Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2020. The filing was signed May 14, 2020. Cemtrex operates Advanced Technologies (including Vicon security products) and Industrial Services; it had exited its electronics manufacturing and environmental products businesses in fiscal 2019.
Financial performance
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Revenue | $12.11 million, up 3% year over year | $24.33 million, up 40% |
| Gross profit / margin | $5.35 million / 44%, versus $4.81 million / 41% | $10.69 million / 44%, versus $6.99 million / 40% |
| Operating loss | $0.79 million, versus $2.75 million | $0.67 million, versus $4.17 million |
| Loss from continuing operations | $1.88 million, versus $2.09 million | $2.02 million, versus $3.97 million |
| Net loss attributable to Cemtrex shareholders | $2.90 million, including $1.03 million of preferred dividends | $4.29 million, including $2.09 million of preferred dividends |
| Basic and diluted loss per share from continuing operations | $0.46 | $0.81 |
- For the quarter, Advanced Technologies revenue declined 11% to $6.19 million, which management attributed mainly to COVID-19; Industrial Services revenue increased 24% to $5.93 million, primarily due to timing and revenue recognition.
- For the six months, Advanced Technologies revenue rose 81% to $13.41 million, mainly reflecting Vicon’s consolidation beginning in the prior-year second quarter. Industrial Services revenue rose 9% to $10.92 million.
- Quarterly G&A expense fell 19% to $5.73 million; six-month G&A increased 3% to $10.58 million, mainly reflecting Vicon consolidation. Research and development expense declined in both comparisons.
- Interest expense was $1.35 million for the quarter and $1.83 million for the six months, up from $0.52 million and $0.63 million, respectively. Six-month other expense also included the effects of financing costs.
Cash flow, liquidity and capital structure
- At March 31, 2020, cash and equivalents were $2.81 million and restricted cash was $1.25 million. Working capital was reported as $6.82 million, versus $3.24 million at September 30, 2019. Current assets were $20.17 million and current liabilities were $13.35 million.
- For the six months, the cash flow statement reports $0.92 million used in operating activities, $3.97 million used in investing activities, and $6.27 million provided by financing activities. Capital spending on property and equipment was $4.34 million.
- Total liabilities increased to $26.23 million from $22.43 million. Balance-sheet borrowings included $2.09 million of long-term bank loans, $5.09 million of long-term notes payable, $2.38 million of long-term mortgage payable, and $5.16 million of short-term liabilities. The filing also reports $1.05 million of lease liabilities and $1.03 million of Series 1 preferred dividends payable.
- Financing included $2.99 million of notes payable proceeds, $2.48 million of bank-loan proceeds, and $1.58 million from securities purchase agreements. The company issued common shares to satisfy debt and raised equity; common shares outstanding rose from 3.96 million at September 30, 2019 to 7.94 million at March 31, 2020, and were 9.81 million as of May 11, 2020.
- Management said existing cash and operating cash generation should meet current fiscal-year operating needs, but cautioned that growth may require substantial capital and that future cash flows or external financing may not meet expansion and working-capital needs.
Management commentary, risks and notable developments
- Management attributed improved gross margin to a strategic shift toward higher-margin products and reduced quarterly losses to prior-year reorganization and cost-saving measures. It cautioned that COVID-19’s effects were uncertain and could not be reliably estimated.
- After quarter-end, the company disclosed receipt of $3.47 million in Paycheck Protection Program loans in April and May 2020. The loans carry 1% interest, have a six-month payment deferral and two-year maturity; the company said it intended to meet requirements for forgiveness.
- On April 21, 2020, Nasdaq notified Cemtrex that its common stock had failed the $1.00 minimum bid-price requirement. The notice did not immediately affect listing; the company had until December 28, 2020, after the compliance period resumed July 1, to regain compliance.
- The March 2020 semiannual Series 1 preferred dividend was postponed for 90 days amid COVID-19 restrictions; the company intended to pay it in preferred shares. The dividend accrued as a liability.
- Management identified 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 public disclosures. The company said it was seeking additional accounting personnel.
- The company disclosed no legal proceedings in this filing. Its forward-looking statements cite business and economic conditions, competition, manufacturing or supplier issues, and access to sufficient credit as risks.
Important facts for investors to verify
- Reconcile cash-flow figures: the cash flow statement reports operating cash use of $0.92 million and investing cash use of $3.97 million, while MD&A cites $0.75 million and $4.13 million, respectively. The filing text does not explain these differences.
- Assess debt maturities, interest costs, covenant requirements, and the company’s ability to service obligations, including the new mortgage and notes. The filing says Vicon was in compliance with its NIL loan covenants at March 31, 2020.
- Track COVID-19 effects on Advanced Technologies sales, Industrial Services activity, customer collections and the company’s cash requirements; also verify PPP loan forgiveness and related obligations.
- Monitor Nasdaq bid-price compliance and the effect of further share issuance on existing holders. The filing reports substantial debt settlement and financing-related equity issuance, as well as post-quarter share issuances.
- Follow remediation of the disclosed material weakness and verify that financial reporting controls improve.
- Review the preferred dividend accrual and payment terms, including the impact of dividends on loss attributable to common shareholders.