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 August 17, 2023, 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
| June 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Inventory | ||||||||
| Deposits on inventory | ||||||||
| Deposits on inventory - related party | ||||||||
| Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||
| 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 | $ | $ | ||||||
| Liabilities for product returns and credits | ||||||||
| 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: | ||||||||
| Deferred tax liability | ||||||||
| 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.
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CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Employee costs | ||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on forgiveness of debt | ||||||||||||||||
| Gain (loss) on derivative valuation | ( | ) | ( | ) | ||||||||||||
| Other income | ||||||||||||||||
| 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
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2023 AND 2022
(Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | deficit | ||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||
| Net loss | — | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| 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 | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Deposits on inventory | ( | ) | ( | ) | ||||
| Deposits on inventory - related party | ( | ) | ||||||
| Accounts receivable | ( | ) | ||||||
| Other current assets | ( | ) | ( | |||||
| Accounts payable | ( | ) | ||||||
| Liabilities for product returns and credits | ||||||||
| Accrued liabilities | ||||||||
| Payments for lease liability | ( | ) | ||||||
| Accrued payroll and compensation | ||||||||
| Accrued interest | ||||||||
| Net cash (used) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net Cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from loans payable | ||||||||
| Proceeds from related-party loans | ||||||||
| Repayments of related-party loans | ( | ) | ( | ) | ||||
| Net Cash provided by (used in) 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 | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed financial statements.
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CIRTRAN CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
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, 2022. In the opinion of our management, all adjustments, including normal recurring adjustments necessary to present fairly our financial position, as of June 30, 2023, and the results of our operations and cash flows for the six 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, 2023.
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. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
In preparing the financial statements in accordance with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.
Concentrations of Credit Risk
We maintain our cash in bank deposit accounts, the balances of which at times may exceed federally insured limits. We continually monitor our banking relationships and consequently have not experienced any losses in our accounts. At times, such deposits may exceed the Federal Deposit Insurance Corporation insurable limit.
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Cash Equivalents
We
consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. There were
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.
During
the six months ended June 30, 2023 and 2022, we recognized revenue of $
Additionally,
we recognized revenues of $
Accounts Receivable
Revenues
that have been recognized but not yet received are recorded as accounts receivable. Losses on receivables will be recognized when it
is more likely than not that a receivable will not be collected. An allowance for estimated uncollectible amounts will be recognized
to reduce the amount receivable to its net realizable value when needed. As of June 30, 2023, the Company has recorded an allowance for
doubtful accounts of $
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 total $ (non-related-party) and $
On most of tobacco related products, the Company pays in advance for Federal Excise Taxes and State Excise Taxes prior to receiving product. The Company accrues those taxes on its balance sheet and expenses them per-unit basis as sold.
Inventory balances consisted of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| 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 June 30, 2023 | 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, 2022 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
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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 and potentially issuable shares from the conversions of convertible debentures outstanding that were excluded in dilutive outstanding shares for the six months ended June 30, 2023 and 2022, respectively, due to the anti-dilutive effect these would have on net loss per share. 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.
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 US GAAP, which contemplates 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 unaudited consolidated 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:
| June 30, 2023 | December 31, 2022 | Useful Life (years) | ||||||||
| Furniture and office equipment | $ | $ | ||||||||
| Vehicles | ||||||||||
| Total | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
We
recorded $
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NOTE 5 — RELATED-PARTY TRANSACTIONS
In
2007, we issued a
On
March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $
There
were $
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 price of $. Mr. Hawatmeh held outstanding options to purchase shares of common stock as of June 30, 2023 and December 31, 2022. See Note 13–Stock Options and Warrants.
As
of June 30, 2023 and December 31, 2022, we owed our president a total of $
As
of June 30, 2023 and December 31, 2022, we owed a total of $ and $
During
the six months ended June 30, 2023, we had a net decrease 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:
| June 30, 2023 | December 31, 2022 | |||||||
| Tax liabilities | $ | $ | ||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Other
accrued liabilities as of June 30, 2023 and December 31, 2022, include a non-interest-bearing payable totaling $
| 11 |
Accrued payroll and compensation liabilities consist of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| 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:
| June 30, 2023 | December 31, 2022 | |||||||
| 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
is $
NOTE 9 — CONVERTIBLE DEBENTURES
Convertible debentures consisted of the following:
| June 30, 2023 | December 31, 2022 | |||||||
| 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 June 30, 2023 and December 31, 2022, 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 $
Stock Incentive Plans
During the six months ended June 30, 2023, options previously granted to employees expired. During the same period we granted those same employees new options to purchase shares of common stock. The value of the options is nominal; therefore there is no current impact to the financial statements.
