EDGAR 10-K Filing

Company CIK: 813716
Filing Year: 2021
Filename: 813716_10-K_2021_0001493152-21-011743.json

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ITEM 1. BUSINESS
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 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. Our 2020 revenue-generating activities capitalized on our efforts during most of 2019 to exploring new product opportunities. In late 2019, we entered into a new, 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
We had no revenue during the year ended December 31, 2019, while we devoted our efforts and financial resources to development of products.
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. On February 19, 2019, we filed articles of dissolution for both CirTran Media Corp. and CirTran Beverage Corp. with the state of Utah. Additionally, a certificate of dissolution was filed for Racore Network, Inc. on March 11, 2019, and a certificate of dissolution was filed for CirTran Online Corp. on March 20, 2019. Lastly, CirTran Corporation (Utah) was dissolved on August 13, 2019.
All share and per-share amounts have been adjusted to give retroactive effect to a 1,000-to-one reverse split of our common stock effective September 2019.
Principal 2020 and 2019 Activities
HUSTLER®-branded Products
In early 2020 we 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 new, wholly owned subsidiary, LBC Products, Inc. (“LBC”), under a December 30, 2019, Exclusive Manufacturing and Distribution Agreement with GloBrands, LLC (“GloBrands).
Our 2020 product launch culminated months of direct, three-way negotiations that began in 2018 among the Flynt/HUSTLER® organization, GloBrands, and us that let to agreed terms in April 2019 and a definitive agreement signed before 2019 year-end. 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 34 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 over a similarly sized retail store that sells erotic clothing, toys, and associated merchandise. Our HUSTLER®-branded products will also be distributed in outlets operated by HUSTLER®’s affiliated DejaVue 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 United Kingdom, Australia, France, Canada, and Mexico.
In undertaking this new product manufacturing and distribution opportunity, we will seek to take advantage of our distribution and manufacturing relationships established in several global locations during the last 18 years.
In early 2020, we completed phase one of our development of all HUSTLER®-branded products and began the manufacture and distribution of licensed products. Our principal activities during the year ended December 31, 2020, were related to executing on our agreement to develop, manufacture, and distribute licensed products that allowed us to generate revenues of $1,732,625 during the year ended December 31, 2020.
During 2019, we devoted our activities to:
● developed 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;
○ 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;
● created samples, wholesale and point-of-sale displays, catalogs, and related merchandising materials;
● developed digital and hard copy media support, website, product spokespersons, direct television commercials, print, and miscellaneous media;
● established, through our marketing and distribution relationships, distribution and delivery channels, inventory management, and related logistics;
● leased Las Vegas facilities to house our offices, showroom, and warehouse;
● assembled a team of contract consultants and support staff to expand into full operations when our business development progresses; and
● designed data gathering, reporting, and analytical systems to support product and market development and refinement to respond to changing dynamics.
These efforts continue.
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 the 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 will also reimburse 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.
The terms of our agreement with GloBrands are 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 us under our agreement 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 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 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. These three licenses, all effective May 31, 2019, cover 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 guaranteed payments. All manufacturing, labeling, and marketing materials, samples, and representative products are subject to the prior approval of the Flynt/HUSTLER® organization. As noted above, the Flynt/HUSTLER® organization has consented to our appointment to market and distribute the licensed products under our marketing and distribution agreement with GloBrands.
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 to developing our clients’ brands and licensed brands and to providing a range of products in various categories for markets globally. We 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
Beyond our current activities under our GloBrands-HUSTLER® Manufacturing and Distribution Agreement, we seek to commercialize one or more consumer products. Through those efforts, 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 effort includes 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 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, providing the customer with a quality product, delivered 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 will 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.
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 partnerships. 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 designed, engineered, manufactured, and supplied products in the international electronic consumer products, and general merchandise industries 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 enables 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, and depending on the contract, we may be required to prepay a portion of the purchase orders 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 will also be 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 the 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.
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 concerns, 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 lead compliance with applicable good manufacturing procedures compliance, 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 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, and they are required to obtain all local licenses and permits.
Employees
At December 31, 2020, we had three full-time employees, including our officers and directors, and fifteen 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.
Recapitalization
In May 2015, our stockholders and board of directors approved an amendment to our articles of incorporation to complete a 1,000-to-1 reverse split, or consolidation, of our common stock, decrease our authorized common stock to 100,000,000 shares, par value $0.001, and authorize a class of 5,000,000 shares of preferred stock having such terms as the board of directors may determine prior to issuance (the “Amendment”). However, FINRA refused to approve the Amendment until such time as we became current in our periodic reports and received approval for our common stock to resume trading. We became current in our periodic reports, and in September 2019, FINRA approved the Amendment, our recapitalization was effective, and our common stock resumed quotation on the Pink tier of the OTC Markets Group.
Corporate Background and History
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 we acquired substantially all of the assets and certain liabilities of Circuit Technology, Inc., through a wholly owned subsidiary, CirTran Corporation (Utah), that we created for the purpose of completing the acquisition.
Since 2000, we evolved from electronics contract manufacturing to market and distribute worldwide a Playboy®-branded non-alcoholic energy drink under a 2007 license and marketing agreement with Playboy Enterprises, Inc. These activities were terminated in 2016 due to legal and financial problems resulting from Playboy’s cancellation of our agreements. The assets and liabilities associated with our beverage distribution businesses were reported as discontinued operations as of December 31, 2016. In early 2019, we dissolved the subsidiaries under which we had conducted our non-alcoholic beverage distribution business.

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ITEM 1A. RISK FACTORS
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.
We may be deemed to be insolvent and may face liquidation.
We may be deemed to be insolvent. We are unable to meet all of 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 of our assets would likely execute and take all of 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 net income of approximately $0.5 million and a net loss of approximately $1.2 million during the years ended December 31, 2020 and 2019, respectively, which includes a gain of approximately $80,000 and a loss of approximately $149,000 from discontinued operations in 2020 and 2019, respectively. Our net income during the year ended December 31, 2020, was driven by a gain of approximately $1.0 million recognized from the write-off of accounts payable, which was a one-time event. We had an accumulated deficit of approximately $77.9 million as of December 31, 2020. During the year ended December 31, 2020, net cash provided by operations was approximately $471,000. We had current liabilities of approximately $38.1 million and an approximately $37.1 million working capital deficit as of December 31, 2020. The report from our auditors on our consolidated financial statements for the years ended December 31, 2020 and 2019, 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. The accompanying financial statements do not include any adjustments that may be necessary if we are unable to continue as a going concern.
The novel COVID-19 pandemic is having and will likely continue to have negative effects on our business and results of operations.
On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. We are monitoring the situation closely and our response to the COVID-19 pandemic continues to evolve. Our current principal responsive measures include implementing a mandatory work from home policy for most employees, restricting airplane travel, rescheduling marketing efforts, and product market launches, and updating our planning for future events in recognition of the fact that retail outlets for the HUSTLER®-branded products we manufacture and distribute are experiencing, and will likely continue to experience, substantially declining revenue. We are also evaluating the impact of the pandemic on our supply chain as compared to product demand. We actively monitor COVID-19-related developments and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, vendors, and stockholders. The effects of these operational modifications will be reflected in current and future reporting periods.
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-ordered lockdowns, stay-home, or shelter-in-place orders, and 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 as a result of its global economic impact, including any resulting and ongoing recession. 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 have made adjustments to, and will need to continue to adjust, our business and expenditures in an effort 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 all of the foregoing cannot now be predicted and may well exceed our expectations or our ability to cope with them.
We have only recently begun new operations with revenue potential after suffering severe operating and legal hurdles in 2016.
We have only recently commenced revenue-generating, full-scale operations under our GloBrands-HUSTLER® agreement. Based on the term sheet signed in April 2019 and an anticipated execution of a definitive agreement, we began to prepare to manufacture, market, and distribute an array of products under the HUSTLER® brand name. We cannot assure that our efforts will be successful, that we will be able to generate revenues, or that revenues will be sufficient to offset operating costs or recover start-up costs.
Our new efforts to market a group of products under the HUSTLER® brand name face all of the risks and uncertainties of a new business.
Manufacturing and marketing products under the HUSTLER® brand name is a new business for us that will be subject to all of the risks and uncertainties of a new 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 new 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 of the terms, covenants, or conditions of the governing license agreement or that GloBrands, the counterparty to our manufacturing agreement, will meet all of 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 to 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.
All of 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 of 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 of 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, 2020, 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 may be 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.
Our management concluded that our internal control over financial reporting was not effective as of December 31, 2020. 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 in order 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, 2020, 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, 2020 and 2019, we had a number of 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
● 167,761,552 shares required for issuance under our outstanding convertible debentures and promissory notes at approximately $0.025 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 in excess of $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.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

---

ITEM 2. PROPERTIES
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
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. MINE SAFETY DISCLOSURE
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
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
4.06
[add extension/amendment]
Exhibit
Number*
Title of Document
Location
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
10.50
Settlement Agreement between CirTran Corporation and Joueboire, LLC, dated April 19, 2017
Incorporated by reference from the registration statement on Form 10 filed May 11, 2018
10.51
Settlement Agreement between CirTran Corporation and YA Global Investments, LP, dated April 20, 2017
Incorporated by reference from the registration statement on Form 10 filed May 11, 2018
10.52
Agreement between Tekfine, LLC and CirTran Corporation dated April 20, 2017
Incorporated by reference from the registration statement on Form 10 filed May 11, 2018
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 23.
