UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
For the quarterly period ended December 31, 2021
OR
For the transition period from ___________to ____________
Commission File Number 001-37464
CEMTREX, INC.
(Exact name of registrant as specified in its charter)
631-756-9116
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of February 15, 2022, the issuer had 23,673,210 shares of common stock issued and outstanding.
Table of Contents
CEMTREX, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Cemtrex, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss)
(Unaudited)
Condensed Consolidated Statement of Stockholders’ Equity
Condensed Consolidated Statement of Stockholders’ Equity (Continued)
Condensed Consolidated Statements of Cash Flows
9,661
9,586
-
(500,000
Condensed Consolidated Statements of Cash Flows (Continued)
Cemtrex Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND PLAN OF OPERATIONS
Cemtrex was incorporated in 1998, in the state of Delaware and has evolved through strategic acquisitions and internal growth into a leading multi-industry technology company. The Company has expanded in a wide range of sectors, including smart technologies, virtual and augmented realities, industrial solutions, and intelligent security systems. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Cemtrex” or “management” refer to Cemtrex, Inc. and its subsidiaries.
The Company has two business segments, consisting of (i) Advanced Technologies (AT) and (ii) Industrial Services (IS).
Advanced Technologies (AT)
Cemtrex’s Advanced Technologies segment operates several brands that deliver cutting-edge software and hardware technologies:
Industrial Services (IS)
Cemtrex’s IS segment operates through a brand, Advanced Industrial Services (“AIS”), that offers single-source expertise and services for rigging, millwrighting, in plant maintenance, equipment erection, relocation, and disassembly to diversified customers. We install high precision equipment in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals among others. We are a leading provider of reliability-driven maintenance and contracting solutions for the 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.
Acquisition of Virtual Driver Interactive
On October 26, 2020, the company acquired Virtual Driver Interactive (“VDI”), a California based provider of innovative driver training simulation solutions for a purchase price of $1,339,774 plus contingent consideration of $175,428.
For over 10 years, VDI has been known for its effective and engaging driver training systems, designed for users of all ages and skill levels. The Company offers comprehensive training for new teen and novice drivers, along with advanced training for corporate fleets and truck drivers. VDI’s wide range of training courses and system options provide customers with highly portable, affordable and effective solutions, all while focusing on the dangers of distracted driving. Results for VDI will be reported under the AT segment.
The Company paid $900,000in cash and issued a note payable in the amount of $439,774. This note carries interest of 5% and is payable in two installments of $239,774plus accumulated interest on October 26, 2021, and $200,000plus accumulated interest on October 26, 2022. Additionally, the Company paid contingent consideration of $175,428in May 2021. There is no further contingent consideration specified in the purchase agreement. The Company has accounted for this acquisition as a business combination and has allocated the purchase price as follows, $876,820to proprietary software, $39,992to inventory, and $598,391to goodwill.
Strategic Investment
On November 13, 2020, Cemtrex made a $500,000investment via a simple agreement for future equity(“SAFE”) in MasterpieceVR. The SAFE provides that the Company will automatically receive shares of the entity based on the conversion rate of future equity rounds up to a valuation cap, as defined. MasterpieceVR is a software company that is developing software for content creation using virtual reality. The investment is included in other assets in the accompanying balance sheet and the Company accounts for this investment and recorded at cost. No impairment has been recorded for the period ended December 31, 2021.
Potential Impacts of COVID-19 on our Business
The current COVID-19 pandemic has impacted our business operations and the results of our operations in the last 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. Overall bookings level in the IS segment of our business were down by more than 20%, however our AT segment had experienced relatively less slow down. Bookings and revenue are starting to show signs of recovery in this fiscal quarter compared to the same period last year. However, 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. Additionally, increased prices and the need to increase wages to retain talent may cause our gross margin percentages to shrink and our operational costs to rise.
