CEMTREX INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “may”, “plans”, “potential” and “intends” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the impact of competitive products and their pricing; unexpected manufacturing or supplier problems; the Company’s ability to maintain sufficient credit arrangements; changes in governmental standards by which our environmental control products are evaluated and the risk factors reported from time to time in the Company’s SEC reports, including this report on Form 10-K. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments. Potential Impacts of COVID-19 on our Business The current COVID-19 pandemic has impacted our business operations and the results of our operations in this fiscal year, primarily with delays in expected orders by many customers and new product development, including newer versions of surveillance software since our technical facility in Pune, India has been under lock down on multiple occasions. Overall bookings level in the IS segment of our business were down by more than 20%, however our AT segment has experienced relatively less slow down. In addition, due to delays in certain supply chain areas, the expected launch times of our new products and new versions has resulted in delays of several months. The broader implications of COVID-19 on our results from operations going forward remains uncertain. The COVID-19 pandemic has the potential to cause adverse effects to our customers, suppliers or business partners in locations that have or will experience more pronounced disruptions, which could result in a reduction to future revenue and manufacturing output as well as delays in our new product development activities. However, on the other hand, opportunities in the video surveillance field have been growing for Vicon products. The extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated at this time. Future developments include the duration, scope and severity of the pandemic, the emergence of new virus variants that are more contagious or harmful than prior variants, the actions taken to contain or mitigate its impact both within and outside the jurisdictions where we operate, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations. Significant Accounting Policies and Estimates The following discussion and analysis is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses, and assets and liabilities during the periods reported. Estimates are used when accounting for certain items such as revenues, allowances for returns, early payment discounts, customer discounts, doubtful accounts, employee compensation programs, depreciation and amortization periods, taxes, inventory values, and valuations of investments, goodwill, other intangible assets and long-lived assets. We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. 25 Please see Note 2 for detailed information regarding our significant accounting policies and estimates in the Notes to Consolidated Financial Statements in this 2021 Form 10-K. Restatement of Financial Statements Background On February 23, 2021, Cemtrex’s Board of Directors determined that certain transactions between Cemtrex Inc. and First Commercial, a company owned by former Executive Director, former Controlling Shareholder and former CFO, Aron Govil, were incorrectly handled and accounted for. The total amount of disputed transfers was approximately $7,100,000 and occurred in fiscal year 2017 in the amount of $5,600,000 and in fiscal year 2018 in the amount of $1,500,000. Cemtrex did not find any other such transfers during this period or thereafter, upon further review of the Company’s records. Upon the Company’s investigation into this matter, the Company has determined that there were inaccuracies in the Company’s financial statements. The financials for the periods 2017 and 2018 were incorrect corresponding to the amounts that were incorrectly accounted for, and subsequent years were affected by the roll forward effects of these entries. The Company found unsupported advertising expenses in the amount of approximately $400,000 on Cemtrex Inc’s income statement for fiscal year 2018 and found that approximately $5,700,000 of intangible assets and $975,000 of research and development expenses, as translated at from Indian Rupee at the time, were recorded on Cemtrex India’s financial statements in fiscal year 2018 and could not be substantiated. The total amount of unsubstantiated transfers recorded by Cemtrex India, and the unsupported advertising expense recorded by Cemtrex, Inc. sums to $7,100,000, corresponding with the total amount in question regarding First Commercial transfers during fiscal years 2017 and 2018. As part of the restatement investigation, it was determined that the Company did not follow GAAP in the treatment of its Series 1 Preferred dividends. The Company currently has a deficit in retained earnings and in accordance with guidance has reversed the accrual for dividends payable and placed