Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2019 (the first quarter of fiscal 2020). The filing was signed February 19, 2020. Cemtrex operates Advanced Technologies (AT), including Vicon security products, and Industrial Services (IS). Following fiscal 2019 exits from Electronics Manufacturing and environmental products, those businesses are presented as discontinued operations.
Financial results
| Metric | Q1 FY2020 | Comparable 2018 period |
|---|---|---|
| Revenue | $12.22 million | $5.72 million |
| Gross profit / margin | $5.35 million / 44% | $2.19 million / 38% |
| Operating income (loss) | $119,000 | ($1.53 million) |
| Loss from continuing operations | ($139,000) | ($2.00 million) |
| Net loss attributable to Cemtrex shareholders, after preferred dividends | ($1.39 million) | ($3.13 million) |
| Operating cash flow | ($841,000) | $1.23 million from continuing operations |
- Revenue increased 114%. AT revenue was $7.23 million, largely reflecting consolidation of Vicon; IS revenue declined 5% to $4.99 million, which management attributed primarily to timing and revenue recognition.
- Gross margin improved to 44% from 38%. Management cited a shift toward higher-margin products and cost-saving measures. General and administrative expense rose 46% to $4.85 million, primarily due to Vicon consolidation, but declined as a share of revenue to 40% from 58%. Research and development expense was approximately $377,000.
- Interest expense was $483,000. Other income included a one-time gain from settlement of certain accounts payable. Foreign-currency translation contributed $583,000 of other comprehensive income; comprehensive loss was $829,000.
- Cash and equivalents were $3.96 million and restricted cash was $1.23 million at December 31. Working capital was $3.50 million, compared with $3.24 million at September 30, 2019. Cash increased by $1.77 million during the quarter, supported by $2.78 million of financing cash flow, despite cash use in operations and investing.
- Current liabilities totaled $18.28 million; total liabilities were $25.69 million. Short-term liabilities were $9.60 million, including $5.43 million remaining on a Vicon term loan due March 30, 2020. Long-term bank loans were $2.01 million and long-term notes payable were $3.08 million. Two new notes issued in October and December had $1.725 million face value each, 8% interest, and 2021 maturities; each generated $1.495 million cash after discounts and fees.
Changes, outlook, and risks
- Comparisons reflect a changed business mix: Vicon’s consolidation materially increased AT revenue, while the exited businesses are excluded from continuing operations. Prior-year discontinued operations included $11.57 million of sales and $4.58 million of operating cash flow, so total-business comparisons require care.
- Management said cash on hand and cash generated by operations should meet current operating needs for fiscal 2020, but cautioned that growth, particularly in new products, may require substantial capital and that funding may not be sufficient for expansion and working-capital needs. No specific revenue or earnings guidance was provided.
- Subsequent events: in January 2020, Cemtrex raised approximately $705,000 net from a common-stock offering; its subsidiary bought two buildings for $3.38 million, using $905,000 cash and a $2.48 million mortgage; and the company repurchased 129,223 Series 1 preferred shares for about $143,000, intending to retire them.
- The company disclosed a material weakness in internal control over financial reporting due to insufficient accounting personnel and a lack of entity-level review controls over period-end reporting, accounting policies, and public disclosures. Management said it was seeking to add accounting personnel and improve controls.
- Risks identified include economic and competitive conditions, supplier or manufacturing problems, and the ability to maintain sufficient credit. The filing refers investors to the 2019 Form 10-K for additional risk factors. No legal proceedings were reported.
- Corporate governance and dilution merit attention: 100,000 Series C preferred shares were issued to the CFO and carry voting rights tied to common shares outstanding; common shares outstanding increased during the quarter. Series 1 preferred dividends of $1.06 million were paid in preferred shares rather than cash.
Key facts for investors to verify
- Whether the revenue and margin gains persist after separating Vicon consolidation effects from organic performance, and whether IS revenue stabilizes.
- How the company will repay or refinance the $5.43 million Vicon loan maturing in March 2020 and fund ongoing operations, debt service, and property-related costs.
- Whether operating cash flow improves and whether the stated fiscal 2020 liquidity outlook remains achievable, given quarterly operating cash use and reliance on financing.
- Progress in remediating the material weakness, including added accounting staff and evidence of effective review controls.
- The terms and impact of preferred securities, equity issuances, and Series C voting rights on dilution, governance, and common shareholders.