The broader implications of COVID-19 on our results from operations going forward remains uncertain. The COVID-19 pandemic and the resulting supply chain issues and inflation 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, opportunities in the video surveillance field have been growing for Vicon products.
The extent of the pandemics 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.
NOTE 2 – INTERIM STATEMENT PRESENTATION
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 30, 2021, of Cemtrex Inc.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Unites States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X pursuant to the requirements of the U.S. Securities and Exchange Commission (‘SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the interim periods are not necessarily indicative of the results of operations for the entire year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities in the condensed consolidated financial statements and the accompanying notes, and the reported amounts of revenues, expenses and cash flows during the periods presented. Actual amounts and results could differ from those estimates. The estimates and assumptions the Company makes are based on historical factors, current circumstances and the experience and judgment of the Company’s management. The Company evaluates its estimates and assumptions on an ongoing basis.
The condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, Cemtrex Advanced Technologies Inc., Cemtrex Technologies Pvt. Ltd., Cemtrex XR Inc., and Advanced Industrial Services, Inc. and the Company’s majority owned subsidiary Vicon Industries, Inc. and its subsidiary, Vicon Industries Ltd. All inter-company balances and transactions have been eliminated in consolidation.
Accounting Pronouncements
Significant Accounting Policies
Note 2 of the Notes to Consolidated Financial Statements, included in the annual report on Form 10-K for the year ended September 30, 2021, includes a summary of the significant accounting policies used in the preparation of the consolidated financial statements.
Recently Issued Accounting Standards
ASU 2016-13 Measurement of Credit Losses on Financial Instrument is effective for fiscal years beginning after December 15, 2022. This is not expected to apply to the Company as financial instruments giving rise to credit risk are not utilized by the Company.
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this new guidance will have on its financial statements
The Company does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
NOTE 3 – LOSS PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of shares of common stock and potentially dilutive outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants. For the three months ended December 31, 2021, and 2020, the following items were excluded from the computation of diluted net loss per common share as their effect is anti-dilutive:
SCHEDULE OF COMPUTATION OF DILUTED NET LOSS PER COMMON SHARE AS ANTI-DILUTIVE EFFECT
NOTE 4 – SEGMENT INFORMATION
The Company reports and evaluates financial information for two segments: Advanced Technologies (AT) segment, and the Industrial Services (IS) segment. The AT segment develops smart devices and provides progressive design and development solutions to create impactful experiences for mobile, web, virtual and augmented reality, wearables and television as well as providing cutting edge, mission critical security and video surveillance. The IS segment offers single-source expertise and services for rigging, millwrighting, in plant maintenance, equipment erection, relocation, and disassembly to diversified customers in USA in industries such as: manufacturing, steel, printing, construction, & petrochemical.
The following tables summarize the Company’s segment information:
SCHEDULE OF SEGMENT INFORMATION
NOTE 5 – FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy is applied to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy under the guidance for fair value measurements are described below:
Level 1 — Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Our Level 1 assets include cash equivalents, banker’s acceptances, trading securities investments and investment funds. We measure trading securities investments and investment funds at quoted market prices as they are traded in an active market with sufficient volume and frequency of transactions.
Level 2 — Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified contractual term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 — Level 3 inputs are unobservable inputs for the asset or liability in which there is little, if any, market activity for the asset or liability at the measurement date. Level 3 assets and liabilities include cost method investments. Quantitative information for Level 3 assets and liabilities reviewed at each reporting period includes indicators of significant deterioration in the earnings performance, credit rating, asset quality, business prospects of the investee, and financial indicators of the investee’s ability to continue as a going concern.
The Company’s fair value assets at December 31, 2021 and September 30, 2021, are as follows.