Consents of Experts and Counsel
23.01
Consent of Fruci & Associates, LLC
This filing
23.02
Consent of Sadler, Gibb & Associates, LLC
This filing
Exhibit
Number*
Title of Document
Location
Item 31.
Rule 13a-14(a)/15d-14(a) Certifications
31.01
Certification of Principal Executive and Principal Financial Officer Pursuant to Rule 13a-14
This filing
Item
Section 1350 Certifications
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
XBRL Instance Document
This filing
101.SCH
XBRL Taxonomy Extension Schema
This filing
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
This filing
101.DEF
XBRL Taxonomy Extension Definition Linkbase
This filing
101.LAB
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 particular 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.
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: May 17, 2021 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: May 17, 2021 /s/ Iehab Hawatmeh
Iehab Hawatmeh, Director, President
Chief Financial Officer (Principal Executive
Officer, Principal Financial Officer)
Date: May 17, 2021 /s/ Kathryn Hollinger
Kathryn Hollinger, Director
CIRTRAN CORPORATION
Financial Statements
December 31, 2020 and 2019
Page
Audited Financial Statements for the Years Ended December 31, 2020 and 2019:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CirTran Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of CirTran Corporation (“the Company”) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, 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, 2020, and the results of its operations and its cash flows for the year then ended, 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 an accumulated deficit, net losses, and working capital deficiencies. 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 audit. 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 audit 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 audit, 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 audit 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 audit 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 audit provides 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.
Valuation of Investments
Description of the Critical Audit Matter
As discussed in Note 2 to the consolidated financial statements, the Company has investments in a private entity which require the Company to periodically evaluate potential impairment by assessing whether the carrying value of the investment exceeds the fair value. Auditing management’s analysis includes tests that are complex and highly judgmental due to the estimation required to determine the fair value of the underlying investees. In particular, fair value estimates are sensitive to significant assumptions and factors such as expectations about future market and economic conditions, revenue growth rates, strategic plans, and historical operating results, among other factors.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management’s valuation of investments consisted of the following, among others:
1. Obtain and test management assumptions and analysis.
2. Obtain and review the financial position and operating result data of the investee entity directly.
3. Assess management’s key indicators regarding impairment considerations compared to tests of underlying data.
We have served as the Company’s auditor since 2020.
Spokane, Washington
May 14, 2021
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 sheet of CirTran Corporation (“the Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
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 audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
We served as the Company’s auditor from 2013 to 2020.
Draper, UT
May 29, 2020
S|G Phone: 801-783-2950 | Fax: 801-783-2960 | 344 West 13800 South, Suite 250, Draper, UT 84020 | sadlergibb.com
CIRTRAN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
Current assets
Cash
$ 108,147
$ -
Inventory
325,252
18,814
Deposits on inventory
53,900
-
Deposits on inventory - related party
319,333
-
Accounts receivable
16,966
-
Other current assets
118,844
1,210
Total current assets
942,442
20,024
Investment in securities at cost
300,000
300,000
Right of use asset
50,409
-
Property and equipment, net of accumulated depreciation
18,299
9,772
Total assets
$ 1,311,150
$ 329,796
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Bank overdraft
$ -
$ 1,611
Accounts payable
1,347,870
2,121,401
Lease liability, current
28,118
-
Related-party payable
13,740
13,740
Short-term advances payable
109,904
163,994
Short-term advances payable - related parties
287,776
738,655
Accrued liabilities
1,354,539
1,077,999
Accrued payroll and compensation expense
4,133,346
3,757,636
Accrued interest, current portion
2,824,948
2,405,946
Convertible debenture, current portion, net of discounts
264,284
248,874
Note payable, current portion
90,000
90,000
Note payable to stockholders and members
521,194
151,833
Derivative liability
922,654
894,079
Liabilities from discontinued operations
26,153,820
26,348,853
Total current liabilities
38,052,193
38,014,621
Lease liability, long term
22,291
-
Accrued interest, net of current portion
1,490,951
1,371,098
Note payable, net of current portion
656,000
500,000
Convertible debenture, net of current portion, net of discount
1,787,816
1,678,768
Total liabilities
42,009,251
41,564,487
Commitments and contingencies
-
-
Stockholders’ deficit
Common stock, par value $0.001; 100,000,000 shares authorized; 4,720,417 and 4,500,417 shares issued and outstanding at December 31, 2020 and 2019, respectively
4,720
4,500
Additional paid-in capital
37,226,851
37,222,615
Accumulated deficit
(77,929,672 )
(78,461,806 )
Total stockholders’ deficit
(40,698,101 )
(41,234,691 )
Total liabilities and stockholders’ deficit
$ 1,311,150
$ 329,796
The accompanying notes are an integral part of these consolidated financial statements.
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
Net sales
$ 1,732,625
$ -
Cost of sales
896,273
-
Gross profit
836,352
-
Operating expenses
Employee costs
292,420
125,733
Selling, general and administrative expenses
465,518
280,825
Total operating expenses
757,938
406,558
Income (loss) from operations
78,414
(406,558 )
Other income (expense)
Interest expense
(658,654 )
(592,756 )
Loss on disposal of equipment
(9,771 )
-
Loss on derivative valuation
(22,822 )
(80,640 )
Gain of write off of accounts payable
1,023,471
-
Gain on settlement of debt
-
Other income
42,000
Total other income (expense)
374,224
(672,415 )
Net income (loss) from continuing operations
452,638
(1,078,973 )
Loss from discontinued operations
79,496
(148,566 )
Net income (loss)
$ 532,134
$ (1,227,539 )
Net income (loss) from continuing operations per common share, basic
$ 0.10
$ (0.24 )
Net income (loss) from continuing operations per common share, diluted
$ 0.00
$ (0.24 )
Net income (loss) from discontinued operations per common share, basic
$ 0.02
$ (0.03 )
Net income (loss) from discontinued operations per common share, diluted
$ 0.00
$ (0.03 )
Net income (loss) per common share, basic
$ 0.12
$ (0.27 )
Net income (loss) per common share, diluted
$ 0.00
$ (0.27 )
Basic weighted average common shares outstanding
4,555,718
4,500,417
Diluted weighted average common shares outstanding
172,317,270
4,500,417
The accompanying notes are an integral part of these consolidated financial statements.
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Common Stock Additional Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance, December 31, 2018 4,500,417 $ 4,500 $ 37,222,615 $ (77,234,267 ) $ (40,007,152 )
Net loss, year ended December 31, 2019 - - - (1,227,539 ) (1,227,539 )
Balance, December 31, 2019 4,500,417 4,500 37,222,615 (78,461,806 ) (41,234,691 )
Stock option expense - - -
Common stock issued for conversion of accrued interest 220,000 4,180 - 4,400
Net loss, year ended December 31, 2020 - - - 532,134
532,134
Balance, December 31, 2020 4,720,417 $ 4,720 $ 37,226,851 $ (77,929,672 ) $ (40,698,101 )
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
Cash flows from operating activities
Net income (loss) income from continuing operations
$ 452,638
$ (1,078,973 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation expense
2,293
Loss on derivative valuation
22,822
80,640
Debt discount amortization
115,211
34,215
Loss on disposal of equipment
9,771
-
Stock option expense
-
Gain on write-off of accounts payable
(1,023,471 )
-
Interest expense recorded on initial measurement of derivative liability
-
56,338
Amortization of right of use asset to rent expense
6,813
Expenses paid on behalf of Company by a related party
1,940
(77,180 )
Changes in operating assets and liabilities:
Inventory
(306,438 )
(18,814 )
Deposits on inventory
(53,900 )
-
Deposits on inventory - related party
(319,333 )
-
Accounts receivable
(16,966 )
-
Other current assets
(117,634 )
(1,210 )
Accounts payable
255,282
6,224
Accrued liabilities
640,560
273,534
Payments for lease liability
(6,813
)
-
Accrued payroll and compensation
375,710
43,970
Accrued interest
543,255
500,746
Related-party payables
-
10,740
Net cash provided by (used in) continuing operating activities
579,876
(167,477 )
Net cash provided by (used in) discontinued operations
(115,537 )
44,050
Net cash provided by (used in) operating activities
464,339
(123,427 )
Cash flows from investing activities
Purchase of equipment
(18,672 )
-
Net cash used in investing activities
(18,672 )
-
Cash flows from financing activities
Proceeds from bank overdraft
(1,611 )
1,611
Proceeds from convertible loans payable
15,000
60,000
Proceeds from related-party loans
11,500
84,987
Repayments of related-party loans
(467,409 )
(17,785 )
Proceeds from loans payable
156,000
15,400
Repayments of loans payable
(51,000 )
(21,000 )
Cash provided by (used in) financing activities
(337,520 )
123,213
Cash used in discontinued financing activities
-
-
Net cash provided by (used in) financing activities
(337,520 )
123,213
Net change in cash
108,147
(214 )
Cash, beginning of period
-
Cash, end of period
$ 108,147
$ -
Supplemental disclosure of cash flow information
Cash paid for interest
$ -
$ -
Cash paid for income taxes
$ -
$ -
Supplemental disclosure of non-cash investing activities
Initial measurement of derivative liability
$ 5,753
$ 813,439
Related-party note entered into in exchange for account payable
$ 5,341
$ -
Related-party note entered into in exchange for accrued liability
$ 364,020
$ -
Common stock issued for conversion of accrued interest
$ 4,400
$ -
Initial measurement of right of use asset and related operating lease liability
$ 57,222
-
The accompanying notes are an integral part of these consolidated financial statements.
