Cemtrex(CETX) - 2023 Q3 - Quarterly Report

Part I. Financial Information This section presents the unaudited condensed consolidated financial statements, management's discussion, and controls and procedures Item 1. Financial Statements This item presents the company's unaudited condensed consolidated financial statements and accompanying detailed notes - The report includes unaudited condensed consolidated financial statements for the periods ended June 30, 2023, and September 30, 2022 (Balance Sheets), and for the three and nine months ended June 30, 2023, and 2022 (Statements of Operations, Comprehensive Loss, Cash Flows, and Stockholders' Equity)[26][28][40] Condensed Consolidated Balance Sheets Key Balance Sheet Data (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 | September 30, 2022 | | :---------------------------------- | :------------ | :----------------- | | Total Assets | $41,743,676 | $45,757,628 | | Total Current Assets | $26,343,074 | $31,767,767 | | Cash and equivalents | $5,628,839 | $9,895,761 | | Restricted cash | $805,273 | $1,577,915 | | Total Current Liabilities | $27,310,563 | $25,514,795 | | Total Liabilities | $33,564,003 | $31,120,090 | | Total Cemtrex Stockholders' Equity | $7,516,424 | $13,944,796 | - The company reported a working capital deficit of $967,489 at June 30, 2023, compared to a working capital surplus of $6,252,972 at September 30, 2022[220] Condensed Consolidated Statements of Operations Three Months Ended June 30 (YoY) | Metric | 2023 | 2022 | Change (YoY) | | :---------------------------------- | :------------ | :------------ | :----------- | | Revenues | $14,730,140 | $12,108,904 | +22% | | Gross profit | $6,480,643 | $5,040,107 | +28.6% | | Operating income/(loss) | $53,774 | $(1,531,297) | N/A (swing to profit) | | Net loss attributable to Cemtrex, Inc. shareholders | $(1,146,524) | $(680,793) | +68.4% (increased loss) | | Basic & Diluted EPS (Continuing Operations) | $(1.29) | $(1.14) | N/A (increased loss) | Nine Months Ended June 30 (YoY) | Metric | 2023 | 2022 | Change (YoY) | | :---------------------------------- | :------------ | :------------ | :----------- | | Revenues | $42,773,779 | $33,268,316 | +29% | | Gross profit | $18,859,530 | $12,032,138 | +56.7% | | Operating income/(loss) | $(1,492,789) | $(7,724,118) | -80.7% (reduced loss) | | Net loss attributable to Cemtrex, Inc. shareholders | $(8,018,529) | $(9,879,991) | -18.9% (reduced loss) | | Basic & Diluted EPS (Continuing Operations) | $(5.83) | $(10.94) | N/A (reduced loss) | Condensed Consolidated Statements of Comprehensive Loss Comprehensive Loss (Three Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------------------------------------- | :------------ | :------------ | | Net loss | $(1,172,119) | $(731,702) | | Foreign currency translation gain/(loss) | $22,470 | $(200,880) | | Comprehensive loss attributable to Cemtrex, Inc. shareholders | $(1,175,244) | $(983,491) | Comprehensive Loss (Nine Months Ended June 30) | Metric | 2023 | 2022 | | :-------------------------------------------------- | :------------ | :------------ | | Net loss | $(8,048,022) | $(10,063,448) | | Foreign currency translation gain/(loss) | $(71,179) | $(341,011) | | Comprehensive loss attributable to Cemtrex, Inc. shareholders | $(8,148,694) | $(10,587,916) | Condensed Consolidated Statement of Stockholders' Equity - Net loss of $(8,048,022) was recorded for the nine months ended June 30, 2023[41] - Foreign currency translation resulted in a loss of $(71,179) for the nine months ended June 30, 2023[41] - Share-based compensation recognized was $93,313 for the nine months ended June 30, 2023[175] - 161,718 common shares were issued to satisfy $487,716 of notes payable, $662,284 in accrued interest, and $276,151 of excess value of shares issued recorded as interest expense during the nine months ended June 30, 2023[174] - 22,017 common shares were issued in exchange for services valued at $141,872 during the nine months ended June 30, 2023[151] - 213,894 Series 1 Preferred Stock shares were issued to pay dividends during the nine months ended June 30, 2023[173] - A 35:1 reverse stock split on common stock was completed on January 25, 2023, with all share and per share data retroactively adjusted[84][201] Condensed Consolidated Statements of Cash Flow Cash Flow Summary (Nine Months Ended June 30, 2023 vs. 2022) | Cash Flow Activity | 2023 | 2022 | Change (YoY) | | :-------------------------------------------------- | :------------ | :------------ | :----------- | | Net cash