UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
For
the quarterly period ended September 30, 2014 |
|
|
[ ] |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from ___________ to ___________
Commission
File Number 000-49654
CirTran
Corporation |
(Exact
name of registrant as specified in its charter) |
Nevada |
|
68-0121636 |
(State
or other jurisdiction of incorporation or organization) |
|
(I.R.S.
Employer Identification No.) |
4125
South 6000 West, West Valley City, Utah 84128 |
(Address
of principal executive offices, including zip code) |
(801)
963-5112 |
(Registrant’s
telephone number, including area code) |
n/a |
(Former
name, former address and former fiscal year, if changed since last report) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 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.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such files).
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ] |
|
Accelerated
filer [ ] |
Non-accelerated
filer [ ] |
|
Smaller
reporting company [X] |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As
of November 17, 2014, issuer had 4,498,891,910 outstanding shares of common stock, par value $0.001.
CIRTRAN
CORPORATION
FORM
10-Q
For
the Quarterly Period Ended September 30, 2014
INDEX
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CIRTRAN
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
| |
September
30, 2014 | | |
December
31, 2013 | |
| |
(Unaudited) | | |
| |
ASSETS | |
| | | |
| | |
Current
assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 200 | | |
$ | 281 | |
Trade accounts receivable, net of allowance for doubtful
accounts of $338,880 and $832,093, respectively | |
| 37,545 | | |
| 6,561 | |
Inventory, net of reserve of $2,255,041 | |
| 173,903 | | |
| 188,634 | |
Other | |
| 72,370 | | |
| 52,555 | |
Total
current assets | |
| 284,018 | | |
| 248,031 | |
| |
| | | |
| | |
Investment in securities, at cost | |
| 300,000 | | |
| 300,000 | |
Long-term receivable, net of allowance of $1,582,895 | |
| - | | |
| - | |
Property and equipment, net | |
| 22,039 | | |
| 39,856 | |
Other assets, net | |
| 45,441 | | |
| 40,733 | |
| |
| | | |
| | |
Total
assets | |
$ | 651,498 | | |
$ | 628,620 | |
| |
| | | |
| | |
LIABILITIES
AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current
liabilities | |
| | | |
| | |
Checks written in excess of bank balance | |
$ | 23,155 | | |
$ | 41,925 | |
Accounts payable | |
| 4,040,689 | | |
| 4,169,641 | |
Related-party payable | |
| 1,374,566 | | |
| 1,193,901 | |
Short-term advances payable - non-related parties | |
| 2,165,321 | | |
| 1,982,212 | |
Short-term advances payable - related parties | |
| 786,382 | | |
| 766,939 | |
Accrued liabilities | |
| 1,792,237 | | |
| 2,147,729 | |
Accrued payroll and compensation expense | |
| 3,471,912 | | |
| 2,961,993 | |
Accrued interest | |
| 1,872,031 | | |
| 1,482,181 | |
Deferred revenue | |
| 2,586,136 | | |
| 2,592,170 | |
Derivative liability | |
| 464,962 | | |
| 158,396 | |
Convertible debenture | |
| 2,390,528 | | |
| 2,390,528 | |
Current maturities of long-term debt | |
| 414,085 | | |
| 414,085 | |
Current liabilities to non-controlling interest holders | |
| 2,738,556 | | |
| 2,728,556 | |
Note payable to stockholders and members | |
| 151,833 | | |
| 151,833 | |
Total
current liabilities | |
| 24,272,393 | | |
| 23,182,089 | |
| |
| | | |
| | |
Total
liabilities | |
| 24,272,393 | | |
| 23,182,089 | |
| |
| | | |
| | |
Stockholders’
deficit | |
| | | |
| | |
CirTran Corporation stockholders’ deficit: | |
| | | |
| | |
Common stock, par value $0.001; authorized 4,500,000,000
shares; issued and outstanding shares: 4,498,891,910 and 4,457,991,910 | |
| 4,498,892 | | |
| 4,457,992 | |
Additional paid-in capital | |
| 29,246,170 | | |
| 29,270,710 | |
Subscription receivable | |
| (17,000 | ) | |
| (17,000 | ) |
Accumulated deficit | |
| (48,371,759 | ) | |
| (47,674,008 | ) |
Total CirTran Corporation and subsidiaries stockholders’
deficit | |
| (14,643,697 | ) | |
| (13,962,306 | ) |
Non-controlling interest | |
| (8,977,198 | ) | |
| (8,591,163 | ) |
Total stockholders’ deficit | |
| (23,620,895 | ) | |
| (22,553,469 | ) |
| |
| | | |
| | |
Total
liabilities and stockholders’ deficit | |
$ | 651,498 | | |
$ | 628,620 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
CIRTRAN
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| |
Three
months ended | | |
Nine
months ended | |
| |
September
30, | | |
September
30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 200,871 | | |
$ | 658,361 | | |
$ | 1,100,484 | | |
$ | 2,623,204 | |
Cost of sales | |
| (6,965 | ) | |
| (124,235 | ) | |
| (87,380 | ) | |
| (554,703 | ) |
Royalty Expense | |
| - | | |
| - | | |
| - | | |
| (37,494 | ) |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 193,906 | | |
| 534,126 | | |
| 1,013,104 | | |
| 2,031,007 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 325,146 | | |
| 892,245 | | |
| 1,406,835 | | |
| 2,575,273 | |
Total operating expenses | |
| 319,513 | | |
| 892,245 | | |
| 1,406,835 | | |
| 2,575,273 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (125,607 | ) | |
| (358,119 | ) | |
| (393,731 | ) | |
| (544,266 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (146,617 | ) | |
| (198,962 | ) | |
| (441,076 | ) | |
| (564,572 | ) |
Gain on settlement of debt | |
| - | | |
| 260,061 | | |
| 57,587 | | |
| 1,703,618 | |
Gain (loss) on derivative valuation | |
| 169,379 | | |
| 104,494 | | |
| (306,566 | ) | |
| 475,560 | |
Total other expense, net | |
| 22,762 | | |
| 165,593 | | |
| (690,055 | ) | |
| 1,614,606 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (102,845 | ) | |
| (192,526 | ) | |
| (1,083,786 | ) | |
| 1,070,340 | |
| |
| | | |
| | | |
| | | |
| | |
Less net income (loss) attributable
to non-controlling interest | |
| 112,399 | | |
| 343,264 | | |
| 386,035 | | |
| (494,004 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable to
CirTran Corporation and subsidiaries | |
$ | 9,554 | | |
$ | 150,738 | | |
$ | (697,751 | ) | |
$ | 576,336 | |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted loss per common share | |
$ | 0.00 | | |
$ | 0.00 | | |
$ | (0.00 | ) | |
$ | 0.00 | |
Basic and diluted weighted-average common shares outstanding | |
| 4,498,891,910 | | |
| 3,996,671,346 | | |
| 4,489,608,265 | | |
| 3,436,274,192 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CIRTRAN
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For
the Nine Months Ended September 30, | |
2014 | | |
2013 | |
| |
| | |
| |
Cash
flows from operating activities | |
| | | |
| | |
Net income (loss) | |
$ | (1,083,786 | ) | |
$ | 1,070,340 | |
Adjustments to reconcile net loss to net cash used in operating
activities: | |
| | | |
| | |
Depreciation and amortization | |
| 17,817 | | |
| 38,118 | |
Inventory reserves | |
| - | | |
| (755 | ) |
(Gain) Loss on derivative valuation | |
| 306,566 | | |
| (475,560 | ) |
Current liabilities to non-controlling interest holders | |
| - | | |
| 124,365 | |
(Gain) on settlement of debt | |
| (57,587 | ) | |
| (1,703,618 | ) |
Non-cash compensation expense | |
| - | | |
| 30,872 | |
Expenses paid by third-party on behalf of the company | |
| 100,000 | | |
| - | |
Loan fees | |
| 25,000 | | |
| - | |
Changes in assets and liabilities: | |
| | | |
| | |
Trade accounts receivable | |
| (30,984 | ) | |
| (144,075 | ) |
