CIRTRAN CORP - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.001

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [  ] Yes [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to the Section 13 or Section 15(d) of the Exchange Act. [  ] Yes [X] No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [  ] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [  ] Yes [X] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [  ]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. As of June 30, 2020, the aggregate market value of voting common equity held by non-affiliates was $183,303.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. As of May 17, 2021, we had 4,945,417 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements about the future, sometimes referred to as “forward-looking” statements. Forward-looking statements are typically identified by use of the words “believe,” “may,” “could,” “should,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “intend,” and similar words and expressions. Statements that describe our future strategic goals, plans, objectives, and predictions are also forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements.

Readers of this report are cautioned that any forward-looking statements, including those regarding us or our management’s current beliefs, expectations, anticipations, estimations, projections, strategies, proposals, plans, or intentions, are not guarantees of future performance or results of events and involve risks and uncertainties, such as:

The forward-looking statements in this report are based on present circumstances and on our predictions respecting events that have not occurred, that may not occur, or that may occur with different consequences from those we now assume or anticipate. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including the risk factors discussed in this report. These cautionary statements are intended to be applicable to all related forward-looking statements wherever they appear in this report. The forward-looking statements included are made only as of the date of this report.

PART I

ITEM 1. BUSINESS

Introduction

Based on our diversified expertise in manufacturing, marketing, distribution, and technology services in a wide variety of consumer products, including tobacco products, medical devices, and beverages, around the world, we have an innovative and consumer-focused approach to brand portfolio management, resting on a strong understanding of consumers domestically, and we have established a footprint in more than 50 key, international markets.

In early 2020, we completed phase one of our development of all HUSTLER®-branded products, which enabled us to generate revenue of $1,732,625 during the year ended December 31, 2020. Our 2020 revenue-generating activities capitalized on our efforts during most of 2019 to exploring new product opportunities. In late 2019, we entered into a new, five-year manufacturing and distribution agreement with an unrelated party to manufacture, distribute, and sell condoms, electronic tobacco products, cigars, energy drinks, water beverages, and related merchandise, all using the HUSTLER® brand name

We had no revenue during the year ended December 31, 2019, while we devoted our efforts and financial resources to development of products.

References to “us,” “we,” “our,” and correlative terms refer to CirTran Corporation and our three subsidiaries, LBC Products, Inc., CirTran Products Corp. and CirTran - Asia, Inc., through which we conduct our activities. On February 19, 2019, we filed articles of dissolution for both CirTran Media Corp. and CirTran Beverage Corp. with the state of Utah. Additionally, a certificate of dissolution was filed for Racore Network, Inc. on March 11, 2019, and a certificate of dissolution was filed for CirTran Online Corp. on March 20, 2019. Lastly, CirTran Corporation (Utah) was dissolved on August 13, 2019.

All share and per-share amounts have been adjusted to give retroactive effect to a 1,000-to-one reverse split of our common stock effective September 2019.

Principal 2020 and 2019 Activities

HUSTLER®-branded Products

In early 2020 we launched our efforts to manufacture, distribute, and sell condoms, electronic cigarettes, electronic cigars, cigars, hookahs, hookah tobacco, energy drinks, water beverages, and related merchandise, all using the HUSTLER® trademark. We conduct these activities through our new, wholly owned subsidiary, LBC Products, Inc. (“LBC”), under a December 30, 2019, Exclusive Manufacturing and Distribution Agreement with GloBrands, LLC (“GloBrands).

Our 2020 product launch culminated months of direct, three-way negotiations that began in 2018 among the Flynt/HUSTLER® organization, GloBrands, and us that let to agreed terms in April 2019 and a definitive agreement signed before 2019 year-end. GloBrands is an unaffiliated licensee to market certain products bearing the HUSTLER® trademark.

The Flynt/HUSTLER® organization, a privately held 45-year-old global empire founded by Larry Flynt, operates under the HUSTLER® brand, including Larry Flynt’s HUSTLER® Clubs in 14 locations worldwide, HUSTLER® Hollywood adult retail stores in 34 locations, the luxurious HUSTLER® Casino and Larry Flynt’s Lucky Lady Casino in California, broadcasting outlets serving over 55 countries, and DVD distribution. Larry Flynt’s HUSTLER® Club, located at the south end of The Las Vegas Strip, consists of an approximately 70,000-square-foot gentlemen’s club over a similarly sized retail store that sells erotic clothing, toys, and associated merchandise. Our HUSTLER®-branded products will also be distributed in outlets operated by HUSTLER®’s affiliated DejaVue organization, which operates approximately 200 gentlemen’s clubs and adjacent adult retail stores in major metropolitan cities across the United States and several foreign countries, including United Kingdom, Australia, France, Canada, and Mexico.

In undertaking this new product manufacturing and distribution opportunity, we will seek to take advantage of our distribution and manufacturing relationships established in several global locations during the last 18 years.

In early 2020, we completed phase one of our development of all HUSTLER®-branded products and began the manufacture and distribution of licensed products. Our principal activities during the year ended December 31, 2020, were related to executing on our agreement to develop, manufacture, and distribute licensed products that allowed us to generate revenues of $1,732,625 during the year ended December 31, 2020.

During 2019, we devoted our activities to:

These efforts continue.

Our GloBrands Manufacturing and Distribution Agreement

Our December 2019 Exclusive Manufacturing and Distribution Agreement with GloBrands grants to us the exclusive right to manufacture, distribute, and sell the specified products, including the authority to deal directly with distribution chain participants and to collect all product payments. We are authorized to retain from the collected sales proceeds an amount equal to 120% of our cost of goods sold, plus 10% of gross sales of the covered products. GloBrands will also reimburse us 105% of certain of our media placement expenses. Our GloBrands’ agreement term extends through November 30, 2024, subject to earlier termination by either party following 60 days’ notice of uncured material default.

