Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2023; filed August 10, 2023. Cemtrex operates Security (Vicon), Industrial Services (AIS), and Corporate segments. The company sold its Cemtrex Advanced Technologies and Cemtrex XR subsidiaries in November 2022; those businesses are reported as discontinued operations.
Financial performance
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Revenue | $14.73 million, up 22% year over year | $42.77 million, up 29% |
| Gross profit / margin | $6.48 million / 44%, versus $5.04 million / 42% | $18.86 million / 44%, versus $12.03 million / 36% |
| Operating income (loss) | $53,774, versus a $1.53 million loss | $(1.49) million, versus $(7.72) million |
| Net loss | $(1.17) million, versus $(0.73) million | $(8.05) million, versus $(10.06) million |
| Net loss from continuing operations | $(1.19) million, versus $106,599 income | $(4.84) million, versus $(7.78) million |
| Cash from operating activities | Not presented for the quarter | $(2.92) million total; continuing operations used $5.39 million |
- For the quarter, Security revenue rose 36% to $9.02 million and Industrial Services revenue rose 5% to $5.71 million. For the nine months, revenue increased 46% in Security and 8% in Industrial Services.
- Management attributed stronger nine-month gross margin to Security price increases and lower transportation costs, and to lower subcontractor costs in Industrial Services. Quarterly Security gross margin declined to 49% from 51%, which management attributed to negotiated sales terms; Industrial Services margin improved to 36% from 30%.
- Nine-month interest expense was $3.72 million. Other expense was $3.32 million, compared with $0.30 million in the prior-year period, which included gains on marketable securities and PPP loan forgiveness. The nine-month discontinued-operations loss was $3.21 million, including a $2.46 million loss on the sale of the businesses.
Liquidity, debt and capital
- At June 30, cash and equivalents were $5.63 million and restricted cash was $0.81 million, or $6.43 million combined. Combined cash and restricted cash declined $4.94 million from September 30, 2022.
- Working capital was a deficit of $0.97 million, compared with positive working capital of $6.25 million at September 30, 2022. Current liabilities were $27.31 million.
- Total liabilities were $33.56 million. The debt schedule reported $20.90 million of lines of credit and secured liabilities, of which $17.19 million was current. The February 2022 note, reported at $10.49 million, had an August 23, 2023 maturity; the filing also describes amendments to other Streeterville notes.
- Nine-month cash used in investing activities was $0.74 million, mainly for property and equipment. Financing activities used $1.28 million, primarily for debt payments. The company issued common shares to pay notes, accrued interest, and for services, creating dilution.
Outlook, risks and notable events
- Going concern: Management states that losses, a working-capital deficit, and $17.19 million of current debt raise substantial doubt about the company’s ability to continue as a going concern. It says the company does not currently have adequate cash to meet short- or long-term needs. Plans include equity issuance, selling unprofitable brands, and improving Vicon margins; management says these may meet needs for at least 12 months but provides no assurance. Equity financing or settling debt with shares could dilute shareholders.
- Acquisition: On July 1, 2023, Cemtrex acquired Heisey Mechanical for approximately $2.40 million, funded in part with a $2.16 million Fulton Bank term loan. A later $1.50 million real-estate purchase was expected.
- Nasdaq: The common stock regained minimum-bid-price compliance in February 2023. Nasdaq subsequently notified Cemtrex that its Series 1 Preferred Stock had not regained compliance; the company requested a hearing that would stay suspension while the matter was considered.
- Related-party matters: The sold businesses were purchased by CEO Saagar Govil. Cemtrex reported $578,388 in receivables and $691,611 in royalties receivable from the sold businesses. A separate $1.53 million note from former CFO Aron Govil was extended to February 2024; the company says it has not recognized the related gain pending payment.
- Controls and risks: Management concluded disclosure controls were ineffective and identified a material weakness related to insufficient accounting personnel, period-end review, reconciliations, and asset recoverability assessments. It engaged a third-party consultant and updated accounting software, but had not had sufficient time to evaluate remediation. Management cites economic conditions, competition and pricing, supplier problems, and access to credit among forward-looking risks. No legal proceedings were reported.
Most important facts for investors to verify
- Whether the company can address the going-concern uncertainty, cash shortfall, and substantial current debt, including the August 2023 note maturity.
- Actual subsequent financing, debt repayments or amendments, and dilution from share issuance.
- Outcome of the Nasdaq hearing and continued listing status of Series 1 Preferred Stock.
- Collection of related-party receivables and royalties, and performance and financing terms of the Heisey acquisition.
- Progress in remediating the material weakness and improving financial reporting controls.