UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________
Commission
File No.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices and zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 7, 2022, there were shares of common stock, $0.001 par value, outstanding.
TABLE OF CONTENTS
| 2 |
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CIRTRAN CORPORATION
CONSOLIDATED BALANCE SHEETS
| September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Inventory | ||||||||
| Deposits on inventory | ||||||||
| Deposits on inventory - related party | ||||||||
| Accounts receivable | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Investment in securities at cost | ||||||||
| Right-of-use asset | ||||||||
| Property and equipment, net of accumulated depreciation | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Lease liability, current | ||||||||
| Related-party payable | ||||||||
| Short-term advances payable | ||||||||
| Short-term advances payable - related parties | ||||||||
| Accrued liabilities | ||||||||
| Accrued payroll and compensation expense | ||||||||
| Accrued interest, current portion | ||||||||
| Convertible debenture, current portion, net of discounts | ||||||||
| Note payable, current portion | ||||||||
| Note payable to stockholders | ||||||||
| Derivative liability | ||||||||
| Liabilities from discontinued operations | ||||||||
| Total current liabilities: | ||||||||
| Note payable, net of current portion | ||||||||
| Convertible debenture, net of current portion, net of discount | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ deficit: | ||||||||
| Common stock, par value $; shares authorized; shares issued and outstanding | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
CIRTRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Employee costs | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on forgiveness of debt | ||||||||||||||||
| Loss on derivative valuation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss from continuing operations per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss from discontinued operations per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted weighted average common shares outstanding | ||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CIRTRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2022 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued for conversion of accrued interest | ||||||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2021 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, September 30, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CIRTRAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||
| Loss from discontinued operations | ||||||||
| Depreciation expense | ||||||||
| Loss on derivative valuation | ||||||||
| Debt discount amortization | ||||||||
| Gain on forgiveness of debt | ( | ) | ||||||
| Amortization of right-of-use asset to rent expense | ||||||||
| Expenses paid on our behalf by a related party | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Deposits on inventory | ( | ) | ||||||
| Deposits on inventory - related party | ( | ) | ||||||
| Accounts receivable | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued liabilities | ||||||||
| Payments for lease liability | ( | ) | ( | ) | ||||
| Accrued payroll and compensation | ||||||||
| Accrued interest | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related-party loans | ||||||||
| Repayments of related-party loans | ( | ) | ( | ) | ||||
| Net cash used by financing activities | ( | ) | ( | ) | ||||
| Net change in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosure of noncash investing activities: | ||||||||
| Common stock issued for conversion of accrued interest | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
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CIRTRAN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2022
NOTE 1 — ORGANIZATION AND NATURE OF OPERATIONS
In 1987, CirTran Corporation was incorporated in Nevada under the name Vermillion Ventures, Inc., for the purpose of acquiring other operating corporate entities. We were largely inactive until July 1, 2000, when our wholly owned subsidiary, CirTran Corporation (Utah), acquired substantially all the assets and certain liabilities of Circuit Technology, Inc., founded by our president, Iehab Hawatmeh.
We, together with our majority-owned subsidiaries, manufacture, distribute, and sell condoms, electronic tobacco products, cigars, energy drinks, water beverages, and related merchandise, all using the HUSTLER® brand name. Since entering our 2019 five-year manufacturing and distribution agreement with an unrelated party, our efforts have been devoted to phase one of our development of all HUSTLER®-branded products, which led us to generating revenue during 2020 for the first time in several years.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These financial statements and the notes attached hereto should be read in conjunction with the financial statements and notes included in our Form 10-K for the fiscal year ended December 31, 2021. In the opinion of our management, all adjustments, including normal recurring adjustments necessary to present fairly our financial position, as of September 30, 2022, and the results of our operations and cash flows for the nine months then ended have been included. The results of operations for the interim period are not necessarily indicative of the results for the full year ending December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the estimated useful lives of property and equipment. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the company and our wholly owned subsidiaries: CirTran Products Corp., LBC Products, Inc., and CirTran Asia, Inc. All intercompany accounts and transactions have been eliminated in consolidation
Revenue Recognition
We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, for revenue recognition. Adoption of ASC 606 did not have a significant impact on our financial statements. We generate revenue by providing product design services and through the sales of tangible product. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. We determine the transaction price associated with each deliverable based on the unique contract with the customer, which is a stand-alone contract that we retain the right to accept or reject. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
| 7 |
During
the nine months ended September 30, 2022 and 2021, we recognized revenue of $
Additionally,
we recognized revenue of $
Leases
In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), which superseded guidance in ASC 840, Leases, which we adopted for the year ended December 31, 2019, under the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. We account for short-term leases, those lasting fewer than 12 months, using the practical expedient as outlined in the guidance, which does not include recording such leases on the balance sheet.
