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, 2022, our business activities generated revenue of $1,719,358. In 2020, we completed phase one and two of our development of all HUSTLER®-branded products, which enabled us to generate revenue of $2,923,269 during the year ended December 31, 2021, 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. 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, 2022 and 2021 Sales and Cost of Sales We had revenues of $1,719,358 and $2,923,269 during the years ended December 31, 2022 and 2021, respectively, a decrease of $1,203,911 or 41.2%. We had cost of sales of $696,548 and $1,024,444, respectively, for gross profit of $1,022,810 and $1,898,825, 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 year ended December 31, 2022, selling, general, and administrative expenses and employee costs were approximately $1,596,000, as compared to approximately $2,127,000 for the same period in 2021, a decrease of $531,000 or 25%. Selling, general, and administrative expenses were $1,004,003 and $1,630,592, respectively, a decrease of $626,589 or 38.4%. 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. We also recognized a accrued tax liability expense in the current year of $50,888. 11 Other Income and Expense Other income and expenses during the year ended December 31, 2022, consisted of interest expense of approximately $709,000 and a loss on the fair value of derivative liabilities of approximately $66,000. 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 $72,000 and other income of approximately $1,000. As a result of the foregoing, we had a net loss of approximately $1,349,000 from continuing operations, as compared to $838,000 in the prior year. 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 is approximately $79.3 million at December 31, 2022. Operating Activities During the year ended December 31, 2022, operations generated $159,304 of net cash, comprised of a loss from continuing operations of $1,502,091, noncash items totaling $337,367 consisting primarily of losses recognized from the changes in fair values of derivative liabilities, debt discount amortization and discontinued operations. Changes in working capital totaled $1,273,140. During the year ended December 31, 2021, operations generated $344,458 of net cash, comprised of income from continuing operations of $126,212, a $964,685 loss from discontinued operations and other noncash items totaling $51,373. Changes in working capital of approximately $1.1 mil. During the year ended December 31, 2022, we used approximately $147,000 of net cash from financing activities mainly comprised of repayments on related-party loans that totaled $155,000 and proceeds from related-party loans of $8,000. 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. 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 has a total outstanding principal balance of $2.4 million, with accrued interest of $1.7 million as of December 31, 2022. 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 $8,137 and $5,000 during the years ended December 31, 2022 and 2021, respectively, as well as making repayments on related-party loans of $154,832 and $448,335 during the years ended December 31, 2022 and 2021, respectively. Critical Accounting Policies Refer to Note 2 of our financial statements contained elsewhere in this Form 10-K for a summary of our critical accounting policies and recently adopting and issued accounting standards. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. 12