The terms of our agreement with GloBrands are subject in all respects to its rights as licensee under its licensing agreements with the Flynt/HUSTLER® organization to use the HUSTLER® brand name, the Flynt/HUSTLER® organization has approved our manufacturing and distribution arrangement. GloBrands is obligated to us under our agreement to fully and timely perform and observe all terms, covenants, and conditions of the three underlying licenses between it and the Flynt/Hustler organization, including the payment of required minimum and actual royalties to the Flynt/HUSTLER® organization. Further, GloBrands cannot amend the license agreements or waive or release any material right under the underlying Flynt/HUSTLER® licenses. Under the Manufacturing and Distribution Agreement, we transmit royalty payments on GloBrands’ behalf directly to the Flynt/HUSTLER® organization.

We have a limited license to use the HUSTLER® brand name for the exclusive purposes of fulfilling our obligations under the Manufacturing and Distribution Agreement.

GloBrands’ License to Use the HUSTLER® Brand Name

Our Exclusive Manufacturing and Distribution Agreement with GloBrands implements its three separate product licenses with the Flynt/HUSTLER organization. These three licenses, all effective May 31, 2019, cover three branded products or product groups (condoms, energy drinks and waters, and natural leaf small cigars and premium cigars, electronic cigarettes/cigars, hookahs, and hookah tobacco), with minimum initial term guaranteed payments. The guaranteed payments are a prepayment of, and are applied to, actual royalties of the gross sales price of products, less freight and returns. The licenses authorize worldwide product distribution through mass retail, drug stores, supermarkets, club stores, direct response, pharmacies casinos/nightclubs, convenience stores, internet sales via licensee’s websites, and miscellaneous other outlets. Each license is automatically renewable for an additional five-year term, subject to adjustment to the amount of guaranteed payments. All manufacturing, labeling, and marketing materials, samples, and representative products are subject to the prior approval of the Flynt/HUSTLER® organization. As noted above, the Flynt/HUSTLER® organization has consented to our appointment to market and distribute the licensed products under our marketing and distribution agreement with GloBrands.

Each license is terminable by the Flynt/HUSTLER® organization if any material default by GloBrands is not cured within 60 days after notice (10 days in the case of nonpayment). We are not entitled to receive a copy of any notice of default.

Business Approach

Our GloBrands-HUSTLER® current activities reflect our commitment to developing our clients’ brands and licensed brands and to providing a range of products in various categories for markets globally. We provide complete product development, manufacturing, and distribution services for a wide range of business sectors. From first concept to design, engineering, prototyping, manufacturing, packaging, marketing, inventory control, distribution, shipping, warranty fulfillment, and customer service.

Consumer Product Commercialization—Contract Marketing

Beyond our current activities under our GloBrands-HUSTLER® Manufacturing and Distribution Agreement, we seek to commercialize one or more consumer products. Through those efforts, we identify what we believe to be the need for a product or other demand and then seek a product that may be distributed to address that demand. When we identify a need, but find no suitable available product, we may design our own product for commercialization.

We pursue contract marketing relationships principally in the domestic consumer products markets, such as home and garden, kitchen, health and beauty, toys, and licensed merchandise for television, sports, and other entertainment properties. If we deem it suitable, we may obtain rights from the product owner to manufacture and market a particular product, generally in consideration of the payment of a royalty, sometimes accompanied with an initial fee. Frequently, owners of undeveloped products or product concepts are seeking branding, marketing, manufacturing, order fulfillment, and distribution assistance.

Our commercialization effort includes developing product packaging, branding the product, arranging third-party manufacturing, establishing distribution channels, and arranging order fulfillment. We anticipate that these activities will generally be undertaken by third parties under contract. In some cases, we may brand a product under a license to use a third-party’s recognized name, as we did in the case of the Playboy-branded energy drink; seek an endorsement from a publicly recognized celebrity, sports figure, or other person; or obtain the rights to use the image, likeness, or logo of a product or a person, such as a well-known celebrity. Licensed merchandise is then sold and marketed in the entertainment and sports franchise industries. We anticipate that these products will be introduced into the market under either one uniform brand name or separate trademarked names that we originate and own or acquire by license.

The contract-manufacturing industry specializes in providing the program management, technical and administrative support, and manufacturing expertise required to take products from the early design and prototype stages through volume production and distribution, providing the customer with a quality product, delivered on time and at a competitive cost. This full range of services gives the customer an opportunity to avoid large capital investments in plant, inventory, equipment, and staffing, so that instead, it can concentrate on innovation, design, and marketing. By using our contract-manufacturing services, customers will have the ability to improve the return on their investment with greater flexibility in responding to market demands and exploiting new market opportunities. Our efforts will be led by our current chief executive officer and others that we may hire as employees or engage as independent contractors.

In previous years, we found that customers increasingly required contract manufacturers to provide complete turn-key manufacturing and material handling services, rather than working on a consignment basis in which the customer supplies all materials and the contract manufacturer supplies only labor. Turn-key contracts involve design, manufacturing and engineering support, procurement of all materials, and sophisticated in-circuit and functional testing and distribution. The manufacturing partnership between customers and contract manufacturers involves an increased use of “just-in-time” inventory management techniques that minimize the customer’s investment in component inventories, personnel, and related facilities, thereby reducing its costs.

Based on the trends we have observed in the contract-manufacturing industry, we believe we will benefit from the increased market acceptance of, and reliance upon, the use of manufacturing specialists by many original equipment manufacturers, or OEMs, marketing firms, distributors, and national retailers. We believe the trend towards outsourcing manufacturing will continue. OEMs use manufacturing specialists for many reasons, including reducing the time it takes to bring new products to market, reducing the initial investment required, accessing leading manufacturing technology, gaining the ability to better focus resources in other value-added areas, and improving inventory management and purchasing power. An important element of our strategy is to establish partnerships with major and emerging OEM leaders in diverse segments across our target industries. Due to the costs inherent in supporting customer relationships, we focus on customers with which the opportunity exists to develop long-term business partnerships. Our goal is to provide our customers with total manufacturing solutions through third-party providers for both new and more mature products, as well as across product generations—an idea we call “Concept to Consumer.”

We have also designed, engineered, manufactured, and supplied products in the international electronic consumer products, and general merchandise industries for various marketers, distributors, and retailers selling overseas. We have provided manufacturing services to the direct-response and retail consumer markets. Our experience and expertise enables us to enter a project at various phases: engineering and design; product development and prototyping; tooling; and high-volume manufacturing. Our contacts with Asian suppliers have helped us to maintain our status as an international contract manufacturer for multiple products in a wide variety of industries, which will allow us to target larger-scale contracts.

