Item 1A. Risk Factors
ITEM 1A. RISK FACTORS
Investing in our common stock
involves a high degree of risk. Our business, reputation, results of operations, financial condition and stock price can be affected by
a number of factors, whether currently known or unknown, including those described below. When any one or more of these risks materialize
from time to time, our business, reputation, results of operations, financial condition and stock price can be materially and adversely
affected.
8
Because of the following factors,
as well as other factors affecting the Company’s results of operations and financial condition, past financial performance should
not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results
or trends in future periods. This discussion of risk factors contains forward-looking statements.
You should carefully consider
the risks and uncertainties described below, together with all of the other information in this report, including the consolidated audited
financial statements and the related notes appearing at the end of this annual report on Form 10-K, with respect to any investment in
shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and
future prospects would likely be materially and adversely affected. In that event, the market price of our common stock could decline,
and you could lose part or all of your investment. These statements, like all statements in this report, speak only as of the date of
this report (unless another date is indicated) and we undertake no obligation to update or revise the statements in light of future development.
Risks Related to Macroeconomics Conditions and
International Operations
Our operations and performance depend significantly
on global and regional economic conditions and adverse economic conditions can materially adversely affect our business, results of operations
and financial condition.
Adverse macroeconomic conditions,
including slow growth or recession, high unemployment, inflation, tighter credit, higher interest rates, and currency fluctuations, can
adversely impact consumer confidence and spending and materially adversely affect demand for our products and services. In addition, consumer
confidence and spending can be materially adversely affected in response to changes in fiscal and monetary policy, financial market volatility,
declines in income or asset values, and other economic factors.
In addition to an adverse impact
on demand for our products and services, uncertainty about, or a decline in, global or regional economic conditions can have a significant
impact on our suppliers, contract manufacturers, logistics providers, distributors, and other channel partners, and developers. Potential
outcomes include financial instability; inability to obtain credit to finance business operations; and insolvency.
Adverse economic conditions can
also lead to increased credit and collectability risk on our trade receivables; the failure of derivative counterparties and other financial
institutions; limitations on our ability to issue new debt; reduced liquidity; and declines in the fair values of our financial instruments.
These and other impacts can materially adversely affect our business, results of operations, financial condition and stock price.
Our business can be impacted by political events,
trade and other international disputes, war, terrorism, natural disasters, public health issues, industrial accidents and other business
interruptions.
Political events, trade and other
international disputes, war, terrorism, natural disasters, public health issues (such as COVID-19), industrial accidents and other business
interruptions can harm or disrupt international commerce and the global economy and could have a material adverse effect on us and our
customers, suppliers, contract manufacturers, logistics providers, distributors, and other channel partners.
Restrictions on international
trade, such as tariffs and other controls on imports or exports of goods, technology or data, can materially adversely affect our operations
and supply chain and limit our ability to offer and distribute products and services to customers. The impact can be particularly significant
if these restrictive measures apply to countries and regions where we derive a significant portion of our revenues and/or have significant
supply chain operations. Restrictive measures can require us to take various actions, including changing suppliers and restructuring business
relationships. Changing our operations in accordance with new or changed restrictions on international trade can be expensive, time-consuming
and disruptive to our operations. Such restrictions can be announced with little or no advance notice and we may not be able to effectively
mitigate all adverse impacts from such measures. For example, tensions between governments, including the U.S. and China, have in the
past led to tariffs and other restrictions being imposed on our business. If disputes and conflicts further escalate in the future, actions
by governments in response could be significantly more severe and restrictive and could materially adversely affect our business. Political
uncertainty surrounding trade and other international disputes could also have a negative effect on consumer confidence and spending,
which could adversely affect our business.
9
Many of our operations and facilities,
as well as critical business operations of our suppliers and contract manufacturers, are in locations that are prone to earthquakes and
other natural disasters. In addition, such operations and facilities are subject to the risk of interruption by fire, power shortages,
nuclear power plant accidents and other industrial accidents, terrorist attacks and other hostile acts, ransomware and other cybersecurity
attacks, labor disputes, public health issues, including pandemics such as the COVID-19 pandemic, and other events beyond our control.
Global climate change is resulting in certain types of natural disasters, such as droughts, floods, hurricanes and wildfires, occurring
more frequently or with more intense effects. Such events can make it difficult or impossible for us to manufacture and deliver products
to our customers, create delays and inefficiencies in our supply and manufacturing chain, and result in slowdowns and outages to our product
and service offerings, and negatively impact consumer spending and demand in affected areas. Following an interruption to our business,
we can require substantial recovery time, experience significant expenditures to resume operations, and lose significant sales.
Our operations are also subject
to the risks of industrial accidents at our suppliers and contract manufacturers. While our suppliers are required to maintain safe working
environments and operations, an industrial accident could occur and could result in serious injuries or loss of life, disruption to our
business, and harm to our reputation. Major public health issues, including pandemics such as the COVID-19 pandemic, have adversely affected,
and could in the future materially adversely affect, us due to their impact on the global economy and demand for consumer products; the
imposition of protective public safety measures, such as stringent employee travel restrictions and limitations on freight services and
the movement of products between regions; and disruptions in our operations, supply chain and sales and distribution channels, resulting
in interruptions to the supply of current products and offering of existing services, and delays in production ramps of new products and
development of new services.
Volatility in currency exchange rates may adversely
affect our financial condition, results of operations and cash flows.
Our international operations accounted
for approximately 9.2% of our net sales in 2023. We are exposed to the effects (both positive and negative) that fluctuating exchange rates
have on translating the financial statements of our international operations, most of which are denominated in local currencies, into
the U.S. dollar. Fluctuations in exchange rates may affect product demand and reported profits in our international operations. In addition,
currency fluctuations may affect the prices we pay suppliers for materials used in our products, along with other local costs incurred
in foreign countries for foreign entities with U.S. dollar functional currency. As a result, fluctuating exchange rates may adversely
impact our results of operations and cash flows.
