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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

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. 000-49654

 

CirTran Corporation

(Exact name of registrant as specified in its charter)

 

Nevada   68-0121636

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

 

6360 S Pecos Road, Suite 8, Las Vegas, NV 89120

(Address of principal executive offices and zip code)

 

(801) 963-5112

(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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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 ☐
  Non-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 ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 9, 2024, there were 4,945,417 shares of common stock, $0.001 par value, outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

Item   Page
  Part I—Financial Information  
1 Financial Statements (Unaudited) 3
  Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023 (Audited) 3
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023 (unaudited) 4
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2024 and 2023 (unaudited) 5
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (unaudited) 6
  Notes to Unaudited Condensed Consolidated Financial Statements 7
2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
3 Quantitative and Qualitative Disclosures about Market Risk 15
4 Controls and Procedures 15
     
  Part II—Other Information  
6 Exhibits 17
     
  Signatures 18

 

2
 

 

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CIRTRAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   March 31, 2024   December 31, 2023 
   (Unaudited)   (Audited) 
ASSETS          
Current assets:          
Cash  $2,996   $ 
Inventory   858,350    815,612 
Deposits on inventory   22,508    26,983 
Deposits on inventory - related party   216,113    224,411 
Accounts receivable   30,179    21,536 
Other current assets   431,348    441,095 
Total current assets   1,561,494    1,529,637 
Investment in securities at cost   300,000    300,000 
Property and equipment, net of accumulated depreciation   17,697    18,925 
Total assets  $1,879,191   $1,848,562 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable  $640,725   $625,848 
Liabilities for product returns and credits   8,701    8,701 
Short-term advances payable   162,966    172,966 
Short-term advances payable - related parties   21,882    21,882 
Accrued liabilities   2,955,068    2,889,389 
Accrued payroll and compensation expense   5,092,261    5,067,213 
Accrued interest, current portion   5,902,897    5,758,603 
Convertible debenture, current portion, net of discounts   264,284    264,284 
Note payable, current portion   90,000    90,000 
Note payable to stockholders   151,833    151,833 
Derivative liability   1,545,391    1,296,937 
Liabilities from discontinued operations   4,549,336    4,511,075 
Total current liabilities:   21,385,344    20,858,731 
Deferred tax liability   55,946    55,946 
Note payable, net of current portion   632,545    634,636 
Convertible debenture, net of current portion, net of discount   2,102,129    2,077,934 
Total liabilities   24,175,964    23,627,247 
           
Commitments and contingencies        
           
Stockholders’ deficit:          
Common stock, par value $0.001; 100,000,000 shares authorized; 4,945,417 shares issued and outstanding   4,945    4,945 
Additional paid-in capital   37,233,561    37,233,561 
Accumulated deficit   (59,535,279)   (59,017,191)
Total stockholders’ deficit   (22,296,773)   (21,778,685)
           
Total liabilities and stockholders’ deficit  $1,879,191   $1,848,562 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3
 

 

CIRTRAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

         
   For the Three Months Ended March 31, 
   2024   2023 
Net sales  $429,391   $213,409 
Cost of sales   157,897    85,707 
Gross profit   271,494    127,702 
           
Operating expenses          
Employee costs   125,229    136,695 
Selling, general and administrative expenses   192,686    138,678 
Total operating expenses   317,915    275,373 
           
Loss from operations   (46,421)   (147,671)
           
Other income (expense)          
Interest expense   (184,952)   (183,288)
Gain on forgiveness of debt       13,000 
Loss on derivative valuation   (248,454)   (124,545)
Total other expense   (433,406)   (294,833)
           
Net loss from continuing operations   (479,827)   (442,504)
           
Loss from discontinued operations   (38,261)   (37,841)
           
Net loss before income tax   (518,088)   (480,345)
Income tax benefit (expense)        
Net loss  $(518,088)  $(480,345)
           
Net loss from continuing operations per common share, basic and diluted  $(0.10)  $(0.09)
Net loss from discontinued operations per common share, basic and diluted  $(0.01)  $(0.01)
Net loss per common share, basic and diluted  $(0.10)  $(0.10)
Basic and diluted weighted average common shares outstanding   4,945,417    4,945,417 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4
 

 

CIRTRAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023

(Unaudited)

 

                     
   Common Stock   Additional
Paid-in
   Accumulated   Total
stockholders’
 
   Shares   Amount   Capital   Deficit   deficit 
Balance, December 31, 2023   4,945,417   $4,945   $37,233,561   $(59,017,191)  $(21,778,685)
Net income               (518,088)   (518,088)
Balance, March 31, 2024   4,945,417   $4,945   $37,233,561   $(59,535,279)  $(22,296,773)