We have developed markets for several product lines, including medical devices, beverages, tobacco products, fitness and exercise products, household and kitchen products and appliances, and health and beauty aids, some of which are manufactured in China. We anticipate that offshore contract manufacturing will play an increased role moving forward as resources become available to us.

Sales and Marketing

We review opportunities to identify products that we may market through current sales channels. We also seek new paths to deliver products and services directly to end users and are pursuing strategic and reciprocal relationships with retail distribution firms whereby they would act as our retail distribution arm and we would act as their manufacturing arm, with each party giving the other priority and first opportunity to work on the other’s products.

We believe there may be a significant marketing advantage related to our development and introduction of the suite of products under the HUSTLER® brand that identifies our products and outweighs related costs.

Our contacts in Central America, Thailand, Vietnam, China, and other Asian countries may allow us to increase our manufacturing capacity and output with minimal capital investment required. By using various subcontractors, we may leverage our upfront payments for inventories and tooling to control costs and receive benefits from economies of scale in Asian manufacturing facilities.

Typically, and depending on the contract, we may be required to prepay a portion of the purchase orders for materials. In exchange for financial commitments, we may receive dedicated manufacturing responsiveness and eliminate the costly expense associated with capitalizing completely proprietary facilities. For example, we previously expanded our manufacturing capabilities for our beverage division outside the United States to accommodate international customers by contracting with manufacturers in Hungary, The Netherlands, South Africa, and India. This will also be the case moving forward with the current branded products manufactured and distributed for GloBrands.

During a typical contract manufacturing sales process, a customer provides us with specifications for the product it wants, and we develop a bid price for manufacturing a minimum quantity that includes manufacture engineering, parts, labor, testing, and shipping. If the bid is accepted, the customer is required to purchase the minimum quantity, and additional product is sold through purchase orders issued under the original contract. Special engineering services are provided at either an hourly rate or a fixed contract price for a specified task.

Competition

As we seek to develop and introduce new private label or similarly branded proprietary products, we may be dependent on our ability to acquire licensing rights with established, broadly recognized brand names, which are typically owned by large, international firms that carefully guard their name’s integrity and reputation. We have little market position or operating history to support our efforts to develop exclusive marketing relationships. On the contrary, we may be adversely affected by the history of our relationship with Playboy Enterprises, Inc., in distributing its private label Playboy nonalcoholic energy drink.

Competition in our targeted markets is based on manufacturing technology, merchandise quality, responsiveness, the provision of value-added services, and price. To be competitive, we must provide technologically advanced manufacturing services, maintain quality levels, offer flexible delivery schedules, and deliver finished products on a reliable basis and for a favorable price.

The manufacturing services industry is large and diverse and serviced by many companies, including several that have achieved significant market share. We will compete with different companies depending on the type of service or geographic area. Certain of our competitors may have greater manufacturing, financial, research and development, and marketing resources than we have.

We will also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally.

Regulation

We or the products we sell are subject to typical federal, state, and local regulations and laws governing the operations of manufacturing concerns, including environmental disposal, storage, and discharge regulations and laws; employee safety laws and regulations; and labor practices laws and regulations. We and the firms that manufacture the products that we market and distribute typically lead compliance with applicable good manufacturing procedures compliance, including FDA 510(k) certification for medical devices such as condoms. We coordinate those efforts and, when we bear the related costs, hold the exclusive rights under those regulatory clearances. We are primarily responsible for complying with importing and interstate shipping licenses, registrations, reporting, and related excise tax payments for tobacco products we handle.

We are not required under current laws and regulations to obtain or maintain any specialized or agency-specific other licenses, permits, or authorizations to conduct our manufacturing services, but we must obtain licenses to sell tobacco products in all states. We believe we are in substantial compliance with all relevant regulations applicable to our business and operations. All international sales permits are the responsibility of the local distributors, and they are required to obtain all local licenses and permits.

Employees

At December 31, 2020, we had three full-time employees, including our officers and directors, and fifteen part-time contract workers. We now rely on part-time and contract workers, independent contractors, and consultants to meet our needs while minimizing fixed overhead. We expect to continue to rely on this strategy in the future as our increasing activities required more personnel.

Recapitalization

In May 2015, our stockholders and board of directors approved an amendment to our articles of incorporation to complete a 1,000-to-1 reverse split, or consolidation, of our common stock, decrease our authorized common stock to 100,000,000 shares, par value $0.001, and authorize a class of 5,000,000 shares of preferred stock having such terms as the board of directors may determine prior to issuance (the “Amendment”). However, FINRA refused to approve the Amendment until such time as we became current in our periodic reports and received approval for our common stock to resume trading. We became current in our periodic reports, and in September 2019, FINRA approved the Amendment, our recapitalization was effective, and our common stock resumed quotation on the Pink tier of the OTC Markets Group.

Corporate Background and History

In 1987, CirTran Corporation was incorporated in Nevada under the name Vermillion Ventures, Inc., for the purpose of acquiring other operating corporate entities. We were largely inactive until July 1, 2000, when we acquired substantially all of the assets and certain liabilities of Circuit Technology, Inc., through a wholly owned subsidiary, CirTran Corporation (Utah), that we created for the purpose of completing the acquisition.

Since 2000, we evolved from electronics contract manufacturing to market and distribute worldwide a Playboy®-branded non-alcoholic energy drink under a 2007 license and marketing agreement with Playboy Enterprises, Inc. These activities were terminated in 2016 due to legal and financial problems resulting from Playboy’s cancellation of our agreements. The assets and liabilities associated with our beverage distribution businesses were reported as discontinued operations as of December 31, 2016. In early 2019, we dissolved the subsidiaries under which we had conducted our non-alcoholic beverage distribution business.

ITEM 1A. RISK FACTORS

In addition to the negative implications of all information and financial data included in or referred to directly in this report, you should consider the following risk factors. This report contains forward-looking statements and information concerning us, our plans, and other future events. Those statements should be read together with the discussion of risk factors set forth below, because those risk factors could cause actual results to differ materially from such forward-looking statements.