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
We offer diversified expertise in manufacturing, marketing, distribution, and technology services in a wide variety of consumer products, including tobacco products, medical devices, and beverages. 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, 2020, we executed on our business plan, fulfilling our obligations under a distribution agreement to manufacture, distribute, and sell condoms, electronic tobacco products, cigars, energy drinks, water beverages, and related merchandise, all using the HUSTLER® brand name under a December 2019 five-year manufacturing and distribution agreement with an unrelated party. We devoted most of 2019 to exploring a number of potential product opportunities and preparing for the HUSTLER® brand name products launch.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
We consolidate all of our majority-owned subsidiaries, companies over which we exercise control through majority voting rights, and companies in which we have a variable interest and we are the primary beneficiary. We account for our investments in common stock of other companies that we do not control, but over which we can exert significant influence, using the cost method.
The consolidated financial statements as of and for the year ended December 31, 2020, include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Products Corp., LBC Products, Inc., and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated.
The consolidated financial statements as of and for the year ended December 31, 2019, include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Products Corp., CirTran Corporation (Utah), CirTran Beverage Corp., CirTran Online Corp., CirTran Media Corp., Racore Network, and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated.
Use of Estimates
In preparing the financial statements in accordance with accounting principles generally accepted in the United States of America, 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.
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 a unique customer purchase order, which is considered to be a stand-alone contract that we retain the right to accept or reject. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
During the year ended December 31, 2020, we recognized revenues of $515,000 related to the performance obligations under product development service agreements with customers. These contracts are long term in nature and revenue is recognized at certain milestone intervals upon our delivery and customer acceptances of work product related to those milestones, namely product design, packaging, branding display, and prototypes. There were no costs to obtain the contracts identified and, as such, no asset has been recorded for customer acquisition costs. Additionally, we have not recognized impairment losses related to the receivables from these contracts during the year ended December 31, 2020.
Additionally, we recognized revenues of $1,217,625 during the year ended December 31, 2020, related to the delivery of product to our customers. Each delivery is based on a unique customer purchase order which is considered to be a stand-alone contract that we retain the right to accept or reject. Upon acceptance, we oblige delivery of such product to the customer at an agreed-upon place, time, and price. We recognize revenue under the unique purchase order contract upon fulfillment of our performance obligations therein, typically limited to the delivery of product.
Cash and Cash Equivalents
We consider all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents. We did not hold any cash equivalents as of December 31, 2020 or 2019.
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 $50,409 as of December 31, 2020. 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 in appropriate to exclude future renewal terms from the capitalization of our operating lease.
We have one lease in effect requiring minimum monthly payments of $2,500 through October 2022. We have determined the appropriate discount rate to be 5% based on our other borrowings secured by assets. A summary of future payments due under the terms of the lease as of December 31, 2021 is as follows:
Total future payments $ 52,500
Implied interest (2,091 )
Operating lease liability as of December 31, 2021 $ 50,409
Investment in Securities
Our cost-method investment consists of an investment in a private digital multi-media technology company that totaled $300,000 at December 31, 2020 and 2019. As we owned less than 20% of that company’s stock as of each date, and no significant influence or control exists, the investment is accounted for using the cost method. We evaluated the investment for impairment and determined there was none during the periods presented.
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. The capitalized cost, net of accumulated depreciation, associated with molds and dies included in property and equipment at December 31, 2020, and December 31, 2019, was $0 and $9,772, respectively. All property and equipment that was in service during the year ended December 31, 2019, was disposed of during the current period. During the year ended December 31, 2020, we purchased a vehicle for $18,672 and recorded depreciation expense of $373, leaving a net book value of $18,299 as of December 31, 2020.
Depreciation expense is recognized in amounts equal to the cost of depreciable assets over estimated service lives. Leasehold improvements are amortized over the shorter of the life of the lease or the service life of the improvements. The straight-line method of depreciation and amortization is followed for financial reporting purposes. Maintenance, repairs, and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in operating results.
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 not record expenses for the impairment of long-lived assets during the year ended December 31, 2020 or 2019.
Financial Instruments with Derivative Features
We do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives using a Monte Carlo simulation. The fair values of the derivative instruments are measured each reporting period.
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. Inventories consist solely of finished goods.
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 $53,900 (non-related-party) and $319,333 (related-party) as of December 31, 2020. There were no deposits on inventory as of December 31, 2019.
Inventory balances consisted of the following:
December 31, 2020 December 31, 2019
Finished goods $ 526,372
$ 18,814
Raw materials 40,803 -
Reserves for obsolescence (241,923 ) -
Total $ 325,252
$ 18,814
Stock-Based Compensation
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, 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).
Stock-based employee compensation was $56 and $800 for the years ended December 31, 2020 and 2019, respectively.
Income Taxes
We use the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets, liabilities, the carryforward of operating losses and tax credits, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized. Research tax credits are recognized as used.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated financial statements for cash, notes payable, and accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments. The carrying amounts of our debt obligations approximate fair value.
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 have been valued using level 3 inputs.
Accounts payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these instruments. Derivative liabilities are measured using level 3 inputs.
Total Fair Value
at December
31, 2020
Quoted
prices in
active markets
(Level 1) Significant
other
observable
inputs (Level 2) Significant
unobservable
inputs (Level 3)
Derivative liabilities $ 922,654 $ - $ - $ 922,654
Total Fair Value at December 31, 2019 Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3)
Derivative liabilities $ 894,079 $ - $ - $ 894,079
Loss Per Share
Basic loss per share (EPS) is calculated by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted EPS 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. We had 569,029,796 potentially issuable common shares at December 31, 2019. However, the impacts of the potentially issuable common shares were excluded from the diluted loss per common shares outstanding given the anti-dilutive effect such shares have on net losses per common share. There were 167,731,552 such shares included for the year ended December 31, 2020.
Short-term Advances
We have short-term advances with various individuals. These advances are due upon demand, carry no interest, and are not collateralized. These advances are classified as short-term liabilities.
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.
Reclassification of Prior Year Expenses
Certain prior year items have been reclassified to conform to current year presentation. Notably, $125,733 of employee-related costs previously included in selling, general and administrative expenses on the consolidated statements of operations have been reclassified and presented as a separate line item.
NOTE 3 - GOING CONCERN AND REALIZATION OF ASSETS
In October 2016, we lost our ability to continue energy drink distribution, our principal source of revenue, after receiving an unfavorable ruling in our suit against Playboy Enterprises, Inc.
The accompanying audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. We had a working capital deficiency of $37,059,342 and $37,994,597 as of December 31, 2020 and 2019, respectively, and a net income (loss) from continuing operations of $78,414 and $(406,558) during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, we had an accumulated deficit of $77,929,672 and $78,461,806, respectively. These conditions raise substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in the following paragraphs 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 mostly 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 us and our shareholders.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
December 31, 2020 December 31, 2019 Useful Life (years)
Furniture and office equipment $ - $ 177,900 5-10
Leasehold improvements - 997,714 7-10
Production equipment - 2,886,267 5-10
Vehicles 18,672 53,209 3-7
Total 18,672 4,115,090
Less: accumulated depreciation (373 ) (4,105,318 )
Property and equipment, net $ 18,299 $ 9,772
During the year ended December 31, 2020, we disposed of all of our remaining assets as part of our adoption of our new agreement to develop and distribute certain products. There was no consideration received upon disposal resulting in a net loss of $9,771 during the year ended December 31, 2020. There was $373 and $2,293 of depreciation expense recorded during the years ended December 31, 2020 and 2019, respectively.
NOTE 5 - RELATED-PARTY TRANSACTIONS
Transactions involving Officers, Directors, and Stockholders
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, 2020 and 2019, the principal amount owing on the note was $151,833 and $151,833, respectively.
On March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $315,000 ($105,000 each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the amount received plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum. We made no payments towards the outstanding notes during the periods presented. The principal balance owing on the notes as of December 31, 2020 and 2019, totaled $72,466 and $72,466, respectively.
During the year ended December 31, 2020, we made repayments to related parties of $467,409 and advances of $11,500 were received from related parties. Additionally, related parties paid expenses totaling $1,940 directly to vendors on our behalf. There were $287,776 and $738,655 of short-term advances due to related parties as of December 31, 2020 and 2019, respectively. The advances are due on demand and as such included in current liabilities.
