Cemtrex, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the three months ended December 31, 2018. Comparisons are with the three months ended December 31, 2017, unless otherwise noted. The filing is unaudited.
Business context
Cemtrex operates Advanced Technologies (AT), Electronics Manufacturing (EM), and Industrial Technology (IT). AT is developing products including SmartDesk and virtual- and augmented-reality applications. EM provides electronics manufacturing services; IT provides industrial services and environmental products. For the quarter, Vicon Industries was accounted for under the equity method; a subsequent-event note says Cemtrex would begin consolidating Vicon after a change to Vicon’s board in January 2019.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $17.28 million | $32.38 million |
| Gross profit / margin | $7.00 million / 40% | $10.52 million / 33% |
| Operating income (loss) | $(1.62) million | $0.87 million |
| Net income (loss) | $(2.18) million | $0.73 million |
| Net income (loss) available to common shareholders | $(3.13) million | $0.73 million |
| Basic and diluted EPS | $(0.24) | $0.07 |
| Operating cash flow | $5.80 million | $3.05 million |
| Cash and equivalents, plus restricted cash, at quarter-end | $2.18 million | Not stated here |
Gross margin improved despite the revenue decline; operating and net margins turned negative. Operating cash flow benefited from working-capital movements, including lower receivables and higher payables and accrued expenses. Investing activities used $0.55 million, while financing activities used $5.39 million, principally for debt and revolving-credit repayments. Cash declined by $0.14 million during the quarter.
At December 31, 2018, working capital was $8.23 million, versus $10.01 million at September 30, 2018; current assets were $30.90 million and current liabilities $22.67 million. Total liabilities were $32.44 million. Disclosed borrowings included $3.91 million of long-term bank loans, $3.46 million of long-term mortgage payable, and $0.31 million of long-term notes payable; current borrowings and other short-term liabilities are presented in several balance-sheet categories. Restricted cash of $1.36 million was held for an employee health-plan trust and is not freely available for general use.
Material changes versus the prior comparable period
- Revenue fell 47%, to $17.28 million. EM revenue declined 46% to $11.03 million, which management attributed to the loss of two customers. IT revenue declined 51% to $5.79 million, amid weaker environmental-product demand. AT contributed $0.47 million of revenue as a new segment.
- Net loss was $2.18 million, compared with net income of $0.73 million. Management cited lower EM and IT sales, increased SmartDesk and VR development and marketing costs, and a $0.34 million loss on the Vicon equity-method investment.
- R&D expense rose to $0.38 million from $0.15 million. G&A expense decreased 13% to $8.24 million, but increased to 48% of revenue from 29% because revenue contracted.
- Inventory increased 18% from September 30 to $13.36 million, which management attributed in part to SmartDesk production and in-house orders. Receivables decreased 17% to $11.58 million.
Outlook, risks and unusual items
- Management expected to begin fulfilling most SmartDesk orders in fiscal Q2 and cited pre-orders from large organizations. It also anticipated growth in AT, but provided no quantified guidance.
- Management said cash on hand and operating cash generation should meet fiscal 2019 operating needs, while warning that increased sales—particularly of new products—may require substantial capital and that additional funding is not assured.
- The company reported a material weakness in internal control over financial reporting due to insufficient qualified accounting personnel and inadequate entity-level review controls. Management said it was prioritizing remediation and seeking additional qualified personnel.
- Series 1 preferred dividends of $0.96 million were paid in additional preferred shares during the quarter. The preferred stock carries a cumulative 10% annual dividend and priority over common stock.
- A securities class-action settlement of $0.625 million and derivative-action settlement of $0.10 million were subject to final court approval; the company said its insurance carrier would pay the amounts.
- The filing cites persistent weakness in environmental-product orders and identifies business and economic conditions, competition, manufacturing or supplier problems, credit availability, and regulatory changes as risks.
Important facts for investors to verify
- Confirm the timing and accounting impact of Vicon consolidation. The filing describes equity-method accounting for the quarter and subsequent consolidation, but its subsequent-event note gives the board-change date as January 14, 2018; that date appears inconsistent with the stated subsequent-event timing.
- Review the composition, maturities, and terms of current and long-term borrowings, including revolving credit, secured loans, and notes.
- Assess SmartDesk order fulfillment, production costs, inventory conversion, and the capital required to support growth.
- Track remediation of the disclosed material weakness and any subsequent changes in disclosure controls.
- Reconcile the common-share count: the balance sheet reports 13,385,108 shares at December 31, 2018, while the cover reports 14,149,698 shares outstanding as of February 11, 2019. Also note subsequent equity issuance and the potential for dilution.
- Check the net-income comparison: the financial statements report prior-year net income of $731,991, while the MD&A text states $733,991.