Our business and results of operations may be
materially adversely affected by compliance with import and export laws.
We must comply with various laws
and regulations relating to the import and export of products, services and technology from the U.S. and other countries having jurisdiction
over our operations, which may affect our transactions with certain customers, business partners and other persons. In certain circumstances,
export control and economic sanctions regulations may prohibit the export of certain products, services, and technologies and in other
circumstances, we may be required to obtain an export license before exporting a controlled item. The length of time required by the licensing
processes can vary, potentially delaying the shipment of products or performance of services and the recognition of the corresponding
revenue. In addition, failure to comply with any of these regulations could result in civil and criminal, monetary and non-monetary penalties,
disruptions to our business, limitations on our ability to import and export products and services and damage to our reputation. Moreover,
any changes in export control or sanctions regulations may further restrict the export of our products or services, and the possibility
of such changes requires constant monitoring to ensure we remain compliant. Any restrictions on the export of our products or product
lines could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.
Risks Related to Covid-19
The global pandemic may disrupt our business
or the business of our customers.
In December 2019, a novel strain
of corona virus, which causes the infectious disease known as COVID-19 was reported. The World Health Organization declared COVID-19 a
Public Health Emergency and Global Pandemic. COVID-19 has severely impacted economies around the world.
10
The current COVID-19 pandemic
has impacted our business operations and the results of our operations in this fiscal year, primarily with delays in expected orders by
many customers and new product development, including newer versions of surveillance software since our technical facility in Pune, India
has been under lock down on multiple occasions. Bookings and revenue have largely recovered in this calendar year compared to last year.
In addition, due to delays in certain supply chain areas, the expected launch times of our new products and new versions has resulted
in delays of several months.
The broader implications of COVID-19
on our results from operations going forward remains uncertain. The COVID-19 pandemic has the potential to cause adverse effects to our
customers, suppliers or business partners in locations that have or will experience more pronounced disruptions, which could result in
a reduction to future revenue and manufacturing output as well as delays in our new product development activities. However, on the other
hand, opportunities in the video surveillance field have been growing for Vicon products.
The extent of the pandemic’s
effect on our operational and financial performance will depend in large part on future developments, which cannot be reasonably estimated
at this time. Future developments include the duration, scope and severity of the pandemic, the emergence of new virus variants that are
more contagious or harmful than prior variants, the actions taken to contain or mitigate its impact both within and outside the jurisdictions
where we operate, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread
economic activity. Due to the inherent uncertainty of the unprecedented and rapidly evolving situation, we are unable to predict with
any confidence the likely impact of the COVID-19 pandemic on our future operations. This could materially impact our results of operations,
cash flows, and financial condition.
Risks Related to our Financial Condition
There is no guarantee that cash flow from operations and/or debt
and equity financings will provide sufficient capital to meet our expansion goals working capital needs or fund our operations.
Our current strategic plan includes
the expansion of our company both organically and through acquisitions if market conditions and competitive conditions allow. Due to the
long-term nature of investments in acquisitions and other financial needs to support organic growth, including working capital, we expect
our long-term and working capital needs to periodically exceed the short-term fluctuations in cash flow from operations. We anticipate
that we may need to raise additional external capital from the sale of common stock, preferred stock and debt instruments as market conditions
may allow, in addition to cash flow from operations (which may not always be sufficient), to fund our growth and working capital needs.
In the event that we need to raise
significant amounts of external capital at any time or over an extended period, we face a risk that we may need to do so under adverse
capital market conditions with the result that our existing shareholders, as well as persons who acquire our common stock, may incur significant
and immediate dilution should we raise capital from the sale of our common or preferred stock. Similarly, we may need to meet our external
capital needs from the sale of secured or unsecured debt instruments at interest rates and with such other debt covenants and conditions
as the market then requires. However, there can be no guarantee that we will be able to raise external capital on terms that are reasonable
in light of current market conditions. In the event that we are not able to do so, those who acquire our common stock may face significant
and immediate dilution and other adverse consequences. Further, debt covenants contained in debt instruments that we issue may limit our
financial and operating flexibility with consequent adverse impact on our common stock market price.
We have a history of losses and may experience
losses in the future, which could result in the market price of our common stock declining.
We have incurred net losses, including
net losses attributable to Cemtrex, Inc. shareholders of $9.2 million in 2023, $13.0 million in 2022, and $7.8 million in 2021. We have
an accumulated deficit of $64.2 million as of September 30, 2023. We expect to continue to incur significant product development, sales
and marketing and administrative expenses. As a result, we will need to generate significant revenues to achieve profitability. We cannot
be certain that we will achieve profitability in the future or, if we achieve profitability, to sustain it. If we do not achieve and maintain
profitability, the market price for our common stock may decline, perhaps substantially.
The Company is exposed to credit risk, market risk, and fluctuations
in the value of its investment portfolio.
The Company may, from time to
time invest excess cash that the Company has on hand in large cap securities listed on major exchanges, including stocks and options.
The Company’s investments can be negatively affected by liquidity, credit deterioration, financial results, market and economic
conditions, political risk, sovereign risk, interest rate fluctuations or other factors.
11
Although we have not recognized
any material losses related to our cash equivalents, short-term investments, or long-term investments, future declines in the market values
of such investments could have an adverse effect on our financial condition and operating results. As a result, the value and liquidity
of the Company’s cash, cash equivalents, and marketable securities may fluctuate substantially. Therefore, although the Company
has not realized any significant losses on its cash, cash equivalents, and marketable securities, future fluctuations in their value could
result in significant losses and could have an adverse impact on the Company’s financial condition and operating results.
We have substantial debt which could adversely affect our ability
to raise additional capital to fund operations and prevent us from meeting our obligations under outstanding indebtedness.