SCHEDULE OF FAIR VALUE OF ASSETS
NOTE 6 – RESTRICTED CASH
A subsidiary of the Company participates in a consortium in order to self-insure group care coverage for its employees. The plan is administrated by Benecon Group and the Company makes monthly deposits in a trust account to cover medical claims and any administrative costs associated with the plan. These funds, as required by the plan are restricted in nature and amounted to $1,476,037at December 31, 2021 and $1,601,932 at Spentember 30, 2021. Additionally, the Company has a standby letter of credit for deposit on a building lease and payable against a money market account. The amount of the standby letter of credit is $157,415as of December 31, 2021 and Sepetmber 30, 2021.
NOTE 7 – ACCOUNTS RECEIVABLE, NET
Accounts receivables, net consist of the following:
SCHEDULE OF ACCOUNTS RECEIVABLE, NET
Accounts receivable include amounts due for shipped products and services rendered.
Allowance for doubtful accounts include estimated losses resulting from the inability of our customers to make required payments.
NOTE 8 – INVENTORY, NET
Inventory, net, consist of the following:
SCHEDULE OF INVENTORY, NET
NOTE 9 – PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
SUMMARY OF PROPERTY AND EQUIPMENT
Depreciation expense for the three months ended December 31, 2021, and 2020 were $262,833 and $360,578
NOTE 10 – LEASES
ASC 842, “Leases”, requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at either the effective date (the “effective date method”) or the beginning of the earliest period presented (the “comparative method”) using a modified retrospective approach. Under the effective date method, the Company’s comparative period reporting is unchanged. In contrast, under the comparative method, the Company’s date of initial application is the beginning of the earliest comparative period presented, and the Topic 842 transition guidance is then applied to all comparative periods presented. Further, under either transition method, the standard includes certain practical expedients intended to ease the burden of adoption. The Company adopted ASC 842 October 1, 2019, using the effective date method and elected certain practical expedients allowing the Company not to reassess:
The Company also made the accounting policy decision not to recognize lease assets and liabilities for leases with a term of 12 months or less.
The Company entered into a financing lease for a single vehicle in the Industrial services segment with a term of 3 years. The Company entered into operating leases for its facilities in New York, United Kingdom, and India, as well as for vehicles for use in our Industrial Services segment. The operating lease terms range from 2 to 7 years. The Company excluded the renewal option on its applicable facility leases from the calculation of its right-of-use assets and lease liabilities.
Finance and operating lease liabilities consist of the following:
SUMMARY OF FINANCE AND OPERATING LEASE LIABILITIES
A reconciliation of undiscounted cash flows to finance and operating lease liabilities recognized in the condensed consolidated balance sheet at December 31, 2021, is set forth below:
SCHEDULE OF RECONCILIATION OF UNDISCOUNTED CASH FLOWS TO FINANCE AND OPERATING LEASE LIABILITIES
Additional disclosures of lease data are set forth below:
SCHEDULE OF LEASE COSTS
The Company used the rate implicit in the lease, where known, or its incremental borrowing rate as the rate used to discount the future lease payments.
NOTE 11 – PREPAID AND OTHER CURRENT ASSETS
On December 31, 2021, the Company had prepaid and other current assets consisting of prepayments on inventory purchases of $467,093, and other current assets of $2,260,418. On September 30, 2021, the Company had prepaid and other current assets consisting of prepayments on inventory purchases of $298,707, and other current assets of $2,286,945.
NOTE 12 – OTHER ASSETS
As of December 31, 2021, the Company had other assets of $697,624 which was comprised of rent security of $96,320, a strategic investment in MasterpieceVR of $500,000, and other assets of $101,304. As of September 30, 2021, the Company had other assets of $697,240 which was comprised of rent security deposits of $84,362, Investment in Masterpiece VR valued at $500,000, and other assets of $112,878.
NOTE 13 – RELATED PARTY TRANSACTIONS
On August 31, 2019, the Company entered into an Asset Purchase Agreement for the sale of Griffin Filters, LLC to Ducon Technologies, Inc., which Aron Govil, the Company’s Founder and former CFO, is President, for total consideration of $550,000. As of December 31, 2021, and September 30, 2021, there was $1,492,321and $1,487,155in receivables due from Ducon Technologies, Inc., respectively. At December 31, 2021, $500,000 of the balance due is for the sale of Griffin, which was due in February 2021, and the remaining balance are various receivables with various due dates within the next fiscal year. The Company is currently negotiating a payment agreement surrounding all these amounts due.
