UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For
the fiscal year ended | |
| or | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from _______ to _____ |
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
(Address of principal executive offices, including zip code)
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | None | None |
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to the Section 13 or Section 15(d) of the Exchange Act. ☐
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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Exchange Act
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☒
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. ☐
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by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
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public accounting firm that prepared or issued its audit report.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
State
the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter. As of June 30, 2021, the aggregate market value of voting common equity held by nonaffiliates
was $
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of April 14, 2022, we had shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements about the future, sometimes referred to as “forward-looking” statements. Forward-looking statements are typically identified by use of the words “believe,” “may,” “could,” “should,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “intend,” and similar words and expressions. Statements that describe our future strategic goals, plans, objectives, and predictions are also forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.
Readers of this report are cautioned that any forward-looking statements, including those regarding us or our management’s current beliefs, expectations, anticipations, estimations, projections, strategies, proposals, plans, or intentions, are not guarantees of future performance or results of events and involve risks and uncertainties, such as:
| ● | Russia’s recent military invasion of Ukraine has caused significant international political and economic disruption that may adversely affect our operations. | |
| ● | The auditors’ report for our most recent fiscal years contains explanatory paragraphs about our ability to continue as a going concern. | |
| ● | The ongoing COVID-19 pandemic is adversely affecting, and will continue to adversely affect, our manufacturing, shipping, marketing, and distribution of HUSTLER®-branded products. | |
| ● | We have new operations that began generating revenues in 2020, after suffering severe operating and legal hurdles in 2016 that forced us to significantly curtail operations. | |
| ● | Our renewed operations have faced the usual risks of beginning a new business, including establishing reliable product sources, new supply and distribution chains, sales, management capabilities, and related requirements, all of which have been exacerbated by a global pandemic. | |
| ● | Our new business will be dependent on maintaining in good standing our manufacturing and distribution agreement with GloBrands and its license agreement with the Flint/Hustler organization to use the HUSTLER® brand name. | |
| ● | We cannot assure that our efforts to identify and commercialize new products for manufacture and distribution will be successful or generate revenue. | |
| ● | Any sizable increase in products being developed, manufactured, and distributed will require skilled management of growth. | |
| ● | All our assets are encumbered to secure the payment of indebtedness convertible to common stock, and if the indebtedness is not converted before April 2027, our default could result in the loss of all our assets. | |
| ● | Our balance sheet and stockholders’ deficit continue to include liabilities accrued before 2013 and an outstanding judgment of $17.2 million owed by our subsidiary, whose operations were discontinued in 2016, but which we still report in accordance with generally accepted accounting principles. | |
| ● | We will require substantial amounts of additional capital from external sources. | |
| ● | Penny stock regulations impose certain restrictions on resales of our securities, which may cause an investor to lose some or all of its investment. | |
| ● | Risk factors, such as those set forth under “Management’s Discussion and Analysis of Analysis of Financial Condition and Results of Operation” and other factors that are not currently known to us, may emerge from time to time. |
The forward-looking statements in this report are based on present circumstances and on our predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences from those we now assume or anticipate. Actual events or results may differ materially from those discussed in the forward-looking statements because of various factors, including the risk factors discussed in this report. These cautionary statements are intended to be applicable to all related forward-looking statements wherever they appear in this report. The forward-looking statements included are made only as of the date of this report.
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PART I
ITEM 1. BUSINESS
Introduction
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.
In early 2020, we completed phase one and two of our development of several HUSTLER®-branded products, which enabled us to generate revenue of about $2.9 million during the year ended December 31, 2021, and about $1.7 million during the year ended December 31, 2020. Our revenue-generating activities capitalized on our 2019 efforts to explore new product opportunities. In late 2019, we entered a 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.
References to “us,” “we,” “our,” and correlative terms refer to CirTran Corporation and our three subsidiaries, LBC Products, Inc., CirTran Products Corp., and CirTran - Asia, Inc., through which we conduct our activities.
Principal Activities
HUSTLER®-branded Products
In 2020, we completed phase one and two of our development of several HUSTLER®-branded products and launched our efforts to manufacture, distribute, and sell condoms, electronic cigarettes, electronic cigars, cigars, hookahs, hookah tobacco, energy drinks, water beverages, and related merchandise, all using the HUSTLER® trademark. We conduct these activities through our wholly owned subsidiary, LBC Products, Inc. (“LBC”), under a December 30, 2019, Exclusive Manufacturing and Distribution Agreement with GloBrands, LLC (“GloBrands). GloBrands is an unaffiliated licensee to market certain products bearing the HUSTLER® trademark.
The Flynt/HUSTLER® organization, a privately held 45-year-old global empire founded by Larry Flynt, operates under the HUSTLER® brand, including Larry Flynt’s HUSTLER® Clubs in 14 locations worldwide, HUSTLER® Hollywood adult retail stores in 39 locations, the luxurious HUSTLER® Casino and Larry Flynt’s Lucky Lady Casino in California, broadcasting outlets serving over 55 countries, and DVD distribution. Larry Flynt’s HUSTLER® Club, located at the south end of The Las Vegas Strip, consists of an approximately 70,000-square-foot gentlemen’s club above a similarly sized retail store that sells erotic clothing, toys, and associated merchandise. Our HUSTLER®-branded products are also distributed in outlets operated by HUSTLER®’s affiliated Deja Vu organization, which operates approximately 200 gentlemen’s clubs and adjacent adult retail stores in major metropolitan cities across the United States and several foreign countries, including the United Kingdom, Australia, France, Canada, and Mexico.
In undertaking this new product manufacturing and distribution opportunity, we have taken advantage of our distribution and manufacturing relationships established in several global locations during the last 20 years.
We continue our efforts to:
| ● | develop product manufacturing relationships with various foreign and domestic suppliers, including: | ||
| ◌ | obtaining, sometimes at our cost and for our exclusive benefit, tobacco import regulatory licenses; | ||
| ◌ | designing product logos and labeling; | ||
| ◌ | obtaining regulatory approval for our HUSTLER®-brand product labeling where required; | ||
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| ◌ | securing, at our cost and for our exclusive benefit, necessary FDA 510(k) approval for condom manufacturing; | ||
| ◌ | developing and refining regular and sugar-free energy drink and water assorted flavorings and formulations; | ||
| ● | create samples, wholesale and point-of-sale displays, catalogs, and related merchandising materials; | ||
| ● | develop digital and hard copy media support, website, product spokesperson content, direct television commercials, print, and miscellaneous media; | ||
| ● | establish, through our marketing and distribution relationships, distribution and delivery channels, inventory management, and related logistics; | ||
| ● | lease Las Vegas facilities to house our offices, showroom, and warehouse; | ||
| ● | assemble a team of contract consultants and support staff to expand into full operations when our business development progresses; and | ||
| ● | design data gathering, reporting, and analytical systems to support product and market development and refinement to respond to changing dynamics. |
Our GloBrands Manufacturing and Distribution Agreement
Our December 2019 Exclusive Manufacturing and Distribution Agreement with GloBrands grants to us the exclusive right to manufacture, distribute, and sell specified products, including the authority to deal directly with distribution chain participants and to collect all product payments. We are authorized to retain from the collected sales proceeds an amount equal to 120% of our cost of goods sold, plus 10% of gross sales of the covered products. GloBrands reimburses us 105% of certain of our media placement expenses. Our GloBrands’ agreement term extends through November 30, 2024, subject to earlier termination by either party following 60 days’ notice of uncured material default.
Our agreement with GloBrands is subject in all respects to its rights as licensee under its licensing agreements with the Flynt/HUSTLER® organization to use the HUSTLER® brand name. The Flynt/HUSTLER® organization has approved our manufacturing and distribution arrangement. GloBrands is obligated to fully and timely perform and observe all terms, covenants, and conditions of the three underlying licenses between it and the Flynt/Hustler organization, including the payment of required minimum and actual royalties to the Flynt/HUSTLER® organization. Further, GloBrands cannot amend the license agreements or waive or release any material right under the underlying Flynt/HUSTLER® licenses. Under the Exclusive Manufacturing and Distribution Agreement, we transmit royalty payments on GloBrands’ behalf directly to the Flynt/HUSTLER® organization.
We have a limited license to use the HUSTLER® brand name for the exclusive purposes of fulfilling our obligations under the Exclusive Manufacturing and Distribution Agreement.
GloBrands’ License to Use the HUSTLER® Brand Name
Our Exclusive Manufacturing and Distribution Agreement with GloBrands implements its three separate product licenses with the Flynt/HUSTLER organization covering three branded products or product groups (condoms, energy drinks and waters, and natural leaf small cigars and premium cigars, electronic cigarettes/cigars, hookahs, and hookah tobacco), with minimum initial term guaranteed payments. The guaranteed payments are a prepayment of, and are applied to, actual royalties of the gross sales price of products, less freight and returns. The licenses authorize worldwide product distribution through mass retail, drug stores, supermarkets, club stores, direct response, pharmacies casinos/nightclubs, convenience stores, internet sales via licensee’s websites, and miscellaneous other outlets. Each license is automatically renewable for an additional five-year term, subject to adjustment to the amount of the guaranteed payments. All manufacturing, labeling, and marketing materials, samples, and representative products are subject to the prior approval of the Flynt/HUSTLER® organization.
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Each license is terminable by the Flynt/HUSTLER® organization if any material default by GloBrands is not cured within 60 days after notice (10 days in the case of nonpayment). We are not entitled to receive a copy of any notice of default.
Business Approach
Our GloBrands-HUSTLER® current activities reflect our commitment and ability to assist our clients in developing their licensed brands and to provide a range of products in various categories for markets globally. We can provide complete product development, manufacturing, and distribution services for a wide range of business sectors. From first concept to design, engineering, prototyping, manufacturing, packaging, marketing, inventory control, distribution, shipping, warranty fulfillment, and customer service.