As of September 30, 2023, our
total indebtedness was approximately $24.4 million, including notes payable of $18.1 million, mortgage payable of $3.4 million, vendor
financed purchase of $0.7 million, and bank loans of $2.2 million, including $0.9 million of PPP loans that the Company expects
to be forgiven. By comparison, as of September 30, 2022, our total indebtedness was approximately $20.6 million, including notes payable
of $17.7 million, mortgage payable of $2.3 million, and bank loans of $0.6 million, including $0.1 million of PPP loans. For 2023 and
2022 approximately $14.5 million and $16.9 million, respectively, of such debt is classified as current. This substantial debt could have
important consequences, including the following: (i) a substantial portion of our cash flow from operations may be dedicated to the payment
of principal and interest on indebtedness, thereby reducing the funds available for operations, future business opportunities and capital
expenditures; (ii) our ability to obtain additional financing for working capital, debt service requirements and general corporate purposes
in the future may be limited; (iii) we may face a competitive disadvantage to lesser leveraged competitors; (iv) our debt service requirements
could make it more difficult to satisfy other financial obligations; and (v) we may be vulnerable in a downturn in general economic conditions
or in our business and we may be unable to carry out activities that are important to our growth.
Our ability to make scheduled
payments of the principal of, or to pay interest on, or to refinance our indebtedness depends on and is subject to our financial and operating
performance, which in turn is affected by general and regional economic, financial, competitive, business and other factors beyond management’s
control. If we are unable to generate sufficient cash flow to service our debt or to fund our other liquidity needs, we will need to restructure
or refinance all or a portion of our debt, which could impair our liquidity. Any refinancing of indebtedness, if available at all, could
be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.
Despite our significant amount of indebtedness, we may need to incur significant additional amounts of debt, which could further exacerbate
the risks associated with our substantial debt.
Our ability to secure and maintain sufficient credit arrangements
is key to our continued operations and there is no assurance we will be able to obtain sufficient additional equity or debt financing
in the future.
There is no assurance that we
will be able to retain or renew our credit agreements and other finance agreements in the future. In the event our company grows rapidly,
the uncertain economic climate continues, or we acquire one or more other companies, additional financing resources will likely be necessary
in the current or future fiscal years. As a smaller public company with a limited ability to attract and obtain financing, there is no
assurance that we will be able to obtain sufficient additional equity or debt financing in the future on terms that are reasonable in
light of current market conditions.
Risks Related to our Business
We are substantially dependent upon the success and continued market
acceptance of our technology, the absence of which may significantly reduce our sales, profits and cash flow and adversely impact our
financial condition.
Competing technologies may be
offered by both existing competitors or by those that enter the market, and these competing technologies may offer a better cost-benefit
ratio than our products and/or at lower prices with the result that our sales, profits, and cash flow may suffer significantly over an
extended period with serious adverse impact on our financial condition.
12
We have taken a multi-operational approach, and some of our business
segments have historically failed to benefit our company to date, and there remains a risk that our remaining segments may not prove to
be successful. We may divest or expand into new areas that are outside of our current business activities and those activities may not
prove to be successful.
We continuously assess the composition
of our portfolio businesses to ensure it is aligned with our strategic objectives and positioned to maximize growth and return in the
coming years. Since our business concerns new and developing technologies, and many of these endeavors fail, some of the businesses in
our portfolio may not be successful in generating sufficient revenue to be a viable option for our company.
Currently, the Company has the
following business segments, consisting of (i) Security, (ii) Industrial Services, and (iii) Cemtrex Corporate. Within these segments
there are a number of technologies that we are pursuing, as discussed in this annual report under “Item 1. Business.” There
is a risk that one or more of our technologies will not be successful in generating revenue to sustain the expenditures associated with
its existence. Moreover, having multiple business segments may present challenges, such as fluctuations in our operating results, using
the company’s limited resources on less worthy business pursuits, and distracting management from obtaining its goals with respect
to our overall operations. If we are unable to establish our technologies in the market, and overcome the challenges of doing so, we could
go out of business.
As we continuously review our
portfolio of businesses we may exit or enter into new business activities which may ultimately prove to be unsuccessful.
Our future operating results depend in part on continued successful
research, development and marketing of new and improved products and services through our Security segment, and there can be no assurance
that we will successfully introduce new products and services into the market.
The success of new and improved
products and services through our Security segment depends on our research and development efforts and the initial acceptance of our products
and solutions by consumers. Our business is affected by varying degrees of technological change and corresponding shifts in customer demand,
which result in unpredictable product transitions, shortened life cycles and increased importance of being first to market with new products
and services. We may experience difficulties or delays in the research and development, production and/or marketing of new products and
services due to lack of capital, which may negatively impact our operating results and prevent us from recouping or realizing a return
on the investments required to continue to bring new products and services to market.
Our future operating results depends in part
on the continued successful operation of our Industrial Services segment, and there can be no assurance that we will be successful in
this business.
The success of selling services
through our Industrial Services segment depends on our ability to hire and retain talent, our ability to market these services successfully
to clients, the overall demand for these services, and the quality of our workmanship by our customers, among other factors. Our business
is affected by varying degrees of technological change and corresponding shifts in customer demand, which result in unpredictable product
transitions, shortened life cycles and increased importance of being first to market with new products and services. We may experience
difficulties or delays in the delivery of services due to lack of capital or lack of adequate talent, which may negatively impact our
operating results and prevent us from recouping or realizing a return on the investments required to continue to compete in our markets.
Our operating results may fluctuate, which could
have a negative impact on our ability to grow our client base, establish sustainable revenues and succeed overall.
Our results of operations may
fluctuate as a result of a number of factors, some of which are beyond our control including but not limited to:
■
general economic conditions in the geographies and industries where we sell our services and conduct operations; legislative policies where we sell our services and conduct operations;
■
the budgetary constraints of our customers; seasonality;
■
success of our strategic growth initiatives;
■
costs associated with the launching or integration of new or acquired businesses;
13
■
timing of new product introductions by us, our suppliers and our competitors; product and service mix, availability, utilization and pricing;
■
the mix, by state and country, of our revenues, personnel and assets;
■
movements in interest rates or tax rates;
■
changes in, and application of, accounting rules;
■
changes in the regulations applicable to us;
■
litigation matters.