On February 23, 2021, Cemtrex’s Board of Directors determined that certain transactions between Cemtrex Inc. and First Commercial, a company owned by former Executive Director, former Controlling Shareholder and former CFO, Aron Govil, were incorrectly handled and accounted for.
The total amount of disputed transfers was approximately $7,100,000 and occurred in fiscal year 2017 in the amount of $5,600,000 and in fiscal year 2018 in the amount of $1,500,000. Cemtrex did not find any other such transfers during this period or thereafter, upon further review of the Company’s records.
Upon the Company’s investigation into this matter, the Company has determined that there were inaccuracies in the Company’s financial statements. The financials for the periods 2017 and 2018 were incorrect corresponding to the amounts that were incorrectly accounted for, and subsequent years were affected by the roll forward effects of these entries. The Company found unsupported advertising expenses in the amount of approximately $400,000on Cemtrex Inc’s income statement for fiscal year 2018 and found that approximately $5,700,000of intangible assets and $975,000of research and development expenses, as translated from Indian Rupee at the time, were recorded on Cemtrex India’s financial statements in fiscal year 2018 and could not be substantiated. The total amount of unsubstantiated transfers recorded by Cemtrex India, and the unsupported advertising expense recorded by Cemtrex, Inc. sums to $7,100,000, corresponding with the total amount in question regarding First Commercial transfers during fiscal years 2017 and 2018
On February 26, 2021, the Company entered into a Settlement Agreement and Release with Aron Govil regarding these transactions.
As part of the Settlement Agreement, Mr. Govil was required to pay the Company consideration with a total value of $7,100,000 (the “Settlement Amount”) by entering into the Agreement. The Settlement Amount was satisfied in a combination of Mr. Govil forfeiting certain Preferred Stock and outstanding options and executing a secured note in the amount of $1,533,280. The Independent Board of Directors in coordination with Management concluded the settlement represented fair value.
In March 2021, Mr. Govil returned to the Company 1,000,000 shares of Series A Preferred Stock, 50,000 Shares of Series C Preferred Stock,469,949 shares of Series 1 Preferred Stock, and forfeited all outstanding options to purchase shares of commons stock (collectively, the “Securities”). For the purposes of accounting recognition, the Company determined the fair value of the Series A, Series C, and Series 1 Preferred stock based on the closing trading value of the Series 1 Preferred Stock on the date of the agreement. The options surrendered were valued using the Black-Scholes option pricing model.
The Company recognized the gain with respect to the surrendered Securities during this reporting period. The gain of $3,674,165is reported as Settlement Agreement – Related Party on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss).
As discussed above, Mr. Govil also executed a secured promissory note (the “Note”) in the amount of $1,533,280. The Note matures and is due in full in two years and bears interest at 9% per annum and is secured by all of Mr. Govil’s assets. Mr. Govil also agreed to sign an affidavit confessing judgment in the event of a default on the Note. While the Company believes the note is fully collectible, in accordance with ASC 450-30, Gain Contingencies, the Company determined the gain will not be recognized until the note is paid. Accordingly, the note and associated gain is not presented on the Company’s Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss).
NOTE 14 – LINES OF CREDIT AND LONG-TERM LIABILITIES
Lines of credit
The Company currently has a line of credit with Fulton Bank for $3,500,000. The line carries an interest of LIBOR plus 2.00%per annum (2.078%as of December 31, 2021 and 2.075% as of September 30, 2021). At December 31, 2021 and September 30, 2021, there was no outstanding balance on this line of credit. The terms of this line of credit are subject to the bank’s review annually on February 1.