We may be deemed to be insolvent and may face liquidation.

We may be deemed to be insolvent. We are unable to meet all of our obligations as they accrue, and the aggregate amount of our liabilities exceeds the reported value of our assets. Creditors may have the right to initiate involuntary bankruptcy proceedings against us to seek our liquidation. We cannot assure that we would be successful in avoiding liquidation by converting such liquidation proceedings to a Chapter 11 reorganization, which would permit us to develop and propose, for creditor and court approval, a reorganization plan that would enable us to proceed. Even if we were to propose a reorganization plan, any reorganization plan would likely require that we obtain new post-petition funding, which may be unavailable. Further, in the event of bankruptcy, our secured creditors that have encumbrances on all of our assets would likely execute and take all of our assets, which may leave nothing for other creditors or our stockholders.

The auditors’ report for our most recent fiscal year, like previous years, contains an explanatory paragraph about our ability to continue as a going concern.

We had net income of approximately $0.5 million and a net loss of approximately $1.2 million during the years ended December 31, 2020 and 2019, respectively, which includes a gain of approximately $80,000 and a loss of approximately $149,000 from discontinued operations in 2020 and 2019, respectively. Our net income during the year ended December 31, 2020, was driven by a gain of approximately $1.0 million recognized from the write-off of accounts payable, which was a one-time event. We had an accumulated deficit of approximately $77.9 million as of December 31, 2020. During the year ended December 31, 2020, net cash provided by operations was approximately $471,000. We had current liabilities of approximately $38.1 million and an approximately $37.1 million working capital deficit as of December 31, 2020. The report from our auditors on our consolidated financial statements for the years ended December 31, 2020 and 2019, as for several previous years, contains explanatory paragraphs about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in the following paragraphs and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if we are unable to continue as a going concern.

The novel COVID-19 pandemic is having and will likely continue to have negative effects on our business and results of operations.

On March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. We are monitoring the situation closely and our response to the COVID-19 pandemic continues to evolve. Our current principal responsive measures include implementing a mandatory work from home policy for most employees, restricting airplane travel, rescheduling marketing efforts, and product market launches, and updating our planning for future events in recognition of the fact that retail outlets for the HUSTLER®-branded products we manufacture and distribute are experiencing, and will likely continue to experience, substantially declining revenue. We are also evaluating the impact of the pandemic on our supply chain as compared to product demand. We actively monitor COVID-19-related developments and may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, vendors, and stockholders. The effects of these operational modifications will be reflected in current and future reporting periods.

The duration and magnitude of the COVID-19 pandemic impacts on our business operations and overall financial performance is unknown at this time and will depend on numerous circumstances outside our control or the ability of anyone to predict accurately. The secondary and tertiary unpredictable and continuing economic effects on our business and on the worldwide economy could be ruinous. The probability of reoccurrences of virus outbreaks is high and may continue for many months, likely resulting in further government-ordered lockdowns, stay-home, or shelter-in-place orders, and social distancing; restrictions on travel; and other widespread measures. We cannot predict the impact of recently introduced vaccines, the rate of inoculations, and whether so-called herd immunity will be achieved to reduce adverse impacts. We cannot predict the effect of these circumstances on us and our vendors, customers, and community; the global economy and political conditions; and the health of our employees, contractors, and their families; all of which will affect how quickly and to what extent normal economic and operating activities can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse effect on our business as a result of its global economic impact, including any resulting and ongoing recession. All of these circumstances likely exert similar hardships on those with which we deal, such as vendors, shippers, distributors, and customers. As a result, we have made adjustments to, and will need to continue to adjust, our business and expenditures in an effort to correlate our activities with business exigencies. These adjustments may include restrictions of executive and employee travel, hiring freezes or delays, and limitations on marketing and other expenditures. The ultimate financial impact and duration of all of the foregoing cannot now be predicted and may well exceed our expectations or our ability to cope with them.

We have only recently begun new operations with revenue potential after suffering severe operating and legal hurdles in 2016.

We have only recently commenced revenue-generating, full-scale operations under our GloBrands-HUSTLER® agreement. Based on the term sheet signed in April 2019 and an anticipated execution of a definitive agreement, we began to prepare to manufacture, market, and distribute an array of products under the HUSTLER® brand name. We cannot assure that our efforts will be successful, that we will be able to generate revenues, or that revenues will be sufficient to offset operating costs or recover start-up costs.

Our new efforts to market a group of products under the HUSTLER® brand name face all of the risks and uncertainties of a new business.

Manufacturing and marketing products under the HUSTLER® brand name is a new business for us that will be subject to all of the risks and uncertainties of a new business, including the difficulties of:

We will be subject to myriad other risks and uncertainties, over which we have no control or material influence.

Our new business will be dependent on GloBrands maintaining the license to use the HUSTLER® brand name.

Our business is fully dependent on GloBrands’ ability to preserve its rights to use the HUSTLER® brand name. We cannot assure that GloBrands will be able to comply with all of the terms, covenants, or conditions of the governing license agreement or that GloBrands, the counterparty to our manufacturing agreement, will meet all of its obligations to us or HUSTLER, through which GloBrands obtained its rights. Under its licenses with the Flynt/HUSTLER® organization, GloBrands has substantial minimum royalty payments due the Flynt/HUSTLER® organization under each of the three product licenses, and we have to rights to monitor whether GloBrands is making those payments as required or to cure any GloBrands defaults. Further, we cannot assure that HUSTLER® will fulfill its obligations under its agreements to GloBrands. Breaches by any party to the agreements under which we derive our rights to use the HUSTLER® brand name will place the entire business we are currently launching in peril and force us to terminate operations.

All of our assets are encumbered to secure the payment of secured convertible debentures that require payments if not previously converted to common stock.

We encumbered all of our assets to secure the payment of indebtedness and accrued interest due on secured convertible debentures, of which approximately $2.4 million is required to be repaid by April 2027, if not previously converted. In the event of default in repayment, our secured creditor could exercise its remedies, including the execution on all of our assets, which would result in the termination of our activities. We cannot assure that the secured creditor will continue to refrain from aggressive collection efforts. The existence of these secured obligations will likely significantly impair our ability to obtain capital from external sources.