Inventory | |
| 14,731 | | |
| (141,816 | ) |
Other current assets | |
| (19,815 | ) | |
| (19,785 | ) |
Other assets | |
| (4,708 | ) | |
| 199,128 | |
Accounts payable | |
| (13,620 | ) | |
| (287,793 | ) |
Related-party payable | |
| 180,665 | | |
| 180,128 | |
Accrued liabilities | |
| (355,492 | ) | |
| 251,463 | |
Accrued payroll and compensation expense | |
| 509,919 | | |
| 373,074 | |
Refundable customer deposits | |
| - | | |
| 127,798 | |
Accrued interest | |
| 389,850 | | |
| 535,582 | |
Deferred revenue | |
| (6,034 | ) | |
| 66,700 | |
Net
cash provided by operating activities | |
| (27,478 | ) | |
| 224,166 | |
| |
| | | |
| | |
Cash
flows from financing activities | |
| | | |
| | |
Checks written in excess of bank balance | |
| (18,770 | ) | |
| (17,118 | ) |
Proceeds from non-controlling interest | |
| - | | |
| 200,000 | |
Proceeds from short-term advances non-related parties | |
| 92,724 | | |
| 23,500 | |
Proceeds from short-term advances related parties | |
| 106,800 | | |
| 224,558 | |
Payments on convertible debenture accrued interest | |
| - | | |
| (64,395 | ) |
Payments on short-term advances non-related parties | |
| (76,000 | ) | |
| (312,903 | ) |
Payments on short-term advances related parties | |
| (77,357 | ) | |
| (252,450 | ) |
Net
cash provided by (used in) financing activities | |
| 27,397 | | |
| (198,808 | ) |
| |
| | | |
| | |
Net
increase (decrease) in cash and cash equivalents | |
| (81 | ) | |
| 25,358 | |
Cash
and cash equivalents at beginning of period | |
| 281 | | |
| 7,883 | |
| |
| | | |
| | |
Cash
and cash equivalents at end of period | |
$ | 200 | | |
$ | 33,241 | |
| |
| | | |
| | |
Supplemental
disclosure of cash flow information: | |
| | | |
| | |
Cash paid during the period for interest | |
$ | 38,000 | | |
$ | 64,395 | |
| |
| | | |
| | |
Noncash
investing and financing activities: | |
| | | |
| | |
Debt and accrued liabilities converted to equity | |
$ | 16,360 | | |
$ | 1,948,381 | |
Conversion of short-term advances, related parties for current
liabilities to non-controlling interest holders | |
| 10,000 | | |
| 350,000 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CIRTRAN
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
as
of September 30, 2014
NOTE
1 – BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements include the accounts of CirTran Corporation and its subsidiaries
(the “Company”). These financial statements have been prepared in accordance with Article 10 of Regulation S-X promulgated
by the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
have been condensed or omitted pursuant to such rules and regulations. These statements should be read in conjunction with the
Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2013. In particular, the Company’s significant accounting policies were presented as Note 2 to the consolidated financial
statements in that Annual Report. In the opinion of management, all adjustments necessary for a fair presentation have been included
in the accompanying condensed consolidated financial statements and consist of only normal recurring adjustments. The results
of operations presented in the accompanying condensed consolidated financial statements for the three and nine months ended September
30, 2014, are not necessarily indicative of the results that may be expected for the 12 months ending December 31, 2014.
NOTE
2 – REALIZATION OF ASSETS
The
accompanying condensed consolidated financial statements have been prepared on the assumption that the Company will continue as
a going concern. The Company had a net loss of $1,083,786 and net income of $1,070,340 for the nine months ended September 30,
2014 and 2013, respectively. As of September 30, 2014, the Company had an accumulated deficit of $48,371,759. In addition, the
Company had cash provided by operations in the amount of $36,917 during the nine months ended September 30, 2014, and cash provided
by operations in the amount of $224,166 during the nine months ended September 30, 2013. The Company also had a negative working
capital deficit balance of $23,988,375 as of September 30, 2014, and $22,934,058 as of December 31, 2013. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern.
The
Company’s ability to continue energy drink distribution, its principal source of revenue, is subject to interruption or
termination because of ongoing disputes respecting the status of the Play Beverages, LLC, or PlayBev, license to market Playboy-licensed
energy drinks. The Company is continuing its suit against Playboy Enterprises, Inc., or Playboy, in Illinois in an effort to enjoin
Playboy’s termination of the license so the Company will be able to continue its beverage distribution segment. If the Playboy
licensing dispute is not resolved satisfactorily through a negotiated settlement or litigation in such proceeding, PlayBev would
be required to terminate its beverage distribution activities, which are currently the principal source of the Company’s
revenues. Such termination may require the Company to cease its activities and seek protection from creditors.
In
view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown
in the accompanying consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent
upon the Company’s ability to meet its financial requirements on a continuing basis, to maintain or replace present financing,
to acquire additional capital from investors, and to succeed in its future operations. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in existence.
The
Company believes that its beverage business segment has the potential to have a substantial impact on its overall business. The
Company plans to focus on the beverage business and the contract manufacturing business. For the beverage business, the Company
plans to sell existing products and develop new products under the license agreement with Playboy to a globally expanding market.
With regard to contract manufacturing, the Company’s goal is to provide customers with manufacturing solutions for both
new and more mature products, as well as across product generations.
The
Company provides product marketing services to the direct response and retail markets for both proprietary and nonproprietary
products. This segment provides campaign management and marketing services for the beverage distribution, direct response, and
retail markets. The Company intends to continue to provide marketing and media services to support its own product efforts and
offer to customers marketing service in channels involving television, radio, print media, and the Internet. The Company intends
to serve the electronics assembly and manufacturing industries, although it anticipates that its focus will shift more to providing
services on a subcontract basis.
NOTE
3 – INVENTORIES
Inventories
are stated at the lower of average cost or market and consisted of the following:
| |
September
30, 2014 | | |
December
31, 2013 | |
| |
| | |
| |
Raw Materials | |
$ | 1,689,854 | | |
$ | 1,682,099 | |
Work in Process | |
| 278,788 | | |
| 255,934 | |
Finished Goods | |
| 460,302 | | |
| 505,642 | |
Allowance / Reserve | |
| (2,255,041 | ) | |
| (2,255,041 | ) |
Totals | |
$ | 173,903 | | |
$ | 188,634 | |
NOTE
4 – RELATED-PARTY TRANSACTIONS
Transactions
Involving Officers, Directors, and Stockholders - In 2007, the Company appointed Fadi Nora to its Board of Directors.
