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 unaudited financial statements and notes to our unaudited 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 and into 2022, 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. Results of Operations for the Three Months Ended March 31, 2022, Compared to the Three Months Ended March 31, 2021 Sales and Cost of Sales During the three months ended March 31, 2022 and 2021, we had net sales of $691,769 and $619,399, respectively, an increase of $72,369 or 11.7%. We had cost of sales of $232,379 and $306,648, respectively, for gross profit of $459,389 and $312,751, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. Operating Expenses During the three months ended March 31, 2022 and 2021, employee costs were $132,506 and $133,888, respectively, a decrease of only $1,382 or 1%. Selling, general, and administrative expenses were $376,177 and $174,298, respectively, an increase of $201,879 or 115.8%. 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. Other Expense Other expenses during the three months ended March 31, 2022 and 2021, consisted of $173,351 and $166,488 of interest expense and a loss of $36,053 and $127,791 on derivative valuation, 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 $78.1 million at March 31, 2022. As of March 31, 2022, we had current assets of $1,429,633 and current liabilities of approximately $40 million, resulting in a working capital deficit of approximately $38.5 million at March 31, 2022. Operating Activities During the three months ended March 31, 2022, operations generated $66,057 of net cash, comprised of a loss from continuing operations of $258,698, noncash items totaling $66,442 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $239,406. During the three months ended March 31, 2021, operations used $61,745 of net cash, comprised of a net loss from continuing operations of $289,714, noncash items totaling $70,103 consisting 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 $157,866. Financing Activities During the three months ended March 31, 2022, financing activities used $35,000 of cash, compared to using $15,000 of cash during the three months ended March 31, 2021. Cash used in financing consisted of repayments of related-party loans. 16 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 Note 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 March 31, 2022. We also have four additional convertible debentures with Tekfine with maturity dates ranging from December 8, 2022, until December 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. During the three months ended March 31, 2022, we made repayments to related parties of $35,000 and had other noncash reductions of $96,145. There were $21,882 and $21,882 of short-term advances due to related parties as of March 31, 2022, and December 31, 2021, respectively. The advances are due on demand and included in current liabilities. No demand for payment has been made. 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. 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. 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.