We will require substantial amounts of additional capital from external sources.

We may seek required funds through the sale of equity or other securities. Our ability to obtain financing on acceptable terms will depend on many factors, including the condition of the securities markets generally and for companies like us at the time of the offering; our business, financial condition, and prospects at the time of the proposed offering; our ability to identify and reach a satisfactory arrangement with prospective securities sales and investment groups; and various other factors. We cannot assure that we will be able to obtain financing on terms favorable to us or at all. The issuance of additional equity securities may dilute the interest of our existing stockholders or may subordinate their rights to the superior rights of new investors.

We may also seek additional capital through strategic alliances, joint ventures, or other collaborative arrangements. Any such relationships may dilute our interest in any specific project and decrease the amount of revenue that we may receive from the project. We cannot assure that we will be able to negotiate any strategic investment or obtain required additional funds on acceptable terms, if at all. In addition, our cash requirements may vary materially from those now planned because of the results of future marketing and manufacturing agreements; results of product testing; potential relationships with our strategic or collaborative partners; changes in the focus and direction of our research and development programs; competition and technological advances; issues related to patent or other protection for proprietary technologies; and other factors.

If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate our planned efforts; obtain funds through arrangements with strategic or collaborative partners that may require us to relinquish rights to certain of our technologies, product candidates, or products that we would otherwise seek to develop or commercialize ourselves; or sublicense our rights to such products on terms that are less favorable to us than might otherwise be available.

Our financial statements report liabilities incurred before 2013 that may impair our ability to obtain capital.

Our balance sheet and stockholders’ deficit continue to include liabilities accrued prior to 2013 by our subsidiary, whose operations were discontinued in 2016, but which we still report on our financial statements in accordance with generally accepted accounting principles (“GAAP”). These liabilities include a judgment with a balance of $17.2 million as of December 31, 2020, awarded to Playboy Enterprises, Inc., which is barred by court order from seeking collection against us, the parent, and amounts due to assorted trade creditors and professional firms for services rendered to other subsidiaries prior to 2013, which we believe may be barred by the applicable statutes of limitations. The resulting large, past-due liabilities may impair our ability to obtain additional capital or decrease the market in which our common stock is traded.

Any substantial increase in business activities will require skilled management of growth.

If we have the opportunity to commercialize new products, our success will depend on our ability to manage continued growth, including integrating new employees, independent contractors, and consultants into an effective management and technical team; formulating strategic alliances, joint ventures, or other collaborative arrangements with third parties; commercializing and marketing proposed products and services; and monitoring and managing these relationships on a long-term basis. If our management is unable to integrate these resources and manage growth effectively, the quality of our products and services, our ability to retain key personnel, and the results of our operations would be materially and adversely affected.

Our management concluded that our internal control over financial reporting was not effective as of December 31, 2020. Compliance with public company regulatory requirements, including those relating to our internal control over financial reporting, have and will likely continue to result in significant expenses and, if we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public reporting company, we are subject to the Sarbanes-Oxley Act of 2002 as well as to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and other federal securities laws. As a result, we incur significant legal, accounting, and other expenses, including costs associated with our public company reporting requirements and corporate governance requirements. As an example of public reporting company requirements, we evaluate the effectiveness of disclosure controls and procedures and of our internal control over financing reporting in order to allow management to report on such controls.

Our management concluded that our internal control over financial reporting was not effective as of December 31, 2020, due to a failure to maintain an effective control environment, failure of segregation of duties, failure of entity-level controls, and our sole executive’s access to cash.

If significant deficiencies or other material weaknesses are identified in our internal control over financial reporting that we cannot remediate in a timely manner, investors and others may lose confidence in the reliability of our financial statements. This would likely have an adverse effect on the trading price of our common stock and our ability to secure any necessary additional equity or debt financing.

Stockholders may suffer substantial dilution related to issued stock options, warrants, and convertible debentures.

As of December 31, 2020 and 2019, we had a number of agreements or obligations for the possible issuance of common stock that may result in dilution to investors. These include:

The sale, or even the possibility of the sale, of the shares of common stock underlying these commitments could have an adverse effect on the market price for our securities or on our ability to obtain future financing.

Additional issuances of stock, stock options and warrants, and convertible debt will cause additional substantial dilution to our stockholders.

The number of our issued and outstanding shares was decreased in 2019 as the result of a 1,000-to-one reverse stock split of our common stock. As a result, 95% of our common stock is available for issuance. Given our limited cash, liquidity, and revenues, it is likely that in the future, as in the past, we will sell stock and issue additional stock options and convertible debt to finance our future business operations. The issuance of additional shares of common stock, the exercise of stock options, and the conversion of debt to stock will cause additional dilution to our stockholders and could have further adverse effects on the market price for our securities or on our ability to obtain future financing.

Penny stock regulations will impose certain restrictions on resales of our securities, which may cause an investor to lose some or all of its investment.

The U.S. Securities and Exchange Commission has adopted regulations that generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share that is not traded on a national securities exchange or that has an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers that sell these securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction before the purchase.

Further, if the price of the stock is below $5.00 per share and the issuer does not have $2.0 million or more net tangible assets or is not listed on a registered national securities exchange, sales of that stock in the secondary trading market are subject to certain additional rules promulgated by the U.S. Securities and Exchange Commission. These rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices, and disclosure of the compensation to the broker-dealer and the salesperson working for the broker-dealer in connection with the transaction. These rules and regulations may affect the ability of broker-dealers to sell our common stock, thereby effectively limiting the liquidity of our common stock. These rules may also adversely affect the ability of persons that acquire our common stock to resell their securities in any trading market that may exist at the time of such intended sale.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We sublease a 2,500-square-foot office, showroom, and warehouse in Las Vegas, NV for $2,500 per month from GloBrands under a lease that expires in October 2022. We believe that the facilities described above are generally in good condition, well maintained, and suitable and adequate for our current needs.