Loans payable to bank
On December 15, 2015, the Company acquired a loan from Fulton Bank in the amount of $5,250,000in order to fund the purchase of Advanced Industrial Services, Inc. $5,000,000of the proceeds went to direct purchase of AIS. This loan carries interest of LIBOR plus 2.25%per annum (2.328%as of December 31, 2021 and 2.325%as of September 30, 2021) and is payable on December 15, 2022. This loan carries loan covenants which the Company was in compliance with as of December 31, 2021. The outstanding balance on this loan was $977,808and $1,218,680, on December 31, 2021, and September 30, 2021, respectively. This loan is secured by the assets of the Company.
On May 1, 2018, the Company acquired a loan from Fulton Bank in the amount of $400,000 in order to fund new equipment for Advanced Industrial Services, Inc. This loan carries interest of LIBOR plus 2.00% per annum (2.078% as of December 31, 2021 and 2.075% as of September 30, 2021) and is payable on May 1, 2023. This loan carries loan covenants which the Company was in compliance with as of December 31, 2021. The outstanding balance on this loan was $133,008 and $149,914, on December 31, 2021, and September 30, 2021, respectively. This loan is secured by the assets of the Company
On January 28, 2020, the Company acquired a loan from Fulton Bank in the amount of $360,000 in order to fund new equipment for Advanced Industrial Services, Inc. This loan carries interest of LIBOR plus 2.25% per annum (2.328% as of December 31, 2021 and 2.325% as of September 30, 2021) and is payable on May 1, 2023. This loan carries loan covenants which the Company was in compliance with as of December 31, 2021. The outstanding balance on this loan was $234,821 and $258,060, on December 31, 2021, and September 30, 2021, respectively. This loan is secured by the assets of the Company
Notes payable
On September 30, 2020, the Company, issued a note payable to an independent private lender in the amount of $4,605,000. This note carries interest of 8%and matures on March 30, 2022. After deduction of an original issue discount of 600,000and legal fees of $5,000, the Company received $4,000,000in cash. As of December 31, 2021, and September 30, 2021, this note had a balance of $0and $2,256,448, respectively. As of December 31, 2021, and September 30, 2021, this note had unamortized original issue discount balance of $0 and $200,000, respectively
On September 30, 2021, the Company, issued a note payable to an independent private lender in the amount of $5,755,000. This note carries interest of 8%and matures on March 30, 2023. After deduction of an original issue discount of 750,000and legal fees of $5,000, the Company received $5,000,000in cash. As of December 31, 2021, and September 30, 2021, this note had a balance of $5,248,855and $5,005,000, respectively. As of December 31, 2021, and September 30, 2021, this note had unamortized original issue discount balance of $625,000and $750,000, respectively
On March 3, 2020, Vicon, a subsidiary of the Company, amended the $5,600,000Term Loan Agreement with NIL Funding Corporation (“NIL”). Upon closing, $500,000of outstanding borrowings were repaid to NIL. The Agreement requires monthly payments of accrued interest that began on October 1, 2018. This note carries interest of 8.85%and matures on March 30, 2022. This note carries loan covenants which the Company is in compliance with as of December 31, 2021. As of December 31, 2021, and September 30, 2021, this note had a balance of $3,529,743and $3,604,743, respectively.
Mortgage Payable
On January 28, 2020, the Company’s subsidiary, Advanced Industrial Services, Inc., completed the purchase of two buildings for a total purchase price of $3,381,433. The Company paid $905,433in cash and acquired a mortgage from Fulton Bank in the amount of $2,476,000. This mortgage carries interest of LIBOR plus 2.50%per annum (2.578%as of December 31, 2021 and 2.575%as of September 30, 2021) and is payable on January 28, 2040. This loan carries loan covenants similar to covenants on the Company’s other loans from Fulton Bank. As of December 31, 2021, the Company was in compliance with these covenants. As of December 31, 2021, and September 30, 2021, this mortgage had a balance of $2,314,141and $2,339,114, respectively.
