CEMTREX INC 10-Q

Item 1. Financial Statements Cemtrex, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) December 31, September 30, 2021 2021 Assets Current assets Cash and equivalents $ 10,338,978 $ 15,426,976 Restricted cash 1,633,452 1,759,347 Short-term investments 14,960 14,981 Trade receivables, net 5,547,749 7,810,896 Trade receivables - related party 1,492,321 1,487,155 Inventory –net of allowance for inventory obsolescence 7,085,698 5,657,287 Prepaid expenses and other assets 2,727,511 2,585,652 Total current assets 28,840,669 34,742,294 Property and equipment, net 6,736,871 6,738,944 Right-of-use assets 2,725,616 2,940,127 Goodwill 7,821,283 7,821,283 Other 697,624 697,240 Total Assets $ 46,822,063 $ 52,939,888 Liabilities & Stockholders’ Equity (Deficit) Current liabilities Accounts payable $ 3,512,267 $ 4,235,002 Short-term liabilities 7,591,892 9,977,972 Lease liabilities - short-term 789,346 830,791 Deposits from customers 722,690 536,220 Accrued expenses 1,478,746 1,621,053 Deferred revenue 1,621,244 2,004,170 Accrued income taxes 323,371 448,194 Total current liabilities 16,039,556 19,653,402 Long-term liabilities Loans payable to bank 486,262 767,279 Long-term lease liabilities 1,936,270 2,017,408 Notes payable 2,400,000 2,350,000 Mortgage payable 2,232,812 2,257,785 Other long-term liabilities 750,905 839,171 Paycheck Protection Program Loans 60,700 1,032,200 Deferred Revenue - long-term 497,771 467,967 Total long-term liabilities 8,364,720 9,731,810 Total liabilities 24,404,276 29,385,212 Commitments and contingencies - - Shareholders’ equity Preferred stock , $ 0.001 par value, 10,000,000 shares authorized, Series 1, 3,000,000 shares authorized, 1,979,753 shares issued and outstanding as of December 31, 2021 and 1,885,151 shares issued and outstanding as of September 30, 2021 (liquidation value of $ 10 per share) 1,980 1,885 Series C, 100,000 shares authorized, 50,000 shares issued and outstanding at December 31, 2021 and September 30, 2021 50 50 Preferred stock , Value Common stock, $ 0.001 par value, 50,000,000 shares authorized, 23,673,210 shares issued and outstanding at December 31, 2021 and 20,782,194 shares issued and outstanding at September 30, 2021 23,673 20,782 Additional paid-in capital 65,058,290 61,727,834 Retained earnings (accumulated deficit) ( 46,386,013 ) ( 41,908,062 ) Treasury stock at cost ( 148,291 ) ( 148,291 ) Accumulated other comprehensive income (loss) 2,955,944 2,896,452 Total Cemtrex stockholders’ equity 21,505,633 22,590,650 Non-controlling interest 912,154 964,026 Total liabilities and shareholders’ equity $ 46,822,063 $ 52,939,888 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 Cemtrex, Inc. and Subsidiaries Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) (Unaudited) December 31, 2021 December 31, 2020 For the three months ended December 31, 2021 December 31, 2020 Revenues $ 10,672,489 $ 8,836,076 Cost of revenues 6,803,295 4,830,606 Gross profit 3,869,194 4,005,470 Operating expenses General and administrative 6,612,004 5,417,196 Research and development 1,311,713 634,225 Total operating expenses 7,923,717 6,051,421 Operating income/(loss) ( 4,054,523 ) ( 2,045,951 ) Other income/(expense) Other income/(expense) 930,169 950,988 Interest Expense ( 1,405,469 ) ( 608,941 ) Total other income/(expense), net ( 475,300 ) 342,047 Net loss before income taxes ( 4,529,823 ) ( 1,703,904 ) Income tax benefit/(expense) - ( 28,954 ) Net income/(loss) ( 4,529,823 ) ( 1,732,858 ) Less income/(loss) in noncontrolling interest ( 51,872 ) ( 40,247 ) Net income/(loss) attributable to Cemtrex, Inc. shareholders $ ( 4,477,951 ) $ ( 1,692,611 ) Other comprehensive income/(loss) Net income/(loss) $ ( 4,529,823 ) $ ( 1,732,858 ) Foreign currency translation gain/(loss) 59,492 37,864 Comprehensive income/(loss) ( 4,470,331 ) ( 1,694,994 ) Less comprehensive income/(loss) attributable to noncontrolling interest ( 51,872 ) ( 40,247 ) Comprehensive income/(loss) attributable to Cemtrex, Inc. shareholders $ ( 4,418,459 ) $ ( 1,654,747 ) Income/(loss) Per Share-Basic $ ( 0.19 ) $ ( 0.09 ) Income/(loss) Per Share-Diluted $ ( 0.19 ) $ ( 0.09 ) Weighted Average Number of Shares-Basic 23,097,141 17,842,664 Weighted Average Number of Shares-Diluted 23,097,141 17,842,664 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Cemtrex, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) Shares Amount Shares Amount Shares Amount Capital Deficit) At cost Income(loss) Equity interest Preferred Stock Series 1 Preferred Stock Series C Common Stock Par Retained Accumulated Par Value $0.001 Par Value $0.001 Value $0.01 Additional Earnings Treasury other Cemtrex Non- Number of Number of Number of Paid-in (Accumulated Stock, Comprehensive Stockholders’ controlling Shares Amount Shares Amount Shares Amount Capital Deficit) At cost Income(loss) Equity interest Balance at September 30, 2021 1,885,151 $ 1,885 - 50,000 $ 50 20,782,194 $ 20,782 $ 61,727,834 $ ( 41,908,062 ) $ ( 148,291 ) $ 2,896,452 $ 22,590,650 $ 964,026 Foreign currency translation gain/(loss) - - - 59,492 59,492 Share-based compensation 45,371 45,371 Shares issued