Cemtrex, Inc. — FY 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2014, not a standalone fourth quarter. Cemtrex operates electronics manufacturing services (EMS), environmental products and systems, and monitoring instruments businesses. The October 31, 2013 acquisition of Germany-based ROB Group added EMS operations in Germany and Romania; its results are included from the acquisition date.
Financial performance and position
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $47.65 million | $13.67 million |
| Gross profit / margin | $15.60 million / 33% | $1.14 million / 8% |
| Operating income | $3.01 million | $0.35 million |
| Net income / margin | $2.67 million / about 6% | $0.29 million / about 2% |
| Basic and diluted EPS | $0.07 | $0.01 |
| Cash from operating activities | $(2.34) million | $(0.62) million |
| Cash from investing activities | $(9.29) million | $0 |
| Cash from financing activities | $11.71 million | $0.36 million |
EMS contributed $30.01 million of FY 2014 revenue, versus none in FY 2013, primarily reflecting the ROB acquisition. Environmental products and systems revenue rose 29% to $17.64 million. Management attributed the higher gross margin partly to high-margin jobs shipped during the year.
At September 30, 2014, cash was $146,095 and short-term investments were $559,815. Working capital was $7.63 million, compared with $1.87 million a year earlier. Receivables were $4.04 million and inventory was $6.27 million; both increased substantially, primarily due to the acquisition and expanded operations. Total liabilities were $16.20 million, including $6.55 million in bank loans, $3.87 million in mortgage debt, and $1.87 million in shareholder notes. Operating cash use occurred despite reported net income.
Material changes and unusual items
- Reported revenue increased 249% and net income increased 825% year over year, but the comparison is substantially affected by the acquisition. Unaudited pro forma figures, as if ROB had been acquired October 1, 2012, show FY 2013 revenue of $47.05 million and a net loss of $372,337, versus FY 2014 revenue of $47.65 million and net income of $2.67 million.
- The acquisition consideration was approximately $5.94 million, funded with bank and related-party loans. Cemtrex also acquired the Neulingen, Germany facility, financed with a 17-year mortgage; the filing reports substantial acquisition-related borrowing.
- Interest expense rose to $436,864 from $45,850, primarily due to acquisition financing. Foreign currency translation produced a $156,559 comprehensive loss.
- Management reported no goodwill impairment. The filing reports no legal proceedings and no material effect from inflation.
Outlook, risks and controls
Management described the outlook as fairly strong and expected continued interest in emissions monitoring and environmental-control products, citing public concern about air quality and regulatory standards. No quantified revenue, earnings, margin, or cash-flow guidance was provided. Management stated that existing cash and operating cash generation were expected to support operations through September 30, 2015, while cautioning that additional growth or investment could require substantial capital.
Key risks include weak operating cash generation and working-capital demands; dependence on financing and the ability to renew or obtain credit; integration and performance of the acquired business; customer order variability and inventory exposure; intense competition from larger companies; changing environmental rules and product obsolescence; and potential product defects. The company also disclosed that it does not carry product-liability insurance. Its OTC-traded shares may be thinly traded and volatile, and management and principal shareholders control approximately 70% of voting equity, including the voting rights attached to Series A preferred stock.
After year-end, Cemtrex issued a $204,000 convertible note due in nine months, bearing 8% interest and convertible at the holder’s option after six months at a 65% discount to market price. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor did not provide an attestation opinion on internal controls.
Important facts for investors to verify
- How ROB performed after acquisition and whether margins and profitability are sustainable; reported and pro forma comparisons differ materially.
- Debt balances, maturities, covenants, collateral, and repayment or refinancing capacity, including shareholder loans and the German mortgage.
- Cash conversion, receivable collections, inventory quality, and the working capital needed to support the expanded EMS business.
- The potential dilution and conversion terms of the post-year-end $204,000 note, along with the status of the 600,000 executive options disclosed in the filing.
- Related-party arrangements and governance: the shareholder notes, prior sales and balances with Ducon Technologies, and concentrated voting control.
- Reported-value consistency: the filing gives differing tax-provision/current-tax figures ($60,962 in the statements and MD&A versus $62,032 in the tax note) and differing 2013 receivables figures in MD&A versus the financial statements.