CIRTRAN CORP 10-K

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. 8 Russia’s recent military intervention in Ukraine and the international community’s response have created substantial political and economic disruption, uncertainty, and risk. Russia’s military intervention in Ukraine in late February 2022, Ukraine’s widespread resistance, and the NATO-led and United States coordinated economic, financial, communications, and other sanctions imposed by other countries have created significant political and economic world uncertainty. There is significant risk of expanded military confrontation between Russia and other countries, possibly including the United States, Current and likely additional international sanctions against Russia may contribute to higher costs, particularly for petroleum-based products. These and related actions, responses, and consequences that cannot now be predicted or controlled may contribute to worldwide economic reversals. In these circumstances, our efforts to distribute branded products may be delayed or otherwise negatively impacted. We may be deemed to be insolvent and may face liquidation. We may be deemed to be insolvent. We are unable to meet all our obligations as they accrue, and the aggregate amount of our liabilities exceeds the reported value of our assets. Creditors may have the right to initiate involuntary bankruptcy proceedings against us to seek our liquidation. We cannot assure that we would be successful in avoiding liquidation by converting such liquidation proceedings to a Chapter 11 reorganization, which would permit us to develop and propose, for creditor and court approval, a reorganization plan that would enable us to proceed. Even if we were to propose a reorganization plan, any reorganization plan would likely require that we obtain new post-petition funding, which may be unavailable. Further, in the event of bankruptcy, our secured creditors that have encumbrances on all our assets would likely execute and take all our assets, which may leave nothing for other creditors or our stockholders. The auditors’ report for our most recent fiscal year, like previous years, contains an explanatory paragraph about our ability to continue as a going concern. We had a net loss from continuing operations of approximately $838,500 during the year ended December 31, 2021, and net income from continuing operations of about $453,000 during the year ended December 31, 2020. We had net income from discontinued operations of approximately $965,000 and $80,000 from discontinued operations in 2021 and 2020, respectively. We had an accumulated deficit of approximately $40.6 million as of December 31, 2021. During the year ended December 31, 2021, operations provided net cash of approximately $345,000. We had current liabilities of approximately $39.5 million and current assets of about $1.1 million, for a working capital deficit of approximately $38.4 million as of December 31, 2021. The report from our auditors on our consolidated financial statements for the years ended December 31, 2021 and 2020, as for several previous years, contains explanatory paragraphs about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in the following paragraphs and eventually attain profitable operations. Continued elevated levels of inflation could adversely impact our business and results of operations. The United States has recently experienced elevated levels of inflation in prices for petroleum products and most other goods and services. Continued inflation could have complex effects on our business and results of operations, some of which could be materially adverse and could also increase volatility and uncertainty in the business environment. In addition, governmental policy responses to the current inflation environment could further affect our business, such as changes to monetary and fiscal policy. The duration and severity of the current inflationary period, and the governmental responses thereto, are unknown and cannot be estimated with precision. The impact of the COVID-19 pandemic on our business, financial position, and results of operations continues to be unpredictable and will likely continue to have negative effects on our business and results of operations. The impacts of the COVID-19 pandemic continue to be highly unpredictable and volatile in light of the potential for a resurgence of infection rates or as a result of future mutations, variants, or related strains of the virus. Recent years have demonstrated the widespread and varying impacts of the pandemic on certain business operations, costs of doing business, supply chain operations, the extent and duration of measures to try to contain the virus (such as travel bans and restrictions, quarantines, shelter-in-place orders, business and government shutdowns, and other restrictions on retailers), our ability to predict future performance, and our financial performance, among other things. 9 The duration and magnitude of the COVID-19 pandemic impacts on our business operations and overall financial performance is unknown at this time and will depend on numerous circumstances outside our control or the ability of anyone to predict accurately. The secondary and tertiary unpredictable and continuing economic effects on our business and on the worldwide economy could be ruinous. The probability of reoccurrences of virus outbreaks is high and may continue for many months, likely resulting in further government responses and mandates; social distancing; restrictions on travel; and other widespread measures. We cannot predict the impact of recently introduced vaccines, the rate of inoculations, and whether so-called herd immunity will be achieved to reduce adverse impacts. We cannot predict the effect of these circumstances on us and our vendors, customers, and community; the global economy and political conditions; and the health of our employees, contractors, and their families; all of which will affect how quickly and to what extent normal economic and operating activities can resume. Even after the COVID-19 pandemic has subsided, we may continue to experience an adverse