to pay notes payable 2,891,016 2,891 3,285,180 3,288,071 Dividends paid in Series 1 preferred shares 94,602 95 ( 95 ) - Income/(loss) attributable to noncontrolling interest - ( 51,872 ) Net loss - ( 4,477,951 ) ( 4,477,951 ) Balance at December 31, 2021 1,979,753 $ 1,980 - 50,000 $ 50 23,673,210 $ 23,673 $ 65,058,290 $ ( 46,386,013 ) $ ( 148,291 ) $ 2,955,944 $ 21,505,633 $ 912,154 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Cemtrex, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders’ Equity (Continued) (Unaudited) Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit) At cost Income(loss) Equity interest Preferred Stock Series 1 Preferred Stock Series A Preferred Stock Series C Common Stock Par Retained Accumulated Par Value $0.001 Par Value $0.001 Par Value $0.001 Value $0.01 Additional Earnings Treasury other Cemtrex Non- Number of Number of Number of Number of Paid-in (Accumulated Stock, Comprehensive Stockholders’ controlling Shares Amount Shares Amount Shares Amount Shares Amount Capital Deficit) At cost Income(loss) Equity interest Balance at September 30, 2020, as restated 2,156,784 $ 2,157 1,000,000 $ 1,000 100,000 $ 100 17,622,539 $ 17,623 $ 60,221,766 $ ( 34,100,067 ) $ ( 148,291 ) $ 1,812,457 $ 27,806,745 $ 1,042,300 Beginning balance, value 2,156,784 $ 2,157 1,000,000 $ 1,000 100,000 $ 100 17,622,539 $ 17,623 $ 60,221,766 $ ( 34,100,067 ) $ ( 148,291 ) $ 1,812,457 $ 27,806,745 $ 1,042,300 Foreign currency translation gain/(loss) - - - 37,864 37,864 Share-based compensation 16,071 16,071 Shares issued to pay notes payable - - 345,638 345 407,507 407,852 Dividends paid in Series 1 preferred shares 108,169 108 ( 108 ) - Income/(loss) attributable to noncontrolling interest - ( 40,247 ) Net loss ( 1,692,611 ) ( 1,692,611 ) Balance at December 31, 2020 2,264,953 2,265 1,000,000 1,000 100,000 100 17,968,177 17,968 60,645,236 ( 35,792,678 ) ( 148,291 ) 1,850,321 26,575,921 1,002,053 Ending balance, value 2,264,953 2,265 1,000,000 1,000 100,000 100 17,968,177 17,968 60,645,236 ( 35,792,678 ) ( 148,291 ) 1,850,321 26,575,921 1,002,053 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Cemtrex, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) Cash Flows from Operating Activities 2021 2020 For the three months ended December 31, Cash Flows from Operating Activities 2021 2020 Net income/(loss) $ ( 4,529,823 ) $ ( 1,732,858 ) Adjustments to reconcile net loss to net cash provided/(used) by operating activities: Depreciation and amortization 262,833 360,578 (Gain)/loss on disposal of property and equipment 27,170 ( 4,050 ) Amortization of right-of-use assets 214,511 186,777 Change in allowance for doubtful accounts 94,588 ( 3,979 ) Share-based compensation 45,371 16,069 Income tax expense/ (benefit) - ( 28,954 ) Interest expense paid in equity shares 821,592 87,099 Accrued interest on notes payable 132,162 126,390 Amortization of original issue discounts on notes payable 325,000 250,000 Gain/loss on marketable securities 21 ( 942,923 ) Discharge of Paycheck Protection Program Loans ( 971,500 ) - Changes in operating assets and liabilities net of effects from acquisition of subsidiaries: Accounts receivable 2,168,559 2,213,132 Accounts receivable - related party ( 5,166 ) ( 243,006 ) Inventory ( 1,428,411 ) ( 632,610 ) Prepaid expenses and other current assets ( 141,859 ) 273,705 Other assets ( 384 ) 141,058 Other liabilities ( 88,266 ) 7,856 Accounts payable ( 722,735 ) ( 702,285 ) Operating lease liabilities ( 122,583 ) ( 192,534 ) Deposits from customers 186,470 3,539 Accrued expenses ( 142,307 ) ( 38,891 ) Deferred revenue ( 353,122 ) ( 156,166 ) Income taxes payable ( 124,823 ) ( 74,099 ) Net cash used by operating activities ( 4,352,702 ) ( 1,086,152 ) Cash Flows from Investing Activities Purchase of property and equipment ( 301,327 ) ( 14,807 ) Proceeds from sale of property and equipment 9,661 9,586 Investment in MasterpieceVR - ( 900,000 ) Investment in related party - ( 500,000 ) Proceeds from sale of marketable securities - 4,307,594 Purchase of marketable securities - ( 3,569,760 ) Net cash used by investing activities ( 291,666 ) ( 667,387 ) Cash Flows from Financing Activities Payments on notes payable ( 326,763 ) ( 1,275,000 ) Payments on bank loans ( 305,990 ) ( 354,708 ) Net cash used by financing activities ( 632,753 ) ( 1,629,708 ) Effect of currency translation 63,228 ( 24,116 ) Net decrease in cash, cash equivalents, and restricted cash ( 5,277,121 ) ( 3,383,247 ) Cash, cash equivalents, and restricted cash at beginning of period 17,186,323 21,072,859 Cash, cash equivalents, and restricted cash at end of period $ 11,972,430 $ 17,665,496 Balance Sheet Accounts Included in Cash, Cash Equivalents, and Restricted Cash Cash and equivalents $ 10,338,978 $ 15,866,068 Restricted cash 1,633,452 1,799,428 Total cash, cash equivalents, and restricted cash $ 11,972,430 $ 17,665,496 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Cemtrex, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Continued) (Unaudited) Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest $ 126,715 $ 145,452 Cash paid during the period for income taxes $ 124,823 $ 74,099 Supplemental Schedule of Non-Cash Investing and Financing Activities Investment in Virtual Driver Interactive $ - $ 439,774 Stock issued to pay notes payable $ 3,288,071 $ 407,854 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 Cemtrex Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 – ORGANIZATION AND PLAN OF OPERATIONS Cemtrex was incorporated in 1998, in the state of Delaware and has evolved through strategic acquisitions and internal growth into a leading multi-industry technology company. The Company has expanded in a wide range of sectors, including smart technologies, virtual and augmented realities, industrial solutions, and intelligent security systems. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Cemtrex” or “management” refer to Cemtrex, Inc. and its subsidiaries. The Company has two business segments, consisting of (i) Advanced Technologies (AT) and (ii) Industrial Services (IS). Advanced Technologies (AT) Cemtrex’s Advanced Technologies segment operates several brands that deliver cutting-edge software and hardware technologies: - Vicon Industries – Vicon Industries, a majority owned subsidiary, provides end-to-end video security solutions to meet the toughest corporate, industrial and governmental security challenges. Vicon’s products include browser-based video monitoring systems and analytics-based recognition systems, cameras, servers, and access control systems for every aspect of security and surveillance in industrial and commercial facilities, federal prisons, hospitals, universities, schools, and federal and state government offices. Vicon provides cutting edge, mission critical security and video surveillance solutions utilizing Artificial Intelligence (AI) based data algorithms. - SmartDesk – SmartDesk is focused on reinventing the workspace through developing state-of-the-art, modern, fully integrated, workplace solutions. - Cemtrex XR (“CXR”) – CXR is focused on realizing the potential of the metaverse. CXR delivers Virtual Reality (VR) and Augmented Reality (AR) solutions that provide higher productivity, progressive design and impactful experiences for consumer products, and various commercial and industrial applications. The Company is in the process of developing virtual reality applications for commercialization in the metaverse over the next couple years. CXR also invests in emerging startups focused on building best in class solutions for the metaverse. - Virtual Driver Interactive (“VDI”) – VDI provides innovative driver training simulation solutions for effective and engaging learning for all ages and skills. - Bravo Strong – Bravo Strong is a gaming and content studio working to building games and experiences for the metaverse. - good tech (formerly Cemtrex Labs) – good tech provides mobile, web, and enterprise software application development services for startups to large enterprises. Industrial Services (IS) Cemtrex’s IS segment operates through a brand, Advanced Industrial Services (“AIS”), that offers single-source expertise and services for rigging, millwrighting, in plant maintenance, equipment erection, relocation, and disassembly to diversified customers. We install high precision equipment in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals among others. We are a leading provider of reliability-driven maintenance and contracting solutions for the machinery, packaging, printing, chemical, and other manufacturing markets. The focus is on customers seeking to achieve greater asset utilization and reliability to cut costs and increase production from existing assets, including small projects, sustaining capital, turnarounds, maintenance, specialty welding services, and high-quality scaffolding. 9 Acquisition of Virtual Driver Interactive On October 26, 2020, the company acquired Virtual Driver Interactive (“VDI”), a California based provider of innovative driver training simulation solutions for a purchase price of $ 1,339,774 plus contingent consideration of $ 175,428 . For over 10 years, VDI has been known for its effective and engaging driver training systems, designed for users of all ages and skill levels. The Company offers comprehensive training for new teen and novice drivers, along with advanced training for corporate fleets and truck drivers. VDI’s wide range of training courses and system options provide customers with highly portable, affordable and effective solutions, all while focusing on the dangers of distracted driving. Results for VDI will be reported under the AT segment. The Company paid $ 900,000 in cash and issued a note payable in the amount of $ 439,774 . This note carries interest of 5 % and is payable in two installments of $ 239,774 plus accumulated interest on October 26, 2021, and $ 200,000 plus accumulated interest on October 26, 2022. Additionally, the Company paid contingent consideration of $ 175,428 in May 2021. There is no further contingent consideration specified in the purchase agreement. The Company has accounted for this acquisition as a business combination and has allocated the purchase price as follows, $ 876,820 to proprietary software, $ 39,992 to inventory, and $ 598,391 to goodwill. Strategic Investment On November 13, 2020, Cemtrex made a $ 500,000 investment via a simple agreement for future equity(“SAFE”) in MasterpieceVR. The SAFE provides that the Company will automatically receive shares of the entity based on the conversion rate of future equity rounds up to a valuation cap, as defined. MasterpieceVR is a software company that is developing software for content creation using virtual reality. The investment is included in other assets in the accompanying balance sheet and the Company accounts for this investment and recorded at cost. No impairment has been recorded for the period ended December 31, 2021. 