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 June 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.
Yes
[X] No [ ]
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).
Yes
[X] No [ ]
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).
Yes
[ ] No [X]
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As
of August 28, 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 June 30, 2014
INDEX
PART
I – FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
CIRTRAN
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
| |
June 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 | |
| 52,510 | | |
| 6,561 | |
Inventory, net of reserve of $2,255,041 | |
| 141,540 | | |
| 188,634 | |
Other | |
| 68,793 | | |
| 52,555 | |
Total current assets | |
| 263,043 | | |
| 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 | |
| 25,491 | | |
| 39,856 | |
Other assets, net | |
| 46,942 | | |
| 40,733 | |
| |
| | | |
| | |
Total assets | |
$ | 635,476 | | |
$ | 628,620 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Checks written in excess of bank balance | |
$ | 7,754 | | |
$ | 41,925 | |
Accounts payable | |
| 4,063,473 | | |
| 4,169,641 | |
Related-party payable | |
| 1,312,766 | | |
| 1,193,901 | |
Short-term advances payable - non-related parties | |
| 2,107,597 | | |
| 1,982,212 | |
Short-term advances payable - related parties | |
| 773,539 | | |
| 766,939 | |
Accrued liabilities | |
| 1,996,895 | | |
| 2,147,729 | |
Accrued payroll and compensation expense | |
| 3,303,983 | | |
| 2,961,993 | |
Accrued interest | |
| 1,735,703 | | |
| 1,482,181 | |
Deferred revenue | |
| 2,522,473 | | |
| 2,592,170 | |
Derivative liability | |
| 634,341 | | |
| 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 | |
| 24,153,526 | | |
| 23,182,089 | |
| |
| | | |
| | |
Total liabilities | |
| 24,153,526 | | |
| 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 | |
| (48,381,313 | ) | |
| (47,674,008 | ) |
Total CirTran Corporation and subsidiaries stockholders’ deficit | |
| (14,653,251 | ) | |
| (13,962,306 | ) |
Non-controlling interest | |
| (8,864,799 | ) | |
| (8,591,163 | ) |
Total stockholders’ deficit | |
| (23,518,050 | ) | |
| (22,553,469 | ) |
| |
| | | |
| | |
Total liabilities and stockholders’
deficit | |
$ | 635,476 | | |
$ | 628,620 | |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CIRTRAN
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| |
Three months ended | | |
Six months ended | |
| |
June 30, | | |
June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Net sales | |
$ | 547,870 | | |
$ | 1,096,691 | | |
$ | 899,613 | | |
$ | 1,964,843 | |
Cost of sales | |
| (59,858 | ) | |
| (195,953 | ) | |
| (80,415 | ) | |
| (430,468 | ) |
Royalty Expense | |
| - | | |
| - | | |
| - | | |
| (37,494 | ) |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 488,012 | | |
| 900,738 | | |
| 819,198 | | |
| 1,496,881 | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 666,785 | | |
| 818,704 | | |
| 1,081,689 | | |
| 1,652,156 | |
Non-cash compensation expense | |
| - | | |
| 1,000 | | |
| 5,633 | | |
| 30,872 | |
Total operating expenses | |
| 666,785 | | |
| 819,704 | | |
| 1,087,322 | | |
| 1,683,028 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from operations | |
| (178,773 | ) | |
| 81,034 | | |
| (268,124 | ) | |
| (186,147 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income (expense) | |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (158,336 | ) | |
| (156,115 | ) | |
| (294,459 | ) | |
| (365,610 | ) |
Gain (loss) on settlement of debt | |
| 78,163 | | |
| 1,405,205 | | |
| 57,587 | | |
| 1,443,557 | |
Gain (loss) on derivative valuation | |
| (463,600 | ) | |
| 365,222 | | |
| (475,945 | ) | |
| 371,066 | |
Total other expense, net | |
| (543,773 | ) | |
| 1,614,312 | | |
| (712,817 | ) | |
| 1,449,013 | |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) | |
| (722,546 | ) | |
| 1,695,346 | | |
| (980,941 | ) | |
| 1,262,866 | |
| |
| | | |
| | | |
| | | |
| | |
Less net income (loss) attributable
to non-controlling interest | |
| 202,378 | | |
| (1,164,172 | ) | |
| 273,636 | | |
| (837,268 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net income (loss) attributable
to CirTran Corporation and subsidiaries | |
$ | (520,168 | ) | |
$ | 531,174 | | |
$ | (707,305 | ) | |
$ | 425,598 | |
| |
| | | |
| | | |
| | | |
| | |
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 | | |
| 3,393,814,977 | | |
| 4,484,881,965 | | |
