CEMTREX INC 10-Q

Item 2. 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. Our operations involve risks and uncertainties, many of which are outside our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. 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 its recent report on Form 10-K. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments. General Overview 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. 21 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. Significant Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based upon the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Although these estimates are based on our knowledge of current events, our actual amounts and results could differ from those estimates. The estimates made are based on historical factors, current circumstances, and the experience and judgment of our management, who continually evaluate the judgments, estimates and assumptions and may employ outside experts to assist in the evaluations. Certain of our accounting policies are deemed “significant”, as they are both most important to the financial statement presentation and require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our significant accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended September 30, 2021. Results of Operations – For the three months ending June 30, 2022, and 2021 Total revenue for the three months ended June 30, 2022, and 2021 was $13,630,846 and $10,326,431, respectively, an increase of $3,304,415, or 32%. Loss from operations for the three months ended June 30, 2022, was $2,120,849 compared to $2,300,269 for the three months ended June 30, 2021, a decrease on the loss of $179,420, or 8%. Total revenue for the quarter increased, as compared to total revenue in the same period last year, due to increased demand for the Company’s products and services. Loss from operations decreased due to increased revenues as compared to the same period in the prior year. Revenues Our Advanced Technologies segment revenues for the three months ended June 30, 2022, increased by $2,316,897 or 40% to $8,162,855 from $5,845,958 for the three months ended June 30, 2021. This increase is due to an increased demand for security technology products under our Vicon brand. Our Industrial Services segment revenues for the three months ended June 30, 2022, increased by $987,518 or 22%, to $5,467,991 from $4,480,473 for the three months ended June 30, 2021. This increase is mainly due to an increased demand for the segment’s products and services. Gross Profit Gross Profit for the three months ended June 30, 2022, was $5,876,356 or 43% of revenues as compared to gross profit of $4,127,716 or 40% of revenues for the three months ended June 30, 2021. Gross profit as a percentage of revenues increased in the three months ended June 30, 2022, compared to the three months ended June 30, 2021, due to price increases implemented throughout the company in response to rising costs of our goods and transportation costs. The Company’s gross profit margins vary from product to product and from customer to customer. 22 General and Administrative Expenses General and administrative expenses for the three months ended June 30, 2022, increased $1,278,940 or 23% to $6,948,959 from $5,670,019 for the three months ended June 30, 2021. General and administrative expenses as a percentage of revenues was 51% and 55% of revenues for the three-month periods ended June 30, 2022, and 2021, respectively. The increase in general and administrative expenses is the result of increased personnel, travel, depreciation and amortization, and insurance expenses. Research and Development Expenses Research and Development expenses for the three months ended June 30, 2022, was $1,048,246 compared to $757,966 for the three months ended June 30, 2021. Research and Development expenses are primarily related to the Advanced Technologies Segment’s development of proprietary technology and further developments of the SmartDesk and Artificial Intelligence (AI) and next generation solutions associated with security and surveillance systems software. Other Income/(Expense) Other income/(expense) for the third quarter of fiscal 2022, was $1,141,206 as compared to $3,468,649 for the third quarter of fiscal 2021. Other income/(expense) for the three months ended June 30, 2022, included realized and unrealized gain on marketable securities of $2,075,125. Provision for Income Taxes During the third quarter of fiscal 2022, the Company had an income tax benefit of $247,941 compared to an expense of $40,759 for the third quarter of fiscal 2021. The provision for income tax is based upon the projected income tax from the Company’s various U.S. and international subsidiaries that are subject to their respective income tax jurisdictions and the Company’s projected ability to utilize net loss carryforwards. Net income/(loss) attributable to Cemtrex, Inc. shareholders The Company had a net loss attributable to Cemtrex, Inc. shareholders of $680,739, or 5% of revenues, for the three-month period ended June 30, 2022, as compared to net income attributable to Cemtrex, Inc. shareholders of $1,098,013 or 11% of revenues, for the three months ended June 30, 2021. Net income/(loss) attributable to Cemtrex, Inc. shareholders decreased in the third quarter as compared to the same period last year was primarily due to operating, and other expenses mentioned above. Results of Operations – For the nine months ending June 30, 2022, and 2021 Total revenue for the nine months ended June 30, 2022, and 2021 was $37,031,550 and $28,422,892 respectively, an increase of $8,608,658, or 30%. Loss from operations for the nine months ended June 30, 2022, was $9,994,709 compared to $6,308,818 for the nine months ended June 30, 2021, an increase on the loss of $3,685,891, or 58%. Total revenue for the period increased, as compared to total revenue in the same period last year, due to increased demand for the Company’s products and services. Loss from operations increased due to increased expenses related to personnel costs, depreciation and amortization, insurance, travel, and research and development costs. Revenues Our Advanced Technologies segment revenues for the nine months ended June 30, 2022, increased by $5,497,438 or 34% to $21,503,679 from $16,006,241 for the nine months ended June 30, 2021. This increase is due to an increased demand for security technology products under our Vicon brand. Our Industrial Services segment revenues for the nine months ended June 30, 2022, increased by $3,111,220 or 25%, to $15,527,871 from $12,416,651 for the nine months ended June 30, 2021. This increase is mainly due to an increased demand and increased pricing for the segment’s products and services. 