Cemtrex Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011, compared with FY2010. Cemtrex designs and sells emissions-monitoring equipment; its Griffin Filters subsidiary sells air-filtration and environmental-control systems. The audited consolidated statements received an unqualified audit opinion.
Financial performance and condition
| Metric | FY2011 / September 30, 2011 | FY2010 / September 30, 2010 |
|---|---|---|
| Revenue | $13.732 million | $3.304 million |
| Gross profit and margin | $2.131 million; 15.5% | $1.392 million; 42.1% |
| Operating expenses | $1.027 million | $2.393 million |
| Operating income (loss) | $1.104 million | ($1.002 million) |
| Net income (loss) | $1.011 million | ($1.029 million) |
| Basic and diluted EPS | $0.02 | ($0.03) |
| Operating cash flow | ($101,519) | ($968,932) |
| Cash and working capital | $415,369 cash; $443,533 working capital | $41,139 cash; ($188,465) working capital |
| Total assets and liabilities | $2.429 million; $2.335 million | $1.231 million; $2.148 million |
| Stockholders’ equity (deficit) | $94,486 | ($916,396) |
Revenue rose by $10.428 million, primarily from a large Griffin Filters project. Gross profit increased, but gross margin fell substantially because the project had a low margin. Operating expenses declined, which management attributed partly to lower activity in the Green DCV and carbon-credit business. The company moved from a net loss to net income.
Cash increased by $374,230, but operations used cash. Financing provided $475,749, including $781,687 in net loans from shareholders, partly offset by repayment of bank and convertible debt. At year-end, the company reported $1.520 million in unsecured notes payable to Chairman Arun Govil, bearing 5% interest with no stated due date. The bank line and convertible debenture balances were zero.
Material changes, outlook, and risks
- Revenue was highly concentrated: $10.951 million came from India, while U.S. sales were $2.781 million. The filing reports $8.921 million of sales to related party Ducon Technologies, owned by Chairman Arun Govil, and $1.128 million due from Ducon at year-end. It also reports a $263,174 advance to Ducon for supplies.
- Management said cash on hand and operating cash generation may cover FY2012 needs, but gave no quantified revenue, earnings, or margin guidance. It described the outlook for products and services as “fairly strong,” citing anticipated demand related to air-quality concerns and environmental standards.
- Management warned that a major sales increase or large contract could require substantial capital. It also identified risks from regulatory changes or weak enforcement, competition from larger companies, product obsolescence, limited working capital, and dependence on key personnel. The company said it lacked a bank credit line to support bid or performance bonds, potentially limiting access to some contracts.
- The company did not maintain product-liability insurance and had not patented its technology. Its common stock traded over the counter and was described as thinly traded and volatile. No cash dividends were planned.
- Arun Govil beneficially owned about 64% of common shares and held all Series A preferred shares, which carry voting rights sufficient to give him substantial control. The company had no standing audit committee and no audit committee financial expert. Management concluded disclosure controls were effective; the auditor did not audit or opine on internal-control effectiveness.
- The filing says there were no current lawsuits. A 2009 dispute with Sindicatum Carbon Technology was settled in 2010 without payment by either side; a $488,237 receivable related to the contract had been charged off in FY2010.
Important facts for investors to verify
- Reconcile the substantial related-party sales, year-end amount due from Ducon, and Ducon advance; assess collection, settlement terms, and the company’s dependence on this relationship.
- Review the low-margin Griffin Filters project and determine whether its revenue and margins are representative of future business.
- Confirm the terms, repayment expectations, and related-party governance around the $1.520 million officer note, and assess cash needs given negative operating cash flow.
- Reconcile the filing’s tax disclosures: the financial statements report no income-tax provision, while MD&A refers to a $3,445 provision.
- Assess access to bonding and working capital, customer and geographic concentration, product-liability exposure, and the voting control attached to Series A preferred stock.