Cemtrex, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2015; comparative periods ended June 30, 2014. The filing was signed August 11, 2015.
Business context and results
Cemtrex is a diversified industrial manufacturer with Environmental Products and Systems and Electronics Manufacturing Services (EMS) businesses. Its subsidiaries include the ROB Group, acquired in 2013, with operations in Germany and Romania.
| Metric | Three months 2015 | Three months 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $14.67 million | $13.45 million | $42.84 million | $33.97 million |
| Gross profit / margin | $4.25 million / 29% | $4.20 million / 31% | $12.52 million / 29% | $11.07 million / 33% |
| Operating income | $681,066 | $835,184 | $1.88 million | $2.13 million |
| Net income, per statements | $942,505 | $716,100 | $2.42 million | $1.90 million |
| Basic EPS | $0.14 | $0.11 | $0.36 | $0.28 |
Financial position and cash flow
- At June 30, 2015, cash was $872,795, current assets $15.70 million, and current liabilities $9.33 million; reported working capital was $6.38 million, down from $7.63 million at September 30, 2014.
- Cash from operations was $3.11 million for the nine months, compared with cash used of $1.34 million in 2014. The filing attributes the improvement primarily to higher accounts payable. Receivables rose $2.70 million to $6.74 million.
- Investing activities used $386,392, including $946,207 of property and equipment purchases, partly offset by $559,815 of short-term investment redemptions. Financing activities used $1.99 million, reflecting loan repayments and $1.53 million of convertible-note proceeds.
- Total liabilities were $18.53 million, including $1.53 million of current convertible notes, $4.64 million of bank loans, $4.06 million of mortgage payable, and $507,855 owed to related party Ducon Technologies. Cash interest paid was $244,525.
Material changes and management commentary
- Quarterly revenue increased 9%; nine-month revenue increased 26%. Environmental Products and Systems revenue rose 69% for the quarter and 98% for the nine months, which management attributed mainly to demand in foreign Asian markets.
- EMS revenue declined 33% for the quarter and 13% for the nine months. Management cited the euro’s decline against the U.S. dollar and timing of shipments.
- Gross margin fell to 29% from 31% for the quarter and to 29% from 33% for the nine months. Management attributed the decreases to lower-margin jobs shipped.
- Other income was $383,693 for the quarter and $893,302 for the nine months; management said it was primarily due to forgiveness of some debt in the EMS group. The filing does not clearly state the amount forgiven.
- The company completed a one-for-six reverse stock split effective April 15, 2015; its shares began trading on Nasdaq Capital Market under CETX on June 25, 2015.
Outlook, risks, and contingencies
Management said cash on hand and cash generated from operations should meet capital needs for fiscal 2015, but substantial sales growth, particularly in new products, may require additional capital; failure to obtain sufficient capital could harm growth. Cited risks include economic and competitive conditions, manufacturing or supplier problems, maintaining adequate credit arrangements, and changes in environmental product standards.
Unsecured convertible notes carry 8% or 10% interest, mature in nine or twelve months, and may convert after six months at a discount to market price. Proceeds were intended for growth capital and planned acquisitions; conversion could dilute shareholders. The filing reports no material change in internal control and says disclosure controls were effective as of June 30, 2015.
Important facts for investors to verify
- Net-income discrepancy: The statements report quarterly net income of $942,505, while MD&A later gives $898,827 for the same quarter. Confirm the correct figure.
- Share-count discrepancy: June 30 balance-sheet shares are 6,884,941; the cover reports 6,964,461 outstanding as of August 4, 2015. Reconcile the intervening change.
- Convertible-note share discrepancy: Note 8 says 97,923 shares were issued for $204,000 of notes, while the equity note says 97,323 shares. Verify the number and conversion terms.
- Assess the sustainability of operating cash flow given the increase in accounts payable and receivables, and the effect of debt forgiveness on reported earnings.
- Review the timing and funding needs of planned acquisitions, near-term note maturities, and potential dilution from discounted conversions.