Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2013; unaudited. Cemtrex designs and sells emissions-monitoring equipment and environmental controls, and provides air-filtration systems through Griffin Filters, LLC.
Financial performance
| Metric | Three months ended Mar. 31, 2013 | Three months ended Mar. 31, 2012 | Six months ended Mar. 31, 2013 | Six months ended Mar. 31, 2012 |
|---|---|---|---|---|
| Revenue | $3,620,176 | $1,672,556 | $5,806,508 | $3,693,472 |
| Gross profit | $380,612 | $569,844 | $887,644 | $1,187,123 |
| Gross margin | 10.5% | 34.1% | 15.3% | 32.1% |
| Operating income | $94,083 | $284,100 | $339,063 | $582,761 |
| Net income | $56,428 | $169,471 | $223,342 | $359,033 |
- Quarterly revenue rose 116.4%, while gross profit and net income declined. Management attributed the revenue increase to a large Griffin Filters project, which had a lower margin.
- Six-month revenue increased 57.2%, but gross margin fell to 15.3% from 32.1%; net income declined 37.8%. Management cited lower-margin jobs and a less favorable product mix.
- General and administrative expense was $286,529 for the quarter, nearly unchanged year over year, and $548,581 for six months, down 9.2%.
Cash flow, financial position, and liquidity
- Six-month cash flow from operations was a use of $577,572; investing activities used $67,294; financing activities provided $387,958. Cash declined $256,908, from $333,045 at September 30, 2012 to $76,137 at March 31, 2013.
- At March 31, 2013, current assets were $2,172,375 and current liabilities were $356,391, yielding reported working capital of $1,815,984. Total assets were $2,340,834; total liabilities were $1,220,807; stockholders’ equity was $1,120,027.
- Current assets included $1,315,618 due from related parties and $340,000 in prepaid supplies. These balances are significant relative to cash and reported liquidity.
- Notes payable to the former CEO were $864,416, up from $476,458 at September 30, 2012. The unsecured notes accrue interest at 5% and have no stated due date. No line-of-credit balance was reported.
- The company invested $149,339 in Pluto Technologies, Inc., up from $80,000; Cemtrex’s CEO is also Pluto’s CEO.
Concentration, outlook, and risks
- Related-party sales to Ducon Technologies were $4,859,332 for the six months, compared with total company revenue of $5,806,508. The filing reports India sales at the same amount. Ducon receivables were reported at $1,300,832 at quarter-end.
- Management said cash and operating cash generation should cover current fiscal 2013 needs, but major sales increases could require additional cash. It described the outlook for its products as fairly strong and cited expected demand related to emissions rules and energy efficiency.
- A planned Green DCV installation agreement in India was still in preliminary planning; no revenue had been recognized. Management also discussed pursuing acquisitions and investments. The filing provides no quantified earnings or revenue guidance.
- Risks include dependence on environmental regulation and enforcement, strong competition from larger companies, uncertain market data, product obsolescence, and the need for working capital. Cemtrex said it lacked a bank credit line to support bid or performance bonds and did not carry product-liability insurance.
- The company reported no current lawsuits or material contingencies. Management concluded disclosure controls were effective; it noted increased controls over recording common-stock sales.
Items investors should verify
- Reconcile the MD&A with the financial statements: MD&A describes quarterly “net profit” of $83,528, which matches pretax income; the statements report after-tax net income of $56,428.
- Reconcile cash-flow descriptions: the statements show operating cash use of $577,572 and investing cash use of $67,294, while the MD&A describes operating cash as provided and investing cash as generated. The MD&A also characterizes financing as repayment of shareholder loans, whereas the cash-flow statement reports $387,958 of net notes from a related party.
- Assess collectability and settlement terms for the substantial Ducon related-party receivable and prepaid-supply balances, and review the concentration of sales with Ducon.
- Review the terms, expected repayment, and governance around the former CEO’s unsecured, no-maturity note and the investment in CEO-affiliated Pluto Technologies.
- Evaluate cash needs if sales expand, given low cash, operating cash outflow, and the company’s stated constraints on bonding and access to additional capital.