Cemtrex Inc.

Greetings and welcome to the CEMTREX first quarter 2023 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcasts may include predictions, estimates, or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risk and uncertainties that could cause actual results to differ materially. Your caution not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information of future events. Throughout today's discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. A press release detailing these results was issued today and is available on the Investor Relations section of our company's website, Semtricks.com. Your hosts today, Sagar Govil, Chief Executive Officer, and Paul Wyckoff, Chief Financial Officer. will present results of operations for the first quarter ended December 31st, 2022. At this time, I will turn the call over to CEMTREX Chief Executive Officer, Sagar Govel.

Please go ahead. Thank you, Operator.

And good afternoon, everyone. I'm pleased to welcome you to today's first quarter 2023 financial results conference call. The first quarter of fiscal year 2023 was highlighted by continued top-line growth as we grew sales by 27% year over year. Additionally, the different steps we have taken operationally have led to a gross margin improvement of 790 basis points to 42%. We expect to see continued increases in our gross margin over the next couple quarters as we drive improvements in our business. In November of 2022, we completed the divestiture of non-core assets to focus on accelerating our Vicon and advanced industrial services brands and reduced expenses at the Semtrex corporate level. This transformative business restructuring is now beginning to reflect more fully in our quarterly performance. Overall, operating income improved with the operating loss for the quarter declining by 41%, and we are pleased with the progress we are making to drive better financial results

since our shift in focus.

In Q1 and going forward, in conjunction with the divestiture, the company has modified its financial presentation into three segments, security consisting of Vicon, industrial services consisting of Advanced Industrial Services, and Centrix Corporate. Year over year, improving revenues for the company was led by our security segment with a 61% increase on strong demand. Vicon is building a dominant security technology brand focused on delivering industry-leading solutions for commercial, industrial, and government applications. We continue to see strong demand from customers for our award-winning Roughneck cameras and Valeris video management software solutions. Most recently, in January, Vicon received a $1.5 million order from a current large border protection customer in Texas to expand its security technology system with new security solutions. With Vicon software currently deployed at the site, the new order expands the customer's state-of-the-art video surveillance security capabilities with the addition of award-winning Roughneck multi-sensor cameras and servers. We believe Vicon is well-positioned for growth as the industry shifts to SaaS models leveraging AI and cloud technology solutions for today's highly dynamic environment. Turning to our industrial services segment, AIS, Revenue decreased slightly during the quarter, mainly due to products and services revenue recognition timing. We continue to see increasing demand and monetizing opportunities for AIS, with the need for predictive maintenance services, reshoring of manufacturing back to the U.S., and growing complexity in industrial equipment. With over 35 years in the industry and high repeat business, AIS is a significant source of cash flow and has a strong balance sheet. empowering the ability to offer more comprehensive services due to inventory of equipment. As the industrial and manufacturing economy in the U.S. continues to thrive, we believe AIS has significant potential for expansion, particularly with bolt-on acquisitions. Most recently, we also announced the capitalization restructure, affecting a 1 for 35 reverse stock split. That has allowed us to regain full compliance for continued listing on the NASDAQ capital market for our common stock. I'll now turn the call over to Paul Wyckoff, Chief Financial Officer, to discuss financials.

Thank you, Sagar. Revenue for the first quarter of 2023 totaled $12 million compared to revenue of $9.4 million for the first quarter of 2022, a 27% increase year over year. The increase in revenue for the year was due to increased demand for the company's products and services. The security segment revenues for the first quarters of 2023 and 2022 were $7 million and $4.4 million, respectively, an increase of 61%. The security segment increase was due to an increased demand for security technology products under our Vicon brand. Industrial services segment revenues for the first quarter of 2023 decreased by $2 million to $5 2 percent to 5 million, mainly due to timing of the recognition of revenue for segments, products, and services. Gross profit for the first quarter of 2023 was 5 million, or 42 percent of revenues, as compared to gross profit of 3.2 million, or 34 percent of revenues, for the year-ago period. And the percentage increase is mainly attributed to the increased prices and lower subcontractor costs. Total operating expenses for the first quarter of 2023 were $7 million compared to $6.5 million in the prior year's quarter. The increase was due to an increase in research and development expenses for the period. Operating loss for the first quarter of 2023 was $2 million. A 41% decline as compared to an operating loss of $3.3 million for the first quarter of 2022. The decrease was primarily due to an increase in gross profit for the period. Net loss for the first quarter of 2023 was $6.1 million as compared to a net loss of $4.5 million in 2021. Net loss increased in the first quarter as compared to the same period last year primarily due to the loss on discontinued operations. Cash and cash equivalents totaled $5.8 million at December 31, 2022, as compared to $9.8 million at September 30, 2021. Inventories increased $116,492, or 1%, to $8,604,759 at December 31, 2022, from $8,487,817 at September 30th, 2022. The increase in inventories is attributable to inventories in transit yet to be sold. I will now turn the call back to Sagar for a review of our 2023 outlook. Thank you, Paul.

