CEMTREX INC quarterly report, Q3 FY2018

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Cemtrex, Inc. — Form 10-Q Summary

Reporting period: Third quarter and nine months ended June 30, 2018; filed August 14, 2018. Figures are unaudited. Cemtrex operates in Advanced Technologies, Electronics Manufacturing and Industrial Technology.

Financial performance

  • Quarter revenue: $19.16 million, down 31% from $27.81 million a year earlier. Gross profit was $7.26 million (38% margin), versus $9.93 million (36%). Operating loss was $1.23 million; net loss was $2.58 million versus net income of $1.18 million. Loss per common share was $0.30.
  • Nine-month revenue: $71.96 million, down 18% from $87.71 million. Gross profit was $25.30 million (35% margin), versus $28.99 million (33%). Operating loss was $0.20 million; net loss was $1.43 million versus net income of $3.00 million. Loss per common share was $0.22.
  • Segment revenue, quarter / nine months: Advanced Technologies $0.30 million / $0.93 million; Electronics Manufacturing $11.22 million / $41.87 million; Industrial Technology $7.65 million / $29.15 million. AT was newly established and reported no comparable prior-year revenue.
  • Cash flow, nine months: Operations provided $7.69 million, compared with $0.42 million used in the prior-year period. Investing used $12.85 million, primarily for property and equipment; financing used $0.62 million. Cash declined by $5.78 million.
  • Liquidity at June 30: Cash and equivalents were $4.60 million and restricted cash was $1.59 million. Working capital was $15.25 million, down from $26.37 million at September 30, 2017.
  • Debt and liabilities: Current liabilities were $17.99 million and long-term liabilities $10.54 million. Reported borrowings included a $1.37 million revolving credit balance, $3.40 million short-term notes, $4.57 million bank loans, $0.45 million long-term notes and a $3.63 million mortgage. The filing reports $4.03 million of note proceeds during the nine-month period.

Material changes and management commentary

  • Revenue declines reflected the loss of two Electronics Manufacturing customers and weaker Industrial Technology demand, particularly for environmental products. Management said the customer losses could weigh on EM revenue for the next few quarters.
  • Management attributed improved gross margin rates to efforts to achieve economies of scale and shift toward higher-margin products and services. General and administrative expense fell in dollars in the quarter, while R&D expense reached $2.25 million for the quarter and $2.45 million for nine months, primarily for SmartDesk and VR development.
  • In January 2018, Cemtrex consolidated two German EM factories and sold ROB Cemtrex Automotive GmbH, recording an approximately $157,000 loss. Management cited continuing weakness in environmental-product orders and said it planned to reduce its presence in that market while emphasizing smart devices and VR.
  • In March 2018, Cemtrex acquired approximately 46% of Vicon Industries for Cemtrex shares and a warrant. It uses the equity method and recorded a $778,823 loss on the investment for the nine-month period. Cemtrex’s CEO also became Vicon’s CEO.
  • SmartDesk reservations totaled 657 as of August 10, 2018. Management expected to convert reservations to orders and begin deliveries in fiscal Q1 2019; these are expectations, not reported completed sales.

Outlook, risks and unusual items

  • Management expects that growth and working-capital needs may exceed operating cash generation and says it will likely seek additional external capital through equity or debt. It cautions that financing may not be available or sufficient.
  • The company issued 91,508 Series 1 preferred shares to pay $915,080 in dividends during the nine months. Common shares outstanding increased from 10,404,434 at September 30, 2017 to 11,675,744 at June 30, 2018; 11,893,889 were outstanding on August 8, 2018.
  • Quarterly other expense included a one-time expense related to a short-term note. The nine-month period also included one-time income related to debt forgiveness associated with the German factory consolidation.
  • Cemtrex faces a consolidated securities class action and a related derivative action. It denies the allegations and intends to defend itself; litigation outcomes, timing and costs are uncertain. The company disclosed insurance coverage subject to a $150,000 deductible.
  • Other stated risks include competition, business and economic conditions, manufacturing or supplier problems, availability of credit and changes in environmental standards. Management assessed disclosure controls as effective at June 30, 2018.

Investor facts to verify

  • Whether SmartDesk reservations convert to paid orders and deliveries, and the resulting revenue, costs and demand.
  • Whether weaker environmental-product demand and lost EM customers continue to reduce sales, and whether factory consolidation produces the expected savings.
  • Cash needs, access to external financing, and the terms and dilution impact of any future debt or equity funding.
  • Vicon’s subsequent operating results and Cemtrex’s share of those results, given the reported equity-method loss.
  • Developments and potential costs in the securities litigation, and the adequacy of disclosed insurance coverage.