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 the last 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 had experienced relatively less slow down. Bookings and revenue are starting to show signs of recovery in this fiscal quarter compared to the same period last year. However, 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. Additionally, increased prices and the need to increase wages to retain talent may cause our gross margin percentages to shrink and our operational costs to rise. The broader implications of COVID-19 on our results from operations going forward remains uncertain. The COVID-19 pandemic and the resulting supply chain issues and inflation 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, opportunities in the video surveillance field have been growing for Vicon products. The extent of the pandemics 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. 10 NOTE 2 – INTERIM STATEMENT PRESENTATION Basis of Presentation and Use of Estimates The accompanying unaudited condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 30, 2021, of Cemtrex Inc. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X pursuant to the requirements of the U.S. Securities and Exchange Commission (‘SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities in the condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenues, expenses and cash flows during the periods presented. Actual amounts and results could differ from those estimates. The estimates and assumptions the Company makes are based on historical factors, current circumstances and the experience and judgment of the Company’s management. The Company evaluates its estimates and assumptions on an ongoing basis. The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, Cemtrex Advanced Technologies Inc., Cemtrex Technologies Pvt. Ltd., Cemtrex XR Inc., and Advanced Industrial Services, Inc. and the Company’s majority owned subsidiary Vicon Industries, Inc. and its subsidiary, Vicon Industries Ltd. All inter-company balances and transactions have been eliminated in consolidation. Accounting Pronouncements Significant Accounting Policies Note 2 of the Notes to Consolidated Financial Statements, included in the annual report on Form 10-K for the year ended September 30, 2021, includes a summary of the significant accounting policies used in the preparation of the consolidated financial statements. 11 Recently Issued Accounting Standards ASU 2016-13 Measurement of Credit Losses on Financial Instrument is effective for fiscal years beginning after December 15, 2022. This is not expected to apply to the Company as financial instruments giving rise to credit risk are not utilized by the Company. In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this new guidance will have on its financial statements The Company does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements. NOTE 3 – LOSS PER COMMON SHARE Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants. For the three months ended December 31, 2021, and 2020, the following items were excluded from the computation of diluted net loss per common share as their effect is anti-dilutive: SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER COMMON SHARE AS ANTI-DILUTIVE EFFECT 2021 2020 For the three months ended December 31, 2021 2020 Warrants to purchase shares 433,965 433,965 Options 950,000 945,833 Net loss per common share anti-dilutive effect 950,000 945,833 NOTE 4 – SEGMENT INFORMATION The Company reports and evaluates financial information for two segments: Advanced Technologies (AT) segment, and the Industrial Services (IS) segment. The AT segment develops smart devices and provides progressive design and development solutions to create impactful experiences for mobile, web, virtual and augmented reality, wearables and television as well as providing cutting edge, mission critical security and video surveillance. The IS segment offers single-source expertise and services for rigging, millwrighting, in plant maintenance, equipment erection, relocation, and disassembly to diversified customers in USA in industries such as: manufacturing, steel, printing, construction, & petrochemical. 