Cemtrex, Inc. (CETX) on Q4 2022 Results - Earnings Call Transcript
Operator: Greetings and welcome to the Cemtrex Fourth Quarter and Full Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on the forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly released results of any revision to these forward-looking statements in light of new information or future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion on these factors and other risks, particularly under the heading Risk Factors. A press release detailing these results was issued on December 28, and is available in the investor relations section of our company's website centrex.com. Your host today, Saagar Govil, Chief Executive Officer, and Paul Wyckoff, Chief Financial Officer will present results of operations for the fourth quarter and full fiscal year ended September 30, 2022. At this time, I will turn the call over to Centrex's Chief Executive Officer, Saagar Govil. Please go ahead.
Saagar Govil: Great, thank you, operator, and good afternoon, everyone. I'm pleased to welcome you to today's fourth quarter and full fiscal year 2022 financial results conference call. The fourth quarter was highly transformative for Cemtrex, divesting the non-core assets Smartdesk and VR subsidiaries to focus on accelerating our Vicon and AIS brands. We see escalating demand for these businesses and believe this shift in focus to capture significant near term opportunities will help us to reach positive operating income by 2024 and maximize shareholder value over the next several years. This restructuring is expected to result in an operating expense reduction of over $5.2 million per year on a go forward basis. We have also identified another million in corporate overhead from legal, accounting and development expenses that were incurred in fiscal year '22 that will not be incurred in fiscal year '23. This will result in approximately $6.2 million in operating expense reduction to be realized going forward from November 2022. We believe our transformation will deliver a strong balance sheet and access to capital markets to execute our growth strategy. Our focus on Vicon comes at an opportune time as it is rapidly building a dominant security technology brands focus on V-SaaS solutions, leveraging AI and cloud technologies solutions for commercial, industrial and government applications. Vicon is seeing growing demand for its award winning roughneck cameras and Valerus video management software solutions. We believe Vicon can move towards $5 million in $10 million in recurring revenue over the next couple of years as a global leader in advanced security and surveillance technology to safeguard businesses, schools, municipalities, hospitals, and cities across the world. The industry is rapidly shifting to SaaS solutions leveraging AI and cloud technology solutions for today's highly dynamic environment. Allied Market Research is predicting the global V-SaaS and video surveillance market will reach over $83 billion by 2030, with a CAGR of 10.9% between 2021 and 2030. During the quarter, we were delighted to welcome Shane Compton as COO at Vicon Industries. Shane is an accomplished leader in the physical security industry bringing over 20 years of experience as a COO, CTO, and CTO and in the industry leading companies like Costar and Pelco. He's now leading the company's global sales support operations and engineering teams to deliver on operational excellence and deepen Vicon's commitment to world class support and customer experience. Shifting gears on our advanced industrial services business, we are also incredibly optimistic as the company is well positioned to monetize the increase in demand for predictive maintenance services reshoring and manufacturing back to the U.S. and increasing complexity and industrial equipment. With over 35 years in the industry and high repeat business, AIS has a strong reputation as a single source industrial contractor and premier provider of industrial contracting services. AIS is a significant source of cash flow and has a strong balance sheet empowering the ability to offer more comprehensive services due to inventory of equipment. As the industrial and manufacturing economy in the U.S. continues to thrive, we believe AIS has significant potential for expansion, particularly with bolt-on acquisitions. To mark this important transformation, we have also taken the opportunity to launch a next generation Investor Relations website to better reflect our forward thinking approach to the Cemtrex brand and enhance communications with the investment community. We believe there's a compelling investment case to be made to both current and prospective shareholders and the site will serve as an invaluable tool to keep our investors better informed of our progress and strategic vision. This site will be going live over the next few days and we will make an announcement accordingly. I'll now turn the call over to Paul Wyckoff. Our CFO to discuss the financial. Paul?
