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Cemtrex Inc – ‘10-K’ for 9/30/16

On:  Wednesday, 12/28/16, at 4:34pm ET   ·   For:  9/30/16   ·   Accession #:  1493152-16-16244   ·   File #:  1-37464

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/28/16  Cemtrex Inc                       10-K        9/30/16   79:4.2M                                   M2 Compliance/FA

Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

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 3: EX-21.1     Subsidiaries                                        HTML     26K 
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 5: EX-31.2     Certification -- Sarbanes-Oxley Act - Sect. 302     HTML     28K 
 6: EX-32.1     Certification -- Sarbanes-Oxley Act - Sect. 906     HTML     24K 
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14: R1          Document and Entity Information                     HTML     50K 
15: R2          Consolidated Balance Sheets                         HTML    122K 
16: R3          Consolidated Balance Sheets (Parenthetical)         HTML     39K 
17: R4          Consolidated Statements of Operations and           HTML     82K 
                          Comprehensive Income                                   
18: R5          Consolidated Statements of Shareholders' Equity     HTML     64K 
19: R6          Consolidated Statements of Cash Flows               HTML    117K 
20: R7          Organization and Plan of Operations                 HTML     29K 
21: R8          Basis of Presentation and Critical Accounting       HTML    101K 
                          Policies                                               
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23: R10         Segment And Geographic Information                  HTML     46K 
24: R11         Fair Value Measurements                             HTML     42K 
25: R12         Restricted Cash                                     HTML     24K 
26: R13         Accounts Receivable, Net                            HTML     28K 
27: R14         Inventory, Net                                      HTML     27K 
28: R15         Property and Equipment                              HTML     32K 
29: R16         Prepaid and Other Current Assets                    HTML     23K 
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                          Policies (Policies)                                    
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                          Policies (Tables)                                      
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                          Policies - Schedule of Consolidated                    
                          Subsidiaries (Details)                                 
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                          Policies - Schedule of Estimated Useful                
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                          Measurements (Details)                                 
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                          Receivables (Details)                                  
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                          Equipment (Details)                                    
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                          Narrative)                                             
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                          Acquisitions by Acquisition, Contingent                
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                          the Assets Acquired and Liabilities                    
                          Assumed (Details)                                      
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                          Acquisitions, Fair Value of Assets and                 
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10-K   —   Annual Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Cautionary Statement Regarding Forward-Looking Statements
"Part I
"Business
"Risk Factors
"Unresolved Staff Comments
"Properties
"Legal Proceedings
"Mine Safety Disclosures
"Part II
"Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
"Selected Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures about Market Risk
"Financial Statements and Supplementary Data
"Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
"Controls and Procedures
"Other Information
"Part III
"Directors, Executive Officers and Corporate Governance
"Executive Compensation
"Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"Certain Relationships and Related Transactions and Director Independence
"Pricipal Accountatnt Fees and Services
"Part IV
"Exhibits and Financial Statement Schedules
"Reports of Independent Registered Public Accounting Firm
"Consolidated Balance Sheets at September 30, 2016 and 2015
"Consolidated Statements of Operations and Comprehensive Income for the Fiscal Years Ended September 30, 2016 and 2015
"Consolidated Statements of Shareholders' Equity for the Fiscal Years Ended September 30, 2016 and 2015
"Consolidated Statement of Cash Flows for Fiscal Years Ended September 30, 2016 and 2015
"Notes to the Consolidated Financial Statements

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES ACT OF 1934

 

For the fiscal year ended September 30, 2016

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES ACT OF 1934

 

Commission File Number 001-37464

 

 

CEMTREX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   30-0399914
(State or other jurisdiction of
incorporation or organization)
   (I.R.S. Employer
Identification No.)

 

19 Engineers Lane, Farmingdale, New York 11735

(Address of principal executive offices) (Zip code)

 

Registrant telephone number, including area code: 631-756-9116

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share   NASDQ CM

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]

 

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. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of March 31, 2016, the number of the registrant’s common stock held by non-affiliates of the registrant was 3,517,813 and the aggregate market value $17,764,956 based on the average bid and asked price of $2.05 on March 31, 2016.

 

As of December 27, 2016, the registrant had 9,919,376 shares of common stock outstanding.

 

Documents Incorporated By Reference

 

Information required by Part III of this Annual Report on Form 10-K is incorporated by reference to portions of our definitive proxy statement for our 2016 annual meeting of stockholders which we will file with the Securities and Exchange Commission.

 

 

 

 
 

 

Table of Contents

 

CEMTREX, INC. AND SUBSIDIARIES

 

INDEX

 

    Page
     
  Part I  
  Cautionary Statement Regarding Forward-Looking Statements  
Item 1 Business 3
Item 1A Risk Factors 7
Item 1B Unresolved Staff Comments 17
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Mine Safety Disclosures 17
  Part II  
Item 5 Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities 18
Item 6 Selected Financial Data 19
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures about Market Risk 23
Item 8 Financial Statements and Supplementary Data 23
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23
Item 9A Controls and Procedures 23
Item 9B Other Information 24
  Part III  
Item 10 Directors, Executive Officers and Corporate Governance 25
Item 11 Executive Compensation 25
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 25
Item 13 Certain Relationships and Related Transactions and Director Independence 25
Item 14 Pricipal Accountatnt Fees and Services 25
     
  Part IV  
Item 15 Exhibits and Financial Statement Schedules 26

 

 2 
   

 

FORWARD-LOOKING STATEMENTS

 

Statements in this report may be “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this report, including the risks described under “Risk Factors” and any risks described in any other filings we make with the SEC. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.

 

Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate these estimates, including those related to useful lives of real estate assets, cost reimbursement income, bad debts, impairment, net lease intangibles, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no assurance that actual results will not differ from those estimates.

 

Part I.

 

Item 1. BUSINESS

 

The Company was incorporated on April 27, 1998, in the state of Delaware under the name “Diversified American Holdings, Inc.” The Company subsequently changed its name to “Cemtrex Inc.” on December 16, 2004. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Cemtrex” or “management” refer to Cemtrex, Inc. and its subsidiaries. Cemtrex is a leading diversified technology company that operates in a wide array of business segments and provides solutions to meet today’s industrial and manufacturing challenges. The Company provides electronic manufacturing services of advanced electric system assemblies, provides instruments & emission monitors for industrial processes, and provides industrial air filtration & environmental control systems.

 

On December 15, 2015, we acquired Advanced Industrial Services Inc. (AIS), an installer of high precision equipment in a wide variety of industrial markets such as automotive, printing and graphics, industrial automation, packaging and chemicals, for a purchase price of approximately $7.7 million. The purchase price was paid in the form of $5.2 million in cash, $1.5 million in a seller note and $1.0 million from the issuance of 315,458 shares of our common stock. AIS averaged approximately $23.0 million in annual revenue during 2013 and 2014. We financed the acquisition by obtaining a $5.25 million self-amortizing, seven-year term loan and $3.5 million working capital credit line. The loans carry annual interest rates at the 30-day LIBOR rate, plus 2.25% and 2.0%, respectively. The seller note matures in three years and bears interest at 6% per year (see NOTE 13 BUSINESS COMBINATION).

 

On May 31, 2016, we acquired machinery and equipment, and the electronics manufacturing and logistics businesses of Periscope, GmbH. These operations deal primarily with major German automotive manufacturers, including Tier 1 suppliers in the industry, as well as with industries including telecommunications, industrial goods, luxury consumer products, display technology, and other industrial OEMs. We purchased the assets of Periscope in consideration for $4,902,670 in cash, $717,936 in the form of a seller note and $3,298,600 in proceeds from the issuance of a related party note (see NOTE 13 BUSINESS COMBINATION).

 

 3 
   

 

Electronics Manufacturing Services (EMS)

 

Cemtrex, through its Electronics Manufacturing Services (EMS) segment, provides end to end electronic manufacturing services, which includes product design and sustaining engineering services, printed circuit board assembly and production, cabling and wire harnessing, systems integration, comprehensive testing services and completely assembled electronic products.

 

Cemtrex’s EMS segment works with industry leading OEMs in their outsourcing of non-core manufacturing services by forming a long term relationship as an electronics manufacturing partner. We work in close relationships with our customers throughout the entire electronic life of a product, from design, manufacturing, and distribution. We seek to grow our business through the addition of new, high quality customers, the expansion of our share of business with existing customers, and participating in the growth of existing customers.

 

Using our manufacturing capabilities, we are able to provide our customers with advanced product assembly and system level integration combined with test services to meet the highest standards of quality. Through our agile manufacturing environment we can deliver low and medium volume and mix services to our clients. Additionally we design, develop, and manufacture various interconnects and cable assemblies that often are sold in conjunction with our PCBAs to enhance our value to our customers. The Company also provides engineering services from new product introductions and prototyping, related testing equipment, to product redesigns.

 

Our ability to attract and retain new customers comes from our ongoing commitment to understanding our customers’ business performance requirements and our expertise in meeting or exceeding these requirements and enhancing their competitive edge. We work closely with our customers from an operational and senior executive level in order to achieve a deep understanding of our customer’s goals, challenges, strategies, operations, and products to ultimately build a long lasting successful relationship.

 

Industrial Products & Services (IPS)

 

Cemtrex, through its Industrial Products and Services segment, offers single-source services for in plant equipment erection, relocation, and maintenance. The segment also sells a complete line of air filtration and environmental control products to a wide variety of industrial customers worldwide. The segment also manufactures, sells, and services monitoring instruments, software and systems for measurement of emissions of Greenhouse gases, hazardous gases, particulate and other regulated pollutants used in emissions trading globally as well as for industrial processes. The Company also markets monitoring and analysis equipment for gas and liquid measurement for various downstream oil & gas applications as well as various industrial process optimization applications.

 

The Company, under the Griffin Filters brand, provides a complete line of air filtration and environmental control equipment to industries such as: chemical, cement, steel, food, construction, mining, & petrochemical. This equipment is used to: (i) remove dust, corrosive fumes, mists, hydrocarbons, volatile organic compounds, submicron particles and particulate from industrial exhausts and boilers; (ii) clean noxious and acid gases such as sulfur dioxide, hydrogen chloride, hydrogen sulfide, chlorides, and organics from industrial exhaust stacks prior to discharging to the atmosphere; and (iii) control emissions of coal, dust, sawdust, phosphates, fly ash, cement, carbon black, soda ash, silica, etc. from construction facilities, mining operations and dryer exhausts.

 

The Company through its AIS subsidiary offers one-source expertise and services for in plant maintenance, equipment erection, relocation, and disassembly to diversified customers in USA. AIS installs high precision equipment in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals among others.

 

The Company, under the MIP-Cemtrex brand, manufactures and sells advanced instruments for emissions monitoring, process analysis, and controls for industrial applications and compliance with environmental regulations. MIP-Cemtrex emission monitoring systems are installed at the exhaust stacks of industrial facilities and are used to measure the outlet flue gas concentrations of a range of regulated air pollutants to determine the quality of the air we breathe. Through use of the company’s equipment and instrumentation, Cemtrex clients can monitor the exhausts to the atmosphere from their facilities and comply with Environmental Protection Agency and state and local emission regulations on dust, particulate, fumes, acid gases and other regulated pollutants into the atmosphere.

 

 4 
   

 

MIP’s Laser Opacity monitor is used to determine opacity or dust concentration in stack gases. Cemtrex also provides direct-extractive and dilution-extractive CEMS (continuous emissions monitoring solutions) equipment and systems for use with utilities, industrial boilers, FGD systems, SCR-NOx control, furnaces, gas turbines, process heaters, incinerators in industries such as: chemicals, pulp and paper, steel, power, coal and petrochemical along with municipalities, state and federal governments. The Company provides a single source responsibility for design, engineering, assembly, installation and maintenance of systems to its customers. The Company’s products are designed to operate so as to allow its users to determine their compliance with the latest governmental emissions regulations.

 

Cemtrex also markets a range of crude oil and natural gas analyzers. These products provide real time measurement of various properties specific to the refining processes of oil and gas. Some of the properties include RON, salt and water content, pH, viscosity, and other critical parameters that can be used to improve the blending and refining processes. The analyzers are sold by refineries and similar facilities to optimize the yield of blended and refined product.

 

SUPPLIERS

 

The Company is not dependent on, nor expects to become dependent on, any one or a limited number of suppliers. The Company buys parts and components to assemble and manufacture its equipment and products. The Company also utilizes sub-suppliers and third party vendors to procure from or fabricate its components based on its design, engineering and specifications. The Company also enters into subcontracts for field installation, which the Company supervises; and the Company manages all technical, physical and commercial aspects of the performance of the Company contracts. To date, the Company has not experienced difficulties either in obtaining fabricated components and other materials and parts or in obtaining qualified subcontractors for installation work.

 

PARTS, REPAIR AND REFURBISHMENT SERVICES

 

The Company also provides replacement and spare parts and repair and refurbishment services for all its systems following the expiration of the warranties which generally range up to 12 months. The Company has experienced only minimal costs from its warranties.

 

The Company’s standard terms of sale disclaim any liability for consequential or indirect losses or damages stemming from any failure of its products or systems or any component thereof. The Company seeks indemnification from its subcontractors for any loss, damage or claim arising from the subcontractors’ failure to perform.

 

COMPETITION

 

The Company faces substantial competition in each of its principal markets. Most of its competitors are larger and have greater financial resources than the Company; several are divisions of multi-national companies. The Company competes on the basis of price, engineering and technological expertise, know-how and the quality of its products, systems and services. Additionally, the Company’s management believes that the successful delivery, installation and performance of the Company’s products and systems is a key factor in gaining business as customers typically prefer to make significant purchases from a company with a solid performance history.

 

The Company obtains virtually all its contracts through competitive bidding. Although price is an important factor and may in some cases be the governing factor, it is not always determinative, and contracts are often awarded on the basis of the efficiency or reliability of products and the engineering and technical expertise of the bidder. Several companies market products that compete directly with Company’s products. Other companies offer products that potential customers may consider to be acceptable alternatives to Company’s products and services. The Company faces direct competition from companies with far greater financial, technological, manufacturing and personnel resources.

 

 5 
   

 

INTELLECTUAL PROPERTY

 

Over the years, the Company has developed proprietary technologies that give it an edge in competing with its competitors. Thus, the Company relies on a combination of trade secrets and know-how to protect its intellectual property.