As a result of these factors, we may not succeed in
our business, and we could go out of business.
We operate in a cyclical business, which could result in significant
fluctuations in demand for our products.
Cyclical changes in our customers’
businesses have, in the past, resulted in, and may in the future result in, significant fluctuations in demand for our products, selling
prices, and our profitability. Most of our customers operate in cyclical industries. Their requirements for our technologies fluctuate
significantly as a result of changes in general economic conditions, technological changes, customer demand, and other factors. During
periods of increasing demand, our customers typically seek to increase their inventory of our products to avoid production bottlenecks.
When demand for their products peaks and begins to decline, as has happened in the past, they tend to reduce or cancel orders for our
products while they use up accumulated inventory. Business cycles vary somewhat in different geographical regions and customer industries.
Significant fluctuations in sales of our products affect our unit manufacturing costs and affect our profitability by making it more difficult
for us to predict our production, raw materials, and shipping needs. Changes in demand mix, needed technologies, and end-use markets may
adversely affect our ability to match our products, inventory, and capacity to meet customer demand and could adversely affect our operating
results and financial condition. We are also vulnerable to general economic events or trends beyond our control, and our sales and profits
may suffer in periods of weak demand.
Our sales and gross margins depend significantly on market demand
for our products, as to which there can be no assurance.
The uncertainty in the United
States and in the international economic and political environment could result in a decline in demand for our products in any industry.
Our gross margins are dependent upon our ability to maintain sales volumes at levels that allow us to cover our fixed costs and variable
costs per unit. To the extent that one or more product lines experience a significant and protracted decline in sales volume, we may experience
significant declines in our gross margins that may result in losses. Further, any adverse changes in tax rates and laws affecting our
customers could result in decreases in demand of our products and thus decrease our gross margins. Any of these factors could negatively
impact our business, results of operations and financial condition.
In these circumstances, we anticipate
that we could be required to increase or decrease staffing and more closely manage other expenses in order to meet the anticipated demand
of our existing and future customers. Orders from our customers are subject to cancellation, and delivery schedules from our customers
fluctuate as a result of changes in our customers’ demand, thereby adversely affecting our results of operations, and may result
in higher inventory levels. Higher inventory levels may cause us to need greater external financing, which adversely affects our financial
performance.
Our products face intense competitive challenges, including rapid
technological changes, and pricing pressure from competitors, which could adversely affect our business.
All of our product lines are subject
to significant competition from existing and future competitors, market conditions and technological change, or a combination of them,
and our sales revenues and gross margins may suffer protracted and serious declines with the result that we would likely incur protracted
losses. Further, the barriers to entry in several of our lines of business are not so significant that we may be facing competition from
others who see significant opportunities to enter the market and undercut our prices with products that possess superior technological
attributes at prices that offer our customers a better value. In this instance, we could incur protracted and significant losses and persons
who acquire our common stock would suffer losses thereby.
From time to time, we may need
to reduce our prices in response to competitive and customer pressures and to maintain our market share. Competition and customer pressures
may also restrict our ability to increase prices in response to commodity and other input cost increases. Our results of operations will
suffer if profit margins decrease, as a result of a reduction in prices, increased input costs or other factors, and if we are unable
to increase sales volumes to offset those profit margin decreases. We may also need to increase spending on marketing, advertising and
new product innovation to protect existing market share or increase market share. The success of our investments is subject to risks,
including uncertainties about trade and consumer acceptance. As a result, our increased expenditures may not maintain or enhance market
share and could result in lower profitability.
14
Factors affecting the industries that utilize our products could
negatively impact our customers and us.
We have no real control over factors
affecting the industries that utilize our products and to the extent that any one or more of these industries change dramatically, we
may be facing significant financial challenges that are in excess of our existing capabilities. These factors include:
●
increased competition among our customers and their competitors;
●
the inability of our customers to develop and market their products;
●
recessionary periods in our customers’ markets;
●
the potential that our customers’ products become obsolete;
●
our customers’ inability to react to rapidly changing technology; and
●
our customers’ inability to pay for our products, which could, in turn, affect the company’s results of operations.
If we are unable to develop new products, our competitors may develop
and market products with better features that may reduce demand for our existing and potential products or otherwise result in our products
becoming obsolete and could materially and adversely affect our ability to sustain profitability.
There are many larger competitors
who compete directly with us and who have significantly greater financial, technological and research resources. This may serve to severely
damage our ability to market and sell our products at price levels that would allow us to achieve and maintain profit margins and positive
cash flow.
We are a smaller public company,
and we face rapid technological change in many of our product markets and we may not be able to introduce any successful new products
or any enhancements to our existing products on a timely basis, or at all. This could result in prolonged and significant losses. In addition,
our introduction of new products could adversely affect sales of certain of our existing products if these new products directly compete
with our existing products. If our competitors develop innovative technologies that are superior to our products or if we fail to accurately
anticipate market trends and respond on a timely basis with our own innovations, we may not achieve sufficient growth in its revenues
to attain profitability or if we do, we may not be able sustain profitability.
The success of new product introductions
is dependent on a number of factors, including, but not limited to, timely and successful development of new products, including software
development, market acceptance of these products and our ability to manage the risks associated with these introductions. These risks
include development and production capabilities, management of inventory levels to support anticipated demand, the risk that new products
may have quality defects in the early stages of introduction, and obsolescence risk of existing products.
Developing and maintaining a patent
portfolio is an expensive and time-consuming process and there is no assurance the Company will successfully develop patents to protect
the intellectual property it is working on.