Paul Wyckoff : Thank you, Sagar. Our revenue for the full year of fiscal year 2022 totaled $50.3 million, compared to revenue of $43.1 million for the full year of 2021, a 17% increase year-over-year. The increase in revenue for the year was due to increased demand for the company's products and services. The Advanced Technology segment revenues for the years ended September 30 2020 and 2021 were $29.1 million and $24.2 million, respectively, an increase of 20%. The Advanced Technology segment increase was due to an increased demand for security technology products under the Vicon brand. Industrial Service segment revenues for the full year 2022 increased by 12% to $21.2 million, primarily due to the increase in demand for their services. Gross profit for the year ended September 30, 2022 was $19.1 million or 38% of revenues as compared to a gross profit of $17 million, or 39% of revenues for the year-ended September 30 2021. The decrease in gross profit as a percentage of revenues for the year-ended September 30, 2022, as compared to the prior year, was due to increased costs or revenues as a result of increased costs for goods and increased transportation costs for those goods. Total operating expenses for 2022 were $35.9 million, compared to $25.7 million with 2021. The increase in total operating expenses was primarily driven by increases in personnel costs, insurance, travel, legal, and research and development costs. Operating activities for continuing operations used $16.1 million for the year ended September 30, 2022, compared to using $10.1 million of cash for the year ended September 30, 2021. Net loss for the full year of 2022 was $13 million, as compared to a net loss of $7.8 million in 2021. Net loss in the fourth quarter of 2022 totaled $3.2 million, compared to a net loss of $9.7 million in the fourth quarter of 2021. Cash and cash equivalents totaled $10.6 million at September 30, 2022 as compared to $11.4 million at June 30, 2022 and $15.4 million at September 30, 2021. Inventories increased by $3.9 million, or 68% to $9.5 million at September 30, 2022 from $5.7 million at September 30, 2021. The increase in inventories attributable to the company's purchase of inventory to the security business of our Advanced Technology segment to maintain sufficient stock on hand for sales to overcome recent supply chain delays and issues. I will now turn the call back over to cyber for a review of our 2023 outlook.
Saagar Govil: Thank you, Paul. In summary, with our restructuring complete and strong performance for Vicon and AIS, we are well positioned to create long-term value for our shareholders. Looking ahead, we believe revenues for Vicon Industries based on our current demand should increase by approximately 16% to $28 million for fiscal year '23, given the launch of our AI-based analytics solution, more improvements to our core product Valerus, as well as additional sales opportunities. We also believe AIS will continue to expand revenues by approximately 3% to $21.8 million, driven by continued strength in the industrial services market. Additionally, based on steps that company has taken during this fiscal year 2023, gross profit margin percent for Vicon is expected to increase to approximately 48%. Similarly, based on operational improvements made, we believe gross profit margin percent for AIS is expected to improve to approximately 34%, for the fiscal year 2023 for AIS. We have taken steps to reduce expenses at the Cemtrex corporate level as well to drive improvement in our overall operating expenses. With all the combined actions taken, we believe the operating loss over the next four quarters to be under $2.5 million. The effects of these changes will be partially demonstrated in our December quarter performance due to the timing of the restructuring, and we expect our March quarter performance to reflect the improvement more fully. We also believe that we can reduce inventory by more than $1.5 million over the course of fiscal year '23, as we have seen supply chain constraints improve. This will allow us to offset the cash loss from the expected operating loss over the next couple of quarters by the cash obtained from the reduction in inventory, reducing the burden on our overall cash position. With approximately $10 million in cash on hand and a dramatic reduction in expenses, we believe we have sufficient capital in the near term to focus on executing on our roadmap, both financially and operationally without the need for immediate capital. Our expectation is that the company reach a positive operating income in fiscal year 2024. We continue to work to position the company on a path to a sustainable financial model and for long-term growth, which we believe will provide long-term value for our shareholders. I look forward to providing our shareholders with further updates in the near term. I thank you all for attending. And now we'd like to open it up for questions. Operator.
Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is from Jason Kolbert with Dawson James. Please proceed with your question.
Jason Kolbert: Thanks, guys. Thanks for the update and really appreciate some of the comprehensive detail in terms of the numbers. I just like to ask some big picture questions. When we think about Vicon versus AIS, it seems like the tremendous growth opportunity exists for Vicon, and AIS seems a little bit like a means to an end. So I'm just trying to understand how you're looking at the business, how you're looking at capital spending, and where you see the future growth coming from?
