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 September 30, 2022, Compared to the Three Months Ended September 30, 2021 Sales and Cost of Sales During the three months ended September 30, 2022 and 2021, we had net sales of $477,018 and $961,474, respectively, a decrease of $484,456 or 50.4%. We had cost of sales of $170,108 and $339,076, respectively, for gross profit of $306,910 and $622,398, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. The decrease in revenue in the current period is due to a decrease in the sale of Vape products in California due to their ban on flavored tobacco. 16 Operating Expenses During the three months ended September 30, 2022 and 2021, employee costs were $139,751 and $139,520, respectively, an increase of only $231 or 0.2%. Selling, general, and administrative expenses were $293,891 and $514,358, respectively, a decrease of $220,467 or 42.9%. 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 September 30, 2022 and 2021, consisted of $179,342 and $172,400 of interest expense and a loss of $1,156 and $62,086 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. Net Loss Our net loss from continuing operations for the three months ended September 30, 2022, was $307,230 compared to $265,966 for the three months ended September 30, 2021, an increase of $41,264. Results of Operations for the Nine Months Ended September 30, 2022, Compared to the Nine Months Ended September 30, 2021 Sales and Cost of Sales During the nine months ended September 30, 2022 and 2021, we had net sales of $1,695,707 and $2,281,529, respectively, a decrease of $585,822 or 25.7%. We had cost of sales of $580,961 and $803,135, respectively, for gross profit of $1,114,746 and $1,478,394, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. The decrease in revenue in the current period is due to a decrease in the sale of Vape products in California due to their ban on flavored tobacco. Operating Expenses During the nine months ended September 30, 2022 and 2021, employee costs were $406,751 and $408,485, respectively, a decrease of only $1,734 or 0.4%. Selling, general, and administrative expenses were $987,662 and $1,165,870, respectively, a decrease of $178,208 or 15.3%. 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 nine months ended September 30, 2022 and 2021, consisted of $527,774 and $507,614 of interest expense and a loss of $35,105 and $176,746 on derivative valuation, respectively. We also had a $12,917 gain on forgiveness of debt in the prior period. 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. Our net loss from continuing operations for the nine months ended September 30, 2022, was $842,546 compared to $767,404 for the nine months ended September 30, 2021, an increase of $75,142. 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 $78.9 million at September 30, 2022. As of September 30, 2022, we had current assets of $1.4 million and current liabilities of approximately $41 million, resulting in a working capital deficit of approximately $39.6 million at September 30, 2022. Operating Activities During the nine months ended September 30, 2022, operations generated $168,030 of net cash, comprised of a loss from continuing operations of $931,863, noncash items totaling $243,194 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $971,483. 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. Financing Activities During the nine months ended September 30, 2022, financing activities used $132,953 of cash, compared to using $214,421 of cash during the nine months ended September 30, 2021. 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 September 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 nine months ended September 30, 2022, we made repayments to related parties of $139,883 and had other noncash reductions of $233,584. There were $21,882 and $21,882 of short-term advances due to related parties as of September 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.