| 3,122,082,670 | |
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 Six Months Ended June 30, | |
2014 | | |
2013 | |
| |
| | |
| |
Cash flows from operating activities | |
| | | |
| | |
Net income (loss) | |
$ | (980,941 | ) | |
$ | 1,262,866 | |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 14,365 | | |
| 26,998 | |
Inventory reserves | |
| - | | |
| (604 | ) |
(Gain) Loss on derivative valuation | |
| 475,945 | | |
| (371,066 | ) |
(Gain) Loss on settlement of debt | |
| (57,587 | ) | |
| (1,443,557 | ) |
Non-cash compensation expense | |
| 5,633 | | |
| 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 | |
| (45,949 | ) | |
| (245,304 | ) |
Inventory | |
| 47,094 | | |
| 46,363 | |
Other current assets | |
| (16,238 | ) | |
| (273,170 | ) |
Other assets | |
| (6,209 | ) | |
| 95,502 | |
Accounts payable | |
| 9,164 | | |
| 18,509 | |
Related-party payable | |
| 118,865 | | |
| 122,258 | |
Accrued liabilities | |
| (156,457 | ) | |
| 90,808 | |
Accrued payroll and compensation expense | |
| 341,990 | | |
| 242,334 | |
Accrued interest | |
| 268,522 | | |
| 392,609 | |
Deferred revenue | |
| (69,697 | ) | |
| 20,530 | |
Net cash provided by operating
activities | |
| 73,500 | | |
| 15,948 | |
| |
| | | |
| | |
Cash flows from financing activities | |
| | | |
| | |
Checks written in excess of bank balance | |
| (34,171 | ) | |
| (17,118 | ) |
Proceeds from non-controlling interest | |
| - | | |
| 279,079 | |
Proceeds from short-term advances non-related parties | |
| 25,000 | | |
| 23,500 | |
Proceeds from short-term advances related parties | |
| 61,800 | | |
| 219,556 | |
Payments on accrued interest | |
| (15,000 | ) | |
| - | |
Payments on convertible debenture accrued interest | |
| - | | |
| (64,395 | ) |
Payments on short-term advances non-related parties | |
| (66,000 | ) | |
| (165,938 | ) |
Payments on short-term advances related parties | |
| (45,200 | ) | |
| (252,450 | ) |
Net cash provided by (used in)
financing activities | |
| (73,571 | ) | |
| 22,234 | |
| |
| | | |
| | |
Net increase (decrease) in cash and cash equivalents | |
| (71 | ) | |
| 38,182 | |
Cash and cash equivalents at beginning of period | |
| 281 | | |
| 7,883 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 210 | | |
$ | 46,065 | |
| |
| | | |
| | |
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 | | |
$ | 1,204,362 | |
Conversion of short-term advances, related parties for current liabilities
to non-controlling interest holders | |
| 10,000 | | |
| - | |
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)
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 six months ended June
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 $980,941 and net income of $1,262,866 for the six months ended June 30, 2014 and
2013, respectively. As of June 30, 2014, the Company had an accumulated deficit of $48,381,313. In addition, the Company had cash
provided by operations in the amount of $73,490 during the six months ended June 30, 2014, and cash provided by operations in
the amount of $15,948 during the six months ended June 30, 2013. The Company also had a negative working capital balance of $23,890,483
as of June 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 financing 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:
| |
June 30, 2014 | | |
December 31, 2013 | |
Raw Materials | |
$ | 1,733,060 | | |
$ | 1,682,099 | |
Work in Process | |
| 217,999 | | |
| 255,934 | |
Finished Goods | |
| 445,522 | | |
| 505,642 | |
Allowance / Reserve | |
| (2,255,041 | ) | |
| (2,255,041 | ) |
| |
| | | |
| | |
Totals | |
$ | 141,540 | | |
$ | 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 June 30, 2014, the
Company owed $72,851 under this arrangement. As of June 30, 2014, the Company owed Mr. Nora $616,773 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 $255,872 in accrued liabilities as of June
30, 2014, for selling, general, and administrative expenses that were paid for by Mr. Nora on a personal credit card. As of June
30, 2014, Mr. Nora had $685,000 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 six months ended June 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 June 30, 2014, the Company made no payments on the outstanding
note. At June 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 six months ended June 30, 2014, the Company made no payments on the outstanding notes. The principal
balance owing on the promissory notes as of June 30, 2014, totaled $41,416.
