Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015. Amounts are U.S. dollars. Cemtrex provides electronics manufacturing services and environmental monitoring, control, and filtration products. Its results include ROB Group, acquired in October 2013.
Financial performance
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Six months ended March 31, 2015 | Six months ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $14.33 million | $11.55 million | $28.17 million | $20.51 million |
| Gross profit (margin) | $4.24 million (29.6%) | $4.05 million (35.0%) | $8.27 million (29.3%) | $6.87 million (33.5%) |
| Operating income | $797,573 | $832,139 | $1.20 million | $1.29 million |
| Net income | $1.08 million | $769,615 | $1.48 million | $1.19 million |
| Basic and diluted EPS | $0.03 | $0.02 | $0.04 | $0.03 |
- Revenue drivers: Environmental products and systems revenue rose 78% to $7.15 million in the quarter and 122% to $14.48 million for six months, primarily on stronger demand in foreign Asian markets. Electronics manufacturing services revenue fell 5% in the quarter and 2% for six months; management cited euro-dollar exchange rates and shipment timing.
- Margins and earnings: Gross margin declined year over year in both periods, which management attributed to lower-margin jobs shipped. Quarterly operating income declined despite higher sales. Net income benefited from higher environmental sales and forgiveness of some debt in the electronics manufacturing group.
- Cash flow: Six-month operating cash flow was $1.93 million, versus $1.30 million used in the prior-year period. Management said higher trade payables were a primary reason for the improvement. Investing activities provided $410,000, including redemption of short-term investments; financing activities used $1.98 million, principally reflecting bank-loan repayments, partly offset by convertible-note proceeds. Cash increased to $504,000 from $146,000 at September 30, 2014.
- Liquidity: Working capital was $6.69 million, down from $7.63 million at September 30, 2014. Current assets were $12.31 million and current liabilities $5.62 million. Inventory was $6.23 million and net trade receivables $3.92 million.
- Debt and financing: The balance sheet lists $858,000 of current convertible notes, $4.55 million of long-term bank loans, $4.07 million of mortgage debt, and $1.21 million of related-party notes, plus $571,000 of current long-term liabilities. The company issued unsecured convertible notes bearing 8% or 10% interest, with maturities of nine or twelve months and conversion rights exercisable after six months at discounts to market price.
Changes, outlook, and risks
- Compared with the prior-year first half, revenue and net income increased, but gross margin declined and operating income was lower. The environmental segment drove revenue growth; electronics manufacturing sales were slightly lower.
- Management said available cash and operating cash generation should be sufficient for current operations through fiscal 2015. It cautioned that major sales increases, particularly in new products, may require substantial capital and that insufficient capital could impair growth.
- Disclosed risks include economic and competitive conditions, manufacturing or supplier problems, availability of credit, and changes in government standards for environmental products. The filing provides no quantified financial guidance.
- Debt forgiveness contributed to other income of $452,060 in the quarter and $509,609 for six months. Foreign-currency translation reduced comprehensive income by $182,659 in the quarter and $268,602 for six months.
- After quarter-end, the company effected a 1-for-6 reverse stock split in preparation for a potential Nasdaq Capital Market listing. Two directors resigned and two independent directors joined the board and audit committee. Management reported disclosure controls were effective as of March 31, 2015.
Important facts to verify
- The MD&A reports six-month revenue of $28,173,129 and comparative revenue of $20,512,592, which differ from the financial statements’ $28,173,729 and $20,512,952. Confirm the correct figures and related growth calculations.
- The MD&A’s stated quarterly net-income increase does not reconcile with the financial statements, which show $1,081,573 versus $769,615. Confirm the reported comparison and percentage change.
- Review the terms, conversion dilution potential, and intended use of proceeds for the $858,000 convertible notes, as well as the company’s ability to meet near-term obligations.
- Assess whether improved operating cash flow is sustainable, given management’s emphasis on increased trade payables, and whether lower gross margins persist.
- Confirm the effect of the reverse split and any subsequent listing developments; the filing describes preparation for a potential Nasdaq listing, not a completed listing.