In summary, with our restructuring complete and strong performance for Vicon and AIS, we continue to be well positioned to create long-term value for our shareholders. Looking ahead, we continue to believe revenues for Vicon Industries, based on our current demand, should increase by approximately 16% to $28 million for fiscal year 2023, given the launch of our AI-based analytics solutions, improvements to Valeris, and additional sales. Furthermore, gross profit margin percentage for Vicon is expected to increase to approximately 48% for the fiscal year 2023. We believe AIS will continue to expand revenues by 3% to $21.8 million for fiscal year 2023, driven by continued strength in the industrial services market. Gross profit margin percentage for AIS is expected to improve to approximately 34% for the fiscal year 2023 for AIS. With all the combined actions taken to drive business improvement, we believe the operating loss over the next four quarters to be under approximately $2.5 million. The effects of these changes were only partially demonstrated in our December quarter performance due to the timing of the restructurings, and we expect our March and June quarters performance to reflect the improvements more fully. We also believe that we can reduce inventory by more than $1.5 million over the course of fiscal year 23, as we have seen supply chain constraints improve. This will allow us to offset the cash loss from the expected operating loss over the next couple quarters by the cash obtained from the reduction in inventory, reducing the burden on our overall cash position. With approximately $5.8 million in cash, our restructuring, revenue growth, increasing margins, operating income improvement, and reduction in expenses, we believe we have sufficient capital in the short term to focus on executing on our roadmap. Our expectation is that the company will see improved financial results moving into the rest of 2023. With escalating demand for our businesses and our shift in focus to capture significant near-term opportunities, we believe we can reach positive operating income by 2024. We continue to work to position the company on the path to a sustainable financial model and for long-term growth, which we believe will provide long-term value for our shareholders. I look forward to providing our shareholders with further updates throughout 2023, and I thank you all for attending. and I would like to answer some questions. Operator?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question comes from the line of Jason Colbert from Dawson James. Please go ahead.

Cigar, how are you? Congratulations on the quarter and also really appreciate the guidance, which is very, very solid and consistent with what you discussed in the prior quarter. One question I have is I'd like to understand sequentially while the numbers are up year over year. it seems like they're down slightly sequentially. And is that an artifact of fourth quarter? Is that typically not a great period for the company? So I wondered if you could address that.

Sure. And thanks for the question, Jason.

As you know, in this quarter, a lot of the revenue growth was driven by Vicon. And Vicon's business is largely project-driven, and sometimes the timing of when those projects are executed is not always within our control. We do have a general sense of the overall demand and the backlog, and so we have a reasonable affirmation that the demand is growing for this business, but sometimes the timing of when projects are closed or when they're executed and shipped and invoiced will fluctuate from period to period. There is also a little bit of seasonality. And that really depends on budgeting cycles for some of our different types of clients, whether it's government or schools and so forth. And that does sometimes play a role in terms of sequentially. So we tend to analyze the business more on a year-over-year basis to determine our overall success in terms of whether we're improving the business and less on a sequential basis from a revenue perspective, from an operating expense perspective, sequentially certainly matters.

And talking a little bit about the, you know, large contract award associated with border security, obviously that's a very hot topic right now. And it seems to me that success in the installation and execution of that system could set the stage for much, much more. So can you discuss a little bit about what it took to win that order and what other municipalities or border states or border municipalities might be next?

Yeah, I appreciate the question. So with respect to border, so due to NDAs in place, We're generally not able to talk specifically about our customers in this area. However, we do actually quite a bit of federal work with respect to border protection. If you look at the company on average over the last five years, border protection is one of our largest segments in terms of individual segments and represents probably five to 10% of our revenue on average. With the unfortunate migrant crisis, there is certainly an opportunity to expand on that. And, you know, the federal government does work a little bit more slowly, but because of the current situation, there's certainly a number of different opportunities that popped up. So we've taken some steps internally. We've created a task force and devoted some more resources towards pursuing these opportunities. And I think, you know, we think that there's a lot of potential with respect to an opportunity to deliver more solutions for border protection. Actually, we have a great product called the thermal sensor that can monitor about half a mile of area per unit. And it's an incredible product for border protection. So I think going forward, you know, we actually have a lot of demonstrated competency and reference customers with respect to border protection. And so we're going to be spending a certain amount of resources getting the word out and ramping up marketing to put these solutions out in front of new clients. A lot of the states are taking this more seriously now. And I think as we make progress on those fronts, we'll certainly keep shareholders apprised. I think it's also important to remember that the U.S. isn't the only country facing border issues at the moment. We've seen growing demand internationally as well for border protection solutions. And I think based on, again, the company's long history and success within border protection, we believe that we can demonstrate our capabilities and garner more sales in border protection markets.

Thank you. That's very helpful. And the last question has to do with how you're breaking down the revenues. I understand AIS, FICON, I saw the notes, but can you talk a little bit about what the third area was, which was, and it's a nominal amount of revenue, but kind of the corporate Is that like other legacy products and other things not directly related to FICON or AIS?

So from a presentation perspective, it's really to separate out some of the non-operating costs for the other two segments with respect to audit fees, legal fees, public company costs, and so forth. So that's really where we put some of those expenses in that bucket rather than allocated across both segments equally or based on a revenue number. We're just breaking it out so that there's a little bit more. You can drill down into the specific business operations more explicitly. And I think that kind of presentation gives more flexibility as we grow, expand, contract. If we added another segment, I mean, it just creates a little bit more visibility in terms of how is the business doing on a standalone basis.

Okay. Terrific. Thanks for the update. Appreciate the questions. My pleasure.

Thank you. Our next question comes from the line of Dennis Panulo from Laban Partners. Please go ahead.

Hi. Good evening. Thanks for taking my question. Listen, congratulations again on a great quarter. I love the direction you guys are heading in. I'm so grateful that you guys got rid of the business that wasn't doing well for you. And I only have one concern. Again, I'm long your stock. I love the direction you're heading. But I do have a concern. My concern is the upcoming debt that you have. It's due March 30th, $7.8 million, and $9.7 million in August. How are we going to address this?

Thanks for the question, Dennis. So the company has a good relationship with those debt holders. And, you know, we have had debt with them in the past and will continue to work with them, you know, to either extend it out or find certain ways to pay it down over time. And so we believe that there's a pot there to work with the debt holder to work out a good solution that's fair for everybody and works well for the company and its shareholders. And it's certainly on our mind, and we're going to continue to work to address that as we go forward.

Yeah, because nil funding, I feel like you have a real, real strong relationship, and you guys have rolled that over many times. It's the private investor money that I'm kind of concerned about, because it was very short term and obviously we're in a little different time than we were a year ago. So again, that's my main concern. I mean, my God, you guys are just doing a wonderful job. If you clear this hurdle, my Lord, you guys are heading for really, really blue skies.

Yeah, I appreciate that, Dennis.

And yeah, it's certainly on our radar and we're working through different options and we certainly have some different options in front of us. So We're going to continue to pursue that and I think drive it to a positive outcome.

Well, I appreciate that and I look forward to some positive outcomes. I really do. Thank you and I look forward to it. Thank you.

Thank you. Our next question comes from the line of Larry Holup from Holup Family Office. Please go ahead.

Thank you for taking my question. I'm just wondering if you could talk about upcoming milestones that we should be looking for to monitor and keep track of the company's progress in the near term. For instance, new customers, pipeline, backlog, anything like that.

Sure. Thanks for the question, Larry.

So at the company, we have a lot of exciting things going on. I think there's a couple of probably key things to continue to look out for to kind of monitor our progress. I think the first thing I would point out is we have a couple of AI-related products that are going to be released under VidCon over the coming weeks and months, which we feel is going to be really exciting for our customers, that they will really love it, and will be a growth driver for the company. As you know, AI is becoming a hot topic in the media these days, And we had been pursuing a path towards developing AI within the company for the last couple of years. We believe AI is going to play a significant role in security going forward, and we're intensely focused on leveraging it throughout some experience going forward. So there'll be product launches around that to look forward to. Additionally, we're pursuing a number of different projects, sizable projects. And I think as we continue to win customers and deals, you know, we'll be making announcements about those customer wins. And so I think that's another thing to keep looking out for. We're also looking at a number of bolt-on acquisitions for AI apps. And, you know, we've been in different levels of conversations with some opportunities. And I think as we're able to find and execute on the right transactions, we'll certainly make an announcement about that. And then lastly, I think the key thing is to just continue to monitor our quarters, right? So, you know, we're continuing to make systematic and methodical improvements in the business. And I think that should continue to translate into better and better financial results as we go forward. And, you know, whether it's the top line, you know, gross margin improvements or operating income improvements, I think on all three levels, we're taking... a real hard look at wherever we can drive better results. And so I think all of that will continue to translate into milestones shareholders can look out for over the coming weeks, months, and quarters.

Great. Looking forward to it. Thank you. Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to call back over to Mr. Goebel for his closing remarks.

Thank you.

I'd like to thank you all for each joining our earnings conference call today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions today, please reach out to our IR firm, MZ Group, and we'd be more than happy to assist. Thank you for your time, everyone.

Thank you, sir.

The conference of Semtrex Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.