used by operating activities | $(2,919,185) | $(10,628,365) | +$7,709,180 (less cash used) | | Net cash (used in)/provided by investing activities | $(735,265) | $752,807 | -$1,488,072 (swing to cash used) | | Net cash (used)/provided by financing activities | $(1,280,991) | $5,902,298 | -$7,183,289 (swing to cash used) | | Net decrease in cash, cash equivalents, and restricted cash | $(4,935,441) | $(3,973,260) | +$962,181 (increased decrease) | | Cash, cash equivalents, and restricted cash at end of period | $6,434,112 | $12,815,223 | -$6,381,111 | - Net cash provided by operating activities from discontinued operations was $2,474,863 in 2023, a significant increase from $41,562 in 2022[46][240] - Investing activities in 2023 were primarily driven by the purchase of property and equipment. In 2022, they were significantly impacted by proceeds from the sale of marketable securities ($12,182,932) and purchases of marketable securities ($10,214,044)[46][241] - Financing activities in 2023 were primarily driven by payments on the Company's debt. In 2022, they were primarily driven by proceeds from notes payable ($8,000,000)[46][222] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the unaudited condensed consolidated financial statements NOTE 1 – Organization and Plan of Operations - During Q1 FY2023, the Company reorganized its reporting segments into Security, Industrial Services, and Cemtrex Corporate[50][182] - The Security segment operates under Vicon Industries, Inc, providing end-to-end security solutions, including AI-based video monitoring and access control systems[51][183] - The Industrial Services segment operates under Advanced Industrial Services (AIS), offering rigging, millwrighting, maintenance, equipment erection, relocation, and disassembly services across various industrial markets[52][184] - On November 22, 2022, the Company sold subsidiaries Cemtrex Advanced Technologies, Inc (SmartDesk) and Cemtrex XR, Inc to CEO Saagar Govil for $895,000 cash, a 5% royalty on revenues for 5 years, and $1,600,000 in SAFE[54][55][56] - The Company incurred substantial losses, has significant debt obligations, and a working capital deficit, raising substantial doubt about its ability to continue as a going concern[61][114] - Management is addressing going concern issues by satisfying short-term liabilities through common stock issuance, selling unprofitable brands, reevaluating pricing models for Vicon, and effecting a 35:1 reverse stock split to potentially raise capital[115][242] - A 35:1 reverse stock split on common stock was completed on January 25, 2023, to regain compliance with Nasdaq's Minimum Bid Price Requirement[84][201] - On July 25, 2023, Nasdaq notified the Company that its Series 1 Preferred Stock would be suspended from trading due to non-compliance with the minimum bid price, with a hearing scheduled for September 14, 2023[111][178] NOTE 2 – Interim Statement Presentation - The unaudited condensed consolidated financial statements are prepared in accordance with US GAAP for interim financial information and SEC requirements, including normal recurring adjustments[116] - Management makes estimates and assumptions based on historical factors, current circumstances, and judgment, which may differ from actual results[63][186] - The statements include Cemtrex, Inc and its wholly-owned subsidiaries (Cemtrex Technologies Pvt Ltd, Advanced Industrial Services, Inc, Advanced Industrial Leasing, Inc) and majority-owned subsidiary Vicon Industries, Inc and its subsidiary[117] - The Company is evaluating the impact of ASU 2016-13 (CECL model), ASU 2021-08 (Business Combinations - Contract Assets/Liabilities), and ASU 2022-03 (Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions) on its financial statements[94][118][119] NOTE 3 – Discontinued Operations - The Company sold Cemtrex Advanced Technologies and Cemtrex XR subsidiaries to CEO Saagar Govil on November 22, 2022[97] - Due to ongoing losses and risks, the royalty and SAFE agreement associated with the SmartDesk sale are valued at $0 and considered a gain contingency[120] - $691,611 of royalties due from Cemtrex XR, Inc were recognized during the nine months ended June 30, 2023, with the remaining amount to be amortized[97] - A pretax loss of $(2,455,341) was recorded on the sale of Cemtrex Advanced Technologies, Inc and Cemtrex XR, Inc[122] Discontinued Operations Financials (Nine Months Ended June 30, 2023 vs. 2022) | Metric | 2023 | 2022 | | :----------------------------------- | :------------ | :------------ | | Total net sales | $649,061 | $3,763,234 | | Income (loss) from discontinued operations | $(879,727) | $(2,282,399) | | Discontinued operations, net of tax | $(3,212,108) | $(2,282,399) | - Vicon completed the closure of its Israeli entity, Vicon Systems, Ltd, resulting in a net recovery of $89,085 from benefit obligations[123] NOTE 4 – Loss Per Common Share - Options (28,796 in 2023, 34,579 in 2022) were excluded from diluted net loss per common share computation for the three and nine months ended June 30, 2023, and 2022, as their effect was anti-dilutive[124] NOTE 5 – Segment Information - The Company reports financial information for three segments: Security, Industrial Services, and Corporate[101] Segment Revenues (Three Months Ended June 30, 2023 vs. 2022) | Segment | 2023 | 2022 | Change (YoY) | | :------------------ | :------------ | :------------ | :----------- | | Security | $9,015,279 | $6,640,913 | +36% | | Industrial Services | $5,714,861 | $5,467,991 | +5% | | Consolidated | $14,730,140 | $12,108,904 | +22% | Segment Revenues (Nine Months Ended June 30, 2023 vs. 2022) | Segment | 2023 | 2022 | Change (YoY) | | :------------------ | :------------ | :------------ | :----------- | | Security | $25,933,921 | $17,740,445 | +46% | | Industrial Services | $16,839,858 | $15,527,871 | +8% | | Consolidated | $42,773,779 | $33,268,316 | +29% | Segment Operating Income/(Loss) (Three Months Ended June 30, 2023 vs. 2022) | Segment | 2023 | 2022 | | :------------------ | :------------ | :------------ | | Security | $81,788 | $(1,081,970) | | Industrial Services | $1,004,169 | $401,408 | | Corporate | $(1,032,183) | $(850,735) | | Consolidated | $53,774 | $(1,531,297) | Segment Operating Income/(Loss) (Nine Months Ended June 30, 2023 vs. 2022) | Segment | 2023 | 2022 | | :------------------ | :------------ | :------------ | | Security | $(623,577) | $(5,064,476) | | Industrial Services | $2,009,201 | $317,249 | | Corporate | $(2,878,413) | $(2,976,891) | | Consolidated | $(1,492,789) | $(7,724,118) | Identifiable Assets (June 30, 2023 vs. September 30, 2022) | Segment | June 30, 2023 | September 30, 2022 | | :------------------ | :------------ | :----------------- | | Security | $20,631,185 | $15,257,235 | | Industrial Services | $17,302,398 | $16,658,984 | | Corporate | $3,810,093 | $9,869,716 | | Discontinued operations | $0 | $3,971,693 | | Total Assets | $41,743,676 | $45,757,628 | NOTE 6 – Restricted Cash - A subsidiary participates in a self-insurance group care coverage plan, requiring monthly deposits into a restricted trust account for medical claims and administrative costs[153] - Restricted cash amounted to $805,237 at June 30, 2023, and $1,577,915 at September 30, 2022[153] NOTE 7 – Fair Value Measurements - The Company applies a three-level hierarchy (Level 1, 2, 3) to prioritize inputs for fair value measurements, with Level 1 being unadjusted quoted prices in active markets and Level 3 being unobservable inputs[104][127][155] Marketable Securities (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 | September 30, 2022 | | :-------------------------------------------------- | :------------ | :----------------- | | Investment in marketable securities (Level 1) | $13,663 | $13,721 | NOTE 8 – Trade Receivables, Net Trade Receivables Composition (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 | September 30, 2022 | | :-------------------------- | :------------ | :----------------- | | Trade receivables | $7,757,039 | $5,648,655 | | Allowance for doubtful accounts | $(249,284) | $(249,439) | | Trade receivables, net | $7,507,755 | $5,399,216 | - Trade receivables increased by $2,108,539 (39%) to $7,507,755 at June 30, 2023, primarily due to increased sales in the Security segment[221] NOTE 9 – Inventory, Net Inventory Composition (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 | September 30, 2022 | | :----------------------------------------- | :------------ | :----------------- | | Raw materials | $1,130,327 | $1,375,933 | | Work in progress | $95,773 | $120,026 | | Finished goods | $8,099,426 | $8,080,235 | | Total before allowance | $9,325,526 | $9,576,194 | | Less: Allowance for inventory obsolescence | $(605,786) | $(1,088,377) | | Inventory – net | $8,719,740 | $8,487,817 | NOTE 10 – Prepaid and Other Current Assets Prepaid and Other Current Assets (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 | September 30, 2022 | | :-------------------------------- | :------------ | :----------------- | | Prepaid expenses | $344,300 | $536,820 | | Prepaid inventory | $1,427,013 | $220,553 | | Deferred costs | $60,169 | $40,626 | | Prepaid income taxes | $402,048 | $604,840 | | VAT & GST tax receivable | $289,371 | $236,986 | | Contract assets | $566,515 | $781,819 | | Total | $3,089,416 | $2,421,644 | NOTE 11 – Property and Equipment Property and Equipment, Net (June 30, 2023 vs. September 30, 2022) | Asset Category | June 30, 2023 | September 30, 2022 | | :-------------------------------- | :------------ | :----------------- | | Land | $790,373 | $790,373 | | Building and leasehold improvements | $2,915,918 | $2,906,953 | | Furniture and office equipment | $574,645 | $546,548 | | Computers and software | $1,333,135 | $365,892 | | Machinery and equipment | $10,725,259 | $11,242,709 | | Total before depreciation | $16,339,330 | $15,852,475 | | Less: Accumulated depreciation | $(10,158,559) | $(10,572,033) | | Property and equipment, net | $6,180,771 | $5,280,442 | - Depreciation expense for the three months ended June 30, 2023, and 2022, were $249,881 and $427,811, respectively. For the nine months, it was $698,269 and $1,038,138, respectively[134] NOTE 12 – Other Assets Other Assets Composition (June 30, 2023 vs. September 30, 2022) | Asset Category | June 30, 2023 | September 30, 2022 | | :-------------------------------- | :------------ | :----------------- | | Rental deposits | $251,739 | $204,388 | | Investment in Masterpiece VR | $1,000,000 | $1,000,000 | | Other deposits | $64,626 | $24,467 | | Demonstration equipment | $330,038 | $170,890 | | Total | $1,646,403 | $1,399,745 | - The Company made two $500,000 investments (total $1,000,000) in MasterpieceVR via SAFE agreements, recorded at cost[224] - A secured promissory note of $761,585 from Aron Govil (related to the sale of Griffin Filters, LLC) matures on July 31, 2024, earning 5% interest. The Company believes it is fully collectible but does not recognize the gain until paid[135][244] NOTE 13 – Related Party Transactions - $3,372 was payable to Ducon Technologies, Pvt Ltd at June 30, 2023, down from $19,133 at September 30, 2022[160] - On November 22, 2022, Cemtrex Advanced Technologies, Inc and Cemtrex XR, Inc were sold to CEO Saagar Govil[161] - As of June 30, 2023, $691,611 in royalties were receivable from the sale of Cemtrex XR, Inc[162] - $578,388 in trade receivables were due from related parties at June 30, 2023, including costs for payroll transition and subscription services ($131,922) and services from Cemtrex Technologies Pvt Ltd ($446,466)[137] NOTE 14 – Leases - The Company does not recognize lease assets and liabilities for leases with terms of 12 months or less[139] - As of June 30, 2023, the weighted average remaining term of operating leases was approximately 3 years, lease liabilities were $2,213,341 (with $716,896 classified as short-term), and the weighted average discount rate was approximately 5.64%[225] Lease Costs (Three Months Ended June 30, 2023 vs. 2022) | Metric | 2023 | 2022 | | :------------------ | :------------ | :------------ | | Operating lease costs | $193,843 | $223,595 | | Total lease cost | $193,843 | $223,595 | Lease Costs (Nine Months Ended June 30, 2023 vs. 2022) | Metric | 2023 | 2022 | | :------------------ | :------------ | :------------ | | Operating lease costs | $678,489 | $592,958 | | Total lease cost | $678,489 | $592,958 | - The Security segment leases office and warehouse space in India, New York, and England, and office space in California. The Corporate segment leases office space in Brooklyn, NY. The Industrial Services segment leases warehouse space in Emigsville, PA, and owns properties in Manchester, PA, and York, PA[164][203][248] NOTE 15 – Lines of Credit and Long-Term Liabilities Total Lines of Credit and Secured Liabilities (June 30, 2023 vs. September 30, 2022) | Metric | June 30, 2023 | September 30, 2022 | | :-------------------------------------------------- | :------------ | :----------------- | | Total lines of credit and secured liabilities | $20,895,781 | $20,568,141 | | Less: Current maturities | $(17,185,167) | $(16,894,743) | | Less: Unamortized original issue discount | $(105,578) | $(1,305,778) | | Long Term | $3,605,036 | $2,367,620 | - A standstill agreement was entered on January 12, 2023, with Streeterville Capital, LLC, temporarily refraining from redemptions until April 12, 2023. The outstanding balance of two notes increased by an aggregate of $451,422, recorded as interest expense[140] - On May 3, 2023, the maturity date of a $5,755,000 note with Streeterville