In addition to compensation the Company normally pays to nonemployee members of the Board, Mr. Nora is entitled to a quarterly
bonus equal to 0.5% of any gross sales earned by the Company directly through Mr. Nora’s efforts. As of September 30, 2014,
the Company owed $134,330 under this arrangement. As of September 30, 2014, the Company owed Mr. Nora $621,773 in the form of
unsecured advances. These advances and short-term bridge loans were approved by the Board of Directors under a 5% borrowing fee.
The borrowing fees on these loans were waived by Mr. Nora. In addition, the Company owed Mr. Nora $233,731 in accrued liabilities
as of September 30, 2014, for selling, general, and administrative expenses that were paid for by Mr. Nora on a personal credit
card. As of September 30, 2014, Mr. Nora had $718,000 in accrued management fees for PlayBev, which is included in related-party
payables. (see Note 5 under Employment Agreements).
The
Company has agreed to issue 2,400,000 options to Mr. Nora as compensation for services provided as a Director of the Company.
The terms of the director agreement require the Company to grant to Mr. Nora options to purchase 2,400,000 shares of the Company’s
stock each year, with the exercise price of the options being the market price of the Company’s common stock as of the grant
date. During the nine months ended September 30, 2014, the Company accrued for 2,400,000 stock options relating to the director
agreement with Mr. Nora. The fair market value of the options was $719, using the following assumptions: seven-year term, estimated
volatility of 246.35%, and a discount rate of 0.0% (see also Note 12).
In
2007, the Company issued a 10% promissory note to a family member of the Company President in exchange for $300,000. The note
was due on demand after May 2008. During the three months ended September 30, 2014, the Company made no payments on the outstanding
note. At September 30, 2014, the principal amount owing on the note was $151,833. On March 31, 2008, the Company issued to this
same family member, along with four other Company shareholders, promissory notes totaling $315,000. The family member’s
note was for $105,000. Under the terms of all the notes, the Company 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. During the nine months ended September 30, 2014, the Company made no payments on the outstanding notes.
The principal balance owing on the promissory notes as of September 30, 2014, totaled $72,466.
The
Company has agreed to issue 6,000,000 options each year to the Company President as compensation for services provided as an officer
of the Company. The terms of the employment agreement require the Company to grant to the Company President options to purchase
6,000,000 shares of the Company’s stock each year, with the exercise price of the options being the market price of the
Company’s common stock as of the grant date. During the nine months ended September 30, 2014, the Company accrued for 6,000,000
stock options relating to the employee agreement with Mr. Hawatmeh. The fair market value of the options was $1,798, using the
following assumptions: estimated seven-year term, estimated volatility of 246.35%, and a discount rate of 0.0% (see also Note
12).
During
the period ending September 30, 2014, the company President advanced $61,800, was repaid $47,357, assumed $58,556 owed to a Company
Director and exchanged $10,000 of this amount for current liabilities to non-controlling interest holders. As a result of these
transactions, as of September 30, 2014, the Company owed the Company President a total of $126,609 in short-term advances payable
and 42,000,000 stock options with an aggregated fair value at time of grant of $166,496. These advances and short-term bridge
loans were approved by the Board of Directors under a 5% borrowing fee. The borrowing fees on these loans were waived by the Company’s
President.
Sublease
- In an effort to operate more efficiently and focus resources on higher margin areas of the Company’s business,
on March 5, 2010, the Company and Katana Electronics, LLC, a Utah limited liability company (“Katana”), entered into
certain agreements (collectively, the “Agreements”) to reduce the Company’s costs. The Agreements include an
Assignment and Assumption Agreement, an Equipment Lease, and a Sublease Agreement relating to the Company’s property. Pursuant
to the terms of the Sublease, the Company agreed to sublease a certain portion of the Company’s premises to Katana, consisting
of the warehouse and office space used as of the close of business on March 4, 2010. The term of the Sublease was for two months
with automatic renewal periods of one month each. The base rent under the Sublease is $8,500 per month. The Sublease contains
normal and customary use restrictions, indemnification rights and obligations, default provisions, and termination rights. Under
the Agreements signed, the Company continues to have rights to operate as a contract manufacturer in the future in the U.S. and
offshore. On July 1, 2011, Katana had assumed the full lease payment, and the Company agreed to pay Katana $5,000 per month for
the use of office space and utilities. The Company recorded a rent expense of $50,000 and $30,000 for the nine months ended September
30, 2014 and 2013, respectively.
NOTE
5 – COMMITMENTS AND CONTINGENCIES
Litigation
and Claims - Various vendors and service providers have notified the Company that they believe they have claims against
the Company totaling approximately $2,250,000. The Company has determined the probability of realizing any loss on these claims
is remote. The Company has made no accrual for these claims and is currently in the process of negotiating the dismissal of these
claims.
Registration
Rights Agreements - In connection with the Company’s issuance of convertible debentures to YA Global Investments,
L.P., formerly known as Cornell Capital Partners, L.P. (“YA Global”), the Company granted to YA Global certain registration
rights, pursuant to which the Company agreed to file a registration statement to register the resale of shares of the Company’s
common stock issuable upon conversion of the debentures. The Company agreed to keep the registration statement effective until
all of the shares issuable upon conversion of the debenture have been sold. The Company has not accrued a liability for potential
losses.
Previously,
YA Global had agreed to extensions of the filing deadlines inherent in the terms of the convertible debentures mentioned above.
On January 24, 2011, the Company and YA Global entered into a forbearance agreement related to the convertible debentures issued
by the Company to YA Global or its predecessor entities.
YA
Global Forbearance Agreements - As of September 30, 2014, the Company had an outstanding Convertible Debenture (as defined
below) issued to YA Global Investments, L.P., formerly known as Cornell Capital Partners, L.P. (“YA Global”), with
an aggregate outstanding balance of $2,390,528, including accrued interest of $748,291, which was then in default.
The
terms of the Company’s outstanding Convertible Debenture are governed by a February 22, 2013, Ratification Agreement with
YA Global (the “Ratification Agreement”). Under this Ratification Agreement, the Company ratified the obligations
under three existing convertible debentures dated May 26, 2005, December 30, 2005, and August 23, 2006, and agreed to amend, restate,
and consolidate the obligations evidenced thereby into the single Convertible Debenture.
Under
the Ratification Agreement and Convertible Debenture payment schedule, the Company was required to make monthly payments, to be
applied first to accrued interest and then to principal, in the amount of $100,000 per month, commencing in April 2013. The convertible
debentures and accrued interest are convertible into shares of the Company’s common stock at the lowest bid price for the
20 trading days prior to conversion ($0.0002 as of December 31, 2013). The amount of its required monthly cash payment would be
reduced in an amount equal to the amount credited to the balance due under the debentures into common stock, as provided in the
original convertible debentures as well as in the Convertible Debenture. Any amount credited against the debenture obligation
in excess of $100,000 per month would be credited against the amounts due in the next succeeding month, with the entire unpaid
balance of principal and interest due on January 31, 2014.
During
2013, a total of $1,284,412 was credited against required payments due YA Global for the conversion of indebtedness to common
stock. Since 2009, the Company has not had insufficient funds to pay cash to YA Global and has had to rely exclusively on the
conversion of the obligation to common stock. However, no further conversions can be effected because the Company has insufficient
authorized but unissued common stock. Based on the prevailing market price for its common stock, which has ranged from a high
bid of $0.0006 to a low bid of $0.0002 during the past six months, the terms of the Convertible Debenture would require a conversion
price of $0.001 per share, which is lower than the per-share par value, so the Company would be obligated to issue shares at $0.001
par value. The Convertible Debenture provides that the holder cannot convert indebtedness to common stock if, as a result of such
conversion, the holder would own more than 9.99% of the Company’s outstanding common stock. Sales of common stock that would
reduce the holder’s ownership would enable the holder to convert additional amounts due under the Convertible Debenture.