Saagar Govil: Yeah, sure. So with respect to organic growth, I think there's no question that Vicon is the more compelling near term opportunity. The demand in the industry is pretty high for the need for physical security. And there's a lot of disruption taking place due to incumbent technology being replaced by next generation technology, which creates an opportunity to take market share. So in a big picture, we see an opportunity to grow there more quickly. And I think in terms of where we'll be focusing our investment that will certainly be driven on that side of the business. I think with respect to AIS, the opportunities will be more driven by acquisitions. I think that with respect to AIS, there's more opportunity to gain scale, through finding good acquisition opportunities. I think for the last couple of years, valuations have been unusually high relative to what we think is fair value for businesses of these types. And we're starting to see valuations come down. So I wouldn't say that we're sort of exclusively thinking about Vicon. I think we're looking at both businesses opportunistically and seeing opportunities to drive growth in both.
Jason Kolbert: Okay. That's actually very helpful, because what it's telling me is that you'll be opportunistic on AIS, if you see the opportunity and it can build free cash flow, is that right.
Saagar Govil: That's right.
Jason Kolbert: Okay. And can you talk a little bit in terms of the Vicon and really some of the camera and intelligence software products, what gives you competitive edge given the fact that you're in such a highly competitive market? I'd like to understand a little bit about, how your installed base is looking at you? And what it's going to take to get kind of some of the new, bigger contracts that are out there?
Saagar Govil: Yeah, absolutely. So Vicon has been in the industry for 55 years. So we have a strong brand. So a lot of customers know us in the industry. And that really helps with our credibility, in terms of when we compete with other folks in the market. So first and foremost, people recognize us. And then secondly, we spend a lot of the last three years investing in our product portfolio quite substantially. So our products, when you compare them against our competitors, they are right there as far as competitive advantage in terms of pricing, in terms of the feature set. And we continue to invest in the product line to ensure that it gets there. We're also rolling out our AI analytics this month. And, that's homegrown analytics that we've built, leveraging the latest AI technology out there. So a lot of it is really just investments we've made starting to pay off and take advantage of the opportunities that are in the market today. So it's a combination of doing that on an ongoing basis. And then we've also made investments in people, right. So over the last 18 months, we've hired a number of really talented individuals from our competitors. We made an announcement, near the end of the summer, where we brought on Hiam. So Haim is, a tremendous product manager has a great product mind, and helps to bring a lot of value from that perspective. And a number of the other folks that we've got, obviously, Shane, just recently joining as well. So all these guys have brought a lot of perspective and a lot of value from many of our competitors in terms of bringing best practices and helping us continue to chart a course that creates our own space in the market and competitive advantages. So that's, again, a lot of that. The other the other thing is that we really just sell end-to-end solution. So many of our competitors, they're generally selling a portion, a portion of the solution. And Vicon is generally going to the market on a complete solution. And a lot of the market, especially in the enterprise world is looking for an end-to-end solution. And that's really how we differentiate ourselves. So it's really a combination of all of these things that is really helping us make be competitive in the market and continue to drive sales growth.
Jason Kolbert: Yeah, perfect. Thank you so much. Really appreciate the update. Thanks, Saagar.
Saagar Govil: Sure.
Operator: Our next question is from Richard Arnold, who's a private investor. Please proceed with your questions.
Unidentified Analyst: My question is directed to Mr. Wyckoff.
Paul Wyckoff : Yes, sir. Okay. With that, I answer for you.
Unidentified Analyst: Do you know the cost to purchase and develop the assets that were divested and purchased by management led by Mr. Govil? That last was a quote from an article that divulged your divestiture.
Paul Wyckoff : I don't know that figure off the top of my head, I can get back to you off this call and provide --
Unidentified Analyst: Can you give me a roundabout number?
Paul Wyckoff : Cost to develop probably in the neighborhood of $7 million.
Unidentified Analyst: And how much cash was received from Mr. Govil, in his lead management by Cemtrex for those divested assets?
Paul Wyckoff : The deal was, was publicly disclosed. And it was a combination of cash and investment opportunity within the Smart Desk company and also royalties on their revenues.
Unidentified Analyst: And how much cash was given to Centrex by Mr. Govil and his management people.
Paul Wyckoff : I believe the amount was $85,000.
Unidentified Analyst: So $7 million worth of assets were sold to him and his group?
Paul Wyckoff : Well, I mean your first question was how much the cost to develop those companies, not how much the assets were?