 

   Common Stock   Additional
Paid-in
   Accumulated   Total
stockholders’
 
   Shares   Amount   Capital   Deficit   deficit 
Balance, December 31, 2022   4,945,417   $4,945   $37,233,561   $(79,305,551)  $(42,067,045)
Net loss               (480,345)   (480,345)
Balance, March 31, 2023   4,945,417   $4,945   $37,233,561   $(79,785,896)  $(42,547,390)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5
 

 

CIRTRAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

         
   For the Three Months Ended March 31, 
   2024   2023 
Cash flows from operating activities          
Net loss  $(518,088)  $(480,345)
Adjustments to reconcile net income to net cash (used) provided by operating activities:          
Loss from discontinued operations   38,261    37,841 
Depreciation expense   1,228    922 
Loss on derivative valuation   248,454    124,545 
Debt discount amortization   24,195    23,302 
Gain on settlement of debt       (13,000)
Changes in operating assets and liabilities:          
Inventory   (42,738)   44,378 
Deposits on inventory   4,475     
Deposits on inventory - related party   8,298    274,479 
Accounts receivable   (8,643)   20,942 
Other current assets   9,747    (11,835)
Accounts payable   14,877    (264,166)
Liabilities for product returns and credits       214,868 
Accrued liabilities   65,679    72,293 
Accrued payroll and compensation   25,048    66,558 
Accrued interest   144,294    85,816 
Net cash provided by operating activities   15,087    196,598 
           
Cash flows from investing activities:        
           
Cash flows from financing activities:          
Repayments of loans payable   (12,091)    
Repayments of related-party loans       (15,788)
Net Cash used by financing activities   (12,091)   (15,788)
           
Net change in cash   2,996    180,810 
Cash, beginning of period       18,081 
Cash, end of period  $2,996   $198,891 
           
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 consolidated financial statements.

 

6
 

 

CIRTRAN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2024

 

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, 2023. In the opinion of our management, all adjustments, including normal recurring adjustments necessary to present fairly our financial position, as of March 31, 2024, and the results of our operations and cash flows for the three 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, 2024.

 

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.

 

Cash Equivalents

 

We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents as of March 31, 2024 and December 31, 2023.

 

7
 

 

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 three months ended March 31, 2024 and 2023, we recognized revenue of $19,515 and $52,570, respectively, related to the performance obligations under product development service agreements with customers. These contracts are long term in nature and revenue is recognized at certain milestone intervals upon our delivery and customer acceptance of work product related to those milestones: namely, product design, packaging, branding display, and prototypes. There were no costs to obtain the contracts identified, and therefore, no asset has been recorded for customer acquisition costs. We have not recognized impairment losses related to the receivables from these contracts during the three months ended March 31, 2024 and 2023.

 

Additionally, we recognized revenues of $409,876 and $160,839 during the three months ended March 31, 2024 and 2023, respectively, related to the delivery of products to our customers. Each delivery is based on the unique contract with the customer, which is a stand-alone contract that we retain the right to accept or reject. Upon acceptance, we oblige delivery of such product to the customer at an agreed-upon place, time, and price. We recognize revenue under the unique contract upon fulfillment of our performance obligations therein, typically limited to the delivery of product.

 

The Company also recognizes revenue from advanced royalty payments per the terms in its Manufacturing and Distribution Agreement with one of its distributors. The royalty to be received is calculated based on 8% of gross sales, with an annual minimum royalty paid upfront per calendar year for the term of the contract. There is a non-refundable $350,000 Minimum Royalty for FY 2023. The Company recognizes the minimum royalty and corresponding expense at the time of receipt.

 

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 March 31, 2024 and December 31, 2023, the Company has not recorded an allowance for doubtful accounts.

 

Investment in Securities

 

Our cost-method investment consists of an investment in a private digital multi-media technology company that totaled $300,000 at March 31, 2024 and December 31, 2023. Because we owned less than 20% of that company’s stock as of each date, and no significant influence or control exists, the investment is accounted for using the cost method. Pursuant to ASC 321, the Company also searched for observable transactions in the investee’s stock.

 

We evaluated the investment for impairment and determined there was none during the periods presented.

 

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.

 

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 $22,508 (non-related-party) and $216,113 (related-party) as of March 31, 2024 and $26,983 (non-related-party) and $224,411 (related-party) as of December 31, 2023.

 

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.