 

MARKETING

 

The Company sells its products globally and relies on direct sales force, manufacturing representatives, distributors, commission sales agents, magazine advertisements, internet advertising, trade shows, trade directories and catalogue listings to market its products and services. The Company uses independent sales representatives in the United States backed by its sales management and technical professionals. The Company’s arrangements with independent sales representatives accord each a defined territory within which to sell some or all of its products and systems, provide for the payment of agreed-upon sales commissions and are terminable at will. The Company’s sales representatives do not have authority to execute contracts on the Company’s behalf.

 

The Company’s sales representatives also serve as ongoing liaison function between Company and its customers during the installation phase of the products and systems and address customers’ questions or concerns arising thereafter. The Company selects representatives based upon industry reputation, prior sales performance including number of prospective leads generated and sales closure rates, and the breadth of territorial coverage, among other criteria.

 

Technical inquiries received from potential customers are referred to the engineering personnel. Thereafter, the Company’s sales and engineering personnel jointly prepare a budget proposal, or a final bid. The period between initial customer contact and issuance of an order is generally between two and twelve months.

 

CUSTOMERS

 

The Company’s principal customers are engaged in automotive, medical, industrial automation, refining, power, chemical, packaging, printing, electronics, mining, and metallurgical processing. Historically, most of the customers have purchased individual products or systems which, in many instances, operate in conjunction with products and systems supplied by others. For several years, the Company has marketed its products as integrated custom engineered systems and solutions. No one single customer accounts for more than 10% of its annual sales.

 

For the IPS segment, the Company is responsible to its customers for all phases of the design, assembly, supply and, if included, field installation of its products and systems. The successful completion of a project is generally determined by a successful operational test of the supplied equipment conducted by our field service technician in the presence of the customer.

 

For the EMS segment, the company is responsible for the prototype design, production, supply, and delivery of products to its customers. In order to satisfy customer orders, the Company must consistently meet production deadlines and maintain a high standard of quality.

 

INSURANCE

 

The Company currently maintains different types of insurance, including general liability and property coverage. The Company also maintains product liability insurance with respect to its products and equipment. Management believes that the insurance coverage that it has is adequate for its current business needs.

 

EMPLOYEES

 

The Company employs approximately 577 full-time people as of December 13, 2016, including 57 engaged in engineering, 335 in manufacturing and 185 in administrative and marketing functions.

 

 6 
   

 

GOVERNMENT REGULATION

 

The Company’s operations are subject to certain foreign, federal, state and local regulatory requirements relating to, among others, environmental, waste management, labor and health and safety matters. Management believes that the Company’s business is operated in material compliance with all such regulations.

 

Management believes that the existence of governmental regulations creates demand for Company’s emission monitoring equipment and environmental control systems. Significant environmental laws, particularly the Federal Clean Air Act, have been enacted in response to public concern about the environment. The Company believes that compliance with and enforcement of these laws and regulations create the demand for its environmental control related products and systems. The Federal Clean Air Act, initially adopted in 1970 and extensively amended in 1990, requires compliance with ambient air quality standards and empowers the EPA to establish and enforce limits on the emission of various pollutants from specific types of industrial facilities. States have primary responsibility for implementing these standards, and, in some cases, have adopted more stringent standards.

 

ITEM 1A. RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this report, including the consolidated audited financial statements and the related notes appearing at the end of this annual report on Form 10-K, with respect to any investment in shares of our common stock. If any of the following risks actually occurs, our business, financial condition, results of operations and future prospects would likely be materially and adversely affected. In that event, the market price of our common stock could decline and you could lose all or part of your investment. These statements, like all statements in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements in light of future development.

 

RISKS RELATED TO OUR BUSINESS

 

There is no guarantee that cash flow from operations and/or debt and equity financings will provide sufficient capital to meet our expansion goals and working capital needs.

 

Our current strategic plan includes the expansion of our company both organically and through acquisitions if market conditions and competitive conditions allow. Due to the long-term nature of investments in acquisitions and other financial needs to support organic growth, including working capital, we expect our long-term and working capital needs to periodically exceed the short-term fluctuations in cash flow from operations. We anticipate that we will likely raise additional external capital from the sale of common stock, preferred stock and debt instruments as market conditions may allow, in addition to cash flow from operations (which may not always be sufficient), to fund our growth and working capital needs. In December 2016, we commenced a subscription rights offering to our stockholders to raise up to $15.0 million through the sale of units, each consisting of one share of our series 1 preferred stock, paying cumulative dividends at the rate of 10% of the purchase price per year, and two five-year series 1 warrants, upon the exercise of subscription rights at $10.00 per unit. The rights offering extends through January 2017 and may be extended thereafter. No assurance can be given that the rights offering will result in significant funds for us. We are subject to uncertain and ever-changing debt and equity capital market conditions over which we have no control. The magnitude and the timing of the funds that we need to raise from external sources also cannot be easily predicted.

 

In the event that we need to raise significant amounts of external capital at any time or over an extended period, we face a risk that we may need to do so under adverse capital market conditions with the result that persons who acquire our common stock may incur significant and immediate dilution should we raise capital from the sale of our common or preferred stock. Similarly, we may need to meet our external capital needs from the sale of secured or unsecured debt instruments at interest rates and with such other debt covenants and conditions as the market then requires. In all of these transactions we anticipate that we will likely need to raise significant amounts of additional external capital to support our growth. However, there can be no guarantee that we will be able to raise external capital on terms that are reasonable in light of current market conditions. In the event that we are not able to do so, those who acquire our common stock may face significant and immediate dilution and other adverse consequences. Further, debt covenants contained in debt instruments that we issue may limit our financial and operating flexibility with consequent adverse impact on our common stock market price.

 

 7 
   

 

We are substantially dependent upon the success and continued market acceptance of our technology and a favorable regulatory environment; the absence of which may significantly reduce our sales, profits and cash flow and adversely impact our financial condition.

 

The failure of the emissions monitoring and controls market to develop as we anticipate and any lack of acceptance of our emissions monitoring and control equipment technology would adversely affect our environmental control products business. In this respect, we may find that other competing technologies may be offered by other existing competitors or by those that enter the market and these competing technologies may offer a better cost-benefit ratio than our products and/or at lower prices with the result that our sales, profits, and cash flow may suffer significantly over an extended period with serious adverse impact on our financial condition.

 

We have substantial debt which could adversely affect our ability to raise additional capital to fund operations and prevent us from meeting our obligations under outstanding indebtedness.

 

As of September 30, 2016, our total indebtedness was approximately $24.2 million, including a revolving line of credit of $3.5 million, convertible notes payable of $3.7 million, non-convertible notes payable of $1.4 million, related party notes payable of $3.6 million, bank loans of $8.0 million and mortgage of $4.0 million. Approximately $7.9 million of such debt is classified as current and approximately $3.7 million of such debt is convertible into shares of our common stock. This substantial debt could have important consequences, including the following: (i) a substantial portion of our cash flow from operations may be dedicated to the payment of principal and interest on indebtedness, thereby reducing the funds available for operations, future business opportunities and capital expenditures; (ii) our ability to obtain additional financing for working capital, debt service requirements and general corporate purposes in the future may be limited; (iii) we may face a competitive disadvantage to lesser leveraged competitors; (iv) our debt service requirements could make it more difficult to satisfy other financial obligations; and (v) we may be vulnerable in a downturn in general economic conditions or in our business and we may be unable to carry out activities that are important to our growth.

 

Our ability to make scheduled payments of the principal of, or to pay interest on, or to refinance indebtedness depends on and is subject to our financial and operating performance, which in turn is affected by general and regional economic, financial, competitive, business and other factors beyond management’s control. If we are unable to generate sufficient cash flow to service our debt or to fund our other liquidity needs, we will need to restructure or refinance all or a portion of our debt, which could impair our liquidity. Any refinancing of indebtedness, if available at all, could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations. Despite our significant amount of indebtedness, we may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial debt.

 

We have outstanding convertible notes with fluctuating conversion rates that are set at a discount to market prices of our common stock during the period immediately preceding conversion, which may result in material dilution to our common stockholders.

 

As of September 30, 2016, we had outstanding unsecured convertible notes issued to a number of unrelated third parties in the aggregate principal amount of approximately $3.7 million. Of these unsecured convertible notes, $373,000 under two notes are convertible into shares of our common stock at a price per share equal to 75% of the average closing bid prices of our common stock for the ten days preceding the conversion date (the “75% Notes”), while approximately $1.3 million under three notes are convertible into shares of our common stock at a price per share equal to 80% of the average closing bid prices of our common stock for the ten days preceding the conversion date (the “80% Notes”). This could result in material dilution to existing stockholders of our company. The number of shares of common stock into which the notes may be converted may increase without an upper bound as a consequence of the fluctuating conversion rate that is 75% or 80% of the weighted average market price at the time of conversion. By way of illustration, the following table sets forth the dilutive impact of conversion of the unsecured convertible notes, assuming that the average closing bid price of our common stock for the ten days preceding the conversion is equal to $5.00, $4.00, $3.00 and $2.00 per share:

 

 8 
   

 

       Conversion Price     
Average Closing Bid Price  Principal Amount   (75%/80% of Market)   Shares Issuable 
$ 5.00:               
75% Notes  $373,000   $3.75    99,467 
80% Notes  $1,265,000   $4.00    316,250 
$ 4.00:               
75% Notes  $373,000   $3.00    124,333 
80% Notes  $1,265,000   $3.20    395,313 
$ 3.00:               
75% Notes  $373,000   $2.25    165,778 
80% Notes  $1,265,000   $2.40    527,083 
$ 2.00:               
75% Notes  $373,000   $1.50    248,667 
80% Notes  $1,265,000   $1.60    790,625 

 

Additionally, we have outstanding convertible notes in the aggregate principal amount of $2,110,000 with fixed conversion prices ranging from $5.00 to $6.50 per share. Approximately 373,300 shares of our common stock are issuable pursuant to these notes at the election of the holder.

 

Our ability to secure and maintain sufficient credit arrangements is key to our continued operations and there is no assurance we will be able to obtain sufficient additional equity or debt financing in the future.

 

There is no assurance that we will be able to retain or renew our credit agreements and other finance agreements in the future. In the event the business grows rapidly, the uncertain economic climate continues or we acquire one or more other companies, additional financing resources will likely be necessary in the current or future fiscal years. As a small company with a limited ability to attract and obtain financing, there is no assurance that we will be able to obtain sufficient additional equity or debt financing in the future on terms that are reasonable in light of current market conditions.

 

Our sales and gross margins depend significantly on market demand for our products, as to which there can be no assurances.

 

The uncertainty in the U.S. and international economic and political environment could result in a decline in demand for our products in any industry. Our gross margins are dependent upon our ability to maintain sales volumes at levels that allow us to cover our fixed costs and variable costs per unit. To the extent that one or more product lines experience a significant and protracted decline in sales volume, we may experience significant declines in our gross margins that may result in losses. Further, any adverse changes in tax rates and laws affecting our customers could result in decreases in demand of our products and thus decrease our gross margins. Any of these factors could negatively impact our business, results of operations and financial condition.

 

Many of our existing and future customers do not commit to firm production schedules, which may result in higher fixed costs per unit for us relative to our competitors.

 

Most of our customers do not commit to long-term production schedules, which makes it difficult to schedule production and achieve maximum efficiency at our manufacturing facilities and to manage inventory levels. As a result, our fixed costs per unit may be higher than our competitors who are able to achieve greater economies with longer production runs at lower costs per unit and, at the same time, achieve lower manufacturing costs as a result and as a result of better manufacturing scheduling.

 

  The volume and timing of sales to our customers may vary due to:
     
  customers’ attempts to manage their inventory;
     
  variation in demand for the company’s customers’ products design changes; or
     
  acquisitions of or consolidation among customers.

 

 9 
   

 

Many of our existing and future customers do not commit to firm production schedules. As a result, we are unable to forecast the level of customer orders with any precision. This means that it is very difficult for us to schedule production and maximize utilization of manufacturing capacity and manage inventory levels. This may adversely impact our unit manufacturing costs so that our unit manufacturing costs may be higher than our competitors’ costs.

 

In these circumstances we anticipate that we could be required to increase or decrease staffing and more closely manage other expenses in order to meet the anticipated demand of our existing and future customers. Orders from our customers are subject to cancellation and delivery schedules fluctuate as a result of changes in our customers’ demand, thereby adversely affecting our results of operations, and may result in higher inventory levels. Higher inventory levels cause us to obtain greater external financing which adversely affects our financial performance.

 

Our products could face serious competitive challenges, including rapid technological changes, and pricing pressure from competitors, which could adversely affect our business.

 

In the event that one or more of our product lines become the subject of significant pressures from our existing and future competitors, market conditions, technological change, or any combination thereof, our sales revenues and our gross margins may suffer protracted and serious declines with the result that we will likely incur protracted losses thereby. Further, the barriers to entry in several of our lines of business are not so significant that we may be facing competition from others who see significant opportunities to enter the market and undercut our prices with products that possess superior technological attributes at prices that offer our customers a better value. In this instance we could incur protracted and significant losses and persons who acquire our common stock would suffer losses thereby.

 

Factors affecting the industries that utilize our customers’ products could negatively impact our customers and us.

 

We have no real control over these factors and to the extent that any one or more of them change dramatically, we may be facing significant financial challenges that are in excess of our abilities. These factors include:

 

  increased competition among our customers and their competitors;
     
  the inability of our customers to develop and market their products;
     
  recessionary periods in our customers’ markets;
     
  the potential that our customers’ products become obsolete;
     
  our customers’ inability to react to rapidly changing technology;
     
  our customers’ inability to pay for our products, which could, in turn, affect the company’s results of operations.

 

If we are unable to develop new products, our competitors may develop and market products with better features that may reduce demand for our potential products or otherwise result in our products becoming obsolete and could materially and adversely affect our ability to sustain profitability.

 

There are many larger competitors who compete directly with us and who have significantly greater technological and research resources. These larger competitors have greater technological and research abilities that put us at a severe disadvantage. This may serve to severely damage our reputation and our ability to market and sell other products at price levels that would allow us to achieve and maintain profit margins and positive cash flow.

 

We are a small company and we face rapid technological change in many of our product markets and we may not be able to introduce any new products or any enhancements to our existing products on a timely basis, or at all. This could result in prolonged and significant losses. In addition, our introduction of any new products could adversely affect the sales of certain of our existing products if new products cannibalize sales of our existing products. If our competitors develop innovative technologies that are superior to our products or if we fail to accurately anticipate market trends and respond on a timely basis with our own innovations, we may not achieve sufficient growth in its revenues to attain profitability or if we do, we may not be able sustain profitability.