We are increasingly dependent on information
technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks, or network security breaches
our operations could be disrupted and we could incur significant costs and reputational harm as a result
We rely on information technology
networks and systems, including the Internet, to process, transmit, and store electronic and financial information; to manage a variety
of business processes and activities; and to comply with regulatory, legal, and tax requirements. We also depend on our information technology
infrastructure for digital marketing and sales activities and for electronic communications among our locations, personnel, customers,
and suppliers around the world. Many of the information technology systems used by us globally have been in place for many years and not
all hardware and software is currently supported by vendors. These information technology systems are susceptible to damage, disruptions,
or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware
failures, computer viruses, cyber-attacks, telecommunication failures, user errors, or catastrophic events. If our information technology
systems suffer severe damage, disruption, or shutdown and our business continuity plans do not effectively resolve the issues in a timely
manner, our product sales, financial condition, and results of operations may be materially affected, and we could experience delays in
reporting our financial results.
15
We have been, and likely will
continue to be, subject to various cyber-attacks. To date, we have seen no material impact on our business or operations from these attacks
or events. Any future significant compromise, breach, or misuse of our data security could result in significant costs and damage to our
reputation. The ever-evolving threats mean us and our third-party service providers must continually evaluate and adapt our respective
systems and processes and overall security environment, as well as those of any companies we acquire. There is no guarantee that these
measures will be adequate to safeguard against all data security compromises, breaches, or misuses. In addition, as the regulatory environment
related to information security, data collection and use, and privacy becomes increasingly rigorous, compliance with those requirements
could also result in additional costs.
Third-party service providers,
such as distributors, subcontractors, vendors, and data processors have access to certain portions of our sensitive data. In the event
that these service providers do not appropriately protect our data, the result could be a security breach or loss of our data. Any such
loss of data by our third-party service providers could have a material adverse impact on our business and results of operations.
In addition, if we are unable
to prevent security breaches, we may suffer financial and reputational damage or penalties because of the unauthorized disclosure of confidential
information belonging to us or to our customers or suppliers. Furthermore, the disclosure of non-public sensitive information through
external media channels could lead to the loss of intellectual property or damage our reputation and brand image.
We are also in the process of
converting certain information technology networks and systems and consolidating certain global systems. If such projects fail, or if
unexpected technical difficulties arise, our operations and financial systems could be adversely affected. Further, we could incur additional
costs or require additional technical support to resolve such difficulties.
Our operating results are sensitive to raw material
and resale product availability, quality, and cost
We seek to have many sources of
supply for each of our major requirements in order to avoid significant dependence on any one or a few suppliers. However, the supply
of materials or other items could be disrupted by natural disasters, international trade tariffs, wars, pandemics, disputes and or other
events. Despite market price volatility for certain requirements and materials pricing pressures at some of our businesses, the raw materials
and various purchased components needed for our products have generally been available in sufficient quantities. In some instances, lead
times have extended beyond normal due to logistic delays and labor shortages occurring globally. Some of our products, however, require
the use of raw materials that are available from only a limited number of regions around the world, are available from only a limited
number of suppliers, or may be subject to significant fluctuations in market prices. Our results of operations may be adversely affected
if we have difficulty obtaining these raw materials, our key suppliers experience financial difficulties, the quality of available raw
materials deteriorates, or there are significant price increases for these raw materials. Our inability to recover increased costs through
increased sales prices could have an adverse impact on our results of operations. For periods in which the prices for these raw materials
rise, we may be unable to pass on the increased cost to our customers, which would result in decreased sales margins for the products
in which they are used. For periods in which prices for these raw materials decline, we may be required, as has occurred in the past,
to write down our inventory carrying cost of these raw materials and products. Depending on the extent of the difference between market
price and our carrying cost, the write-down could have a significant adverse effect on our results of operations.
We resell products manufactured
by other component and interconnect product manufacturers. Should these manufacturers experience difficulties supplying the products that
we resell, or such suppliers use other channels to market their products, we could experience lower sales, which could have an adverse
effect on our results of operations.
Risks Related to Legal Uncertainty
We could be subject to additional civil penalties
or face criminal penalties and sanctions if we violate the terms of settlement with the SEC.
On September 30, 2022, acting
pursuant to an offer of settlement submitted by the Company, the SEC issued an order pursuant to Section 8A of the Securities Act, directing
the Company to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities
Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder (the “SEC Order”).
16
While we have already paid
the penalties imposed by the order into which we entered pursuant to the SEC Order, it contains ongoing and continuing requirements that
we refrain from violating the Securities Act. Any future violation of applicable securities laws by us or management could result in
harsher sanctions and fines, which would have a material adverse effect on our ability to implement our business plans. SEC staff can
make reasonable requests from us for further evidence of compliance. Such requests for further information, record-keeping requirements
and others generally could divert management’s attention from implementing its business plans and could require additional material
expenditures by us to legal counsel or other advisors and service providers. Further issues could reduce investor and shareholder confidence
in our company and could result in a failure to execute on our business plan, which would negatively impact our business. A copy of the
SEC Order can be found at www.sec .gov.
Our global operations subject us to many different
and complex laws and rules, and we may face difficulty in compliance.
Due to our global operations,
we are subject to many laws governing international relations (including but not limited to the Foreign Corrupt Practices Act, the U.S.
Export Administration Act the EU General Data Protection Regulation, and the U.K. Modern Anti-Slavery Act); which prohibit improper payments
to government officials and restrict where and how we can do business, what information or products we can supply to certain countries,
what personal information we can transfer, and what information we can provide to a non-U.S. government. Although we have procedures and
policies in place that should mitigate the risk of violations of these laws, there is no guarantee that they will be sufficiently effective.
If, and when we acquire new businesses, we may not be able to ensure that the pre-existing controls and procedures meant to prevent violations
of the rules and laws were effective, and we may not be able to implement effective controls and procedures to prevent violations quickly
enough when integrating newly acquired businesses. Acquisitions of new businesses in new non-U.S. jurisdictions may also subject us to
new regulations and laws, and we may face difficulties ensuring compliance with these new requirements.