the amount of the accrual back into retained earnings. In response to the above discussed restatements, the Company revisited its fiscal year 2020 financial statements. As a result, the following items have been restated, (i) inventory valuation, recognition of discontinued operations, accrued expenses, and accounts payable of the Company’s subsidiary Vicon Industries, Inc., (ii) fixed asset valuation and deferred revenue of the Company’s subsidiary Advanced Industrial Services, Inc., some of these valuation error dates to prior to acquisition of each entity. Position and Adjusting Entries The Company has determined that these transactions are not material in the years that they occurred and conclude that prior financial reports can be relied upon. The Company’s determination is based on the following: The adjustments do not cause any changes to the previously reported cash and debt balances as of the end of each of the periods in FY 2019 and 2020. The adjustments also do not cause any changes to revenues in any of the prior periods. In addition, the Company expects to maintain compliance with its debt covenants based on a preliminary review of the covenants for all the impacted periods. The Company has also determined that the adjustments have little effect on the trend of earnings over the last three fiscal years. In 2017 the operations of the Company were vastly different with both the environmental and circuit board manufacturing segments accounting for approximately 75% of revenues. These businesses are now either sold or discontinued. The current reported 2017 financial statements of the Company do not give an accurate representation of the Company today because only 16% of the $120M business operations are still a part of current operations. The table below represents the balances of the affected accounts on the Condensed Consolidated Balance Sheets as of September 30, 2020, the Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for the year ended September 30, 2020, Condensed Consolidated Statement of Stockholders’ Equity, and the Condensed Consolidated Statements of Cash Flows for the year ended September 30, 2020. 26 Condensed Consolidated Balance Sheets Balance as reported on September 30, 2020 Adjustment of net value of intangible assets Adjustment resulting from reaudit of Fiscal Year 2020 Financial Statements Adjustment of net value of inventory Adjustment of net value of fixed assets Cumulative effect of restatement adjustments Loss on amounts transferred to First Commercial Restatement on Dividends Cumulative effect of currency translation Adjusted balance at September 30, 2020 Cash and equivalents $ 19,490,061 $ (3,038 ) $ 19,487,023 Prepaid expenses and other assets $ 1,188,317 $ (12,542 ) $ 1,175,775 Other Assets $ 744,207 $ (362,307 ) $381,900 Property and equipment, net $ 9,558,936 $ (2,597,185 ) $ (987,901 ) $ 5,973,850 Inventory –net of allowance for inventory obsolescence $ 6,793,806 $ (1,847,349 ) $ 4,946,457 Goodwill $ 4,370,894 $ 2,851,998 $ 7,222,892 Accounts payable $ 2,857,817 $ 1,953,400 $ 4,811,217 Accrued expenses $ 2,392,487 $ (285,460 ) $ 2,107,027 Deferred revenue $ 1,651,784 $ (153,958 ) $ 1,497,826 Other long-term liabilities $ 1,063,733 $ (295,138 ) $ 768,595 Series 1 preferred stock dividends payable $ 1,081,690 $ (1,081,690 ) $ - Additional paid-in capital $ 63,313,336 $ (3,091,570 ) $ 60,221,766 Retained earnings (accumulated deficit) $ (33,172,690 ) $ 1,999,363 $ (7,100,000 ) $ 4,173,260 $ (34,100,067) Accumulated other comprehensive income $ 853,643 $ 958,814 $ 1,812,457 Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) For the year ended September 30, 2020 Previously reported Adjustments Adjusted Net loss available to Cemtrex, Inc. shareholders $ (13,105,005 ) $ 2,634,924 $ (10,470,081 ) Cost of revenues $ 24,153,937 $ 1,743,244 $ 25,897,181 General and administrative $ 21,570,666 $ (1,206,938 ) $ 20,363,728 Preferred dividends $ 3,171,230 $ (3,171,230 ) $ - Loss Per Share-Basic $ (1.28 ) $ 0.27 $ (1.01 ) Loss Per Share-Diluted $ (1.28 ) $ 0.27 $ (1.01 ) Condensed Consolidated Statement of Stockholders’ Equity For the year ended September 30, 2020 Previously reported Adjustments Adjusted Retained earnings (accumulated deficit) at September 30, 2019 $ (20,067,685 ) $ (3,562,301 ) $ (23,629,986 ) Dividends pad in series preferred shares $ (2,089,540 ) $ 2,089,540 $ - Accrued dividends $ (1,081,690 ) $ 1,081,690 $ - Net income/(loss) $ (9,706,659 ) $ (763,422 ) $ (10,470,081 ) Retained earnings (accumulated deficit) at September 30, 2020 $ (33,172,690 ) $ (927,377 ) $ (34,100,067 ) Accumulated other comprehensive income/(loss)at September 30, 2019 $ 796,004 $ 958,814 $ 1,754,818 Foreign currency translation gain $ 22,294 $ 35,345 $ 57,639 Income in noncontrolling interest $ 35,345 $ (35,345 ) $ - Accumulated other comprehensive income/(loss) at September 30, 2020 $ 853,643 $ 958,814 $ 1,812,457 Additional paid-in capital at September 30, 2019 $ 40,344,837 $ (1,002,030 ) $ 39,342,807 