Cemtrex, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Cemtrex reported for the fiscal year ended September 30, 2022, compared with FY2021. Its two segments are Advanced Technologies (AT), including video security, workplace products, VR/AR, driver-training simulation and software services, and Industrial Services (IS), which provides industrial installation, maintenance and related services.
Financial performance and liquidity
| Metric | FY2022 | FY2021 | Change / context |
|---|---|---|---|
| Revenue | $50.27 million | $43.13 million | Up 17% |
| AT revenue | $29.07 million | $24.15 million | Up 20%, primarily increased Vicon security demand |
| IS revenue | $21.21 million | $18.98 million | Up 12% |
| Gross profit / margin | $19.06 million / 38% | $16.97 million / 39% | Higher product and transportation costs pressured margin |
| Operating loss | $16.87 million | $8.74 million | Widened; included $3.32 million goodwill impairment |
| Net loss | $13.29 million | $7.89 million | Loss increased 69%; attributable loss to Cemtrex shareholders was $13.02 million |
| Cash used in operating activities | $16.09 million | $10.05 million | Use of cash increased |
| Cash, cash equivalents and restricted cash | $12.19 million | $17.19 million | Down $5.00 million year over year |
| Total debt | $20.57 million | $17.3 million, approximately | Approximately $18.20 million due within one year |
| Working capital | $4.75 million | $15.09 million | Down materially; the filing also gives a different FY2022 figure of $4.69 million in its going-concern note |
Operating expenses increased: general and administrative expense rose 23% to $27.76 million, and research and development increased to $4.85 million. Management cited higher personnel, travel, depreciation and amortization, legal and accounting costs, and a $708,512 write-off of related-party receivables. The company reported $3.90 million of interest expense. FY2022 other income included $8.40 million of realized gains on marketable securities and $971,500 of PPP loan forgiveness; the company also recorded the $2.20 million SEC penalty as an expense.
Investing activities provided $6.61 million, mainly reflecting purchases and sales of marketable securities; financing activities provided $5.02 million, primarily from note proceeds net of debt payments. Inventory rose 68% to $9.53 million as the company built security-product stock to address supply-chain delays. Current liabilities increased, largely due to debt maturities. The filing says the company does not have adequate cash for its short- or long-term needs.
Material changes, outlook and significant risks
- Going concern: Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, significant short-term obligations and working capital. Management described plans including cost and portfolio changes, pricing adjustments, equity financing and settling some debt with shares, but said there is no guarantee the plans will succeed. The auditor’s financial-statement opinion was unmodified and included a going-concern emphasis.
- Debt and dilution: Notes payable and other debt create substantial near-term refinancing and repayment needs. Cemtrex issued 5.48 million common shares during FY2022 to satisfy $4.69 million of notes payable and accumulated interest. Further equity financing or debt-for-equity exchanges could dilute shareholders.
- SEC settlement: On September 30, 2022, the SEC issued a cease-and-desist order concerning securities-law violations by the company and CEO Saagar Govil; the findings were neither admitted nor denied. The company paid a $2.20 million penalty and Govil paid $350,000. The order also imposes continuing requirements on public announcements of partnerships and customers.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at year-end, citing insufficient qualified accounting personnel, inadequate review controls, and untimely account reconciliations and asset-recoverability assessments. It engaged a third-party accounting firm and updated accounting software, but had not fully tested the remediation measures.
- Subsequent sale to CEO: On November 22, 2022, the company sold Cemtrex Advanced Technologies, Inc. and Cemtrex XR, Inc., including SmartDesk, Cemtrex XR, VDI, Bravo Strong and good tech, to Saagar Govil. Consideration includes cash, revenue royalties, a minimum royalty payment for one business, and a $1.60 million SAFE for the other. Govil abstained from the board vote. Verify the transaction’s valuation, terms, governance process and effect on future revenue and results.
- Operating risks: The company cited lingering supply-chain delays, inflation and wage pressure, product-development delays, competitive pricing, cyclical customer demand and dependence on skilled personnel. COVID-related bookings and revenue had largely recovered, but future impacts remained uncertain. Management provided no quantified financial guidance.
- Other balance-sheet and governance risks: Goodwill impairment was $3.32 million, with $4.51 million of goodwill remaining. The filing describes prior-period accounting inaccuracies associated with disputed related-party transfers and a related settlement. Govil controls the company’s voting power through common and preferred shares, and the company identifies itself as a Nasdaq controlled company.
Key facts investors should verify
- Reconcile the FY2022 working-capital figures of $4.75 million and $4.69 million reported in different sections of the filing.
- Review the detailed maturity, interest, collateral and refinancing terms for the approximately $18.20 million of obligations due within one year.
- Assess whether operating cash use can be reduced and whether planned financing or debt settlements can be completed without material dilution.
- Examine the CEO-related subsidiary sale agreements, including the royalties, SAFE terms, valuation and post-sale financial impact.
- Track testing and remediation of the disclosed internal-control material weaknesses, and compliance with the SEC order.
- Review the financial-statement notes for the goodwill impairment assumptions, inventory valuation and marketable-securities gains.