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 company. The currently operates in two areas: industrial services, 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. During the first quarter of fiscal year 2023, The Company reorganized its reporting segments to be in line with its current structure. The Company has three business segments, consisting of (i) Security (ii) Industrial Services and (iii) Cemtrex Corporate. Security Cemtrex’s Security segment operates under the Vicon Industries brand. Vicon Industries, a majority owned subsidiary, provides end-to-end 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 innovative, mission critical security and video surveillance solutions utilizing Artificial Intelligence (AI) based data algorithms. Industrial Services Cemtrex’s Industrial Services segment operates under the 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 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. Cemtrex Corporate Cemtrex’s Corporate segment is the holding company of our other two segments. 24 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, 2022. Results of Operations – For the three months ending December 31, 2022, and 2021 Total revenue for the three months ended December 31, 2022, and 2021 was $11,970,242 and $9,413,395, respectively, an increase of $2,556,847, or 27%. Loss from continuing operations for the three months ended December 31, 2022, was $3,096,753 compared to $3,770,865 for the three months ended December 31, 2021, a decrease on the loss of $674,112, or 18%. 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 Security segment revenues for the three months ended December 31, 2022, increased by $2,646,131 or 40% to $7,004,744 from $4,358,613 for the three months ended December 31, 2021. This increase is due to an increased demand for Security technology. Our Industrial Services segment revenues for the three months ended December 31, 2022, decreased by $88,474 or 2%, to $4,965,498 from $5,053,972 for the three months ended December 31, 2021. This decrease is mainly due to timing of the recognition of revenue for the segment’s products and services. Gross Profit Gross Profit for the three months ended December 31, 2022, was $5,042,615 or 42% of revenues as compared to gross profit of $3,222,250 or 34% of revenues for the three months ended December 31, 2021. Gross profit in our Security segment was $3,403,690 or 49% of the segment’s revenues for the three months ended December 31, 2022 as compared to gross profit of $1,791,255 or 41% of the segment’s revenues for the period ended December 31, 2021. Gross profit as a percentage of revenues increased in the three months ended December 31, 2022, compared to the three months ended December 31, 2021, due to price increases implemented throughout the segment in response to rising costs of our goods and transportation costs. Gross profit in our Industrial Services segment was $1,638,925 or 33% of the segment’s revenues for the three months ended December 31, 2022 as compared to gross profit of $1,430,185 or 28% of the segment’s revenues for the period ended December 31, 2021. Gross profit as a percentage of revenues increased in the three months ended December 31, 2022, compared to the three months ended December 31, 2021, was primarily due to lower subcontractor costs. 25 General and Administrative Expenses General and administrative expenses for the three months ended December 31, 2022, increased $7,882 or 0.14% to $5,455,833 from $5,447,951 for the three months ended December 31, 2021. General and administrative expenses as a percentage of revenues were 46% and 58% of revenues for the three-month periods ended December 31, 2022, and 2021, respectively. Research and Development Expenses Research and Development expenses for the three months ended December 31, 2022, were $1,538,218 compared to $1,072,898 for the three months ended December 31, 2021. Research and Development expenses are primarily related to the Security Segment’s development of next generation solutions associated with security and surveillance systems software. Other Income/(Expense) Other income/(expense) for the first quarter of fiscal 2022, was an expense of $1,145,317 as compared to an expense of $472,266 for the first quarter of fiscal 2021. Other income/(expense) for the three months ended December 31, 2022, was mainly driven by interest on the Company’s debt. Other income/(expense) for the three months ended December 31, 2021, included the gain on the forgiveness of our PPP loans of $971,500. Provision for Income Taxes During the first quarters of fiscal 2022, and 2021, the Company took no provision on income taxes. 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. Loss from Discontinued Operations As discussed in Note 3, the Company had losses on discontinued operations of $3,239,621. The losses are comprised of the $2,455,701 loss on the sale of Cemtrex Advanced Technologies, and Cemtrex XR, Inc.. The net loss of $877,792 for the three months ended December 31, 2022, and the net gain on the recovery of cash from Vicon Industries Ltd. of $89,085. Losses on discontinued operations for the three months ended December 31, 2021 were $758,241 attributable to the operations of the Cemtrex brands discussed in Note 3. Net income/(loss) attributable to Cemtrex, Inc. shareholders The Company had a net loss attributable to Cemtrex, Inc. shareholders of $6,277,711, or 52% of revenues, for the three-month period ended December 31, 2022, as compared to net loss attributable to Cemtrex, Inc. shareholders of $4,477,951 or 42% of revenues, for the three months ended December 31, 2021. The net loss attributable to Cemtrex, Inc. shareholders increased in the first quarter as compared to the same period last year was primarily due to the loss 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 deficit was $469,270 at December 31, 2022, compared to working capital of $4,754,493 at September 30, 2022. This includes cash and equivalents and restricted cash of $7,370,333 at December 31, 2022, and $12,188,096 at September 30, 2022. The decrease in working capital was primarily due to the Company’s transfer of cash to in the sale of Cemtrex Advanced Technologies and Cemtrex XR, Inc. and accrual of interest on short-term liabilities during the first quarter of fiscal year 2023. 26 Cash used by operating activities for continuing operations for the three months ended December 31, 2022 and 2021 was $5,872,310 and $3,633,702 respectively. Cash provided by operating activities for discontinued operations for the three months ended December 31, 2022 was $2,501,426, compared to using cash of $719,237. The increase in operating cash usage for continuing operations was primarily due to increases of trade receivables, prepaid expenses, and other assets and payment of accounts payable and other liabilities. Trade receivables increased $1,536,861 or 28% to $6,936,077 at December 31, 2022, from $5,399,216 at September 30, 2022. The increase in trade receivables is attributable to increased sales in the Security segment. Inventories increased $116,492 or 1% to $8,604,759 at December 31, 2022, from $8,487,817 at September 30, 2022. The increase in inventories is attributable to inventories in transit yet to be sold. Cash used by investment activities for continuing operations for the three months ended December 31, 2022 was $568,111 compared to $291,666 for the three-month period ending December 31, 2021. Cash provided by investing activities for discontinued operations for the three months ended December 31, 2022 was $207,329. Investing activities for the first quarter of fiscal year 2023 were driven mainly by the Company’s purchase of property and equipment. Cash used by financing activities for the three months ended December 31, 2022, was $600,920 compared to $632,753 for the three-month period ending December 31, 2021. Financing activities were primarily driven by payments on the Company’s debt and the royalties receivable for discontinued operations. While our working capital deficit and current debt indicate a substantial doubt regarding the Company’s ability to continue as a going concern, 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. Additionally, the Company has recently sold unprofitable brands, reducing the cash required to maintain those brands, reevaluated our pricing model on our Vicon brand to improve margins on those products, and has effected a reverse stock split on our common stock to remain trading on the Nasdaq Capital Markets, and improved our ability to potentially raise capital through equity offerings that we may use to satisfy debt. In the event additional capital is raised through equity offerings and/or debt is satisfied with equity, it may have a dilutive effect on our existing stockholders. While the Company believes these plans are sufficient to meet the capital demands of our current operations for at least the next twelve months, the is no guarantee that we will succeed. 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 working capital needs. We currently do not have adequate cash to meet our short or long-term needs. The consolidated financial statements do not include any adjustments relating to this uncertainty. 27