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 June 30, 2022, Compared to the Three Months Ended June 30, 2021 Sales and Cost of Sales During the three months ended June 30, 2022 and 2021, we had net sales of $526,921 and $700,656, respectively, a decrease of $173,735 or 24.8%. We had cost of sales of $178,474 and $262,411, respectively, for gross profit of $348,447 and $438,245, 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 June 30, 2022 and 2021, employee costs were $134,494 and $135,077, respectively, a decrease of only $583 or 0.4%. Selling, general, and administrative expenses were $317,594 and $359,297, respectively, a decrease of $41,703 or 115.8%. The decrease in operating expenses period over period was the result of selling certain tobacco products in states with lower or no excise tax. Other Expense Other expenses during the three months ended June 30, 2022 and 2021, consisted of $175,081 and $168,726 of interest expense and a gain of $2,104 and $13,131 on derivative valuation, respectively. The increase in other expenses period over period is the result of a decrease to our loss on derivative valuation combined with increased interest expense. Results of Operations for the Six Months Ended June 30, 2022, Compared to the Six Months Ended June 30, 2021 Sales and Cost of Sales During the six months ended June 30, 2022 and 2021, we had net sales of $1,218,689 and $1,320,055, respectively, a decrease of $101,366 or 7.7%. We had cost of sales of $410,853 and $464,059, respectively, for gross profit of $807,836 and $855,996, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. 16 Operating Expenses During the six months ended June 30, 2022 and 2021, employee costs were $267,000 and $268,965, respectively, a decrease of only $1,965 or 0.7%. Selling, general, and administrative expenses were $696,771 and $638,595, respectively, an increase of $55,176 or 8.6%. The decrease in operating expenses period over period is the result of substantially increased activities attributable to the development of products under the HUSTLER® brand name and selling certain tobacco products in states with lower or no excise tax in the first quarter. Other Expense Other expenses during the six months ended June 30, 2022 and 2021, consisted of $348,432 and $335,214 of interest expense and a loss of $33,949 and $114,660 on derivative valuation, respectively. The decrease in other expenses period over period is the result of a decrease to our loss on derivative valuation combined with increased interest expense. 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 $78.4 million at June 30, 2022. As of June 30, 2022, we had current assets of $1,471,759 and current liabilities of approximately $40 million, resulting in a working capital deficit of approximately $38.9 million at June 30, 2022. Operating Activities During the six months ended June 30, 2022, operations generated $101,926 of net cash, comprised of a loss from continuing operations of $535,316, noncash items totaling $95,332 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $541,910. During the six months ended June 30, 2021, operations used $81,207 of net cash, comprised of a net loss from continuing operations of $501,438, noncash items totaling $153,367 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 $466,733. Financing Activities During the six months ended June 30, 2022, financing activities used $100,552 of cash, compared to using $8,663 of cash during the six months ended June 30, 2021. Cash used in financing consisted of repayments of related-party loans. 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. 17 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 $1.7 million as of June 30, 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 six months ended June 30, 2022, we made repayments to related parties of $35,000 and had other noncash reductions of $166,747. There were $21,882 and $21,882 of short-term advances due to related parties as of June 30, 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.