effect on our business because of its global economic impact on inflation, national debt, consumer trends, supply chain disruptions, and employment culture. All of these circumstances likely exert similar hardships on those with which we deal, such as vendors, shippers, distributors, and customers. As a result, we will need to continue to adjust our business and expenditures to correlate our activities with business exigencies. These adjustments may include restrictions of executive and employee travel, hiring freezes or delays, and limitations on marketing and other expenditures, the ultimate financial impact and duration of which cannot now be predicted and may well exceed our expectations or our ability to cope with them. Termination or interruption of our supply relationships and increases in labor costs and the prices of our raw materials will negatively impact our business or financial condition. The availability and price of materials from which our products are manufactured are affected by a variety of factors beyond our control, including changes in supply and demand, general economic conditions, labor costs, fuel-related transportation bottlenecks and costs, competition, and political uncertainty around the world. We may be unable to pass cost increases from our manufacturers on to our customers. In addition, transportation costs and delivery delays have generally increased and may continue to increase. Sometimes cost increases are too immediate for us to be able to pass on to our customers. Our efforts to market a group of products under the HUSTLER® brand name face all the risks and uncertainties of a developing business. Manufacturing and marketing products under the HUSTLER® brand name will be subject to all the risks and uncertainties of a developing business, including the difficulties of: ● developing a new product that can be manufactured, marketed, and distributed successfully; ● obtaining the benefit of applicable licenses, registrations, and other required governmental approvals; ● operating a cost-effective business that generates revenue sufficiently over the costs of start-up and other related expenses; ● competing effectively in an industry dominated by larger, more experienced firms with well-established markets and greater management and financial resources; ● managing operations and growth. We will be subject to myriad other risks and uncertainties, over which we have no control or material influence. Our business will be dependent on GloBrands maintaining the license to use the HUSTLER® brand name. Our business is fully dependent on GloBrands’ ability to preserve its rights to use the HUSTLER® brand name. We cannot assure that GloBrands will be able to comply with all the terms, covenants, or conditions of the governing license agreement or that GloBrands, the counterparty to our manufacturing agreement, will meet all its obligations to us or HUSTLER, through which GloBrands obtained its rights. Under its licenses with the Flynt/HUSTLER® organization, GloBrands has substantial minimum royalty payments due the Flynt/HUSTLER® organization under each of the three product licenses, and we have no rights to monitor whether GloBrands is making those payments as required or to cure any GloBrands defaults. Further, we cannot assure that HUSTLER® will fulfill its obligations under its agreements to GloBrands. Breaches by any party to the agreements under which we derive our rights to use the HUSTLER® brand name will place the entire business we are currently launching in peril and force us to terminate operations. 10 All our assets are encumbered to secure the payment of secured convertible debentures that require payments if not previously converted to common stock. We encumbered all our assets to secure the payment of indebtedness and accrued interest due on secured convertible debentures, of which approximately $2.4 million is required to be repaid by April 2027, if not previously converted. In the event of default in repayment, our secured creditor could exercise its remedies, including the execution on all our assets, which would result in the termination of our activities. We cannot assure that the secured creditor will continue to refrain from aggressive collection efforts. The existence of these secured obligations will likely significantly impair our ability to obtain capital from external sources. We will require substantial amounts of additional capital from external sources. We may seek required funds through the sale of equity or other securities. Our ability to obtain financing on acceptable terms will depend on many factors, including the condition of the securities markets generally and for companies like us at the time of the offering; our business, financial condition, and prospects at the time of the proposed offering; our ability to identify and reach a satisfactory arrangement with prospective securities sales and investment groups; and various other factors. We cannot assure that we will be able to obtain financing on terms favorable to us or at all. The issuance of additional equity securities may dilute the interest of our existing stockholders or may subordinate their rights to the superior rights of new investors. We may also seek additional capital through strategic alliances, joint ventures, or other collaborative arrangements. Any such relationships may dilute our interest in any specific project and decrease the amount of revenue that we may receive from the project. We cannot assure that we will be able to negotiate any strategic investment or obtain required additional funds on acceptable terms, if at all. In addition, our cash requirements may vary materially from those now planned because of the results of future marketing and manufacturing agreements; results of product testing; potential relationships with our strategic or collaborative partners; changes in the focus and direction of our research and development programs; competition and technological advances; issues related to patent or other protection for proprietary technologies; and other factors. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate our planned efforts; obtain funds through arrangements with strategic or collaborative partners that may require us to relinquish rights to certain of our technologies, product candidates, or products that we would otherwise seek to develop or commercialize ourselves; or sublicense our rights to such products on terms that are less favorable to us than might otherwise be available. Our financial statements report liabilities incurred before 2013 that may impair our ability to obtain capital. Our balance sheet and stockholders’ deficit continue to include liabilities accrued prior to 2013 by our subsidiary, whose operations were discontinued in 2016, but which we still report on our financial statements in accordance with generally accepted accounting principles (“GAAP”). These liabilities include a judgment with a balance of $17.2 million as of December 31, 2021, awarded to Playboy Enterprises, Inc., which is barred by court order from seeking collection against us, the parent, and amounts due to assorted trade creditors and professional firms for services rendered to other subsidiaries prior to 2013, which we believe are barred by the applicable statutes of limitations. The resulting large, past-due liabilities may impair our ability to obtain additional capital or decrease the market in which our common stock is traded. Any substantial increase in business activities will require skilled management of growth. If we have the opportunity to commercialize new products, our success will depend on our ability to manage continued growth, including integrating new employees, independent contractors, and consultants into an effective management and technical team; formulating strategic alliances, joint ventures, or other collaborative arrangements with third parties; commercializing and marketing proposed products and services; and monitoring and managing these relationships on a long-term basis. If our management is unable to integrate these resources and manage growth effectively, the quality of our products and services, our ability to retain key personnel, and the results of our operations would be materially and adversely affected. 11 Our management concluded that our internal control over financial reporting was not effective as of December 31, 2021. Compliance with public company regulatory requirements, including those relating to our internal control over financial reporting, have and will likely continue to result in significant expenses and, if we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected. As a public reporting company, we are subject to the Sarbanes-Oxley Act of 2002 as well as to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and other federal securities laws. As a result, we incur significant legal, accounting, and other expenses, including costs associated with our public company reporting requirements and corporate governance requirements. As an example of public reporting company requirements, we evaluate the effectiveness of disclosure controls and procedures and of our internal control over financing reporting to allow management to report on such controls. Our management concluded that our internal control over financial reporting was not effective as of December 31, 2021, due to a failure to maintain an effective control environment, failure of segregation of duties, failure of entity-level controls, and our sole executive’s access to cash. If significant deficiencies or other material weaknesses are identified in our internal control over financial reporting that we cannot remediate in a timely manner, investors and others may lose confidence in the reliability of our financial statements. This would likely have an adverse effect on the trading price of our common stock and our ability to secure any necessary additional equity or debt financing. Stockholders may suffer substantial dilution related to issued stock options, warrants, and convertible debentures. As of December 31, 2021, we had several agreements or obligations for the possible issuance of common stock that may result in dilution to investors. These include: ● 40,000 shares required for issuance upon the exercise of stock options; and ● 144,264,247 shares required for issuance under our outstanding convertible debentures and promissory notes at approximately $0.10 per share. The sale, or even the possibility of the sale, of the shares of common stock underlying these commitments could have an adverse effect on the market price for our securities or on our ability to obtain future financing. Additional issuances of stock, stock options and warrants, and convertible debt will cause additional substantial dilution to our stockholders. The number of our issued and outstanding shares was decreased in 2019 as the result of a 1,000-to-one reverse stock split of our common stock. As a result, 95% of our common stock is available for issuance. Given our limited cash, liquidity, and revenues, it is likely that in the future, as in the past, we will sell stock and issue additional stock options and convertible debt to finance our future business operations. The issuance of additional shares of common stock, the exercise of stock options, and the conversion of debt to stock will cause additional dilution to our stockholders and could have further adverse effects on the market price for our securities or on our ability to obtain future financing. Penny stock regulations will impose certain restrictions on resales of our securities, which may cause an investor to lose some or all of its investment. The U.S. Securities and Exchange Commission has adopted regulations that generally define a “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share that is not traded on a national securities exchange or that has an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers that sell these securities to persons other than established customers and accredited investors (generally those with assets more than $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s written consent to the transaction before the purchase. 12 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.