12 The following tables summarize the Company’s segment information: SCHEDULE OF SEGMENT INFORMATION 2021 2020 For the three months ended December 31, 2021 2020 Revenues from external customers Advanced Technologies $ 5,618,517 $ 4,672,869 Industrial Services 5,053,972 4,163,207 Total revenues $ 10,672,489 $ 8,836,076 Gross profit Advanced Technologies $ 2,439,009 $ 2,346,272 Industrial Services 1,430,185 1,659,198 Total gross profit $ 3,869,194 $ 4,005,470 Operating loss Advanced Technologies $ ( 3,894,624 ) $ ( 1,842,346 ) Industrial Services ( 159,899 ) ( 203,605 ) Total operating loss $ ( 4,054,523 ) $ ( 2,045,951 ) Other income/(expense) Advanced Technologies $ ( 424,252 ) $ 367,235 Industrial Services ( 51,048 ) ( 25,188 ) Total other expense $ ( 475,300 ) $ 342,047 Depreciation and Amortization Advanced Technologies $ 83,610 $ 115,832 Industrial Services 179,223 244,746 Total depreciation and amortization $ 262,833 $ 360,578 December 31, September 30, 2021 2021 Identifiable Assets Advanced Technologies $ 29,506,121 $ 33,850,496 Industrial Services 17,315,942 19,089,392 Total Assets $ 46,822,063 $ 52,939,888 NOTE 5 – FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy is applied to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the guidance for fair value measurements are described below: Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Our Level 1 assets include cash equivalents, banker’s acceptances, trading securities investments and investment funds. We measure trading securities investments and investment funds at quoted market prices as they are traded in an active market with sufficient volume and frequency of transactions. 13 Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. Level 3 assets and liabilities include cost method investments. Quantitative information for Level 3 assets and liabilities reviewed at each reporting period includes indicators of significant deterioration in the earnings performance, credit rating, asset quality, business prospects of the investee, and financial indicators of the investee’s ability to continue as a going concern. The Company’s fair value assets at December 31, 2021 and September 30, 2021, are as follows. SCHEDULE OF FAIR VALUE OF ASSETS Quoted Prices Significant in Active Other Significant Balance Markets for Observable Unobservable as of Identical Assets Inputs Inputs December 31, (Level 1) (Level 2) (Level 3) 2021 Assets Investment in marketable securities (included in short-term investments) $ 14,960 $ - $ - $ 14,960 $ 14,960 $ - $ - $ 14,960 Quoted Prices Significant in Active Other Significant Balance Markets for Observable Unobservable as of Identical Assets Inputs Inputs September, 30 (Level 1) (Level 2) (Level 3) 2021 Assets Investment in marketable securities (included in short-term investments) $ 14,981 $ - $ - $ 14,981 $ 14,981 $ - $ - $ 14,981 NOTE 6 – RESTRICTED CASH A subsidiary of the Company participates in a consortium in order to self-insure group care coverage for its employees. The plan is administrated by Benecon Group and the Company makes monthly deposits in a trust account to cover medical claims and any administrative costs associated with the plan. These funds, as required by the plan are restricted in nature and amounted to $ 1,476,037 at December 31, 2021 and $ 1,601,932 at Spentember 30, 2021. Additionally, the Company has a standby letter of credit for deposit on a building lease and payable against a money market account. The amount of the standby letter of credit is $ 157,415 as of December 31, 2021 and Sepetmber 30, 2021 . NOTE 7 – ACCOUNTS RECEIVABLE, NET Accounts receivables, net consist of the following: SCHEDULE OF ACCOUNTS RECEIVABLE, NET December 31, September 30, 2021 2021 Accounts receivable $ 5,821,329 $ 7,989,888 Allowance for doubtful accounts ( 273,580 ) ( 178,992 ) Accounts receivables, net, total $ 5,547,749 $ 7,810,896 Accounts receivable include amounts due for shipped products and services rendered. Allowance for doubtful accounts include estimated losses resulting from the inability of our customers to make required payments. 14 NOTE 8 – INVENTORY, NET Inventory, net, consist of the following: SCHEDULE OF INVENTORY, NET December 31, September 30, 2021 2021 Raw materials $ 2,109,452 $ 1,957,410 Work in progress 947,091 429,871 Finished goods 5,848,146 5,191,007 Inventory, gross 8,904,689 7,578,288 Less: Allowance for inventory obsolescence ( 1,818,991 ) ( 1,921,001 ) Inventory –net of allowance for inventory obsolescence $ 7,085,698 $ 5,657,287 NOTE 9 – PROPERTY AND EQUIPMENT Property and equipment are summarized as follows: SUMMARY OF PROPERTY AND EQUIPMENT December 31, September 30, 2021 2021 Land $ 790,373 $ 790,373 Building and leasehold improvements 2,907,109 2,892,900 Furniture and office equipment 515,873 501,885 Computers and software 1,313,816 1,105,681 Machinery and equipment 12,918,350 12,984,959 Property and equipment, gross 18,445,521 18,275,798 Less: Accumulated depreciation ( 11,708,650 ) ( 11,536,854 ) Property and equipment, net $ 6,736,871 $ 6,738,944 Depreciation expense for the three months ended December 31, 2021, and 2020 were $ 262,833 and $ 360,578 NOTE 10 – LEASES ASC 842, “Leases”, requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at either the effective date (the “effective date method”) or the beginning of the earliest period