CIRTRAN CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in “Risk Factors” and elsewhere in this annual report. Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes and with the understanding that our actual future results may be materially different from what we currently expect. Introduction 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 the year ended December 31, 2021, our expanded business activities generated revenue of $2,923,269. In 2020, we completed phase one and two of our development of all HUSTLER®-branded products, which enabled us to generate revenue of $1,732,625 during the year ended December 31, 2020, related to 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. 15 Going Concern We have suffered substantial losses. The future of our company is dependent upon our ability to continue to generate revenues sufficient to offset operating costs or recover start-up costs under our GloBrands-HUSTLER® Exclusive Manufacturing and Distribution Agreement signed in December 2019. Management intends to seek additional capital through a private placement or public offering of its common stock, if necessary. Our auditors have expressed a going concern in their opinion, which raises substantial doubts about our ability to continue as a going concern. Results of Operations Comparison of Years Ended December 31, 2021 and 2020 Sales and Cost of Sales We had revenues of $2,923,269 and $1,732,625 during the years ended December 31, 2021 and 2020, respectively. Revenues during the years ended December 31, 2021 and 2020, were derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. Costs of sales were $1,024,444, or 35% of revenue, and $896,273, or 51% of revenue, during 2021 and 2020, respectively. The improved margin in the latter year reflects production and purchasing efficiencies as our operations increased. Operating Expenses During the year ended December 31, 2021, selling, general, and administrative expenses and employee costs were approximately $2,139,000, as compared to approximately $758,000 for the same period in 2020, an almost three-fold increase because of increased operations in 2021 from executing our business plan. Other Income and Expense Other income and expenses during the year ended December 31, 2021, consisted of interest expense of approximately $680,000, loss on the fair value of derivative liabilities of approximately $16,000, gain on forgiveness of debt of approximately $13,000, gains on the write-off of accounts payable of approximately $1.2 million and other income of approximately $1,000. Other income and expenses during the year ended December 31, 2020, consisted of interest expense of approximately $658,000, a loss of disposal of equipment of approximately $10,000, losses of the fair value of derivative liabilities of approximately $23,000, gains on the write-off of accounts payable of approximately $1.0 million, and other income of $42,000. As a result of the foregoing, we had a net profit from continuing operations of approximately $267,000 during the year ended December 31, 2021, as compared to $453,000 during the year ended December 31, 2020. Liquidity and Capital Resources We had a history of losses from operations prior to 2020, as our expenses had been greater than our revenues, which had ceased entirely several years earlier. Our accumulated deficit was approximately $77.8 million at December 31, 2021. For the year ended December 31, 2021, we used approximately $103,000 of cash in operating, investing, and financing activities, compared to generating cash of approximately $108,000 for the prior year from operating and financing activities. During the year ended December 31, 2021, we generated approximately $345,000 of net cash in operations, comprised of net income from continuing operations of approximately $114,000, income from discontinued operations of approximately $153,500, noncash expenses of approximately $1.1 mil, and changes in working capital of approximately $1.1 mil. The net change in working capital was primarily driven by increase in accrued interest of approximately $574,000, accounts payable of approximately $540,000 and accrued payroll and compensation of approximately $357,000. During the year ended December 31, 2020, we generated approximately $464,000 of net cash in operations, comprised of net income from continuing operations of $452,000, noncash expenses of approximately $866,000, changes in working capital of approximately $1,000,000, and net cash used in discontinued operations of approximately $115,000. The net change in working capital was primarily driven by accrued interest of approximately $543,000 and accrued liabilities of approximately $640,000. 16 During the year ended December 31, 2021, we used approximately $443,000 of net cash from financing activities mainly comprised of repayments on related-party loans that totaled $448,000 and proceeds from non-related-party loans of $5,000. During the year ended December 31, 2020, we used $337,520 of net cash from financing activities mainly comprised of repayments on related-party loans that totaled $467,409 and proceeds from non-related-party loans of $156,000. Our Capital Resources and Anticipated Requirements Our monthly operating costs are approximately $35,000 per month, excluding approximately $50,000 of accruing interest expense and capital expenditures. We continue to focus on generating revenue and reducing our monthly business expenses through cost reductions and operational streamlining. We have only recently begun to generate enough cash to sustain our day-to-day operations, and we expect to access external capital resources in the future to fund any new projects we may undertake. We cannot assure that we will be successful in obtaining such capital. If we seek infusions of capital from investors, it is unlikely that we will be able to obtain additional debt financing. If we did incur additional debt, we would be required to devote additional cash flow to servicing the debt and securing the debt with assets. Our issuance of additional shares for equity or for conversion of debt could dilute the value of our common stock and existing stockholders’ positions. Convertible Debentures and Notes Payable 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 $1.6 million as of December 31, 2021. We also have four additional convertible debentures with Tekfine with maturity dates ranging from February 28, 2022, until 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. We have received advances from related parties totaling $5,000 and $11,500 during the years ended December 31, 2021 and 2020, respectively, as well as making repayments on related-party loans of $448,335 and $467,409 during the years ended December 31, 2021 and 2020, respectively. Additionally, related parties paid expenses on our behalf of $1,940 during the years ended December 31, 2020. The advances are non-interest-bearing, due on demand, and are included in current liabilities. Critical Accounting Policies The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations” in this Item 7. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and that require complex management judgment. Use of Estimates The preparation of our financial statements in conformity with GAAP 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 of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our periodic filings with the Securities and Exchange Commission include, when applicable, disclosures of estimates, assumptions, and uncertainties that could affect the financial statements and our future operations. 17 Fair Value of Financial Instruments The carrying amounts reflected in the balance sheets for cash, accounts payable, and related-party payables approximate the respective fair values due to the short maturities of these items. We do not hold any investments that are available-for-sale. Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures , defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following: Level 1: Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the reporting date Level 2: Pricing inputs are quoted for similar assets or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes assets or liabilities valued at quoted prices adjusted for legal or contractual restrictions specific to these investments. Level 3: Pricing inputs are unobservable for the assets or liabilities; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. We do not currently have any financial instruments that we measure at fair value. Recently Issued Accounting Pronouncements Recently issued accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that require adoption and that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This item is not applicable as we are currently considered a smaller reporting company.