 

 10 
   

 

We have grown through acquisitions and are continuously looking to fund such acquisitions; our failure to raise funds will have the effect of slowing down our growth.

 

We recently completed the acquisitions of Advanced Industrial Services Inc., an installer of high precision equipment, and Periscope, GmbH, an electronics manufacturing company. We need to raise funds to finance acquisitions and support the working capital requirements of the acquired companies. A portion of the expected net proceeds from our pending $15.0 million subscription rights offering is intended to be used to fund our acquisition growth plan. Through this rights offering, which was commenced in December 2016 and extends through January 2017 and may be extended thereafter, and any subsequent financing transactions. There is substantial risk that we will only be able to raise funds that would cause substantial dilution to the existing stockholders or at terms that may be very expensive. In the past, we have raised funds from related party loans and there can be no assurance that such related party loans will be available to us in the future. Further, there can be no guarantee that we will be able to raise funds in sufficient amounts in the future and on terms that are reasonable in light of our current circumstances. Persons who acquire our common stock may suffer immediate and substantial dilution and, in other instances, the total loss of their investment if we are not able to raise sufficient funds on reasonable terms. In the event that we are unable to raise funds in sufficient amounts and on reasonable terms, we may not be able to complete any further acquisitions and provide working capital for the completed acquisitions.

 

We could be subject to economic, political, regulatory and other risks arising from international operations.

 

Operating in international markets requires significant resources and management attention and will subject us to regulatory, economic and political risks that may be different from and incremental to those in the United States. In addition to the risks that we face in the United States, our international operations may involve risks that could adversely affect our business, including:

 

  the need to adapt our content and user interfaces for specific cultural and language differences, including licensing a certain portion of our content library before we have developed a full appreciation for its performance within a given territory;
     
  difficulties and costs associated with staffing and managing foreign operations;
     
  management distraction;
     
  political or social unrest and economic instability;
     
  compliance with United States laws, such as the Foreign Corrupt Practices Act, export controls and economic sanctions, and local laws prohibiting corrupt payments to government officials;
     
  unexpected changes in regulatory requirements;
     
  less favorable foreign intellectual property laws;
     
  adverse tax consequences such as those related to repatriation of cash from foreign jurisdictions into the United States, non-income related taxes such as value-added tax or other indirect taxes, changes in tax laws or their interpretations, or the application of judgment in determining our global provision for income taxes and other tax liabilities given inter-company transactions and calculations where the ultimate tax determination is uncertain;
     
   ● fluctuations in currency exchange rates, which could impact revenues and expenses of our international operations and expose us to foreign currency exchange rate risk;
     
  profit repatriation and other restrictions on the transfer of funds;
     
  differing payment processing systems as well as consumer use and acceptance of electronic payment methods, such as payment cards;
     
  new and different sources of competition;
     
  different and more stringent user protection, data protection, privacy and other laws; and
     
  availability of reliable broadband connectivity and wide area networks in targeted areas for expansion.

 

Our failure to manage any of these risks successfully could harm our international operations and our overall business, and results of our operations.

 

 11 
   

 

Even though we achieved a profit for the fiscal year ended September 30, 2016, we cannot assure you that we will remain profitable and maintain a positive cash flow or, if we are profitable and have a positive cash flow, that we can sustain operations that are profitable and have a positive cash flow in the future.

 

We continue to incur significant expenditures related to selling and marketing and general and administrative activities as well as capital expenditures and anticipate that our expenses may increase in the foreseeable future as we expand our business. Further, as a public company we continue to incur significant legal, accounting and other expenses that we would not incur as a private company. To maintain profitability, we will need to generate significant additional revenues with significantly improved gross margins. There can be no assurance that we will be able to maintain profitability with our existing revenues and in the future generate such additional revenues, improve our gross margins, or both of them and maintain and sustain our profitability or a positive cash flow.

 

We face constant changes in governmental standards by which our environmental control products are evaluated and we have no control over these standards.

 

We have no ability to predict the extent to which governmental standards and regulations will favor or disfavor our products, our technology, or the business strategies that we have or will implement in the future. There is a distinct risk that we may face governmental standards and regulations that seriously undercut our fundamental assumptions regarding existing trends in regulation and technology and assumptions regarding the type of technology to use. To the extent that we are not able to accurately predict these trends and effectively utilize these predictions in our business strategy, we may suffer protracted losses with the result that persons who acquire our common stock will suffer losses thereby.

 

We believe that, due to the constant focus on the environment and clean air standards throughout the world, a requirement in the future to adhere to new and more stringent regulations both domestically and abroad is possible as governmental agencies seek to improve standards required for certification of products intended to promote clean air. In the event our products fail to meet these ever-changing standards, some or all of our emission monitoring and environmental control products may become obsolete.

 

The future growth of our environmental control business depends, in part, on enforcement of existing emissions-related environmental regulations and further tightening of emission standards worldwide with regulations that allow our products to compete effectively against our competitors.

 

We expect that the future environmental control products business growth will likely be driven, in part, by the enforcement of existing emissions-related environmental regulations and tightening of emissions standards worldwide. If such standards do not continue to become stricter or are loosened or are not enforced by governmental authorities or if such standards require the use of technologies that we do not possess or are not able to develop, it could have a material adverse effect on our business, operating results, financial condition and long-term prospects.

 

We may incur substantial costs enforcing our proprietary information, defending against third-party patents, invalidating third-party patents or licensing third-party intellectual property, as a result of litigation or other proceedings relating to intellectual property rights.

 

We have undertaken only a limited evaluation of our intellectual property rights and we may discover that one or more of our intellectual property rights infringe upon the patents or rights of others with the result that we may incur significant losses thereby. In that event, any person who acquires our common stock may suffer losses thereby.

 

 12 
   

 

While we believe that our technology and procedures are likely proprietary, we cannot assure you that others have not or will not replicate our technology and procedures and achieve greater efficiencies and success at our expense.

 

In that event, we could suffer serious and protracted losses and negative cash flow thereby, our strategy has been to rely on our flexibility to develop custom engineered solutions for various applications and be responsive to customer needs. We cannot assure you that this strategy is or will remain effective to meet these challenges.

 

We may not have sufficient financial resources to defend our intellectual property rights or otherwise successfully defend against claims that we have infringed on a third party’s intellectual property and, as a result, it may adversely affect our business, financial condition and results of operations.

 

Even if such claims are not valid, they could subject us to significant costs. In addition, it may be necessary in the future to enforce our intellectual property rights to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. We may not have sufficient financial resources to defend our intellectual property rights or otherwise to successfully defend the company against valid or spurious claims that we have infringed upon the intellectual property rights of others.

 

An adverse outcome in litigation or any similar proceedings could force us to take actions that could harm its business. These include: (i) ceasing to sell products that contain allegedly infringing property; (ii) obtaining licenses to the relevant intellectual property which we may not be able to obtain on terms that are acceptable, or at all; (iii) indemnifying certain customers or strategic partners if it is determined that we have infringed upon or misappropriated another party’s intellectual property; and (iv) redesigning products that embody allegedly infringing intellectual property. Any of these results could adversely and significantly affect our business, financial condition and results of operations. In addition, the cost of defending or asserting any intellectual property claim, both in legal fees and expenses, and the diversion of management resources, regardless of whether the claim is valid, could be significant and lead to significant and protracted losses.

 

We may not have sufficient funds to defend a class action suit from a customer as a result of our installed base of products.

 

Our products are installed at large industrial plants where products of other manufacturers and suppliers are also installed. We could be subject to a class action lawsuit from a customer as a result of loss sustained by a customer due to malfunction of another manufacturer’s product. We may not have sufficient financial resources to successfully defend such a lawsuit.

 

Product defects could cause us to incur significant product liability, warranty and repair and support costs and damage our reputation which would have a material adverse effect on our business.

 

Although we test our products, defects may be discovered in future or existing products. These defects could cause us to incur significant warranty, support and repair costs and divert the attention of research and development personnel. It could also significantly damage our reputation and relationship with distributors and customers which would adversely affect our business. In addition, such defects could result in personal injury or financial or other damages to customers who may seek damages with respect to such losses. A product liability claim against us, even if unsuccessful, would likely be time consuming and costly to defend. We carry some product liability insurance but we cannot assure you that the amount of coverage that we carry is sufficient to insulate us from these claims. In the event of any claim asserting product defects, we will be directly exposed to liability for claims in excess of our coverage limits and there is a clear risk that we and our stockholders could suffer significant and protracted losses thereby.

 

The markets in which we operate are highly competitive, and many of our competitors have significantly greater financial and managerial resources than we do.

 

There is significant competition among companies that provide emissions monitoring and environmental control systems. Several companies market products that compete directly with our products. Other companies offer products that potential customers may consider to be acceptable alternatives to our products and services. We face direct competition from companies with far greater financial, technological, manufacturing and personnel resources.

 

 13 
   

 

Our results may fluctuate due to certain regulatory, marketing and competitive factors over which we have little or no control.

 

The factors listed below, some of which we cannot control, may cause our revenue and results of operations to fluctuate significantly:

 

  The existence and enforcement of government environmental regulations. If these regulations are not maintained or enforced then the market for the company’s products could deteriorate;
     
  Retaining and keeping qualified employees and management personnel;
     
  Ability to upgrade our products to keep up with the changing market place requirements;
     
  Ability to keep up with our competitors who have much higher resources than us;
     
  Ability to find sub-suppliers and sub-contractors to assemble and install our products;
     
  General economic conditions of the industry and the ability of potential customers to spend money on setting up new industries that require our products;
     
  Ability to maintain or raise adequate working capital required for the operations and future growth; and
     
  Ability to retain our Chief Executive Officer and other senior key personnel.

 

The loss of the services of Aron Govil and Saagar Govil for any reason would materially and adversely affect our business operations and prospects.

 

Our financial success is dependent to a significant degree upon the efforts of Aron Govil, our Executive Director, and Saagar Govil, our President and Chief Executive Officer. Aron Govil, who previously served as our Chairman of the Board, has knowledge regarding environmental control systems and has financial resources and business contacts that would be extremely difficult to replace. Saagar Govil possesses engineering, sales and marketing experience concerning our company that our other officers do not have. We have not entered into employment arrangements with them. There can be no assurance that Aron Govil and Saagar Govil will continue to provide services to us. While Saagar Govil devotes all of his working time to our company, Aron Govil devotes an average of 20 hours per week to our company and the balance of his working time is devoted to other business and investment activities. A voluntary or involuntary departure by Aron Govil and/or Saagar Govil could have a materially adverse effect on our business operations if we were not able to attract a qualified replacement for them in a timely manner.

 

We have a small management team. The loss of any member of our senior management and any significant failure to attract and retain qualified personnel in a competitive labor market could limit our ability to execute our growth strategy, resulting in a slower rate of growth or a period of losses and/or negative cash flow.

 

We depend on the continued service of our senior management. Due to the nature of our business, we may have difficulty locating and hiring qualified personnel and retaining such personnel once hired. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could limit our ability to execute our growth strategy resulting in a slower rate of growth.

 

We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our consolidated financial statements not being comparable to those of some other public companies. As a result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive to investors.

 

As a company with less than $1.0 billion in revenue during our last completed fiscal year, we qualify as an “emerging growth company” under the JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company we:

 

  are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;

 

 14 
   

 

  are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives;
     
   ● are not required to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements;
     
  are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and Chief Executive Officer pay ratio disclosure;
     
  may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;
     
  are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
     
  will not be required to conduct an evaluation of our internal control over financial reporting for two years.

 

We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our consolidated financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.

 

Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting, are not required to provide a compensation discussion and analysis, are not required to provide a pay-for-performance graph or CEO pay ratio disclosure, and may present only two years of audited financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure.

 

Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act, or such earlier time that we no longer meet the definition of an emerging growth company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion in principal amount of non-convertible debt over a three-year period. Under current SEC rules, however, we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the market value of common equity held by non-affiliates) of less than $75 million as of the last business day of our most recently completed second fiscal quarter.

 

We cannot predict if investors will find our securities less attractive due to our reliance on these exemptions. If investors were to find our securities less attractive as a result of our election, we may have difficulty raising all of the proceeds we seek in this offering.

 

Sales of substantial amounts of our common stock in the public market could depress the market price of our common stock.

 

Our common stock is traded on the Nasdaq Capital Market. If our stockholders sell substantial amounts of our common stock in the public market, including the shares of common stock issuable upon the exercise of the Series 1 Warrants, shares issued in acquisitions, and shares issuable upon the exercise of outstanding stock options, or the market perceives that such sales may occur, the market price of our common stock could fall and we may be unable to sell our common stock in the future.

 

 15 
   

 

Our common stock may experience extreme price and volume fluctuations, which could lead to costly litigation for us and make an investment in us less appealing.

 

  The market price of our common stock may fluctuate substantially due to a variety of factors, including:
     
  our business strategy and plans;
     
  changing factors related to doing business in various jurisdictions within the United States;
     
  new regulatory pronouncements and changes in regulatory guidelines and timing of regulatory approvals;
     
  general and industry-specific economic conditions;
     
  additions to or departures of our key personnel;
     
  variations in our quarterly financial and operating results;
     
  changes in market valuations of other companies that operate in our business segments or in our industry;
     
  lack of adequate trading liquidity;
     
  announcements about our business partners;
     
  changes in accounting principles; and
     
  general market conditions.

 

The market prices of the securities of early-stage companies, particularly companies like ours without consistent product revenues and earnings, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our financial condition and results of operations.

 

RISKS RELATED TO INVESTMENT IN THE COMMON STOCK OF THE COMPANY

 

The Company’s Common Stock currently trades on the NASDAQ under the symbol “CETX”. There can be no assurance that the Company’s shares will continue to trade on NASDAQ in the future, and there can be no assurance that an active trading market will develop or be sustained. The market price of the shares of Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company’s operating results, announcements of technological innovations, new products or new contracts by the Company or its competitors, developments with respect to proprietary rights, adoption of new government regulations affecting the environment, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for the common stocks of technology companies. These types of broad market fluctuations may adversely affect the market price of the Company’s common stock.

 

Our common stock has from time to time been “thinly-traded.”

 

The number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. Therefore, stockholders may be unable to sell at or near ask prices or at all if they need to sell shares to raise money or otherwise desire to liquidate their shares. Our “thinly-traded” stock is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give stockholders any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.