The
obligation under the Company’s Convertible Debentures is secured by liens and security interests in all of the Company’s
assets, so the continuation of the Company is dependent of meeting this obligation. If YA Global were to exercise its collection
remedies and execute on its collateral, it could take all of the Company’s assets and leave nothing for other creditors
or shareholders.
During
the nine months ended September 30, 2014, the Company did not issue any common stock against the required payments.
Delinquent
Payroll Taxes, Interest, and Penalties - In November 2004, the IRS accepted the Company’s Amended Offer in Compromise
(the “Offer”) to settle delinquent payroll taxes, interest, and penalties. The acceptance of the Offer required the
Company to pay $500,000. Additionally, the Offer required the Company to remain current in its payment of taxes for five years
and not claim any net operating losses for the years 2001 through 2015, or until the Company pays taxes on future profits in an
amount equal to the taxes waived by the Offer of $1,455,767. In June 2013, the Company entered into a partial installment agreement
to pay $768,526 in unpaid 2009 payroll taxes. The installment agreement requires the Company to pay the IRS 5% of cash deposits.
The monthly payments are to continue until the account balances are paid in full or until the collection statute of limitation
expires on October 6, 2020. As of September 30, 2014, this balance is $445,983.
Disputed
Account Payable - The Company is in disagreement with its former legal counsel over the amount due to this provider for
billed services, charges, and interest expense. The Company is vigorously working with this provider to settle the outstanding
balance. Management assesses the likelihood to be remote that it will not be able to settle the balance at or below the currently
accrued balance.
Employment
Agreements - On August 1, 2009, the Company entered into a new employment agreement with Mr. Hawatmeh, the Company’s
President. The term of the employment agreement continues until August 31, 2014, and automatically extends for successive one-year
periods, with an annual base salary of $345,000. The employment agreement also grants to Mr. Hawatmeh options to purchase a minimum
of 6,000,000 shares of the Company’s stock each year, with the exercise price of the options being the market price of the
Company’s common stock as of the grant date. The employment agreement also 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 the
Board. The employment agreement includes additional incentive compensation as follows: a quarterly bonus equal to 5% of the Company’s
earnings before interest, taxes, depreciation, and amortization for the applicable quarter; bonus(es) equal to 1.0% of the net
purchase price of any acquisitions completed by the Company that are directly generated and arranged by Mr. Hawatmeh; and an annual
bonus (payable quarterly) equal to 1% of the gross sales, net of returns and allowances, of all beverage products of the Company
and its affiliates for the most recent fiscal year. During the nine months ended September 30, 2014 and 2013, the Company incurred
$1,798 and $10,171, respectively, of noncash compensation expense related to accrual for employee stock options to be awarded
per the employment contract with Mr. Hawatmeh.
Pursuant
to the employment agreement, Mr. Hawatmeh’s employment may be terminated for cause or upon death or disability, in which
event, the Company is required to pay Mr. Hawatmeh any unpaid base salary and unpaid earned bonuses. In the event that Mr. Hawatmeh
is terminated without cause, the Company is required to pay to Mr. Hawatmeh: (i) within 30 days following such termination, any
benefit, incentive, or equity plan, program, or practice (the “Accrued Obligations”) paid when such would have been
paid to him if employed; (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 of annual base salary; (iii) bonus(es) owing
under the employment agreement 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 of 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 such annual base salary and bonus payment amounts.
On
May 1, 2009, PlayBev, a consolidated variable interest entity, entered into compensation agreements with its managers, Mr. Hawatmeh
and Mr. Nora. The agreed compensation consists of a monthly fee of $10,000 for each manager, reimbursement of reasonable expenses
on its behalf, and a car allowance for Mr. Nora of $1,000 per month to cover the cost of use, fuel, and repairs. The Company has
accrued $1,368,000 in compensation, which is included in related-party payables as of September 30, 2014.
Advanced
Beauty Solutions, LLC - On March 22, 2012, the Company and Advanced Beauty Solutions, LLC, or ABS, entered into a formal
forbearance agreement, dated as of March 1, 2012 (the “ABS Forbearance Agreement”), whereby ABS agreed to take no
further judgment enforcement actions in consideration of the payment of $25,000 upon execution of the definitive ABS Forbearance
Agreement and satisfaction of applicable conditions precedent. The ABS Forbearance Agreement calls for the Company to pay $7,500
per month for 46 consecutive months (except for a payment of $15,000 in December 2012), commencing in March 2012, with the unpaid
balance, as finally determined as provided below, due and payable in January 2016. No interest on the principal accrues unless
the note is in default, in which case, it would bear interest at 10% per annum from the date of the ABS Forbearance Agreement.
In addition, the Company stipulated to an additional judgment for attorney’s fees incurred in negotiating the ABS Forbearance
Agreement and entering into the related definitive agreements and in related post-judgment collection efforts. The obligation
to pay $1,835,000 under the ABS Forbearance Agreement is secured by an encumbrance on all of the Company’s assets, subject
to a prior lien and encumbrance in favor of YA Global.
ABS
entered into a subordination agreement subordinating the obligation under the ABS Forbearance Agreement in favor of the obligations
and first-priority security interest of YA Global. The Company conveyed to ABS the trademarks and intellectual property previously
conveyed by ABS to the Company.
The
Company has assigned to ABS its creditor claim against the estate of ABS, to the extent of the balance due under the ABS Forbearance
Agreement. Any distribution from the ABS estate in excess of the adjusted amounts due under the ABS Forbearance Agreement will
be paid to the Company. Pending the determination of the amount of the credit due for the value of the intellectual property conveyed,
the Company accrued a balance of $90,000 for the minimum required payment under the ABS Forbearance Agreement. It is reasonably
possible that this estimate may change in the near future based on the events of the ABS settlement.
Under
the ABS Forbearance Agreement, the Company accrued $90,000 as of December 31, 2011, and made payments of $0 and $70,000 during
the nine months ended September 30, 2014 and 2013, respectively. The royalty accrual as of September 30, 2014 and 2013, was $0
and $20,000, respectively.
NOTE
6 – NOTES PAYABLE
Notes
payable to stockholders and members consisted of a promissory note to a stockholder due on demand with a 10% stated interest rate,
unsecured, with interest due quarterly. The principal balance was $151,833 as of September, 30, 2014, and December 31, 2013.
Notes
payable consisted of the following at September 30, 2014, and December 31, 2013:
| |
2014 | | |
2013 | |
| |
| | |
| |
Promissory notes to three investors, 12% stated interest, 5% borrowing fee, due on
demand to related party, in default. | |
$ | 72,465 | | |
$ | 72,465 | |
| |
| | | |
| | |
Settlement note, 10 monthly payments, no interest, in default. | |
| 59,120 | | |
| 59,120 | |
| |
| | | |
| | |
Promissory note to a member of AfterBev Group LLC, 10% stated interest, interest payable quarterly.