Consumer Product Commercialization—Contract Marketing
In addition to current activities under our GloBrands-HUSTLER® Manufacturing and Distribution Agreement, we are seeking to commercialize one or more consumer products. We identify what we believe to be the need for a product or other demand and then seek a product that may be distributed to address that demand. When we identify a need, but find no suitable available product, we may design our own product for commercialization.
We pursue contract marketing relationships principally in the domestic consumer products markets, such as home and garden, kitchen, health and beauty, toys, and licensed merchandise for television, sports, and other entertainment properties. If we deem it suitable, we may obtain rights from the product owner to manufacture and market a particular product, generally in consideration of the payment of a royalty, sometimes accompanied with an initial fee. Frequently, owners of undeveloped products or product concepts are seeking branding, marketing, manufacturing, order fulfillment, and distribution assistance.
Our commercialization efforts include developing product packaging, branding the product, arranging third-party manufacturing, establishing distribution channels, and arranging order fulfillment. We anticipate that these activities will generally be undertaken by third parties under contract. In some cases, we may brand a product under a license to use a third-party’s recognized name, as we did in the case of the discontinued Playboy-branded energy drink; seek an endorsement from a publicly recognized celebrity, sports figure, or other person; or obtain the rights to use the image, likeness, or logo of a product or a person, such as a well-known celebrity. Licensed merchandise is then sold and marketed in the entertainment and sports franchise industries. We anticipate that these products will be introduced into the market under either one uniform brand name or separate trademarked names that we originate and own or acquire by license.
The contract-manufacturing industry specializes in providing the program management, technical and administrative support, and manufacturing expertise required to take products from the early design and prototype stages through volume production and distribution of a quality product on time and at a competitive cost. This full range of services gives the customer an opportunity to avoid large capital investments in plant, inventory, equipment, and staffing, so that instead, it can concentrate on innovation, design, and marketing. By using our contract-manufacturing services, customers have the ability to improve the return on their investment with greater flexibility in responding to market demands and exploiting new market opportunities. Our efforts will be led by our current chief executive officer and others that we may hire as employees or engage as independent contractors.
In previous years, we found that customers increasingly required contract manufacturers to provide complete turn-key manufacturing and material handling services, rather than working on a consignment basis in which the customer supplies all materials, and the contract manufacturer supplies only labor. Turn-key contracts involve design, manufacturing and engineering support, procurement of all materials, and sophisticated in-circuit and functional testing and distribution. The manufacturing partnership between customers and contract manufacturers involves an increased use of “just-in-time” inventory management techniques that minimize the customer’s investment in component inventories, personnel, and related facilities, thereby reducing its costs.
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Based on the trends we have observed in the contract-manufacturing industry, we believe we will benefit from the increased market acceptance of, and reliance upon, the use of manufacturing specialists by many original equipment manufacturers, or OEMs, marketing firms, distributors, and national retailers. We believe the trend towards outsourcing manufacturing will continue. OEMs use manufacturing specialists for many reasons, including reducing the time it takes to bring new products to market, reducing the initial investment required, accessing leading manufacturing technology, gaining the ability to better focus resources in other value-added areas, and improving inventory management and purchasing power. An important element of our strategy is to establish partnerships with major and emerging OEM leaders in diverse segments across our target industries. Due to the costs inherent in supporting customer relationships, we focus on customers with which the opportunity exists to develop long-term business relationships. Our goal is to provide our customers with total manufacturing solutions through third-party providers for both new and more mature products, as well as across product generations—an idea we call “Concept to Consumer.”
We have also previously designed, engineered, manufactured, and supplied international electronic consumer products and general merchandise for various marketers, distributors, and retailers selling overseas. We have provided manufacturing services to the direct-response and retail consumer markets. Our experience and expertise enable us to enter a project at various phases: engineering and design; product development and prototyping; tooling; and high-volume manufacturing. Our contacts with Asian suppliers have helped us to maintain our status as an international contract manufacturer for multiple products in a wide variety of industries, which will allow us to target larger-scale contracts.
We have developed markets for several product lines, including medical devices, beverages, tobacco products, fitness and exercise products, household and kitchen products and appliances, and health and beauty aids, some of which are manufactured in China. We anticipate that offshore contract manufacturing will play an increased role moving forward as resources become available to us.
Sales and Marketing
We review opportunities to identify products that we may market through current sales channels. We also seek new paths to deliver products and services directly to end users and are pursuing strategic and reciprocal relationships with retail distribution firms whereby they would act as our retail distribution arm and we would act as their manufacturing arm, with each party giving the other priority and first opportunity to work on the other’s products.
We believe there may be a significant marketing advantage related to our development and introduction of the suite of products under the HUSTLER® brand that identifies our products and outweighs related costs.
Our contacts in Central America, Thailand, Vietnam, China, and other Asian countries may allow us to increase our manufacturing capacity and output with minimal capital investment required. By using various subcontractors, we may leverage our upfront payments for inventories and tooling to control costs and receive benefits from economies of scale in Asian manufacturing facilities.
Typically, we may be required to prepay a portion of the purchase order price for materials. In exchange for financial commitments, we may receive dedicated manufacturing responsiveness and eliminate the costly expense associated with capitalizing completely proprietary facilities. For example, we previously expanded our manufacturing capabilities for our beverage division outside the United States to accommodate international customers by contracting with manufacturers in Hungary, The Netherlands, South Africa, and India. This is also the case moving forward with the current branded products manufactured and distributed for GloBrands.
During a typical contract manufacturing sales process, a customer provides us with specifications for the product it wants, and we develop a bid price for manufacturing a minimum quantity that includes manufacture engineering, parts, labor, testing, and shipping. If the bid is accepted, the customer is required to purchase an agreed minimum quantity, and additional product is sold through purchase orders issued under the original contract. Special engineering services are provided at either an hourly rate or a fixed contract price for a specified task.
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Competition
As we seek to develop and introduce new private label or similarly branded proprietary products, we may be dependent on our ability to acquire licensing rights with established, broadly recognized brand names, which are typically owned by large, international firms that carefully guard their name’s integrity and reputation. We have little market position or operating history to support our efforts to develop exclusive marketing relationships. On the contrary, we may be adversely affected by the history of our relationship with Playboy Enterprises, Inc., in distributing its private label Playboy nonalcoholic energy drink.
Competition in our targeted markets is based on manufacturing technology, merchandise quality, responsiveness, the provision of value-added services, and price. To be competitive, we must provide technologically advanced manufacturing services, maintain quality levels, offer flexible delivery schedules, and deliver finished products on a reliable basis and for a favorable price.
The manufacturing services industry is large and diverse and serviced by many companies, including several that have achieved significant market share. We will compete with different companies depending on the type of service or geographic area. Certain of our competitors may have greater manufacturing, financial, research and development, and marketing resources than we have.
We will also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally.
Regulation
We or the products we sell are subject to typical federal, state, and local regulations and laws governing the operations of manufacturing facilities, including environmental disposal, storage, and discharge regulations and laws; employee safety laws and regulations; and labor practices laws and regulations. We and the firms that manufacture the products that we market and distribute typically require compliance with applicable good manufacturing procedures, including FDA 510(k) certification for medical devices such as condoms. We coordinate those efforts and, when we bear the related costs, hold the exclusive rights under those regulatory clearances. We are primarily responsible for complying with importing and interstate shipping licenses, registrations, reporting, and related excise tax payments for tobacco products we handle.
We generally are not required under current laws and regulations to obtain or maintain any specialized or agency-specific other licenses, permits, or authorizations to conduct our manufacturing services, but we must obtain licenses to sell tobacco products in all states. We believe we are in substantial compliance with all relevant regulations applicable to our business and operations. All international sales permits are the responsibility of the local distributors, which are required to obtain all local licenses and permits.
Employees
As of December 31, 2021, we had three full-time employees, including our officers and directors, and tweny-three part-time contract workers. We now rely on part-time and contract workers, independent contractors, and consultants to meet our needs while minimizing fixed overhead. We expect to continue to rely on this strategy in the future as our increasing activities required more personnel.
ITEM 1A. RISK FACTORS
In addition to the negative implications of all information and financial data included in or referred to directly in this report, you should consider the following risk factors. This report contains forward-looking statements and information concerning us, our plans, and other future events. Those statements should be read together with the discussion of risk factors set forth below, because those risk factors could cause actual results to differ materially from such forward-looking statements.
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Russia’s recent military intervention in Ukraine and the international community’s response have created substantial political and economic disruption, uncertainty, and risk.
Russia’s military intervention in Ukraine in late February 2022, Ukraine’s widespread resistance, and the NATO-led and United States coordinated economic, financial, communications, and other sanctions imposed by other countries have created significant political and economic world uncertainty. There is significant risk of expanded military confrontation between Russia and other countries, possibly including the United States, Current and likely additional international sanctions against Russia may contribute to higher costs, particularly for petroleum-based products. These and related actions, responses, and consequences that cannot now be predicted or controlled may contribute to worldwide economic reversals. In these circumstances, our efforts to distribute branded products may be delayed or otherwise negatively impacted.
We may be deemed to be insolvent and may face liquidation.
We may be deemed to be insolvent. We are unable to meet all our obligations as they accrue, and the aggregate amount of our liabilities exceeds the reported value of our assets. Creditors may have the right to initiate involuntary bankruptcy proceedings against us to seek our liquidation. We cannot assure that we would be successful in avoiding liquidation by converting such liquidation proceedings to a Chapter 11 reorganization, which would permit us to develop and propose, for creditor and court approval, a reorganization plan that would enable us to proceed. Even if we were to propose a reorganization plan, any reorganization plan would likely require that we obtain new post-petition funding, which may be unavailable. Further, in the event of bankruptcy, our secured creditors that have encumbrances on all our assets would likely execute and take all our assets, which may leave nothing for other creditors or our stockholders.
The auditors’ report for our most recent fiscal year, like previous years, contains an explanatory paragraph about our ability to continue as a going concern.
We had a net loss from continuing operations of approximately $838,500 during the year ended December 31, 2021, and net income from continuing operations of about $453,000 during the year ended December 31, 2020. We had net income from discontinued operations of approximately $965,000 and $80,000 from discontinued operations in 2021 and 2020, respectively. We had an accumulated deficit of approximately $40.6 million as of December 31, 2021. During the year ended December 31, 2021, operations provided net cash of approximately $345,000. We had current liabilities of approximately $39.5 million and current assets of about $1.1 million, for a working capital deficit of approximately $38.4 million as of December 31, 2021. The report from our auditors on our consolidated financial statements for the years ended December 31, 2021 and 2020, as for several previous years, contains explanatory paragraphs 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 described in the following paragraphs and eventually attain profitable operations.
Continued elevated levels of inflation could adversely impact our business and results of operations.
The United States has recently experienced elevated levels of inflation in prices for petroleum products and most other goods and services. Continued inflation could have complex effects on our business and results of operations, some of which could be materially adverse and could also increase volatility and uncertainty in the business environment. In addition, governmental policy responses to the current inflation environment could further affect our business, such as changes to monetary and fiscal policy. The duration and severity of the current inflationary period, and the governmental responses thereto, are unknown and cannot be estimated with precision.
The impact of the COVID-19 pandemic on our business, financial position, and results of operations continues to be unpredictable and will likely continue to have negative effects on our business and results of operations.
The impacts of the COVID-19 pandemic continue to be highly unpredictable and volatile in light of the potential for a resurgence of infection rates or as a result of future mutations, variants, or related strains of the virus. Recent years have demonstrated the widespread and varying impacts of the pandemic on certain business operations, costs of doing business, supply chain operations, the extent and duration of measures to try to contain the virus (such as travel bans and restrictions, quarantines, shelter-in-place orders, business and government shutdowns, and other restrictions on retailers), our ability to predict future performance, and our financial performance, among other things.
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The duration and magnitude of the COVID-19 pandemic impacts on our business operations and overall financial performance is unknown at this time and will depend on numerous circumstances outside our control or the ability of anyone to predict accurately. The secondary and tertiary unpredictable and continuing economic effects on our business and on the worldwide economy could be ruinous. The probability of reoccurrences of virus outbreaks is high and may continue for many months, likely resulting in further government responses and mandates; social distancing; restrictions on travel; and other widespread measures. We cannot predict the impact of recently introduced vaccines, the rate of inoculations, and whether so-called herd immunity will be achieved to reduce adverse impacts. We cannot predict the effect of these circumstances on us and our vendors, customers, and community; the global economy and political conditions; and the health of our employees, contractors, and their families; all of which will affect how quickly and to what extent normal economic and operating activities can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse effect on our business because of its global economic impact on inflation, national debt, consumer trends, supply chain disruptions, and employment culture. All of these circumstances likely exert similar hardships on those with which we deal, such as vendors, shippers, distributors, and customers. As a result, we will need to continue to adjust our business and expenditures to correlate our activities with business exigencies. These adjustments may include restrictions of executive and employee travel, hiring freezes or delays, and limitations on marketing and other expenditures, the ultimate financial impact and duration of which cannot now be predicted and may well exceed our expectations or our ability to cope with them.
Termination or interruption of our supply relationships and increases in labor costs and the prices of our raw materials will negatively impact our business or financial condition.
The availability and price of materials from which our products are manufactured are affected by a variety of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel-related transportation bottlenecks and costs, competition, and political uncertainty around the world. We may be unable to pass cost increases from our manufacturers on to our customers. In addition, transportation costs and delivery delays have generally increased and may continue to increase. Sometimes cost increases are too immediate for us to be able to pass on to our customers.
Our efforts to market a group of products under the HUSTLER® brand name face all the risks and uncertainties of a developing business.
Manufacturing and marketing products under the HUSTLER® brand name will be subject to all the risks and uncertainties of a developing business, including the difficulties of:
| ● | developing a new product that can be manufactured, marketed, and distributed successfully; | |
| ● | obtaining the benefit of applicable licenses, registrations, and other required governmental approvals; | |
| ● | operating a cost-effective business that generates revenue sufficiently over the costs of start-up and other related expenses; | |
| ● | competing effectively in an industry dominated by larger, more experienced firms with well-established markets and greater management and financial resources; | |
| ● | managing operations and growth. |
We will be subject to myriad other risks and uncertainties, over which we have no control or material influence.
Our business will be dependent on GloBrands maintaining the license to use the HUSTLER® brand name.
Our business is fully dependent on GloBrands’ ability to preserve its rights to use the HUSTLER® brand name. We cannot assure that GloBrands will be able to comply with all the terms, covenants, or conditions of the governing license agreement or that GloBrands, the counterparty to our manufacturing agreement, will meet all its obligations to us or HUSTLER, through which GloBrands obtained its rights. Under its licenses with the Flynt/HUSTLER® organization, GloBrands has substantial minimum royalty payments due the Flynt/HUSTLER® organization under each of the three product licenses, and we have no rights to monitor whether GloBrands is making those payments as required or to cure any GloBrands defaults. Further, we cannot assure that HUSTLER® will fulfill its obligations under its agreements to GloBrands. Breaches by any party to the agreements under which we derive our rights to use the HUSTLER® brand name will place the entire business we are currently launching in peril and force us to terminate operations.
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All our assets are encumbered to secure the payment of secured convertible debentures that require payments if not previously converted to common stock.
We encumbered all our assets to secure the payment of indebtedness and accrued interest due on secured convertible debentures, of which approximately $2.4 million is required to be repaid by April 2027, if not previously converted. In the event of default in repayment, our secured creditor could exercise its remedies, including the execution on all our assets, which would result in the termination of our activities. We cannot assure that the secured creditor will continue to refrain from aggressive collection efforts. The existence of these secured obligations will likely significantly impair our ability to obtain capital from external sources.
We will require substantial amounts of additional capital from external sources.
We may seek required funds through the sale of equity or other securities. Our ability to obtain financing on acceptable terms will depend on many factors, including the condition of the securities markets generally and for companies like us at the time of the offering; our business, financial condition, and prospects at the time of the proposed offering; our ability to identify and reach a satisfactory arrangement with prospective securities sales and investment groups; and various other factors. We cannot assure that we will be able to obtain financing on terms favorable to us or at all. The issuance of additional equity securities may dilute the interest of our existing stockholders or may subordinate their rights to the superior rights of new investors.
We may also seek additional capital through strategic alliances, joint ventures, or other collaborative arrangements. Any such relationships may dilute our interest in any specific project and decrease the amount of revenue that we may receive from the project. We cannot assure that we will be able to negotiate any strategic investment or obtain required additional funds on acceptable terms, if at all. In addition, our cash requirements may vary materially from those now planned because of the results of future marketing and manufacturing agreements; results of product testing; potential relationships with our strategic or collaborative partners; changes in the focus and direction of our research and development programs; competition and technological advances; issues related to patent or other protection for proprietary technologies; and other factors.
If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate our planned efforts; obtain funds through arrangements with strategic or collaborative partners that may require us to relinquish rights to certain of our technologies, product candidates, or products that we would otherwise seek to develop or commercialize ourselves; or sublicense our rights to such products on terms that are less favorable to us than might otherwise be available.
Our financial statements report liabilities incurred before 2013 that may impair our ability to obtain capital.
Our balance sheet and stockholders’ deficit continue to include liabilities accrued prior to 2013 by our subsidiary, whose operations were discontinued in 2016, but which we still report on our financial statements in accordance with generally accepted accounting principles (“GAAP”). These liabilities include a judgment with a balance of $17.2 million as of December 31, 2021, awarded to Playboy Enterprises, Inc., which is barred by court order from seeking collection against us, the parent, and amounts due to assorted trade creditors and professional firms for services rendered to other subsidiaries prior to 2013, which we believe are barred by the applicable statutes of limitations. The resulting large, past-due liabilities may impair our ability to obtain additional capital or decrease the market in which our common stock is traded.
Any substantial increase in business activities will require skilled management of growth.
If we have the opportunity to commercialize new products, our success will depend on our ability to manage continued growth, including integrating new employees, independent contractors, and consultants into an effective management and technical team; formulating strategic alliances, joint ventures, or other collaborative arrangements with third parties; commercializing and marketing proposed products and services; and monitoring and managing these relationships on a long-term basis. If our management is unable to integrate these resources and manage growth effectively, the quality of our products and services, our ability to retain key personnel, and the results of our operations would be materially and adversely affected.
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Our management concluded that our internal control over financial reporting was not effective as of December 31, 2021. Compliance with public company regulatory requirements, including those relating to our internal control over financial reporting, have and will likely continue to result in significant expenses and, if we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
As a public reporting company, we are subject to the Sarbanes-Oxley Act of 2002 as well as to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and other federal securities laws. As a result, we incur significant legal, accounting, and other expenses, including costs associated with our public company reporting requirements and corporate governance requirements. As an example of public reporting company requirements, we evaluate the effectiveness of disclosure controls and procedures and of our internal control over financing reporting to allow management to report on such controls.
Our management concluded that our internal control over financial reporting was not effective as of December 31, 2021, due to a failure to maintain an effective control environment, failure of segregation of duties, failure of entity-level controls, and our sole executive’s access to cash.
If significant deficiencies or other material weaknesses are identified in our internal control over financial reporting that we cannot remediate in a timely manner, investors and others may lose confidence in the reliability of our financial statements. This would likely have an adverse effect on the trading price of our common stock and our ability to secure any necessary additional equity or debt financing.
Stockholders may suffer substantial dilution related to issued stock options, warrants, and convertible debentures.
As of December 31, 2021, we had several agreements or obligations for the possible issuance of common stock that may result in dilution to investors. These include:
| ● | 40,000 shares required for issuance upon the exercise of stock options; and | |
| ● | 144,264,247 shares required for issuance under our outstanding convertible debentures and promissory notes at approximately $0.10 per share. |
The sale, or even the possibility of the sale, of the shares of common stock underlying these commitments could have an adverse effect on the market price for our securities or on our ability to obtain future financing.
Additional issuances of stock, stock options and warrants, and convertible debt will cause additional substantial dilution to our stockholders.
The number of our issued and outstanding shares was decreased in 2019 as the result of a 1,000-to-one reverse stock split of our common stock. As a result, 95% of our common stock is available for issuance. Given our limited cash, liquidity, and revenues, it is likely that in the future, as in the past, we will sell stock and issue additional stock options and convertible debt to finance our future business operations. The issuance of additional shares of common stock, the exercise of stock options, and the conversion of debt to stock will cause additional dilution to our stockholders and could have further adverse effects on the market price for our securities or on our ability to obtain future financing.
Penny stock regulations will impose certain restrictions on resales of our securities, which may cause an investor to lose some or all of its investment.
The U.S. Securities and Exchange Commission has adopted regulations that generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share that is not traded on a national securities exchange or that has an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers that sell these securities to persons other than established customers and accredited investors (generally those with assets more than $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction before the purchase.
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Further, if the price of the stock is below $5.00 per share and the issuer does not have $2.0 million or more net tangible assets or is not listed on a registered national securities exchange, sales of that stock in the secondary trading market are subject to certain additional rules promulgated by the U.S. Securities and Exchange Commission. These rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices, and disclosure of the compensation to the broker-dealer and the salesperson working for the broker-dealer in connection with the transaction. These rules and regulations may affect the ability of broker-dealers to sell our common stock, thereby effectively limiting the liquidity of our common stock. These rules may also adversely affect the ability of persons that acquire our common stock to resell their securities in any trading market that may exist at the time of such intended sale.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We sublease a 2,500-square-foot office, showroom, and warehouse in Las Vegas, NV, for $2,500 per month from GloBrands under a lease that expires in October 2022. We believe that the facilities described above are generally in good condition, well maintained, and suitable and adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. All judgments, including interest, have been booked as 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 consider litigation reduced to judgment as no longer pending. However, in certain circumstances, a litigant can initiate further proceedings following the entry of a non-appealable final judgment and the passage of the applicable statute of limitations on the enforcement of a judgment to seek enforcement or further relief. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. As of December 31, 2021, we were not a party to any material pending litigation, and no lawsuits have been threatened by or against us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the Pink tier of the OTC Markets Group under the trading symbol “CIRX.” These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions. Since our inception, the sporadic trading activity in our common stock and the price fluctuations have been volatile, and we cannot assure that any market for our common stock will be maintained.
The following table sets forth the range of low and high closing sale prices for our common stock for each of the periods indicated, as reported and summarized by the Pink tier of the OTC Markets Group:
| Low | High | |||||||
| 2021: | ||||||||
| Fourth Quarter | 0.03 | 0.08 | ||||||
| Third Quarter | 0.05 | 0.09 | ||||||
| Second Quarter | 0.04 | 0.10 | ||||||
| First Quarter | 0.03 | 0.09 | ||||||
| 2020: | ||||||||
| Fourth Quarter | 0.02 | 0.10 | ||||||
| Third Quarter | 0.03 | 0.04 | ||||||
| Second Quarter | 0.02 | 0.11 | ||||||
| First Quarter | 0.01 | 0.13 | ||||||
On April 14, 2022, the closing price per share for the most recent sale of our common stock on the Pink tier of the OTC Markets Group was $0.06. We have 498 stockholders of record of our common stock. As of April 14, 2022, we had 4,945,417 shares of our common stock issued and outstanding.
Our shares of common stock are subject to the “penny stock” and other rules of the Exchange Act. In general terms, “penny stock” is defined as any equity security that has a market price less than $5.00 per share that is not traded on a national securities exchange or that has an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers that sell these securities to persons other than established customers and accredited investors (generally those with assets more than $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse).
Transactions covered by these rules are subject to additional sales practice requirements, including the broker-dealer must make a special suitability determination for the purchase of these securities and have received the purchaser’s written consent to the transaction before the purchase. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of stockholders to sell their shares.
Dividends
Holders of shares of common stock are entitled to receive dividends for our common stock when, as, and if declared by the board of directors out of funds legally available therefor. We have not paid any dividends on our common stock and intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy is subject to the discretion of the board of directors and will depend upon the number of factors, including future revenues, capital requirements, overall financial condition, and such other factors as our board of directors deems relevant.
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Equity Compensation Plan
The following table provides information as of December 31, 2021, respecting our compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.
| Plan Category | Number of Securities To Be Issued upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)(c) | |||||||||
| Equity compensation plans approved by security holders | 40,000 | $ | 0.06 | 350,000 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 40,000 | $ | 0.06 | 350,000 | ||||||||
Recent Sales of Unregistered Securities
During 2021, the holder of our outstanding convertible debenture converted $6,750 of accrued but unpaid interest into 225,000 shares of our common stock. This conversion resulted in the reduction of the balance due on these debentures but did not generate cash proceeds. The common stock was issued in reliance on the exemption from registration set forth in Section 4(a)(1) of the Securities Act of 1933, as amended. No underwriter participated.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in “Risk Factors” and elsewhere in this annual report. Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes and with the understanding that our actual future results may be materially different from what we currently expect.
Introduction
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 the year ended December 31, 2021, our expanded business activities generated revenue of $2,923,269. In 2020, we completed phase one and two of our development of all HUSTLER®-branded products, which enabled us to generate revenue of $1,732,625 during the year ended December 31, 2020, related to 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.
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Going Concern
We have suffered substantial losses. The future of our company is dependent upon our ability to continue to generate revenues sufficient to offset operating costs or recover start-up costs under our GloBrands-HUSTLER® Exclusive Manufacturing and Distribution Agreement signed in December 2019. Management intends to seek additional capital through a private placement or public offering of its common stock, if necessary. Our auditors have expressed a going concern in their opinion, which raises substantial doubts about our ability to continue as a going concern.
Results of Operations
Comparison of Years Ended December 31, 2021 and 2020
Sales and Cost of Sales
We had revenues of $2,923,269 and $1,732,625 during the years ended December 31, 2021 and 2020, respectively. Revenues during the years ended December 31, 2021 and 2020, were derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement. Costs of sales were $1,024,444, or 35% of revenue, and $896,273, or 51% of revenue, during 2021 and 2020, respectively. The improved margin in the latter year reflects production and purchasing efficiencies as our operations increased.
Operating Expenses
During the year ended December 31, 2021, selling, general, and administrative expenses and employee costs were approximately $2,139,000, as compared to approximately $758,000 for the same period in 2020, an almost three-fold increase because of increased operations in 2021 from executing our business plan.
Other Income and Expense
Other income and expenses during the year ended December 31, 2021, consisted of interest expense of approximately $680,000, loss on the fair value of derivative liabilities of approximately $16,000, gain on forgiveness of debt of approximately $13,000, gains on the write-off of accounts payable of approximately $1.2 million and other income of approximately $1,000. Other income and expenses during the year ended December 31, 2020, consisted of interest expense of approximately $658,000, a loss of disposal of equipment of approximately $10,000, losses of the fair value of derivative liabilities of approximately $23,000, gains on the write-off of accounts payable of approximately $1.0 million, and other income of $42,000.
As a result of the foregoing, we had a net profit from continuing operations of approximately $267,000 during the year ended December 31, 2021, as compared to $453,000 during the year ended December 31, 2020.
Liquidity and Capital Resources
We had a history of losses from operations prior to 2020, as our expenses had been greater than our revenues, which had ceased entirely several years earlier. Our accumulated deficit was approximately $77.8 million at December 31, 2021. For the year ended December 31, 2021, we used approximately $103,000 of cash in operating, investing, and financing activities, compared to generating cash of approximately $108,000 for the prior year from operating and financing activities.
During the year ended December 31, 2021, we generated approximately $345,000 of net cash in operations, comprised of net income from continuing operations of approximately $114,000, income from discontinued operations of approximately $153,500, noncash expenses of approximately $1.1 mil, and changes in working capital of approximately $1.1 mil. The net change in working capital was primarily driven by increase in accrued interest of approximately $574,000, accounts payable of approximately $540,000 and accrued payroll and compensation of approximately $357,000.
During the year ended December 31, 2020, we generated approximately $464,000 of net cash in operations, comprised of net income from continuing operations of $452,000, noncash expenses of approximately $866,000, changes in working capital of approximately $1,000,000, and net cash used in discontinued operations of approximately $115,000. The net change in working capital was primarily driven by accrued interest of approximately $543,000 and accrued liabilities of approximately $640,000.
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During the year ended December 31, 2021, we used approximately $443,000 of net cash from financing activities mainly comprised of repayments on related-party loans that totaled $448,000 and proceeds from non-related-party loans of $5,000.
During the year ended December 31, 2020, we used $337,520 of net cash from financing activities mainly comprised of repayments on related-party loans that totaled $467,409 and proceeds from non-related-party loans of $156,000.
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 Notes 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 $1.6 million as of December 31, 2021. We also have four additional convertible debentures with Tekfine with maturity dates ranging from February 28, 2022, until May 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.
We have received advances from related parties totaling $5,000 and $11,500 during the years ended December 31, 2021 and 2020, respectively, as well as making repayments on related-party loans of $448,335 and $467,409 during the years ended December 31, 2021 and 2020, respectively. Additionally, related parties paid expenses on our behalf of $1,940 during the years ended December 31, 2020. The advances are non-interest-bearing, due on demand, and are included in current liabilities.
Critical Accounting Policies
The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations” in this Item 7. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and that require complex management judgment.
Use of Estimates
The preparation of our financial statements in conformity with 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our periodic filings with the Securities and Exchange Commission include, when applicable, disclosures of estimates, assumptions, and uncertainties that could affect the financial statements and our future operations.
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Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheets for cash, accounts payable, and related-party payables approximate the respective fair values due to the short maturities of these items. We do not hold any investments that are available-for-sale.
Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
| Level 1: | Pricing inputs are quoted prices available in active markets for identical assets or liabilities as of the reporting date | |
| Level 2: | Pricing inputs are quoted for similar assets or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes assets or liabilities valued at quoted prices adjusted for legal or contractual restrictions specific to these investments. | |
| Level 3: | Pricing inputs are unobservable for the assets or liabilities; that is, the inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. |
We do not currently have any financial instruments that we measure at fair value.
Recently Issued Accounting Pronouncements
Recently issued accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that require adoption and that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable as we are currently considered a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, including the Report of Independent Registered Public Accounting Firm on our consolidated financial statements, are included beginning on page F-1 after this report, which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2021, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying 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 December 31, 2021, 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 Certifying Officer, as appropriate, to allow timely decisions regarding required disclosure.
Limitations on Effectiveness of Controls
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.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls, as defined in the Exchange Act. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.
Our internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with GAAP and the receipts and expenditures of company assets are made and in accordance with our management and directors authorization; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Management has undertaken an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2021.
Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective due to the following material weakness identified:
| ● | Lack of appropriate segregation of duties, | |
| ● | Lack of control procedures that include multiple levels of supervision and review, | |
| ● | Lack of financial resources to engage adequate external expertise; and | |
| ● | Overreliance upon independent financial reporting consultants for review of critical accounting areas and disclosures and material, nonstandard transactions. |
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This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only the management’s report in this annual report.
Implemented or Planned Remedial Actions in Response to the Material Weaknesses
We will continue to strive to correct the above noted weakness in internal control once we have adequate funds to do so. We believe appointing a director who qualifies as a financial expert will improve the overall performance of our control over our financial reporting.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2021, that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The names of our director and executive officers as of December 31, 2021, and their ages, positions, and biographies are set forth below. Our executive officers are appointed by, and serve at the discretion of, our board of directors.
| Name | Age | Title | Tenure | |||
| Iehab Hawatmeh | 55 | President, Chief Executive Officer, | July 2000 to date | |||
| Chief Financial Officer, Chairman | ||||||
| Kathryn Hollinger | 71 | Director, Controller | August 2011 to date |
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Iehab J. Hawatmeh
Iehab J. Hawatmeh founded our predecessor company in 1993 and has been our chairman, president, and chief executive officer since July 2000, except for a brief absence during 2017. Mr. Hawatmeh oversees all daily operations, including our technical and sales functions. Mr. Hawatmeh is currently functioning in a dual role as chief financial officer. Before his involvement with our company, Mr. Hawatmeh was the Processing Engineering Manager for Tandy Corporation, Salt Lake City, Utah, overseeing that company’s contract manufacturing printed circuit board assembly division. In addition, he was responsible for developing and implementing Tandy’s facility Quality Control and Processing Plan model. Mr. Hawatmeh earned an MBA from University of Phoenix and a BS in Electrical and Computer Engineering from Brigham Young University.
Kathryn Hollinger
Kathryn Hollinger has been with CirTran since 2000 as our controller, except for a brief period during 2017 in which she also acted as chief executive officer. She has been involved with the day-to-day accounting and finance functions throughout her term with us. Ms. Hollinger studied mathematics and accounting at Northridge University (now Cal. State University Northridge) in California.
Election of Directors and Officers
Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the board of directors following the next annual meeting of stockholders and until their successors have been elected and qualified.
Committees of the Board
We currently do not have nominating, compensation, or audit committees or committees performing similar functions and we do not have a written nominating, compensation, or audit committee charter. Our board of directors believes that it is not necessary to have these committees, at this time, because the directors can adequately perform the functions of such committees.
Family Relationships
There are no family relationships among any of our officers or directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive officers, and persons that own more than 10% of a registered class of our equity securities to file with the U.S. Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our equity securities. Officers, directors, and greater than 10% stockholders are required to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review of Forms 3, 4, and 5 and amendments thereto filed with the U.S. Securities and Exchange Commission for the year ended December 31, 2021, no person that, at any time during the most recent fiscal year, was a director, officer, beneficial owner of more than 10% of any class of our equity securities, or any other person known to be subject to Section 16 of the Exchange Act failed to file, on a timely basis, reports required by Section 16(a) of the Exchange Act, except that two officers failed to report options earned and options that expired during the fiscal year.
Code of Ethics
We expect that all directors, officers, and employees will maintain a high level of integrity in their dealings with us and on our behalf and will act in our best interests. We have adopted a Code of Business Conduct and Ethics that provides principles of conduct and ethics for our directors, officers, and employees. This Code of Ethics is available on our website at www.cirtran.com under “Investor Relations—Corporate Governance.”
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for each of our last two completed fiscal years, the dollar value of all cash and noncash compensation earned by any person who was our principal executive officer and each of our three most highly compensated other executive officers or persons who were serving in such capacities during the preceding fiscal year (“Named Executive Officers”):
| Name and Principal Position | Year Ended Dec. 31 | Salary ($) | Bonus ($) | Stock Award(s) ($) | Option Awards ($)(1) | Non Equity Incentive Plan Compen- sation | Change in Pension Value and Non- Qualified Deferred Compen- sation Earnings ($) | All Other Compen- sation ($) | Total ($) | |||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | (j) | |||||||||||||||||||||||||
| Iehab J. Hawatmeh(1) | 2021 | 345,000 | - | - | 139 | (2) | - | - | 15,600 | (3) | 360,739 | |||||||||||||||||||||||
| President, Chief Executive Officer | 2020 | 345,000 | - | - | 42 | (2) | - | - | 17,417 | (3) | 362,459 | |||||||||||||||||||||||
| Kathryn Hollinger(4) | 2021 | 55,000 | 10,000 | - | 46 | (2) | - | - | 5,000 | (5) | 70,046 | |||||||||||||||||||||||
| 2020 | 55,000 | 10,000 | - | 14 | (2) | - | - | 5,000 | (5) | 70,014 | ||||||||||||||||||||||||
| (1) | Mr. Hawatmeh accrued his full salary in 2020 and $296,500 of his salary in 2021, he has not yet received any of his 2020 salary. | |
| (2) | The amount is the fair value of the option awards on the date of grant in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718. See note 2 to our consolidated financial statements. | |
| (3) | Includes $12,000 for car allowance for each of 2021 and 2020 and $3,600 and $5,417 for medical insurance premiums for 2021 and 2020. | |
| (4) | Ms. Hollinger’s compensation listed in this table is for her services as our controller. | |
| (5) | Fees accrued as director compensation. |
Employment Agreements—Change in Control
We engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended in September 2017, with a salary in an amount and commencement date to be determined. In July 2017, Mr. Hawatmeh resigned all positions with us to pursue other business activities, thereby effectively terminating the agreement. However, in September 2017, we reinstated Mr. Hawatmeh to his previous positions and reinstated his employment agreement. 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; (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. All cash amounts payable to Mr. Hawatmeh more than an aggregate of $120,000 per year are accrued and will not be paid until the secured convertible debenture is paid or converted to common stock.
Pursuant to the employment agreement, Mr. Hawatmeh’s employment may be terminated for cause, or upon death or disability, in which event we are required to pay him any unpaid base salary and unpaid earned bonuses. In the event that Mr. Hawatmeh is terminated without cause, we are required to pay to him: (i) within 30 days following such termination, any benefit, incentive, or equity plan, program, or practice paid when such would have been paid to him if employed (the “Accrued Obligations”); (ii) within 30 days following such termination (or on the earliest later date as may be required by Internal Revenue Code Section 409A to the extent applicable), a lump sum equal to 30 months’ annual base salary; (iii) bonuses owing for the two-year period after the date of termination (net of any bonus amounts paid as Accrued Obligations) based on actual results for the applicable quarters and fiscal years; and (iv) within 12 months following such termination (or on the earliest later date as may be required by Internal Revenue Code Section 409A to the extent applicable), a lump sum equal to 30 months’ annual base salary; provided that if Mr. Hawatmeh is terminated without cause in contemplation of, or within one year, after a change in control, then two times his annual base salary and bonus payment amounts.
| 22 |
During the year ended December 31, 2021, we were obligated to issue options to purchase 6,000 shares to Mr. Hawatmeh but did not issue the options until after the end of the period.
During the years ended December 31, 2021 and 2020, we accrued for 6,000 and 6,000 stock options, respectively, relating to this employment agreement. The fair market value of the options issued during the year ended December 31, 2021 and 2020, was $139 and $42, respectively.
Outstanding Equity Awards at Fiscal Year End
The following table summarizes information regarding unexercised options, stock that has not vested, and equity incentive plan awards owned by the Named Executive Officers as of December 31, 2021:
| Option Awards | Stock Awards | ||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexer- cised Options (#) Exer- cisable | Number of Securities Underlying Unexercised Options (#) Unexer- cisable(1) | Equity Incentive Plan Awards: Number of Securities Underlying Unexer- cised Unearned Options(#) | Option Exercise Price($) | Option Expiration Date | Number of Shares or Units of Stock Held That Have Not Vested(#) | Market Value of Shares or Units of Stock That Have Not Vested($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested($) | ||||||||||||||||||||||||
| Iehab Hawatmeh | — | 6,000 | — | 0.10 | 01/20/22 | — | — | — | — | ||||||||||||||||||||||||
| Kathryn Hollinger | — | 2,000 | — | 0.10 | 01/20/22 | — | — | — | — | ||||||||||||||||||||||||
| Iehab Hawatmeh | — | 6,000 | — | 0.10 | 01/20/23 | — | — | — | — | ||||||||||||||||||||||||
| Kathryn Hollinger | — | 2,000 | — | 0.10 | 01/20/23 | — | — | — | — | ||||||||||||||||||||||||
| Iehab Hawatmeh | — | 6,000 | — | 0.10 | 04/01/24 | — | — | — | — | ||||||||||||||||||||||||
| Kathryn Hollinger | — | 2,000 | — | 0.10 | 04/01/24 | — | — | — | — | ||||||||||||||||||||||||
| Iehab Hawatmeh | — | 6,000 | — | 0.01 | 01/06/25 | — | — | — | — | ||||||||||||||||||||||||
| Kathryn Hollinger | — | 2,000 | — | 0.01 | 01/06/25 | — | — | — | — | ||||||||||||||||||||||||
| Iehab Hawatmeh | — | 6,000 | — | 0.01 | 01/06/26 | — | — | — | — | ||||||||||||||||||||||||
| Kathryn Hollinger | — | 2,000 | — | 0.01 | 01/06/26 | — | — | — | — | ||||||||||||||||||||||||
Director Compensation
Except for Iehab Hawatmeh, who is also our chief executive officer, we pay our directors $5,000 per year to serve on our board.
| 23 |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, as of March 15, 2022, respecting the beneficial ownership of our outstanding common stock by: (i) any holder of more than 5%; (ii) each of the Named Executive Officers (defined as any person who was principal executive officer during the preceding fiscal year and each other highest compensated executive officers earning more than $100,000 during the last fiscal year) and directors; and (iii) our directors and Named Executive Officers as a group, based on 4,945,417 shares of common stock outstanding.
| Name of Person or Group(1) | Nature of Ownership | Amount | Percent | |||||||
| Principal Stockholders: | ||||||||||
| Iehab J. Hawatmeh | Common stock | 211,554 | 4.3 | |||||||
| Options(2) | 30,000 | * | ||||||||
| 241,554 | 4.7 | |||||||||
| Directors: | ||||||||||
| Iehab J. Hawatmeh | Common stock | 211,554 | 4.3 | |||||||
| Options(2) | 30,000 | * | ||||||||
| 241,554 | 4.7 | |||||||||
| Kathryn Hollinger | Common stock | 26,003 | * | |||||||
| Options(3) | 10,000 | * | ||||||||
| 36,003 | * | |||||||||
| All Executive Officers and Directors as a Group (2 persons): | Common stock | 237,557 | 4.8 | |||||||
| Options(2)(3) | 40,000 | * | ||||||||
| Total | 277,557 | 5.4 | ||||||||
| * | Less than one percent. |
| (1) | Address for all stockholders is 6360 S Pecos Road, Suite 8, Las Vegas, NV 89120. |
| (2) | Includes options to purchase shares that have been accrued for services provided during the preceding fiscal years and that have not expired. These options can be exercised any time at exercise prices ranging from $0.10 to $0.01 per share. |
| (3) | Includes options to purchase shares that have been accrued for services provided the preceding fiscal years and that have not expired. These options can be exercised any time at exercise prices ranging from $0.10 to $0.01 per share. |
The persons named in the above table have sole voting and dispositive power respecting all shares beneficially owned, subject to community property laws where applicable. Beneficial ownership is determined according to the rules of the U.S. Securities and Exchange Commission, and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power over that security. Each director, officer, or 5% or more stockholder has furnished the information respecting beneficial ownership.
Beneficial ownership is determined in accordance with the rules of the SEC, which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities. Unless otherwise indicated, voting and investment power are exercised solely by the person named above or shared with members of such person’s household. This includes any shares such person has the right to acquire within 60 days.
Changes in Control
There are no arrangements, known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in our control.
| 24 |
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information is set forth below for any transaction during the preceding fiscal year to which we were a party and in which any of our officers and directors or any holder of more than 10% of any class of our stock had or is deemed to have a material interest.
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 December 31, 2021, the principal amount owing on the note was $151,833. 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). These notes accrue interest at 12% per annum and are due on demand. We made no payments towards the outstanding notes during 2021. The principal balance owing on the notes as of December 31, 2021, of $72,466 is included in liabilities from discontinued operations.
During the year ended December 31, 2021, we made repayments to related parties of $188,877 and had other noncash reductions of $82,018. There were $21,882 of short-term advances due to related parties as of December 31, 2021. The advances are due on demand and included in current liabilities. No demand for payment has been made.
As of December 31, 2021, we owed our president a total of $433,379 in unsecured advances due on demand.
As of December 31, 2021, we owed $13,740 to a related party through trade payables incurred in the normal course of business.
During the year ended December 31, 2021, we had a net decrease in deposits with a related-party inventory supplier totaling $232,291. 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 $1,186,645 during the year ended December 31, 2021.
Director Independence
Under the definition of independent directors found in Nasdaq Rule 5605(a)(2), which is the definition we have chosen to apply, none of our directors is independent.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The firm of Fruci & Associates II, PLLC has served as our independent registered public accounting firm since July 2020.
Audit Fees
For our fiscal year ended December 31, 2021, we were billed approximately $18,000 for professional services rendered for the audit and reviews of our consolidated financial statements. For our fiscal year ended December 31, 2020, we were billed approximately $28,500 for professional services rendered for the audit and reviews of our consolidated financial statements.
Audit Related Fees
For our fiscal years ended December 31, 2021 and 2020, we did not incur any audit-related fees.
Tax Fees
For our fiscal years ended December 31, 2021 and 2020, we were not billed for professional services rendered for tax compliance, tax advice, and tax planning.
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All Other Fees
We did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31, 2021 and 2020.
Audit and Non-Audit Service Preapproval Policy
In accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, our board of directors has adopted an informal approval policy that it believes will result in an effective and efficient procedure to preapprove services performed by the independent registered public accounting firm.
All professional services rendered by principal accountants for the audit of our annual financial statements that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for last two fiscal years were approved by our board of directors.
Audit Services
Audit services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed by the independent registered public accounting firm to be able to form an opinion on our consolidated financial statements. The board of directors preapproves specified annual audit services engagement terms and fees and other specified audit fees. All other audit services must be specifically preapproved by the board of directors. The board of directors monitors the audit services engagement and may approve, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope or other items.
Audit-Related Services
Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements, which historically have been provided to us by the independent registered public accounting firm and are consistent with the Securities and Exchange Commission’s rules on auditor independence. The board of directors preapproves specified audit-related services within preapproved fee levels. All other audit-related services must be preapproved by the board of directors.
Tax Services
The board of directors preapproves specified tax services that it believes would not impair the independence of the independent registered public accounting firm and that are consistent with Securities and Exchange Commission’s rules and guidance. The board of directors must specifically approve all other tax services.
All Other Services
Other services are services provided by the independent registered public accounting firm that do not fall within the established audit, audit-related, and tax services categories. The board of directors preapproves specified other services that do not fall within any of the specified prohibited categories of services.
Procedures
All proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description of the services to be rendered and the amount of corresponding fees, are submitted to the board of directors and the chief financial officer. The chief financial officer authorizes services that have been preapproved by the board of directors. The chief financial officer submits requests or applications to provide services that have not been preapproved by board of directors, which must include an affirmation by the chief financial officer and the independent registered public accounting firm that the request or application is consistent with the Securities and Exchange Commission’s rules on auditor independence, to board of directors for approval.