 

 16 
   

 

We do not anticipate paying any dividends.

 

No dividends have been paid on the common stock of the Company. The Company does not intend to pay cash dividends on its common stock in the foreseeable future, and anticipates that profits, if any, received from operations will be devoted to the Company’s future operations. Any decision to pay dividends will depend upon the Company’s profitability at the time, cash available and other relevant factors.

 

Our principal shareholder has significant influence over our Company which could make it impossible for the public stockholders to influence the affairs of the Company.

 

We are a “Controlled Company” under exchange listing rules. Approximately 50.0% of our outstanding voting equity is beneficially held by combination of Aron Govil, the Company’s former Chairman of the Board, and Saagar Govil the Company’s CEO, as a result of this common stock ownership and the Series A preferred stock ownership by Mr. Aron Govil, the Company’s management controls and will control in the future, substantially all matters requiring approval by the stockholders of the Company, including the election of all directors and approval of significant corporate transactions. This makes it impossible for the public stockholders to influence the affairs of the Company.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

The Company has the following properties:

 

Our IPS segment leases (i) approx. 5,000 sq. ft. of office and warehouse space in Liverpool, New York from a third party in a five year lease at a monthly rent of $2,200 expiring on March 31, 2018, (ii) approximately 2000 square feet of office on a month to month rental from a third party in Hong Kong at a monthly rental of $4,133.00, (iii) approximately 1500 square feet of office on a month to month rental from a third party in Navi Mumbai, India at a monthly rental of $600.00, (iv) approximately 25,000 sq. ft. of warehouse space in Manchester, PA from a third party in a seven year lease at a monthly rent of $7,300 expiring on December 13, 2020, (v) approximately 43,000 sq. ft. of office and warehouse space in York, PA from a third party in a ten year lease at a monthly rent of $22,625 expiring on March 23, 2026, (vi) approximately 15,500 sq. ft. of warehouse space in Emigsville, PA from a third party in a one year lease at a monthly rent of $4,337 expiring on August 31, 2016, and (vii) the Company leases its principal office at Farmingdale, New York, 4,000 square feet of office and warehouse/shop space in a single story commercial structure on a month to month lease from Ducon Technologies Inc., a company controlled by Aron Govil, Executive Director of the Company, at a monthly rental of $4,000.

 

Our EMS segment owns a 70,000 sq. ft. manufacturing building in Neulingen, Germany which has a 17 year 3.00% interest mortgage with monthly mortgage payments of €25,000, through March 2031. The EMS segment also leases (i) a 10,000 sq. ft. manufacturing facility in Sibiu, Romania from a third party in a ten year lease at a monthly rent of €8,000 expiring on May 31, 2019, (ii) approximately 100,000 sq. ft. of office, warehouse and manufacturing space in Paderborn, Germany at monthly rental of €54,100 which expires on March 31, 2017, (iii) approximately 50,000 sq. ft. of office, warehouse space in Paderborn, Germany at a monthly rental of €27,050 which expires on March 31, 2017.

 

ITEM 3. LEGAL PROCEEDINGS

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 17 
   

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s Common Stock currently trades on the NASDAQ Capital Markets under the symbol “CETX”.

 

As of December 27, 2016, there were approximately 1,800 holders of record of the Company’s common stock as determined from the Company’s transfer agent’s list. Such list also includes beneficial owners of securities whose shares are held in the names of various dealers and clearing agencies.

 

The Company is authorized to issue 20,000,000 shares of common stock, $0.001 par value per share. On December 27, 2016, there were 9,919,376 shares of common stock issued and outstanding and 1,000,000 shares of Series A preferred stock issued or outstanding.

 

In April 2015 the Company effected a 1-for-6 reverse stock split of its outstanding common stock.

 

On June 25, 2015 the Company’s common stock commenced trading on the NASDAQ Capital Markets under the symbol “CETX”. Prior to June 25, 2015 the Company’s Common Stock traded on the over-the-counter bulletin board trading system. The price ranges presented below represent the highest and lowest quoted bid prices during the calendar quarters for 2014, 2015 and 2016 reported by the exchange and converted based on the one-for-six reverse stock split. The quotes represent prices between dealers and do not reflect mark-ups, markdowns or commissions and therefore may not necessarily represent actual transactions.

 

Year  Fiscal Period   Stock Price 
2016   4th Quarter    $5.95   $3.71 
    3rd Quarter    $3.69   $1.90 
    2nd Quarter    $2.85   $1.65 
    1st Quarter    $3.44   $2.36 
                
2015   4th Quarter   $4.35   $2.23 
    3rd Quarter   $5.40   $2.70 
    2nd Quarter   $4.20   $2.58 
    1st Quarter   $4.74   $3.60 
                
    4th Quarter    $6.24   $4.38 
    3rd Quarter    $6.00   $3.00 
    2nd Quarter    $3.30   $1.68 
2014   1st Quarter    $2.58   $0.84 

 

As reported by NASDAQ Capital Markets, on December 27, 2016 the closing sales price of the Company’s Common Stock was $6.42 per share.

 

Dividend Policy

 

The Company has not declared or paid any cash dividends on its common stock nor does it anticipate paying any in the foreseeable future. Furthermore, the Company expects to retain any future earnings to finance its operations and expansion. The payment of cash dividends in the future will be at the discretion of its Board of Directors and will depend upon its earnings levels, capital requirements, any restrictive loan covenants and other factors the Board considers relevant.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

Not required for Smaller Reporting Companies

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Except for historical information contained in this report, the matters discussed are forward-looking statements that involve risks and uncertainties. When used in this report, words such as “anticipates”, “believes”, “could”, “estimates”, “expects”, “may”, “plans”, “potential” and “intends” and similar expressions, as they relate to the Company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the Company’s management, as well as assumptions made by and information currently available to the Company’s management. Among the factors that could cause actual results to differ materially are the following: the effect of business and economic conditions; the impact of competitive products and their pricing; unexpected manufacturing or supplier problems; the Company’s ability to maintain sufficient credit arrangements; changes in governmental standards by which our environmental control products are evaluated and the risk factors reported from time to time in the Company’s SEC reports, including 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.

 

Overview

 

The Company was incorporated on April 27, 1998, in the state of Delaware under the name “Diversified American Holdings, Inc.” The Company subsequently changed its name to “Cemtrex Inc.” on December 16, 2004. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Cemtrex” or “management” refer to Cemtrex, Inc. and its subsidiaries. Cemtrex is a leading diversified technology company that operates in a wide array of business segments and provides solutions to meet today’s industrial and manufacturing challenges. The Company provides manufacturing services of advanced electronic system assemblies, provides broad-based industrial services, instruments & emission monitors for industrial processes, and provides industrial air filtration & environmental control systems.

 

Through our Electronics Manufacturing Services (“EMS”) segment, we provide end to end electronic manufacturing services, which include product design and sustaining engineering services, printed circuit board assembly and production, cabling and wire harnessing, systems integration, comprehensive testing services and completely assembled electronic products. Our EMS segment offers fully integrated contract manufacturing services to global original equipment manufacturers (OEMs) and technology companies that operate primarily in the medical, industrial, automation, automotive, and renewable markets.

 

Through our Industrial Products and Services (“IPS”) segment, we provide a complete line of air filtration and environmental control products to a wide variety of industrial and manufacturing industries worldwide. The segment also manufactures, sells, and services monitoring instruments, software and systems for measurement of emissions of Greenhouse gases, hazardous gases, particulate and other regulated pollutants used in emissions trading globally as well as for industrial processes. We also market monitoring and analysis equipment for gas and liquid measurement for various downstream oil & gas applications as well as various industrial process applications. In addition we, through our newly acquired business, offer one-source expertise and capabilities in plant and equipment erection, relocation, and disassembly in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals among others.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The following discussion and analysis is based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses, and assets and liabilities during the periods reported. Estimates are used when accounting for certain items such as revenues, allowances for returns, early payment discounts, customer discounts, doubtful accounts, employee compensation programs, depreciation and amortization periods, taxes, inventory values, and valuations of investments, goodwill, other intangible assets and long-lived assets. We base our estimates on historical experience, where applicable and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions. We believe that the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.

 

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We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balances and our historical write-off experience, net of recoveries.

 

We value our inventories at the lower of cost or market. We write down inventory balances for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions.

 

Goodwill is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the Company’s carrying amount is greater than the fair value. In accordance with SFAS 142, the Company examined goodwill for impairment and determined that the Company’s carrying amount did not exceed the fair value, thus, there was no impairment.

 

Generally, sales are recognized when shipments are made to customers. Rebates, allowances for damaged goods and other advertising and marketing program rebates are accrued pursuant to contractual provisions and included in accrued expenses. Certain amount of our revenues fall under the percentage-of-completion method of accounting used for long-term contracts. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Sales and gross profit are adjusted prospectively for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified.

 

In countries in which the Company operates, and the functional currency is other than the U.S. dollar, assets and liabilities are translated using published exchange rates in effect at the consolidated balance sheet date. Revenues and expenses and cash flows are translated using an approximate weighted average exchange rate for the period. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income on the accompanying consolidated balance sheet.

 

Results of Operations - For the fiscal years ending September 30, 2016 and 2015

 

Total revenue for the years ended September 30, 2016 and 2015 was $93,704,560 and $56,887,389, respectively, an increase of $36,817,171, or 65%. Net income for years ended September 30, 2016 and 2015 was $4,994,045 and $2,838,116, respectively, an increase of $2,155,929, or 76%. Revenues and net income in this period as compared to the previous one was higher as a result of the acquisitions of AIS and Periscope.

 

Revenues

 

Our IPS segment’s revenues for the year ended September 30, 2016 increased by $17,621,667 or 56%, to $49,224,011 from $31,622,344 for the year ended September 30, 2015. The acquisition of AIS on December 15, 2015, provided an additional $16,751,330 in revenues while existing companies had an increase in revenues of $870,337.

 

Our EMS segment’s revenues for the year ended September 30, 2016 increased by $19,195,504 or 76% to $44,460,549 from $25,265,045 for the year ended September 30, 2015. The acquisition of Periscope on May 31, 2016, provided an additional $18,688,287 in revenues while existing companies had an increase in revenues of $507,217.

 

Gross Profit

 

Gross Profit for the year ended September 30, 2016 was $29,213,670 or 31% of revenues as compared to gross profit of $16,322,570 or 29% of revenues for the year ended September 30, 2015. The increase in gross profit percentage in the year ended September 30, 2016, as compared to the prior year, was a direct result of higher profit margin projects executed during this period as compared to the prior year. The higher dollar amount of gross profit during fiscal 2016 was due to higher overall revenue.

 

 20 
   

 

Operating Expenses

 

Operating expenses for the year ended September 30, 2016 increased $10,328,226 or 75% to $24,149,772 from $13,281,546 for the year ended September 30, 2015. Operating expenses as a percentage of revenue increased in the year ended September 30, 2016 to 26% from 24% in the year ended September 30, 2015. The acquisition of AIS and Periscope provided additional operating expenses of $10,449,718, while existing companies had a decrease of $121,492.

 

Other Income

 

Other income for the fiscal year of 2016 was $1,693,931 as compared to $834,290 for the fiscal year of 2015. The acquisition of AIS and Periscope provided additional other income of $913,545, while existing companies had a decrease of $53,904.

 

Interest Expense

 

Interest expense for the fiscal year of 2016 was $673,612 as compared to $496,281 for the fiscal year of 2015. The acquisition of AIS and Periscope provided additional interest expense of $271,456, while existing companies had a decrease of $94,125.

 

Provision for Income Taxes

 

During the fiscal year of 2016 we recorded an income tax provision of $1,090,172 compared to $917 for the fiscal year of 2015. The provision for income tax is based upon the projected income tax from the Company’s various domestic and international subsidiaries that are subject to income taxes.

 

Net Income

 

The Company had net income of $4,994,045 or 5% of revenues, for the year ended September 30, 2016 as compared to a net income of $2,383,116 or 5% of revenues, for the year ended September 30, 2015. The increase in net income of $2,155,929 was mainly due to higher profit margin of projects executed during this period as compared to the prior year.

 

Effects of Inflation

 

The Company’s business and operations have not been materially affected by inflation during the periods for which financial information is presented.

 

Liquidity and Capital Resources

 

Working capital was $11,771,946 at September 30, 2016 compared to $4,693,904 at September 30, 2015. This includes cash and cash equivalents of $6,045,521 at September 30, 2016 and $1,486,737 at September 30, 2015, respectively. The acquisition of AIS and Periscope provided additional working capital of $5,432,734, while existing companies had an increase of $1,645,308.

 

Accounts receivable increased by $8,797,683 or 184% to $13,568,727 at September 30, 2016 from $4,771,044 at September 30, 2015. The acquisition of AIS and Periscope provided additional accounts receivable of $7,406,279 while existing companies had an increase of $1,391,404.

 

Inventories increased by $7,702,111 or 121% to $14,071,627 at September 30, 2016 from $6,369,516 at September 30, 2015. The acquisition of AIS and Periscope provided additional inventories of $7,736,297 while existing companies had a decrease of $34,186.

 

Operating activities provided $7,895,211 for the year ended September 30, 2016 compared to providing $3,879,926 of cash for the year ended September 30, 2015. The increase in operating cash flows in fiscal 2016 was primarily due to profitable operations.

 

 21 
   

 

Investment activities used $17,146,716 of cash during the year ended September 30, 2016 compared to using $956,046 during the year ended September 30, 2015. The use of cash by investing activities in fiscal 2016 was the result of the acquisition, net of cash received, of AIS and Periscope for $16,482,882 and the purchase of property and equipment for $663,834.

 

Financing activities provided $13,810,289 for the year ended September 30, 2016 as compared to using $1,583,238 in the year ended September 30, 2015. Cash flows from financing activities during fiscal 2016 was the result of proceeds from notes payable of $2,217,936, affiliated loans of $3,480,252, convertible notes of $5,077,500 and bank loans of $5,176,262 all used to fund our acquisition of AIS and Periscope, and to fund operations, offset by payments on notes payable of $486,125 and payments on bank loans of $1,655,536.

 

We believe that our cash on hand, cash generated by operations, is sufficient to meet the capital demands of our current operations during the 2017 fiscal year (ending September 30, 2017). 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.