Additional paid-in capital at September 30, 2020 $ 63,313,336 $ (3,091,570 ) $ 60,221,766 Non-controlling interst of Vicon at September 30, 2019 $ 885,874 $ (70,690 ) $ 815,184 Income in noncontrolling interest $ 191,771 $ 35,345 $ 227,116 Non-controlling interst of Vicon at September 30, 2020 $ 1,077,645 $ (35,345 ) $ 1,042,300 Condensed Consolidated Statements of Cash Flows For the year ended September 30, 2020 Previously reported Adjustments Adjusted Net loss $ (9,706,659 ) $ (536,306 ) $ (10,242,965 ) Depreciation and amortization $ 2,460,043 $ (594,317 ) $ 1,865,726 Inventory $ (1,586,651 ) $ 1,743,244 $ 156,593 Accrued expenses $ (499,527 ) $ (174,265 ) $ (673,792 ) Net cash used by operating activities - continuing operations $ (3,786,202 ) $ 438,356 $ (3,347,846 ) On February 26, 2021, the Company entered into a Settlement Agreement and Release with Aron Govil regarding these transactions. As part of the Settlement Agreement, Mr. Govil was required to pay the Company consideration with a total value of $7,100,000 (the “Settlement Amount”) by entering into the Agreement. The Settlement Amount was satisfied in a combination of Mr. Govil forfeiting certain Preferred Stock and outstanding options and executing a secured note in the amount of $1,533,280. The Independent Board of Directors in coordination with Management concluded the settlement represented fair value. 27 In March 2021, Mr. Govil returned to the Company 1,000,000 shares of Series A Preferred Stock, 50,000 Shares of Series C Preferred Stock, 469,949 shares of Series 1 Preferred Stock, and forfeited all outstanding options to purchase shares of commons stock (collectively, the “Securities”). For the purposes of accounting recognition, the Company determined the fair value of the Series A, Series C, and Series 1 Preferred stock based on the closing trading value of the Series 1 Preferred Stock on the date of the agreement. The options surrendered were valued using the Black-Scholes option pricing model. The Company recognized the gain with respect to the surrendered Securities during this reporting period. The gain of $3,674,165 is reported as Settlement Agreement - Related Party on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss). As discussed above, Mr. Govil also executed a secured promissory note (the “Note”) in the amount of $1,533,280. The Note matures and is due in full in two years and bears interest at 9% per annum and is secured by all of Mr. Govil’s assets. Mr. Govil also agreed to sign an affidavit confessing judgment in the event of a default on the Note. While the Company believes the note is fully collectible, in accordance with ASC 450-30, Gain Contingencies, the Company determined the gain will not be recognized until the note is paid. Accordingly, the note and associated gain is not presented on the Company’s Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss). Results of Operations - For the fiscal years ending September 30, 2021 and 2020 Total revenue for the years ended September 30, 2021, and 2020 was $43,130,934 and $43,518,384, respectively, a decrease of $387,450, or 1%. Net loss attributable to Cemtrex, Inc. shareholders for the years ended September 30, 2021, and 2020 was a $7,807,995 and $10,470,081 respectively, a decrease of the loss of $2,662,086 or 25%. Total revenue for the fiscal year decreased, as compared to total revenue in the same period last year, due to sales decreases in the Advanced Technology Segment offset by increases in the Industrial Services Segment. Net loss attributable to Cemtrex, Inc. shareholders decreased due to onetime other income items related to forgiveness and credits related to COVID-19 programs offset by the losses on discontinued operations. Revenues Our Advanced Technologies segment revenues for the years ended September 30, 2021, and 2020 were $24,154,488 and $25,750,684, respectively, a decrease of $1,596,196 or 6%. This decrease represents a decrease in the video security solutions products offset by an increase in SmartDesk and IoT products mostly as a result of the release of the SmartDesk Connect product and the addition of the VDI product line. Our Industrial Services segment revenues for the year ended September 30, 2021, increased by $1,208,746 or 7%, to $18,976,446 from $17,767,700 for the year ended September 30, 2020. The increase was primarily due to the increase in demand for services as the COVID-19 crisis receded during fiscal year 2021. Gross Profit Gross Profit for the year ended September 30, 2021, was $16,968,352 or 39% of revenues as compared to gross profit of $17,621,203 or 40% of revenues for the year ended September 30, 2020. The decrease in gross profit dollars and percentage in the year ended September 30, 2020, as compared to the prior year, was a result of the sale of products and services with lower gross profit margins. General and Administrative Expenses General and Administrative Expenses for the year ended September 30, 2021, increased $2,174,768 or 11% to $22,538,496 from $20,363,728 for the year ended September 30, 2020. The increases in General and Administrative Expenses in dollars is the result of increases in personnel costs, audit and insurance, offset by savings measures enacted during the fiscal year. Research and Development Expenses Research and Development expenses for the year ended September 30, 2021, and 2020 were $3,171,676 and $1,827,286, respectively. Research and Development expenses have increased with the increased capital resources of the Company and focus on new product development. 