As of June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 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 June 30, 2023, consisted of:
| Exercise Price | Count | Average Exercise | Remaining Life | Exercisable | ||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| Total | ||||||||||||||||||
NOTE 12—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 June 30, 2023 and December 31, 2022. Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations.
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Total assets and liabilities included in discontinued operations were as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| 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 six months ended June 30, 2023 and 2022, were comprised of the following components:
| Six Months ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Other expense: | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Net loss from discontinued operations | $ | ( | ) | $ | ( | ) | ||
NOTE 13 — SUBSEQUENT EVENTS
In accordance with SFAS 165 (ASC 855-10), management has performed an evaluation of subsequent events through the date that the unaudited consolidated financial statements were issued and has determined that it does not have any material subsequent events to disclose in these unaudited consolidated financial statements.
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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, 2023, Compared to the Three Months Ended June 30, 2022
Sales and Cost of Sales
During the three months ended June 30, 2023 and 2022, we had net sales of $458,511 and $526,921, respectively, a decrease of $68,410 or 13%. We had cost of sales of $270,010 and $178,474, respectively, for gross profit of $188,501 and $348,447, 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 three months ended June 30, 2023 and 2022, employee costs were $137,107 and $134,494, respectively, an increase of $2,613 or 1.9%. Selling, general, and administrative expenses were $150,515 and $317,594, respectively, a decrease of $167,079 or 52.6%. 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 June 30, 2023 and 2022, consisted of $186,771 and $175,081 of interest expense and a gain of $80,042 and $2,104 on derivative valuation, respectively. We also recognized other revenue of $1,124 in the current period.
Net Loss
Our net loss from continuing operations for the three months ended June 30, 2023, was $204,726 compared to $276,618 for the three months ended June 30, 2022, a decrease of $71,892. Our net loss decreased in the current period mainly due to the decrease of our SG&A expenses.
Results of Operations for the Six Months Ended June 30, 2023, Compared to the Six Months Ended June 30, 2022
Sales and Cost of Sales
During the six months ended June 30, 2023 and 2022, we had net sales of $671,920 and $1,218,689, respectively, a decrease of $546,769 or 44.9%. We had cost of sales of $355,717 and $410,853, respectively, for gross profit of $316,203 and $807,836, 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 six months ended June 30, 2023 and 2022, employee costs were $273,802 and $267,000, respectively, an increase of $6,802 or 2.5%. Selling, general, and administrative expenses were $289,193 and $693,771, respectively, a decrease of $404,578 or 58.3%. 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 six months ended June 30, 2023 and 2022, consisted of $370,059 and $348,432 of interest expense and a loss of $44,503 and $33,949 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. The increase in other expenses period over period is the result of an increase to our loss on derivative valuation.
Net Loss
Our net loss from continuing operations for the six months ended June 30, 2023, was $647,230 compared to $535,316 for the six months ended June 30, 2022, an increase of $111,914 or 20.9%. Our net loss increased in the current period mainly due the decrease in our gross profit.
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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 June 30, 2023. As of June 30, 2023, we had current assets of $1.5 million and current liabilities of approximately $42 million, resulting in a working capital deficit of approximately $40 million at June 30, 2023.
Operating Activities
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. During the six months ended June 30, 2022, operations generated $101,926 of net cash, comprised of a loss from continuing operations of $535,316, noncash items totaling $95,332 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $541,910.
Investing Activities
During the six months ended June 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 six months ended June 30, 2023, financing activities provided $46,813 of cash, compared to using $100,552 of cash during the six months ended June 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 June 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 June 30, 2023, there is $85,877 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.
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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 June 30, 2023, 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 June 30, 2023, 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 June 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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: August 21, 2023 | By: | /s/ Iehab Hawatmeh |
| Iehab Hawatmeh, President | ||
| Principal Executive and Financial Officer | ||
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