 

As of September 30, 2016 and 2015, $5,740,046 of the $5,825,521 and $1,467,938 of the $1,486,737 of cash and cash equivalents on the consolidated balance sheet was held by foreign subsidiaries, respectively. Net income of $5,061,026 and $2,618,610 for the years ended September 30, 2016 and 2015, respectively, were earned by foreign subsidiaries and are considered indefinitely reinvested. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the U.S.

 

In December 2016, we commenced a subscription rights offering to our stockholders to raise up to $15.0 million through the sale of units, each consisting of one share of our series 1 preferred stock, paying cumulative dividends at the rate of 10% of the purchase price per year, and two five-year series 1 warrants, upon the exercise of subscription rights at $10.00 per unit. The rights offering extends through January 2017 and may be extended thereafter. No assurance can be given that the rights offering will result in significant funds for us. In the event that we raise significant external capital from the issuance of our common stock, preferred stock, or debt instruments, we remain subject to the uncertainties and the volatility of the capital markets over which we have no control. In all of these transactions we may be forced to raise capital on adverse terms or terms that are not reasonable in light of current market conditions. As a result, persons who acquire our common stock may incur immediate and substantial dilution and, in the case of our issuance of preferred stock or any debt instrument, we may issue preferred stock with rights and privileges that adversely impact common stockholder rights and, in the case of the issuance of any debt instrument, the affirmative and negative covenants that we may be required to accept, could adversely impact our financial and operating flexibility with consequent adverse impact on the rights of our common stockholders and our common stock market price.

 

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.

 

Outlook

 

We anticipate that the outlook for our products and services remains fairly strong and we are positioned well to take advantage of it.

 

We believe there is currently a gradually increasing public awareness of the issues surrounding air quality and that this trend will continue for the next several years. We also believe there is an increase in public concern regarding the effects of air quality on society and future generations, as well as an increase in interest by standards-making bodies in creating specifications and techniques for detecting, defining and solving air quality problems. As a result, we believe there will be an increase in interest in our emission monitors, and environmental control products of subsidiary Griffin Filters.

 

 22 
   

 

This Outlook section, and other portions of this document, include certain “forward-looking statements” within the meaning of that term in Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, including, among others, those statements preceded by, following or including the words “believe,” “expect,” “intend,” “anticipate” or similar expressions. These forward-looking statements are based largely on the current expectations of management and are subject to a number of assumptions, risks and uncertainties. Our actual results could differ materially from these forward-looking statements. Important factors to consider in evaluating such forward-looking statements include those discussed in Item 1A. Risk Factors as well as:

 

  the shortage of reliable market data regarding the emission monitoring & air filtration market;
     
  changes in external competitive market factors or in our internal budgeting process which might impact trends in our results of operations;
     
  anticipated working capital or other cash requirements;
     
  changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the market;
     
  product obsolescence due to the development of new technologies; and
     
  Various competitive factors that may prevent us from competing successfully in the marketplace.
     
  In light of these risks and uncertainties, there can be no assurance that the events contemplated by the forward-looking statements contained in this Form 10-K will in fact occur.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements required to be included in this report appear as indexed in the appendix to this report beginning on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There have been no changes in and/or disagreements with Bharat Parikh & Associates, our independent registered public accountants, on accounting and financial disclosure matters.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

Our Chief Executive Officer and Vice President of Finance (the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company. The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this Report was prepared.

 

Evaluation of Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive and financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost- benefit relationship of possible controls and procedures.

 

 23 
   

 

Management’s Report on Internal Control Over Financial Reporting

 

The company’s management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Management evaluates the effectiveness of the company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework). Management, under the supervision and with the participation of the company’s Chief Executive Officer and Vice President of Finance, assessed the effectiveness of the company’s internal control over financial reporting as of September 30, 2016, and concluded that it is effective.

 

This report does not include an attestation report of the Company’s Independent Registered Public Accounting Firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s Independent Registered Public Accounting Firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this Annual Report.

 

As of September 30, 2016, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Controls

 

There have been no changes in the Company’s internal controls over financial reporting that occurred during the Company’s last fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

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. Because of 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 a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving its objectives. The Company’s chief executive officer and principal financial and accounting officer concluded that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

 24 
   

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

We incorporate the information this item requires by referring to the information under the captions Proposal No. 1: Election of Directors and Corporate Governance in our proxy statement for our 2016 annual stockholders’ meeting (“2016 Proxy Statement”), which we will file with the SEC pursuant to Regulation 14A.

 

ITEM 11. EXECUTIVE COMPENSATION

 

We incorporate the information this item requires by referring to the information under the caption Executive Compensation in our 2016 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

We incorporate the information this item requires by referring to the information under the caption Security Ownership of Certain Beneficial Owners and Management in our 2016 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The following table presents certain information as of September 30, 2016 regarding our equity compensation plans:

 

Plan category   Number of Common
Stock Shares to be
Issued upon Exercise
of Outstanding
Options
    Weighted Average
Exercise Price of
Outstanding Options
    Number of Securities
Remaining Available
for Future Issuance
under Plans
 
Approved by security holders           $ -          
Not approved by security holders     275,400     $ 1.73       0  

 

See more detailed information regarding our equity compensation plans in Note 15 in the Notes to Consolidated Financial Statements in this 2016 Form 10-K.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

We incorporate the information this item requires by referring to the information under the captions Proposal No. 1: Election of Directors and Corporate Governance in our 2016 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

We incorporate the information this item requires by referring to the information under the caption Proposal No. 2: Ratification of Appointment of Independent Registered Public Accounting Firm in our 2016 Proxy Statement, which we will file with the SEC pursuant to Regulation 14A.

 

 25 
   

 

PART IV

 

ITEM 15   EXHIBITS AND FINANCIAL STATEMENTS
     
(a)    Financial Statements and Notes to the Consolidated Financial Statements
    See Index to Consolidated Financial Statements on page F-1 at beginning of attached financial statements.
     
(b)   Exhibits
     
Exhibit No.   Description
2.1   Asset Purchase Agreement regarding the assets of ROB Holding AG, ROB Electronic GmbH, ROB Connect GmbH, and ROB Engineering dated Spetember 10, 2013. (5)
2.2   Stock Purchase Agreement regarding the stock of Advanced Industrial Services, Inc., AIS Leasing Company, AIS Graphic Services, Inc., and AIS Energy Services, LLC, Dated December 15, 2015. (6)
2.3   Asset Purchase agreement between Periscope GmbH and ROB Centrex Assets UG, ROB Cemtrex Automotive GmbH, and ROB Cemtrex Logistics GmbH. (7)
3.1   Certificate of Incorporation of the company.(1)
3.2   By Laws of the company.(1)
3.3   Certificate of Amendment of Certificate of Incorporation, dated September 29, 2006.(1)
3.4   Certificate of Amendment of Certificate of Incorporation, dated March 30, 2007.(1)
3.5   Certificate of Amendment of Certificate of Incorporation, dated May 16, 2007.(1)
3.6   Certificate of Amendment of Certificate of Incorporation, dated August 21, 2007.(1)
3.7   Certificate of Amendment of Certificate of Incorporation, dated April 3, 2015.(3)
3.8   Certificate of Designation of the Series A Preferred Shares, dated September 8, 2009.(2)
3.9   Certificate of Designation of the Series 1 Preferred Stock.(10)
4.1   Form of Subscription Rights Certificate. (10)
4.2   Form of Series 1 Preferred Stock Certificate. (10)
4.3   Form of Series 1 Warrant. (10)
10.1   Cemtrex Lease Agreement-Ducon Technologies, Inc.(1)
10.2   Lease Agreement between Daniel L. Canino and Griffin Filters, LLC.(1)
10.3   Asset Purchase Agreement between Ducon Technologies, Inc. and Cemtrex, Inc.(1)
10.4   Agreement and Assignment of Membership Interests between Aron Govil and Cemtrex, Inc.(1)
10.5   8.0% Convertible Subordinated Debenture.(1)
10.6   Letter Agreement by and between Cemtrex, Inc. and Arun Govil, dated September 8, 2009.(2)
10.7   Loan Agreement between Fulton Bank, N.A. and Advanced Industrial Services, Inc., AIS Acquisition, Inc., AIS Leasing Company, dated December 15, 2015.(6)
10.8   Promissory Note between Kris L. Mailey and AIS Acquisition, Inc. dated December 15, 2015.(6)
10.9   Promissory Note between Michael R. Yergo and AIS Acquisition, Inc. dated December 15, 2015.(6)
10.1   Term Loan Agreement between Cemtrex GmbH and Sparkasse Bank for Financing of funds within the scope of the Asset-Deals of the ROB Group, dated October 4, 2013.(8)
10.11   Working Capital Credit Line Agreement between Cemtrex GmbH and Sparkasse Bank, dated October 4, 2013 (updated May 8, 2014).(8)
10.12   Loan Agreement between ROB Cemtrex GmbH and Sparkasse Bank to finance the purchase of the property at Am Wolfsbaum 1, 75245 Neulingen, Germany, dated October 7, 2013, purchase completed March 1, 2014.(9)
10.13*   Stock Option Agreement entered into as of February 12, 2016 between Cemtrex, Inc. and Saagar Govil
14.1   Corporate Code of Business Ethics.(4)
21.1*   Subsidiaries of the Registrant
31.1*   Certification of Chief Executive Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Vice President of Finance and Principal Financial Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 0f of 2002.
32.2*   Certification of Vice President of Finance and Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act 0f of 2002.
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase
101.DEF*   XBRL Taxonomy Extension Definition Linkbase
101.LAB*   XBRL Taxonomy Extension Label Linkbase
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith
 (1) Incorporated by reference from Form 10-12G filed on May 22, 2008.
(2) Incorporated by reference from Form 8-K filed on September 10, 2009.
(3) Incorporated by reference from Form 8-K filed on August 22, 2016.
(4) Incorporated by reference from Form 8-K filed on July 1, 2016.
(5) Incorporated by reference from Form 10-K filed on August 25, 2016.
(6) Incorporated by reference from Form 8-K/A filed on September 26, 2016.
(7) Incorporated by reference from Form 8-K/A filed on November 4, 2016.
(8) Incorporated by reference from Form 8-K/A filed on November 9, 2016.
(9) ncorporated by reference from Form 10-Q/A filed on November 10, 2016.
(10) Incorporated by reference from Form S-1 filed on August 29, 2016 and as amended on November 4, 2016, November 23, 2016, and December 7, 2016

 

 26 
   

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CEMTREX, INC.
     
December 28, 2016 By: /s/ Saagar Govil .
     Saagar Govil,
     Chairman of the Board, CEO,
     President & Secretary (Principal Executive Officer)

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

December 28, 2016 By:. /s/ Saagar Govil
     Saagar Govil,
    Chairman of the Board, CEO,
    President & Secretary (Principal Executive Officer)
     
December 28, 2016 By: /s/ Renato Dela Rama .
    Renato Dela Rama,
    Vice President of Finance (Principal Financial and Accounting Officer)
     
December 28, 2016 By: /s/ Raju Panjwani
    Raju Panjwani,
    Director
     
December 28, 2016 By: /s/ Sunny Patel
    Sunny Patel,
    Director
     
December 28, 2016 By: /s/ Shamik Shah
    Shamik Shah,
    Director
     
December 28, 2016 By: /s/ Aron Govil
    Aron Govil,
    Executive Director

 

 27 
   

 

Index to the Consolidated Financial Statements

 

Contents   Page(s)
     
Reports of Independent Registered Public Accounting Firm   F-2
     
Consolidated Balance Sheets at September 30, 2016 and 2015   F-3
     
Consolidated Statements of Operations and Comprehensive Income for the Fiscal Years Ended September 30, 2016 and 2015   F-4
     
Consolidated Statements of Shareholders’ Equity for the Fiscal Years Ended September 30, 2016 and 2015   F-5
     
Consolidated Statement of Cash Flows for Fiscal Years Ended September 30, 2016 and 2015   F-6
     
Notes to the Consolidated Financial Statements   F-7

 

 F-1 
   

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Cemtrex, Inc.

 

We have audited the consolidated balance sheet of Cemtrex, Inc. (the “Company”) and subsidiaries as of September 30, 2016 and 2015 and the related consolidated statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the financial statements of Advanced Industrial Services Inc, a wholly owned subsidiary, which statements reflect total assets of $11,833,564 as of September 30, 2016 and total revenues of $16,751,330 for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, in so far as it relates to the amounts included for Advanced Industrial Services Inc., is based solely on the report of the other auditors.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of September 30, 2016 and 2015 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

/s/Bharat Parikh & Associates  
Bharat Parikh & Associates  
4940, McDermott Road,  
Plano, TX 75024, USA  
December 28, 2016  

 

 F-2 
   

 

CONSOLIDATED BALANCE SHEETS

 

    September 30, 2016     September 30, 2015  
Assets            
Current assets                
Cash and equivalents   $ 6,045,521     $ 1,486,737  
Restricted Cash     698,459       -  
Accounts receivable, net     13,568,727       4,771,044  
Inventory, net     14,071,627       6,369,516  
Prepaid expenses and other current assets     2,475,404       893,792  
Deferred tax asset     67,000       -  
Total current assets     36,926,738       13,521,089  
                 
Property and equipment, net     17,647,888       8,142,523  
Goodwill     918,819       845,000  
Other assets     540,064       35,630  
Total Assets   $ 56,033,509     $ 22,544,242  
                 
Liabilities & Stockholders’ Equity (Deficit)                
Current liabilities                
Accounts payable   $ 7,733,459     $ 4,208,783  
Credit card payable     294,169       -  
Sales tax payable     263,107       177,795  
Revolving line of credit     3,454,913       2,129,711  
Accrued expenses     5,174,529       309,130  
Deferred revenue     1,387,139       -  
Accrued income taxes     1,042,589       73,746  
Convertible notes payable     3,748,000       1,274,000  
Current portion of long-term liabilities     2,056,887       654,020  
Total current liabilities     25,154,792       8,827,185  
                 
Long-term liabilities                
Loans payable to bank     6,402,228       2,383,815  
Notes payable     1,222,158       -  
Mortgage payable     3,869,066       4,088,618  
Notes payable to related party     3,599,307       119,055  
Total long-term liabilities     15,092,759       6,591,488  
Deferred tax liabilities     94,000       -  
Total liabilities     40,341,551       15,418,673  
                 