Unidentified Analyst: And how much was the net asset value of the divested assets when purchased?
Paul Wyckoff : About billion dollars.
Unidentified Analyst: So, some for $85,000, he got a million dollars worth of assets, and then promises of something that may or may not happen.
Saagar Govil: Yeah, so if I may interject. Richard, so I can think I can sort of generally understand where you're going with it. So I'll say a couple of things. One is when the company explored options before the assets, we looked at a lot of different options. And these were all money losing businesses. And so there were no buyers lining up for these things. So I want to be clear about that, that the opportunity to make swift changes to the company, they're just not -- they were not readily available for the company and meaning that we approached different investment bankers, and we talked to different advisors about the various options. So because these companies were losing a lot of money, there wasn't an opportunity to get a lot of cash for them. So it's not like I'm getting a sweetheart deal here. There's no buyers lining up, right? I mean, that's the reality. Okay. The second thing is, the company's market cap was less than cash. So for a big part of most of 2022. And so, when you think about the collection of seven different brands, under the Cemtrex umbrella that is trading less than cash, the value of these businesses under this umbrella wasn't a -- the market was not recognizing that value. And so the company had to make some strategic decisions and we had to do it quickly. And this was discussed at the board level in terms of we need to make some strategic changes about what we're doing here. And that was discussed at length and the company made an announcement around this in --
Unidentified Analyst: I know that the announcement was on 11-22. I don't make myself clear. You had a vote of the board of directors, from which you abstained. Would it not have been better to have shareholders' vote on these asset purchases? And you abstaining from that vote?
Operator: Our next question is from Richard Mishkin with GRF Capital Investors. Please proceed with your question.
Richard Mishkin: Yeah. So, good afternoon. So, I have a couple of mundane questions not actually about the operating of the company, but about some of the stock transaction. So hopefully, you can help me. I've been an investor, or I've invested with clients in Vicon since around 2000. So I have many years, working with Vicon and Cemtrex, with the preferred stock. So do you have just a moment to answer a couple of quick questions for me, please?
Saagar Govil: I think those kinds of questions would be best directed offline. I'm not sure that this would be the best form for that.
Richard Mishkin: I certainly agree with that. But I've made no less than five attempts to contact your company directly, and through Investor Relations. And I never received a call back. So I thought I just asked these two questions. And then maybe if somebody can get back to me some time, that would be fine. But approximately, what percentage of Vicon do you own?
Saagar Govil: Around 95%
Richard Mishkin: How much?
Saagar Govil: Around 95%.
Richard Mishkin: 95% and the 5% of the outstanding shares that are still out there, I guess you'd call them minority very minority holders. What can be done to placate them and make it so you own 100% of Vicon?
Saagar Govil: I think that's a question best to take offline. I'm not sure that that is necessarily in the cards. But, I think it's something we should, if you had further discussion about it would be --
Richard Mishkin: Well because there were some Vicon holders that were asked to participate in the secondary never saw daylight since. Pbviously, I've got some sour grapes here but not going on. I understand. One question, last question is Cemtrex preferred stock in the year 2021, you as a part of a dividend, you settled your dividend obligation in unregistered shares of stock, is there a reason for that?
Saagar Govil: Yeah, it was a little bit of a mixed up that has been sorted out now actually. So if you reach out to Paul after this call we can -- there's an opinion available and for we can get those unrestricted. So that is --
Richard Mishkin: Yes, I appreciate that. That is causing havoc in my account. So at this point, we get charged $50 a year to hold it now.
Saagar Govil: Yeah, we can we can address that.
Paul Wyckoff : You can contact our transfer agent, the transfer agent is ClearTrust.
Richard Mishkin: I've done that already. They tell me I need to hire an attorney, get an opinion and pay hundreds and hundreds of dollars to get it done.
Saagar Govil: The in their possession I'm not sure how long ago that was, but that's all there.
Operator: Our next question is from Steven Brickner , who is a private investor. Please proceed with your question.