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PART IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
| (a) | The following financial statements are filed as part of this report: |
| Page | |
| Audited Consolidated Financial Statements for the Years Ended December 31, 2021 and 2020: | |
| Report of Independent Registered Public Accounting Firm (PCAOB ID No. 0 |
F-1 |
| Consolidated Balance Sheets as of December 31, 2021 and 2020 | F-2 |
| Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 | F-3 |
| Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2021 and 2020 | F-4 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 | F-5 |
| Notes to the Consolidated Financial Statements | F-6 |
| (b) | The following exhibits are filed as part of this report: |
Exhibit Number* |
Title of Document | Location | ||
| Item 3. | Articles of Incorporation and Bylaws | |||
| 3.01 | Articles of Incorporation | Incorporated by reference from our Current Report on Form 8-K filed July 17, 2000 | ||
| 3.02 | Amended and Restated Bylaws | Incorporated by reference from our Current Report on Form 8-K filed August 18, 2011 | ||
| 3.03 | Articles of Amendment to Articles of Incorporation of CirTran Corporation | Incorporated by reference from our Current Report on Form 8-K filed August 18, 2011 | ||
| 3.04 | Second Amendment to Articles of Incorporation of CirTran Corporation | Incorporated by reference from our Current Report on Form 8-K filed May 8, 2015 | ||
| Item 4. | Instruments Defining the Rights of Security Holders, Including Debentures | |||
| 4.01 | Specimen stock certificate | Incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2019, filed May 29, 2020 | ||
| 4.02 | Amended, Restated, and Consolidated Secured Convertible Debenture No. TK-1 in the amount of $3,437,798 payable to Tekfine, LLC | Incorporated by reference from the registration statement on Form 10 filed May 11, 2018 | ||
| 4.03 | Secured Convertible Debenture No. TK-2 in the amount of $200,000 payable to Tekfine, LLC | Incorporated by reference from the registration statement on Form 10 filed May 11, 2018 | ||
| 4.04 | Amendment No. 1 to Secured Convertible Debenture between CirTran Corporation and Tekfine, LLC, effective April 20, 2018 | Incorporated by reference from the registration statement on Form 10 filed May 11, 2018 |
| 27 |
| 4.05 | Amendment No. 2 to Secured Convertible Debenture between CirTran Corporation and Tekfine, LLC, effective May 12, 2020 | Incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2019, filed May 29, 2020 | ||
| Item 10. | Material Contracts | |||
| 10.42** | Employment Agreement with Iehab Hawatmeh dated August 1, 2009 | Incorporated by reference from our Annual Report on Form 10-K/A for the year ended December 31, 2011, filed April 30, 2012 | ||
| 10.49 | CirTran Corporation 2013 Incentive Plan | Incorporated by reference from our Registration Statement on Form S-8 filed August 26, 2013 | ||
| 10.53** | Amendment No. 1 to Employment Agreement with Iehab J. Hawatmeh | Incorporated by reference from the registration statement on Form 10/A filed June 18, 2018 | ||
| 10.55 | Exclusive Manufacturing and Distribution Agreement dated December 30, 2019 | Incorporated by reference from our Current Report on Form 8-K filed January 27, 2020 | ||
| 10.56 | Commercial Lease dated November 29, 2019 | Incorporated by reference from our Current Report on Form 8-K filed January 27, 2020 | ||
| Item 21. | Schedule of Subsidiaries | |||
| 21.01 | Schedule of Subsidiaries | Incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2019, filed May 29, 2020 | ||
| 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 |
| * | 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 sequence of the document. Omitted numbers in the sequence refer to documents previously filed with the SEC as exhibits to previous filings, but no longer required. |
| ** | Identifies each management contract or compensatory plan or arrangement required to be filed. |
| *** | Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or Annual Report for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Exchange Act of 1934 and otherwise are not subject to liability. |
| 28 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CIRTRAN CORPORATION | ||
| Date: April 15, 2022 | By: | /s/ Iehab Hawatmeh |
| Iehab Hawatmeh, President | ||
| Chief Financial Officer (Principal Executive | ||
| Officer, Principal Financial Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Date: April 15, 2022 | /s/ Iehab Hawatmeh |
| Iehab Hawatmeh, Director, President | |
| Chief Financial Officer (Principal Executive | |
| Officer, Principal Financial Officer) |
| Date: April 15, 2022 | /s/ Kathryn Hollinger |
| Kathryn Hollinger, Director |
| 29 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of CirTran Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CirTran Corporation and Subsidiaries (“the Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has a significant accumulated deficit and working capital deficiency. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition – Refer to Note 2 to the financial statements
Description of the Critical Audit Matter
As discussed in Note 2, the Company recognizes 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.
Significant judgment is exercised by the Company in determining revenue recognition for products and services, and includes the following:
| ● | Identification and treatment of contract terms that may impact the timing and amount of revenue recognized. | |
| ● | Determination of stand-alone selling prices for each distinct performance obligation. |
Auditing management’s revenue recognition was highly judgmental due to the significant estimation required for the recognition of revenue.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company's revenue recognition for these customer agreements included the following, among others:
| ● | We evaluated management's significant accounting policies related to revenue recognition and reviewed underlying customer invoices for reasonableness of the application of ASC 606. | |
| ● | We obtained and read contract source documents for selected revenue transactions and tested management’s treatment of those terms. | |
| ● | We tested the accuracy and completeness of selected revenue transactions during the year ended December 31, 2021. |
We have served as the Company’s auditor since 2020.
April 15, 2022
| F-1 |
CIRTRAN CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Inventory | ||||||||
| Deposits on inventory | ||||||||
| Deposits on inventory - related party | ||||||||
| Accounts receivable | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Investment in securities at cost | ||||||||
| Right-of-use asset | ||||||||
| Property and equipment, net of accumulated depreciation | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Lease liability, current | ||||||||
| Related-party payable | ||||||||
| Short-term advances payable | ||||||||
| Short-term advances payable - related parties | ||||||||
| Accrued liabilities | ||||||||
| Accrued payroll and compensation expense | ||||||||
| Accrued interest, current portion | ||||||||
| Convertible debenture, current portion, net of discounts | ||||||||
| Note payable, current portion | ||||||||
| Note payable to stockholders | ||||||||
| Derivative liability | ||||||||
| Liabilities from discontinued operations | ||||||||
| Total current liabilities: | ||||||||
| Lease liability, long-term | ||||||||
| Accrued interest, net of current portion | ||||||||
| 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; and shares issued and outstanding at December 31, 2021 and 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Net sales | $ | $ | ||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Employee costs | ||||||||
| Selling, general and administrative expenses | ||||||||
| Total operating expenses | ||||||||
| (Loss) income from operations | ( | ) | ||||||
| Other income (expense) | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Loss on disposal of equipment | ( | ) | ||||||
| Gain on forgiveness of debt | ||||||||
| Gain on write off of accounts payable | ||||||||
| Gain (loss) on derivative valuation | ( | ) | ( | ) | ||||
| Other income | ||||||||
| Total other (expense) income | ( | ) | ||||||
| Net (loss) income from continuing operations | ( | ) | ||||||
| Income from discontinued operations | ||||||||
| Net income | $ | $ | ||||||
| Net (loss) income from continuing operations per common share, basic | $ | ( | ) | $ | ||||
| Net income from continuing operations per common share, diluted | ||||||||
| Net income from discontinued operations per common share, basic | $ | $ | ||||||
| Net income from discontinued operations per common share, diluted | ||||||||
| Net income per share, basic | $ | $ | ||||||
| Net income per share, diluted | ||||||||
| Basic and diluted weighted average common shares outstanding | ||||||||
| Diluted weighted average common shares outstanding | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| Common Stock | Additional Paid-in | Accumulated | ||||||||||||||||||
| Shares | Amount | Capital | Deficit | Total | ||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Stock option expense | — | |||||||||||||||||||
| Common stock issued for conversion of accrued interest | ||||||||||||||||||||
| Net income | ||||||||||||||||||||
| Balance, December 31, 2020 | ( | ) | ( | ) | ||||||||||||||||
| Stock option expense | — | |||||||||||||||||||
| Common stock issued for conversion of accrued interest | ||||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash (used) provided by operating activities: | ||||||||
| Income from discontinued operations | ( | ) | ( | ) | ||||
| Depreciation expense | ||||||||
| Loss on derivative valuation | ||||||||
| Debt discount amortization | ||||||||
| Loss on disposal of equipment | ||||||||
| Stock option expense | ||||||||
| Gain on forgiveness of debt | ( | ) | ||||||
| Gain on write off of accounts payable | ( | ) | ( | ) | ||||
| Amortization of right-of-use asset to rent expense | ||||||||
| Expenses paid on our behalf by a related party | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Inventory | ( | ) | ( | ) | ||||
| Deposits on inventory | ( | ) | ||||||
| Deposits on inventory - related party | ( | ) | ||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ||||||||
| Accrued liabilities | ( | ) | ||||||
| Payments for lease liability | ( | ) | ( | ) | ||||
| Accrued payroll and compensation | ||||||||
| Accrued interest | ||||||||
| Net cash provided by continuing operating activities | ||||||||
| Net cash provided by (used in) discontinued operations | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Cash flows from investing activities: | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from bank overdraft | ( | ) | ||||||
| Proceeds from convertible loans payable | ||||||||
| Proceeds from related-party loans | ||||||||
| Repayments of related-party loans | ( | ) | ( | ) | ||||
| Proceeds from loan payable | ||||||||
| Repayments of loans payable | ( | ) | ( | ) | ||||
| Net Cash used in financing activities | ( | ) | ( | ) | ||||
| Net change in cash | ( | ) | ||||||
| Cash, beginning of year | ||||||||
| Cash, end of year | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental disclosure of noncash investing activities: | ||||||||
| Initial measurement of derivative liability | $ | $ | ||||||
| Common stock issued for conversion of accrued interest | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
| F-5 |
CIRTRAN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2021
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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
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
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, which ranges from three to ten years. Leasehold improvements are amortized over the lesser of the remaining term of the lease or the estimated useful life of the asset. Expenditures for repairs and maintenance are expensed as incurred. Gains or losses on dispositions of property and equipment are included in operating results.
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.
| F-6 |
During
the years ended December 31, 2021 and 2020, we recognized revenue of $
Additionally,
we recognized revenues of $
Leases
In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), which superseded guidance in ASC 840, Leases, which we adopted for the year ended December 31, 2019, under the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. We account for short-term leases, those lasting fewer than 12 months, using the practical expedient as outlined in the guidance, which does not include recording such leases on the balance sheet.
The adoption of the standard resulted in recording right-of-use (“ROU”) assets and operating lease liabilities of $22,291 as of December 31, 2021. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the lease does not provide an implicit rate, we use our incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain we will exercise that option. Although considered, we determined it was appropriate to exclude future renewal terms from the capitalization of our operating lease.
We
have one lease in effect requiring minimum monthly payments of $
| Total future payments | $ | |||
| Implied interest | ( | ) | ||
| Operating lease liability as of December 31, 2021 | $ | |||
Investment in Securities
Our
cost-method investment consists of an investment in a private digital multi-media technology company that totaled $
Impairment of Long-Lived Assets
We
review our long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. At each balance sheet date, we evaluate whether events and circumstances have occurred that
indicate possible impairment. We use an estimate of future undiscounted net cash flows from the related asset or group of assets over
their remaining life in measuring whether the assets are recoverable. We did
| F-7 |
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 totaled $
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:
| December 31, 2021 | December 31, 2020 | |||||||
| Finished goods | $ | $ | ||||||
| Raw materials | ||||||||
| Reserve for obsolescence | ( | ) | ||||||
| Total | $ | $ | ||||||
We have outstanding stock options to directors and employees, which are described more fully in Note 13–Stock Options and Warrants. We account for our stock options in accordance with ASC 718-10, Accounting for Stock Issued to Employees, and ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, as updated, which requires the recognition of the cost of employee services received in exchanged for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718-10 also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (typically the vesting period). There was no impact to our methodology for accounting for equity-based compensation as a result of adopting ASC 718-10 and ASU 2018-07.
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.
| F-8 |
| Total Fair Value at December 31, 2021 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant
unobservable inputs (Level 3) | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
| Total Fair Value at December 31, 2020 | Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
| Derivative liabilities | $ | $ | $ | $ | ||||||||||||
Basic loss per share is calculated by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted loss per share is similarly calculated, except that the weighted-average number of common shares outstanding would include common shares that may be issued subject to existing rights with dilutive potential when applicable. There were potentially issuable shares from the conversions of convertible debentures outstanding that were excluded in dilutive outstanding shares for the year ended December 31, 2021, due to the anti-dilutive effect these would have on net loss per share. There were such shares issuable as of December 31, 2020. 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.
Income Taxes
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to tax net operating loss carryforwards. The deferred tax assets and liabilities represent the future tax return consequences of these differences, which will either be taxable or deductible when assets and liabilities are recovered or settled, as well as operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established against deferred tax assets when in the judgment of management, it is more likely than not that such deferred tax assets will not become available. Because the judgment about the level of future taxable income is dependent to a great extent on matters that may, at least in part, be beyond our control, it is at least reasonably possible that management’s judgment about the need for a valuation allowance for deferred taxes could change in the near term.
Tax
benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The
amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. A liability
for “unrecognized tax benefits” is recorded for any tax benefits claimed in our tax returns that do not meet these recognition
and measurement standards. As of December 31, 2021 and 2020,
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.
| F-9 |
NOTE 3 — GOING CONCERN
The
accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplate our continuation as a
going concern. We had a working capital deficiency of $
Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if we are unable to continue as a going concern.
In the coming year, our foreseeable cash requirements will relate to development of business operations and associated expenses. We may experience a cash shortfall and be required to raise additional capital.
Historically, we have mainly relied upon shareholder loans and advances to finance operations and growth. Management may raise additional capital by retaining net earnings, if any, or through future public or private offerings of our stock or loans from private investors, although we cannot assure that we will be able to obtain such financing. Our failure to do so could have a material and adverse effect upon our shareholders and us.
NOTE 4 — PROPERTY AND EQUIPMENT
We incur certain costs associated with the design and development of molds and dies for our contract-manufacturing segment. These costs are held as deposits on the balance sheet until the molds or dies are finished and ready for use. At that point, the costs are included as part of production equipment in property and equipment and are amortized over their useful lives. We hold title to all molds and dies used in the manufacture of products.
Property and equipment and estimated service lives consist of the following:
| December 31, 2021 | December 31, 2020 | Useful Life (years) | ||||||||
| Furniture and office equipment | $ | $ | ||||||||
| Vehicles | ||||||||||
| Total | ||||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Property and equipment, net | $ | $ | ||||||||
We
recorded $
NOTE 5 — RELATED-PARTY TRANSACTIONS
In
2007, we issued a
On
March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $
During
the year ended December 31, 2021, we made repayments to related parties of $
| F-10 |
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 $. We issued options to purchase and shares of common stock during the years ended December 31, 2021 and 2020, respectively. There were options to purchase shares of common stock that expired during each year ended December 31, 2021 and 2020. Mr. Hawatmeh held outstanding options to purchase and shares of common stock as of December 31, 2021 and 2020, respectively. See Note 13–Stock Options and Warrants.
As
of December 31, 2021 and 2020, we owed our president a total of $
As
of December 31, 2021 and 2020, we owed a total of $
During
the year ended December 31, 2021, 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:
| December 31, 2021 | December 31, 2020 | |||||||
| Tax liabilities | $ | $ | ||||||
| Other | ||||||||
| Total | $ | $ | ||||||
Other
accrued liabilities as of December 31, 2021 and 2020, include a non-interest-bearing payable totaling $
Accrued payroll and compensation liabilities consist of the following:
| December 31, 2021 | December 31, 2020 | |||||||
| Director fees | $ | $ | ||||||
| Bonus expenses | ||||||||
| Commissions | ||||||||
| Consulting | - | |||||||
| Administrative payroll | ||||||||
| Total | $ | $ | ||||||
| F-11 |
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Commitments to GloBrands, LLC
Our
December 2019 Exclusive Manufacturing and Distribution Agreement with GloBrands grants to us the exclusive right to manufacture, distribute,
and sell specified products, including the authority to deal directly with distribution chain participants and to collect all product
payments.
From time to time, GloBrands, LLC agrees to advance funds to the Company to assist in precuring inventory due to long lead times and to avoid last minute high cost of shipping. These advances are booked under Accrued Liabilities. In addition, the Company bills GloBrands under its agreement monthly, those amounts get netted out of the advances made.
Our agreement with GloBrands is subject in all respects to its rights as licensee under its licensing agreements with the Flynt/HUSTLER® organization to use the HUSTLER® brand name. The Flynt/HUSTLER® organization has approved our manufacturing and distribution arrangement. GloBrands is obligated to fully and timely perform and observe all terms, covenants, and conditions of the three underlying licenses between it and the Flynt/Hustler organization, including the payment of required minimum and actual royalties to the Flynt/HUSTLER® organization. Further, GloBrands cannot amend the license agreements or waive or release any material right under the underlying Flynt/HUSTLER® licenses. Under the Exclusive Manufacturing and Distribution Agreement, we transmit royalty payments on GloBrands’ behalf directly to the Flynt/HUSTLER® organization.
We have a limited license to use the HUSTLER® brand name for the exclusive purposes of fulfilling our obligations under the Exclusive Manufacturing and Distribution Agreement
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
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.
During
the years ended December 31, 2021 and 2020, we granted options to purchase and shares of common stock, respectively, to Mr.
Hawatmeh and Ms. Hollinger. We recorded expenses totaling $
| F-12 |
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:
| December 31, 2021 | December 31, 2020 | |||||||
| Note payable to former service provider for past due account payable (current) | $ | $ | ||||||
| Note payable for settlement of debt (long-term) | ||||||||
| Small Business Administration loan | ||||||||
| Total | $ | $ | ||||||
There
was $
NOTE 9 — CONVERTIBLE DEBENTURES
Convertible debentures consisted of the following:
| December 31, 2021 | December 31, 2020 | |||||||
| 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 $
As
of December 31, 2021 and 2020, we had accrued interest on the convertible debentures totaling $
| F-13 |
NOTE 10 — DERIVATIVE LIABILITIES
As
discussed in Note 9—Convertible Debentures, we have entered into five separate agreements to borrow a total of $
| Volatility | % | |||
| Risk-free rates | % | |||
| Stock price | $ | |||
| Remaining life | ||||
The
fair values of the derivative instruments are measured each quarter, which resulted in a loss of $
NOTE 11 – COMMON STOCK TRANSACTIONS
We are authorized to issue up to shares of $ par value common stock.
During
the year ended December 31, 2021, we issued a total of shares of common stock for the conversion of $
During
the year ended December 31, 2020, we issued a total of shares of common stock for the conversion of $
NOTE 12 — INCOME TAXES
We
did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because we have
experienced operating losses since inception. When it is more likely than not that a tax asset cannot be realized through future income,
the company must allow for this future tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting
of net operating loss carryforwards, because management has determined that it is more likely than not that we will not earn income sufficient
to realize the deferred tax assets during the carryforward period. The U.S. federal income tax rate of
We have not taken a tax position that, if challenged, would have a material effect on the financial statements for the years ended December 31, 2021 and 2020, applicable under FASB ASC 740, Income Taxes. We did not recognize any adjustment to the liability for an uncertain tax position and, therefore, did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. All our tax returns remain open.
As
of December 31, 2021 and 2020, we had net operating loss carryforwards for tax reporting purposes of approximately $
| 2021 | 2020 | |||||||
| Deferred Tax Assets: | ||||||||
| NOL Carryover | $ | $ | ||||||
| Less valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
| F-14 |
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended December 31, 2021 and 2020 due to the following:
| 2021 | 2020 | |||||||
| Book income (loss) | $ | $ | ||||||
| Change in payroll accruals | ||||||||
| Stock option expense | ||||||||
| Amortization of debt discount | ||||||||
| Change in derivative liability | ||||||||
| Valuation allowance | ( | ) | ||||||
| $ | $ | |||||||
Stock Incentive Plans
During the years ended December 31, 2021 and 2020, we granted to employees and options to purchase shares of common stock.
The options granted during the year ended December 31, 2021, were valued using the following assumptions: estimated -year term, estimated volatility of %, and a risk-free rate of %.
The options granted during the year ended December 31, 2020, were valued using the following assumptions: estimated -year term, estimated volatility of %, and a risk-free rate of %.
As of December 31, 2021 and 2020, 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 December 31, 2021, 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 December 31, 2021, consisted of:
| Exercise Price | Count | Average Exercise | Remaining Life | Exercisable | ||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| Total | ||||||||||||||||||
NOTE 14—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 December 31, 2021 and 2020, as a result. Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations for the years ended December 31, 2021 and 2020.
Total assets and liabilities included in discontinued operations were as follows:
| December 31, 2021 | December 31, 2020 | |||||||
| 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) income from discontinued operations for the years ended December 31, 2021 and 2020, were comprised of the following components:
| Years ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain on write off of accounts payable | ||||||||
| Total other income | ||||||||
| Net income from discontinued operations | $ | $ | ||||||
NOTE 15 — SUBSEQUENT EVENTS
In accordance with SFAS 165 (ASC 855-10), management has performed an evaluation of subsequent events through the date that the financial statements were issued and has determined that it does not have any material subsequent events to disclose in these consolidated financial statements.
| F-15 |