CEMTREX INC 10-K

ITEM 7. 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. 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 this report on Form 10-K. The Company undertakes no obligation to update forward-looking statements as a result of future events or developments. Significant Accounting Policies and Estimates The Company’s accounting policies are more fully described in Note 2 of the Consolidated Financial Statements. As disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments. Valuation of Goodwill At September 30, 2023, the Company had approximately $4,400,000 of goodwill. As discussed in Note 2 to the consolidated financial statements, goodwill is tested annually for impairment at the reporting unit level, or more frequently if impairment indicators arise. In accordance with the FASB revised guidance on “Testing of Goodwill for Impairment,” a company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company decides, as a result of its qualitative assessment, that it is more-likely-than- not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a two-step goodwill impairment test. The first step compares the fair value of each reporting unit to its carrying amount. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. Assessing the Company’s goodwill for impairment analyses is complex and highly judgmental due to the nature of qualitive assessment and, where necessary, the significant estimation required to determine the fair value of the reporting units. In particular, the fair value estimate is sensitive to significant assumptions, such as future operating results, cash flows and the weighted average cost of capital. These significant assumptions are forward looking and could be materially affected by future market or economic conditions. Related Parties During fiscal year 2023, the Company sold two of its operating entities to Saagar Govil, Chairman of the Board, CEO, President and Secretary, additionally, there are transactions related to Ducon Industries, Inc. owned by Aron Govil, Founder, and former CFO and Executive director all of which are discussed in Note 17 of the consolidated financial statements. The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved b. description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement. Business Combinations During fiscal year 2023, The Company acquired Heisey Mechanical, Ltd. As discussed in Note 1 of the consolidated financial statements. The Company accounts for business combinations under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 “Business Combinations” using the acquisition method of accounting, and accordingly, the assets and liabilities of the acquired business are recorded at their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value is recorded as goodwill. All acquisition costs are expensed as incurred. Upon acquisition, the accounts and results of operations are consolidated as of and subsequent to the acquisition date. Please see Note 2 for detailed information regarding our significant accounting policies and estimates in the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for the year ended September 30, 2023. 25 Results of Operations - For the fiscal years ending September 30, 2023 and 2022 Total revenue for the year ended September 30, 2023, increased by $14,341,782 or 32% to $59,368,562 from $45,026,780 for the year ended September 30, 2022. Net loss for the year ended September 30, 2023, decreased by $3,981,654 to $9,310,588 from $13,292,242 for the year ended September 30, 2022. 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 and $2,316,000 of additional revenue from the business related to the acquisition of Heisey Mechanical. Net loss decreased due to the increase in revenue, an impairment of goodwill and the write-off of related party receivables in the prior year. Revenues Our Security segment revenues for the years ended September 30, 2023, increased by $10,538,706 or 44%, to $34,359,470 from $23,820,764 for the year ended September 30, 2022. This increase is due to an increased demand for security technology products under our Vicon brand. Our Industrial Services segment revenues for the year ended September 30, 2023, increased by $3,803,076 or 18%, to $25,009,092 from $21,206,016 for the year ended September 30, 2022. This increase is mainly due to an increased demand for the segment’s products and services and $2,316,000 of additional revenue from the business related to the acquisition of Heisey Mechanical. Gross Profit Gross Profit for the year ended September 30, 2023, was $25,685,826 or 43% of revenues as compared to gross profit of $16,565,928 or 37% of revenues for the year ended September 30, 2022. Gross profit in our Security segment was $17,106,300 or 50% of the segment’s revenues for the year ended September 30, 2023, as compared to gross profit of $10,223,704 or 43% of the segment’s revenues for the year ended September 30, 2022. Gross profit as a percentage of revenues increased in the year ended September 30, 2023, compared to the year ended September 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 2022. Gross profit in our Industrial Services segment was $8,579,526 or 34% of the segment’s revenues for the year ended September 30, 2023, as compared to gross profit of $6,342,224 or 30% of the segment’s revenues for