On
April 2, 2009, the Company President and a Director of the Company borrowed from a third party a total of $890,000 in the form
of four short-term promissory notes. The Company President and the Director of the Company signed personally for the notes. Because
the loans were used to pay obligations of the Company, the Company has assumed full responsibility for the notes. Two of the notes
were for a term of 60 days, with a 60-day grace period; a third note was for a term of 90 days; and a fourth note was for 24 days.
Loan fees totaling $103,418 were incurred with the issuance of the notes and are payable upon maturity of the notes. During 2012,
two of the notes with a combined balance of $411,912 were converted from short-term advances to a notes payable on The Company’s
books, with the intent to convert the liability to a membership interest in Play Beverages, LLC, a consolidated variable interest
entity. As of June 30, 2014, the notes had been restructured, incurred directly by the Company, without the Company President
and the Director’s personal guaranty.
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 six months ended June 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).
As
of June 30, 2014, the Company owed the Company President a total of $156,766 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 $35,000 and $30,000 for the six months ended June
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 or its predecessor entities.
YA
Global Forbearance Agreements - On February 22, 2013, the Company entered into a Ratification Agreement with YA Global
(the “2013 Ratification Agreement”). Under the 2013 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 a Consolidated Debenture.
The
2013 Ratification Agreement also provides for a new payment schedule under the Consolidated Debenture that replaces the payment
schedule that had been agreed to in a March 1, 2012, Forbearance Agreement among the parties. Under the 2013 Ratification Agreement
payment schedule, the Company is 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 the Company’s required monthly cash payment
shall be 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, as provided in the original
convertible debentures as well as in the Consolidated Debenture. Any amount credited against the debenture obligation in excess
of $100,000 per month shall be credited against the amounts due in the next succeeding month.
During
the six months ended June 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.
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 six months ended June 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 $1,305,000 in compensation, which is included in related-party payables as of June 30, 2014.
Advanced
Beauty Solutions, LLC - On March 22, 2012, the Company and 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 would accrue 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 would be secured by an encumbrance on all of the Company’s assets, subject to a prior lien and encumbrance in
favor of YA Global.
The
principal amount of $1,835,000 due under the ABS Forbearance Agreement would be reduced by the greater of the amount of credit
granted in the bankruptcy proceedings for the value of the intellectual property the Company previously conveyed to ABS and the
amount received by ABS from the sale of such intellectual property to a third party during the term of the ABS Forbearance Agreement,
plus the amount of any distribution to which the Company is entitled as a creditor of ABS, provided, however, that in no event
would the amount due under the ABS Forbearance Agreement be reduced below $90,000, which is the amount payable during the first
12 months under the ABS Forbearance Agreement. 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’s appeal of the approximately $1.8 million judgment has been remanded in the ABS bankruptcy proceedings to conclusively
determine the amount of credit due the Company for the conveyance of the intellectual property. Except for the determination of
the fair market value of the intellectual property and any enforcement or collection proceedings that may be required under the
ABS Forbearance Agreement, all litigation and disputes between ABS and its affiliates, on the one hand, and the Company and its
affiliates, on the other hand, would be dismissed, including the pending order to show cause regarding contempt against the Company,
its subsidiaries, and its President.
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.
The
Company entered into a forbearance agreement with ABS on March 1, 2012. As part of that agreement, among other things, the Company
agreed to a settlement amount that is to be reduced by any distribution to which the Company was entitled as a creditor of ABS.
Under the ABS Forbearance Agreement the minimum amount due ABS is $90,000, which is the amount payable during the first 12 months
under the ABS Forbearance Agreement. The Company accrued $90,000 as of December 31, 2011, and made payments of $0 and $45,000
during the six months ended June 30, 2014 and 2013, respectively. The royalty accrual as of June 30, 2014 and 2013, was $0 and
$45,000, 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 June, 30, 2014, and December 31, 2013.