23 Gross Profit Gross Profit for the nine months ended June 30, 2022, was $13,798,161 or 37% of revenues as compared to gross profit of $12,062,070 or 42% of revenues for the nine months ended June 30, 2021. Gross profit as a percentage of revenues decreased in the nine months ended June 30, 2022, compared to the nine months ended June 30, 2021, due to increased cost of revenues as a result of supply chain difficulties and increased transportation costs for goods. The Company’s gross profit margins vary from product to product and from customer to customer. General and Administrative Expenses General and administrative expenses for the nine months ended June 30, 2022, increased $3,980,996 or 24% to $20,318,196 from $16,337,200 for the nine months ended June 30, 2021. General and administrative expenses as a percentage of revenues was 55% and 57% of revenues for the nine-month periods ended June 30, 2022, and 2021, respectively. The increase in general and administrative expenses is the result of increased personnel, travel, depreciation and amortization, and insurance expenses. Research and Development Expenses Research and Development expenses for the nine months ended June 30, 2022, was $3,474,674 compared to $2,033,688 for the nine months ended June 30, 2021. Research and Development expenses are primarily related to the Advanced Technologies Segment’s development of proprietary technology and further developments of the SmartDesk and Artificial Intelligence (AI) and next generation solutions associated with security and surveillance systems software. Other Income/(Expense) Other income/(expense) for the first three quarters of fiscal 2022, was $(316,680) as compared to $8,315,729 for the first three quarters of fiscal year 2021. Other income/(expense) for the nine months ended June 30, 2022, included the gain on the forgiveness of our PPP loans of $971,500 and the issuance of common stock in connection with a note payable of $700,400 and the realized and unrealized gain on marketable securities of $2,235,738. Provision for Income Taxes During the first three quarters of fiscal year 2022, the Company had an income tax benefit of $247,941 compared to an expense of $168,190 for the first three quarters of fiscal year 2021. The provision for income tax is based upon the projected income tax from the Company’s various U.S. and international subsidiaries that are subject to their respective income tax jurisdictions and the Company’s projected ability to utilize net loss carryforwards. Net income/(loss) attributable to Cemtrex, Inc. shareholders The Company had a net loss attributable to Cemtrex, Inc. shareholders of $9,879,991, or 27% of revenues, for the nine-month period ended June 30, 2022, as compared to net income attributable to Cemtrex, Inc. shareholders of $1,859,534 or 7% of revenues, for the nine months ended June 30, 2021. Net loss attributable to Cemtrex, Inc. shareholders increased in the first three quarters of fiscal year 2022 as compared to the same period last year was primarily due to costs of revenues and operating expenses mentioned above. 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. 24 Liquidity and Capital Resources Working capital was $5,751,185 at June 30, 2022, compared to $15,088,892 at September 30, 2021. This includes cash and equivalents and restricted cash of $12,961,207 at June 30, 2022, and $17,186,323 at September 30, 2021. The decrease in working capital was primarily due to the Company’s use of cash to build inventory and a shift of liabilities to short-term during the first three quarters of fiscal year 2022. Trade receivables decreased $246,514 or 3% to $7,564,382 at June 30, 2022, from $7,810,896 at September 30, 2021. The decrease in trade receivables is attributable to increased collection efforts to keep our trade receivables from going past due. Inventories increased $2,801,243 or 50% to $8,458,530 at June 30, 2022, from $5,657,287 at September 30, 2021. The increase in inventories is attributable to the purchase of inventories for new products the Company plans to ship in the future and to build up stock inventory to account for supply chain issues. Cash used by operating activities for the nine months ended June 30, 2022 and 2021 was $10,246,799 and $6,198,611 respectively. The decrease in operating cash flows was primarily due to purchases on inventory and payment of accounts payable and accrued expenses. Cash provided by investment activities for the nine months ended June 30, 2022 was $517,029 compared to $154,326 for the nine-month period ending June 30, 2021. Investing activities for the first three quarters of fiscal year 2022 were driven mainly by the Company’s net gain on the purchase and sale of marketable securities and the sale of property and equipment. Cash provided by financing activities for the nine months ended June 30, 2022 and 2021 $5,902,298 compared to using cash of $160,158 for the nine-month period ending June 30, 2021. Financing activities were primarily driven by proceeds from the note payable issued in February of 2022. We believe that our cash on hand and cash generated by operations is sufficient to meet the capital demands of our current operations for the next year (ending June 30, 2023). While our working capital and current debt indicate a going concern issue, the Company has historically, from time to time, satisfied and may continue to satisfy certain short-term liabilities through the issuance of common stock, thus reducing our cash requirement to meet our operating needs. Any major increases in sales, particularly in new products, may require substantial 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. 25