presented (the “comparative method”) using a modified retrospective approach. Under the effective date method, the Company’s comparative period reporting is unchanged. In contrast, under the comparative method, the Company’s date of initial application is the beginning of the earliest comparative period presented, and the Topic 842 transition guidance is then applied to all comparative periods presented. Further, under either transition method, the standard includes certain practical expedients intended to ease the burden of adoption. The Company adopted ASC 842 October 1, 2019, using the effective date method and elected certain practical expedients allowing the Company not to reassess: ● whether expired or existing contracts contain leases under the new definition of a lease; ● lease classification for expired or existing leases; and ● whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. The Company also made the accounting policy decision not to recognize lease assets and liabilities for leases with a term of 12 months or less. 15 The Company entered into a financing lease for a single vehicle in the Industrial services segment with a term of 3 years. The Company entered into operating leases for its facilities in New York, United Kingdom, and India, as well as for vehicles for use in our Industrial Services segment. The operating lease terms range from 2 to 7 years. The Company excluded the renewal option on its applicable facility leases from the calculation of its right-of-use assets and lease liabilities. Finance and operating lease liabilities consist of the following: SUMMARY OF FINANCE AND OPERATING LEASE LIABILITIES December 31, September 30, 2021 2021 Lease liabilities - current Finance leases $ - $ - Operating leases 789,346 830,791 Lease liabilities - current 789,346 830,791 Lease liabilities - net of current portion Finance leases $ - $ - Operating leases 1,936,270 2,017,408 Lease liabilities - net of current portion $ 1,936,270 $ 2,017,408 A reconciliation of undiscounted cash flows to finance and operating lease liabilities recognized in the condensed consolidated balance sheet at December 31, 2021, is set forth below: SCHEDULE OF RECONCILIATION OF UNDISCOUNTED CASH FLOWS TO FINANCE AND OPERATING LEASE LIABILITIES Years ending September 30, Finance leases Operating Leases Total 2022 - 685,022 685,022 2023 - 704,934 704,934 2024 - 580,667 580,667 2025 - 557,870 557,870 2026 & Thereafter - 661,696 661,696 Undiscounted lease payments - 3,190,189 3,190,189 Amount representing interest - ( 464,573 ) ( 464,573 ) Discounted lease payments $ - $ 2,725,616 $ 2,725,616 16 Additional disclosures of lease data are set forth below: SCHEDULE OF LEASE COSTS Three months ended December 31, 2021 December 31, 2020 Lease costs: Finance lease costs: Depreciation of finance lease assets $ - $ 5,728 Interest on lease liabilities - 27 Operating lease costs: Amortization of right-of-use assets 214,511 186,777 Interest on lease liabilities 24,341 16,636 Total lease cost $ 238,852 $ 209,168 Other information: Cash paid for amounts included in the measurement of lease liabilities: Operating leases $ 122,583 $ 178,228 Finance leases - 14,306 $ 122,583 $ 192,534 Weighted-average remaining lease term - finance leases (months) 0 7 Weighted-average remaining lease term - operating leases (months) 52 48 Weighted-average discount rate - finance leases 3.63 % 3.63 % Weighted-average discount rate - operating leases 6.85 % 6.64 % The Company used the rate implicit in the lease, where known, or its incremental borrowing rate as the rate used to discount the future lease payments. NOTE 11 – PREPAID AND OTHER CURRENT ASSETS On December 31, 2021, the Company had prepaid and other current assets consisting of prepayments on inventory purchases of $ 467,093 , and other current assets of $ 2,260,418 . On September 30, 2021, the Company had prepaid and other current assets consisting of prepayments on inventory purchases of $ 298,707 , and other current assets of $ 2,286,945 . NOTE 12 – OTHER ASSETS As of December 31, 2021, the Company had other assets of $ 697,624 which was comprised of rent security of $ 96,320 , a strategic investment in MasterpieceVR of $ 500,000 , and other assets of $ 101,304 . As of September 30, 2021, the Company had other assets of $ 697,240 which was comprised of rent security deposits of $ 84,362 , Investment in Masterpiece VR valued at $ 500,000 , and other assets of $ 112,878 . NOTE 13 – RELATED PARTY TRANSACTIONS On August 31, 2019, the Company entered into an Asset Purchase Agreement for the sale of Griffin Filters, LLC to Ducon Technologies, Inc., which Aron Govil, the Company’s Founder and former CFO, is President, for total consideration of $ 550,000 . As of December 31, 2021, and September 30, 2021, there was $ 1,492,321 and $ 1,487,155 in receivables due from Ducon Technologies, Inc., respectively. At December 31, 2021, $500,000 of the balance due is for the sale of Griffin, which was due in February 2021, and the remaining balance are various receivables with various due dates within the next fiscal year. The Company is currently negotiating a payment agreement surrounding all these amounts due. 17 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 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 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. 