Paycheck Protection Program Loans
In April and May of 2020, and January and April of 2021, the Company and its subsidiaries applied for and were granted $6,413,385in Paycheck Protection Program loans under the CARES Act. These loans bear interest of 2%and mature in two years. The Company has applied for and received loan forgiveness under the provisions of the CARES Act for $6,291,985. The remaining loan of $121,400is recorded under Paycheck Protection Program Loans on our Condensed Consolidated Balance Sheet as of December 31, 2021, net of the short-term portion of $60,700. The issuing bank determined that this loan qualifies for loan forgiveness, however the Company is awaiting final approval from the Small Business Administration.
NOTE 15 – STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue 10,000,000 shares of Preferred Stock, $0.001 par value. As of December 31, 2021, and September 30, 2021, there were 2,029,753 and 1,935,151 shares issued and outstanding, respectively.
Series 1 Preferred Stock
Duringthe three months ended December 31, 2021, 94,602shares of Series 1 Preferred Stock were issued to pay dividends to holders of Series 1 Preferred Stock.
As of December 31, 2021, and September 30, 2021, there were 1,979,753 and 1,885,151 shares of Series 1 Preferred Stock issued and outstanding, respectively.
Series C Preferred Stock
On October 3, 2019, pursuant to Article IV of our Articles of Incorporation, our Board of Directors voted to designate a class of preferred stock entitled Series C Preferred Stock, consisting of up to one hundred thousand (100,000) shares, par value $0.001. Under the Certificate of Designation, holders of Series C Preferred Stock are 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 of December 31, 2021, and September 30, 2021, there were 50,000 shares of Series C Preferred Stock issued and outstanding.
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, $0.001 par value. As of December 31, 2021, there were 23,673,210 shares issued and outstanding and at September 30, 2021, there were 20,782,194 shares issued and outstanding.
During the three months ended December 31, 2021, 2,981,016 shares of the Company’s common stock have been issued to satisfy $2,112,500of notes payable, $353,978 in accrued interest, and $821,593 of excess value of shares issued recorded as interest expense.
NOTE 16 – SHARE-BASED COMPENSATION
For the three months ended December 31, 2021, and 2020, the Company recognized $45,371 and $16,071 of share-based compensation expense on its outstanding options, respectively. As of December 31, 2021, $314,043 of unrecognized share-based compensation expense is expected to be recognized over a period of four years. Future compensation amounts will be adjusted for any change in estimated forfeitures.
NOTE 17 – COMMITMENTS AND CONTINGENCIES
The Company has its corporate headquarters in New York City with a month-to-month lease of 2,500 square feet of office space at a rate of $13,000 per month.
The Company’s IS segment owns approximately 25,000 square feet of warehouse space in Manchester, PA and approximately 43,000 square feet of office and warehouse space in York, PA. The IS segment also leases approximately 15,500 square feet of warehouse space in Emigsville, PA from a third party in a three-year lease at a monthly rent of $4,555 expiring on August 31, 2022.
The Company’s AT segment leases (i) approximately 6,700 square feet of office and warehouse space in Pune, India from a third party in an five year lease at a monthly rent of $6,453 (INR456,972) expiring on February 28, 2024, (ii) approximately 30,000 square feet of office and warehouse space in Hauppauge, New York from a third party in a seven-year lease at a monthly rent of $28,719 expiring on March 31, 2027, and (iii) approximately 9,400 square feet of office and warehouse space in Hampshire, England in a fifteen-year lease with at a monthly rent of $7,329 (£5,771) which expires on March 24, 2031 and contains provisions to terminate in 2026.
NOTE 18 – SUBSEQUENT EVENTS
Cemtrex has evaluated subsequent events up to the date the condensed consolidated financial statements were issued. Cemtrex concluded that the following subsequent events have occurred and require recognition or disclosure in the condensed consolidated financial statements.