The
adoption of the standard resulted in recording right-of-use (“ROU”) assets and operating lease liabilities of $
We
have one lease in effect requiring minimum monthly payments of $
The
lease was renewed on October 19, 2022, on a month to months basis, with payments remaining at $
Investment in Securities
Our
cost-method investment consists of an investment in a private digital multi-media technology company that totaled $
Inventories
Inventories are stated at the lower of average cost or net realizable value. Cost on manufactured inventories includes labor, material, and overhead. Overhead cost is based on indirect costs allocated to cost of sales, work-in-process inventory, and finished goods inventory. Indirect overhead costs have been charged to cost of sales or capitalized as inventory, based on management’s estimate of the benefit of indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory’s value is less than original cost, the inventory is reduced to market value. We determine market value on current resale amounts and whether technological obsolescence exists. We will seek agreements with manufacturing customers that require them to purchase their inventory items in the event they cancel their business with us.
| 8 |
From
time to time, we will place deposits on inventory to be delivered in the future. These deposits are carried as a separate balance sheet
component and totaled $
Inventory balances consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Total | $ | $ | ||||||
Fair Value of Financial Instruments
ASC 820-10-15, Fair Value Measurement-Overall-Scope and Scope Exceptions, defines fair value, thereby eliminating inconsistencies in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations. ASC 820-10-15 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1—Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2—Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3—Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Accounts payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these instruments. Derivative liabilities are measured using level 3 inputs.
| Total
Fair Value at September 30, 2022 | Quoted
prices in active markets (Level 1) | Significant
other observable inputs (Level 2) | Significant
unobservable inputs (Level 3) | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total
Fair Value at December 31, 2021 | Quoted
prices in active markets (Level 1) | Significant
other observable inputs (Level 2) | Significant
unobservable inputs (Level 3) | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
Basic loss per share is calculated by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted loss per share is similarly calculated, except that the weighted-average number of common shares outstanding would include common shares that may be issued subject to existing rights with dilutive potential when applicable. There were potentially issuable shares from the conversions of convertible debentures outstanding that were excluded in dilutive outstanding shares as of September 30, 2022, due to the anti-dilutive effect these would have on net loss per share. There were such shares issuable as of September 30, 2021. We do not currently have adequate authorized but unissued shares to satisfy our obligations should all instruments eligible to convert to common stock be exercised. We are not currently contemplating an increase in our authorized shares but may do so in the future.
| 9 |
Recently Issued Accounting Pronouncements
We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on our financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations.
NOTE 3 — GOING CONCERN
The
accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate our continuation
as a going concern. We had a working capital deficiency of $
Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if we are unable to continue as a going concern.
In the coming year, our foreseeable cash requirements will relate to development of business operations and associated expenses. We may experience a cash shortfall and be required to raise additional capital.
Historically, we have mainly relied upon shareholder loans and advances to finance operations and growth. Management may raise additional capital by retaining net earnings, if any, or through future public or private offerings of our stock or loans from private investors, although we cannot assure that we will be able to obtain such financing. Our failure to do so could have a material and adverse effect upon our shareholders and us.
NOTE 4 — PROPERTY AND EQUIPMENT
We incur certain costs associated with the design and development of molds and dies for our contract-manufacturing segment. These costs are held as deposits on the balance sheet until the molds or dies are finished and ready for use. At that point, the costs are included as part of production equipment in property and equipment and are amortized over their useful lives. We hold title to all molds and dies used in the manufacture of products.