Unidentified Analyst: Yeah. My questions were actually along the lines of the last two investors. But I'm really concerned that as of -- early as of fall of 2021, you're painting a rosy picture for your roadmap for the Smart Desk, and your AR/VR products, namely the StarForce Game. And then I think it was around February, you made another $500,000 investment in Masterpiece Studios, making that a $1 million investment right there. And then as early as May, you announced you're going to divest in all of these business units, and focus on Vicon and AIS. So I'm just a little perplexed, why your lack of foresight, when you're painting a rosy picture in the fall, and then less than six months later, you're going no, that isn't working. We got to, it just seems like a real lack of foresight, or was it the SEC action against you and your father in the company that was temporary in your decision? Or could you could you just expand on your reasoning to divest in those?
Saagar Govil: So there are a couple of reasons for that. I think the primary driver for that was really that -- well, I won't say primary, and I appreciate the question, Steve. So pretty, the company, as an owner of seven brands, doing many different things did not get the value attributed for all of those seven things simultaneously. And I think my impression after speaking with many investors, was that they didn't understand the story. And it was very complicated to an associated value with the business and appreciate everything that we were doing. And as a result, this was reflected in the Cemtrex stock price. And in bringing on a new board, this was discussed in great length at the board that, bringing better focus to what we're doing as an organization would have a direct impact on creating shareholder value. So from 2021 into the end of 2022, the share price was declining substantially despite all of these exciting things that we were doing. So it wasn't sort of my decision alone, unilaterally just changing out a whim here, this was a combination of result of recognizing and seeing what was actually taking place with respect to the overall business, to share price, and so forth. The other thing I just really want to point out is, all of the things that we've liked about Smart Desk and VR, those are long term opportunities, and they will consume a lot of cash. And so if, in order to do them, the company needs to continually be raising capital, which means more dilution. And if the stock price is going down, it just makes that more and more difficult. So, I mean, we viewed where the stock price is, is a referendum from shareholders that, the direction that we're going in is not the right one, right. And we need to get back to focusing on where we can drive cash flow, and where we can drive growth in the nearest amount of time. And that meant focusing on things with the most upside in the nearest amount of time. And that would not result in more and more endless dilution for shareholders. Does that make sense?
Unidentified Analyst: No, it does, I just want to make sure that this time, I mean, your last stock split in June 2019, it and eight for one, and then you refocus on Smart Desk, and you start calling your flagship product. And you just kept throwing out teasing everybody about some VR game that never happened. And then you got rid of Rob Cemtrex, and then you sold Griffin Filters to your father. And then since then you reported $50 million in losses, you're carrying $20 million in debt. And I'm just want to make sure that you do it right this time, because I meant the best since 2014, we're looking at them at a third reverse split. And can you say what that cost is going to be? How big it's going to be?
Saagar Govil: No, we don't know what the rate is going to be.
Unidentified Analyst: So my initial investment is pennies on the dollar. So it's basically a tax write off, but I would like to see some accountability for how you've been running this company. I mean, and then now the SEC finally comes up where you cost the company, another $2.2 million. And I mean, is that factor in anywhere? Are you going to repay that or is that just a write-off for the company? I mean, does SEC describes it in their filing as fraudulent conduct? So, I mean, I would like you to comment on that a little bit.
Saagar Govil: Yeah, I can't really comment on the SEC matter. I think everything that we had to say has been already disclosed on that matter. So, there's nothing really more for me to add. It's a situation where anytime you get into a legal battle with the SEC, you have to be mindful of running a legal bill, and all of the implications that that come with that as a distraction to running the core business for a company of our size. So that's really all I'm going to comment on that. But I think that based on the direction we're going right now, we've taken an enormous amount of steps to move this company in the right direction. We have a new board, all the new board members that came to our auditors. We moved and shed all of our money losing operations, we're focused on are two very well established businesses with product market fit that have real opportunity for growth and opportunities in this market. And we're very much focused on driving growth and making improvement in the overall business and helping that translate to create more value for shareholders. And I think everything that we've been doing now over the last 12 to 15 months, I think, has all been under that same guide and direction. And we're going to continue to do that to turn this around. And that's really what we're 100% focused on.
Operator: There are no further questions at this time. I would like to now turn the call back over to Mr. Govil for his closing remarks.
Saagar Govil: Thank you, operator. I would like to thank each of you for joining our earnings conference call today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please feel free to reach out to our IR firm and regroup we'd be more than happy to assist. Thank you.
