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, 2024, Compared to the Three Months Ended September 30, 2023 Sales and Cost of Sales During the three months ended September 30, 2024 and 2023, we had net sales of $256,070 and $766,512, respectively, a decrease of $510,422 or 66.6%. We had cost of sales of $130,072 and $112,094, respectively, and gross profit of $125,998 and $654,418, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. We had higher revenue in the prior period due to additional income from the licensing of novelties in an international territory. Operating Expenses During the three months ended September 30, 2024 and 2023, employee costs were $129,743 and $149,100 respectively, a decrease of $19,357 or 13%. Employee costs decreased in the current period due to efficiencies based on the current business level. During the three months ended September 30, 2024 and 2023, selling, general, and administrative expenses (“S,G&A”) were $218,480 and $505,169, respectively, a decrease of $286,689 or 56.8%. The decrease in S,G&A expenses period over period was the result of a reduction in spending on marketing. Other Expense Total other expense during the three months ended September 30, 2024 was $639,047 compared to $167,222 for the prior period. In the current period we had $190,399 of interest expense and a loss of $448,898 on derivative valuation. We also had other income of $250. In the prior period we had $192,487 of interest expense and a gain of $25,265 on derivative valuation. Net Loss Our net loss from continuing operations for the three months ended September 30, 2024, was $861,272 compared to $167,073 for the three months ended September 30, 2023, an increase to our net loss of $694,199. Our net loss increased in the current period due to the reasons discussed above. 16 Results of Operations for the Nine Months Ended September 30, 2024, Compared to the Nine Months Ended September 30, 2023 Sales and Cost of Sales During the nine months ended September 30, 2024 and 2023, we had net sales of $1,075,952 and $1,438,432, respectively, a decrease of $362,480 or 25.2%. We had cost of sales of $456,533 and $467,811, respectively, for gross profit of $619,419 and $970,621, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. We had higher revenue in the prior period due to additional income from the licensing of novelties in an international territory. Operating Expenses During the nine months ended September 30, 2024 and 2023, employee costs were $380,645 and $422,902 respectively, a decrease of $42,257 or 10%. Employee costs decreased in the current period due to efficiencies based on the current business level. During the nine months ended September 30, 2024 and 2023, S,G&A costs were $601,714 and $794,362, respectively, a decrease of $192,648 or 24.3%. The decrease in S,G&A expenses period over period was the result of a reduction in spending on marketing. Other Expense Total other expense during the nine months ended September 30, 2024 was $1,336,006 compared to $567,660 for the prior period. In the current period we had $561,099 of interest expense and a loss of $775,157 on derivative valuation. We also had other income of $250. In the prior period we had $562,546 of interest expense, a loss of $19,238 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 nine months ended September 30, 2024, was $1,698,946 compared to $814,303 for the nine months ended September 30, 2023, an increase to our net loss of $884,643 Our net loss increased in the current period due to the reasons discussed above. 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 $60.8 million at September 30, 2024. As of September 30, 2024, we had current assets of $2 million and current liabilities of approximately $23 million, resulting in a working capital deficit of approximately $21 million at September 30, 2024. Operating Activities During the nine months ended September 30, 2024, operations used $8,434 of net cash, comprised of a loss of $1,814,150, noncash items totaling $967,890 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $837,826. 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 $837,826. Investing Activities There were no investing activities during the nine months ended September 30, 2024. During the nine months ended September 30, 2023, we used $8,414 for investing activities for the purchase of equipment. 17 Financing Activities During the nine months ended September 30, 2024, financing activities provided $8,434 of cash, compared to using $19,273 of cash during the nine months ended September 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. 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 September 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 September 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. 18