Commitments and contingencies     -       -  
                 
Shareholders’ equity                
Preferred stock series A, $0.001 par value, 10,000,000 shares authorized,1,000,000 shares issued and outstanding, respectively      1,000        1,000  
Common stock, $0.001 par value, 20,000,000 shares authorized, 9,460,283 shares issued and outstanding at September 30, 2016 and 7,158,087 shares issued and outstanding at September 30, 2015       9,460         7,158  
Additional paid-in capital     5,230,745       1,020,444  
Retained earnings     11,424,900       6,430,855  
Accumulated other comprehensive loss     (974,147 )     (333,888 )
Total shareholders’ equity     15,691,958       7,125,569  
Total liabilities and shareholders’ equity   $ 56,033,509     $ 22,544,242  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-3 
   

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

 

    For the year ended  
    September 30,  
    2016     2015  
Revenues                
Industrial Products & Services Revenue   $ 49,244,011     $ 31,622,344  
Electronics Manufacturing Services Revenue     44,460,549       25,265,045  
Total revenues     93,704,560       56,887,389  
                 
Cost of revenues                
Cost of Sales, Industrial Products & Services     35,496,098       24,843,753  
Cost of Sales, Electronics Manufacturing Services     28,994,792       15,721,066  
Total cost of revenues     64,490,890       40,564,819  
Gross profit     29,213,670       16,322,570  
                 
Operating expenses                
General and administrative     24,149,772       13,821,546  
Total operating expenses     24,149,772       13,821,546  
Operating income (loss)     5,063,898       2,501,024  
                 
Other income (expense)                
Other Income (expense)     1,693,931       834,290  
Interest Expense     (673,612 )     (496,281 )
Total other income (expense)     1,020,319       338,009  
                 
Net income (loss) before income taxes     6,084,217       2,839,033  
                 
Provision for income taxes     1,090,172       917  
Net income (loss)     4,994,045       2,838,116  
                 
Other comprehensive income/(loss)                
Foreign currency translation gain/(loss)     (640,259 )     (177,329 )
Comprehensive income/(loss)   $ 4,353,786     $ 2,660,787  
                 
Income (Loss) Per Share-Basic   $ 0.59     $ 0.41  
Income (Loss) Per Share-Diluted   $ 0.58     $ 0.40  
                 
Weighted Average Number of Shares-Basic     8,441,620       6,843,666  
Weighted Average Number of Shares-Diluted     8,581,607       6,911,235  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-4 
   

 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

   

Preferred Stock
Series A Par

     Common Stock Par                            
    Value $0.001     Value $0.01                          
                                  Retained     Accumulated        
                            Additional     Earnings     other     Total  
    Number of           Number of           Paid-in     (Accumulated     Comperhensive     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit)     Income(loss)     Equity  
Balance at September 30, 2014     1,000,000     $ 1,000       6,766,587     $ 6,767     $ 199,562     $ 3,592,739     $ (156,559 )   $ 3,643,509  
Foreign currency translations                                                   $ (177,329 )   $ (177,329 )
Stock issued for employee options                     16,264     $ 16     $ 44,251                     $ 44,267  
Stock issued for convertible debt                     371,069     $ 371     $ 763,645                     $ 764,016  
Stock issued for services                     4,167     $ 4     $ 12,986                     $ 12,990  
Net income                                           $ 2,838,116             $ 2,838,116  
Balance at September 30, 2015     1,000,000     $ 1,000       7,158,087     $ 7,158     $ 1,020,444     $ 6,430,855     $ (333,888 )   $ 7,125,569  
Foreign currency translations                                                   $ (640,259 )   $ (640,259 )
Stock issued for employee options                     7,583     $ 8     $ 51,888                     $ 51,896  
Stock issued for convertible debt                     1,919,492     $ 1,919     $ 2,989,488                     $ 2,991,407  
Stock issued for services                     57,661     $ 58     $ 169,242                     $ 169,300  
Stock issued for acquisition                     317,460     $ 317     $ 999,683                     $ 1,000,000  
Net income                                           $ 4,994,045             $ 4,994,045  
Balance at September 30, 2016     1,000,000     $ 1,000       9,460,283     $ 9,460     $ 5,230,745     $ 11,424,900     $ (974,147 )   $ 15,691,958  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-5 
   

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the year ended  
    September 30,  
    2016     2015  
Cash Flows from Operating Activities                
                 
Net income   $ 4,994,045     $ 2,838,116  
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     2,296,010       772,434  
Deferred revenue     1,126,809       -  
Share-based compensation     51,896       57,257  
Shares issued for acquisition     1,000,000       -  
Discounts on convertible debt     249,000       64,000  
Interest expense on convertible debt     138,907       6,016  
Deferred taxes     102,000       -  
Goodwill     4,633       -  
Changes in operating assets and liabilities net of effects from acquisition                
of subsidiaries:                
Restricted cash     (90,032 )     -  
Accounts receivable     (5,585,686 )     (732,704 )
Inventory     764,640       (99,189 )
Prepaid expenses and other assets     2,342,744       (362,530 )
Others     (170,926 )     16,798  
Accounts payable     1,376,793       1,588,110  
Credit card payable     66,891       25,841  
Sales tax payable     85,312       50,922  
Revolving line of credit     (6,116,739 )     (225,553 )
Accrued expenses     4,297,221       (131,306 )
Income taxes payable     961,693       11,714  
Net cash provided by (used by) operating activities     7,895,211       3,879,926  
                 
Cash Flows from Investing Activities                
Purchase of property and equipment     (663,834 )     (1,515,861 )
Redemption of short-term investments     -       559,815  
Investment in subsidiary, net of cash received     (16,482,882 )     -  
Net cash provided by (used by) investing activities     (17,146,716 )     (956,046 )
                 
Cash Flows from Financing Activities                
Proceeds from notes payable     2,217,936       -  
Payments on notes payable     (486,125 )     -  
Proceeds/(payments) on affiliated loan     3,480,252       (1,750,736 )
Proceeds from bank loans     5,176,262       -  
Payments on bank loans     (1,655,536 )     (1,800,502 )
Proceeds from convertible notes     5,077,500       1,968,000  
Net cash provided by (used by) financing activities     13,810,289       (1,583,238 )
                 
Net increase (decrease) in cash     4,558,784       1,340,642  
Cash beginning of period     1,486,737       146,095  
Cash end of period   $ 6,045,521     $ 1,486,737  
                 
Supplemental Disclosure of Cash Flow Information:                
Cash paid during the period for interest   $ 605,826     $ 312,286  
                 
Cash paid during the period for income taxes   $ 9,943     $ 5,032  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 F-6 
   

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – ORGANIZATION AND PLAN OF OPERATIONS

 

The Company was incorporated on April 27, 1998, in the state of Delaware under the name “Diversified American Holdings, Inc.” The Company subsequently changed its name to “Cemtrex Inc.” on December 16, 2004. Unless the context requires otherwise, all references to “we”, “our”, “us”, “Company”, “registrant”, “Cemtrex” or “management” refer to Cemtrex, Inc. and its subsidiaries. Cemtrex is a leading diversified technology company that operates in a wide array of business segments and provides solutions to meet today’s industrial and manufacturing challenges. The Company provides manufacturing services of advanced electronic system assemblies, provides broad-based industrial services, instruments & emission monitors for industrial processes, and provides industrial air filtration & environmental control systems.

 

Through our Electronics Manufacturing Services (“EMS”) segment, we provide end to end electronic manufacturing services, which include product design and sustaining engineering services, printed circuit board assembly and production, cabling and wire harnessing, systems integration, comprehensive testing services and completely assembled electronic products. Our EMS segment offers fully integrated contract manufacturing services to global original equipment manufacturers (OEMs) and technology companies that operate primarily in the medical, industrial, automation, automotive, and renewable markets.

 

Through our Industrial Products and Services (“IPS”) segment, we provide a complete line of air filtration and environmental control products to a wide variety of industrial and manufacturing industries worldwide. The segment also manufactures, sells, and services monitoring instruments, software and systems for measurement of emissions of Greenhouse gases, hazardous gases, particulate and other regulated pollutants used in emissions trading globally as well as for industrial processes. We also market monitoring and analysis equipment for gas and liquid measurement for various downstream oil & gas applications as well as various industrial process applications. In addition we, through our newly acquired business, offer one-source expertise and capabilities in plant and equipment erection, relocation, and disassembly in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals among others.

 

On December 15, 2015 we acquired Advanced Industrial Services Inc. (“AIS”) and its affiliate subsidiary company based in York, Pennsylvania for a purchase price of approximately $7.7 million and acquisition related expenses of $476,340. The purchase price was paid with $5.2 million in cash, $1,500,000 in a seller’s note, and $1,000,000 in the form of 315,458 shares of Cemtrex restricted Common Stock. AIS averaged approximately $23 million in annual revenue and $2.4 million in annual normalized EBITDA over the two calendar years 2013 and 2014. We worked with a local bank to finance the $5.25 million self-amortizing, seven (7) year term loan and $3.5 million working capital credit line for the transaction. The loans carry annual interest rates of 30 day LIBOR plus 2.25 and 2.0 respectively. The seller’s note is for 3 years at 6% (see NOTE 13 BUSINESS COMBINATION).

 

On May 31, 2016 we acquired machinery & equipment, electronics manufacturing business and logistics business from a German company, Periscope, GmbH (“Periscope”) and placed them in three newly formed entities: ROB Cemtrex Assets UG, ROB Cemtrex Automotive GmbH and ROB Cemtrex Logistics GmbH respectively. Periscope’s electronic manufacturing business deals primarily with the major German automotive manufacturers, including Tier 1 suppliers in the industry, as well as for industries like telecommunications, industrial goods, luxury consumer products, display technology, and other industrial OEMs. Periscope had more than 35 years of industrial operating experience. The Periscope acquisition was completed through use of $4,902,670 of Company cash, $717,936 in Seller note and $3,298,600 in proceeds from issuance of a note to Ducon Technologies Inc., a related party (see NOTE 13 BUSINESS COMBINATION).

 

 F-7 
   

 

NOTE 2 – BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

 

Basis of Presentation and Use of Estimates

 

The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of Presentation

 

The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Fiscal Year-End

 

The Company elected September 30 as its fiscal year-end date.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).

 

Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:

 

  i. Allowance for doubtful accounts: Management’s estimate of the allowance for doubtful accounts is based on historical sales, historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance in determining that it is reasonable in relation to the financial statements taken as a whole;
     
  ii. Inventory Obsolescence and Markdowns: The Company’s estimate of potentially excess and slow-moving inventories is based on evaluation of inventory levels and aging, review of inventory turns and historical sales experiences. The Company’s estimate of reserve for inventory shrinkage is based on the historical results of physical inventory cycle counts;
     
  iii. Fair value of long-lived assets: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review:

 

  i. significant under-performance or losses of assets relative to expected historical or projected future operating results;
     
  ii. significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy;
     
  iii. significant negative industry or economic trends;
     
  iv. increased competitive pressures;
     
  v. a significant decline in the Company’s stock price for a sustained period of time; and
     
  vi. regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

 

  iv. Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry- forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.

 

 F-8 
   

 

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

 

Actual results could differ from those estimates.

 

Principles of Consolidation

 

The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.

 

The Company’s consolidated subsidiaries and/or entities are as follows:

 

Name of consolidated   State or other jurisdiction of   Date of incorporation or   Attributable
subsidiary or entity   incorporation or organization   formation (date of acquisition)   Interest
             
Griffin Filters, LLC   New York   September 6, 2005 (April 30, 2007)   100%
Cemtrex, Ltd.   Hong Kong   September 4, 2013   100%
ROB Cemtrex GmbH   Germany   August 15, 2013 (October 31, 2013)   100%
ROB Systems, Srl   Romania   November 1, 2013   100%
Advanced Industrial Services, Inc.   Pennsylvania   July 20, 1984 (December 15, 2015)   100%
ROB Cemtrex Assets UG   Germany   May 12, 2016   100%
ROB Cemtrex Automotive GmbH   Germany   May 12, 2016   100%
ROB Cemtrex Logistics GmbH   Germany   May 12, 2016   100%

 

The consolidated financial statements include all accounts of the Company and its wholly-owned subsidiary as of the reporting period end dates and for the reporting periods then ended.

 

All inter-company balances and transactions have been eliminated.

 

 F-9 
   

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

  Level 1 - Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
     
  Level 2 - Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
     
  Level 3 - Pricing inputs that are generally observable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses and accounts payable, approximate their fair values because of the short maturity of these instruments.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated.

 

Fair Value of Non-Financial Assets or Liabilities Measured on a Recurring Basis

 

The Company’s non-financial assets include inventories. The Company identifies potentially excess and slow-moving inventories by evaluating turn rates, inventory levels and other factors. Excess quantities are identified through evaluation of inventory aging, review of inventory turns and historical sales experiences. The Company provides lower of cost or market reserves for such identified excess and slow- moving inventories. The Company establishes a reserve for inventory shrinkage, if any, based on the historical results of physical inventory cycle counts.

 

Carrying Value, Recoverability and Impairment of Long-Lived Assets

 

The Company has adopted paragraph 360-10-35-17 of the FASB Accounting Standards Codification for its long-lived assets. The Company’s long-lived assets, which include property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

 F-10 
   

 

The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. When long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.

 

The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

 

The key assumptions used in management’s estimates of projected cash flow deal largely with forecasts of sales levels, gross margins, and operating costs of the manufacturing facilities. These forecasts are typically based on historical trends and take into account recent developments as well as management’s plans and intentions. Any difficulty in manufacturing or sourcing raw materials on a cost effective basis would significantly impact the projected future cash flows of the Company’s manufacturing facilities and potentially lead to an impairment charge for long-lived assets. Other factors, such as increased competition or a decrease in the desirability of the Company’s products, could lead to lower projected sales levels, which would adversely impact cash flows. A significant change in cash flows in the future could result in an impairment of long lived assets.

 

The impairment charges, if any, is included in operating expenses in the accompanying statements of operations.

 

Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

 

Short-term Investments

 

The Company’s short-term investments consist of certificates of deposit with original maturities of greater than three months. They are bought and held principally for the purpose of selling them in the near-term and are classified as trading securities. Trading securities are recorded at fair value on the consolidated balance sheets in current assets, with the change in fair value during the year recorded in earnings.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. The Company follows paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and general economic conditions that may affect a client’s ability to pay.

 

Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.

 

Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.

 

 F-11 
   

 

 

The Company has $121,650 and $65,002 allowance for doubtful accounts at September 30, 2016 and 2015, respectively.

 

The Company does not have any off-balance-sheet credit exposure to its customers at September 30, 2016 or 2015.