 

8
 

 

Inventory balances consisted of the following:

   March 31, 2024   December 31, 2023 
Finished goods  $817,121   $772,589 
Raw materials   41,229    43,023 
Total  $858,350   $815,612 

 

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
March 31,
2024
   Quoted prices
in active
markets
(Level 1)
   Significant
other
observable
inputs (Level 2)
   Significant
unobservable
inputs(Level 3)
 
Derivative liabilities  $1,545,391   $   $   $1,545,391 

 

   Total Fair
Value at
December 31,
2023
   Quoted prices
in active
markets
(Level 1)
   Significant
other
observable
inputs (Level 2)
   Significant
unobservable
inputs (Level 3)
 
Derivative liabilities  $1,296,937   $   $   $1,296,937 

 

Loss per Share

 

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 approximately 462,334,000 and 179,468,200 potentially issuable shares from the conversions of convertible debentures outstanding that were excluded in dilutive outstanding shares for the three months ended March 31, 2024 and 2023, 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

 

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its Consolidated Financial Statements and assures that there are proper controls in place to ascertain that the Company’s Consolidated Financial Statements properly reflect the change.

 

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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 $19,823,850 as of March 31, 2024, and a net loss from continuing operations of $479,827 for the three months ended March 31, 2024. As of March 31, 2024, we had an accumulated deficit of $59,535,279. These conditions raise substantial doubt about our ability to continue as a going concern.

 

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:

 

   March 31, 2024   December 31, 2023   Useful Life (years)
Furniture and office equipment  $12,212   $12,212   5-10
Vehicles   18,672    18,672   3-7
Total   30,884    30,884    
Less: accumulated depreciation   (13,187)   (11,959)   
Property and equipment, net  $17,697   $18,925    

 

We recorded $1,228 and $922 of depreciation expense during the three months ended March 31, 2024 and 2023.

 

NOTE 5 — RELATED PARTY TRANSACTIONS

 

In 2007, we issued a 10% promissory note to a family member of our president in exchange for $300,000. The note was due on demand after May 2008. There were no repayments made during the periods presented. At March 31, 2024 and December 31, 2023, the principal amount owing on the note was $151,833 and $151,833, respectively. No demand for payment has been made.

 

On March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $315,000 ($105,000 each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the amount received plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum. We made no payments towards the outstanding notes during the periods presented. The principal balance owing on the notes as of March 31, 2024 and December 31, 2023, was $72,466 and $72,466, respectively. No demand for payment has been made.

 

There were $21,882 and $21,882 of short-term advances due to related parties as of March 31, 2024 and December 31, 2023, respectively.

 

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 6,000 shares of our stock each year, with an exercise price of $0.10. Mr. Hawatmeh held outstanding options to purchase 30,000 shares of common stock as of March 31, 2024. See Note 11–Stock Options and Warrants.

 

As of March 31, 2024 and December 31, 2023, we owed our president a total of $433,379 and $433,379, respectively, in unsecured advances. The advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee. The borrowing fees were waived by our president on these loans. These amounts are included in our liabilities from discontinued operations.

 

During the three months ended March 31, 2024, we had a net decrease in deposits with a related-party inventory supplier totaling $8,298. The related party is an entity controlled by our chief executive officer. All transactions were at a 2% markup over the related-party’s cost paid for inventory in arm’s-length transactions. Total inventory purchases from the related party were $251,788 and $837,618 during the periods ended March 31, 2024 and December 31, 2023, respectively.

 

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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:

 

   March 31,
2024
   December 31,
2023
 
         
Tax liabilities  $38,335   $37,228 
Accrued Royalty - Globrands LLC   970,581    1,092,915 
Other   1,946,152    1,759,246 
Total  $2,955,068   $2,889,389 

 

Other accrued liabilities as of March 31, 2024 and December 31, 2023, include a non-interest-bearing payable totaling $45,000 and $45,000, respectively, that is due on demand and customer deposits totaling $1,924,814 and $1,735,109, respectively.

 

Accrued payroll and compensation liabilities consist of the following:

 

   March 31,
2024
   December 31,
2023
 
         
Director fees  $135,000   $135,000 
Bonus expenses   121,858    121,858 
Commissions   2,148    2,148 
Consulting   409,822    438,822 
Administrative payroll   4,423,433    4,369,385 
Total  $5,092,261   $5,067,213 

 

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 $6.6 million to Playboy against Play Beverages and CirTran Beverage Corp., our subsidiary. The court denied our motion for a new trial and awarded Playboy treble patent infringement damages and attorney’s fees. We filed a notice of appeal in July 2017 and again in March 2018. Playboy has initiated collection efforts but has recovered no funds. In September 2018, the appellate court affirmed the judgment of the circuit court. The balance due related to this judgment, has been included in liabilities in discontinued operations. As of December 31, 2023, the Company received legal representation that the judgement can no longer be enforced after seven years, as a result, the Company has recognized a gain from discontinued operations of $18,878,359 of time barred debt previously included in liabilities from discontinued operations.