The terms of our employment agreement with Iehab Hawatmeh, our president, require us to grant options to purchase 6,000 shares of our stock each year, with an exercise price equal to the fair market price of our common stock as of the grant date, as compensation for services provided as our chief executive officer. During the year ended December 31, 2020, we granted options to purchase 6,000 shares of common stock relating to this employment agreement. There were also options to purchase 6,000 shares of common stock that expired during the year ended December 31, 2020. There were outstanding options to purchase 30,000 shares of common stock and options to purchase 30,000 shares of common held by Iehab Hawatmeh as of December 31, 2020 and 2019, respectively. See Note 6 - Other Accrued Liabilities and Note 12 - Stock Options and Warrants.
As of December 31, 2020 and 2019, we owed our president a total of $868,528 and $903,740 in unsecured advances. The advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee. The borrowing fees were waived by our president on these loans. These amounts are included in our liabilities from discontinued operations.
As of December 31, 2020 and 2019, we owed a total of $13,740 to a related party through trade payables incurred in the normal course of business. These amounts are shown as a separate related-party payable on the balance sheet as of each reporting date.
During the year ended December 31, 2020, we made deposits with a related-party inventory supplier totaling $319,333. The related party is an entity controlled by our CEO. 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 $643,772 during the year ended December 31, 2020.
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,
Tax liabilities $ 557,894 $ 806,331
Other 796,645 271,668
Total $ 1,354,539 $ 1,077,999
Other accrued liabilities as of December 31, 2020 and 2019, include a non-interest-bearing payable totaling $45,000 that is due on demand. Additionally, other accrued liabilities as of December 31, 2020 include customer deposits totaling $751,645. During the year ended December 31, 2020, our CEO made tax payments totaling $364,202 directly to the IRS on our behalf to reduce the tax liabilities owing.
Accrued payroll and compensation liabilities consist of the following:
December 31, 2020 December 31, 2019
Stock option expenses $ - $ 4,000
Director fees 135,000 135,000
Bonus expenses 121,858 121,858
Commissions 2,148 2,148
Administrative payroll 3,874,340 3,494,630
Total $ 4,133,346 $ 3,757,636
During the year ended December 31, 2020, the statute of limitations on certain liabilities carried in accounts payable passed. As a result, we recognized a gain of $1,023,471 from the write-off of accounts payable included in continuing operations and $233,382 included in gains from discontinued operations.
Stock option expenses consist of employee stock option expenses. During the year ended December 31, 2020, we resumed accruing wages for our CEO, which are included in administrative payroll. A total of $345,000 was accrued during the year ended December 31, 2020, of which $172,500 are included in cost of sales as a direct labor cost of fulfilling performance obligations related to our revenue recognized and $172,500 are included in operating expenses. The allocation of wages to cost of sales and operating expenses is based on the percentage of time spent by our CEO to directly deliver on certain performance obligations under our contracts with our customers. Our CEO spent 100% of his time as such during the six months ended June 30, 2020, with 0% of his time spent as such during the third and fourth quarters of 2020.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Litigation and Claims
Various vendors, service providers, and others have asserted legal claims in previous years. These creditors generally are not actively seeking collection of amounts due 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. 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 to Playboy of $6.6 million against Play Beverages and CirTran Beverage Corp., our subsidiary. The court denied our motion for a new trial and awarded Playboy treble patent infringement damages and attorney’s fees. We filed a notice of appeal in July 2017 and again in March 2018. Playboy has initiated collection efforts but has recovered no funds. In September 2018, the appellate court affirmed the judgment of the circuit court. We have accrued $17,205,599 as of December 31, 2020 and 2019, related to this judgment, which is included in liabilities in discontinued operations.
Delinquent Payroll Taxes, Interest, and Penalties
In November 2004, the IRS accepted our amended offer in compromise (the “Offer”) to settle delinquent payroll taxes, interest, and penalties, which requires us to pay $500,000, remain current in our payment of taxes for five years, and forego claiming any net operating losses for the years 2001 through 2015 or until we pay taxes on future profits in an amount equal to the taxes of $1,455,767 waived by the Offer. In June 2013, we entered into a partial installment agreement to pay $768,526 in unpaid 2009 payroll taxes, which requires us to pay the IRS 5% of cash deposits. The monthly payments are to continue until the account balances are paid in full or until the collection statute of limitation expired on October 6, 2020. We are currently in communication with the IRS regarding the statute of limitations on this settlement and appropriate next steps. There was $673,645 and $1,048,756 due as of December 31, 2020 and 2019, respectively.
Employment Agreements
We engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended in September 2017. In July 2017, Mr. Hawatmeh had resigned all positions with us to pursue other business activities, thereby effectively terminating the agreement. However, the amendment to his employment agreement in September 2017 reinstated Mr. Hawatmeh to his previous positions, with a salary in an amount to be determined. Among other things, the reinstated employment agreement: (a) grants options to purchase a minimum of 6,000 shares of our stock each year, with an exercise price equal to the market price of our common stock as of the grant date, for the maximum term allowed under our stock option plan; (b) provides for health insurance coverage, cell phone, car allowance, life insurance, and director and officer liability insurance, as well as any other bonus approved by our board; and (c) includes additional incentive compensation as follows: (i) a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization for the applicable quarter; (ii) bonuses equal to 1% of the net purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and (iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of all products, net of returns and allowances. On January 1, 2020, we resumed accruing wages for our CEO. A total of $345,000 was accrued during the year ended December 31, 2020.
We also have an oral agreement with our other director that requires us to issue options to purchase 2,000 shares of our common stock each year.
During the years ended December 31, 2020 and 2019, we granted options to purchase 8,000 and 8,000 shares of common stock to Mr. Hawatmeh and Ms. Hollinger, respectively. We recorded expenses totaling $56 and $800 during the years ended December 31, 2020 and 2019, respectively, for these options.
We have no other agreements requiring the grant of options.
License Agreements
We have entered into agreements whereby we are required to pay certain royalties for the manufacture and distribution of licensed products. Fees are based on a percentage of sales and remitted quarterly. Such costs are included in cost of sales for financial reporting purposes.
NOTE 8 - NOTES PAYABLE
Notes payable consisted of the following:
December 31, 2020 December 31, 2019
Note payable to former service provider for past due account payable (current) $ 90,000 $ 90,000
Note payable for settlement of debt (long term) 500,000 500,000
Small Business Administration loan 156,000 -
Total $ 746,000 $ 590,000
There was $205,165 and $157,535 of accrued interest due on these note as of December 31, 2020 and 2019, respectively.
NOTE 9 - CONVERTIBLE DEBENTURES
We have entered into various convertible debentures that encumber all of our assets. Convertible debentures consisted of the following:
December 31, 2020 December 31, 2019
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on May 30, 2021 $ 200,000 $ 200,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on December 8, 2021 25,000 25,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on February 8, 2021 25,000 25,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on December 8, 2021 25,000 10,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on April 30, 2027 2,390,528 2,390,528
Subtotal $ 2,665,528 $ 2,650,528
Less: discounts (613,428 ) (722,886 )
Total $ 2,052,100 $ 1,927,642
Less: current portion (264,284 ) (248,874 )
Long term portion $ 1,787,816 $ 1,678,768
The convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or the lowest bid price for the 20 trading days prior to conversion.
As of December 31, 2020 and 2019, we had accrued interest on the convertible debentures totaling $1,528,511 and $1,399,295, respectively, of which $41,960 and $28,199 was current and $1,486,551 and $1,371,098 was long term, respectively. As of December 31, 2020 and 2019, the debentures, including accrued but unpaid interest, were convertible into 167,761,552 and 568,989,796 shares of our common stock.
NOTE 10 - DERIVATIVE LIABILITIES
As discussed in Note 9 - Convertible Debentures, we have entered into five separate agreements to borrow a total of $2,665,528 with the outstanding principal and interest being convertible at the holder’s option into common stock of the company at the lesser of $100 (notes one through four) or $0.10 (note five) or the lowest closing bid price in the prior 20 trading days. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a Monte Carlo simulation as of December 31, 2020, using the following assumptions:
Volatility 78.5% - 93.8 %
Risk-free rates 0.06% - 0.51 %
Stock price $ .028 0
Remaining life 0.25- 6.33 years
The fair values of the derivative instruments are measured each reporting period, which resulted in a loss on the fair value of derivative liabilities of $22,822 and $80,640 during the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, the fair market value of the derivatives aggregated $922,654 and $894,079, respectively.
NOTE 11-STOCKHOLDERS’ DEFICIT
We are authorized to issue up to 100,000,000 shares of $0.001 par value common stock. During the year ended December 31, 2020, we issued a total of 220,000 shares of common stock for the conversion of $4,400 of accrued interest payable under our convertible debentures. We had a total of 4,720,417 and 4,500,417 common shares issued and outstanding as of December 31, 2020 and 2019, respectively. During the year ended December 31, 2019, we effected a 1:1000 reverse stock split of our outstanding stock. The impacts of the reverse stock split have been retroactively stated.
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.
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, 2020 and 2019, 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 of our tax returns remain open.