ITEM 3. LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings 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 non-appealable 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, 2020, 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 II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

In September 2019, our common stock resumed quotation on the Pink tier of the OTC Markets Group under the trading symbol “CIRX.” Our common stock did not trade during the previous portion of the preceding two years. These over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions. Since our inception, the sporadic trading activity in our common stock and the price fluctuations have been volatile, and we cannot assure that any market for our common stock will be maintained.

The following table sets forth the range of low and high closing sale prices for our common stock, as adjusted to give retroactive effect to a 1,000-to-one reverse split effective September 2019, for each of the periods indicated as reported and summarized by the Pink tier of the OTC Markets Group:

On May 10, 2021, the closing price per share for the most recent sale of our common stock on the Pink tier of the OTC Markets Group was $0.06. We have 498 stockholders of record of our common stock. As of May 12, 2021, we had 4,945,417 shares of our common stock issued and outstanding.

Our shares of common stock are subject to the “penny stock” and other rules of the Exchange Act. In general terms, “penny stock” is defined as any equity security that has a market price less than $5.00 per share that is not traded on a national securities exchange or that has an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers that sell these securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse).

Transactions covered by these rules are subject to additional sales practice requirements, including the broker-dealer must make a special suitability determination for the purchase of these securities and have received the purchaser’s written consent to the transaction before the purchase. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of stockholders to sell their shares.

Dividends

Holders of shares of common stock are entitled to receive dividends for our common stock when, as, and if declared by the board of directors out of funds legally available therefor. We have not paid any dividends on our common stock and intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy is subject to the discretion of the board of directors and will depend upon a number of factors, including future revenues, capital requirements, overall financial condition, and such other factors as our board of directors deems relevant.

Equity Compensation Plan

The following table provides information respecting our compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance.

Recent Sales of Unregistered Securities

During 2020, the holder of our outstanding convertible debenture converted $4,400 in accrued interest into 220,000 shares of our common stock. This conversion resulted in the reduction of the balance due on these debentures but did not generate cash proceeds. The common stock was issued in reliance on the exemption from registration set forth in Section 4(a)(1) of the Securities Act of 1933, as amended. No underwriter participated.

ITEM 6. SELECTED FINANCIAL DATA

We are not required to provide the information called for by this item.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Except for the historical information, the following discussion contains forward-looking statements that are subject to risks and uncertainties. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. Our actual results or actions may differ materially from these forward-looking statements for many reasons, including the risks described in “Risk Factors” and elsewhere in this annual report. Our discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes and with the understanding that our actual future results may be materially different from what we currently expect.

Introduction

Based on our diversified expertise in manufacturing, marketing, distribution, and technology services in a wide variety of consumer products, including tobacco products, medical devices, and beverages, around the world, we have an innovative and consumer-focused approach to brand portfolio management, resting on a strong understanding of consumers domestically, and we have established a footprint in more than 50 key, international markets.

In early 2020, we completed phase one of our development of all HUSTLER®-branded products, which enabled us to generate revenue of $1,732,625 during the year ended December 31, 2020. Our 2020 revenue-generating activities capitalized on our efforts during most of 2019 to exploring new product opportunities. In late 2019, we entered into a new, five-year manufacturing and distribution agreement with an unrelated party to manufacture, distribute, and sell condoms, electronic tobacco products, cigars, energy drinks, water beverages, and related merchandise, all using the HUSTLER® brand name.

We had no revenue during the year ended December 31, 2019, while we devoted our efforts and financial resources to development of products.

Going Concern

We have suffered substantial losses. The future of our company is dependent upon our ability to generate revenues sufficient to offset operating costs or recover start-up costs under our GloBrands-HUSTLER® Exclusive Manufacturing and Distribution Agreement signed in December 2019. Management intends to seek additional capital through a private placement or public offering of its common stock, if necessary. Our auditors have expressed a going concern in their opinion, which raises substantial doubts about our ability to continue as a going concern.

Results of Operations

Comparison of Years Ended December 31, 2020 and 2019

Sales and Cost of Sales

We had revenues of $1,732,625 and $0 during the years ended December 31, 2020 and 2019, respectively. Revenues during the year ended December 31, 2020, were derived from the design, manufacture, and delivery of certain licensed products in accordance with our GloBrands-HUSTLER® distribution agreement entered into in late 2019.

Operating Expenses

During the year ended December 31, 2020, selling, general, and administrative expenses and employee costs were approximately $758,000, as compared to approximately $407,000 for the same period in 2019, an increase of 86%, as a result of increased operations from executing our business plan.

Other Income and Expense

Other income and expenses during the year ended December 31, 2020, consisted of interest expense of approximately $658,000, a loss of disposal of equipment of approximately $10,000, losses of the fair value of derivative liabilities of approximately $23,000, gains on the write-off of accounts payable of approximately $1.0 million, and other income of $42,000. Other expenses during the year ended December 31, 2019, consisted of approximately $593,000 of interest expense and a loss on derivation valuation of approximately $81,000, offset by other income and a gain on settlement of debt totaling approximately $1,000.

As a result of the foregoing, we had income from continuing operations of $0.5 million during the year ended December 31, 2020, as compared to a loss of $1.1 million during the year ended December 31, 2019.

Liquidity and Capital Resources

We had a history of losses from operations prior to 2020, as our expenses had been greater than our revenues, which had ceased entirely several years earlier. Our accumulated deficit was $77.9 million at December 31, 2020. For the year ended December 31, 2020, we generated approximately $108,000 of cash from operating, investing, and financing activities, compared to using negligible net cash of $200 for the prior year from operating and financing activities.

During the year ended December 31, 2020, we generated approximately $464,000 of net cash in operations, comprised of net income from continuing operations of $452,000, noncash expenses of approximately $866,000, changes in working capital of approximately $1,000,000, and net cash used in discontinued operations of approximately $115,000. The net change in working capital was primarily driven by accrued interest of approximately $543,000 and accrued liabilities of approximately $640,000.

During the year ended December 31, 2019, we used approximately $123,000 of net cash in operations, comprised of a net loss from continuing operations of $1.1 million, noncash losses of approximately $96,000, changes in working capital of approximately $815,000, and net cash provided by discontinued operations of approximately $44,000. The net change in working capital was primarily driven by accrued interest of approximately $501,000 and accrued liabilities of approximately $274,000.

During the year ended December 31, 2020, we used $337,520 of net cash from financing activities mainly comprised of repayments on related-party loans that totaled $467,409 and proceeds from non-related-party loans of $156,000.

During the year ended December 31, 2019, financing activities provided approximately $123,000 of net cash, which were mainly proceeds from convertible and related-party loans.

Our Capital Resources and Anticipated Requirements

Our monthly operating costs are approximately $35,000 per month, excluding approximately $50,000 of accruing interest expense and capital expenditures. We continue to focus on generating revenue and reducing our monthly business expenses through cost reductions and operational streamlining. We have only recently begun to generate enough cash to sustain our day-to-day operations, and we expect to access external capital resources in the future to fund any new projects we may undertake. We cannot assure that we will be successful in obtaining such capital.

If we seek infusions of capital from investors, it is unlikely that we will be able to obtain additional debt financing. If we did incur additional debt, we would be required to devote additional cash flow to servicing the debt and securing the debt with assets.

Our issuance of additional shares for equity or for conversion of debt could dilute the value of our common stock and existing stockholders’ positions.

Convertible Debentures and Notes Payable

We currently have an outstanding amended, restated, and consolidated secured convertible debenture with Tekfine, LLC, an unrelated entity, with a maturity date of April 30, 2027, to the extent not previously converted. The amended debenture had a total outstanding principal balance of $2.4 million, with accrued interest of $1.5 million as of December 31, 2020. We also have four additional convertible debentures with Tekfine with maturity dates ranging from May 30, 2021, until December 8, 2021, totaling $275,000, unless earlier converted. The convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or $0.10 (depending on the instrument) or the lowest bid price for the 20 trading days prior to conversion.

We have received advances from related parties totaling $11,500 and $84,987 during the years ended December 31, 2020 and 2019, respectively, as well as making repayments on related-party loans of $467,409 and $17,785 during the years ended December 31, 2020 and 2019, respectively. Additionally, related parties paid expenses on our behalf totaling $1,940 and $(77,180) during the years ended December 31, 2020 and 2019, respectively. The advances are non-interest-bearing, due on demand, and are included in current liabilities.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements and do not anticipate entering into any such arrangements in the foreseeable future.

Critical Accounting Policies

The methods, estimates, and judgments we use in applying our accounting policies have a significant impact on the results we report in our financial statements, which we discuss under the heading “Results of Operations” in this Item 7. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

We set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition and that require complex management judgment.

Use of Estimates

The preparation of our financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our periodic filings with the Securities and Exchange Commission include, when applicable, disclosures of estimates, assumptions, and uncertainties that could affect the financial statements and our future operations.

Fair Value of Financial Instruments

The carrying amounts reflected in the balance sheets for cash, accounts payable, and related-party payables approximate the respective fair values due to the short maturities of these items. We do not hold any investments that are available-for-sale.

Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value under GAAP, and enhances disclosures about fair value measurements. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

We do not currently have any financial instruments that we measure at fair value.

Recently Issued Accounting Pronouncements

Recently issued accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that require adoption and that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This item is not applicable as we are currently considered a smaller reporting company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, including the Report of Independent Registered Public Accounting Firm on our consolidated financial statements, are included beginning on page F-1 after this report, which are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of December 31, 2020, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, management concluded that our disclosure controls and procedures were not effective as of December 31, 2020, to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods prescribed by U.S. Securities and Exchange Commission and that such information is accumulated and communicated to management, including our Certifying Officer, as appropriate, to allow timely decisions regarding required disclosure.

Limitations on Effectiveness of Controls

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal controls, as defined in the Exchange Act. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.

Our internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with GAAP and the receipts and expenditures of company assets are made and in accordance with our management and directors authorization; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

Management has undertaken an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2020.

Based on that evaluation, management concluded that, during the period covered by this report, such internal controls and procedures were not effective due to the following material weakness identified:

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only the management’s report in this annual report.

Implemented or Planned Remedial Actions in Response to the Material Weaknesses

We will continue to strive to correct the above noted weakness in internal control once we have adequate funds to do so. We believe appointing a director who qualifies as a financial expert will improve the overall performance of our control over our financial reporting.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2020, that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The names of our director and executive officers as of December 31, 2020, 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.

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, 2020, 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”):

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.

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, 2020, 2019, 2018, 2017, and 2016, 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, 2020, was $42, using the following assumptions: estimated five-year term, estimated volatility of 91%, and a risk-free rate of 1.61%. The fair market value of the options issued during the year ended December 31, 2019, was $600, using the following assumptions: estimated seven-year term, estimated volatility of 567%, and a risk-free rate of 2.31%.

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, 2020:

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 6, 2021, 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 4,720,417 shares of common stock outstanding. All share and per-share amounts have been adjusted to give retroactive effect to a 1,000-to-one reverse split of our common stock effective September 2019:

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, 2020 and 2019, the principal amount owing on the note was $151,833 and $151,833, respectively.

On March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $315,000 ($105,000 each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the amount received plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum. We made no payments towards the outstanding notes during the periods presented. The principal balance owing on the notes as of December 31, 2020 and 2019, totaled $72,466 and $72,466, respectively, and are presented in liabilities from discontinued operations.

During the year ended December 31, 2020, we received cash advances from related parties of $11,500. Additionally, related parties paid expenses totaling $1,940 directly to vendors on our behalf. There were $287,776 and $738,655 of short-term advances due to related parties as of December 31, 2020 and 2019, respectively. The advances are due on demand and are included in current liabilities.

The terms of our employment agreement with Iehab Hawatmeh, our president, require us to grant options to purchase 6,000 shares of our stock each year, with an exercise price equal to the fair market price of our common stock as of the grant date, as compensation for his services provided as our chief executive officer. During the year ended December 31, 2020, we issued options to purchase 6,000 shares of our common stock relating to this employment agreement, resulting in outstanding options to purchase 30,000 shares of stock and options to purchase 30,000 shares of stock held by Mr. Hawatmeh as of December 31, 2020 and 2019, respectively. See Note 6 – Other Accrued Liabilities and Note 14 – Stock Options and Warrants.

