Cemtrex, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, three months ended December 31, 2012. The filing was signed February 14, 2013. Cemtrex designs and sells emissions-monitoring equipment and, through Griffin Filters, air-filtration and environmental-control systems.
Financial performance
| Metric | Quarter ended Dec. 31, 2012 | Prior-year quarter |
|---|---|---|
| Revenue | $2,186,332 | $2,020,916 |
| Gross profit / margin | $507,032 / 23.2% | $617,279 / 30.5% |
| Operating expenses | $262,051 | $318,618 |
| Operating income | $244,981 | $298,661 |
| Income before tax | $235,515 | $283,297 |
| Income tax provision | $68,600 | $0 |
| Net income per statement of operations | $166,915 | $283,297 |
| Basic and diluted EPS | $0.01 | $0.01 |
Revenue increased 8.2%, primarily due to large Griffin Filters contracts. Gross margin declined because of lower-margin jobs. General and administrative expenses fell 17.8%; management attributed the reduction to lower selling and general expenses amid poor market conditions. Net income fell about 41% year over year, reflecting lower gross profit and the new tax provision.
Cash flow, liquidity and debt
- Cash declined from $333,045 at September 30, 2012 to $4,876 at December 31, 2012.
- Operating activities used $587,509, versus $359,323 used in the prior-year quarter. A $1,340,214 increase in receivables from related parties was a major cash-use item.
- Investing activities used $21,493, reported as a purchase of investment. Financing provided $280,833 through net shareholder loans. Cash decreased by $328,169 overall.
- Working capital was $1,691,216, based on current assets of $2,413,526 and current liabilities of $722,310. The current-asset total includes $1,695,000 due from related parties; cash on hand was minimal.
- Total liabilities were reported as $1,479,601, including $722,310 of current liabilities and a $757,291 shareholder note. The note is unsecured, accrues interest at 5%, and has no stated due date. The bank line of credit had no outstanding balance.
Material changes, related parties and other items
- Receivables due from Ducon Technologies, a related party, rose to $1,695,000 from $354,786 at September 30, 2012. The company reported $1,764,500 of related-party sales to Ducon in the quarter, compared with $841,500 a year earlier; these were also reported as sales in India.
- The company reported $174,118 in prepaid amounts to Ducon at quarter end. It also reported a $102,021 investment in Pluto Technologies, whose CEO is Cemtrex’s CEO.
- Common shares outstanding were 40,599,129 at December 31, 2012 and February 11, 2013. The company had 1,000,000 Series A preferred shares outstanding; those shares carry voting rights tied to common shares.
- The filing says there were no current lawsuits or litigation and no defaults upon senior securities. Management concluded disclosure controls were effective; it reported increased controls over recording common-stock sales.
Outlook, risks and contingencies
Management said it expected cash and operating cash generation to meet current operating needs through fiscal 2013, while cautioning that major sales growth or new products could require substantial capital. It described the outlook for its products as “fairly strong,” citing expected demand linked to environmental regulation and air-quality concerns. These are forward-looking statements, not quantified guidance.
A planned Green DCV installation agreement in India remained in preliminary planning, with no revenue recognized. Management also discussed pursuing acquisitions and investments. Risks identified include competitive pressure, uncertain market data, working-capital needs, execution risk and product obsolescence. The company said it had no bank credit line to support bid or performance bonds, limiting its ability to bid on some contracts, and did not maintain product-liability insurance. The filing reported no impairment loss on long-lived assets in either comparative quarter.
Important facts for investors to verify
- Financial statement inconsistencies: The MD&A describes $507,032 as net profit in one passage and gives inconsistent net-income figures elsewhere. The statement of operations reports gross profit of $507,032 and net income of $166,915 for 2012. The prior-year cash-flow statement lists net income of $189,562, while the statement of operations reports $283,297.
- Cash-flow narrative conflicts with the statements: MD&A text characterizes investing cash flow as generated and financing activity as cash used for shareholder-loan repayment. The cash-flow statement instead reports $21,493 used in investing and $280,833 provided by net shareholder loans.
- Related-party exposure and collectability: Verify the terms, aging and subsequent collection of the $1,695,000 Ducon receivable, as well as the related-party sales and prepaid balance.
- Liquidity and obligations: Verify cash availability, expected operating cash needs, the terms of the shareholder note, and the apparent mismatch between near-term cash and reported working capital.
- Presentation and period comparisons: The balance-sheet presentation labels total liabilities inconsistently; the reported total of $1,479,601 equals current liabilities plus the shareholder note. Confirm the filing’s figures against the underlying statements and subsequent filings.