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. Since 2021, we continue 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, 2023, Compared to the Three Months Ended September 30, 2022 Sales and Cost of Sales During the three months ended September 30, 2023 and 2022, we had net sales of $766,512 and $477,018, respectively, an increase of $289,494 or 60.7%. We had cost of sales of $112,094 and $170,108, respectively, for gross profit of $654,418 and $306,910, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. The increase in revenue in the current period is due to additional income from the licensing of novelties in an international territory. Operating Expenses During the three months ended September 30, 2023 and 2022, employee costs were $149,100 and $139,750 respectively, an increase of $9,350 or 6.7%. Employee costs increased in the current period due to additional labor needed based on the current business level. Selling, general, and administrative expenses (S,G&A”)were $505,169 and $293,891, respectively, an increase of $211,278 or 71.8%. The increase in S,G&A expenses period over period was the result of additional marketing spending to support the brand. Other Expense Other expenses during the three months ended September 30, 2023 and 2022, consisted of $192,487 and $179,342 of interest expense and a gain of $25,265 and a loss of $1,156 on derivative valuation, respectively. Net Loss Our net loss from continuing operations for the three months ended September 30, 2023, was $167,073 compared to $307,230 for the three months ended September 30, 2022, a decrease of $140,157. Our net loss decreased in the current period mainly due to the increase of our gross margin. 16 Results of Operations for the Nine Months Ended September 30, 2023, Compared to the Nine Months Ended September 30, 2022 Sales and Cost of Sales During the nine months ended September 30, 2023 and 2022, we had net sales of $1,438,432 and $1,695,707, respectively, a decrease of $257,275 or 15.2%. We had cost of sales of $467,811 and $580,960, respectively, for gross profit of $970,621 and $1,114,746, 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 in 2022. Operating Expenses During the nine months ended September 30, 2023 and 2022, employee costs were $422,902 and $406,751, respectively, an increase of $16,151 or 4%. Selling, general, and administrative expenses were $794,362 and $987,662, respectively, a decrease of $193,300 or 19.6%. The decrease in S,G&A expenses period over period was the result of our efforts to control costs. Other Expense Other expenses during the nine months ended September 30, 2023 and 2022, consisted of $562,546 and $527,774 of interest expense and a loss of $19,238 and $35,105 on derivative valuation, respectively. We also recognized a gain on the forgiveness of debt of $13,000 and other income of $1,124, in the current period. Net Loss Our net loss from continuing operations for the nine months ended September 30, 2023, was $814,303 compared to $842,546 for the nine months ended September 30, 2022, a decrease of $28,243 or 3.4%. 17 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 $80 million at September 30, 2023. As of September 30, 2023, we had current assets of $1.8 million and current liabilities of approximately $42 million, resulting in a working capital deficit of approximately $42 million at September 30, 2023. Operating Activities During the nine months ended September 30, 2023, operations provided $33,008 of net cash, comprised of a loss of $929,087, noncash items totaling $195,833 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $766,262. 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. Investing Activities During the nine months ended September 30, 2023, we used $8,414 for investing activities for the purchase of equipment. We had no investing activity in the prior period. Financing Activities During the nine months ended September 30, 2023, financing activities used $19,273 of cash, compared to using $132,952 of cash during the nine months ended September 30, 2022. 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. 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 $1.8 million as of September 30, 2023. 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. As of September 30, 2023, there is $21,882 of short-term advances due to related parties. The advances are due on demand and included in current liabilities. No demand for payment has been made. 18 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.