The following discussion should be read in conjunction with our condensed
consolidated unaudited financial statements and notes to our unaudited financial
statements included elsewhere in this report. This discussion contains
forward-looking statements that involve risks and uncertainties. Actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors discussed elsewhere in this report.
Overview
Based on our diversified expertise in manufacturing, marketing, distribution,
and technology services in a wide variety of consumer products, including
tobacco products, medical devices, and beverages, around the world, we have an
innovative and consumer-focused approach to brand portfolio management, resting
on a strong understanding of consumers domestically, and we have established a
footprint in more than 50 key, international markets.
During 2021 and into 2022, we continued under our 2019 five-year manufacturing
and distribution agreement with an unrelated party to manufacture, distribute,
and sell condoms, electronic tobacco products, cigars, energy drinks, water
beverages, and related merchandise, all using the HUSTLER® brand name.
Results of Operations for the Three Months Ended September 30, 2022, Compared to
the Three Months Ended September 30, 2021
Sales and Cost of Sales
During the three months ended September 30, 2022 and 2021, we had net sales of
$477,018 and $961,474, respectively, a decrease of $484,456 or 50.4%. We had
cost of sales of $170,108 and $339,076, respectively, for gross profit of
$306,910 and $622,398, respectively. Revenues are derived from the design,
manufacture, and delivery of certain licensed products in accordance with our
GloBrands-HUSTLER® distribution agreement. The decrease in revenue in the
current period is due to a decrease in the sale of Vape products in California
due to their ban on flavored tobacco.
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Operating Expenses
During the three months ended September 30, 2022 and 2021, employee costs were
$139,751 and $139,520, respectively, an increase of only $231 or 0.2%. Selling,
general, and administrative expenses were $293,891 and $514,358, respectively, a
decrease of $220,467 or 42.9%. The decrease in operating expenses period over
period was the result of selling certain tobacco products in states with lower
or no excise tax.
Other Expense
Other expenses during the three months ended September 30, 2022 and 2021,
consisted of $179,342 and $172,400 of interest expense and a loss of $1,156 and
$62,086 on derivative valuation, respectively. The increase in other expenses
period over period is the result of a decrease to our loss on derivative
valuation combined with increased interest expense.
Net Loss
Our net loss from continuing operations for the three months ended September 30,
2022, was $307,230 compared to $265,966 for the three months ended September 30,
2021, an increase of $41,264.
Results of Operations for the Nine Months Ended September 30, 2022, Compared to
the Nine Months Ended September 30, 2021
Sales and Cost of Sales
During the nine months ended September 30, 2022 and 2021, we had net sales of
$1,695,707 and $2,281,529, respectively, a decrease of $585,822 or 25.7%. We had
cost of sales of $580,961 and $803,135, respectively, for gross profit of
$1,114,746 and $1,478,394, respectively. Revenues are derived from the design,
manufacture, and delivery of certain licensed products in accordance with our
GloBrands-HUSTLER® distribution agreement. The decrease in revenue in the
current period is due to a decrease in the sale of Vape products in California
due to their ban on flavored tobacco.
Operating Expenses
During the nine months ended September 30, 2022 and 2021, employee costs were
$406,751 and $408,485, respectively, a decrease of only $1,734 or 0.4%. Selling,
general, and administrative expenses were $987,662 and $1,165,870, respectively,
a decrease of $178,208 or 15.3%. The decrease in operating expenses period over
period is the result of substantially increased activities attributable to the
development of products under the HUSTLER® brand name and selling certain
tobacco products in states with lower or no excise tax in the first quarter.
Other Expense
Other expenses during the nine months ended September 30, 2022 and 2021,
consisted of $527,774 and $507,614 of interest expense and a loss of $35,105 and
$176,746 on derivative valuation, respectively. We also had a $12,917 gain on
forgiveness of debt in the prior period. The decrease in other expenses period
over period is the result of a decrease to our loss on derivative valuation
combined with increased interest expense.
Our net loss from continuing operations for the nine months ended September 30,
2022, was $842,546 compared to $767,404 for the nine months ended September 30,
2021, an increase of $75,142.
Liquidity and Capital Resources
We have had a history of losses from operations, as our expenses have been
greater than our revenue. Our accumulated deficit was approximately $78.9
million at September 30, 2022. As of September 30, 2022, we had current assets
of $1.4 million and current liabilities of approximately $41 million, resulting
in a working capital deficit of approximately $39.6 million at September 30,
2022.
Operating Activities
During the nine months ended September 30, 2022, operations generated $168,030
of net cash, comprised of a loss from continuing operations of $931,863, noncash
items totaling $243,194 consisting primarily of losses recognized from the
changes in fair values of derivative liabilities and debt discount amortization,
and changes in working capital totaling $971,483. During the nine months ended
September 30, 2021, operations generated $152,353 of net cash, comprised of a
loss from continuing operations of $767,404, noncash items totaling $15,093
consisting primarily of losses recognized from the changes in fair values of
derivative liabilities and debt discount amortization, repayment expenses paid
by related parties on our behalf of $268,924, and changes in working capital
totaling $934,850.
Financing Activities
During the nine months ended September 30, 2022, financing activities used
$132,953 of cash, compared to using $214,421 of cash during the nine months
ended September 30, 2021.
Our Capital Resources and Anticipated Requirements
Our monthly operating costs are approximately $35,000 per month, excluding
approximately $50,000 of accruing interest expense and capital expenditures. We
continue to focus on generating revenue and reducing our monthly business
expenses through cost reductions and operational streamlining. We have only
recently begun to generate enough cash to sustain our day-to-day operations, and
we expect to access external capital resources in the future to fund any new
projects we may undertake. We cannot assure that we will be successful in
obtaining such capital.
If we seek infusions of capital from investors, it is unlikely that we will be
able to obtain additional debt financing. If we did incur additional debt, we
would be required to devote additional cash flow to servicing the debt and
securing the debt with assets.
Our issuance of additional shares for equity or for conversion of debt could
dilute the value of our common stock and existing stockholders' positions.
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Convertible Debentures and Note Payable
We currently have an outstanding amended, restated, and consolidated secured
convertible debenture with Tekfine, LLC, an unrelated entity, with a maturity
date of April 30, 2027, to the extent not previously converted. The amended
debenture had a total outstanding principal balance of $2.4 million, with
accrued interest of $1.7 million as of September 30, 2022. We also have four
additional convertible debentures with Tekfine with maturity dates ranging from
December 8, 2022, until December 30, 2022, totaling $275,000, unless earlier
converted. The convertible debentures and accrued interest are convertible into
shares of our common stock at the lower of $100 or $0.10 (depending on the
instrument) or the lowest bid price for the 20 trading days prior to conversion.
During the nine months ended September 30, 2022, we made repayments to related
parties of $139,883 and had other noncash reductions of $233,584. There were
$21,882 and $21,882 of short-term advances due to related parties as of
September 30, 2022, and December 31, 2021, respectively. The advances are due on
demand and included in current liabilities. No demand for payment has been made.
Going Concern
These interim unaudited financial statements have been prepared on the going
concern basis, which assumes that adequate sources of financing will be obtained
as required and that our assets will be realized and liabilities settled in the
ordinary course of business. Accordingly, the interim unaudited financial
statements do not include any adjustments related to the recoverability of
assets and classification of assets and liabilities that might be necessary
should we not be unable to continue as a going concern.
Critical Accounting Policies
We have identified the policies outlined below as critical to our business
operations and an understanding of our results of operations. Refer to Note 2 -
Summary of Significant Accounting Policies for discussion.
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