Cemtrex, Inc. — Form 10-Q Summary
Business and period: Cemtrex designs and sells emissions-monitoring instruments and, through Griffin Filters, air-filtration and environmental-control systems. This filing covers the fiscal second quarter and six months ended March 31, 2012; the fiscal year ends September 30.
Financial performance
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Six months ended March 31, 2012 | Six months ended March 31, 2011 |
|---|---|---|---|---|
| Revenue | $1,672,556 | $3,254,170 | $3,693,472 | $5,075,803 |
| Gross profit | $569,844 | $654,363 | $1,187,123 | $1,217,656 |
| Operating income | $284,100 | $256,645 | $582,761 | $416,519 |
| Net income | $169,471 | $240,885 | $359,033 | $385,101 |
| Basic and diluted EPS | $0.01 | $0.01 | $0.01 | $0.01 |
- Quarterly revenue fell about 49%; six-month revenue declined about 27%. Management attributed the decreases to weaker overall sales and poor economic conditions.
- Gross margin improved to about 34% from 20% in the quarter, and to about 32% from 24% for six months. Management attributed the improvement to a more favorable mix of higher-margin shipments.
- Operating expenses declined 29% for the quarter and 25% for six months. Despite higher operating income, net income decreased year over year, including income-tax provisions of $126,565 for the quarter and $220,300 for six months in 2012; no tax provision was reported for the comparable 2011 periods.
Financial position and cash flow
- At March 31, 2012, cash was $81,741, current assets $1,190,001, current liabilities $1,599,368, total assets $3,571,161, and total liabilities $3,117,642. Stockholders’ equity was $453,519.
- Reported six-month operating cash flow was a use of $331,724, versus a use of $34,530 in 2011. Investing cash flow was zero; financing used $1,904. Cash declined from $415,369 at September 30, 2011. The cash-flow statement attributes a $1,191,500 use to amounts due from a related party.
- Current liabilities exceeded current assets by $409,367, implying negative working capital. The MD&A instead describes working capital as positive $409,367; this appears inconsistent with the balance-sheet totals.
- The balance sheet reports $1,518,274 of unsecured shareholder notes, accruing interest at 5% with no due date. The company reported no balance on its $250,000 bank line of credit at either balance-sheet date.
- Amounts due from related parties were $2,319,075 at March 31, up from $1,127,575 at September 30, 2011. The filing reports related-party sales to Ducon Technologies of $800,000 for the quarter and $1,641,500 for six months, and purchases from Ducon of $825,000 for six months.
Outlook, risks, and other matters
- Management said cash on hand and operating cash generation should meet current fiscal-2012 operating needs, but major sales increases may require additional cash; failure to obtain capital could harm operations and growth.
- Management expressed optimism about demand related to air-quality regulation, emissions monitoring, filtration, and energy efficiency. A prospective Green DCV installation arrangement in India remained in preliminary planning, and no revenue had been recognized. The company also discussed pursuing acquisitions and investments; no specific financial guidance was provided.
- Identified risks include uncertain market data, competition, product obsolescence, execution and working-capital needs. The company said it lacked a 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 states there were no pending legal proceedings material to the company. A previously disclosed arbitration dispute was settled without payment or other consideration by either side; a $488,237 balance related to the contract had been written off in 2010.
- Management concluded disclosure controls were effective as of March 31, 2012, and reported increased controls around issuance and recording of common-stock sales.
Important facts for investors to verify
- Net-income discrepancy: The financial statements report quarterly net income of $169,471 after tax, while the MD&A calls $296,036 “net profit”; $296,036 is the statement’s pretax income. Confirm the appropriate interpretation.
- Working capital and cash-flow descriptions: The MD&A describes positive working capital of $409,367 and says operating activities provided cash, while the balance sheet indicates a $409,367 working-capital deficit and the cash-flow statement reports a $331,724 operating cash use.
- Related-party exposure: Review the collectability, terms, and timing of the $2,319,075 related-party balance and the scale of Ducon transactions, given low cash and negative working capital.
- Liquidity and shareholder financing: Assess near-term cash requirements and repayment expectations for the shareholder note, which is unsecured and has no stated due date.
- Filing-period details: The filing’s notes contain inconsistent references to dates and periods for certain related-party balances and share data; confirm those disclosures against the underlying statements and subsequent filings.