On January 28, 2022, Christopher C. Moore was dismissed from his position as Chief Financial Officer and Paul J. Wyckoff was appointed Cemtrex’s Interim Chief Financial Officer.
On February 2, 2022, the Company invested an additional $500,000 investment via a simple agreement for future equity(“SAFE”) in MasterpieceVR.
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
Significant Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon the accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Although these estimates are based on our knowledge of current events, our actual amounts and results could differ from those estimates. The estimates made are based on historical factors, current circumstances, and the experience and judgment of our management, who continually evaluate the judgments, estimates and assumptions and may employ outside experts to assist in the evaluations.
Certain of our accounting policies are deemed “significant”, as they are both most important to the financial statement presentation and require management’s most difficult, subjective or complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a discussion of our significant accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended September 30, 2021.
Results of Operations – For the three months ending December 31, 2021, and 2020
Total revenue for the three months ended December 31, 2021, and 2020 was $10,672,489 and $8,836,076, respectively, an increase of $1,863,413, or 21%. Loss from operations for the three months ended December 31, 2021, was $4,054,523 compared to $2,045,951 for the three months ended December 31, 2020, an increase on the loss of $2,008,572, or 98%. Total revenue for the quarter increased, as compared to total revenue in the same period last year, due to shutdowns and limited operations of businesses due to the COVID-19 crisis during the same period last year. Loss from operations increased due to increased expenses related to personnel costs, travel, and research and development costs.
Revenues
Our Advanced Technologies segment revenues for the three months ended December 31, 2021, increased by $945,648 or 20% to $5,618,517 from $4,672,869 for the three months ended December 31, 2020. This increase is mainly due to an improvement in economic climate from the impact of the COVID-19 crisis during the same period last year.
Our Industrial Services segment revenues for the three months ended December 31, 2021, increased by $890,765 or 21%, to $5,053,972 from $4,163,207 for the three months ended December 31, 2020. This increase is mainly due to an improvement in economic climate from the impact of the COVID-19 crisis during the same period last year.
Gross Profit
Gross Profit for the three months ended December 31, 2021, was $3,869,194 or 36% of revenues as compared to gross profit of $4,005,470 or 45% of revenues for the three months ended December 31, 2020. Gross profit decreased in the three months ended December 31, 2021, compared to the three months ended December 31, 2020, due to increased cost of revenues. The Company’s gross profit margins vary from product to product and from customer to customer.
General and Administrative Expenses
General and administrative expenses for the three months ended December 31, 2021, increased $1,194,808 or 22% to $6,612,004 from $5,417,196 for the three months ended December 31, 2020. General and administrative expenses as a percentage of revenues was 62% and 61% of revenues for the three-month periods ended December 31, 2021, and 2020, respectively. The increase in general and administrative expenses is the result of increased personnel, travel, marketing and sales expenses.
Research and Development Expenses
Research and Development expenses for the three months ended December 31, 2021, was $1,311,713 compared to $634,225 for the three months ended December 31, 2020. Research and Development expenses are primarily related to the Advanced Technologies Segment’s development of proprietary technology and further developments of the SmartDesk and Artificial Intelligence (AI) and next generation solutions associated with security and surveillance systems software.
Other Income/(Expense)
Other income/(expense) for the first quarter of fiscal 2022, was $(475,300) as compared to $342,047 for the first quarter of fiscal 2021. Other income/(expense) for the three months ended December 31, 2021, included the gain on the forgiveness of our PPP loans of $971,500.
Provision for Income Taxes
During the first quarter of fiscal 2022, the Company did not record an income tax provision compared to $28,954 for the first quarter of fiscal 2021. The provision for income tax is based upon the projected income tax from the Company’s various U.S. and international subsidiaries that are subject to their respective income tax jurisdictions and the Company’s projected ability to utilize net loss carryforwards.