As of December 31, 2020 and 2019, we owed our president a total of $868,528 and $903,740, respectively, in unsecured advances. The advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee. The borrowing fees were waived by our president on these loans.

Director Independence

Under the definition of independent directors found in Nasdaq Rule 5605(a)(2), which is the definition we have chosen to apply, none of our directors is independent.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The firm of Fruci & Associates has served as our independent registered public accounting firm since July 2020.

Audit Fees

For our fiscal year ended December 31, 2020, we were billed approximately $28,500 for professional services rendered for the audit and reviews of our consolidated financial statements. 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.

Audit Related Fees

For our fiscal years ended December 31, 2020 and 2019, we did not incur any audit-related fees.

Tax Fees

For our fiscal years ended December 31, 2020 and 2019, 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, 2020 and 2019.

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.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

CIRTRAN CORPORATION

Financial Statements

December 31, 2020 and 2019

TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of CirTran Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of CirTran Corporation (“the Company”) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has an accumulated deficit, net losses, and working capital deficiencies. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Investments

Description of the Critical Audit Matter

As discussed in Note 2 to the consolidated financial statements, the Company has investments in a private entity which require the Company to periodically evaluate potential impairment by assessing whether the carrying value of the investment exceeds the fair value. Auditing management’s analysis includes tests that are complex and highly judgmental due to the estimation required to determine the fair value of the underlying investees. In particular, fair value estimates are sensitive to significant assumptions and factors such as expectations about future market and economic conditions, revenue growth rates, strategic plans, and historical operating results, among other factors.

How the Critical Audit Matter Was Addressed in the Audit

Our principal audit procedures to evaluate management’s valuation of investments consisted of the following, among others:

We have served as the Company’s auditor since 2020.
Spokane, Washington
May 14, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of CirTran Corporation:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of CirTran Corporation (“the Company”) as of December 31, 2019, the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

We served as the Company’s auditor from 2013 to 2020.

Draper, UT

May 29, 2020

S|G Phone: 801-783-2950 | Fax: 801-783-2960 | 344 West 13800 South, Suite 250, Draper, UT 84020 | sadlergibb.com

CIRTRAN CORPORATION

CONSOLIDATED BALANCE SHEETS

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

CIRTRAN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

CIRTRAN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

CIRTRAN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

CIRTRAN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020 AND 2019

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

We offer diversified expertise in manufacturing, marketing, distribution, and technology services in a wide variety of consumer products, including tobacco products, medical devices, and beverages. We have an innovative and consumer-focused approach to brand portfolio management, resting on a strong understanding of consumers domestically, and we have established a footprint in more than 50 key, international markets.

During the year ended December 31, 2020, we executed on our business plan, fulfilling our obligations under a distribution agreement to manufacture, distribute, and sell condoms, electronic tobacco products, cigars, energy drinks, water beverages, and related merchandise, all using the HUSTLER® brand name under a December 2019 five-year manufacturing and distribution agreement with an unrelated party. We devoted most of 2019 to exploring a number of potential product opportunities and preparing for the HUSTLER® brand name products launch.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

We consolidate all of our majority-owned subsidiaries, companies over which we exercise control through majority voting rights, and companies in which we have a variable interest and we are the primary beneficiary. We account for our investments in common stock of other companies that we do not control, but over which we can exert significant influence, using the cost method.

The consolidated financial statements as of and for the year ended December 31, 2020, include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Products Corp., LBC Products, Inc., and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated.

The consolidated financial statements as of and for the year ended December 31, 2019, include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Products Corp., CirTran Corporation (Utah), CirTran Beverage Corp., CirTran Online Corp., CirTran Media Corp., Racore Network, and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated.

Use of Estimates

In preparing the financial statements in accordance with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

Revenue Recognition

We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, for revenue recognition. Adoption of ASC 606 did not have a significant impact on our financial statements. We generate revenue by providing product design services and through the sales of tangible product. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. We determine the transaction price associated with each deliverable based on a unique customer purchase order, which is considered to be a stand-alone contract that we retain the right to accept or reject. Revenue is recognized net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.

During the year ended December 31, 2020, we recognized revenues of $515,000 related to the performance obligations under product development service agreements with customers. These contracts are long term in nature and revenue is recognized at certain milestone intervals upon our delivery and customer acceptances of work product related to those milestones, namely product design, packaging, branding display, and prototypes. There were no costs to obtain the contracts identified and, as such, no asset has been recorded for customer acquisition costs. Additionally, we have not recognized impairment losses related to the receivables from these contracts during the year ended December 31, 2020.

Additionally, we recognized revenues of $1,217,625 during the year ended December 31, 2020, related to the delivery of product to our customers. Each delivery is based on a unique customer purchase order which is considered to be a stand-alone contract that we retain the right to accept or reject. Upon acceptance, we oblige delivery of such product to the customer at an agreed-upon place, time, and price. We recognize revenue under the unique purchase order contract upon fulfillment of our performance obligations therein, typically limited to the delivery of product.

Cash and Cash Equivalents

We consider all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents. We did not hold any cash equivalents as of December 31, 2020 or 2019.

Leases

In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), which superseded guidance in ASC 840, Leases, which we adopted for the year ended December 31, 2019, under the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. We account for short term leases, those lasting fewer than 12 months, using the practical expedient as outlined in the guidance, which does not include recording such leases on the balance sheet.

The adoption of the standard resulted in recording right-of-use (“ROU”) assets and operating lease liabilities of $50,409 as of December 31, 2020. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As the lease does not provide an implicit rate, we use our incremental borrowing rate based on information available at the commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease terms may include options to extend or terminate the lease when it is reasonably certain we will exercise that option. Although considered, we determined in appropriate to exclude future renewal terms from the capitalization of our operating lease.

We have one lease in effect requiring minimum monthly payments of $2,500 through October 2022. We have determined the appropriate discount rate to be 5% based on our other borrowings secured by assets. A summary of future payments due under the terms of the lease as of December 31, 2021 is as follows: