PART
I
ITEM
1. BUSINESS
Introduction
Based
on our diversified expertise in manufacturing, marketing, distribution, and technology services in a wide variety of consumer
products, including tobacco products, medical devices, and beverages, around the world, we have an innovative and consumer-focused
approach to brand portfolio management, resting on a strong understanding of consumers domestically, and we have established a
footprint in more than 50 key, international markets.
We
devoted most of 2019 to exploring new product opportunities in a number of products. 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 years ended December 31, 2019 and 2018, 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 1000-to-one reverse split of our common stock effective
September 2019.
Principal
2019 Activities
HUSTLER®-branded
Products
After
months of direct, three-way negotiations that began in 2018 among the Flynt/HUSTLER® organization, GloBrands, LLC (“GloBrands),
and us, in April 2019, we entered into a term sheet to become an exclusive contract manufacturer and distributor for GloBrands,
an unaffiliated licensee that was completing licensing arrangements with HUSTLER®, a privately held, well-capitalized, U.S.
firm with international adult entertainment, retail, and publishing operations. HUSTLER® is a well-established international
lifestyle private label.
On
December 30, 2019, through our new, wholly owned subsidiary, LBC Products, Inc. (“LBC”), we entered into an Exclusive
Manufacturing and Distribution Agreement with GloBrands. Under this agreement, we were granted the right through November 2024
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.
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.
Under
the term sheet and in anticipation of completing our agreement, during 2019, we:
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developed
product manufacturing relationships with various foreign and domestic suppliers, including:
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obtaining,
sometimes at our cost and for our exclusive benefit, tobacco import regulatory licenses;
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designing
product logos and labeling;
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obtaining
regulatory approval for our HUSTLER® brand product labeling where required;
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securing,
at our cost and for our exclusive benefit, necessary FDA 510(k) approval for condom manufacturing;
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developing
and refining regular and sugar-free energy drink and water assorted flavorings and formulations;
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created
samples, wholesale and point-of-sale displays, catalogs, and related merchandising materials;
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developed
digital and hard copy media support, website, product spokespersons, direct television commercials, print, and miscellaneous
media;
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established,
through our marketing and distribution relationships, distribution and delivery channels, inventory management, and related
logistics;
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leased
Las Vegas facilities to house our offices, showroom, and warehouse;
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assembled
a team of contract consultants and support staff to expand into full operations when our business development progresses;
and
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designed
data gathering, reporting, and analytical systems to support product and market development and refinement to respond to changing
dynamics.
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These
efforts continue. In early 2020, we completed phase one of our development of all HUSTLER®-branded products, which enabled
us to receive payment of $250,000 from GloBrands. We expect to receive additional payments in 2020.
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
We
are committed 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 December 2019 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, 2019, we had three full-time employees, including our officers and directors, and two 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
Authorization
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.
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 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 a net loss of approximately $1.2 million and approximately $1.1 million during the years ended December 31, 2019 and 2018,
respectively, which includes approximately $149,000 and approximately $165,000 in losses from discontinued operations. We had
an accumulated deficit of approximately $78.5 million as of December 31, 2019. During the year ended December 31, 2019, net cash
used in operations was approximately $123,000. We had current liabilities of approximately $38.0 million and an approximately
$38.0 million working capital deficit as of December 31, 2019. The report from our auditors on our consolidated financial statements
for the years ended December 31, 2019 and 2018, as for several previous years, contains explanatory paragraphs about our ability
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 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 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.
Based
on the term sheet signed in April 2019 and the Exclusive Manufacturing and Distribution Agreement signed in December 2019, we
began to prepare to manufacture, market, and distribute an array of products under the HUSTLER® brand name, but have not actually
commenced revenue-generating, full-scale operations. 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. We have not generated
revenue from product sales since we discontinued manufacturing and distribution our previous non-alcoholic beverage product due
to legal and financial problems.
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 will be a new business for us that will be subject to all of the risks
and uncertainties of a new business, including the difficulties of:
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developing
a new product that can be manufactured, marketed, and distributed successfully;
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obtaining
the benefit of applicable licenses, registrations, and other required governmental approvals;
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operating
a cost-effective business that generates revenue sufficiently over the costs of start-up and other related expenses;
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competing
effectively in an industry dominated by larger, more experienced firms with well-established markets and greater management
and financial resources;
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managing
operations and growth.
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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
new 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 $260,000 is required to be repaid between June 3 and December 23, 2020, and 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 seek 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, 2019,
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, 2019. 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, 2019, 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, 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
|
|
|
|
|
●
|
568,989,796
shares required for issuance under our outstanding convertible
debentures and promissory notes at approximately $0.01 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 recently decreased as the result of a 1 for 1,000 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.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
As
of November 29, 2019, we entered into a Commercial Lease with GloBrands, LLC, a New Mexico limited liability company (“GloBrands”),
an unrelated party, to sublease a 2,500-square-foot office, showroom, and warehouse in Las Vegas, NV, on a month-to-month basis,
for $2,500 per month. We believe that the facilities described above are generally in good condition, well maintained, and suitable
and adequate for our current needs. During 2020, we will obtain additional warehouse space in southern California to store imported
tobacco products in order to reduce interstate taxation.
ITEM
3. LEGAL PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
All judgments, including interest, have been booked as liabilities and the matters are no longer pending. However, litigants can
initiate further proceedings following the entry of a nonappealable final judgments seeking enforcement or further relief. Litigation
is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm
our business. As of December 31, 2019, we were not a party to any material pending litigation and no lawsuits have been threatened
by or against us.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
names of our director and executive officers as of December 31, 2019, and their ages, positions, and biographies are set forth
below. Our executive officers are appointed by, and serve at the discretion of, our board of directors.
Name
|
|
Age
|
|
Title
|
|
Tenure
|
|
|
|
|
|
|
|
Iehab
Hawatmeh
|
|
53
|
|
President,
Chief Executive Officer,
|
|
July
2000 to date
|
|
|
|
|
Chief
Financial Officer, Chairman
|
|
|
Kathryn
Hollinger*
|
|
69
|
|
Director,
Controller
|
|
August
2011 to date
|
Iehab
J. Hawatmeh
Iehab
J. Hawatmeh founded our predecessor company in 1993 and has been our chairman, president, and chief executive officer since July
2000, except for a brief absence during 2017. Mr. Hawatmeh oversees all daily operations, including our technical and sales functions.
Mr. Hawatmeh is currently functioning in a dual role as chief financial officer. Before his involvement with our company, Mr.
Hawatmeh was the Processing Engineering Manager for Tandy Corporation, Salt Lake City, Utah, overseeing that company’s contract
manufacturing printed circuit board assembly division. In addition, he was responsible for developing and implementing Tandy’s
facility Quality Control and Processing Plan model. Mr. Hawatmeh earned an MBA from University of Phoenix and a BS in Electrical
and Computer Engineering from Brigham Young University.
Kathryn
Hollinger
Kathryn
Hollinger has been with CirTran since 2000 as our controller, except for a brief period during 2017 in which she also acted as
chief executive officer. She has been involved with the day-to-day accounting and finance functions throughout her term with us.
Ms. Hollinger studied mathematics and accounting at Northridge University (now Cal. State University Northridge) in California.
Election
of Directors and Officers
Directors
are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified.
Officers are appointed to serve until the meeting of the board of directors following the next annual meeting of stockholders
and until their successors have been elected and qualified.
Committees
of the Board
We
currently do not have nominating, compensation, or audit committees or committees performing similar functions and we do not have
a written nominating, compensation, or audit committee charter. Our board of directors believes that it is not necessary to have
these committees, at this time, because the directors can adequately perform the functions of such committees.
Family
Relationships
There
are no family relationships among any of our officers or directors.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our directors, executive officers, and persons that own more than 10% of a registered class
of our equity securities to file with the U.S. Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of our equity securities. Officers, directors, and greater than 10% stockholders are required to furnish
us with copies of all Section 16(a) forms they file.
Based
solely upon a review of Forms 3, 4, and 5 and amendments thereto filed with the U.S. Securities and Exchange Commission for the
year ended December 31, 2019, no person that, at any time during the most recent fiscal year, was a director, officer, beneficial
owner of more than 10% of any class of our equity securities, or any other person known to be subject to Section 16 of the Exchange
Act failed to file, on a timely basis, reports required by Section 16(a) of the Exchange Act.
Code
of Ethics
We
expect that all of our directors, officers, and employees will maintain a high level of integrity in their dealings with us and
on our behalf and will act in our best interests. We have adopted a Code of Business Conduct and Ethics that provides principles
of conduct and ethics for our directors, officers, and employees. This Code of Ethics is available on our website at www.cirtran.com
under “Investor Relations—Corporate Governance.”
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth, for each of our last two completed fiscal years, the dollar value of all cash and noncash compensation
earned by any person who was our principal executive officer and each of our three most highly compensated other executive officers
or persons who were serving in such capacities during the preceding fiscal year (“Named Executive Officers”):
Name
and Principal Position
|
|
Year
Ended Dec. 31
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Award(s) ($)
|
|
|
Option
Awards ($)(1)
|
|
|
Non
Equity Incentive Plan Compen- sation
|
|
|
Change
in Pension Value and Non- Qualified Deferred Compen- sation Earnings ($)
|
|
|
All
Other Compen- sation ($)
|
|
|
Total
($)
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(e)
|
|
|
(f)
|
|
|
(g)
|
|
|
(h)
|
|
|
(i)
|
|
|
(j)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iehab J.
Hawatmeh(1)
|
|
2019
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
38,603
|
(3)
|
|
|
39,203
|
|
President, Chief Executive
Officer
|
|
2018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
600
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
38,535
|
(3)
|
|
|
39,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathryn Hollinger(4)
|
|
2019
|
|
|
|
55,000
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
200
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000
|
(5)
|
|
|
70,200
|
|
|
|
2018
|
|
|
|
55,000
|
|
|
|
10,000
|
|
|
|
-
|
|
|
|
200
|
(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000
|
(5)
|
|
|
70,200
|
|
|
(1)
|
Mr.
Hawatmeh waived his compensation in 2019 and 2018.
|
|
(2)
|
The
amount is the fair value of the option awards on the date of grant in accordance with Financial Accounting Standards Board
Accounting Standards Codification Topic 718. See note 2 to our consolidated financial statements.
|
|
(3)
|
Includes
$12,000 for car allowance for each 2019 and 2018 and $26,603 and $26,535 for medical insurance premiums for 2019 and 2018.
|
|
(4)
|
Ms.
Hollinger’s compensation listed in this table is for her services as our controller.
|
|
(5)
|
Fees
accrued as director compensation.
|
Employment
Agreements—Change in Control
We
engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended
in September 2017, with a salary in an amount and commencement date to be determined. In July 2017, Mr. Hawatmeh resigned all
positions with us to pursue other business activities, thereby effectively terminating the agreement. However, in September 2017,
we reinstated Mr. Hawatmeh to his previous positions and reinstated his employment agreement. Among other things, the reinstated
employment agreement: (a) grants options to purchase a minimum of 6,000 shares of our stock each year, with an exercise price
equal to the market price of our common stock as of the grant date, for the maximum term allowed under our stock option plan;
(b) provides for health insurance coverage, cell phone, car allowance, life insurance, and director and officer liability insurance,
as well as any other bonus approved by our board; (c) includes additional incentive compensation as follows: (i) a quarterly bonus
equal to 5% of our earnings before interest, taxes, depreciation and amortization for the applicable quarter; (ii) bonuses equal
to 1% of the net purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and
(iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of all products, net of returns and allowances. All cash
amounts payable to Mr. Hawatmeh in excess of an aggregate of $120,000 per year are accrued and will not be paid until the secured
convertible debenture is paid or converted to common stock. Mr. Hawatmeh waived his compensation in 2019 and 2018.
Pursuant
to the employment agreement, Mr. Hawatmeh’s employment may be terminated for cause, or upon death or disability, in which
event we are required to pay him any unpaid base salary and unpaid earned bonuses. In the event that Mr. Hawatmeh is terminated
without cause, we are required to pay to him: (i) within 30 days following such termination, any benefit, incentive, or equity
plan, program, or practice paid when such would have been paid to him if employed (the “Accrued Obligations”); (ii)
within 30 days following such termination (or on the earliest later date as may be required by Internal Revenue Code Section 409A
to the extent applicable), a lump sum equal to 30 months’ annual base salary; (iii) bonuses owing for the two-year period
after the date of termination (net of any bonus amounts paid as Accrued Obligations) based on actual results for the applicable
quarters and fiscal years; and (iv) within 12 months following such termination (or on the earliest later date as may be required
by Internal Revenue Code Section 409A to the extent applicable), a lump sum equal to 30 months’ annual base salary; provided
that if Mr. Hawatmeh is terminated without cause in contemplation of, or within one year, after a change in control, then two
times his annual base salary and bonus payment amounts.
During
the years ended December 31, 2019, 2018, 2017, 2016, and 2015, we accrued for 6,000 stock options relating to this employment
agreement. The fair market value of the options issued during the year ended December 31, 2019, was $600, using the following
assumptions: estimated five-year term, estimated volatility of 567%, and a risk-free rate of 2.31%. The fair market value of the
options issued during the year ended December 31, 2018, was $600, using the following assumptions: estimated seven-year term,
estimated volatility of 567%, and a risk-free rate of 2.38%.
Outstanding
Equity Awards at Fiscal Year End
The
following table summarizes information regarding unexercised options, stock that has not vested, and equity incentive plan awards
owned by the Named Executive Officers as of December 31, 2019:
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of
Securities
Underlying
Unexer-
cised
Options
(#)
Exer-
cisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexer-
cisable(1)
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexer-
cised
Unearned
Options(#)
|
|
|
Option
Exercise
Price($)
|
|
|
Option
Expiration
Date
|
|
|
Number
of
Shares
or
Units
of
Stock
Held
That
Have
Not
Vested(#)
|
|
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested($)
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested(#)
|
|
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested($)
|
|
Iehab J.
Hawatmeh
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/22/20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kathryn Hollinger
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/22/20
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Iehab J. Hawatmeh
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/20/21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kathryn Hollinger
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/20/21
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Iehab J. Hawatmeh
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/24/22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kathryn Hollinger
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/24/22
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Iehab J. Hawatmeh
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/18/23
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kathryn Hollinger
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
01/18/23
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Iehab J. Hawatmeh
|
|
|
—
|
|
|
|
6,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
04/01/24
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Kathryn Hollinger
|
|
|
—
|
|
|
|
2,000
|
|
|
|
—
|
|
|
|
0.10
|
|
|
|
04/01/24
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Director
Compensation
Except
for Iehab Hawatmeh, who is also our chief executive officer, we pay our directors $5,000 per year to serve on our board.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth certain information, as of May 26, 2020, respecting the beneficial ownership of our outstanding common
stock by: (i) any holder of more than 5%; (ii) each of the Named Executive Officers (defined as any person who was principal executive
officer during the preceding fiscal year and each other highest compensated executive officers earning more than $100,000 during
the last fiscal year) and directors; and (iii) our directors and Named Executive Officers as a group, based on 4,500,417 shares
of common stock outstanding. All share and per-share amounts have been adjusted to give retroactive effect to a 1000-to-one reverse
split of our common stock effective September 2019:
Name
of Person or Group(1)
|
|
Nature
of Ownership
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
Principal Stockholders:
|
|
|
|
|
|
|
|
|
|
|
Iehab
J. Hawatmeh
|
|
Common stock
|
|
|
211,554
|
|
|
|
4.7
|
|
|
|
Options(2)
|
|
|
30,000
|
|
|
|
*
|
|
|
|
|
|
|
241,554
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors:
|
|
|
|
|
|
|
|
|
|
|
Iehab J. Hawatmeh
|
|
Common stock
|
|
|
211,554
|
|
|
|
4.7
|
|
|
|
Options(2)
|
|
|
30,000
|
|
|
|
*
|
|
|
|
|
|
|
241,554
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathryn Hollinger
|
|
Common stock
|
|
|
26,003
|
|
|
|
*
|
|
|
|
Options(3)
|
|
|
10,000
|
|
|
|
*
|
|
|
|
|
|
|
36,003
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
All
Executive Officers and
Directors
as a Group (2 persons):
|
|
Common stock
|
|
|
237,557
|
|
|
|
5.3
|
|
|
|
Options(2)(3)
|
|
|
40,000
|
|
|
|
*
|
|
|
|
Total
|
|
|
277,557
|
|
|
|
6.1
|
|
*
|
Less
than one percent.
|
(1)
|
Address
for all stockholders is 6360 S Pecos Road, Suite 8, Las Vegas, NV 89120.
|
(2)
|
Includes
options to purchase up to 30,000 shares that have been accrued for services provided during each of 2015, 2016, 2017, 2018,
and 2019. These options can be exercised any time at an exercise price of $0.10 per share
|
(3)
|
Includes
options to purchase up to 30,000 shares that have been accrued for services provided during each of 2015, 2016, 2017, 2018,
and 2019. These options can be exercised any time at an exercise price of $0.10 per share
|
The
persons named in the above table have sole voting and dispositive power respecting all shares beneficially owned, subject to community
property laws where applicable. Beneficial ownership is determined according to the rules of the U.S. Securities and Exchange
Commission, and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting
or investment power over that security. Each director, officer, or 5% or more stockholder, as the case may be, has furnished the
information respecting beneficial ownership.
Beneficial
ownership is determined in accordance with the rules of the SEC which generally attribute beneficial ownership of securities to
persons who possess sole or shared voting power and/or investment power with respect to those securities. Unless otherwise indicated,
voting and investment power are exercised solely by the person named above or shared with members of such person’s household.
This includes any shares such person has the right to acquire within 60 days.
Changes
in Control
There
are no arrangements, known to us, including any pledge by any person of our securities, the operation of which may at a subsequent
date result in a change in our control.
ITEM
13. CERTAIN RELATIONSHIPS AND
RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information
is set forth below for any transaction during the three years ended December 31, 2019, to which we were a party and in which any
of our officers and directors or any holder of more than 10% of any class of our stock had or is deemed to have a material interest.
Related-Party
Transactions
In
2007, we issued a 10% promissory note to a family member of our president in exchange for $300,000. The note was due on demand
after May 2008. There were no repayments made during the periods presented. At December 31, 2019 and 2018, 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, 2019 and 2018, totaled $72,466 and $72,466, respectively, and are presented in liabilities
from discontinued operations.
During
the year ended December 31, 2018, we received cash advances from related parties of $203,380. Additionally, a related party forgave
outstanding payables of $92,000 and related parties paid expenses totaling $241,734 directly to vendors on our behalf. There was
$873,721 and $520,608 of short-term advances due to related parties as of December 31, 2018 and 2017, respectively. The advances
are due on demand and as such included in current liabilities.
We
have agreed to issue options to Iehab Hawatmeh, our president, as compensation for services provided as our chief executive officer.
The terms of this employment agreement 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. During the year ended December 31, 2019, we accrued
for 6,000 stock options relating to this employee agreement, resulting in 30,000 stock options as of December 31, 2019 and 2018,
respectively. See Note 6 – Other Accrued Liabilities and Note 14 – Stock Options and Warrants.
As
of December 31, 2019 and 2018, we owed our president a total of $903,740 and $893,000, respectively, in unsecured advances. Additionally,
30,000 stock options with a fair market value of $3,000 were accrued as of December 31, 2019. 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.
Director
Independence
Under
the definition of independent directors found in Nasdaq Rule 5605(a)(2), which is the definition we have chosen to apply, none
of our directors is independent.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
firm of Sadler, Gibb and Associates has served as our independent registered public accounting firm since 2013.
Audit
Fees
For
our fiscal year ended December 31, 2019, we were billed approximately $33,250 for professional services rendered for the audit
and reviews of our consolidated financial statements. For our fiscal year ended December 31, 2018, we were billed approximately
$16,000 for professional services rendered for the audit and reviews of our consolidated financial statements.
Audit
Related Fees
For
our fiscal years ended December 31, 2019 and 2018, we did not incur any audit-related fees.
Tax
Fees
For
our fiscal years ended December 31, 2019 and 2018, we were not billed for professional services rendered for tax compliance, tax
advice, and tax planning.
All
Other Fees
We
did not incur any other fees related to services rendered by our principal accountant for the fiscal years ended December 31,
2019 and 2018.
Audit
and Non-Audit Service Preapproval Policy
In
accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder, our board
of directors has adopted an informal approval policy that it believes will result in an effective and efficient procedure to preapprove
services performed by the independent registered public accounting firm.
All
of the professional services rendered by principal accountants for the audit of our annual financial statements that are normally
provided by the accountant in connection with statutory and regulatory filings or engagements for last two fiscal years were approved
by our board of directors.
Audit
Services
Audit
services include the annual financial statement audit (including quarterly reviews) and other procedures required to be performed
by the independent registered public accounting firm to be able to form an opinion on our consolidated financial statements. The
board of directors preapproves specified annual audit services engagement terms and fees and other specified audit fees. All other
audit services must be specifically preapproved by the board of directors. The board of directors monitors the audit services
engagement and may approve, if necessary, any changes in terms, conditions, and fees resulting from changes in audit scope or
other items.
Audit-Related
Services
Audit-related
services are assurance and related services that are reasonably related to the performance of the audit or review of our consolidated
financial statements, which historically have been provided to us by the independent registered public accounting firm and are
consistent with the Securities and Exchange Commission’s rules on auditor independence. The board of directors preapproves
specified audit-related services within preapproved fee levels. All other audit-related services must be preapproved by the board
of directors.
Tax
Services
The
board of directors preapproves specified tax services that it believes would not impair the independence of the independent registered
public accounting firm and that are consistent with Securities and Exchange Commission’s rules and guidance. The board of
directors must specifically approve all other tax services.
All
Other Services
Other
services are services provided by the independent registered public accounting firm that do not fall within the established audit,
audit-related, and tax services categories. The board of directors preapproves specified other services that do not fall within
any of the specified prohibited categories of services.
Procedures
All
proposals for services to be provided by the independent registered public accounting firm, which must include a detailed description
of the services to be rendered and the amount of corresponding fees, are submitted to the board of directors and the chief financial
officer. The chief financial officer authorizes services that have been preapproved by the board of directors. The chief financial
officer submits requests or applications to provide services that have not been preapproved by board of directors, which must
include an affirmation by the chief financial officer and the independent registered public accounting firm that the request or
application is consistent with the Securities and Exchange Commission’s rules on auditor independence, to board of directors
for approval.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019 AND 2018 (Revised)
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.
We
devoted most of 2019 to exploring a number of potential 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.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
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., LBC Products, Inc., and CirTran - Asia, Inc. All intercompany balances
and transactions have been eliminated. The results of CirTran Beverage Corp., CirTran Online Corp., CirTran Media Corp., and Racore
Network have been included through the dates of each dissolution during the three months ended March 31, 2019, and the liabilities
have been included in the balance sheet as of March 31, 2020 and December 31, 2019.
The
consolidated financial statements as of and for the year ended December 31, 2018, 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 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. Revenue is recognized net of allowances
for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities. We did not recognize
revenue during the years ended December 31, 2019 and 2018.
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, 2019 or 2018.
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, 2019 and 2018. 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, 2019 and 2018, was $9,772 and $12,065, respectively.
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, 2019 or 2018.
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 Multi-NomialLattis model. The fair values of the derivative instruments are measured
each reporting period.
During
the year ended December 31, 2017, our common stock was suspended from trading. Because of this, the convertible notes no longer
met the criteria to bifurcate the instrument under FASB ASC 815, Derivatives and Hedging. Accordingly, we determined the
underlying common stock of the instruments being accounted for as derivative liabilities had no value. As a result, the fair value
of the derivative liabilities, as of the date our common stock was no longer available to trade, was written off to additional
paid-in capital in accordance with ASC 815-15-35-4. During the year ended December 31, 2018, we became current with our filing
requirements with the SEC, and FINRA approved our common stock to continue trading during the year ended December 31, 2019. Accordingly,
we recorded derivative liabilities as of the date our stock resumed trading, or September 13, 2019, and revalued the liability
as of December 31, 2019.
Inventories
Inventories
are stated at the lower of average cost or market value. Cost on manufactured inventories includes labor, material, and overhead.
Overhead cost is based on indirect costs allocated to cost of sales, work-in-process inventory, and finished goods inventory.
Indirect overhead costs have been charged to cost of sales or capitalized as inventory, based on management’s estimate of
the benefit of indirect manufacturing costs to the manufacturing process.
When
there is evidence that the inventory’s value is less than original cost, the inventory is reduced to market value. We determine
market value on current resale amounts and whether technological obsolescence exists. We will seek agreements with manufacturing
customers that require them to purchase their inventory items in the event they cancel their business with us.
Stock-Based
Compensation
We
have outstanding stock options to directors and employees, which are described more fully in Note 14 – 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 $800 and $480 for the years ended December 31, 2019 and 2018, 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.
|
Our
financial assets and liabilities carried at fair valued measured on a recurring basis as of December 31, 2019 and 2018, consisted
of the following:
|
|
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
|
|
|
|
Total Fair Value
at December 31,
2018
|
|
|
Quoted prices in active markets
(Level
1)
|
|
|
Significant other observable
inputs (Level 2)
|
|
|
Significant
unobservable
inputs (Level
3)
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
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.
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 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
$37,994,597 and $36,177,119 as of December 31, 2019 and 2018, respectively, and a net loss from continuing operations of $1,078,973
and $946,166 during the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, we had an accumulated
deficit of $78,461,806 and $77,234,267, 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,
|
|
|
Useful Life
|
|
|
2019
|
|
|
2018
|
|
|
(years)
|
Furniture and office equipment
|
|
$
|
177,900
|
|
|
$
|
177,900
|
|
|
5 - 10
|
Leasehold improvements
|
|
|
997,714
|
|
|
|
997,714
|
|
|
7 - 10
|
Production equipment
|
|
|
2,886,267
|
|
|
|
2,886,267
|
|
|
5 - 10
|
Vehicles
|
|
|
53,209
|
|
|
|
53,209
|
|
|
3 - 7
|
Total
|
|
|
4,115,090
|
|
|
|
4,115,090
|
|
|
|
Less: accumulated depreciation
|
|
|
(4,105,025
|
)
|
|
|
(4,103,025
|
)
|
|
|
Property and equipment, net
|
|
$
|
9,772
|
|
|
$
|
12,065
|
|
|
|
There
was $2,293 and $2,292 of depreciation expense recorded during the years ended December 31, 2019 and 2018, 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, 2019 and 2018, 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, 2019 and 2018, totaled $72,466 and $72,466, respectively, and are presented in liabilities
from discontinued operations.
During
the years ended December 31, 2019 and 2018, we received cash advances from related parties of $84,987 and $203,380, respectively.
Additionally, related parties paid expenses on our behalf totaling $(77,180) and $241,734 during the years ended December 31,
2019 and 2018, respectively. The advances are non-interest-bearing, due on demand, and are included in current liabilities. Total
advances from related parties were:
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Related party A
|
|
$
|
106,018
|
|
|
$
|
13,758
|
|
Related party B
|
|
|
632,637
|
|
|
|
734,875
|
|
Total
|
|
$
|
738,655
|
|
|
$
|
748,633
|
|
We
have agreed to issue options to Iehab Hawatmeh, our president, as compensation for services provided as our chief executive officer.
The terms of this employment agreement 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. During the year ended December 31, 2019, we accrued
for 6,000 stock options relating to this employee agreement, resulting in 30,000 stock options as of December 31, 2019 and 2018,
respectively. See Note 6 – Other Accrued Liabilities and Note 14 – Stock Options and Warrants.
As
of December 31, 2019 and 2018, we owe our president a total of $903,740 and $893,000, respectively, in unsecured advances. Additionally,
30,000 stock options with a fair market value of $3,000 were owed as of December 31, 2019 and 2018. 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.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Tax liabilities
|
|
|
806,331
|
|
|
|
758,827
|
|
Other
|
|
|
271,668
|
|
|
|
45,638
|
|
Total
|
|
$
|
1,077,999
|
|
|
$
|
804,465
|
|
Other
accrued liabilities as of December 31, 2019 and 2018, include a non-interest-bearing payable totaling $45,000 that is due on demand.
Additionally, customer deposits totaling $226,030 were included in other accrued liabilities as of December 31, 2019.
Accrued
payroll and compensation liabilities consist of the following:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
(Revised)
|
|
Stock option expenses
|
|
$
|
4,000
|
|
|
$
|
4,000
|
|
Director fees
|
|
|
135,000
|
|
|
|
135,000
|
|
Bonus expenses
|
|
|
121,858
|
|
|
|
121,858
|
|
Commissions
|
|
|
2,148
|
|
|
|
2,148
|
|
Administrative
payroll
|
|
|
3,494,630
|
|
|
|
3,450,660
|
|
Total
|
|
$
|
3,757,636
|
|
|
$
|
3,713,666
|
|
Stock
option expenses consist of accrued employee stock option expenses. Options granted during the years ended December 31, 2018 and
2019, were issued during the year ended December 31, 2019 (see Note 14 – Stock Options and Warrants for further
discussion).
There
were 8,000 stock options accrued during the year ended December 31, 2019. During the year ended December 31, 2019, we accrued
for 6,000 stock options relating to the employment agreement with Mr. Hawatmeh. The fair market value of the options was $600,
using the following assumptions: estimated five-year term, estimated volatility of 567% and a risk-free rate of 2.31%.
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, 2019 and 2018, 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 expires on October 6, 2020. There was $1,048,756
and $986,861 due as of December 31, 2019 and 2018, 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.
In
addition to the employment agreement above, we have verbal contracts with our employees that require payment of noncash compensation
in a fixed number of shares. During the years ended December 31, 2019 and 2018, we granted options to purchase 8,000 and 8,000
shares of common stock, respectively, to two employees. We recorded expenses totaling $800 and $480 during the years ended December
31, 2019 and 2018, respectively, for employee options relating to the employment contracts of these employees.
NOTE
8 - NOTES PAYABLE
Notes
payable consisted of the following:
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
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
|
|
Total
|
|
$
|
590,000
|
|
|
$
|
590,000
|
|
There
was $157,535 and $110,035 of accrued interest due on these note as of December 31, 2019 and 2018, 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
|
|
|
|
2019
|
|
|
2018
|
|
Convertible debenture, 5%
stated interest rate, secured by all of our assets, due on November 12, 2020
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Convertible debenture, 5% stated interest
rate, secured by all of our assets, due on June 3, 2020
|
|
|
25,000
|
|
|
|
-
|
|
Convertible debenture, 5% stated interest
rate, secured by all of our assets, due on August 8, 2020
|
|
|
25,000
|
|
|
|
-
|
|
Convertible debenture, 5% stated interest
rate, secured by all of our assets, due on December 23, 2020
|
|
|
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
|
|
$
|
2,650,528
|
|
|
$
|
2,590,528
|
|
Less: discounts
|
|
|
(722,886
|
)
|
|
|
-
|
|
Total
|
|
$
|
1,927,642
|
|
|
$
|
2,590,528
|
|
Less: current
portion
|
|
|
(248,874
|
)
|
|
|
(200,000
|
)
|
Long term portion
|
|
$
|
1,678,768
|
|
|
$
|
2,390,528
|
|
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, 2019 and 2018, we had accrued interest on the convertible debentures totaling $1,399,295 and $1,268,556, respectively,
of which $28,199 and $16,986 was current and $1,371,098 and $1,251,570 was long term, respectively. As of December 31, 2019 and
2018, the debentures were convertible into 568,989,796 and an undeterminable number of 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 $2,650,528
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 5 due December 23, 2020) 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 model as of December 31, 2019, using the following
assumptions:
Volatility
|
|
91.9%
- 100.9%
|
|
Rick Free Rates
|
|
1.55%
- 1.80%
|
|
Stock price
|
|
$0.0100
– $0.0101
|
|
Remaining life
|
|
0.542
- 7.33 years
|
|
The
fair values of the derivative instruments are measured each quarter, which resulted in a loss of $80,640 during the year ended
December 31, 2019. As of December 31, 2019, and December 31, 2018, the fair market value of the derivatives aggregated $894,079
and $0, respectively.
NOTE
11 - LEASES
We
sublease from an unaffiliated party at $5,000 per month on a month to month basis for the use of office space and utilities. Due
to the short-term nature of the lease, we have not recorded a right of use asset or related payable. We recorded rent expense
of $21,000 and $42,000 for the years ended December 31, 2019 and 2018, respectively.
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, 2019 and 2018, 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, 2019 and 2018, we had net operating loss carryforwards for tax reporting purposes of approximately $19.1
million and $26.7 million, respectively. These net operating loss carryforwards, if unused, begin to expire in 2020. 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, 2019
|
|
|
December
31, 2018
|
|
Net operating loss carryforward
|
|
$
|
4,005,545
|
|
|
$
|
5,630,037
|
|
Valuation allowance
|
|
|
(4,005,545
|
)
|
|
|
(5,630,037
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of income taxes computed at the statutory rate is as follows:
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Computed federal income
tax benefit (expense) at statutory rate of 21% and 21%
|
|
$
|
(245,508
|
)
|
|
$
|
(222,244
|
)
|
Depreciation and amortization
|
|
|
459
|
|
|
|
458
|
|
Change in payroll accruals
|
|
|
8,794
|
|
|
|
7,336
|
|
Stock option expense
|
|
|
160
|
|
|
|
56
|
|
Change in derivative liability
|
|
|
-
|
|
|
|
-
|
|
Change in valuation
allowance
|
|
|
236,095
|
|
|
|
214,394
|
|
Income tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE
13 - STOCKHOLDERS’ DEFICIT
We
are authorized to issue up to 100,000,000 shares of $0.001 par value common stock. No shares were issued during the periods presented.
We had a total of 4,500,417 common shares issued and outstanding as of December 31, 2019 and 2018.
During
the year ended December 31, 2019, we effected a 1:1000 reverse stock split. The impacts of the reverse stock split have been retroactively
stated.
NOTE
14 - STOCK OPTIONS AND WARRANTS
Stock
Incentive Plans
During
the year ended December 31, 2019, we granted options to purchase 8,000 shares of common stock, less forfeitures of options to
purchase 8,000 shares of common stock from a previous year, relating to the employment of our president and one of our employees.
The fair market value of the accrued stock options aggregated $800, using the following assumptions: seven-year term, volatility
of 567%, a risk-free rate of 2.31%, and exercise price of $0.0001.
During
the year ended December 31, 2018, we granted options to purchase 8,000 shares of common stock, less forfeitures of options to
purchase 8,000 shares of common stock from a previous year, relating to the employment of our president and one of our employees.
The fair market value of the accrued stock options aggregated $800, using the following assumptions: seven-year term, volatility
of 567%, a risk-free rate of 2.38%, and exercise price of $0.0001.
As
of December 31, 2019, we had no unrecognized compensation costs 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.
NOTE
15 - 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, 2019 and 2018, 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, 2019 and 2018.
Total
assets and liabilities included in discontinued operations were as follows:
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Assets from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
|
122
|
|
Total
assets from discontinued operations
|
|
$
|
-
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
Liabilities from
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
19,690,378
|
|
|
$
|
19,869,559
|
|
Accrued liabilities
|
|
|
704,917
|
|
|
|
704,917
|
|
Accrued interest
|
|
|
1,022,342
|
|
|
|
868,874
|
|
Accrued payroll
and compensation expense
|
|
|
131,108
|
|
|
|
117,901
|
|
Current maturities
of long-term debt
|
|
|
444,085
|
|
|
|
239,085
|
|
Related party payable
|
|
|
1,776,250
|
|
|
|
1,776,250
|
|
Short-term
advances payable
|
|
|
2,579,773
|
|
|
|
2,579,773
|
|
Total
liabilities from discontinued operations
|
|
$
|
26,348,853
|
|
|
$
|
26,156,359
|
|
Net
losses from discontinued operations were comprised of the following components:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of sales
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
13,193
|
|
|
|
11,590
|
|
Total operating expenses
|
|
|
13,193
|
|
|
|
11,590
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(153,465
|
)
|
|
|
(153,465
|
)
|
Other
income
|
|
|
18,095
|
|
|
|
-
|
|
Total other income
(expense)
|
|
|
(135,373
|
)
|
|
|
(153,465
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from
discontinued operations
|
|
$
|
(148,566
|
)
|
|
$
|
(165,055
|
)
|
NOTE
16 - REVISION TO PRIOR YEAR FINANCIAL STATEMENTS
During
the year ended December 31, 2019, we identified an error in the presentation and accounting for option-based liabilities in prior
years, dating to the year ended December 31, 2008. We have performed an analysis and determined it appropriate to correct the
error on a cumulative basis as of December 31, 2017, resulting in a decrease in accrued liabilities and retained earnings of $476,253
as of December 31, 2017. The impacts on accrued liabilities and retained earnings were also $476,253 as of and for the year ended
December 31, 2018. The balance sheet and statement of stockholders’ deficit for the year then ended has been revised to
correct the error.
|
|
Originally
Reported
|
|
|
Adjustments
|
|
|
Revised
|
|
Total assets
|
|
$
|
312,401
|
|
|
$
|
-
|
|
|
$
|
312,401
|
|
Accrued payroll and compensation expense
|
|
$
|
4,189,919
|
|
|
$
|
(476,253
|
)
|
|
$
|
3,713,666
|
|
Total current liabilities
|
|
$
|
36,653,708
|
|
|
$
|
(476,253
|
)
|
|
$
|
36,177,455
|
|
Total liabilities
|
|
$
|
40,795,806
|
|
|
$
|
(476,253
|
)
|
|
$
|
40,319,553
|
|
Accumulated deficit
|
|
$
|
(77,710,520
|
)
|
|
$
|
476,253
|
|
|
$
|
(77,234,267
|
)
|
Total stockholders’ deficit
|
|
$
|
(40,483,405
|
)
|
|
$
|
476,253
|
|
|
$
|
(40,007,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(946,166
|
)
|
|
$
|
-
|
|
|
$
|
(946,166
|
)
|
Loss from discontinued operations
|
|
$
|
(165,055
|
)
|
|
$
|
-
|
|
|
$
|
(165,055
|
)
|
Net loss
|
|
$
|
(1,111,221
|
)
|
|
$
|
-
|
|
|
$
|
(1,111,221
|
)
|
NOTE
17 - SUBSEQUENT EVENTS
We
have evaluated all events occurring subsequent to the financial statements and determined there are no additional items to disclose.
However,
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. We have taken measures to mitigate the impact on our business
operations and overall financial performance, which continue to evolve. 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.
On
March 30, 2020, we filed a Current Report on Form 8-K to indicate our reliance on the Order of the U.S. Securities and Exchange
Commission (Release No. 34-88465) in connection with filing our Annual Report on Form 10-K for the year ended December 31, 2019,
as a result of the circumstances set forth below. Specifically, our executive team and contract outside accountant that live in
Salt Lake City, Utah, were dislocated and delayed as they began working remotely in a “shelter-at-home” environment
in response to the COVID-19 pandemic that precluded face-to-face meetings. The difficulty of operating in the COVID-19 “shelter-at-home”
environment was then exacerbated by a 5.7 Richter scale earthquake and persistent ongoing aftershocks in the Salt Lake Valley.