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 June 30, 2024, Compared to the Three Months Ended June 30, 2023 Sales and Cost of Sales During the three months ended June 30, 2024 and 2023, we had net sales of $390,491 and $458,511, respectively, a decrease of $68,020 or 14.8%. We had cost of sales of $168,564 and $270,010, respectively, for gross profit of $221,927 and $188,501, 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, 2024 and 2023, employee costs were $125,673 and $137,107 respectively, a decrease of $11,434 or 8.3%. Employee costs decreased in the current period due to efficiencies based on the current business level. Selling, general, and administrative expenses (“S,G&A”) were $190,548 and $150,515, respectively, an increase of $40,033 or 26.5%. The increase in S,G&A expenses period over period was the result of additional marketing spending to support the brand. Other Expense Total other expense during the three months ended June 30, 2024 was $263,553 compared to $105,605 for the prior period. In the current period we had $185,748 of interest expense and a loss of $77,805 on derivative valuation. In the prior period we had $186,771 of interest expense, a gain of $80,042 on derivative valuation and other income of $1,124. Net Loss Our net loss from continuing operations for the three months ended June 30, 2024, was $357,847 compared to $204,726 for the three months ended June 30, 2023, an increase of $153,121. Our net loss increased in the current period mainly due to the increase of our other expense. Results of Operations for the Six Months Ended June 30, 2024, Compared to the Six Months Ended June 30, 2023 Sales and Cost of Sales During the six months ended June 30, 2024 and 2023, we had net sales of $819,882 and $671,920, respectively, an increase of $147,962 or 22%. We had cost of sales of $326,461 and $355,717, respectively, for gross profit of $493,421 and $316,203, 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 six months ended June 30, 2024 and 2023, employee costs were $250,902 and $273,802 respectively, a decrease of $22,900 or 8.4%. Employee costs decreased in the current period due to efficiencies based on the current business level. Selling, general, and administrative expenses (“S,G&A”) were $383,234 and $289,193, respectively, an increase of $94,041 or 32.5%. The increase in S,G&A expenses period over period was the result of additional marketing spending to support the brand. 16 Other Expense Total other expense during the six months ended June 30, 2024 was $696,959 compared to $400,438 for the prior period. In the current period we had $370,700 of interest expense and a loss of $326,259 on derivative valuation. In the prior period we had $370,059 of interest expense, a loss of $44,503 on derivative valuation, a gain on forgiveness of debt of $13,000 and other income of $1,124. Net Loss Our net loss from continuing operations for the six months ended June 30, 2024, was $837,674 compared to $647,230 for the six months ended June 30, 2023, an increase of $190,444. Our net loss increased in the current period mainly due to the increase of our other 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 $59.9 million at June 30, 2024. As of June 30, 2024, we had current assets of $2 million and current liabilities of approximately $22 million, resulting in a working capital deficit of approximately $20 million at June 30, 2024. Operating Activities During the six months ended June 30, 2024, operations provided $11,682 of net cash, comprised of a loss of $914,197, noncash items totaling $454,460 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $471,419. During the six months ended June 30, 2023, operations used $20,815 of net cash, comprised of a loss of $723,332, noncash items totaling $156,646 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $545,871. Investing Activities There were no investing activities during the six months ended June 30, 2024. During the six months ended June 30, 2023, we used $8,414 for investing activities for the purchase of equipment. Financing Activities During the six months ended June 30, 2024, financing activities used $11,682 of cash, compared to providing $46,813 of cash during the six months ended June 30, 2023. Cash used in financing consisted of repayments of 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 $2 million as of June 30, 2024. 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 June 30, 2024, 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. 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.