28 Other Income/(Expense) Other income/(expense) of fiscal 2021 was $9,511,032 as compared to $(2,786,424) for fiscal 2020. Other income/(expense) for the year ended September 30, 2021, included the following one-time items (i) the settlement with Aron Govil, generated other income of $3,674,165, (ii) employee retention credits of $733,426 (iii) other income resulting from the forgiveness of our PPP loans of $5,320,485. Additionally, the company had realized and unrealized gains on marketable securities of $2,612,632. Income Tax Benefit/(Expense) During the fiscal year of 2021 we recorded an income tax expense of $375,434 compared to an expense of $2,073,835 for the fiscal year of 2020. The decrease in the expense for income tax is mainly due to the adjustment in the valuation allowance in the Company’s deferred taxes in fiscal year 2020. Net Income/(Loss) The Company had a net loss attributable to Cemtrex, Inc. shareholders of $7,807,995 or 18% of revenues, for the year ended September 30, 2021, as compared to a net loss of $10,470,081 or 24% of revenues, for the year ended September 30, 2020. Net loss attributable to Cemtrex, Inc. shareholders in this period as compared to the previous period was lower due to the one-time other income items discussed above business offset by the loss on discontinued operations. For the year ended September 30, 2021, the Company had a loss of $8,280,047 on discontinued operations and for the year ended September 30, 2020, the Company had a loss of $812,895 on discontinued operations. Effects of Inflation The Company’s business and operations have not been materially affected by inflation during the periods for which financial information is presented. Liquidity and Capital Resources Working capital was $15,088,892 at September 30, 2021, compared to $19,908,211 at September 30, 2020. This includes cash and cash equivalents and restricted cash of $17,186,323 at September 30, 2021, and $21,069,821 at September 30, 2020, respectively. The decrease in working capital was primarily due to the decrease in the Company’s current assets of $1,456,511 and an increase in the Company’s current liabilities of $3,362,808. The primary reason for the decrease in current assets was the cash used for operations during the fiscal year and the primary reason for the increase in current liabilities was the increase in the Company’s current portion of log-term liabilities. Accounts receivable increased by $1,124,099 or 17% to $7,810,896 at September 30, 2021, from $6,686,797 at September 30, 2020. The increase in accounts receivable is mainly due to offering some extended payment terms to maintain revenue levels. Inventories increased by $710,830 or 14% to $5,657,287 at September 30, 2021, from $4,946,457 at September 30, 2020. The increase in inventories is attributable to the company’s purchase of inventory for its security business to maintain sufficient stock on hand for sale. Operating activities for continuing operations used $10,051,165 for the year ended September 30, 2021, compared to using $3,347,846 of cash for the year ended September 30, 2020. In fiscal 2020 discontinued operations used $438,356. Investing activities for continuing operations provided $840,901 of cash during the year ended September 30, 2021, compared to using $2,432,500 during the year ended September 30, 2020. Financing activities for continuing operations provided $4,445,932 for the year ended September 30, 2021, as compared to providing $24,836,994 in the year ended September 30, 2020. In fiscal 2021 our financing activities were mainly comprised of the proceeds from notes payable offset by payments on our debt. In fiscal 2020 discontinued operations used $374,538. 29 We believe that our cash on hand and cash generated by operations is sufficient to meet the capital demands of our current operations during the 2022 fiscal year (ending September 30, 2022). Any major increases in sales, particularly in new products, may require additional capital investment. Failure to obtain sufficient capital could materially adversely impact our growth potential. Overall, there is no guarantee that cash flow from our existing or future operations and any external capital that we may be able to raise will be sufficient to meet our expansion goals and working capital needs. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required under Regulation S-K for “smaller reporting companies”.