Provisions in the Delaware law and our Bylaws
could make it very difficult for an investor to bring any legal actions against our directors or officers for violations of their fiduciary
duties or could require us to pay any amounts incurred by our directors or officers in any such actions.
Members of our board of directors
and our officers will have no liability for breaches of their fiduciary duty of care as a director or officer, except in limited circumstances,
pursuant to provisions in the Delaware law and our Bylaws. Accordingly, you may be unable to prevail in a legal action against our directors
or officers even if they have breached their fiduciary duty of care. In addition, our Bylaws allow us to indemnify our directors and officers
from and against any and all costs, charges and expenses resulting from their acting in such capacities with us. This means that if you
were able to enforce an action against our directors or officers, in all likelihood, we would be required to pay any expenses they incurred
in defending the lawsuit and any judgment or settlement they otherwise would be required to pay. Accordingly, our indemnification obligations
could divert needed financial resources and may adversely affect our business, financial condition, results of operations and cash flows,
and adversely affect prevailing market prices for our common stock.
If we fail to establish, maintain, and enforce
intellectual property rights with respect to our technology, our financial condition, results of operations and business could be negatively
impacted.
Our ability to establish, maintain
and enforce intellectual property rights with respect to our proprietary technologies, patents, patent applications, software and other
rights will be a significant factor in determining our future financial and operating performance. We seek to protect our intellectual
property rights by relying on a combination of patent, trade secret and copyright laws. We also use confidentiality and other provisions
in our agreements that restrict access to and disclosure of our confidential know-how and trade secrets.
We have filed patent applications
with respect to many aspects of our technologies. However, we cannot provide any assurances that any of these applications will ultimately
result in issued patents or, if patents are issued, that they will provide sufficient protections for our technology against competitors.
Although we have filed various patent applications for some of our core technologies, we currently hold only six issued patents, with
two in the United States and four in Canada, and we may face delays and difficulties in obtaining our other filed patents, or we may not
be able to obtain such patents at all.
17
Outside of these patent applications,
we seek to protect our technology as trade secrets and technical know-how. However, trade secrets and technical know-how are difficult
to maintain and do not provide the same legal protections provided by patents. In particular, only patents will allow us to prohibit others
from using independently developed technology that are similar. If competitors develop knowledge substantially equivalent or superior
to our trade secrets and technical know-how or gain access to our knowledge through other means such as observation of our technology
that embodies trade secrets at customer sites which we do not control, the value of our trade secrets and technical know-how would be
diminished.
While we strive to maintain systems
and procedures to protect the confidentiality and security of our trade secrets and technical know-how, these systems and procedures may
fail to provide an adequate degree of protection. For example, although we generally enter into agreements with our employees, consultants,
advisors, and strategic partners restricting the disclosure and use of trade secrets, technical know-how and confidential information,
we cannot provide any assurance that these agreements will be sufficient to prevent unauthorized use or disclosure. In addition, some
of the technology deployed at customer sites in the future, which we do not control, may be readily observable by third parties who are
not under contractual obligations of non-disclosure, which may limit or compromise our ability to continue to protect such technology
as a trade secret.
Monitoring and policing unauthorized
use and disclosure of intellectual property is difficult. If we learned that a third party was in fact infringing or otherwise violating
our intellectual property, we may need to enforce our intellectual property rights through litigation. Litigation relating to our intellectual
property may not prove successful and might result in substantial costs and diversion of resources and management attention.
From our customers’ standpoint,
the strength of the intellectual property under which we control can be a critical determinant of the value of our products and services.
If we are unable to secure, protect and enforce our intellectual property, it may become more difficult for us to attract new customers.
Any such development could have a material adverse effect on our business, prospects, financial condition and results of operations.
We may not have sufficient financial resources
to defend our intellectual property rights or otherwise successfully defend against claims that we have infringed on a third party’s
intellectual property and, as a result, it may adversely affect our business, financial condition and results of operations.
Even if such claims are not valid,
they could subject us to significant costs. In addition, it may be necessary in the future to enforce our intellectual property rights
to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of
infringement or invalidity by others. We may not have sufficient financial resources to defend our intellectual property rights or otherwise
to successfully defend the company against valid or spurious claims that we have infringed upon the intellectual property rights of others.
An adverse outcome in litigation or any similar proceedings could force us to take actions that could harm its business. These include:
(i) ceasing to sell products that contain allegedly infringing property; (ii) obtaining licenses to the relevant intellectual property
which we may not be able to obtain on terms that are acceptable, or at all; (iii) indemnifying certain customers or strategic partners
if it is determined that we have infringed upon or misappropriated another party’s intellectual property; and (iv) redesigning products
that embody allegedly infringing intellectual property. Any of these results could adversely and significantly affect our business, financial
condition and results of operations. In addition, the cost of defending or asserting any intellectual property claim, both in legal fees
and expenses, and the diversion of management resources, regardless of whether the claim is valid, could be significant and lead to significant
and protracted losses.
Product liability lawsuits against us could
cause us to incur substantial liabilities and to limit commercialization of our product or any future products that we may develop.
We face an inherent risk of product
liability exposure related to the sale of our products and the future sale of planned products. We may be sued if any of our products
allegedly causes injury. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure
to warn of dangers inherent in the product, negligence, strict liability, and a breach of warranties. We may also be subject to liability
for a misunderstanding of, or inappropriate reliance upon, the information we provide. If we cannot successfully defend ourselves against
claims that our product or planned products caused injuries, we may incur substantial liabilities. Regardless of merit or eventual outcome,
liability claims may result in:
■
decreased demand for our product or any planned products that we may develop;
■
injury to our reputation and significant negative media attention;
18
■
significant costs to defend the related litigation and distraction to our management team;
■
substantial monetary awards to plaintiffs;
■
loss of revenue; and
■
the inability to commercialize any future products that we may develop.
