Cemtrex, Inc. — Form 10-Q Summary
Business context and period. This unaudited filing covers the quarter and six months ended March 31, 2016 (Cemtrex’s fiscal Q2 and first half). Cemtrex operates electronics manufacturing services (EMS) and industrial products and services (IPS), including industrial services through Advanced Industrial Services (AIS), acquired December 15, 2015.
Financial performance
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Six months ended March 31, 2016 | Six months ended March 31, 2015 |
|---|---|---|---|---|
| Revenue | $18.91 million | $14.33 million | $32.22 million | $28.17 million |
| Gross profit | $5.83 million | $4.24 million | $9.71 million | $8.27 million |
| Gross margin | 30.8% | 29.6% | 30.1% | 29.3% |
| Operating income | $895,086 | $797,573 | $1.36 million | $1.20 million |
| Net income | $829,896 | $1.08 million | $1.52 million | $1.48 million |
| Basic earnings per share | $0.10 | $0.16 | $0.20 | $0.22 |
- Revenue and segment trends: Q2 revenue increased 32%; first-half revenue increased 14%. AIS acquisition contributed to IPS growth: IPS revenue rose 80% in Q2 and 43% in the first half. EMS revenue declined 16% in both periods; management attributed the decline to postponed execution of in-house orders.
- Profitability: Gross margin improved year over year, which management attributed to product and service mix. Q2 net income fell 23%, with higher operating expenses and lower other income contributing. Management cited one-time costs for planned but uncompleted acquisitions and corporate marketing. First-half net income rose about 3%.
- Cash flow: First-half operating activities provided $1.87 million, versus $1.93 million a year earlier. Investing activities used $7.50 million, primarily for AIS. Financing activities provided $7.43 million, mainly from bank borrowing. Cash and equivalents were $3.28 million at March 31, 2016; restricted cash was a further $883,538.
- Liquidity: Current assets were $22.57 million and current liabilities $15.39 million, yielding reported working capital of $7.19 million. Accounts receivable increased to $10.99 million from $4.77 million at September 30, 2015; management attributed the increase primarily to AIS.
- Debt and obligations: Total liabilities were $27.54 million. The balance sheet included a $3.52 million revolving line, $1.95 million of convertible notes, $7.19 million of long-term bank loans, $3.79 million mortgage payable, and other notes and current maturities. AIS acquisition financing included a $5.25 million seven-year bank term loan, an $800,000 working-capital facility (partly drawn at closing), and a $1.5 million seller note. The filing does not provide a single clearly stated total for all debt obligations.
Material changes, outlook, and risks
- AIS was acquired for $7.5 million, funded with $5.0 million cash, a $1.5 million seller note, and $1.0 million in Cemtrex shares. AIS had averaged approximately $23 million annual revenue and $2.4 million annual normalized EBITDA in 2013–2014, according to the filing. Purchase-price allocation remained subject to adjustment.
- Common shares outstanding increased from 7,158,087 at September 30, 2015 to 8,456,148 at March 31, 2016. The company reported issuing shares to satisfy convertible debt; the notes generally carried conversion prices at 75% of market price and had a 4 million-share reserve. These terms create potential dilution.
- Management expects growth and working-capital requirements may periodically exceed operating cash generation and anticipates needing external capital. It cautioned that capital may not be available on reasonable terms; equity financing could dilute shareholders, while debt could impose restrictive covenants and interest costs.
- No specific revenue or earnings guidance was provided. Management cited risks including economic and competitive conditions, pricing, manufacturing or supplier problems, credit availability, and changes in governmental standards applicable to environmental products.
- Subsequent events: on April 22, 2016, Cemtrex issued a $525,000 convertible note with 10% interest and a conversion price of 80% of market price after six months. An April 11 equity distribution agreement permits potential common-stock sales through Chardan, subject to effectiveness of the company’s shelf registration statement.
- The filing states disclosure controls were effective as of March 31, 2016 and reports no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify receivable aging and collections, given the sharp increase in accounts receivable and the corresponding use of operating cash.
- Track EMS order timing and whether the segment’s 16% revenue decline reverses.
- Assess AIS integration, contribution to results, and the final acquisition accounting and purchase-price allocation.
- Review convertible-note conversion activity, potential share dilution, and any sales under the Chardan equity distribution agreement.
- Reconcile inconsistencies in the filing: the six-month income statement reports net income of $1,522,291, while MD&A states $1,552,291 in one passage; the statement figure aligns with the stated $43,846 year-over-year increase. MD&A also gives a different prior-year six-month revenue figure in one passage than the financial statements.