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. 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, consisting of (i) Security, (ii) Industrial Services, and (iii) Cemtrex Corporate. Security Cemtrex’s Security segment operates under the brand of its majority owned subsidiary, Vicon Industries, Inc. (“Vicon”), which 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”), which offers single-source expertise and services for rigging, millwrighting, in plant maintenance, equipment erection, relocation, and disassembly to diversified customers. AIS installs high precision equipment in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals, among others. AIS is 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. 26 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 June 30, 2023, and 2022 Total revenue for the three months ended June 30, 2023, and 2022 was $14,730,140 and $12,108,904, respectively, an increase of $2,621,236, or 22%. Loss from continuing operations for the three months ended June 30, 2023, was $1,185,400 compared to income of $106,599 for the three months ended June 30, 2022, a decrease of $1,291,999, or 1,212%. 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. Income from continuing operations became a loss due to other income related to realized and unrealized gain on marketable securities during the same period in the prior year. Revenues Our Security segment revenues for the three months ended June 30, 2023, increased by $2,374,366 or 36% to $9,015,279 from $6,640,913 for the three months ended June 30, 2022. This increase is due to an increased demand for the Security segment’s products and services. Our Industrial Services segment revenues for the three months ended June 30, 2023, increased by $246,870 or 5%, to $5,714,861 from $5,467,991 for the three months ended June 30, 2022. This increase is mainly due to increased demand for the segment’s products and services. Gross Profit Gross Profit for the three months ended June 30, 2023, was $6,480,643 or 44% of revenues as compared to gross profit of $5,040,107 or 42% of revenues for the three months ended June 30, 2022. Gross profit in our Security segment was $4,404,836 or 49% of the segment’s revenues for the three months ended June 30, 2023, as compared to gross profit of $3,383,241 or 51% of the segment’s revenues for the period ended June 30, 2022. Gross profit as a percentage of revenues decreased in the three months ended June 30, 2023, compared to the three months ended June 30, 2022, due to negotiated terms on some sales. Gross profit in our Industrial Services segment was $2,075,807 or 36% of the segment’s revenues for the three months ended June 30, 2023, as compared to gross profit of $1,656,866 or 30% of the segment’s revenues for the period ended June 30, 2022. Gross profit as a percentage of revenues increased in the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was primarily due to lower subcontractor costs. General and Administrative Expenses General and administrative expenses for the three months ended June 30, 2023, decreased $4,569 or less than 1% to $5,376,960 from $5,381,529 for the three months ended June 30, 2022. General and administrative expenses as a percentage of revenues were 37% and 44% of revenues for the three-month periods ended June 30, 2023, and 2022, respectively. The decrease in general and administrative expenses is mainly related to decreased general and administrative expenses and professional fees expenses offset by increased personnel and insurance expenses. 27 Research and Development Expenses Research and Development expenses for the three months ended June 30, 2023, were $1,049,909 compared to $1,189,875 for the three months ended June 30, 2022, a decrease of $139,966 or 12%. 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 expense for the three months ended June 30, 2023, was $1,219,533, as compared to other income of $1,389,955 for the three months ended June 30, 2022. Other expense for the three months ended June 30, 2023, was mainly driven by interest on the Company’s debt. Other income for the three months ended June 30, 2022, included one-time realized and unrealized gain on marketable securities of $2,075,125. Provision for Income Taxes During the three months ended June 30, 2023, the Company had income tax expense of $19,641 and a benefit of $247,941 for the three months ended June 30, 2022. 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. Income/(loss) from Discontinued Operations For the three months ended June 30, 2023, the Company had income on discontinued operations of $13,281. This income is mainly related to the recognition of the royalties due from CXR, Inc. Losses on discontinued operations for the three months ended June 30, 2022, were $838,301 attributable to the operations of the Cemtrex brands discussed in Note 3. Results of Operations – For the nine months ending June 30, 2023, and 2022 Total revenue for the nine months ended June 30, 2023, and 2022 was $42,773,779 and $33,268,316, respectively, an increase of $9,505,463, or 29%. Loss from continuing operations for the nine months ended June 30, 2023, was $4,835,914 compared to $7,781,049 for the nine months ended June 30, 2022, a decrease on the loss of $2,945,135, or 38%. 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 continuing operations decreased due to increased revenues and improved gross profit margins as compared to the same period in the prior year. Revenues Our Security segment revenues for the nine months ended June 30, 2023, increased by $8,193,476 or 46% to $25,933,921 from $17,740,445 for the nine months ended June 30, 2022. This increase is due to an increased demand for the Security segment’s products and services. Our Industrial Services segment revenues for the nine months ended June 30, 2023, increased by $1,311,987 or 8%, to $16,839,858 from $15,527,871 for the nine months ended June 30, 2022. This increase is mainly due to increased demand for the segment’s products and services. Gross Profit Gross Profit for the nine months ended June 30, 2023, was $18,859,530 or 44% of revenues as compared to gross profit of $12,032,138 or 36% of revenues for the nine months ended June 30, 2022. Gross profit in our Security segment was $12,928,607 or 50% of the segment’s revenues for the nine months ended June 30, 2023, as compared to gross profit of $7,479,069 or 42% of the segment’s revenues for the nine-month period ended June 30, 2022. Gross profit as a percentage of revenues increased in the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022, due to price increases implemented throughout the segment in January 2023 in response to rising costs of our goods and a reduction in transportation costs in 2023, compared to the same period in 2022. 28 Gross profit in our Industrial Services segment was $5,930,923 or 35% of the segment’s revenues for the nine months ended June 30, 2023, as compared to gross profit of $4,553,069 or 29% of the segment’s revenues for the period ended June 30, 2022. Gross profit as a percentage of revenues increased in the nine months ended June 30, 2023, compared to the nine months ended June 30, 2022, was primarily due to lower subcontractor costs. General and Administrative Expenses General and administrative expenses for the nine months ended June 30, 2023, increased $361,229 or 2% to $16,456,602 from $16,095,373 for the nine months ended June 30, 2022. General and administrative expenses as a percentage of revenues were 38% and 48% of revenues for the nine-month periods ended June 30, 2023, and 2022, respectively. The increase in general and administrative expenses is mainly related to increased employee costs and insurance expenses. Research and Development Expenses Research and Development expenses for the nine months ended June 30, 2023, were $3,895,717 compared to $3,660,883 for the nine months ended June 30, 2022, an increase of $234,834 or 6%. 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 Expense Other expense for the nine months ended June 30, 2023, was $3,323,484, as compared to an expense of $304,872 for the nine months ended June 30, 2022. Other expense for the nine months ended June 30, 2023, was mainly driven by interest on the Company’s debt, offset by a one-time income related to employee retention credits of $416,502. Other expense for the nine months ended June 30, 2022, included the gain on the forgiveness of our PPP loans of $971,500 and the realized and unrealized gain on marketable securities of $2,235,738. Provision for Income Taxes During the nine months ended June 30, 2023, and 2022, the Company had income tax expense of $19,641 and a benefit of $247,941 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 The Company had losses on discontinued operations of $3,212,108. The losses are comprised of the $2,455,341 loss on the sale of Cemtrex Advanced Technologies, and Cemtrex XR, Inc. The net loss of $879,727 attributable to the operations of the Cemtrex brands, the recognition of discounted royalties of $33,875, and the net gain on the recovery of cash from Vicon Industries Ltd. of $89,085. Losses on discontinued operations for the nine months ended June 30, 2022, were $2,282,399 attributable to the operations of the Cemtrex brands discussed in Note 3. Effects of Inflation The Company’s business and operations have been affected by inflation during the periods for which financial information is presented. In response, the Company has instituted price increases and initiated cost-saving measures to mitigate the effects of inflation on operations. Liquidity and Capital Resources Working capital deficit was $967,489 at June 30, 2023, compared to working capital of $6,252,972 at September 30, 2022. This includes cash and equivalents and restricted cash of $6,434,112 at June 30, 2023, and $11,473,676 at September 30, 2022. The decrease in working capital was primarily due to the Company’s sale of assets and liabilities of discontinued operations and an increase in accounts payable, accrued expenses, and deferred revenue during the nine months ended June 30, 2023. 29 Cash used by operating activities for continuing operations for the six months ended June 30, 2023, and 2022 was $5,394,048 and $10,669,927, respectively. Cash provided by operating activities for discontinued operations for the nine months ended June 30, 2023, was $2,474,863, compared to providing cash of $41,562 for the nine months ended June 30, 2022. Trade receivables increased by $2,108,539 or 39% to $7,507,755 at June 30, 2023, from $5,399,216 at September 30, 2022. The increase in trade receivables is attributable to increased sales in the Security segment. Cash used by investment activities for continuing operations for the nine months ended June 30, 2023, was $735,265 compared to providing cash of $792,195 for the nine months ended June 30, 2022. Cash used by investing activities for discontinued operations for the nine months ended June 30, 2022, was $39,388. Investing activities for the nine months ended June 30, 2023, were driven by the Company’s purchase of property and equipment. Cash used by financing activities for the nine months ended June 30, 2023, was $1,280,991 compared to providing cash of $5,902,298 for the nine months ended June 30, 2022. Financing activities were primarily driven by payments on the Company’s debt. Financing activities for the nine months ended June 30, 2022, were primarily driven by proceeds from the note payable issued in February of 2022. 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, there 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. 30