Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2021. The filing was signed June 23, 2021. Cemtrex operates in Advanced Technologies (including Vicon security systems and virtual-reality products) and Industrial Services.
Financial results and liquidity
| Metric | Three months ended March 31, 2021 | Prior-year quarter | Six months ended March 31, 2021 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $9.26 million | $12.11 million | $18.10 million | $24.33 million |
| Gross profit / margin | $3.93 million / 42% | $5.35 million / 44% | $7.93 million / 44% | $10.69 million / 44% |
| Operating income (loss) | $(1.96) million | $(0.52) million | $(4.01) million | $(0.12) million |
| Net income (loss), consolidated | $2.44 million | $(1.61) million | $0.71 million | $(1.47) million |
| Net income (loss) attributable to Cemtrex shareholders | $2.45 million | $(1.60) million | $0.76 million | $(1.65) million |
| Operating cash flow | Not separately presented for the quarter | $(2.86) million | $(1.37) million |
- Quarterly revenue fell 24%; Advanced Technologies revenue declined 11% and Industrial Services revenue declined 36%. For the six-month period, revenue fell 26%, with declines of 24% and 27% in those segments, respectively.
- Operating losses widened despite lower quarterly G&A expense, as revenue and gross profit declined. Six-month G&A increased 6% to $10.67 million and R&D increased to $1.28 million from $0.78 million.
- Reported net income benefited materially from non-operating items: the quarter included a $3.67 million related-party settlement gain, $736,899 of employee retention credits, and marketable-securities gains. Six-month marketable-securities gains were approximately $1.87 million. Thus reported profit did not reflect operating profitability.
- At March 31, cash and equivalents were $15.57 million; restricted cash was $1.71 million. Working capital was $19.96 million, down from $23.29 million at September 30, 2020. Current assets were $33.88 million and current liabilities $13.92 million.
- Cash, cash equivalents and restricted cash declined $3.72 million in the six months. Investing activities used $0.11 million and financing activities used $0.75 million.
- Reported debt-related balances included $1.32 million in bank loans, $3.15 million in notes payable, $2.31 million in mortgage payable and $5.41 million in PPP loans, in addition to lease liabilities and current short-term liabilities. The filing does not provide a clear breakdown of the $6.60 million “short-term liabilities” line.
Material changes and unusual items
- The company restated prior-period financial statements after identifying unsupported transactions and expenses associated with transfers involving First Commercial, a company owned by former executive and controlling shareholder Aron Govil. The company cited approximately $7.1 million of disputed transfers from fiscal 2017–2018, including unsupported advertising expense and unsubstantiated intangible assets and R&D expense. Cemtrex said it found no other such transfers in its review and concluded the adjustments were not material to the years originally reported; it stated prior reports could be relied upon.
- Under a February 2021 settlement, Govil surrendered preferred shares and options, valued by the company at $3.67 million, which Cemtrex recognized as income. He also issued a secured $1.53 million note bearing 9% interest and due in two years. Cemtrex stated it would not recognize the note-related gain until the note is paid.
- Common shares outstanding increased to 18,711,463 at March 31 from 17,622,539 at September 30. During the six months, 1,088,654 common shares were issued in connection with notes payable and related amounts. Series 1 preferred dividends are payable in additional preferred shares; 90,147 shares were issued after quarter-end.
- Cemtrex acquired Virtual Driver Interactive in October 2020 for $1.34 million plus contingent consideration and invested $500,000 in MasterpieceVR through a SAFE.
- The filing’s six-month financial statements report $711,100 consolidated net income and $761,521 attributable to Cemtrex shareholders; MD&A describes $711,100 as attributable to shareholders. This presentation is inconsistent within the filing.
Outlook, risks and controls
- Management attributed weaker sales and operating results to COVID-19-related customer shutdowns and limited operations. It also cited delayed orders and product development, supply-chain delays, and rising prices for components that could pressure margins. The future effects remained uncertain.
- Management said cash on hand and operating cash flow should be sufficient for current operations during fiscal 2021, but cautioned that sales growth or expansion may require substantial capital and that available cash flow and external financing may not meet future needs. No numerical revenue or earnings guidance was provided.
- Management reported a material weakness in internal control over financial reporting due to insufficient accounting personnel and inadequate entity-level review of period-end reporting, accounting policies and disclosures. It said it was seeking additional accounting personnel and that the board prioritized remediation.
- The company reported $1.50 million in related-party receivables from Ducon Technologies, including $500,000 overdue from the Griffin Filters sale, and said it was negotiating a payment agreement.
- The $3.5 million Fulton Bank line of credit had no balance outstanding at quarter-end. Cemtrex reported compliance with stated bank loan covenants as of March 31. It also disclosed subsequent PPP loan forgiveness of $3.16 million and $0.19 million, and a further $0.97 million PPP loan received in April 2021.
- The filing reported no legal proceedings. It directs readers to the 2020 Form 10-K for risk factors.
Important facts for investors to verify
- Whether operating performance and cash generation improve absent settlement, securities gains and employee retention credits.
- The status and collectability of Govil’s secured $1.53 million note and the related-party receivable from Ducon.
- Remediation of the material weakness, and whether later filings identify additional control or restatement issues.
- PPP loan forgiveness, remaining loan balances, and the complete maturity and composition of short-term liabilities.
- The effects of COVID-19, supply-chain constraints and component-cost increases on bookings, product launches and gross margins.
- The inconsistent six-month net-income attribution figures and the restated comparative financial statements.