Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2013; unaudited results compared with the three months ended December 31, 2012. Cemtrex provides electronics manufacturing, emissions monitoring, and industrial air-filtration and environmental-control products and services.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $8.964 million | $2.186 million |
| Gross profit / margin | $2.825 million / 31.51% | $507,032 / 23.19% |
| Operating expenses | $2.367 million | $262,051 |
| Operating income | $457,677 | $244,981 |
| Net income | $416,552 | $166,915 |
| Net margin | 4.64% | 7.63% |
| Basic and diluted EPS | $0.01 | $0.01 |
| Cash used in operating activities | $7.326 million | $587,509 |
Revenue rose 310%, primarily because the October 31, 2013 acquisition of ROB Group contributed two months of operations and $6.665 million of revenue. Management attributed higher gross margin to the acquisition and higher-margin jobs. Operating expenses also rose substantially with the acquisition; net income increased, but net margin declined.
Liquidity, debt, and cash flow
- At December 31, 2013, cash was $1.413 million, current assets were $16.329 million, current liabilities were $2.052 million, and reported working capital was $14.276 million.
- Total assets were $17.007 million; total liabilities were $15.281 million; stockholders’ equity was $1.725 million.
- Long-term borrowings shown were $5.069 million from a bank, $6.934 million payable to Ducon, and $1.227 million in shareholder notes. The filing does not provide a clear interest-rate or repayment schedule for these balances in the supplied text.
- Operating cash use of $7.326 million reflected significant increases in receivables, inventory, and prepaid expenses. Investing activities used $3.449 million, reported as investment in subsidiary. Financing activities provided $12.121 million, including bank and affiliated loans. Cash increased by $1.346 million for the quarter.
- Current assets included $3.571 million of related-party receivables, $5.294 million of inventory, and $5.656 million of prepaid expenses and other assets; liquidity therefore depends partly on collection, sale, or realization of these balances.
Outlook, risks, and other notable disclosures
- Management said it expected cash on hand and operating cash generation to meet current operating needs during fiscal 2014, while warning that major sales increases could require substantial capital.
- Management described the outlook for its products and services as fairly strong, citing expected demand related to air-quality awareness and environmental regulation. It also planned to pursue acquisitions and investments. No quantitative revenue or earnings guidance was provided.
- Risks identified include limited reliable market data, competition from larger and better-resourced companies, changing markets and strategy, product obsolescence, and working-capital needs. The company does not maintain product-liability insurance.
- The filing reports no material pending legal proceedings, other than ordinary-course incidental litigation, and states that disclosure controls were effective. It reports no material adverse effect from inflation.
- The cash-flow statement lists depreciation and amortization as a negative $664,225 adjustment, an unusual presentation that the supplied filing text does not explain clearly.
Important facts for investors to verify
- ROB acquisition consideration, purchase accounting, acquired assets and liabilities, and the terms and related-party aspects of acquisition financing.
- Collectability and aging of receivables, particularly related-party balances, and the recoverability of large inventory and prepaid-expense balances.
- Reconciliation of the unusual negative depreciation and amortization cash-flow adjustment, and the filing’s inconsistent receivables comparison in MD&A.
- Debt maturity, interest, covenant, and repayment terms, including the Ducon and shareholder loans.
- Whether acquired operations can sustain margins and generate cash sufficient to address ongoing working-capital demands.