Notes
payable consisted of the following at June 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 | |
$ | - | | |
$ | - | |
In
January 2012, the Company issued a 10%, five-year, $175,000 promissory note to an investor. The promissory note outstanding was
$7,500 as of June 30, 2014, and December 31, 2013.
As
of June 30, 2014, and December 31, 2013, the Company had accrued interest owed on the notes payable in the amounts of $409,341
and $362,435, respectively. The Company recorded interest expense of $46,907 and $244,137 for the six months June 30, 2014 and
2013, respectively. During the six months ended June 30, 2014, the Company paid $0 of accrued interest on the notes.
Short-term
advances payable
As
of June 30, 2014 and December 31, 2013, the Company had $2,107,597 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 $119,868 and $79,864 as
of June 30, 2014 and December 31, 2013, respectively.
During
the six months ended June 30, 2014, the Company made cash payments of $66,000 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 $25,000 for cash received from third parties.
During
the six months ended June 30, 2014, the Company recorded interest expense of $55,005 and paid $15,000 of accrued interest on the
unrelated party short-term advances.
NOTE
7 – CONVERTIBLE DEBENTURES
Convertible
Debentures consisted of the following as of June 30, 2014, and December 31, 2013:
| |
June 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 June 30, 2014, and December 31, 2013, the Company had accrued interest owed on the convertible debentures in the amounts of
$718,164 and $654,344, respectively. The Company recorded interest expense of $59,272 during the six months ended June 30, 2014.
During the six months ended June 30, 2014, there were no payments or conversions.
As
of June 30, 2014 and December, 2013, the fair value of the conversion feature for the convertible debt and associated warrants
was determined to be $634,341 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 June 30, 2014, and December 31, 2013.
The fair values of the derivative instruments are measured each quarter, which resulted in a gain (loss) of ($475,945) and $371,066
during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, and December 31, 2013, the fair market
value of the derivatives aggregated $634,341 and $158,396, respectively, using the following assumptions: estimated 1.5-0.5-year
term, estimated volatility of 292.28-32.87%, and a discount rate of 0.06-0.29%.
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 June 30, 2014, are summarized as follows:
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
| | | |
| | | |
| | | |
| | |
Fair value of derivatives | |
$ | - | | |
$ | 634,341 | | |
$ | - | | |
$ | 634,341 | |
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 $964,581 as a result of the net loss attributable to CirTran Corporation
for the six months ended June 30, 2014. The Company’s noncontrolling interest in consolidated subsidiaries increased stockholders’
deficit by $273,636 for the six months ended June 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 3,176,228,000 in potentially issuable common shares at June 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 six months ending June 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.
NOTE
12 – STOCK OPTIONS AND WARRANTS
Stock
Incentive Plans - As of June 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 six months ended June 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 June 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 ASC 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 June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales to external customers | |
$ | - | | |
$ | 109,717 | | |
$ | - | | |
$ | 438,153 | | |
$ | 547,870 | |
Segment income (loss) | |
| (339,027 | ) | |
| 19,379 | | |
| - | | |
| (402,898 | ) | |
| (722,546 | ) |
Segment assets | |
| 331,355 | | |
| (47,945 | ) | |
| - | | |
| 352,066 | | |
| 635,476 | |
Depreciation and amortization | |
| 3,476 | | |
| 2,830 | | |
| - | | |
| - | | |
| 6,306 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Three Months Ended June 30, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales to external customers | |
$ | - | | |
$ | 26,080 | | |
$ | - | | |
$ | 1,070,611 | | |
$ | 1,096,691 | |
Segment income (loss) | |
| 276,804 | | |
| 26,376 | | |
| (25 | ) | |
| 527,231 | | |
| 830,386 | |
Segment assets | |
| 405,365 | | |
| 49,346 | | |
| - | | |
| 820,769 | | |
| 1,275,480 | |
Depreciation and amortization | |
| 4,269 | | |
| 7,591 | | |
| - | | |
| - | | |
| 11,860 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Six Months Ended June 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales to external customers | |
$ | - | | |
$ | 148,960 | | |
$ | - | | |
$ | 750,653 | | |
$ | 899,613 | |
Segment income (loss) | |
| (273,988 | ) | |
| 6,569 | | |
| - | | |
| (713,522 | ) | |