Property and equipment and estimated service lives consist of the following:
| September 30, 2022 | December 31, 2021 | Useful
Life (years) | ||||||||
| Furniture and office equipment | $ | $ | ||||||||
| Vehicles | ||||||||||
| Total | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
We
recorded $
NOTE 5 — RELATED PARTY TRANSACTIONS
In
2007, we issued a
| 10 |
On
March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $
During
the nine months ended September 30, 2022, we made repayments to related parties of $
We have agreed to issue stock options to Iehab Hawatmeh, our president, as compensation for services provided as our chief executive officer. The terms of his employment agreement require us to grant options to purchase shares of our stock each year, with an exercise $. Mr. Hawatmeh held outstanding options to purchase and shares of common stock as of September 30, 2022, and December 31, 2021, respectively. See Note 12–Stock Options.
As
of September 30, 2022, and December 31, 2021, we owed our president a total of $
As
of September 30, 2022, and December 31, 2021, we owed a total of $
During
the nine months ended September 30, 2022, we had a net increase in deposits with a related-party inventory supplier totaling $
NOTE 6 — OTHER ACCRUED LIABILITIES
Accrued tax liabilities consist of delinquent payroll taxes, interest, and penalties owed by us to the Internal Revenue Service (“IRS”) and other tax entities.
Accrued liabilities consist of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Tax liabilities | $ | $ | ||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Other
accrued liabilities as of September 30, 2022, and December 31, 2021, include a non-interest-bearing payable totaling $
| 11 |
Accrued payroll and compensation liabilities consist of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Director fees | $ | $ | ||||||
| Bonus expenses | ||||||||
| Commissions | ||||||||
| Consulting | ||||||||
| Administrative payroll | ||||||||
| Total | $ | $ | ||||||
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Litigation and Claims
Various vendors, service providers, and others have asserted legal claims in previous years. These creditors generally are not actively seeking collection of amounts due to them, and we have determined that the probability of realizing any loss on these claims is remote and will seek to compromise and settle at a deep discount any of such claims that are asserted for collection. These amounts are included in our current liabilities, except where we believe collection or enforcement of the judgments is barred by the applicable statute of limitations, in which case the liabilities have been eliminated. We have not accrued any liability for claims or judgments that we have determined to be barred by the applicable statute of limitations, which generally is eight years for judgments in Utah.
Playboy Enterprises, Inc.
Our
affiliate, Play Beverages, LLC, filed suit against Playboy Enterprises, Inc., in Cook County, Illinois, Circuit Court in October 2012
asserting numerous claims, including breach of contract and tortious interference. Playboy responded with a counterclaim of breach of
contract and trademark infringement. After proceedings in October 2016, the court awarded a judgment of $
Delinquent Payroll Taxes, Interest, and Penalties
In
November 2004, the IRS accepted our amended offer in compromise (the “Offer”) to settle delinquent payroll taxes, interest,
and penalties, which required us to pay $
Employment Agreements
We
engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended
in September 2017. In July 2017, Mr. Hawatmeh had resigned all positions with us to pursue other business activities, thereby effectively
terminating the agreement. However, the amendment to his employment agreement in September 2017 reinstated Mr. Hawatmeh to his previous
positions, with a salary in an amount to be determined. Among other things, the reinstated employment agreement: (a) grants options to
purchase a minimum of shares of our stock each year, with an exercise price equal to the market price of our common stock as of
the grant date, for the maximum term allowed under our stock option plan; (b) provides for health insurance coverage, cell phone, car
allowance, life insurance, and director and officer liability insurance, as well as any other bonus approved by our board; and (c) includes
additional incentive compensation as follows: (i) a quarterly bonus equal to
| 12 |
We also have an oral agreement with our other director that requires us to issue options to purchase shares of our common stock each year.
License Agreements
We have entered into agreements requiring us to pay certain royalties for the manufacture and distribution of licensed products. Fees are based on a percentage of sales and remitted quarterly and are included in cost of sales for financial reporting purposes.
NOTE 8 — NOTES PAYABLE
Notes payable consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Note payable to former service provider for past due account payable (current) | $ | $ | ||||||
| Note payable for settlement of debt (long-term) | ||||||||
| Small Business Administration loan | ||||||||
| Total | $ | $ | ||||||
There
was $
NOTE 9 — CONVERTIBLE DEBENTURES
Convertible debentures consisted of the following:
| September 30, 2022 | December 31, 2021 | |||||||
| Convertible
debenture, | $ | $ | ||||||
| Convertible
debenture, | ||||||||
| Convertible
debenture, | ||||||||
| Convertible
debenture, | ||||||||
| Convertible
debenture, | ||||||||
| Subtotal | $ | $ | ||||||
| Less: discounts | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| Less: current portion | ( | ) | ( | ) | ||||
| Long-term portion | $ | $ | ||||||
The
convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $
| 13 |
As
of September 30, 2022, and December 31, 2021, we had accrued interest on the convertible debentures totaling $
NOTE 10 — DERIVATIVE LIABILITIES
As
discussed in Note 9—Convertible Debentures, we have entered into five separate agreements to borrow a total of $
| Volatility | % | |||
| Risk-free rates | % | |||
| Stock price | $ | |||
| Remaining life | ||||
The
fair values of the derivative instruments are measured each quarter, which resulted in a loss of $
NOTE 11 – COMMON STOCK TRANSACTIONS
We are authorized to issue up to shares of $ par value common stock.
