularly given the $851,586 increase in related-party receivables and the decline in cash to $66,963.
- Whether project mix and gross margins improve after the FY2013 decline, and whether the company can fund growth without unfavorable financing or dilution.
- Governance and voting control: the Chairman and CEO together were reported to beneficially control about 70% of voting equity; the Chairman’s Series A preferred shares carry substantial voting power. The board had no standing audit committee or audit committee financial expert.