 

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 $500,000, remain current in our payment of taxes for five years, and forego claiming any net operating losses for the years 2001 through 2015 or until we paid taxes on future profits in an amount equal to the taxes of $1,455,767 waived by the Offer. In June 2013, we entered into a partial installment agreement to pay $768,526 in unpaid 2009 payroll taxes, which required us to pay the IRS 5% of cash deposits. The monthly payments were to continue until the account balances were paid in full or until the collection statute of limitation expired on October 6, 2020. We are currently in communication with the IRS regarding the statute of limitations on this settlement and appropriate next steps. During the year ended December 31, 2023, the Company wrote off $512,520 as time barred debt. The amounts of $5,164 and $5,164 were due as March 31, 2024 and December 31, 2023, respectively.

 

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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 6,000 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 5% of our earnings before interest, taxes, depreciation, and amortization for the applicable quarter; (ii) bonuses equal to 1% of the net purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and (iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of all products, net of returns and allowances. On January 1, 2020, we resumed accruing wages for our chief executive officer. A total of $74,124 and $345,000 was accrued during the periods ended March 31, 2024 and December 31, 2023, respectively.

 

We also have an oral agreement with our other director that requires us to issue options to purchase 2,000 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:

 

   March 31, 2024   December 31, 2023 
         
Note payable to former service provider for past due account payable (current)  $90,000   $90,000 
Note payable for settlement of debt (long-term)   500,000    500,000 
Small Business Administration loan   132,545    134,636 
Total  $722,545   $724,636 

 

There is $379,806 and $366,626 of accrued interest due on these notes as of March 31, 2024 and December 31, 2023, respectively.

 

NOTE 9 — CONVERTIBLE DEBENTURES

 

Convertible debentures consisted of the following:

 

   March 31, 2024   December 31, 2023 
         
Convertible debenture, 5% stated interest rate, secured by all our assets, due on May 30, 2022  $200,000   $200,000 
Convertible debenture, 5% stated interest rate, secured by all our assets, due on February 8, 2022   25,000    25,000 
Convertible debenture, 5% stated interest rate, secured by all our assets, due on May 30, 2022   25,000    25,000 
Convertible debenture, 5% stated interest rate, secured by all our assets, due on December 8, 2022   25,000    25,000 
Convertible debenture, 5% stated interest rate, secured by all our assets, due on April 30, 2027   2,390,528    2,390,528 
Subtotal  $2,665,528   $2,665,528 
Less: discounts   (299,115)   (323,310)
Total  $2,366,413   $2,342,218 
Less: current portion   (264,284)   (264,284)
Long-term portion  $2,102,129   $2,077,934 

 

The convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or the lowest bid price for the 20 trading days prior to conversion.

 

As of March 31, 2024 and December 31, 2023, we had accrued interest on the convertible debentures totaling $1,954,819 and $1,921,590, respectively.

 

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NOTE 10 — DERIVATIVE LIABILITIES

 

As discussed in Note 9—Convertible Debentures, we have entered into five separate agreements to borrow a total of $2,665,528 with the outstanding principal and interest being convertible at the holder’s option into common stock of the company at the lesser of $100 (notes one through four) or $0.10 (note five) or the lowest closing bid price in the prior 20 trading days. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a Monte Carlo simulation as of March 31, 2024, using the following assumptions:

 

Volatility  114.8% - 127.5%
Risk-free rates   4.83% - 4.98%
Stock price  $0.025 
Remaining life   0.25- 3.08 years 

 

The fair values of the derivative instruments are measured each quarter, which resulted in a loss of $248,454 and $124,545 during the three months ended March 31, 2024 and 2023, respectively. As of March 31, 2024 and December 31, 2023, the fair market value of the derivatives aggregated $1,545,391 and $1,296,937, respectively.

 

NOTE 11 — STOCK OPTIONS AND WARRANTS

 

Stock Incentive Plans

 

As of March 31, 2024 and December 31, 2023, we had no unrecognized compensation related to outstanding options that have not yet vested at year-end that would be recognized in subsequent periods.