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). NOTE 14 – LINES OF CREDIT AND LONG-TERM LIABILITIES Lines of credit The Company currently has a line of credit with Fulton Bank for $ 3,500,000 . The line carries an interest of LIBOR plus 2.00 % per annum ( 2.078 % as of December 31, 2021 and 2.075 % as of September 30, 2021). At December 31, 2021 and September 30, 2021, there was no outstanding balance on this line of credit. The terms of this line of credit are subject to the bank’s review annually on February 1. 18 Loans payable to bank On December 15, 2015, the Company acquired a loan from Fulton Bank in the amount of $ 5,250,000 in order to fund the purchase of Advanced Industrial Services, Inc. $ 5,000,000 of the proceeds went to direct purchase of AIS. This loan carries interest of LIBOR plus 2.25 % per annum ( 2.328 % as of December 31, 2021 and 2.325 % as of September 30, 2021) and is payable on December 15, 2022 . This loan carries loan covenants which the Company was in compliance with as of December 31, 2021. The outstanding balance on this loan was $ 977,808 and $ 1,218,680 , on December 31, 2021, and September 30, 2021, respectively. This loan is secured by the assets of the Company. On May 1, 2018, the Company acquired a loan from Fulton Bank in the amount of $ 400,000 in order to fund new equipment for Advanced Industrial Services, Inc. This loan carries interest of LIBOR plus 2.00 % per annum ( 2.078 % as of December 31, 2021 and 2.075 % as of September 30, 2021) and is payable on May 1, 2023 . This loan carries loan covenants which the Company was in compliance with as of December 31, 2021. The outstanding balance on this loan was $ 133,008 and $ 149,914 , on December 31, 2021, and September 30, 2021, respectively. This loan is secured by the assets of the Company On January 28, 2020, the Company acquired a loan from Fulton Bank in the amount of $ 360,000 in order to fund new equipment for Advanced Industrial Services, Inc. This loan carries interest of LIBOR plus 2.25 % per annum ( 2.328 % as of December 31, 2021 and 2.325 % as of September 30, 2021) and is payable on May 1, 2023 . This loan carries loan covenants which the Company was in compliance with as of December 31, 2021. The outstanding balance on this loan was $ 234,821 and $ 258,060 , on December 31, 2021, and September 30, 2021, respectively. This loan is secured by the assets of the Company Notes payable On September 30, 2020, the Company, issued a note payable to an independent private lender in the amount of $ 4,605,000 . This note carries interest of 8 % and matures on March 30, 2022 . After deduction of an original issue discount of 600,000 and legal fees of $ 5,000 , the Company received $ 4,000,000 in cash. As of December 31, 2021, and September 30, 2021, this note had a balance of $ 0 and $ 2,256,448 , respectively. As of December 31, 2021, and September 30, 2021, this note had unamortized original issue discount balance of $ 0 and $ 200,000 , respectively On September 30, 2021, the Company, issued a note payable to an independent private lender in the amount of $ 5,755,000 . This note carries interest of 8 % and matures on March 30, 2023 . After deduction of an original issue discount of 750,000 and legal fees of $ 5,000 , the Company received $ 5,000,000 in cash. As of December 31, 2021, and September 30, 2021, this note had a balance of $ 5,248,855 and $ 5,005,000 , respectively. As of December 31, 2021, and September 30, 2021, this note had unamortized original issue discount balance of $ 625,000 and $ 750,000 , respectively On March 3, 2020, Vicon, a subsidiary of the Company, amended the $ 5,600,000 Term Loan Agreement with NIL Funding Corporation (“NIL”). Upon closing, $ 500,000 of outstanding borrowings were repaid to NIL. The Agreement requires monthly payments of accrued interest that began on October 1, 2018. This note carries interest of 8.85 % and matures on March 30, 2022 . This note carries loan covenants which the Company is in compliance with as of December 31, 2021. As of December 31, 2021, and September 30, 2021, this note had a balance of $ 3,529,743 and $ 3,604,743 , respectively. Mortgage Payable On January 28, 2020, the Company’s subsidiary, Advanced Industrial Services, Inc., completed the purchase of two buildings for a total purchase price of $ 3,381,433 . The Company paid $ 905,433 in cash and acquired a mortgage from Fulton Bank in the amount of $ 2,476,000 . This mortgage carries interest of LIBOR plus 2.50 % per annum ( 2.578 % as of December 31, 2021 and 2.575 % as of September 30, 2021) and is payable on January 28, 2040 . This loan carries loan covenants similar to covenants on the Company’s other loans from Fulton Bank. As of December 31, 2021, the Company was in compliance with these covenants. As of December 31, 2021, and September 30, 2021, this mortgage had a balance of $ 2,314,141 and $ 2,339,114 , respectively. 