| (980,941 | ) |
Segment assets | |
| 331,355 | | |
| (47,945 | ) | |
| - | | |
| 352,066 | | |
| 635,476 | |
Depreciation and amortization | |
| 7,515 | | |
| 6,850 | | |
| - | | |
| - | | |
| 14,365 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Six Months Ended June 30, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales to external customers | |
$ | - | | |
$ | 57,212 | | |
$ | - | | |
$ | 1,907,631 | | |
$ | 1,964,843 | |
Segment income (loss) | |
| 29,313 | | |
| 13,922 | | |
| (25 | ) | |
| 950,656 | | |
| 993,866 | |
Segment assets | |
| 405,365 | | |
| 49,346 | | |
| - | | |
| 820,769 | | |
| 1,275,480 | |
Depreciation and amortization | |
| 8,600 | | |
| 18,398 | | |
| - | | |
| - | | |
| 26,998 | |
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 August 28, 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 (83% and 96% of total revenue during six months ended June 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 (17% and 4% of total revenue during the six months ended June 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.
Marketing
and Media (no revenues during the six months ended June 30, 2014 and 2013, respectively):
CirTran
Online sells products via the Internet and provides services and support to Internet retailers.
CirTran
Media provides end-to-end services to the direct-response and entertainment industries.
Electronics
Assembly (no revenues during the six months ended June 30, 2014 and 2013, respectively):
CirTran
Corporation (“CirTran USA”) provides low-volume electronics assembly activities consisting primarily of placing
and attaching electronic and mechanical components on printed circuit boards and flexible (i.e., bendable) cables.
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 Six Months Ended June 30, 2014 and 2013
Sales
and Cost of Sales
Gross
profit decreased to $488,012 for the three months ended June 30, 2014, as compared to $900,738 for the three months ended June
30, 2013. Gross profit decreased to $819,198 for the six months ended June 30, 2014, as compared to $1,496,881 for the six months
ended June 30, 2013. The decrease is primarily attributable to our ability to manage 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 increased $86,637 in the three months ended June 30, 2014, as compared to the same period in 2013. Beverage
distribution revenue decreased to $438,153 for the three months ended June 30, 2014, as compared to $1,070,611 for the quarter
ended June 30, 2013. Net sales in the contract manufacturing segment increased $91,748 in the six months ended June 30, 2014,
as compared to the same period in 2013. Beverage distribution revenue decreased to $750,653 for the six months ended June 30,
2014, as compared to $1,907,631 for the quarter ended June 30, 2013. The decrease was driven by decreases in product sales and
royalty revenues, as well as less recognition of deferred revenue. During each of the three months and six months ended June 30,
2014, and 2013, we recognized approximately $0 in 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 11% from 18% for the three months ended June 30, 2014,
as compared to the three months ended June 30, 2013, respectively, and decreased to 9% from 24% for the six months ended June
30, 2014, as compared to the six months ended June 30, 2013, respectively. Consequently, the gross profit margin increased to
91% from 76%, for the six months ended June 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 six months ended June 30, 2014 and 2013:
Six
months Ended June 30:
Segment | |
Year | | |
Sales | | |
Cost of Sales | | |
Royalty Expense | | |
Gross Loss / Margin | |
Beverage Distribution | |
2014 | | |
$ | 750,653 | | |
$ | 80,415 | | |
$ | - | | |
$ | 670,238 | |
| |
2013 | | |
| 878,830 | | |
| 246,763 | | |
| 526,015 | | |
| 106,052 | |
Contract Manufacturing | |
2014 | | |
| 148,960 | | |
| - | | |
| - | | |
| 148,960 | |
| |
2013 | | |
| 55,625 | | |
| 201 | | |
| - | | |
| 55,424 | |
Three
months Ended June 30:
Segment | |
Year | | |
Sales | | |
Cost of Sales | | |
Royalty Expense | | |
Gross Loss / Margin | |
Beverage Distribution | |
2014 | | |
$ | 438,153 | | |
$ | 59,858 | | |
$ | - | | |
$ | 378,295 | |
| |
2013 | | |
| 291,214 | | |
| 8,613 | | |
| 5,011 | | |
| 277,590 | |
Contract Manufacturing | |
2014 | | |
| 109,717 | | |
| - | | |
| - | | |
| 109,717 | |
| |
2013 | | |
| 24,541 | | |
| 201 | | |
| - | | |
| 24,340 | |
Selling,
General, and Administrative Expenses
During
the six months ended June 30, 2014, selling, general, and administrative expenses decreased by $570,467 to $1,081,689 from $1,652,156
for the same period during 2013. The decrease in selling, general, and administrative expenses was driven primarily by a decrease
in consulting and accounting fees of $104,510, a decrease of legal fees of $276,072, a decrease in travel expense of $75,216,
and a decrease in sales commission expense of $96,828.
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 June 30, 2014, as compared to $1,000 for the three months ended June 30, 2013, and $5,633 for the six months ended June
30, 2014, as compared to $30,872 for the six months ended June 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 June 30, 2014 was $158,336, as compared to $156,115 for the three months ended June 30, 2013,
an increase of 1.4%. Interest expense for the six months ended June 30, 2014, was $294,459, as compared to $365,610 for the six
months ended June 30, 2013. The decrease in the combined interest expense was driven by the reduction in interest-bearing liabilities
during the six months ended June 30, 2014, and a decrease in the interest rate on the convertible debentures.
We
recorded a loss of $463,600 on our derivative valuation for the three months ending June 30, 2014, as compared to a gain of $365,222
recorded for the three months ended June 30, 2013. We recorded a loss of $475,945 on our derivative valuation for the six months
ended June 30, 2014, as compared to a gain of $371,066 recorded for the six months ended June 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 six months ended June 30, 2014. We recorded a gain of $78,163 on
our settlement of debt for the three months ended June 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 increased to $722,546 for the three months ended June 30, 2014, as compared to
net income of $1,695,346 for the three months ended June 30, 2013. The net loss attributable to the Company was $520,168 for the
three months ended June 30, 2014, and a net loss of $202,378 was attributable to a non-controlling equity interest in PlayBev.
Net loss increased to $980,941 for the six months ended June 30, 2014, as compared to net income of $1,262,866 for the six months
ended June 30, 2013. The net loss attributable to the Company was $707,305 for the six months ended June 30, 2014, and net loss
of $273,636 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
$48,381,313 at June 30, 2014, and $47,674,008 at December 31, 2013. Our current liabilities exceeded our current assets by $23,890,483
as of June 30, 2014, and by $22,934,058 as of December 31, 2013.
Cash
The
amount of cash provided by operating activities during the six months ended June 30, 2014, increased by $57,542, driven primarily
by deferred expenses and expenses paid by third-parties on behalf of the company. The amount of cash used in financing activities
during the six months ended June 30, 2014, increased by $95,805, driven primarily from conversion of debt to equity and checks
written in excess of bank balance.
Accounts
Receivable
Trade
accounts receivable, net of allowance for doubtful accounts, increased $45,949 during the six months ended June 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 six months ended June 30, 2014, accounts payable, accrued liabilities, advances payable, interest payable, and short-term
debt increased by $589,360 to a combined balance of $15,293,956 as of June 30, 2014. The increase includes a decrease of $150,834
in accrued liabilities, a $253,522 increase in interest payable, an increase of $341,990 in accrued payroll and compensation,
and a $106,168 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 six months ended June 30, 2014, for beverage development,
distribution, marketing, and legal services. At June 30, 2014, we owed $2,107,597 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 convertible debentures with an aggregate outstanding balance of $3,108,692 as of June 30, 2014, including accrued interest
of $718,164. 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 are 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 six months ended June 30, 2014, we did not issue any common stock
against the required monthly payments. The amount of cash required to meet our payment obligations under the debentures 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, or
ASC, 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 June 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 June 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 June 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 second 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:
August 28, 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: August
28, 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 June 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.
|
August 28, 2014 |
|
|
|
/s/ Iehab Hawatmeh |
|
Iehab Hawatmeh |
|
Chief Executive Officer and Chief Financial Officer |
|
(Principal Executive Officer and Principal Financial Officer) |
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