During
the year ended December 31, 2021, we issued a total of shares of common stock for the conversion of $
Stock Incentive Plans
During the nine months ended September 30, 2022, and the year ended December 31, 2021, we granted to employees and options to purchase shares of common stock, respectively.
The options granted during the year ended December 31, 2021, were valued using the following assumptions: estimated -year term, estimated volatility of %, and a risk-free rate of %.
As of September 30, 2022, and December 31, 2021, we had unrecognized compensation related to outstanding options that have not yet vested at year-end that would be recognized in subsequent periods.
As of September 30, 2022, there were options issued and vested with a weighted average exercise price of $ and a weighted average remaining life of years. Outstanding options as of September 30, 2022, consisted of:
| Exercise Price | Count | Average Exercise | Remaining Life | Exercisable | ||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| Total | ||||||||||||||||||
| 14 |
NOTE 13—DISCONTINUED OPERATIONS
At October 21, 2016, we exited the beverage licensing and distribution business. The assets and liabilities associated with this business are displayed as assets and liabilities from discontinued operations as of September 30, 2022, and December 31, 2021. Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations for the nine months ended September 30, 2022 and 2021.
Total assets and liabilities included in discontinued operations were as follows:
| September 30, 2022 | December 31, 2021 | |||||||
| Assets from Discontinued Operations: | ||||||||
| Cash | $ | $ | ||||||
| Total assets from discontinued operations | $ | $ | ||||||
| Liabilities from Discontinued Operations: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Accrued interest | ||||||||
| Accrued payroll and compensation expense | ||||||||
| Current maturities of long-term debt | ||||||||
| Related-party payable | ||||||||
| Short-term advances payable | ||||||||
| Total liabilities from discontinued operations | $ | $ | ||||||
Net loss from discontinued operations for the nine months ended September 30, 2022 and 2021, were comprised of the following components:
| Nine Months ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Other expense: | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Net loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
NOTE 14 — SUBSEQUENT EVENTS
In accordance with SFAS 165 (ASC 855-10), management has performed an evaluation of subsequent events through the date that the financial statements were issued and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements.
On
October 19, 2022, the Company renewed its lease with GloBrands, LLC, for
| 15 |
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.
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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.
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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.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2022, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive and financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, management concluded that our disclosure controls and procedures were not effective as of September 30, 2022, to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods prescribed by U.S. Securities and Exchange Commission and that such information is accumulated and communicated to management, including our chief executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
Exhibit Number* |
Title of Document | Location | ||
| Item 31 | Rule 13a-14(a)/15d-14(a) Certifications | |||
| 31.01 | Certification of Principal Executive and Principal Financial Officer Pursuant to Rule 13a-14 | This filing. | ||
| Item 32 | Section 1350 Certifications | |||
| 32.01 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | This filing. | ||
| Item 101 | Interactive Data File | |||
| 101.INS | Inline XBRL Instance Document | This filing. | ||
| 101.SCH | Inline XBRL Taxonomy Extension Schema | This filing. | ||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | This filing. | ||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | This filing. | ||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | This filing. | ||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | This filing. | ||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
| * | All exhibits are numbered with the number preceding the decimal indicating the applicable SEC reference number in Item 601 and the number following the decimal indicating the document’s sequence. |
| ** | The XBRL related information in Exhibit 101 will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and will not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as is expressly set forth by specific reference in such filing or document. |
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| CIRTRAN CORPORATION | ||
| Dated: November 21, 2022 | By: | /s/ Iehab Hawatmeh |
| Iehab Hawatmeh, President | ||
| Principal Executive and Financial Officer | ||
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