19 Paycheck Protection Program Loans In April and May of 2020, and January and April of 2021, the Company and its subsidiaries applied for and were granted $ 6,413,385 in Paycheck Protection Program loans under the CARES Act. These loans bear interest of 2 % and mature in two years. The Company has applied for and received loan forgiveness under the provisions of the CARES Act for $ 6,291,985 . The remaining loan of $ 121,400 is recorded under Paycheck Protection Program Loans on our Condensed Consolidated Balance Sheet as of December 31, 2021, net of the short-term portion of $ 60,700 . The issuing bank determined that this loan qualifies for loan forgiveness, however the Company is awaiting final approval from the Small Business Administration. NOTE 15 – STOCKHOLDERS’ EQUITY Preferred Stock The Company is authorized to issue 10,000,000 shares of Preferred Stock, $ 0.001 par value. As of December 31, 2021, and September 30, 2021, there were 2,029,753 and 1,935,151 shares issued and outstanding, respectively. Series 1 Preferred Stock During the three months ended December 31, 2021, 94,602 shares of Series 1 Preferred Stock were issued to pay dividends to holders of Series 1 Preferred Stock. As of December 31, 2021, and September 30, 2021, there were 1,979,753 and 1,885,151 shares of Series 1 Preferred Stock issued and outstanding, respectively. Series C Preferred Stock On October 3, 2019, pursuant to Article IV of our Articles of Incorporation, our Board of Directors voted to designate a class of preferred stock entitled Series C Preferred Stock, consisting of up to one hundred thousand ( 100,000 ) shares, par value $ 0.001 . Under the Certificate of Designation, holders of Series C Preferred Stock are entitled to the number of votes equal to the result of (i) the total number of shares of Common Stock outstanding at the time of such vote multiplied by 10.01, and divided by (ii) the total number of shares of Series C Preferred Stock outstanding at the time of such vote, at each meeting of our shareholders with respect to any and all matters presented to our shareholders for their action or consideration, including the election of directors. As of December 31, 2021, and September 30, 2021, there were 50,000 shares of Series C Preferred Stock issued and outstanding. Common Stock The Company is authorized to issue 50,000,000 shares of common stock, $ 0.001 par value. As of December 31, 2021, there were 23,673,210 shares issued and outstanding and at September 30, 2021, there were 20,782,194 shares issued and outstanding. During the three months ended December 31, 2021, 2,981,016 shares of the Company’s common stock have been issued to satisfy $ 2,112,500 of notes payable, $ 353,978 in accrued interest, and $ 821,593 of excess value of shares issued recorded as interest expense. NOTE 16 – SHARE-BASED COMPENSATION For the three months ended December 31, 2021, and 2020, the Company recognized $ 45,371 and $ 16,071 of share-based compensation expense on its outstanding options, respectively. As of December 31, 2021, $ 314,043 of unrecognized share-based compensation expense is expected to be recognized over a period of four years . Future compensation amounts will be adjusted for any change in estimated forfeitures. 20 NOTE 17 – COMMITMENTS AND CONTINGENCIES The Company has its corporate headquarters in New York City with a month-to-month lease of 2,500 square feet of office space at a rate of $ 13,000 per month. The Company’s IS segment owns approximately 25,000 square feet of warehouse space in Manchester, PA and approximately 43,000 square feet of office and warehouse space in York, PA. The IS segment also leases approximately 15,500 square feet of warehouse space in Emigsville, PA from a third party in a three-year lease at a monthly rent of $ 4,555 expiring on August 31, 2022 . The Company’s AT segment leases (i) approximately 6,700 square feet of office and warehouse space in Pune, India from a third party in an five year lease at a monthly rent of $ 6,453 (INR 456,972 ) expiring on February 28, 2024 , (ii) approximately 30,000 square feet of office and warehouse space in Hauppauge, New York from a third party in a seven -year lease at a monthly rent of $ 28,719 expiring on March 31, 2027 , and (iii) approximately 9,400 square feet of office and warehouse space in Hampshire, England in a fifteen-year lease with at a monthly rent of $ 7,329 (£ 5,771 ) which expires on March 24, 2031 and contains provisions to terminate in 2026 . NOTE 18 – SUBSEQUENT EVENTS Cemtrex has evaluated subsequent events up to the date the condensed consolidated financial statements were issued. Cemtrex concluded that the following subsequent events have occurred and require recognition or disclosure in the condensed consolidated financial statements. On January 28, 2022, Christopher C. Moore was dismissed from his position as Chief Financial Officer and Paul J. Wyckoff was appointed Cemtrex’s Interim Chief Financial Officer. On February 2, 2022, the Company invested an additional $ 500,000 investment via a simple agreement for future equity(“SAFE”) in MasterpieceVR. 21