Net income/(loss) attributable to Cemtrex, Inc. shareholders
The Company had a net loss attributable to Cemtrex, Inc. shareholders of $4,477,951, or 42% of revenues, for the three month period ended December 31, 2021, as compared to a net loss attributable to Cemtrex, Inc. shareholders of $1,692,611 or 19% of revenues, for the three months ended December 31, 2020. Net loss attributable to Cemtrex, Inc. shareholders increased in the first quarter as compared to the same period last year was primarily due to costs of revenues and operating expenses mentioned above.
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 $12,801,113 at December 31, 2021, compared to $15,088,892 at September 30, 2021. This includes cash and equivalents and restricted cash of $11,972,430 at December 31, 2021, and $17,186,323 at September 30, 2021. The decrease in working capital was primarily due to the Company’s use of cash to build inventory and pay down liabilities during the first quarter of fiscal year 2022.
Accounts receivable decreased $2,263,147 or 29% to $5,547,749 at December 31, 2021, from $7,810,896 at September 30, 2021. The decrease in accounts receivable is attributable to collections of receivables from the last quarter of fiscal year 2021 and lower revenues in this quarter and compared to the fourth quarter of fiscal year 2021.
Inventories increased $1,428,411 or 25% to $7,085698 at December 31, 2021, from $5,657,287 at September 30, 2021. The increase in inventories is attributable to the purchase of inventories for new products the Company plans to ship in the future.
Cash used by operating activities for the three months ended December 31, 2021 and 2021 was $4,352,702 and $1,078,052 respectively. The decrease in operating cash flows was primarily due to purchases on inventory and payment of accounts payable and accrued expenses.
Cash used by investment activities for the three months ended December 31, 2021 and 2020 was $291,666 and $675,487, respectively. Investing activities for the first quarter of fiscal year 2022 were driven by the Company’s purchase of fixed assets.
Cash used by financing activities for the three months ended December 31, 2021 and 2020 was $632,753 and $1,629,708, respectively. Financing activities were primarily driven by payments on bank loans and notes.
We believe that our cash on hand and cash generated by operations is sufficient to meet the capital demands of our current operations for fiscal year 2022 (ending September 30, 2022). Any major increases in sales, particularly in new products, may require substantial capital investment. Failure to obtain sufficient capital could materially adversely impact our growth potential.
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 expansion goals and working capital needs.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures reporting as promulgated under the Exchange Act is defined as controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our CEO and our CFO have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2021. Based on their evaluation, our management has concluded that as of December 31, 2021, there is a material weakness in our internal control over financial reporting. The material weakness relates to the Company lacking sufficient accounting personnel. The shortage of accounting personal resulted in the Company lacking entity level controls around the review of period-end reporting processes, accounting policies and public disclosures. Additionally, the Company’s current processes and systems do not provide for necessary, timely reconciliation of certain accounts and sufficient consideration regarding recoverability of certain assets. This deficiency is common in small companies, similar to us, with limited personnel.
Notwithstanding the conclusion by our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures as of December 31, 2021, were not effective, and notwithstanding the material weakness in our internal control over financial reporting described below, management believes that the unaudited condensed financial statements and related financial information included in this Quarterly Report fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with GAAP.
In order to mitigate the material weakness, the Board of Directors has assigned a priority to the short-term and long-term improvement of our internal control over financial reporting. Our Board of Directors will work with management to continuously review controls and procedures to identified deficiencies and implement remediation within our internal controls over financial reporting and our disclosure controls and procedures.
Changes in Internal Control Over Financial Reporting
While there was no change in the Company’s internal control over financial reporting during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, the Company is taking steps to improve its internal controls by obtaining additional accounting personnel.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.
Part II Other Information
Item 1. Legal Proceedings.
NONE.
Item 1A. Risk Factors
See Risk Factors included in our Annual Report on Form 10-K for 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the three months ended December 31, 2021 the Company issued an aggregate of 2,891,016 shares of common stock to settle outstanding debt of $3,288,071. Such shares were issued pursuant to the exemption contained under Section 4(a)(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.