Business Context and Reporting Period
Company: Cemtrex, Inc. (Delaware corporation)
Reporting Period: Nine months ended June 30, 2011 (Unaudited)
Business Overview: Cemtrex designs, engineers, and sells emission monitoring instruments and environmental control equipment to industries such as power, chemical, cement, and petrochemical. The company operates through wholly-owned subsidiaries Griffin Filters, LLC (air filtration) and Cemtrex India Pvt. Ltd. It also markets the "Green DCV" energy efficiency product line.
Key Financial Metrics
| Metric | Nine Months Ended June 30, 2011 | Nine Months Ended June 30, 2010 |
|---|---|---|
| Revenues | $11,077,595 | $2,559,972 |
| Gross Profit | $2,035,398 | $1,377,945 |
| Gross Margin | 18.4% | 53.8% |
| Operating Expenses | $1,171,489 | $1,671,969 |
| Net Income (Loss) | $813,553 | $(306,087) |
| Net Cash Used in Operating Activities | $(262,259) | $(703,854) |
| Cash and Equivalents (End of Period) | $53,343 | $0 |
| Total Assets | $1,780,007 | $1,231,255 |
| Total Liabilities | $1,882,850 | $2,147,651 |
| Stockholders' Equity (Deficit) | $(102,843) | $(916,396) |
Debt and Liquidity: The company holds a $250,000 bank line of credit and $1,068,892 in notes payable to shareholders. Working capital improved to $916,758 from $188,465 in the prior fiscal year-end.
Material Changes vs. Prior Period
- Revenue Surge: Revenues increased by 332% ($8.5 million) compared to the prior nine-month period. Management attributes this primarily to large contracts executed by the Griffin Filters subsidiary.
- Margin Compression: Despite revenue growth, the gross margin declined significantly from 53.8% to 18.4%. Management cites lower profit margins on large contract jobs and a shift in product mix toward lower-margin items.
- Profitability Turnaround: The company reported a net profit of $813,553, reversing a net loss of $306,087 in the same period last year. This was driven by higher sales volume and a 29% reduction in operating expenses, largely due to the cessation of marketing expenses for the Green DCV and MCDR product lines.
- Balance Sheet Strength: Total liabilities decreased by approximately $265,000, while the accumulated deficit improved significantly, reducing the stockholders' deficit from $(916,396) to $(102,843).
Outlook, Risks, and Contingencies
- Going Concern: The filing includes a "Going Concern" note. Despite the recent profitability, the company has an accumulated deficit of $210,172. Management states that the ability to continue as a going concern is dependent on raising additional capital and maintaining profitable operations.
- Outlook: Management expresses uncertainty regarding the domestic climate and US environmental regulatory outlook. However, they anticipate increasing public awareness of air quality issues may drive demand for mercury monitors, opacity monitors, and air filtration products.
- Legal Proceedings: A demand for arbitration filed by Sindicatum Carbon Technology Limited in 2009 was settled in December 2010 without monetary payment. The company had previously charged off $488,237 related to this contract as a bad debt.
- Capital Constraints: The company lacks a bank credit line to back bid or performance bonds, limiting its ability to bid on certain large government contracts. It relies on progress payments with retention provisions instead.
Investor Verification Checklist
- Sustainability of Margins: Verify if the 18.4% gross margin is sustainable or if it is an anomaly caused by specific low-margin contracts.
- Cash Flow vs. Net Income: Investigate why the company reported a net profit of $813k but still used $262k in cash from operations (primarily due to a $601k increase in accounts receivable).
- Accounts Receivable Quality: Review the aging of the $1.33 million in accounts receivable, which increased 82% year-over-year, to assess collection risks.
- Related Party Debt: Confirm the terms and repayment schedule of the $1.07 million in notes payable to shareholders.
- Regulatory Dependence: Assess the risk exposure to changes in EPA regulations, which drive the primary demand for the company's products.