Due on demand, in default. | |
| 75,000 | | |
| 75,000 | |
| |
| | | |
| | |
Promissory note to a member of PlayBev, 10% stated interest, interest payable quarterly, unsecured.
Due on demand, in default. | |
| 100,000 | | |
| 100,000 | |
| |
| | | |
| | |
Promissory note to an investor, 0% stated interest, interest payable quarterly, unsecured. Due
on demand, in default. | |
| 100,000 | | |
| 100,000 | |
| |
| | | |
| | |
Promissory note to an investor, 10% stated interest, interest payable
quarterly, unsecured. Due on demand. | |
| 7,500 | | |
| 7,500 | |
| |
| | | |
| | |
Total | |
| 414,085 | | |
| 414,085 | |
| |
| | | |
| | |
Less current maturities | |
| (414,085 | | |
| (414,085 | ) |
| |
| | | |
| | |
Long-term portion of notes payable | |
$ | - | | |
$ | - | |
As
of September 30, 2014, and December 31, 2013, the Company had accrued interest owed on the notes payable in the amounts of $369,679
and $312,917, respectively. The Company recorded interest expense of $56,763 and $284,376 for the nine months September 30, 2014
and 2013, respectively. During the nine months ended September 30, 2014, the Company paid $0 of accrued interest on the notes.
Short-term
advances payable
As
of September 30, 2014 and December 31, 2013, the Company had $2,165,322 and $1,982,212, respectively, in short-term advances payable
to unrelated parties. The short-term advances to unrelated parties also had accrued interest expense of $147,821 and $79,864 as
of September 30, 2014 and December 31, 2013, respectively.
During
the nine months ended September 30, 2014, the Company made cash payments of $76,000 and recorded a loss from settlement of short-term
advances payable in the amount of $41,385. The additional accrual is included in the loss on settlement of debt. The Company also
increased short-term advances payable to unrelated parties by $125,000 for expenses, $25,000 of which relates to loan fees, paid
on behalf of the company by outside parties and approximately $93,000 for cash received from third parties.
During
the nine months ended September 30, 2014, the Company recorded interest expense of $82,957 and paid $15,000 of accrued interest
on the unrelated party short-term advances.
NOTE
7 – CONVERTIBLE DEBENTURES
Convertible
Debenture consisted of the following as of September 30, 2014, and December 31, 2013:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Convertible debenture, 5% stated interest rate, secured by all of the Company’s
assets, due on December 31, 2014. | |
$ | 2,390,528 | | |
$ | 2,390,528 | |
| |
| 2,390,528 | | |
| 2,390,528 | |
Less current maturities | |
| (2,390,528 | ) | |
| (2,390,528 | ) |
Long-term portion of convertible debentures | |
$ | - | | |
$ | - | |
The
convertible debentures and accrued interest are convertible into shares of the Company’s common stock at the lowest bid
price for the 20 trading days prior to conversion ($0.0002 as of December 31, 2013). As of December 31, 2010, the Company was
in default on the all three convertible debentures. On January 24, 2011, the Company entered into an Amended and Restated Forbearance
Agreement that requires the Company to make payments according to the agreement (see Note 5). The Company subsequently defaulted
under the terms of the agreement and the debenture holders are seeking their rights as secured creditors. See Note 12 regarding
the actions taken by the holder of the convertible debentures in connection with the Company’s noncompliance with the Amended
and Restated Forbearance Agreement.
As
of September 30, 2014 and December 31, 2013, the fair value of the conversion feature for the convertible debt and associated
warrants was determined to be $464,961 and $158,396, respectively, which has been recorded as a derivative liability on the balance
sheet.
As
of September 30, 2014 and December, 2013, the fair value of the conversion feature for the convertible debt and associated warrants
was determined to be $464,961 and $158,396, respectively which has been recorded as a derivative liability on the balance sheet.
NOTE
8 – FINANCIAL INSTRUMENTS
The
Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting.
Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s
balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated
fair value in results of operations during the period of change. The Company has estimated the fair value of these embedded derivatives
for convertible debentures and associated warrants using a multinomial lattice model as of September 30, 2014, and December 31,
2013. The fair values of the derivative instruments are measured each quarter, which resulted in a gain (loss) of ($306,566) and
$475,560 during the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, and December 31, 2013,
the fair market value of the derivatives aggregated $464,962 and $158,396, respectively, using the following assumptions: estimated
1.5-0.25-year term, estimated volatility of 419.37-32.87%, and a discount rate of 0.02-0.36%.
NOTE
9 – FAIR VALUE MEASUREMENTS
For
asset and liabilities measured at fair value, the Company uses the following hierarchy of inputs:
|
● |
Level
one — Quoted market prices in active markets for identical assets or liabilities; |
|
|
|
|
● |
Level
two — Inputs other than level one inputs that are either directly or indirectly observable; and |
|
|
|
|
● |
Level
three — Unobservable inputs developed using estimates and assumptions, which are developed by the reporting entity and
reflect those assumptions that a market participant would use. |
Liabilities
measured at fair value on a recurring basis at September 30, 2014, are summarized as follows:
| | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Fair
value of derivatives | | |
$ | - | | |
$ | 464,962 | | |
$ | - | | |
$ | 464,962 | |
Liabilities
measured at fair value on a recurring basis at December 31, 2013, are summarized as follows:
| | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
Fair
value of derivatives | | |
$ | - | | |
$ | 158,396 | | |
$ | - | | |
$ | 158,396 | |
NOTE
10 – STOCKHOLDERS’ DEFICIT
The
Company’s stockholders’ deficit increased by $681,391 as a result of the net loss attributable to CirTran Corporation
for the nine months ended September 30, 2014. The Company’s noncontrolling interest in consolidated subsidiaries increased
stockholders’ deficit by $386,035 for the nine months ended September 30, 2014, due to the operating losses of the noncontrolled
subsidiary.
Loss
Per Share - Basic loss per share is calculated by dividing net loss available to common shareholders by the weighted-average
number of common shares outstanding during each period. Diluted loss per share is similarly calculated, except that the weighted-average
number of common shares outstanding would include common shares that may be issued subject to existing rights with dilutive potential
when applicable. The Company had 3,210,783,000 and 3,186,357,000 in potentially issuable common shares at September 30, 2014,
and December 31, 2013, respectively. These potentially issuable common shares were excluded from the calculation of diluted loss
per share because the effects were antidilutive.
NOTE
11 – CAPITAL STOCK
During
the nine months ending September 30, 2014, the Company issued 40,900,000 shares of common stock for conversion of liabilities
to multiple nonrelated parties for convertible notes and liabilities of $16,360. This resulted in a gain of $24,540.
NOTE
12 – STOCK OPTIONS AND WARRANTS
Stock
Incentive Plans - As of September 30, 2014, a total of 201,000,000 shares of common stock had been issued from the 2012
Stock Incentive Plan, out of which a maximum of 403,000,000 can be issued. The Company’s Board of Directors administers
the plan and has discretion in determining the employees, directors, independent contractors, and advisors who receive awards,
the type of awards (stock, incentive stock options, nonqualified stock options, or share purchase rights) granted, and the term,
vesting, and exercise prices.
Employee
Options - During the nine months ended September 30, 2014 and 2013, the Company did not grant any options to purchase
shares of common stock to employees.
During
2013, the Company accrued for 18,800,000 employee options relating to the employment contract of the Company’s president,
directors, and officers. The fair market value of the options accrued aggregated $28,423, using the following assumptions: seven-year
term, volatility of 212.05%, and a discount rate of 1.31%.
