CIRTRAN CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report. Overview Based on our diversified expertise in manufacturing, marketing, distribution, and technology services in a wide variety of consumer products, including tobacco products, medical devices, and beverages, around the world, we have an innovative and consumer-focused approach to brand portfolio management, resting on a strong understanding of consumers domestically, and we have established a footprint in more than 50 key, international markets. During 2021, we continued under our 2019 five-year manufacturing and distribution agreement with an unrelated party to manufacture, distribute, and sell condoms, electronic tobacco products, cigars, energy drinks, water beverages, and related merchandise, all using the HUSTLER® brand name. In 2020, our efforts had been devoted to phase one of our development of all HUSTLER®-branded products, which led us to generating revenue during 2020 for the first time in several years. 16 Results of Operations for the Three and Nine Months Ended September 30, 2021, Compared to the Three and Nine Months Ended September 30, 2020 Sales and Cost of Sales During the three months ended September 30, 2021 and 2020, we had net sales of $961,474and $405,005, respectively, and cost of sales of $339,076 and $228,380, respectively, for gross profit of $622,398 and $176,625, respectively. During the nine months ended September 30, 2021, we had net sales of $2,281,529 and $935,319, respectively, and cost of sales of $803,135 and $425,699, respectively, for gross profit of $1,478,394 and $509,620, respectively. The net sales for the three months ended September 30, 2021, consisted of product sales, which increased about 137.4% from the prior year. For the nine months ended September 30, 2021, net sales included revenue received in the first quarter of 2021 related to our agreement to develop and distribute certain HUSTLER® branded product, which was approximately 143.9% higher than net sales for the corresponding period in the previous year. Operating Expenses During the three months ended September 30, 2021 and 2020, employee costs were $139,520 and $126,559, respectively, and selling, general, and administrative expenses were $514,358 and $129,125, respectively, representing an increase in operating expenses of $385,233, or 155.7%, in the current period. During the nine months ended September 30, 2021 and 2020, employee costs were $408,485 and $169,169, respectively, and selling, general, and administrative expenses were $1,165,870 and $248,059, respectively, representing an increase in operating expenses of $1,157,127, or 277.3%, in the current period. The increase in operating expenses period over period is the result of substantially increased activities attributable to the development of products under the HUSTLER® brand name in 2020. Other Income and Expense Other income and expenses during the three months ended September 30, 2021 and 2020, consisted of $172,400 and $154,318 in interest expense and a loss of $62,086 and a gain of $39,700 on derivative valuation, respectively. Other income and expenses during the nine months ended September 30, 2021 and 2020, consisted of $507,614 and $466,953 in interest expense; a loss on disposal of equipment of $0 and $9,771, a loss of $176,746 and $318,564 on derivative valuation; other income of $0 and $42,000, respectively; and a gain on forgiveness of debt of $12,917 and $0, respectively. The decrease in other expenses period over period is the result of a decrease to our loss on derivative valuation. Liquidity and Capital Resources We have had a history of losses from operations, as our expenses have been greater than our revenue. Our accumulated deficit was approximately $78.8 million and $77.9 million at September 30, 2021, and December 31, 2020, respectively. As of September 30, 2021, and December 31, 2020, we had current assets of $1,217,186 and $942,442, respectively, and current liabilities of approximately $39 million and $38.1 million, respectively, creating working capital deficits of approximately $37.8 million and $37.1 million, respectively, as of September 30, 2021, and December 31, 2020. Operating Activities We have only nominal cash or short-term assets, while our current liabilities aggregated approximately $39 million as of September 30, 2021. During the nine months ended September 30, 2021, operations generated $152,353 of net cash, comprised of a loss from continuing operations of $767,404, noncash items totaling $15,093 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, repayment expenses paid by related parties on our behalf of $268,924, and changes in working capital totaling $934,850. During the nine months ended September 30, 2020, operations generated $135,415of net cash, comprised of a net loss from continuing operations of $660,896, noncash items totaling $418,085consisting of losses recognized from the changes in fair values of derivative liabilities and expense paid by related parties on our behalf, and changes in working capital totaling $378,226. 17 Financing Activities During the nine months ended September 30, 2021, financing activities used $214,421 of cash, compared to using$126,061 of cash during the nine months ended September 30, 2020. Cash used in financing activities during the nine months ended September 30, 2021, consisted of repayments of related-party loans. Cash used in financing activities during the nine months ended September 30, 2020, consisted of advances from convertible debentures totaling $15,000, repayments of bank overdrafts of $1,611, repayments on related-party payables of $270,150, advances from related parties of $10,700, advances from loans payable of $156,000 and repayments on loans payable $36,000. Our Capital Resources and Anticipated Requirements Our monthly operating costs total approximately $143,000 per month, excluding approximately $50,000 of accruing interest expense and capital expenditures. We are generating sales revenue under our Exclusive Manufacturing and Distribution Agreement with GloBrands, LLC. Currently, we do not have enough cash on hand to sustain our business operations, and we expect to access external capital resources in the future. In conjunction with our efforts to commercialize new products, we are actively seeking infusions of capital from investors. In our current financial condition, it is unlikely that we will be able to obtain additional debt financing. Even if we did acquire additional debt, we would be required to devote additional cash flow to servicing the debt and securing the debt with assets. Accordingly, we are looking to obtain equity financing to meet our anticipated capital needs. We cannot assure that we will be successful in obtaining such capital. If we were to issue additional shares for debt and/or equity, this would dilute the value of our common stock and existing stockholders’ positions. We also have no authorized but unissued capital available. Convertible Debentures We currently have an outstanding amended, restated, and consolidated secured convertible debenture with Tekfine, LLC, an unrelated entity, with a maturity date of April 30, 2027, to the extent not previously converted. The amended debenture had a total outstanding principal balance of $2.4 million, with accrued interest of $1.5 million as of September 30, 2021. We also have four additional convertible debentures with Tekfine with maturity dates ranging from December 8, 2021, through May 30, 2022, totaling $275,000, unless earlier converted. The convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or $0.10 (depending on the instrument) or the lowest bid price for the 20 trading days prior to conversion. Going Concern These interim unaudited financial statements have been prepared on the going concern basis, which assumes that adequate sources of financing will be obtained as required and that our assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the interim unaudited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we not be unable to continue as a going concern. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements. Critical Accounting Policies We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. Refer to Note 2 – Summary of Significant Accounting Policies for discussion. 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this item.