Capital, LLC was extended to June 30, 2024, for a 5% fee ($252,912) added to the outstanding balance[226] - An amendment on March 3, 2023, with NIL Funding extended the term loan maturity date to December 31, 2024, and set the interest rate at 11.5%. Additional principal payments of $100,000 were made/required[141] - On April 3, 2023, the Company entered a software license agreement for $1,125,000, payable in 15 monthly installments, for source code for its security products. Current balance of $900,000 is short-term[167] NOTE 16 – Stockholders' Equity - 10,000,000 shares of Preferred Stock ($0.001 par value) and 50,000,000 shares of Common Stock ($0.001 par value) are authorized[148][150] - 2,293,016 Series 1 Preferred Stock shares were issued and 2,228,916 outstanding at June 30, 2023. 213,894 shares were issued to pay dividends during the nine months ended June 30, 2023[149][173] - 50,000 Series C Preferred Stock shares were issued and outstanding at June 30, 2023[228] - 957,760 Common Stock shares were issued and outstanding at June 30, 2023[150] - During the nine months ended June 30, 2023, 161,718 common shares were issued to satisfy $487,716 of notes payable, $662,284 in accrued interest, and $276,151 of excess value of shares issued (recorded as interest expense)[174] - During the nine months ended June 30, 2023, 22,017 common shares were issued in exchange for services valued at $141,872[151] - A 35:1 reverse stock split on common stock was completed on January 25, 2023, with 19,314 shares issued for rounding[201] NOTE 17 – Share-Based Compensation - $93,313 was recognized for the nine months ended June 30, 2023, compared to $111,402 in the prior year[175] - $76,831 of unrecognized share-based compensation expense is expected to be recognized over two years[175] - Options to purchase 2,931 shares (exercise price $13.65) and 2,858 shares (exercise price $40.95) were cancelled during the nine months ended June 30, 2023[202] NOTE 18 – Commitments and Contingencies NOTE 19 – Subsequent Events - On July 1, 2023, the Company acquired Heisey Mechanical, Ltd for approximately $2,400,000 ($2,160,000 cash, $240,000 seller's note), funded by a Fulton Bank term loan[177][229] - On July 25, 2023, Nasdaq issued a Notice of Staff Determination for delisting of Series 1 Preferred Stock, with a hearing scheduled for September 15, 2023[178] - On July 31, 2023, 32,488 common shares were issued to settle $200,000 of notes payable and accrued interest, and $25,792 of excess value of shares issued[179] - On July 6, 2023, 1,686 common shares were issued for services valued at $7,500[204] - On August 4, 2023, 6,400 common shares were issued for services valued at $45,625[249] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and liquidity - The report contains forward-looking statements based on management's expectations, involving risks and uncertainties that could materially affect results[181] - The Company reorganized its reporting segments into Security, Industrial Services, and Cemtrex Corporate during Q1 FY2023[182] - Discussion and analysis are based on unaudited condensed consolidated financial statements prepared in accordance with U.S. GAAP, involving management judgments, estimates, and assumptions[186] General Overview - Cemtrex, incorporated in 1998, has grown into a multi-industry company through acquisitions and internal growth[79][230] - The Security segment (Vicon) provides AI-based end-to-end security solutions, including video monitoring, analytics, cameras, servers, and access control systems for corporate, industrial, and governmental clients[51][183] - The Industrial Services segment (AIS) offers single-source expertise in rigging, millwrighting, maintenance, equipment erection, relocation, and disassembly for diverse industrial markets[52][184] - Cemtrex Corporate serves as the holding company for the other two segments[53][250] Significant Accounting Policies and Estimates - Certain accounting policies are deemed 'significant' due to their importance to financial statements and the need for difficult, subjective, or complex management judgments and estimates[209] - A detailed discussion of significant accounting policies is available in the Annual Report on Form 10-K for the year ended September 30, 2022[209] Results of Operations – Three Months Ended June 30, 2023, and 2022 - Total revenue increased by $2,621,236 (22%) to $14,730,140 in 2023, driven by increased demand for products and services[187] - Security Segment revenue increased by $2,374,366 (36%) to $9,015,279 due to increased demand[188] - Industrial Services Segment revenue increased by $246,870 (5%) to $5,714,861 due to increased demand[210] - Gross profit increased to $6,480,643 (44% of revenues) in 2023 from $5,040,107 (42% of revenues) in 2022[211] - Security segment gross profit decreased as a percentage of revenues (49% in 2023 vs 51% in 2022) due to negotiated terms on some sales[251] - Industrial Services segment gross profit increased as a percentage of revenues (36% in 2023 vs 30% in 2022) primarily due to lower subcontractor costs[189] - Operating income swung to an income of $53,774 in 2023 from a loss of $(1,531,297) in 2022[30] - General and administrative expenses decreased by $4,569 (less than 1%) to $5,376,960, representing 37% of revenues in 2023 (down from 44% in 2022), mainly due to decreased general and administrative expenses and professional fees, offset by increased personnel and insurance expenses[190] - Research and Development expenses decreased by $139,966 (12%) to $1,049,909, primarily related to Security Segment's next-generation solutions development[191] - Other income/expense swung to an expense of $1,219,533 in 2023 from an income of $1,389,955 in 2022, mainly driven by interest on debt in 2023, while 2022 included a one-time realized and unrealized gain on marketable securities of $2,075,125[192] - Income tax expense of $19,641 in 2023 compared to a benefit of $247,941 in 2022[213] - Income from discontinued operations of $13,281 in 2023 (due to recognition of CXR, Inc royalties) compared to a loss of $(838,301) in 2022[234] Results of Operations – Nine Months Ended June 30, 2023, and 2022 - Total revenue increased by $9,505,463 (29%) to $42,773,779 in 2023, driven by increased demand[214] - Security Segment revenue increased by $8,193,476 (46%) to $25,933,921 due to increased demand[235] - Industrial Services Segment revenue increased by $1,311,987 (8%) to $16,839,858 due to increased demand[215] - Gross profit increased to $18,859,530 (44% of revenues) in 2023 from $12,032,138 (36% of revenues) in 2022[236] - Security segment gross profit increased as a percentage of revenues (50% in 2023 vs 42% in 2022) due to price increases in January 2023 and reduced transportation costs[216] - Industrial Services segment gross profit increased as a percentage of revenues (35% in 2023 vs 29% in 2022) primarily due to lower subcontractor costs[195] - Operating loss decreased by $6,231,329 (80.7%) to $(1,492,789) in 2023 from $(7,724,118) in 2022, due to increased revenues and improved gross profit margins[30][214] - General and administrative expenses increased by $361,229 (2%) to $16,456,602, representing 38% of revenues in 2023 (down from 48% in 2022), mainly due to increased employee and insurance costs[217] - Research and Development expenses increased by $234,834 (6%) to $3,895,717, primarily for Security Segment's next-generation solutions[237] - Other expense increased to $3,323,484 in 2023 from $304,872 in 2022, mainly driven by interest on debt, partially offset by $416,502 in employee retention credits. 2022 included a $971,500 PPP loan forgiveness gain and $2,235,738 gain on marketable securities[196] - Income tax expense of $19,641 in 2023 compared to a benefit of $247,941 in 2022[253] - Total loss from discontinued operations of $3,212,108 in 2023, including a $2,455,341 loss on sale of Cemtrex Advanced Technologies and Cemtrex XR, Inc, net operating loss of $879,727, and a net gain of $89,085 from Vicon Industries Ltd recovery[238] Effects of Inflation - The Company's business and operations have been affected by inflation[219] - In response, the Company has implemented price increases and cost-saving measures[219] Liquidity and Capital Resources - The Company had a working capital deficit of $967,489 at June 30, 2023, a significant decrease from a surplus of $6,252,972 at September 30, 2022[220] - Cash and equivalents and restricted cash decreased to $6,434,112 at June 30, 2023, from $11,473,676 at September 30, 2022[220] - Cash used by operating activities for continuing operations decreased to $5,394,048 for the nine months ended June 30, 2023, from $10,669,927 in the prior year. Cash provided by discontinued operations was $2,474,863[240] - Cash used by investing activities for continuing operations was $735,265, primarily for property and equipment purchases[241] - Cash used by financing activities was $1,280,991, primarily for debt payments, compared to $5,902,298 provided in the prior year from notes payable[222] - The