 

As of March 31, 2024 and December 31, 2023, there were 40,000 options issued and vested with a weighted average exercise price of $0.03 and a weighted average remaining life of 1.68 years. Outstanding options as of March 31, 2024, consisted of:

 

Exercise Price   Count   Average Exercise   Remaining Life   Exercisable 
$0.01    32,000    0.01    2.48    32,000 
$0.10    8,000    0.10    4.75    8,000 
 Total    40,000    0.03    2.94    40,000 

 

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 March 31, 2024 and December 31, 2023. Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations.

 

During the year ended December 31, 2023, the Company received legal representation that the judgement related to Play Beverages, LLC, (Note 7) can no longer be enforced after seven years, as a result, the Company has recognized a gain from discontinued operations of $18,873,932 of time barred debt previously included in liabilities from discontinued operations.

 

Total assets and liabilities included in discontinued operations were as follows:

 

   March 31, 2024   December 31, 2023 
Assets from Discontinued Operations:          
Cash  $   $ 
Total assets from discontinued operations  $   $ 
           
Liabilities from Discontinued Operations:          
Accounts payable  $283,818   $283,818 
Accrued liabilities   58,184    58,184 
Accrued interest   1,674,885    1,636,624 
Accrued payroll and compensation expense   122,864    122,864 
Current maturities of long-term debt   239,085    239,085 
Related-party payable        
Short-term advances payable   2,170,500    2,170,500 
Total liabilities from discontinued operations  $4,549,336   $4,511,075 

 

Net loss from discontinued operations for the three months ended March 31, 2024 and 2023, were comprised of the following components:

 

   2024   2023 
   Three Months ended March 31, 
   2024   2023 
Other expense:          
Interest expense   (38,261)   (37,841)
Net loss from discontinued operations  $(38,261)  $(37,841)

 

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.

 

13
 

 

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 March 31, 2024, Compared to the Three Months Ended March 31, 2023

 

Sales and Cost of Sales

 

During the three months ended March 31, 2024 and 2023, we had net sales of $429,391 and $213,409, respectively, an increase of $215,982 or 101.2%. We had cost of sales of $157,897 and $85,707, respectively, for gross profit of $271,494 and $127,702, respectively. Revenues are derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. The increase in revenue in the current period is due to additional income from the licensing of novelties in an international territory.

 

Operating Expenses

 

During the three months ended March 31, 2024 and 2023, employee costs were $125,229 and $136,695 respectively, a decrease of $11,466 or 8.4%. Employee costs decreased in the current period due to efficiencies based on the current business level.

 

Selling, general, and administrative expenses (“S,G&A”)were $192,686 and $138,678, respectively, an increase of $54,008 or 38.9%. The increase in S,G&A expenses period over period was the result of additional marketing spending to support the brand.

 

Other Expense

 

Total other expense during the three months ended March 31, 2024 was $433,406 compared to $294,833 for the prior period. In the current period we had $184,952 of interest expense and a loss of $248,454 on derivative valuation. In the prior period we had $183,288 of interest expense, a loss of $124,545 on derivative valuation and a gain on forgiveness of debt of $13,000.

 

Net Loss

 

Our net loss from continuing operations for the three months ended March 31, 2024, was $479,827 compared to $442,504 for the three months ended March 31, 2023, an increase of $37,323. Our net loss increased in the current period mainly due to the increase of our other expense.

 

Liquidity and Capital Resources

 

We have had a history of losses from operations, as our expenses have been greater than our revenue. Our accumulated deficit was approximately $59.5 million at March 31, 2024. As of March 31, 2024, we had current assets of $1.6 million and current liabilities of approximately $21 million, resulting in a working capital deficit of approximately $19.4 million at March 31, 2024.

 

Operating Activities

 

During the three months ended March 31, 2024, operations provided $15,087 of net cash, comprised of a loss of $518,088, noncash items totaling $312,138 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $221,037. During the three months ended March 31, 2023, operations generated $196,598 of net cash, comprised of a loss of $480,345, noncash items totaling $173,610 consisting primarily of losses recognized from the changes in fair values of derivative liabilities and debt discount amortization, and changes in working capital totaling $503,333.

 

Investing Activities

 

There were no investing activities during the three months ended March 31, 2024 and 2023.

 

14
 

 

Financing Activities

 

During the three months ended March 31, 2024, financing activities used $12,091 of cash, compared to using $15,788 of cash during the three months ended March 31, 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 $1.9 million as of March 31, 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 March 31, 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.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of March 31, 2024, 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 March 31, 2024, 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.

 

15
 

 

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 March 31, 2024, 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: May 15, 2024 By: /s/ Iehab Hawatmeh
    Iehab Hawatmeh, President
    Principal Executive and Financial Officer

 

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