 

Inventory and Cost of Goods Sold

 

Inventory Valuation

 

The Company values inventory, consisting of finished goods, at the lower of cost or market. Cost is determined on the first-in and first- out (“FIFO”) method. The Company reduces inventory for the diminution of value, resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated market value. Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, and (iii) competitive pricing pressures.

 

Inventory Obsolescence and Markdowns

 

The Company evaluates its current level of inventory considering historical sales and other factors and, based on this evaluation, classify inventory markdowns in the income statement as a component of cost of goods sold pursuant to Paragraph 420-10-S99 of the FASB Accounting Standards Codification to adjust inventory to net realizable value. These markdowns are estimates, which could vary significantly from actual requirements if future economic conditions, customer demand or competition differ from expectations.

 

There was $970,763 and $148,967 in inventory obsolescence at September 30, 2016 and 2015, respectively.

 

Property and Equipment

 

Property and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values shown in the table below) over the estimated useful lives of the respective assets.

 

    Estimated Useful Life  
    (Years)  
Building     30  
Furniture and office equipment     5  
Computer software     7  
Machinery and equipment     7  

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.

 

Goodwill

 

Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. The Company accounts for goodwill under the guidance of the ASC Topic 350, “Intangibles: Goodwill and Other”. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but instead tested for impairment, at least annually, in accordance with this guidance. The recoverability of goodwill is subject to an annual impairment test or whenever an event occurs or circumstances change that would more likely than not result in an impairment. The Company tests goodwill for impairment at the reporting unit level on an annual basis as of September 30 and between annual tests when an event occurs or circumstances change that could indicate that the asset might be impaired. In accordance with the FASB revised guidance on “Testing of Goodwill for Impairment,” a company first has the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the company decides, as a result of its qualitative assessment, that it is more-likely-than- not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is mandatory. Otherwise, no further testing is required. The quantitative impairment test consists of a two-step goodwill impairment test. The first step compares the fair value of each reporting unit to its carrying amount. If the fair value of each reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

 

 F-12 
   

 

Leases

 

Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”). Pursuant to Paragraph 840-10-25-1 A lessee and a lessor shall consider whether a lease meets any of the following four criteria as part of classifying the lease at its inception under the guidance in the Lessees Subsection of this Section (for the lessee) and the Lessors Subsection of this Section (for the lessor): a. Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. b. Bargain purchase option. The lease contains a bargain purchase option. c. Lease term. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. d. Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor. In accordance with paragraphs 840-10- 25-29 and 840-10-25-30, if at its inception a lease meets any of the four lease classification criteria in Paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease; and if none of the four criteria in Paragraph 840-10-25-1 are met, the lease shall be classified by the lessee as an operating lease. Pursuant to Paragraph 840-10- 25-31 a lessee shall compute the present value of the minimum lease payments using the lessee’s incremental borrowing rate unless both of the following conditions are met, in which circumstance the lessee shall use the implicit rate: a.) It is practicable for the lessee to learn the implicit rate computed by the lessor. b.) The implicit rate computed by the lessor is less than the lessee’s incremental borrowing rate. Capital lease assets are depreciated on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

 

Operating leases primarily relate to the Company’s leases of office spaces. When the terms of an operating lease include tenant improvement allowances, periods of free rent, rent concessions, and/or rent escalation amounts, the Company establishes a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized, which is amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.

 

The Company has adopted Subtopic 350-30 of the FASB Accounting Standards Codification for intangible assets other than goodwill. Under the requirements, the Company amortizes the acquisition costs of intangible assets other than goodwill on a straight-line basis over their estimated useful lives, the terms of the exclusive licenses and/or agreements, or the terms of legal lives of the intangible assets, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

 

 F-13 
   

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b. entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved b. description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Commitment and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

 

 F-14 
   

 

Revenue Recognition

 

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

The Company derives a certain amount of its revenues from sales of its products, with revenues being generated upon the shipment of merchandise. Persuasive evidence of an arrangement is demonstrated via sales invoice or contract; the sales price to the customer is fixed upon acceptance of the signed purchase order or contract and there is no separate sales rebate, discount, or volume incentive.

 

A certain amount of our revenues fall under the percentage-of-completion method of accounting used for long-term contracts. Under this method, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion. Sales and gross profit are adjusted prospectively for revisions in estimated total contract costs and contract values. Estimated losses are recorded when identified.

 

Shipping and Handling Costs

 

The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification. While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of goods sold as incurred.

 

Income Tax Provision

 

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Consolidated Statements of Income and Comprehensive Income in the period that includes the enactment date.

 

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

 

 F-15 
   

 

Uncertain Tax Positions

 

The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the fiscal year ended September 30, 2016 or 2015.

 

Net Income (Loss) per Common Share

 

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. 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 (loss) per common share is computed by dividing net income (loss) 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.

 

There were 139,987 and 67,569 potentially dilutive common shares outstanding for the fiscal years ended September 30, 2016 or 2015, respectively.

 

Foreign Currency Translation Gain and Comprehensive Income (Loss)

 

In countries in which the Company operates, and the functional currency is other than the U.S. dollar, assets and liabilities are translated using published exchange rates in effect at the consolidated balance sheet date. Revenues and expenses and cash flows are translated using an approximate weighted average exchange rate for the period. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income on the accompanying consolidated balance sheet. For the years ending September 30, 2016 and September 30, 2015, comprehensive income includes losses of $640,259 and $177,329, respectively, which were entirely from foreign currency translation.

 

Cash Flows Reporting

 

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements were issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Reclassifications

 

Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

 

 F-16 
   

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued guidance surrounding credit losses for financial instruments that replaces the incurred loss impairment methodology in current U.S. generally accepted accounting principles (“GAAP”). The new impairment model requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The standard is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for fiscal year beginning after December 15, 2018 is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company expects to adopt this standard in its fiscal year ending September 30, 2021 and does not expect the adoption of this standard to have a material effect upon its consolidated financial statements.

 

In March 2016, the FASB issued guidance to simplify key components of employee share-based payment accounting. The guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company expects to adopt this standard in its fiscal year ending September 30, 2018 and does not expect the adoption of this guidance to have a material effect upon its consolidated financial statements.

 

In February 2016, the FASB issued guidance requiring a lessee to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expense and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, this new guidance will require both types of leases to be recognized on the balance sheet. The guidance also requires disclosures to help investors and other financial statement users to better understand the amount, timing and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2018 and is to be applied using the modified retrospective approach. The Company expects to adopt this standard in its fiscal year ending September 30, 2020 and does not expect the adoption of this guidance to have a material effect upon its consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

NOTE 3 – LIQUIDITY

 

Our current strategic plan includes the expansion of the Company both organically and through acquisitions if market conditions and competitive conditions allow. Due to the long-term nature of investments in acquisitions and other financial needs to support organic growth, including working capital, we expect our long-term and working capital needs to periodically exceed the short-term fluctuations in cash flow from operations. Accordingly, we anticipate that we will likely raise additional external capital from the sale of common stock, preferred stock, and debt instruments as market conditions may allow in addition to cash flow from operations to fund our growth and working capital needs.

 

To the extent that our internally-generated cash flow is insufficient to meet our needs, we are subject to uncertain and ever-changing debt and equity capital market conditions over which we have no control. The magnitude and the timing of the funds that we need to raise from external sources also cannot be easily predicted.

 

In December 2016, we commenced a subscription rights offering to our stockholders to raise up to $15.0 million through the sale of units, each consisting of one share of our series 1 preferred stock, paying cumulative dividends at the rate of 10% of the purchase price per year, and two five-year series 1 warrants, upon the exercise of subscription rights at $10.00 per unit. The rights offering extends through January 2017 and may be extended thereafter. No assurance can be given that the rights offering will result in significant funds for us. In the event that we raise significant external capital from the issuance of our common stock, preferred stock, or debt instruments, we remain subject to the uncertainties and the volatility of the capital markets over which we have no control. In all of these transactions we may be forced to raise capital on adverse terms or terms that are not reasonable in light of current market conditions. As a result, persons who acquire our common stock may incur immediate and substantial dilution and, in the case of our issuance of preferred stock or any debt instrument, we may issue preferred stock with rights and privileges that adversely impact common stockholder rights and, in the case of the issuance of any debt instrument, the affirmative and negative covenants that we may be required to accept, could adversely impact our financial and operating flexibility with consequent adverse impact on the rights of our common stockholders and our common stock market price.

 

 F-17 
   

 

There is no guarantee that cash flow from operations and/or debt and equity vehicles will provide sufficient capital to meet our expansion goals and working capital needs.

 

NOTE 4 – SEGMENT AND GEOGRAPHIC INFORMATION

 

The Company reports and evaluates financial information for two segments: Electronics Manufacturing Services (EMS) segment and the Industrial Products and Services (IPS) segment. The EMS segment provides end to end electronic manufacturing services, which includes product design and sustaining engineering services, printed circuit board assembly and production, cabling and wire harnessing, systems integration, comprehensive testing services and completely assembled electronic products. The IPS segment sells a complete line of air filtration and environmental control products to a wide variety of industrial and manufacturing industries worldwide. The Company also manufactures sells, and services monitoring instruments, software and systems for measurement of emissions of Greenhouse gases, hazardous gases, particulate and other regulated pollutants used in emissions trading globally as well as for industrial processes. The Company also markets monitoring and analysis equipment for gas and liquid measurement for various downstream oil & gas applications as well as various industrial process applications.

 

The following tables summarize the Company’s segment information:

 

    As of or for the year ended September 30, 2016  
    Industrial
Products &
Services Segment
    Electronics
Manufacturing
Services Segment
    Consolidated  
                   
Revenue form external customers   $ 49,244,011     $ 44,460,549     $ 93,704,560  
Total assets   $ 23,890,455     $ 32,143,054     $ 56,033,509  
Accounts receivable, net   $ 8,193,982     $ 5,374,745     $ 13,568,727  
Other assets   $ 477,456     $ 62,608     $ 540,064  

 

    As of or for the year ended September 30, 2015  
    Industrial
Products &
Services Segment
    Electronics
Manufacturing
Services Segment
    Consolidated  
                   
Revenue form external customers   $ 31,622,344     $ 25,265,045     $ 56,887,389  
Total assets   $ 7,225,828     $ 15,318,414     $ 22,544,242  
Accounts receivable, net   $ 2,947,242     $ 1,823,802     $ 4,771,044  
Other assets   $ 4,225     $ 31,405     $ 35,630  

 

 F-18 
   

 

The Company generates revenue from product sales and services from its subsidiaries located in the United States, Germany, Romania and Hong Kong. Revenue information for the Company is as follows:

 

    Year ended September 30,  
    2016     2015  
United States   $ 21,692,736     $ 4,567,591  
Non-U.S. Locations     72,011,824       52,319,798  
    $ 93,704,560     $ 56,887,389  

 

NOTE 5 – FAIR VALUE MEASUREMENTS

 

The Company complies with the provisions of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”). Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

The following tables present information about the Company’s assets measured at fair value as of September 30, 2016 and September 30, 2015:

 

      Quoted Prices       Significant                  
      in Active       Other       Significant       Balance  
      Markets for       Observable       Unobservable       as of  
      Identical Assets       Inputs       Inputs       September 30,  
      (Level 1)       (Level 2)       (Level 3)       2016  
Assets                                
Investment in certificates of deposit                                
(included in short-term investments)   $ -     $ -     $ -     $ -  
    $ -     $ -     $ -     $ -  

 

    Quoted Prices     Significant              
    in Active     Other     Significant     Balance  
    Markets for     Observable     Observable     as of  
    Identical Assets     Inputs     Inputs     September 30,  
    (Level 1)     (Level 2)     (Level 3)     2015  
Assets                                
Investment in certificates of deposit                                
(included in short-term investments)   $ -     $ -     $ -     $ -  
                                 
    $ -     $ -     $ -     $ -  

 

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 $698,849 as of September 30, 2016. The Company also records a liability for claims that have been incurred but not recorded at the end of each year. The amount of the liability is determined by Benecon Group. The liability recorded in accrued expenses amounted to $71,789 as of September 30, 2016.

 

 F-19 
   

 

NOTE 7 – ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net consists of the following:

 

    September 30, 2016     September 30, 2015  
Accounts receivable   $ 13,690,377     $ 4,836,046  
Allowance for doubtful accounts     (121,650 )     (65,002 )
    $ 13,568,727     $ 4,771,044  

 

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 of reserves, consist of the following:

 

    September 30, 2016     September 30, 2015  
Raw materials   $ 9,636,142     $ 3,345,432  
Work in progress     2,554,025       1,306,906  
Finished goods     2,852,223       1,866,145  
      15,042,390       6,518,483  
                 
Less: Allowance for inventory obsolescence     (970,763 )   $ (148,967 )
Inventory –net of allowance for inventory obsolescence   $ 14,071,627     $ 6,369,516  

 

NOTE 9 – PROPERTY AND EQUIPMENT

 

Property and equipment are summarized as follows:

 

    September 30, 2016     September 30, 2015  
Land   $ 1,193,230     $ 1,194,979  
Building     5,019,484       3,938,544  
Furniture and office equipment     1,180,963       576,741  
Computer software     1,377,260       286,638  
Machinery and equipment     12,718,694       3,663,526  
      21,489,631       9,660,428  
                 
Less: Accumulated depreciation     (3,841,743 )     (1,517,905 )
Property and equipment, net   $ 17,647,888     $ 8,142,523  

 

The Company completed the annual impairment test of property and equipment and determined that there was no impairment as the fair value of property and equipment, substantially exceeded their carrying values at September 30, 2016. Depreciation and amortization of property and equipment totaled approximately $2,296,010 and $772,434 for fiscal years ended September 30, 2016 and 2015, respectively.

 

NOTE 10 – PREPAID AND OTHER CURRENT ASSETS

 

On September 30, 2016 the Company had prepaid and other current assets consisting of prepayments on inventory purchases of $2,201,335 and other current assets of $274,049 and on September 30, 2015 the Company had prepaid and other current assets consisting of prepayments on inventory purchases of $120,296 and other current assets of $773,496.

 

 F-20 
   

 

NOTE 11 – CONVERTIBLE NOTES PAYABLE

 

As of September 30, 2016 the Company has the following unsecured convertible notes, issued on the dates listed, to various unrelated third parties outstanding.