working capital deficit and current debt indicate a substantial doubt about the Company's ability to continue as a going concern[242] - Management plans to satisfy short-term liabilities through common stock issuance, sell unprofitable brands, reevaluate pricing, and use a reverse stock split to potentially raise capital[242] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and internal control over financial reporting - Disclosure controls and procedures are defined as controls designed to ensure timely recording, processing, summarizing, and reporting of information required by the Exchange Act[19] Evaluation of Disclosure Controls and Procedures - As of June 30, 2023, the CEO and CFO concluded that disclosure controls and procedures were not effective[1] - A material weakness exists in internal control over financial reporting due to a shortage of accounting personnel[1] - This shortage led to a lack of entity-level controls over period-end reporting, accounting policies, and public disclosures, as well as insufficient timely reconciliation of accounts and consideration of asset recoverability[1] - The Company has implemented measures including updating accounting software for tighter control and improved data, and engaging a third-party consulting firm for review of reporting processes, policies, and disclosures[2] - Management believes these new measures, given more time, will remediate the material weakness[2] - Despite the material weakness, management believes the unaudited condensed financial statements fairly present the Company's financial condition, results of operations, and cash flows in conformity with GAAP[20] Changes in Internal Control Over Financial Reporting - There was no change in internal control over financial reporting during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company's internal control[3] - The Company is continuing to improve its internal controls through the actions mentioned in the evaluation section[3] Limitations on the Effectiveness of Controls - Management does not expect controls to prevent all errors and fraud, as a control system can only provide reasonable, not absolute, assurance[4] - The design of a control system must consider resource constraints, and benefits must be weighed against costs[4] - Due to inherent limitations, no evaluation can provide absolute assurance that all control issues or fraud instances have been detected[4] Part II. Other Information This section covers various non-financial disclosures, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings - The Company reported no legal proceedings[6] Item 1A. Risk Factors - Risk factors are included in the Annual Report on Form 10-K filed with the SEC on December 28, 2022[7] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - During the nine months ended June 30, 2023, 161,718 common shares were issued to satisfy $487,716 of notes payable, $662,284 in accrued interest, and $276,151 of excess value of shares issued (recorded as interest expense)[8] - During the nine months ended June 30, 2023, 22,017 common shares were issued in exchange for services valued at $141,872[8] - Subsequent to the reporting period, 32,488 common shares were issued to settle $200,000 of notes payable and accrued interest, and $25,792 of excess value of shares issued[9] - Subsequent to the reporting period, 8,086 common shares were issued in exchange for services valued at $53,125[9] - All such shares were issued pursuant to the exemption under Section 4(a)(2) of the Securities Act of 1933, as amended[10] Item 3. Defaults Upon Senior Securities - The Company reported no defaults upon senior securities[11] Item 4. Mine Safety Disclosures - Mine Safety Disclosures are not applicable to the Company[11] Item 5. Other Information - The Company reported no other information[11] Item 6. Exhibits - The report includes a comprehensive list of exhibits, including various corporate documents, stock-related forms, material contracts, and CEO/CFO certifications under Sarbanes-Oxley Act[12][13] - The exhibits also include Inline XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase, along with the Cover Page Interactive Data File[12] Signatures This section contains the official signatures of the Company's authorized officers certifying the report - The report is signed by Saagar Govil (Chief Executive Officer) and Paul J. Wyckoff (Interim Chief Financial Officer) on August 10, 2023[18] - Signatures confirm compliance with the requirements of the Securities Exchange Act of 1934[16]