During
2014, the Company accrued for 18,800,000 employee options relating to the employment contract of the Company’s president,
directors, and officers. The fair market value of the options accrued aggregated $5,634, using the following assumptions: seven-year
term, volatility of 246.35%, and a discount rate of 2.42%.
As
of September 30, 2014, and December 31, 2013, the Company had a total of 125,600,000 and 106,800,000, respectively, in options
not issued but accrued.
Warrants
- In connection with the YA Global convertible debenture issued in August 2006, the Company issued three-year warrants
to purchase 15,000,000 shares of the Company’s common stock. The initial expiration date of the warrants was August 23,
2009. As part of the Forbearance Agreement (see Note 5), the life of the warrants was extended one year to August 23, 2010. The
warrants had an exercise price of $0.06 per share and vested immediately. On January, 24, 2011, as part of the Forbearance Agreement,
a warrant to purchase 25,000,000 shares of common stock was issued to YA Global. The warrant had an exercise price of $0.02 per
share and vested immediately and expires December 2015.
NOTE
13 – SEGMENT INFORMATION
Segment
information has been prepared in accordance with Financial Accounting Standards Board Accounting Standards Codification 280-10,
Disclosure about Segments of an Enterprise and Related Information. The Company has four reportable segments: electronics assembly,
contract manufacturing, marketing and media, and beverage distribution. The electronics assembly segment manufactures and assembles
circuit boards and electronic component cables. The contract manufacturing segment manufactures, either directly or through foreign
subcontractors, various products under manufacturing and distribution agreements. The marketing and media segment provides marketing
services to online retailers, along with beverage development and promotional services to PlayBev. The beverage distribution segment
manufactures, markets, and distributes Playboy-licensed energy drinks domestically and internationally.
The
accounting policies of the segments are consistent with those described in the summary of significant accounting policies. The
Company evaluates performance of each segment based on earnings or loss from operations. Selected segment information is as follows:
| |
Electronics | | |
Contract | | |
Marketing | | |
Beverage | | |
| |
| |
Assembly | | |
Manufacturing | | |
and Media | | |
Distribution | | |
Total | |
Three Months Ended September 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales to external customers | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 200,871 | | |
$ | 200,871 | |
Segment income (loss ) | |
| 191,769 | | |
| - | | |
| - | | |
| (369,614 | ) | |
| (177,845 | ) |
Segment as assets | |
| 38,159 | | |
| (51,661 | ) | |
| - | | |
| 665,000 | | |
| 651,498 | |
Depreciation and amortization | |
| 3,059 | | |
| 393 | | |
| - | | |
| - | | |
| 3,452 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Three Months Ended September 30, 2013 Sales to external customers | |
$ | - | | |
$ | 501 | | |
$ | - | | |
$ | 657,860 | | |
$ | 658,361 | |
Segment income (loss ) | |
| 95,113 | | |
| (10,371 | ) | |
| - | | |
| (277,268 | ) | |
| (192,526 | ) |
Segment assets | |
| 395,365 | | |
| 41,346 | | |
| - | | |
| 544,915 | | |
| 981,626 | |
Depreciation and amortization | |
| 4,123 | | |
| 6,997 | | |
| - | | |
| - | | |
| 11,120 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Nine Months Ended September 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales to external customers | |
$ | - | | |
$ | 148,960 | | |
$ | - | | |
$ | 951,524 | | |
$ | 1,100,484 | |
Segment income (loss ) | |
| (82,219 | ) | |
| 6,569 | | |
| | | |
| (1,083,136 | ) | |
| (1,158,786 | ) |
Segment assets | |
| 38,159 | | |
| (51,661 | ) | |
| - | | |
| 665,000 | | |
| 651,498 | |
Depreciation and amortization | |
| 10,574 | | |
| 7,243 | | |
| - | | |
| - | | |
| 17,817 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Nine Months Ended September 30, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales to external customers | |
$ | - | | |
$ | 57,713 | | |
$ | - | | |
$ | 2,565,491 | | |
$ | 2,623,204 | |
Segment income (loss ) | |
| 393,426 | | |
| 3,551 | | |
| (25 | ) | |
| 673,388 | | |
| 1,070,340 | |
Segment assets | |
| 395,365 | | |
| 41,346 | | |
| - | | |
| 544,915 | | |
| 981,626 | |
Depreciation and amortization | |
| 12,723 | | |
| 25,395 | | |
| - | | |
| - | | |
| 38,118 | |
NOTE
14 – GEOGRAPHIC INFORMATION
The
Company currently maintains $7,842 of capitalized tooling costs in China. All other revenue-producing assets are located in the
United States of America. Revenues are attributed to the geographic areas based on the location of the customers purchasing the
products.
NOTE
15 – RECLASSIFICATIONS
Certain
amounts have been reclassified in the 2013 financial statements to conform to the 2014 presentation, short-term advances payable
– non-related parties of $45,000 was reclassified to accrued liabilities.
NOTE
16 – SUBSEQUENT EVENTS
These
financial statements considered subsequent events through November 19, 2014, the date the financial statements were available
to be issued.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This
discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of
Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013.
Overview
We
manufacture, market, and distribute internationally an energy drink under a license, now in dispute, with Playboy Enterprises,
Inc., or Playboy, and in the U.S. we provide a mix of high- and medium-volume turnkey manufacturing services and products using
various high-tech applications for leading electronics OEMs (original equipment manufacturers) in the communications, networking,
peripherals, gaming, law enforcement, consumer products, telecommunications, automotive, medical, and semiconductor industries.
Our services include pre-manufacturing, manufacturing, and post-manufacturing services. Our goal is to offer customers the significant
competitive advantages that can be obtained from manufacture outsourcing.
We
are engaged in the following business segments.
Beverage
Distribution (100% and 98% of total revenue during nine months ended September 30, 2014 and 2013, respectively):
CirTran
Beverage manufactures, markets, and distributes Playboy-branded energy drinks in accordance with an agreement we entered into
with Play Beverages, LLC, or PlayBev, a consolidated variable interest entity, which holds the Playboy license.
Contract
Manufacturing (0% and 2% of total revenue during the nine months ended September 30, 2014 and 2013, respectively):
CirTran
Products pursues contract-manufacturing relationships in the U.S. consumer products markets, including licensed merchandise
sold in the sports and entertainment markets.
CirTran
Asia manufactures and distributes electronics, consumer products, and general merchandise to companies selling in international
markets.
Prior
to 2012, we also conducted activities in the marketing and media and electronics assembly operating segments, which may be reactivated.
Forward-Looking
Statements
The
statements contained in this report that are not purely historical are considered to be “forward-looking statements.”
These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding
the future. They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,”
“should,” “plans,” “estimates,” and “potential,” among others. Forward-looking
statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition
and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of
our existing assets to fund future operations and capital spending needs. Readers are cautioned that actual results could differ
materially from the anticipated results or other expectations that are expressed in these forward-looking statements. The forward-looking
statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update
the reasons why our actual results could differ from those that we have projected in such forward-looking statements. We expressly
disclaim any obligation or intention to update any forward-looking statement.
Results
of Operations
Comparison
of the Three Months and Nine months Ended September 30, 2014 and 2013
Sales
and Cost of Sales
Gross
profit decreased to $193,906 for the three months ended September 30, 2014, as compared to $534,126 for the three months ended
September 30, 2013. Gross profit decreased to $1,013,104 for the nine months ended September 30, 2014, as compared to $2,031,007
for the nine months ended September 30, 2013. The decrease is primarily attributable to the disruption we experienced in 2013
and into 2014 with the unexpected bankruptcy proceedings initiated against PlayBev, the continuing uncertainty created by Playboy
in relation to the interference with our beverage distributors, and our defenses against numerous lawsuits. Net sales in the contract
manufacturing segment decreased $501 in the three months ended September 30, 2014, as compared to the same period in 2013. Beverage
distribution revenue decreased to $200,871 for the three months ended September 30, 2014, as compared to $657,860 for the quarter
ended September 30, 2013. Net sales in the contract manufacturing segment increased $91,247 in the nine months ended September
30, 2014, as compared to the same period in 2013. Beverage distribution revenue decreased to $951,524 for the nine months ended
September 30, 2014, as compared to $2,565,491 for the quarter ended September 30, 2013. The decrease was driven by reductions
in product sales and royalty revenues, as well as less recognition of deferred revenue. During each of the three months and nine
months ended September 30, 2014, and 2013, we recognized no revenue from prepayments under contracts that were in default and/or
were terminated due to nonperformance.
Cost
of sales, including royalty expense, as a percentage of sales, decreased to 3% from 19% for the three months ended September 30,
2014, as compared to the three months ended September 30, 2013, respectively, and decreased to 19% from 21% for the nine months
ended September 30, 2014, as compared to the nine months ended September 30, 2013, respectively. Consequently, the gross profit
margin increased to 92% from 77%, for the nine months ended September 30, 2014 and 2013, respectively. The increase in gross profit
margin is attributable to an increase in revenues from royalty agreements that have an overall lower cost and the settlement of
royalty expense contracts during 2013.
The
following charts present comparisons of sales, cost of sales, and gross profits generated by our two operating segments, beverage
distribution and contract manufacturing, during the nine months ended September 30, 2014 and 2013:
Nine
months Ended September 30:
Segment | |
Year | | |
Sales | | |
Cost of Sales | | |
Royalty
Expense | | |
Gross Loss /
Margin | |
Beverage Distribution | |
| 2014 | | |
$ | 951,524 | | |
$ | 87,380 | | |
$ | - | | |
$ | 864,144 | |
| |
| 2013 | | |
| 2,565,491 | | |
| 553,303 | | |
| 37,494 | | |
| 1,974,694 | |
Contract Manufacturing | |
| 2014 | | |
| 148,960 | | |
| - | | |
| - | | |
| 148,960 | |
| |
| 2013 | | |
| 57,713 | | |
| 1,400 | | |
| - | | |
| 56,313 | |
Three
months Ended September 30:
Segment | |
Year | | |
Sales | | |
Cost of Sales | | |
Royalty
Expense | | |
Gross Loss / Margin | |
Beverage Distribution | |
| 2014 | | |
$ | 200,871 | | |
$ | 6,965 | | |
$ | - | | |
$ | 193,906 | |
| |
| 2013 | | |
| 657,860 | | |
| 124,185 | | |
| - | | |
| 533,675 | |
Contract Manufacturing | |
| 2014 | | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| 2013 | | |
| 501 | | |
| 50 | | |
| - | | |
| 451 | |
Selling,
General, and Administrative Expenses
During
the nine months ended September 30, 2014, selling, general, and administrative expenses decreased by $1,132,199 to $1,401,202
from $2,533,401 for the same period during 2013. The decrease in selling, general, and administrative expenses was driven primarily
by reduced consulting and accounting fees of $230,966, legal fees of $414,537, sales commission expense of $153,877, and travel
expense of $102,720, and an adjustment to inventory costs of $217,914.
Noncash
Compensation Expense
Compensation
expense in connection with accounting for options owed or granted to employees to purchase common stock was $0 for the three months
ended September 30, 2014, as compared to $11,000 for the three months ended September 30, 2013, and $5,633 for the nine months
ended September 30, 2014, as compared to $41,872 for the nine months ended September 30, 2013, as a result of the employee stock
options accrued for pursuant to the respective employment agreements.
Other
Income and Expense
Interest
expense for the three months ended September 30, 2014 was $146,617, as compared to $198,962 for the three months ended September
30, 2013, a decrease of 26.3%. Interest expense for the nine months ended September 30, 2014, was $441,076, as compared to $564,572
for the nine months ended September 30, 2013. The decrease in the combined interest expense was driven by the reduction in interest-bearing
liabilities during the nine months ended September 30, 2014, and a decrease in the interest rate on the convertible debentures.
We
recorded a gain of $169,379 on our derivative valuation for the three months ending September 30, 2014, as compared to a gain
of $104,494 recorded for the three months ended September 30, 2013. We recorded a loss of $306,566 on our derivative valuation
for the nine months ended September 30, 2014, as compared to a gain of $475,560 recorded for the nine months ended September 30,
2013. The swing in the derivative valuation is primarily the result of the change in estimating the fair value of convertible
debentures and associated warrants from using the Black-Scholes model to a multinomial lattice model, together with the varying
market values of our common stock.
We
recorded a gain of $57,587 on our settlement of debt for the nine months ended September 30, 2014.
We
recorded no gain or loss on our settlement of debt for the three months ended September 30, 2014. This was a result of settling
accounts payable and accrued liabilities with various vendors.
As
a result of these factors, our overall net loss decreased to $102,845 for the three months ended September 30, 2014, as compared
to net loss of $192,526 for the three months ended September 30, 2013. The net income attributable to the Company was $9,554 for
the three months ended September 30, 2014, and a net loss of $112,399 was attributable to a non-controlling equity interest in
PlayBev. Net loss increased to $1,083,786 for the nine months ended September 30, 2014, as compared to net income of $1,070,340
for the nine months ended September 30, 2013. The net loss attributable to the Company was $697,751 for the nine months ended
September 30, 2014, and net loss of $386,035 was attributable to a non-controlling equity interest in PlayBev.
Liquidity
and Capital Resources
We
have had a history of losses from operations, as our expenses have been greater than our revenues. Our accumulated deficit was
$48,371,759 at September 30, 2014, and $47,674,008 at December 31, 2013. Our current liabilities exceeded our current assets by
$23,988,375 as of September 30, 2014, and by $22,934,058 as of December 31, 2013.
Cash
The
amount of cash provided by operating activities during the nine months ended September 30, 2014, decreased by $187,249, driven
primarily by deferred expenses and expenses paid by third-parties on our behalf. The amount of cash used in financing activities
during the nine months ended September 30, 2014, increased by $161,810, driven primarily from conversion of debt to equity and
checks written in excess of our bank balance.
Accounts
Receivable
Trade
accounts receivable, net of allowance for doubtful accounts, increased $30,984 during the nine months ended September 30, 2014.
We continue to monitor individual customer accounts and are working to improve collections on trade accounts receivable. We eliminate
the receivables associated with PlayBev as part of consolidation in accordance with GAAP treatment as a variable interest entity.
Accounts
Payable and Accrued Liabilities
During
the nine months ended September 30, 2014, accounts payable, accrued liabilities, advances payable, interest payable, and short-term
debt increased by $798,542 to a combined balance of $15,503,138 as of September 30, 2014. The increase includes a decrease of
$355,492 in accrued liabilities, a $389,850 increase in interest payable, an increase of $509,919 in accrued payroll and compensation,
and a $128,952 decrease in accounts payable. The decrease in accounts payable activity is a result of payments made by outside
investors for continued PlayBev-related services performed during the nine months ended September 30, 2014, for beverage development,
distribution, marketing, and legal services. At September 30, 2014, we owed $2,165,321 to various investors from whom we had borrowed
funds in the form of either unsecured or short-term advances.
Capital
Requirements
In
conjunction with our efforts to improve our results of operations, we are also actively seeking infusions of capital from investors
and are seeking sources to repay our existing convertible debentures. In our current financial condition and with ongoing activities
substantially dependent on the outcome of the Playboy litigation, it is unlikely that we will be able to obtain additional debt
financing. Even if we did acquire additional debt, we would be required to devote additional cash flow to servicing the debt and
securing the debt with assets. Accordingly, we are looking to obtain equity financing to meet our anticipated capital needs. We
cannot assure that we will be successful in obtaining such capital. If we issue additional shares for debt and/or equity, this
will dilute the value of our common stock and existing shareholders’ positions.
We
cannot assure that we will be successful in obtaining more debt and/or equity financing in the future or that our results of operations
will materially improve in either the short- or the long-term. If we fail to obtain such financing and improve our results of
operations, we will be unable to meet our obligations as they become due. These conditions raise substantial doubt about our ability
to continue as a going concern.
Convertible
Debentures
We
had an outstanding Convertible Debenture with an aggregate outstanding balance of $2,390,528 as of September 30, 2014, including
accrued interest of $748,291. We have entered into forbearance agreements following our previous defaults in payments in order
to obtain extended payment terms. Under our most recent agreement reached with the lender in the second quarter of 2013, we were
required to make monthly payments, to be applied first to accrued interest and then to principal, in the amount of $100,000 per
month, commencing in April 2013. The amount of our required monthly cash payments is reduced in an amount equal to the amount
credited to the lender against the obligation as a result of the lender’s exercise of the right to convert the outstanding
balance due under the debentures into common stock. Any amount credited against the debenture obligation in excess of $100,000
per month is credited against the amounts due in the next succeeding month.
During
the nine months ended September 30, 2014, we did not issue any common stock against the required monthly payments because we had
insufficient authorized but unissued common stock. Based on the prevailing market price for our common stock, which has ranged
from a high bid of $0.0006 to a low bid of $0.0002 during the past six months, the terms of the Consolidated Debenture would require
a conversion price of $0.001 per share, which is lower than the per-share par value, so we would be obligated to issue shares
at $0.001 par value. As of September 30, 2014, we had only 81,016 authorized but unissued shares. The Consolidated Debenture provides
that the holder cannot convert indebtedness to common stock if, as a result of such conversion, the holder would own more than
9.99% of the Company’s outstanding common stock. We are seeking shareholder authorization of a recapitalization of the Company
to provide additional shares to issue on conversion of the Convertible Debenture but cannot assure whether the stockholders will
approve such amendment.
In
the absence of an amendment to our articles to provide sufficient shares to issue on conversion of the Convertible Debenture,
we would be required to pay the debenture in cash. The amount of cash required to meet our payment obligations under the Convertible
Debenture will depend on the lender’s decision to convert amounts to common stock, which will in turn depend on the trading
market prices and volumes for our common stock, over which we have no control.
Critical
Accounting Estimates
Revenue
Recognition
Revenue
is recognized when products are shipped. Title passes to the customer or independent sales representative at the time of shipment.
Returns for defective items are repaired and sent back to the customer. Historically, expenses associated with returns have not
been significant and have been recognized as incurred.
Shipping
and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping
products to customers are included as a component of cost of goods sold.
We
sold our Salt Lake City, Utah, building in a sale/leaseback transaction and reported the gain on the sale as deferred revenue
to be recognized over the term of lease pursuant to Financial Accounting Standards Board Accounting Standards Codification 840-10,
Accounting for Leases. The lease agreement was terminated during 2011 and the remainder of the deferred revenue was recognized
upon this termination event.
We
have entered into a Manufacturing, Marketing and Distribution Agreement with PlayBev, a consolidated variable interest entity,
whereby we are the vendor of record in providing initial development, promotional, marketing, and distribution services. Accordingly,
all amounts billed to PlayBev in connection with the development and marketing of its new energy drink have been eliminated in
consolidation.
Financial
Instruments with Derivative Features
We
do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives
or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument
and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value
and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the
fair value of these embedded derivatives using the Black-Scholes model. The fair values of the derivative instruments are measured
each quarter.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required.
ITEM
4. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We
carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer
/ Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2014. Based on our
evaluation, our Chief Executive Officer / Chief Financial Officer has concluded that our disclosure controls and procedures were
not effective at September 30, 2014, due to the fact that the material weaknesses in our internal control over financial reporting
described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, had not been remediated as of September
30, 2014.
These
weaknesses are continuing. Management and the Board of Directors are aware of these weaknesses that result because of limited
resources and staff. Efforts to design and implement controls and processes have been put on hold due to limited resources, but
we anticipate a renewed focus on this effort in the near future. Due to our limited financial and managerial resources, we cannot
assure when we will be able to implement effective internal controls over financial reporting.
Changes
in Internal Control over Financial Reporting
There
was no change in our internal control over financial reporting that occurred in the third quarter of 2014 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM
6. EXHIBITS
The
following exhibits are filed as a part of this report:
Exhibit
Number* |
|
Title
of Document |
|
Location |
|
|
|
|
|
Item
31 |
|
Rule
13a-14(a)/15d-14(a) Certifications |
|
|
31.01 |
|
Certification
of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14 |
|
This
filing. |
|
|
|
|
|
Item
32 |
|
Section
1350 Certifications |
|
|
32.01 |
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer and Chief Financial Officer) |
|
This
filing. |
|
|
|
|
|
Item
101 |
|
Interactive
Data File |
|
|
101 |
|
Interactive
Data File |
|
This
filing. |
* | All
exhibits are numbered with the number preceding the decimal indicating the applicable
SEC reference number in Item 601 and the number following the decimal indicating the
sequence of the particular document. |
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
CIRTRAN
CORPORATION |
|
|
(Registrant) |
|
|
|
Date:
November 19, 2014 |
By: |
/s/
Iehab Hawatmeh |
|
|
Iehab
Hawatmeh, President, |
|
|
Chief
Financial Officer (Principal Executive Officer, Principal Financial Officer) |
Exhibit
31.01
CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14
I,
Iehab Hawatmeh, certify that:
1.
I have reviewed this Quarterly Report on Form 10-Q of CirTran Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions):
(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: November 19,
2014 |
|
|
|
/s/
Iehab Hawatmeh |
|
Iehab Hawatmeh |
|
President, Chief Executive Officer,
and Chief Financial Officer |
|
(Principal Executive Officer
and Principal Financial Officer) |
|
EXHIBIT
32.01
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of CirTran Corporation on Form 10-Q for the period ended September 30, 2014, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), Iehab Hawatmeh, Chief Executive Officer and
Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
|
November
19, 2014 |
|
|
|
/s/
Iehab Hawatmeh |
|
Iehab Hawatmeh |
|
Chief Executive
Officer and Chief Financial Officer |
|
(Principal Executive
Officer and Principal Financial Officer) |
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