As of December 31, 2020 and 2019, we had net operating loss carryforwards for tax reporting purposes of approximately $19.0 million and $19.1 million, respectively. During the year ended December 31, 2019, we dissolved four subsidiaries that had total net operating loss carryforwards of approximately $8.9 million, which were forfeited upon dissolution, reducing our deferred tax asset by approximately $1.9 million. In addition, the realization of tax benefits relating to net operating loss carryforwards is limited due to the settlement related to amounts previously due to the IRS, as discussed in Note 6 - Other Accrued Liabilities.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:
Income tax provision at the federal statutory rate 21 %
Effect on operating losses (21 )%
-
Net deferred tax assets consisted of the following:
December 31, 2020 December 31, 2019
Net operating loss carryforward $ 3,791,763 $ 4,005,545
Valuation allowance (3,791,763 ) (4,005,545 )
Net deferred tax asset $ - $ -
A reconciliation of income taxes computed at the statutory rate is as follows:
December 31, 2020 December 31, 2019
Computed federal income tax benefit (expense) at statutory rate of 21% and 21% $ 111,023 $ (245,508 )
Depreciation and amortization -
Change in payroll accruals 75,142 8,794
Stock option expense
Amortization of debt discount 23,042 -
Change in derivative liability 4,564 -
Change in valuation allowance (213,782 ) 236,095
Income tax expense $ - $ -
NOTE 13 - STOCK OPTIONS AND WARRANTS
Stock Incentive Plans
During the year ended December 31, 2020 and 2019, we granted to employees 8,000 and 8,000 options to purchase shares of common stock, respectively.
The 8,000 options granted during the year ended December 31, 2020, were valued using the following assumptions: estimated five-year term, estimated volatility of 91%, and a risk-free rate of 1.61%.
During the year ended December 31, 2019, we granted 6,000 and 2,000 stock options relating to the employment agreements with Mr. Hawatmeh and Ms. Hollinger. The fair market value of the options was $600, using the following assumptions: estimated seven-year term, estimated volatility of 567%, and a risk-free rate of 2.31%.
As of December 31, 2020 and 2019, we had no unrecognized compensation related to outstanding options that have not yet vested at year-end that would be recognized in subsequent periods. See Note 6 - Other Accrued Liabilities for a description of amounts of option expenses included in accrued payroll and compensation expense.
During the year ended December 31, 2020, we issued a total of 8,000 options to purchase common stock, and a total of 8,000 options expired unexercised. As of December 31, 2020, there were 40,000 options issued and vested with a weighted average exercise price of $0.01 and a weighted average remaining life of 2.92 years. Outstanding options as of December 31, 2020 consisted of:
Exercise Price Count Avg Exercise Remaining Life Exerciseable
$ 0.01 8,000 $ 0.01 0.99 8,000
$ 0.10 32,000 $ 0.10 3.40 32,000
Total 40,000 $ 0.08 2.92 40,000
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, 2020 and 2019, 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, 2020 and 2019.
Total assets and liabilities included in discontinued operations were as follows:
December 31,
Assets from Discontinued Operations:
Cash $ - -
Total assets from discontinued operations $ - $ -
Liabilities from Discontinued Operations:
Accounts payable $ 19,456,998 $ 19,690,378
Accrued liabilities 589,380 704,917
Accrued interest 1,176,226 1,022,342
Accrued payroll and compensation expense 131,108 131,108
Current maturities of long-term debt 239,085 444,085
Related-party payable 1,776,250 1,776,250
Short-term advances payable 2,784,773 2,579,773
Total liabilities from discontinued operations $ 26,153,820 $ 26,348,853
Net losses from discontinued operations were comprised of the following components:
Year Ended December 31,
Net sales $ - $ -
Cost of sales - -
Gross profit - -
Operating expenses
Selling, general and administrative expenses - 13,193
Total operating expenses - 13,193
Other income (expense)
Interest expense (153,886 ) (153,465 )
Gain on write of off accounts payable 233,382 18,095
Total other income (expense) 79,496 (135,373 )
Net income (loss) from discontinued operations $ 79,496 $ (148,566 )
NOTE 15 - SUBSEQUENT EVENTS
On March 29, 2021, we accepted a request from a convertible debenture holder to convert $6,750 of accrued but unpaid interest for 225,000 shares of common stock.
On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. This situation is ongoing, and we are monitoring it closely. Although our response to the COVID-19 pandemic continues to evolve, we have taken measures to mitigate the impact on our business operations and overall financial performance. We are also constantly evaluating and responding to the impact of the pandemic on our supply chain as compared to product demand. In addition, we actively monitor COVID-19-related developments and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, vendors, and stockholders. The effects of these operational modifications will be reflected in current and future reporting periods.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS

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ITEM 9A. CONTROLS AND PROCEDURES

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ITEM 9B. OTHER INFORMATION

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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
10.50
Settlement Agreement between CirTran Corporation and Joueboire, LLC, dated April 19, 2017
Incorporated by reference from the registration statement on Form 10 filed May 11, 2018
10.51
Settlement Agreement between CirTran Corporation and YA Global Investments, LP, dated April 20, 2017
Incorporated by reference from the registration statement on Form 10 filed May 11, 2018
10.52
Agreement between Tekfine, LLC and CirTran Corporation dated April 20, 2017
Incorporated by reference from the registration statement on Form 10 filed May 11, 2018
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 23.
Consents of Experts and Counsel
23.01
Consent of Fruci & Associates, LLC
This filing
23.02
Consent of Sadler, Gibb & Associates, LLC
This filing
Exhibit
Number*
Title of Document
Location
Item 31.
Rule 13a-14(a)/15d-14(a) Certifications
31.01
Certification of Principal Executive and Principal Financial Officer Pursuant to Rule 13a-14
This filing
Item
Section 1350 Certifications
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
XBRL Instance Document
This filing
101.SCH
XBRL Taxonomy Extension Schema
This filing
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
This filing
101.DEF
XBRL Taxonomy Extension Definition Linkbase
This filing
101.LAB
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 particular 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.
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: May 17, 2021 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: May 17, 2021 /s/ Iehab Hawatmeh
Iehab Hawatmeh, Director, President
Chief Financial Officer (Principal Executive
Officer, Principal Financial Officer)
Date: May 17, 2021 /s/ Kathryn Hollinger
Kathryn Hollinger, Director
CIRTRAN CORPORATION
Financial Statements
December 31, 2020 and 2019
Page
Audited Financial Statements for the Years Ended December 31, 2020 and 2019:
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Stockholders’ Deficit for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of CirTran Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of CirTran Corporation (“the Company”) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, 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, 2020, and the results of its operations and its cash flows for the year then ended, 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 an accumulated deficit, net losses, and working capital deficiencies. 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 audit. 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 audit 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 audit, 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 audit 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 audit 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 audit provides 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.
Valuation of Investments
Description of the Critical Audit Matter
As discussed in Note 2 to the consolidated financial statements, the Company has investments in a private entity which require the Company to periodically evaluate potential impairment by assessing whether the carrying value of the investment exceeds the fair value. Auditing management’s analysis includes tests that are complex and highly judgmental due to the estimation required to determine the fair value of the underlying investees. In particular, fair value estimates are sensitive to significant assumptions and factors such as expectations about future market and economic conditions, revenue growth rates, strategic plans, and historical operating results, among other factors.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures to evaluate management’s valuation of investments consisted of the following, among others:
1. Obtain and test management assumptions and analysis.
2. Obtain and review the financial position and operating result data of the investee entity directly.
3. Assess management’s key indicators regarding impairment considerations compared to tests of underlying data.
We have served as the Company’s auditor since 2020.
Spokane, Washington
May 14, 2021
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 sheet of CirTran Corporation (“the Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
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 audit 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 audit, 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
We served as the Company’s auditor from 2013 to 2020.
Draper, UT
May 29, 2020
S|G Phone: 801-783-2950 | Fax: 801-783-2960 | 344 West 13800 South, Suite 250, Draper, UT 84020 | sadlergibb.com
CIRTRAN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS
Current assets
Cash
$ 108,147
$ -
Inventory
325,252
18,814
Deposits on inventory
53,900
-
Deposits on inventory - related party
319,333
-
Accounts receivable
16,966
-
Other current assets
118,844
1,210
Total current assets
942,442
20,024
Investment in securities at cost
300,000
300,000
Right of use asset
50,409
-
Property and equipment, net of accumulated depreciation
18,299
9,772
Total assets
$ 1,311,150
$ 329,796
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Bank overdraft
$ -
$ 1,611
Accounts payable
1,347,870
2,121,401
Lease liability, current
28,118
-
Related-party payable
13,740
13,740
Short-term advances payable
109,904
163,994
Short-term advances payable - related parties
287,776
738,655
Accrued liabilities
1,354,539
1,077,999
Accrued payroll and compensation expense
4,133,346
3,757,636
Accrued interest, current portion
2,824,948
2,405,946
Convertible debenture, current portion, net of discounts
264,284
248,874
Note payable, current portion
90,000
90,000
Note payable to stockholders and members
521,194
151,833
Derivative liability
922,654
894,079
Liabilities from discontinued operations
26,153,820
26,348,853
Total current liabilities
38,052,193
38,014,621
Lease liability, long term
22,291
-
Accrued interest, net of current portion
1,490,951
1,371,098
Note payable, net of current portion
656,000
500,000
Convertible debenture, net of current portion, net of discount
1,787,816
1,678,768
Total liabilities
42,009,251
41,564,487
Commitments and contingencies
-
-
Stockholders’ deficit
Common stock, par value $0.001; 100,000,000 shares authorized; 4,720,417 and 4,500,417 shares issued and outstanding at December 31, 2020 and 2019, respectively
4,720
4,500
Additional paid-in capital
37,226,851
37,222,615
Accumulated deficit
(77,929,672 )
(78,461,806 )
Total stockholders’ deficit
(40,698,101 )
(41,234,691 )
Total liabilities and stockholders’ deficit
$ 1,311,150
$ 329,796
The accompanying notes are an integral part of these consolidated financial statements.
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
Net sales
$ 1,732,625
$ -
Cost of sales
896,273
-
Gross profit
836,352
-
Operating expenses
Employee costs
292,420
125,733
Selling, general and administrative expenses
465,518
280,825
Total operating expenses
757,938
406,558
Income (loss) from operations
78,414
(406,558 )
Other income (expense)
Interest expense
(658,654 )
(592,756 )
Loss on disposal of equipment
(9,771 )
-
Loss on derivative valuation
(22,822 )
(80,640 )
Gain of write off of accounts payable
1,023,471
-
Gain on settlement of debt
-
Other income
42,000
Total other income (expense)
374,224
(672,415 )
Net income (loss) from continuing operations
452,638
(1,078,973 )
Loss from discontinued operations
79,496
(148,566 )
Net income (loss)
$ 532,134
$ (1,227,539 )
Net income (loss) from continuing operations per common share, basic
$ 0.10
$ (0.24 )
Net income (loss) from continuing operations per common share, diluted
$ 0.00
$ (0.24 )
Net income (loss) from discontinued operations per common share, basic
$ 0.02
$ (0.03 )
Net income (loss) from discontinued operations per common share, diluted
$ 0.00
$ (0.03 )
Net income (loss) per common share, basic
$ 0.12
$ (0.27 )
Net income (loss) per common share, diluted
$ 0.00
$ (0.27 )
Basic weighted average common shares outstanding
4,555,718
4,500,417
Diluted weighted average common shares outstanding
172,317,270
4,500,417
The accompanying notes are an integral part of these consolidated financial statements.
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
Common Stock Additional Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance, December 31, 2018 4,500,417 $ 4,500 $ 37,222,615 $ (77,234,267 ) $ (40,007,152 )
Net loss, year ended December 31, 2019 - - - (1,227,539 ) (1,227,539 )
Balance, December 31, 2019 4,500,417 4,500 37,222,615 (78,461,806 ) (41,234,691 )
Stock option expense - - -
Common stock issued for conversion of accrued interest 220,000 4,180 - 4,400
Net loss, year ended December 31, 2020 - - - 532,134
532,134
Balance, December 31, 2020 4,720,417 $ 4,720 $ 37,226,851 $ (77,929,672 ) $ (40,698,101 )
CIRTRAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
Cash flows from operating activities
Net income (loss) income from continuing operations
$ 452,638
$ (1,078,973 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
Depreciation expense
2,293
Loss on derivative valuation
22,822
80,640
Debt discount amortization
115,211
34,215
Loss on disposal of equipment
9,771
-
Stock option expense
-
Gain on write-off of accounts payable
(1,023,471 )
-
Interest expense recorded on initial measurement of derivative liability
-
56,338
Amortization of right of use asset to rent expense
6,813
Expenses paid on behalf of Company by a related party
1,940
(77,180 )
Changes in operating assets and liabilities:
Inventory
(306,438 )
(18,814 )
Deposits on inventory
(53,900 )
-
Deposits on inventory - related party
(319,333 )
-
Accounts receivable
(16,966 )
-
Other current assets
(117,634 )
(1,210 )
Accounts payable
255,282
6,224
Accrued liabilities
640,560
273,534
Payments for lease liability
(6,813
)
-
Accrued payroll and compensation
375,710
43,970
Accrued interest
543,255
500,746
Related-party payables
-
10,740
Net cash provided by (used in) continuing operating activities
579,876
(167,477 )
Net cash provided by (used in) discontinued operations
(115,537 )
44,050
Net cash provided by (used in) operating activities
464,339
(123,427 )
Cash flows from investing activities
Purchase of equipment
(18,672 )
-
Net cash used in investing activities
(18,672 )
-
Cash flows from financing activities
Proceeds from bank overdraft
(1,611 )
1,611
Proceeds from convertible loans payable
15,000
60,000
Proceeds from related-party loans
11,500
84,987
Repayments of related-party loans
(467,409 )
(17,785 )
Proceeds from loans payable
156,000
15,400
Repayments of loans payable
(51,000 )
(21,000 )
Cash provided by (used in) financing activities
(337,520 )
123,213
Cash used in discontinued financing activities
-
-
Net cash provided by (used in) financing activities
(337,520 )
123,213
Net change in cash
108,147
(214 )
Cash, beginning of period
-
Cash, end of period
$ 108,147
$ -
Supplemental disclosure of cash flow information
Cash paid for interest
$ -
$ -
Cash paid for income taxes
$ -
$ -
Supplemental disclosure of non-cash investing activities
Initial measurement of derivative liability
$ 5,753
$ 813,439
Related-party note entered into in exchange for account payable
$ 5,341
$ -
Related-party note entered into in exchange for accrued liability
$ 364,020
$ -
Common stock issued for conversion of accrued interest
$ 4,400
$ -
Initial measurement of right of use asset and related operating lease liability
$ 57,222
-
The accompanying notes are an integral part of these consolidated financial statements.
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020 AND 2019
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
We offer diversified expertise in manufacturing, marketing, distribution, and technology services in a wide variety of consumer products, including tobacco products, medical devices, and beverages. 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, 2020, we executed on our business plan, fulfilling our obligations under a distribution agreement to manufacture, distribute, and sell condoms, electronic tobacco products, cigars, energy drinks, water beverages, and related merchandise, all using the HUSTLER® brand name under a December 2019 five-year manufacturing and distribution agreement with an unrelated party. We devoted most of 2019 to exploring a number of potential product opportunities and preparing for the HUSTLER® brand name products launch.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
We consolidate all of our majority-owned subsidiaries, companies over which we exercise control through majority voting rights, and companies in which we have a variable interest and we are the primary beneficiary. We account for our investments in common stock of other companies that we do not control, but over which we can exert significant influence, using the cost method.
The consolidated financial statements as of and for the year ended December 31, 2020, include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Products Corp., LBC Products, Inc., and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated.
The consolidated financial statements as of and for the year ended December 31, 2019, include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Products Corp., CirTran Corporation (Utah), CirTran Beverage Corp., CirTran Online Corp., CirTran Media Corp., Racore Network, and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated.
Use of Estimates
In preparing the financial statements in accordance with accounting principles generally accepted in the United States of America, 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.
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 a unique customer purchase order, which is considered to be a stand-alone contract that we retain the right to accept or reject. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
During the year ended December 31, 2020, we recognized revenues of $515,000 related to the performance obligations under product development service agreements with customers. These contracts are long term in nature and revenue is recognized at certain milestone intervals upon our delivery and customer acceptances of work product related to those milestones, namely product design, packaging, branding display, and prototypes. There were no costs to obtain the contracts identified and, as such, no asset has been recorded for customer acquisition costs. Additionally, we have not recognized impairment losses related to the receivables from these contracts during the year ended December 31, 2020.
Additionally, we recognized revenues of $1,217,625 during the year ended December 31, 2020, related to the delivery of product to our customers. Each delivery is based on a unique customer purchase order which is considered to be a stand-alone contract that we retain the right to accept or reject. Upon acceptance, we oblige delivery of such product to the customer at an agreed-upon place, time, and price. We recognize revenue under the unique purchase order contract upon fulfillment of our performance obligations therein, typically limited to the delivery of product.
Cash and Cash Equivalents
We consider all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents. We did not hold any cash equivalents as of December 31, 2020 or 2019.
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 $50,409 as of December 31, 2020. 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 in appropriate to exclude future renewal terms from the capitalization of our operating lease.
We have one lease in effect requiring minimum monthly payments of $2,500 through October 2022. We have determined the appropriate discount rate to be 5% based on our other borrowings secured by assets. A summary of future payments due under the terms of the lease as of December 31, 2021 is as follows:
Total future payments $ 52,500
Implied interest (2,091 )
Operating lease liability as of December 31, 2021 $ 50,409
Investment in Securities
Our cost-method investment consists of an investment in a private digital multi-media technology company that totaled $300,000 at December 31, 2020 and 2019. As we owned less than 20% of that company’s stock as of each date, and no significant influence or control exists, the investment is accounted for using the cost method. We evaluated the investment for impairment and determined there was none during the periods presented.
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. The capitalized cost, net of accumulated depreciation, associated with molds and dies included in property and equipment at December 31, 2020, and December 31, 2019, was $0 and $9,772, respectively. All property and equipment that was in service during the year ended December 31, 2019, was disposed of during the current period. During the year ended December 31, 2020, we purchased a vehicle for $18,672 and recorded depreciation expense of $373, leaving a net book value of $18,299 as of December 31, 2020.
Depreciation expense is recognized in amounts equal to the cost of depreciable assets over estimated service lives. Leasehold improvements are amortized over the shorter of the life of the lease or the service life of the improvements. The straight-line method of depreciation and amortization is followed for financial reporting purposes. Maintenance, repairs, and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in operating results.
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 not record expenses for the impairment of long-lived assets during the year ended December 31, 2020 or 2019.
Financial Instruments with Derivative Features
We do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives using a Monte Carlo simulation. The fair values of the derivative instruments are measured each reporting period.
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. Inventories consist solely of finished goods.
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 $53,900 (non-related-party) and $319,333 (related-party) as of December 31, 2020. There were no deposits on inventory as of December 31, 2019.
Inventory balances consisted of the following:
December 31, 2020 December 31, 2019
Finished goods $ 526,372
$ 18,814
Raw materials 40,803 -
Reserves for obsolescence (241,923 ) -
Total $ 325,252
$ 18,814
Stock-Based Compensation
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, 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).
Stock-based employee compensation was $56 and $800 for the years ended December 31, 2020 and 2019, respectively.
Income Taxes
We use the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets, liabilities, the carryforward of operating losses and tax credits, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized. Research tax credits are recognized as used.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated financial statements for cash, notes payable, and accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments. The carrying amounts of our debt obligations approximate fair value.
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 have been valued using level 3 inputs.
Accounts payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these instruments. Derivative liabilities are measured using level 3 inputs.
Total Fair Value
at December
31, 2020
Quoted
prices in
active markets
(Level 1) Significant
other
observable
inputs (Level 2) Significant
unobservable
inputs (Level 3)
Derivative liabilities $ 922,654 $ - $ - $ 922,654
Total Fair Value at December 31, 2019 Quoted prices in active markets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3)
Derivative liabilities $ 894,079 $ - $ - $ 894,079
Loss Per Share
Basic loss per share (EPS) is calculated by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted EPS 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. We had 569,029,796 potentially issuable common shares at December 31, 2019. However, the impacts of the potentially issuable common shares were excluded from the diluted loss per common shares outstanding given the anti-dilutive effect such shares have on net losses per common share. There were 167,731,552 such shares included for the year ended December 31, 2020.
Short-term Advances
We have short-term advances with various individuals. These advances are due upon demand, carry no interest, and are not collateralized. These advances are classified as short-term liabilities.
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.
Reclassification of Prior Year Expenses
Certain prior year items have been reclassified to conform to current year presentation. Notably, $125,733 of employee-related costs previously included in selling, general and administrative expenses on the consolidated statements of operations have been reclassified and presented as a separate line item.
NOTE 3 - GOING CONCERN AND REALIZATION OF ASSETS
In October 2016, we lost our ability to continue energy drink distribution, our principal source of revenue, after receiving an unfavorable ruling in our suit against Playboy Enterprises, Inc.
The accompanying audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. We had a working capital deficiency of $37,059,342 and $37,994,597 as of December 31, 2020 and 2019, respectively, and a net income (loss) from continuing operations of $78,414 and $(406,558) during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, we had an accumulated deficit of $77,929,672 and $78,461,806, respectively. These conditions raise substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in the following paragraphs 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 mostly 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 us and our shareholders.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment and estimated service lives consist of the following:
December 31, 2020 December 31, 2019 Useful Life (years)
Furniture and office equipment $ - $ 177,900 5-10
Leasehold improvements - 997,714 7-10
Production equipment - 2,886,267 5-10
Vehicles 18,672 53,209 3-7
Total 18,672 4,115,090
Less: accumulated depreciation (373 ) (4,105,318 )
Property and equipment, net $ 18,299 $ 9,772
During the year ended December 31, 2020, we disposed of all of our remaining assets as part of our adoption of our new agreement to develop and distribute certain products. There was no consideration received upon disposal resulting in a net loss of $9,771 during the year ended December 31, 2020. There was $373 and $2,293 of depreciation expense recorded during the years ended December 31, 2020 and 2019, respectively.
NOTE 5 - RELATED-PARTY TRANSACTIONS
Transactions involving Officers, Directors, and Stockholders
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, 2020 and 2019, the principal amount owing on the note was $151,833 and $151,833, respectively.
On March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $315,000 ($105,000 each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the amount received plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum. We made no payments towards the outstanding notes during the periods presented. The principal balance owing on the notes as of December 31, 2020 and 2019, totaled $72,466 and $72,466, respectively.
During the year ended December 31, 2020, we made repayments to related parties of $467,409 and advances of $11,500 were received from related parties. Additionally, related parties paid expenses totaling $1,940 directly to vendors on our behalf. There were $287,776 and $738,655 of short-term advances due to related parties as of December 31, 2020 and 2019, respectively. The advances are due on demand and as such included in current liabilities.
The terms of our employment agreement with Iehab Hawatmeh, our president, require us to grant options to purchase 6,000 shares of our stock each year, with an exercise price equal to the fair market price of our common stock as of the grant date, as compensation for services provided as our chief executive officer. During the year ended December 31, 2020, we granted options to purchase 6,000 shares of common stock relating to this employment agreement. There were also options to purchase 6,000 shares of common stock that expired during the year ended December 31, 2020. There were outstanding options to purchase 30,000 shares of common stock and options to purchase 30,000 shares of common held by Iehab Hawatmeh as of December 31, 2020 and 2019, respectively. See Note 6 - Other Accrued Liabilities and Note 12 - Stock Options and Warrants.
As of December 31, 2020 and 2019, we owed our president a total of $868,528 and $903,740 in unsecured advances. The advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee. The borrowing fees were waived by our president on these loans. These amounts are included in our liabilities from discontinued operations.
As of December 31, 2020 and 2019, we owed a total of $13,740 to a related party through trade payables incurred in the normal course of business. These amounts are shown as a separate related-party payable on the balance sheet as of each reporting date.
During the year ended December 31, 2020, we made deposits with a related-party inventory supplier totaling $319,333. The related party is an entity controlled by our CEO. 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 $643,772 during the year ended December 31, 2020.
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,
Tax liabilities $ 557,894 $ 806,331
Other 796,645 271,668
Total $ 1,354,539 $ 1,077,999
Other accrued liabilities as of December 31, 2020 and 2019, include a non-interest-bearing payable totaling $45,000 that is due on demand. Additionally, other accrued liabilities as of December 31, 2020 include customer deposits totaling $751,645. During the year ended December 31, 2020, our CEO made tax payments totaling $364,202 directly to the IRS on our behalf to reduce the tax liabilities owing.
Accrued payroll and compensation liabilities consist of the following:
December 31, 2020 December 31, 2019
Stock option expenses $ - $ 4,000
Director fees 135,000 135,000
Bonus expenses 121,858 121,858
Commissions 2,148 2,148
Administrative payroll 3,874,340 3,494,630
Total $ 4,133,346 $ 3,757,636
During the year ended December 31, 2020, the statute of limitations on certain liabilities carried in accounts payable passed. As a result, we recognized a gain of $1,023,471 from the write-off of accounts payable included in continuing operations and $233,382 included in gains from discontinued operations.
Stock option expenses consist of employee stock option expenses. During the year ended December 31, 2020, we resumed accruing wages for our CEO, which are included in administrative payroll. A total of $345,000 was accrued during the year ended December 31, 2020, of which $172,500 are included in cost of sales as a direct labor cost of fulfilling performance obligations related to our revenue recognized and $172,500 are included in operating expenses. The allocation of wages to cost of sales and operating expenses is based on the percentage of time spent by our CEO to directly deliver on certain performance obligations under our contracts with our customers. Our CEO spent 100% of his time as such during the six months ended June 30, 2020, with 0% of his time spent as such during the third and fourth quarters of 2020.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Litigation and Claims
Various vendors, service providers, and others have asserted legal claims in previous years. These creditors generally are not actively seeking collection of amounts due 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. 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 to Playboy of $6.6 million against Play Beverages and CirTran Beverage Corp., our subsidiary. The court denied our motion for a new trial and awarded Playboy treble patent infringement damages and attorney’s fees. We filed a notice of appeal in July 2017 and again in March 2018. Playboy has initiated collection efforts but has recovered no funds. In September 2018, the appellate court affirmed the judgment of the circuit court. We have accrued $17,205,599 as of December 31, 2020 and 2019, related to this judgment, which is included in liabilities in discontinued operations.
Delinquent Payroll Taxes, Interest, and Penalties
In November 2004, the IRS accepted our amended offer in compromise (the “Offer”) to settle delinquent payroll taxes, interest, and penalties, which requires us to pay $500,000, remain current in our payment of taxes for five years, and forego claiming any net operating losses for the years 2001 through 2015 or until we pay taxes on future profits in an amount equal to the taxes of $1,455,767 waived by the Offer. In June 2013, we entered into a partial installment agreement to pay $768,526 in unpaid 2009 payroll taxes, which requires us to pay the IRS 5% of cash deposits. The monthly payments are to continue until the account balances are paid in full or until the collection statute of limitation expired on October 6, 2020. We are currently in communication with the IRS regarding the statute of limitations on this settlement and appropriate next steps. There was $673,645 and $1,048,756 due as of December 31, 2020 and 2019, respectively.
Employment Agreements
We engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended in September 2017. In July 2017, Mr. Hawatmeh had resigned all positions with us to pursue other business activities, thereby effectively terminating the agreement. However, the amendment to his employment agreement in September 2017 reinstated Mr. Hawatmeh to his previous positions, with a salary in an amount to be determined. Among other things, the reinstated employment agreement: (a) grants options to purchase a minimum of 6,000 shares of our stock each year, with an exercise price equal to the market price of our common stock as of the grant date, for the maximum term allowed under our stock option plan; (b) provides for health insurance coverage, cell phone, car allowance, life insurance, and director and officer liability insurance, as well as any other bonus approved by our board; and (c) includes additional incentive compensation as follows: (i) a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization for the applicable quarter; (ii) bonuses equal to 1% of the net purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and (iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of all products, net of returns and allowances. On January 1, 2020, we resumed accruing wages for our CEO. A total of $345,000 was accrued during the year ended December 31, 2020.
We also have an oral agreement with our other director that requires us to issue options to purchase 2,000 shares of our common stock each year.
During the years ended December 31, 2020 and 2019, we granted options to purchase 8,000 and 8,000 shares of common stock to Mr. Hawatmeh and Ms. Hollinger, respectively. We recorded expenses totaling $56 and $800 during the years ended December 31, 2020 and 2019, respectively, for these options.
We have no other agreements requiring the grant of options.
License Agreements
We have entered into agreements whereby we are required to pay certain royalties for the manufacture and distribution of licensed products. Fees are based on a percentage of sales and remitted quarterly. Such costs are included in cost of sales for financial reporting purposes.
NOTE 8 - NOTES PAYABLE
Notes payable consisted of the following:
December 31, 2020 December 31, 2019
Note payable to former service provider for past due account payable (current) $ 90,000 $ 90,000
Note payable for settlement of debt (long term) 500,000 500,000
Small Business Administration loan 156,000 -
Total $ 746,000 $ 590,000
There was $205,165 and $157,535 of accrued interest due on these note as of December 31, 2020 and 2019, respectively.
NOTE 9 - CONVERTIBLE DEBENTURES
We have entered into various convertible debentures that encumber all of our assets. Convertible debentures consisted of the following:
December 31, 2020 December 31, 2019
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on May 30, 2021 $ 200,000 $ 200,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on December 8, 2021 25,000 25,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on February 8, 2021 25,000 25,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on December 8, 2021 25,000 10,000
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on April 30, 2027 2,390,528 2,390,528
Subtotal $ 2,665,528 $ 2,650,528
Less: discounts (613,428 ) (722,886 )
Total $ 2,052,100 $ 1,927,642
Less: current portion (264,284 ) (248,874 )
Long term portion $ 1,787,816 $ 1,678,768
The convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or the lowest bid price for the 20 trading days prior to conversion.
As of December 31, 2020 and 2019, we had accrued interest on the convertible debentures totaling $1,528,511 and $1,399,295, respectively, of which $41,960 and $28,199 was current and $1,486,551 and $1,371,098 was long term, respectively. As of December 31, 2020 and 2019, the debentures, including accrued but unpaid interest, were convertible into 167,761,552 and 568,989,796 shares of our common stock.
NOTE 10 - DERIVATIVE LIABILITIES
As discussed in Note 9 - Convertible Debentures, we have entered into five separate agreements to borrow a total of $2,665,528 with the outstanding principal and interest being convertible at the holder’s option into common stock of the company at the lesser of $100 (notes one through four) or $0.10 (note five) or the lowest closing bid price in the prior 20 trading days. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a Monte Carlo simulation as of December 31, 2020, using the following assumptions:
Volatility 78.5% - 93.8 %
Risk-free rates 0.06% - 0.51 %
Stock price $ .028 0
Remaining life 0.25- 6.33 years
The fair values of the derivative instruments are measured each reporting period, which resulted in a loss on the fair value of derivative liabilities of $22,822 and $80,640 during the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, the fair market value of the derivatives aggregated $922,654 and $894,079, respectively.
NOTE 11-STOCKHOLDERS’ DEFICIT
We are authorized to issue up to 100,000,000 shares of $0.001 par value common stock. During the year ended December 31, 2020, we issued a total of 220,000 shares of common stock for the conversion of $4,400 of accrued interest payable under our convertible debentures. We had a total of 4,720,417 and 4,500,417 common shares issued and outstanding as of December 31, 2020 and 2019, respectively. During the year ended December 31, 2019, we effected a 1:1000 reverse stock split of our outstanding stock. The impacts of the reverse stock split have been retroactively stated.
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.
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, 2020 and 2019, 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 of our tax returns remain open.
As of December 31, 2020 and 2019, we had net operating loss carryforwards for tax reporting purposes of approximately $19.0 million and $19.1 million, respectively. During the year ended December 31, 2019, we dissolved four subsidiaries that had total net operating loss carryforwards of approximately $8.9 million, which were forfeited upon dissolution, reducing our deferred tax asset by approximately $1.9 million. In addition, the realization of tax benefits relating to net operating loss carryforwards is limited due to the settlement related to amounts previously due to the IRS, as discussed in Note 6 - Other Accrued Liabilities.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:
Income tax provision at the federal statutory rate 21 %
Effect on operating losses (21 )%
-
Net deferred tax assets consisted of the following:
December 31, 2020 December 31, 2019
Net operating loss carryforward $ 3,791,763 $ 4,005,545
Valuation allowance (3,791,763 ) (4,005,545 )
Net deferred tax asset $ - $ -
A reconciliation of income taxes computed at the statutory rate is as follows:
December 31, 2020 December 31, 2019
Computed federal income tax benefit (expense) at statutory rate of 21% and 21% $ 111,023 $ (245,508 )
Depreciation and amortization -
Change in payroll accruals 75,142 8,794
Stock option expense
Amortization of debt discount 23,042 -
Change in derivative liability 4,564 -
Change in valuation allowance (213,782 ) 236,095
Income tax expense $ - $ -
NOTE 13 - STOCK OPTIONS AND WARRANTS
Stock Incentive Plans
During the year ended December 31, 2020 and 2019, we granted to employees 8,000 and 8,000 options to purchase shares of common stock, respectively.
The 8,000 options granted during the year ended December 31, 2020, were valued using the following assumptions: estimated five-year term, estimated volatility of 91%, and a risk-free rate of 1.61%.
During the year ended December 31, 2019, we granted 6,000 and 2,000 stock options relating to the employment agreements with Mr. Hawatmeh and Ms. Hollinger. The fair market value of the options was $600, using the following assumptions: estimated seven-year term, estimated volatility of 567%, and a risk-free rate of 2.31%.
As of December 31, 2020 and 2019, we had no unrecognized compensation related to outstanding options that have not yet vested at year-end that would be recognized in subsequent periods. See Note 6 - Other Accrued Liabilities for a description of amounts of option expenses included in accrued payroll and compensation expense.
During the year ended December 31, 2020, we issued a total of 8,000 options to purchase common stock, and a total of 8,000 options expired unexercised. As of December 31, 2020, there were 40,000 options issued and vested with a weighted average exercise price of $0.01 and a weighted average remaining life of 2.92 years. Outstanding options as of December 31, 2020 consisted of:
Exercise Price Count Avg Exercise Remaining Life Exerciseable
$ 0.01 8,000 $ 0.01 0.99 8,000
$ 0.10 32,000 $ 0.10 3.40 32,000
Total 40,000 $ 0.08 2.92 40,000
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, 2020 and 2019, 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, 2020 and 2019.
Total assets and liabilities included in discontinued operations were as follows:
December 31,
Assets from Discontinued Operations:
Cash $ - -
Total assets from discontinued operations $ - $ -
Liabilities from Discontinued Operations:
Accounts payable $ 19,456,998 $ 19,690,378
Accrued liabilities 589,380 704,917
Accrued interest 1,176,226 1,022,342
Accrued payroll and compensation expense 131,108 131,108
Current maturities of long-term debt 239,085 444,085
Related-party payable 1,776,250 1,776,250
Short-term advances payable 2,784,773 2,579,773
Total liabilities from discontinued operations $ 26,153,820 $ 26,348,853
Net losses from discontinued operations were comprised of the following components:
Year Ended December 31,
Net sales $ - $ -
Cost of sales - -
Gross profit - -
Operating expenses
Selling, general and administrative expenses - 13,193
Total operating expenses - 13,193
Other income (expense)
Interest expense (153,886 ) (153,465 )
Gain on write of off accounts payable 233,382 18,095
Total other income (expense) 79,496 (135,373 )
Net income (loss) from discontinued operations $ 79,496 $ (148,566 )
NOTE 15 - SUBSEQUENT EVENTS
On March 29, 2021, we accepted a request from a convertible debenture holder to convert $6,750 of accrued but unpaid interest for 225,000 shares of common stock.
On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. This situation is ongoing, and we are monitoring it closely. Although our response to the COVID-19 pandemic continues to evolve, we have taken measures to mitigate the impact on our business operations and overall financial performance. We are also constantly evaluating and responding to the impact of the pandemic on our supply chain as compared to product demand. In addition, we actively monitor COVID-19-related developments and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, vendors, and stockholders. The effects of these operational modifications will be reflected in current and future reporting periods.

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ITEM 11. EXECUTIVE COMPENSATION

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES