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. The Company’s reporting segments consist of Security and Industrial Services. Additionally, the Company’s operational structure also reports unallocated corporate expenses. 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. 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. 30 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, 2023. Results of Operations – For the three months ended June 30, 2024, and 2023 Revenues Our Security segment revenues for the three months ended June 30, 2024, decreased by $2,821,792 or 31% to $6,193,487 from $9,015,279 for the three months ended June 30, 2023. This decrease is due to the delay of multiple projects for the Security segment’s products and services and overall worsening economic conditions in the industry. Our Industrial Services segment revenues for the three months ended June 30, 2024, increased by $2,778,050 or 49%, to $8,492,911 from $5,714,861, for the three months ended June 30, 2023. This increase is mainly due to increased demand for the segment’s services and the additional business from the Heisey acquisition completed during the fourth quarter of fiscal year 2023. Gross Profit Gross Profit for the three months ended June 30, 2024, was $5,877,147 or 40% of revenues as compared to gross profit of $6,480,643 or 44% of revenues for the three months ended June 30, 2023. Gross profit in our Security segment was $3,223,091 or 52% of the segment’s revenues for the three months ended June 30, 2024, as compared to gross profit of $4,404,836 or 49% of the segment’s revenues for the period ended June 30, 2023. Gross profit percentage was down due to the mix of product sold in the three months ended June 30, 2024, compared to the three months ended June 30, 2023. Gross profit in our Industrial Services segment was $2,654,056 or 31% of the segment’s revenues for the three months ended June 30, 2024, as compared to gross profit of $2,075,807 or 36% of the segment’s revenues for the period ended June 30, 2023. Gross profit as a percentage of revenues decreased due to lower margins related to Heisey acquisition related projects in the three months ended June 30, 2024, compared to the three months ended June 30, 2023. General and Administrative Expenses General and administrative expenses for the three months ended June 30, 2024, increased $2,815,220 or 52% to $8,192,180 from $5,376,960 for the three months ended June 30, 2023. The increase in general and administrative expenses is mainly related to increased sales and marketing activities including payroll, fringe benefits, legal expenses, insurance, travel as well as an increase in insurance, and repairs and maintenance expenses. Expenses related to the $1,397,388 write-off of related party note receivable are included here. Research and Development Expenses Research and Development expenses for the three months ended June 30, 2024, were $864,483 compared to $1,049,909 for the three months ended June 30, 2023, a decrease of $185,426 or 18%. Research and Development expenses are related to the Security Segment’s development of next generation solutions associated with security and surveillance systems software. 31 Other Income/Expense Other expense for the three months ended June 30, 2024, was $5,902,493, as compared to $1,219,533 for the three months ended June 30, 2023. Other expense for the three months ended June 30, 2024, was mainly driven by the May 2024 Equity Financing expenses of $995,333, the loss on the excess fair value of the warrants issued in the May 2024 Equity Financing of $7,255,528, offset by the change in the fair value of the warrants of $2,807,890. Provision for Income Taxes During the three months ended June 30, 2024 and 2023, the Company had income tax expense from continuing operations of $67,294 and $19,461, respectively. The provision for income tax is based upon the current 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 current ability to utilize net loss carryforwards. Results of Operations – For the nine months ended June 30, 2024, and 2023 Revenues Our Security segment revenues for the nine months ended June 30, 2024, decreased by $2,487,701 or 10% to $23,446,220 from $25,933,921 for the nine months ended June 30, 2023. This decrease is due to the delay of multiple projects for the Security segment’s products and services and weakening economic conditions in the industry. Our Industrial Services segment revenues for the nine months ended June 30, 2024, increased by $8,438,081 or 50%, to $25,277,939 from $16,839,858 for the nine months ended June 30, 2023. This increase is mainly due to increased demand for the segment’s services and the additional business from the Heisey acquisition completed during the fourth quarter of fiscal year 2023. Gross Profit Gross Profit for the nine months ended June 30, 2024, was $19,898,962 or 41% of revenues as compared to gross profit of $18,859,530 or 44% of revenues for the nine months ended June 30, 2023. Gross profit in our Security segment was $11,853,007 or 51% of the segment’s revenues for the nine months ended June 30, 2024, as compared to gross profit of $12,928,607 or 50% of the segment’s revenues for the nine-month period ended June 30, 2023. Gross profit was percentage down due to the mix of products sold in the nine months ended June 30, 2024, compared to the nine months ended June 30, 2023. Gross profit in our Industrial Services segment was $8,045,955 or 32% of the segment’s revenues for the nine months ended June 30, 2024, as compared to gross profit of $5,930,923 or 35% of the segment’s revenues for the nine-month period ended June 30, 2023. Gross profit as a percentage of revenues decreased due to lower margins related to Heisey acquisition related projects in the nine months ended June 30, 2024, compared to the nine months ended June 30, 2023. General and Administrative Expenses General and administrative expenses for the nine months ended June 30, 2024, increased $5,727,701 or 35% to $22,184,303 from $16,456,602 for the nine months ended June 30, 2023. The increase in general and administrative expenses is mainly related to increased payroll, fringe benefits, insurance, professional fees and travel. Increases in payroll include approximately $680,000 in severance and bonus payments. Legal expenses for the nine months ended June 30, 2024, include non-recurring expenses of $360,000. Expenses related to the $1,491,415 write-off of related party notes receivable are included here. 32 Research and Development Expenses Research and Development expenses for the nine months ended June 30, 2024, were $2,664,688 compared to $3,895,717 for the nine months ended June 30, 2023, a decrease of $1,231,029 or 32%. Research and Development expenses are 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 nine months ended June 30, 2024, was $6,855,804, as compared to $3,323,484 for the nine months ended June 30, 2023. Other expense for the nine months ended June 30, 2024, and 2023, was mainly driven by interest on the Company’s debt. Other expense for the nine months ended June 30, 2024, was mainly driven by the May 2024 Equity Financing expenses of $995,333, the loss on the excess fair value of the warrants issued in the May 2024 Equity Financing of $7,255,528, offset by the change in the fair value of the warrants of $2,807,890. Provision for Income Taxes During the nine months ended June 30, 2024 and 2023, the Company had income tax expense from continuing operations of $238,049 and $19,641. The provision for income tax is based upon the current 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 current ability to utilize net loss carryforwards. 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 was $12,400,461 at June 30, 2024, compared to working capital of $1,948,923 at September 30, 2023. This includes cash and equivalents and restricted cash of $7,620,225 at June 30, 2024, and $6,349,562 at September 30, 2023. The increase in working capital was primarily due to the Company’s May 2024 Equity Financing and entry into a standstill agreement on two notes extending the maturity date and holding redemptions for a period of one year. Cash used by operating activities for continuing operations for the nine months ended June 30, 2024, and 2023 was $2,076,477 and $5,394,048, respectively. Cash provided by operating activities for discontinued operations for the nine months ended June 30, 2023, was $2,474,863. Our negative operating cash flow was mainly the result of our net loss combined with operating changes in trade payables. Trade receivables decreased by $1,408,812 or 15% to $7,800,883 at June 30, 2024, from $9,209,695 at September 30, 2023. The decrease in trade receivables is attributable to decreased sales in the Security segment. Cash used by investing activities for continuing operations for the nine months ended June 30, 2024, was $406,224 compared to $735,265 used for the nine months ended June 30, 2023. Investing activities for the nine months ended June 30, 2024, were driven by the Company’s purchase of property and equipment and investment in Masterpiece VR. Investing activities for the nine months ended June 30, 2023, were driven by the Company’s purchase of property and equipment. Cash provided by financing activities for the nine months ended June 30, 2024, was $3,867,544 compared to using cash of $1,280,991 for the nine months ended June 30, 2023. Financing activities for the nine months ended June 30, 2024, were primarily driven by the proceeds and expenses on the May 2024 Equity Financing, proceeds and payments on the Company’s revolving line of credit and payments on its secured debt. Financing activities for the nine months ended June 30, 2023, were primarily driven by payments on the Company’s debt. 33 The Company’s working capital may not be sufficient to cover operating costs which indicates 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. The Company has $7,620,225 in cash and cash equivalents and restricted cash as of June 30, 2024. Additionally, the Company has (i) secured a line of credit for its Vicon brand to fund operations, which as of June 30, 2024, has available capacity of $2,269,675, (ii) continually reevaluated its pricing model on our Vicon brand to improve margins on those products, (iii) entered into a Standstill Agreement with Streeterville Capital, LLC (“Streeterville”) in which Streeterville agreed not to seek to redeem any portion of its two outstanding notes with the Company for a period of one year expiring on April 30, 2025 in exchange, the Company agreed to pay to Streeterville the greater of $4,000,000 or fifty percent (50%) of the net proceeds the Company receives from the sale of any of its common stock or preferred stock during the Standstill Period. To date, the company has paid Streeterville $4,588,897 under this agreement. 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 if successful, would be 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. The Company currently does not have adequate cash or available liquidity/available capacity on our lines of credit to meet our short or long-term needs. Absent an ability to raise additional outside capital and restructure or refinance all or a portion of our debt, the Company will be unable to meet its obligations as they become due over the next twelve months beyond the issuance date. Each segment of the Company’s operations has positioned itself for growth and the Company’s long-term objectives include, increasing marketing and sales for the Company’s products and services in each segment, increasing the Company’s presence through collaboration partnerships in each segment and through strategic acquisitions of complementary businesses for each segment. These long-term objectives will require sufficient cash to complete, and the Company expects to fund these objectives with cash on hand, issuance of debt, and from proceeds from the sale of the Company’s securities, which may not be sufficient to fully implement our growth initiatives. The condensed consolidated financial statements do not include any adjustments relating to this uncertainty. 34