 

Date   Amount     Maturity period     Interest rate     Conversion price     Conversion period  
February 29, 2016   $ 115,000       12 Months       8 %     75% of Market       6 Months  
March 16, 2016     258,000       12 Months       10 %     75% of market       6 Months  
April 22, 2016     525,000       12 Months       10 %     80% of market       6 Months  
May 20, 2016     525,000       12 Months       10 %     80% of market       6 Months  
June 13, 2016     215,000       12 Months       8 %     80% of market       6 Months  
July 13, 2016     1,055,000       12 Months       10 %   $ 5.00       6 Months  
August 16, 2016     1,055,000       12 Months       10 %   $ 6.50       6 Months  
Total   $ 3,748,000                                  

 

The use of the proceeds from the notes issued is for growth capital and planned acquisitions. As per the terms of these convertible notes the Company has reserved 4,000,000 shares (post reverse split basis) representing approximately three times the actual shares that would be issued upon conversion of all the notes.

 

As of September 30, 2016, 2,290,368 shares of the Company’s common stock have been issued to satisfy $3,610,500 of convertible notes payable.

 

NOTE 12 – LONG-TERM LIABILITIES

 

Loans payable to bank

 

On October 31, 2013, the company acquired a loan from Sparkasse Bank of Germany in the amount of €3,000,000 ($4,006,500, based upon exchange rate on October 31, 2013) in order to fund the purchase of ROB Cemtrex GmbH. $2,799,411 of the proceeds went to direct purchase of ROB Cemtrex GmbH and $1,207,089 funded beginning operations. This loan carries interest of 4.95% per annum and is payable on October 30, 2021.

 

On May 28, 2014 the Company financed an upgrade of the information technology infrastructure for ROB Cemtrex GmbH. The purchase was fully financed through Sparkasse Bank of Germany for €200,000 ($272,840 based upon the exchange rate on May 28, 2014). This loan carries interest of 4.50% and is payable over 4 years.

 

On December15, 2015, the company acquired a loan from Fulton Bank in the amount of $5,250,000 in order to fund the purchase of Advanced Industrial Services, Inc. $5,000,000 of the proceeds went to direct purchase of AIS. This loan carries interest of LIBOR plus 2.25% per annum and is payable on December 15, 2022.

 

On December15, 2015, the company acquired a loan from Fulton Bank in the amount of $800,000 in order to fund the operations of Advanced Industrial Services, Inc. $620,000 of the proceeds was drawn upon closing. This loan carries interest of LIBOR plus 2.00% per annum and is payable on December 15, 2020.

 

Mortgage payable

 

On March 1, 2014 the Company completed the purchase of the building that ROB Cemtrex GmbH occupies in Neulingen, Germany. The purchase was fully financed through Sparkasse Bank of Germany for €4,000,000 ($5,500,400 based upon the exchange rate on March 1, 2014). This mortgage carries interest of 3.00% and is payable over 17 years.

 

Notes payable

 

On December 15, 2015 the Company issued notes payable to the sellers of Advanced Industrial Services, Inc. for $1,500,000 to fund the purchase of AIS. These notes carry interest of 6% and are payable over 3 years.

 

 F-21 
   

 

Notes payable – related party

 

Please see Note 14 – Related Party Transactions for details on notes payable to Ducon Technologies, Inc.

 

NOTE 13 – BUSINESS COMBINATION

 

Advanced Industrial Services, Inc.

 

On December 15, 2015 the Company acquired Advanced Industrial Services, Inc. (“AIS”) and its affiliate subsidiary company based in York Pennsylvania. Advanced Industrial Services Inc. is a well-known broad based industrial services provider that offers one-source expertise and capabilities in plant and equipment erection, relocation, and disassembly. Over the years it has been one of the market leaders in installing high precision equipment in a wide variety of industrial markets like automotive, printing & graphics, industrial automation, packaging, and chemicals among others. In addition, AIS has experience in installing industrial air filtration equipment, similar to the equipment sold by Cemtrex through its existing business operations.

 

The acquisition date fair value of the total consideration transferred was approximately $7.7 million, which consisted of the following:

 

Cemtrex, Inc. common stock     1,000,000  
Loan from bank     5,176,262  
Note payable     1,500,000  
Total Purchase Price   $ 7,676,262  

 

In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), the total purchase consideration is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of December 15, 2015 (the acquisition date). The purchase price was allocated based on the information currently available, and may be adjusted after obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions of preliminary estimates.

 

The following table summarizes the current allocation of the assets acquired and liabilities assumed based on their preliminary estimated fair values and current measurement period adjustments as follows:

 

    As initially
reported
    Measurement
period adjustments
    As adjusted  
Cash   $ 112,586     $ -     $ 112,586  
Restricted Cash     608,427       -       608,427  
Accounts receivable, net     3,211,997       -       3,211,997  
Prepaid expenses     551,292       -       551,292  
Inventory, net     465,877       -       465,877  
Deferred costs     43,208       -       43,208  
Deferred Tax Asset - current     -       75,000       75,000  
Property, plant, and equipment, net     6,525,902       126,192       6,652,094  
Goodwill     -       78,452       78,452  
Other     121,000       -       121,000  
Total Liabilities     (4,140,289 )     (103,382 )     (4,243,671 )
Net assets acquired   $ 7,500,000     $ 176,262     $ 7,676,262  

 

 F-22 
   

 

The following supplemental pro forma information presents the financial results as if the acquisition of AIS had occurred October 1, 2014:

 

    For the year ended  
    September 30,  
    2016     2015  
             
Revenues   $ 98,456,214     $ 79,097,686  
                 
Net income   $ 4,468,692     $ 3,491,020  
                 
Income (Loss) Per Share-Basic   $ 0.53     $ 0.49  
                 
Income (Loss) Per Share-Diluted   $ 0.52     $ 0.47  

 

Periscope, GmbH

 

On May 31, 2016 we acquired machinery & equipment, electronics manufacturing business and logistics business from a German company, Periscope, GmbH (“Periscope”) and placed them in three newly formed entities: ROB Cemtrex Assets UG, ROB Cemtrex Automotive GmbH and ROB Cemtrex Logistics GmbH respectively. Periscope’s electronic manufacturing business deals primarily with the major German automotive manufacturers, including Tier 1 suppliers in the industry, as well as for industries like telecommunications, industrial goods, luxury consumer products, display technology, and other industrial OEMs. Periscope had more than 35 years of industrial operating experience.

 

The acquisition date fair value of the total consideration transferred was approximately $8.9 million, which consisted of the following:

 

Cash     4,902,670  
Loan from related party     3,298,600  
Note payable     717,936  
Total Purchase Price   $ 8,919,206  

 

In accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), the total purchase consideration is allocated to the net tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of May 31, 2016 (the acquisition date). The purchase price was allocated based on the information currently available, and may be adjusted after obtaining more information regarding, among other things, asset valuations, liabilities assumed, and revisions of preliminary estimates.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

 

Prepaid expenses   $ 3,373,063  
Inventory, net     8,000,874  
Property, plant, and equipment, net     4,485,448  
Total Liabilities     (6,940,179 )
Net assets acquired   $ 8,919,206  

 

 F-23 
   

 

The following supplemental pro forma information presents the financial results as if the acquisition of Periscope had occurred October 1, 2014:

 

    For the year ended  
    September 30,  
    2016     2015  
             
Revenues   $ 121,850,369     $ 143,871,692  
                 
Net income   $ 5,132,306     $ (7,884,095 )
                 
Income (Loss) Per Share-Basic   $ 0.61     $ (1.15 )
                 
Income (Loss) Per Share-Diluted   $ 0.60     $ (1.12 )

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

The Company has Notes payable to Ducon Technologies Inc., totaling $3,413,840 and $119,055 at September 30, 2016 and September 30, 2015, respectively. These notes are unsecured and carry 5% interest per annum.

 

NOTE 15 – SHAREHOLDERS’ EQUITY

 

Series A Preferred Stock

 

The Company is authorized to issue 10,000,000 shares of Series A Preferred Stock, $0.001 par value. As of September 30, 2016 and September 30, 2015, there were 1,000,000 shares issued and outstanding, respectively.

 

Each issued and outstanding Series A Preferred Share shall be entitled to the number of votes equal to the result of: (i) the number of shares of common stock of the Company issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number of Series A Preferred Shares issued and outstanding at the time of such vote, at each meeting of shareholders of the Company with respect to any and all matters presented to the shareholders of the Company for their action or consideration, including the election of directors. Holders of Series A Preferred Shares shall vote together with the holders of Common Shares as a single class.

 

During the year ending September 30, 2016 and 2015, the Company did not issue any Series A Preferred Stock.

 

Common Stock

 

On April 3, 2015, our Board of Directors approved a reverse split of our common stock, par value $0.001, at a ratio of one-for-six. This reverse stock split became effective on April 15, 2015 and, unless otherwise indicated, all share amounts. Per share data, share prices, exercise prices and conversion rates set forth in this Report and the accompanying consolidated financial statements have, where applicable, been adjusted retroactively to reflect this reverse stock split.

 

On June 25, 2015 the Company’s common stock commenced trading on the NASDAQ Capital Markets under the symbol “CETX”.

 

The Company is authorized to issue 20,000,000 shares of common stock, $0.001 par value. As of September 30, 2016 and September 30, 2015, there were 9,460,283 and 7,158,087 shares issued and outstanding, respectively.

 

During the year ending September 30, 2016 the company issued 2,302,196 shares of Common Stock. During the year ended September 30, 2015 the company issued 391,500 shares of Common Stock.

 

During the year ending September 30, 2014 the company issued stock options for 100,000 shares to three key executives of ROB Cemtrex GmbH. These options have a call price of $1.80 per share, vest over four years, and expire after six years. During the years ended September 30, 2016 and 2015 zero and 16,264 shares of common stock were issued in relation to these options, respectively.

 

 F-24 
   

 

On February 12, 2016, the Company granted a stock option for 200,000 shares to Saagar Govil, Company’s Chairman and CEO. These options have a call price of $1.70 per share, and expire after six years. As of September 30, 2016 no shares under this option have been exercised.

 

During the year ending September 30, 2016 the company issued 1,919,492 shares of common stock to satisfy $2,952,500 of convertible notes payable. During the year ending September 30, 2015 the company issued 371,069 shares of common stock to satisfy $658,000 of convertible notes payable (see NOTE 11 CONVERTIBLE NOTES PAYABLE).

 

NOTE 16 – COMMITMENTS AND CONTINGENCIES

 

Our IPS segment leases (i) approx. 5,000 sq. ft. of office and warehouse space in Liverpool, New York from a third party in a five year lease at a monthly rent of $2,200 expiring on March 31, 2018, (ii) approximately 2000 square feet of office on a month to month rental from a third party in Hong Kong at a monthly rental of $4,133.00, (iii) approximately 25,000 sq. ft. of warehouse space in Manchester, PA from a third party in a seven year lease at a monthly rent of $7,300 expiring on December 13, 2020, (iv) approximately 43,000 sq. ft. of office and warehouse space in York, PA from a third party in a ten year lease at a monthly rent of $22,625 expiring on March 23, 2026, (v) approximately 15,500 sq. ft. of warehouse space in Emigsville, PA from a third party in a one year lease at a monthly rent of $4,337 expiring on August 31, 2016, and (vi) the Company leases its principal office at Farmingdale, New York, 4,000 square feet of office and warehouse/shop space in a single story commercial structure on a month to month lease from Ducon Technologies Inc., a company controlled by Aron Govil, Executive Director of the Company, at a monthly rental of $4,000..

 

Our EMS segment owns a 70,000 sq. ft. manufacturing building in Neulingen, Germany which has a 17 year 3.00% interest mortgage with monthly mortgage payments of €25,000, through March 2031. The EMS segment also leases (i) a 10,000 sq. ft. manufacturing facility in Sibiu, Romania from a third party in a ten year lease at a monthly rent of €8,000 expiring on May 31, 2019, (ii) approximately 100,000 sq. ft. of office, warehouse and manufacturing space in Paderborn, Germany at monthly rental of €54,100 which expires on March 31, 2017, (iii) approximately 50,000 sq. ft. of office, warehouse space in Paderborn, Germany at a monthly rental of €27,050 which expires on March 31, 2017.

 

NOTE 17 – INCOME TAX PROVISION

 

The Company accounts for income taxes under the provisions of FASB ASC 740, “Income Taxes”, formerly referenced as SFAS No.109, “Accounting for Income Taxes”. Under the provisions of FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between their financial statement carrying values and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Significant judgment is required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that the Company changes its determination as to the amount of deferred tax assets that can be realized, the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

 

 F-25 
   

 

The provision for income taxes is as follows:

 

    September 30, 2016     September 30, 2015  
Current taxes payable                
Federal   $ 112,088     $ 5,594  
State     46,363       5,506  
Foreign     904,721       (10,183 )
Deferred taxes     27,000       -  
Deferred tax valuation allowance     -       -  
Total   $ 1,090,172     $ 917  

 

The foreign provision for income taxes is based on foreign pre-tax earnings of $5,965,747, and $2,806,427 in 2016 and 2015, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. Substantially all of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S.

 

Reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:

 

    For the Fiscal Year     For the Fiscal Year  
    Ended     Ended  
    September 30, 2016     September 30, 2015  
U.S. statutory rate     34.00 %     34.00 %
State income taxes (net of federal benefit)     9 %     9 %
Permanent differences     1.77 %     -0.10 %
Foreign     -27.29 %     -42.86 %
Benefit of net operating loss carry-forward     0.00       0.00  
Effective rate     17.47 %     0.03 %

 

At September 30, 2015 and 2014, the Company has no net operating loss carryovers.

 

NOTE 18– SUBSEQUENT EVENTS

 

On October 31, 2016 Cemtrex announced that it had entered into a Letter of Intent to acquire an electronics manufacturing solutions company (“Target”) based in the Silicon Valley area. The Target Company is focused on electronic manufacturing services primarily for global leading semiconductor customers as well as OEMs in the medical, industrial, telecommunications industries. The Target Company has averaged $7 million in annual revenues over the last two years. The company also has an office in India to support the engineering & prototype development and operational activities.

 

In December 2016, we commenced a subscription rights offering to our stockholders to raise up to $15.0 million through the sale of units, each consisting of one share of our series 1 preferred stock, paying cumulative dividends at the rate of 10% of the purchase price per year, and two five-year series 1 warrants, upon the exercise of subscription rights at $10.00 per unit. The rights offering extends through January 2017 and may be extended thereafter.

 

 F-26 
   


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