the year ended September 30, 2022. Gross profit as a percentage of revenues increased in the year ended September 30, 2023, compared to the year ended September 30, 2022, was primarily due to an increase in prices for our services and lower subcontractor costs. General and Administrative Expenses General and Administrative Expenses for the year ended September 30, 2023, increased by $994,785 or 4% to $24,006,490 from $22,934,555 for the year ended September 30, 2022. The increase in general and administrative expenses is mainly due to increases in salaries and wages, travel, and utilities. Research and Development Expenses Research and Development expenses for the year ended September 30, 2023, and 2022 were $3,267,994 and $4,444,488, respectively. The decrease in Research and Development expenses are primarily related to the Security Segment’s development of proprietary technology and next generation solutions associated with security and surveillance systems software which are nearing the production phase. Other Income/(Expense) Other income/(expense) for the year ended September 30, 2023, was $(4,489,605) as compared to $3,302,035 for the year ended 2022. Other income/(expense) for the year ended September 30, 2023, was mainly driven by interest expense on the Company’s debt and included an employee retention credit of $416,502. Other income/(expense) for the year ended September 30, 2022, included the following one-time items (i) the settlement with Securities and Exchange Commission, generated other expense of $2,200,000, (ii) other income resulting from the forgiveness of our PPP loans of $971,500. Additionally, the company had realized gains on marketable securities of $8,402,125. 26 Income Tax Benefit/(Expense) During the fiscal year of 2023 we recorded an income tax expense of $394,272 compared to a benefit of $208,545 for the fiscal year of 2022. The increase in the expense for income tax is mainly due to an increase in the net income of the industrial services segment compared to the prior year. 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 was $1,948,923 at September 30, 2023, compared to $6,252,972 at September 30, 2022. This includes cash and cash equivalents and restricted cash of $6,349,562 at September 30, 2023, and $11,473,676 at September 30, 2022, respectively. The decrease in working capital was primarily due to the decrease in the Company’s current assets of $2,474,726 and an increase in the Company’s current liabilities of $1,906,473. The primary reason for the decrease in current assets was the cash used for operations during the fiscal year and the decrease in assets of discontinued operations, while the primary reason for the increase in current liabilities was the increase in the Company’s accounts payable. Operating activities for continuing operations used $4,724,305 for the year ended September 30, 2023, compared to using $16,262,531 of cash for the year ended September 30, 2022. Cash provided by operating activities for discontinued operations for the year ended September 30, 2023, was $2,491,581, compared to providing cash of $169,027 for the year ended September 30, 2022. Trade receivables increased by $3,810,479 or 71% to $9,209,695 at September 30, 2023, from $5,399,216 at September 30, 2022. The increase in trade receivables is mainly due to increased revenues and receivables related to the business generated by the acquisition of Heisey. Investing activities for continuing operations used $5,628,400 of cash during the year ended September 30, 2023, compared to $6,681,035 provided in the year ended September 30, 2022. Cash used by investing activities for discontinued operations for the year ended September 30, 2023, was $0, compared to using $70,908 for the year ended September 30, 2022. Investing activities for fiscal year 2023 were mainly driven by the purchase of property and equipment and the acquisition of Heisey Mechanical. Investing activities for fiscal year 2022 were mainly driven by the sale and purchase of marketable securities. Financing activities provided $2,036,655 of cash for the year ended September 30, 2023, as compared to $5,022,537 provided in the year ended September 30, 2022. In fiscal 2023 our financing activities were mainly comprised of financing of the acquisition of Heisey and the building purchase. In fiscal 2022 our financing activities were mainly comprised of the proceeds on new debt. The Company has incurred substantial losses of $9,196,875 and $13,020,958 for fiscal years 2023 and 2022, respectively, and has debt obligations over the next fiscal year of $14,507,711 and working capital of $1,948,923, that raise substantial doubt with respect to the Company’s ability to continue as a going concern. While the Company’s working capital 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, implemented a new pricing model on our Vicon brand which has improved margins on those products, has refinanced some debt to provide the Company with additional capital when needed, has effected a reverse stock split on our common stock to remain trading on the Nasdaq Capital Markets, and improve our ability to raise capital through equity offerings and reduce the number of shares the Company 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required under Regulation S-K for “smaller reporting companies”.