Such events could subject us to
costly litigation, require us to pay substantial amounts of money to injured parties, delay, negatively impact, or end our opportunity
to market those products, or require us to suspend or abandon our commercialization efforts. Even in a circumstance in which we do not
believe that an adverse event is related to our product, the investigation into the circumstance may be time-consuming or inconclusive.
These investigations may interrupt our sales efforts. As a result of these factors, a product liability claim, even if successfully defended,
could harm our business.
We currently maintain product
liability insurance coverage, which may not be adequate to cover all liabilities that we may incur. Insurance coverage is increasingly
expensive. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that
may arise.
If we experience material weaknesses in the
future or otherwise fail to maintain an effective system of internal control over financial reporting in the future, we may not be able
to accurately or timely report our financial condition or results of operations, which may adversely affect investor confidence in us
and, as a result, the value of our common stock.
As a public company, we are required
to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of
the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and
provide a management report on internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies,
in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial
statements will not be prevented or detected on a timely basis. Ensuring that we have adequate internal financial and accounting controls
and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort.
Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with Generally Accepted Accounting Principles. We may not be able to complete
our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one
or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are
effective. The identification of one or more material weaknesses would preclude a conclusion that we maintain effective internal control
over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial
statements would not be prevented or detected on a timely basis.
Our
management, including our principal executive officer and principal accounting officer, conducted an evaluation of the effectiveness of
our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission ( “ COSO ” )
in Internal Control—Integrated Framework (2013). Based on its evaluation, our management concluded that as of September 30, 2023,
that our internal control over financial reporting were effective.
We are required to disclose changes
made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not
be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act until we are no longer an “smaller reporting company.” At such time, our independent registered public accounting firm
may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
Our remediation efforts may not enable us to avoid a material weakness in the future. If we are unable to assert that our internal control
over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable
to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence
in the accuracy and completeness of our financial reports and the market price of our common stock could be adversely affected, and we
could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities,
which could require additional financial and management resources.
19
Risks Related to Acquisitions
We have grown through acquisitions and are continuously looking to
fund other acquisitions; our failure to raise funds for acquisitions may have the effect of slowing down our growth and our use of funds
for acquisitions subjects us to acquisition-related risks.
We intend to make acquisitions
of complementary (including competitive) businesses, products and technologies. However, any future acquisitions may result in material
transaction costs, increased interest and amortization expenses related to goodwill and other intangible assets, increased depreciation
expense and increased operating expenses, any of which could have an adverse effect on our operating results and financial position. Acquisitions
will require integration of acquired assets and management into our operations to realize economies of scale and control costs. Acquisitions
may involve other risks, including diversion of management attention that would otherwise be available for ongoing internal development
of our business and risks inherent in entering markets in which we have no or limited prior experience. In connection with future acquisitions,
we may make potentially dilutive issuances of equity securities. In addition, consummation of acquisitions may subject us to unanticipated
business uncertainties, contingent liabilities or legal matters relating to those acquired businesses for which the sellers of the acquired
businesses may not fully indemnify us. There can be no assurance that our business will grow through acquisitions, as anticipated.
We may fail to successfully integrate our acquisitions
or otherwise be unable to benefit from pursuing acquisitions.
We believe there are meaningful
opportunities to grow through acquisitions and joint ventures across all product categories and we expect to continue a strategy of selectively
identifying and acquiring businesses with complementary products. We may be unable to identify, negotiate, and complete suitable acquisition
opportunities on reasonable terms. There can be no assurance that any business acquired by us will be successfully integrated with our
operations or prove to be profitable to us. We may incur future liabilities related to acquisitions. Should any of the following problems,
or others, occur as a result of our acquisition strategy, the impact could be material:
■
difficulties integrating personnel from acquired entities and other corporate cultures into our business;
■
difficulties integrating information systems;
■
the potential loss of key employees of acquired companies;
■
the assumption of liabilities and exposure to undisclosed or unknown liabilities of acquired companies; or
■
the diversion of management attention from existing operations.
Risks Related to Our Management and Control Persons
The loss of the services of Saagar Govil for any reason would materially
and adversely affect our business operations and prospects.
Our financial success is dependent
to a significant degree upon the efforts of Saagar Govil, our Chairman, President and Chief Executive Officer. Saagar Govil possesses
management, financial expertise, engineering, sales and marketing experience concerning our company that our other officers do not have.
We have not entered into an employment arrangement with Mr. Govil, and we have not obtained key man insurance over him. There can be no
assurance that Saagar Govil will continue to provide services to us. A voluntary or involuntary departure by Saagar Govil could have a
materially adverse effect on our business operations if we were not able to attract a qualified replacement for them in a timely manner.
If we are unable to attract and retain qualified
personnel, especially our design and technical personnel, we may not be able to execute our business strategy effectively.
Our future success depends on
our ability to retain, attract and motivate qualified personnel, including our management, sales and marketing, finance, and especially
our design and technical personnel. As the source of our technological and product innovations, our design and technical personnel represent
a significant asset. Any inability to retain, attract or motivate such personnel could have a material adverse effect on our business
and results of operations.
20
Our management stockholders have significant stockholdings in and
influence over our company which could make it impossible for public stockholders to influence the affairs of our company.
We are a “controlled company”
under Nasdaq Listing Rules. Approximately 90% of our outstanding voting shares, which includes our common stock, Series C preferred stock
and Series 1 preferred stock, are beneficially held by Saagar Govil, our Chairman, President and Chief Executive Officer. Pursuant to
certificate of designation for our Series C preferred, each outstanding share of Series C Preferred Stock is 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 a result of Saagar Govil’s ownership of our common stock, Series C preferred stock, and Series 1 preferred stock,
he controls, and will control in the future, substantially all matters requiring approval by the stockholders of our company, including
the election of all directors and approval of significant corporate transactions. This could make it impossible for public stockholders
to influence the affairs of our company.
Risks Related to Our Securities
Sales of substantial amounts of our common stock in the public market
could depress the market price of our common stock.
Our common stock and Series 1
Preferred Stock are listed for trading on the Nasdaq Capital Market. If our stockholders sell substantial amounts of our securities in
the public market, including the shares of common stock issuable upon the exercise of our Series 1 warrants and stock options, and shares
issued as consideration in future acquisitions, or the market perceives that such sales may occur, the market price of our securities
could fall and we may be unable to sell our securities in the future.
Our securities may experience extreme price and volume fluctuations,
which could lead to costly litigation for us and make an investment in us less appealing.
The market price of our securities
may fluctuate substantially due to a variety of factors, including:
●
our business strategy and plans;
●
changing factors related to doing business in various jurisdictions within the United States;
●
new regulatory pronouncements and changes in regulatory guidelines and timing of regulatory approvals;
●
general and industry-specific economic conditions;
●
additions to or departures of our key personnel;
●
variations in our quarterly financial and operating results;
●
changes in market valuations of other companies that operate in our business segments or in our industry;
●
lack of trading liquidity;
●
announcements about our business partners;
●
Intellectual property disputes;
●
Operating results below or exceeding expectations or period-to-period fluctuations in our financial results;
●
Whether we achieve profits or not;
●
changes in accounting principles; and
●
general market conditions, economic and other external factors.
The market prices of the securities
of early-stage companies, particularly companies like ours without consistent product revenues and earnings, have been highly volatile
and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular
companies. In the past, companies that experience volatility in the market price of their securities have often faced securities class
action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s
attention and resources and harm our financial condition and results of operations.
Our Series 1 preferred stock and all of our existing and future indebtedness
rank senior to our common stock in the event of a liquidation, winding up or dissolution of our business.
In the event of our liquidation, winding up or dissolution,
our assets would be available to make payments to holders of all existing and future indebtedness and Series 1 preferred stock before
payments to holders of our common stock. In the event of our bankruptcy, liquidation or winding up, there may not be sufficient assets
remaining, after paying amounts to the holders of our indebtedness and Series 1 preferred stock, to pay anything to common stockholders.
As of September 30, 2023, we had total consolidated debt of approximately $37.8 million and 2,293,116 shares issued and 2,229,016 shares
of Series 1 preferred stock outstanding. Any liquidation, winding up or dissolution of our company or of any of our wholly or partially
owned subsidiaries would have a material adverse effect on holders of our common stock.
21
Our common stockholders may be adversely affected by the issuance
of any subsequent series of preferred stock.
Our certificate of incorporation
does not restrict our ability to offer one or more additional new series of preferred stock, any or all of which may rank equally with
or have preferences over our common stock as to dividend payments, voting rights, rights upon liquidation or other types of rights. We
would have no obligation to consider the specific interests of the holders of common stock in creating any such new series of preferred
stock or engaging in any such offering or transaction. Our creation of any new series of preferred stock or our engaging in any such offering
or transaction could have a material adverse effect on holders of our common stock.
The public trading market for the common stock may be limited in
the future.
Our common stock is listed for
trading on the Nasdaq Capital Market under the symbol CETX. The trading volume fluctuates and there have been time periods during which
the common stock trading volume has been limited. Management can make no assurances that trading volume will not be similarly limited
in the future. Without an active trading market, there can be no assurance of any liquidity or resale value of the common stock, and stockholders
may be required to hold their shares of common stock for an indefinite period of time.
We may not pay cash dividends on our common stock.
Our board of directors declared
a one-time cash dividend on our common stock in April 2017. The terms of our series 1 preferred stock provide for the payment of semiannual
dividends on the last day of March and September in each year, which began in March 2017. No other cash dividends have been declared or
paid by us on our stock during either of the two most recent fiscal years or the period through the date of this Annual Report. Other
than with respect to our series 1 preferred stock, our board of directors declares dividends when, in its discretion, it determines that
a dividend payment, as opposed to another use of cash, is in the best interests of the stockholders. Such decisions are based on the facts
and circumstances then existing including, without limitation, our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board of directors deems relevant. As a result, we cannot predict when, or
whether, another dividend on our common stock will be declared in the future.
If our shares become subject to the penny stock
rules, it would become more difficult to trade our shares.
The SEC has adopted rules that
regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a
price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain
automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided
by the exchange or system. If the price of our Common Stock is less than $5.00, our Common Stock will be deemed a penny stock. The penny
stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized
risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction
in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure
statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability
statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our Common Stock,
and therefore shareholders may have difficulty selling their shares.
Although our Common Stock and Series 1 Preferred
Stock are listed on the Nasdaq Capital Market, the exchange may subsequently delist our Common Stock or Series 1 Preferred Stock if we
fail to comply with ongoing listing standards.
Although our Common Stock and
Series 1 Preferred Stock are listed on the Nasdaq Capital Market, the exchange will require us to meet certain financial, public float,
bid price and liquidity standards on an ongoing basis in order to continue the listing of our Common Stock and Series 1 Preferred Stock.
If we fail to meet these continued listing requirements, our Common Stock and/or our Series 1 Preferred stock may be subject to delisting.
If our Common Stock and/or our Series 1 Preferred Stock are delisted and we are not able to list such Common Stock or Series 1 Preferred
Stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market; However, if this
were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations
for our Common Stock and Series 1 Preferred Stock and reduced liquidity for the trading of our securities. In addition, in the event of
such delisting, we could experience a decreased ability to issue additional securities and obtain additional financing in the future.
Even though our securities are listed on the Nasdaq Capital Market, there can be no assurance that an active trading market for our securities
will develop or be sustained after our initial listing.
22
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Item 1C. Cybersecurity
Not Applicable.