NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2020
NOTE
1—BASIS OF PRESENTATION
The
consolidated financial statements of CirTran Corporation for the three- and nine-month periods ended September 30, 2020 and 2019,
are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim
periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally
accepted in the United States of America. In the opinion of our management, the accompanying consolidated financial statements
contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position
as of September 30, 2020, and December 31, 2019, and our results of operations and cash flows for the periods ended September
30, 2020 and 2019. The results of operations for the three and nine months ended September 30, 2020 and 2019, are not necessarily
indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction
with the financial statements included in our annual report on Form 10-K for the year ended December 31, 2019.
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
We
consolidate all of our majority-owned subsidiaries, companies over which we exercise control through majority voting rights, and
companies in which we have a variable interest and we are the primary beneficiary. We account for our investments in common stock
of other companies that we do not control, but over which we can exert significant influence, using the cost method.
The
consolidated financial statements as of and for the periods ended September 30, 2020, include the accounts of CirTran Corporation
and our wholly owned subsidiaries: CirTran Products Corp., LBC Products, Inc., and CirTran - Asia, Inc. All intercompany balances
and transactions have been eliminated.
The
consolidated financial statements as of and for the periods ended September 30, 2019, include the accounts of CirTran Corporation
and our wholly owned subsidiaries: CirTran Products Corp., CirTran Corporation (Utah), CirTran Beverage Corp., CirTran Online
Corp., CirTran Media Corp., Racore Network, and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated.
Use
of Estimates
In
preparing the financial statements in accordance with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
Revenue
Recognition
We
follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue
from Contracts with Customers, for revenue recognition. Adoption of ASC 606 did not have a significant impact on our financial
statements. We generate revenue by providing product design services and through the sales of tangible product. We recognize revenue
upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to
be received in exchange for those products or services. We determine the transaction price associated with each deliverable based
on the unique contract with the customer, typically a purchase order received that we have accepted the terms of. Revenue is recognized
net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
During
the three and nine months ended September 30, 2020, we recognized revenues of $15,000 and $515,000, respectively, related to the
performance obligations under product development service agreements with customers. These contracts are long term in nature and
revenue is recognized at certain milestone intervals upon our delivery and customer acceptances of work product related to those
milestones, namely product design, packaging, branding display, and prototypes. There were no costs to obtain the contracts identified
and, as such, no asset has been recorded for customer acquisition costs. Additionally, we have not recognized impairment losses
related to the receivables from these contracts during the three and nine months ended September 30, 2020.
Additionally,
we recognized revenues of $390,005 and $420,319 during the three and nine months ended September 30, 2020, respectively, related
to the delivery of product to our customers. Each delivery is based on a unique customer purchase order which is considered to
be a stand-alone contract that we retain the right to accept or reject. Upon acceptance, we oblige delivery of such product to
the customer at an agreed-upon place, time, and price. We recognize revenue under the unique purchase order contract upon fulfillment
of our performance obligations therein, typically limited to the delivery of product.
Cash
and Cash Equivalents
We
consider all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents. We
did not hold any cash equivalents as of September 30, 2020, or December 31, 2019.
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which superseded guidance in ASC 840, Leases, which
we adopted for the year ended December 31, 2019, under the modified retrospective transition approach by applying the new standard
to all leases existing at the date of initial application. We account for short term leases, those lasting fewer than 12 months,
using the practical expedient as outlined in the guidance, which does not include recording such leases on the balance sheet.
Investment
in Securities
Our
cost-method investment consists of an investment in a private digital multi-media technology company that totaled $300,000 at
September 30, 2020, and December 31, 2019. As we owned less than 20% of that company’s stock as of each date, and no significant
influence or control exists, the investment is accounted for using the cost method. We evaluated the investment for impairment
and determined there was none during the periods presented.
Property
and Equipment
We
incur certain costs associated with the design and development of molds and dies for our contract-manufacturing segment. These
costs are held as deposits on the balance sheet until the molds or dies are finished and ready for use. At that point, the costs
are included as part of production equipment in property and equipment and are amortized over their useful lives. We hold title
to all molds and dies used in the manufacture of products. The capitalized cost, net of accumulated depreciation, associated with
molds and dies included in property and equipment at September 30, 2020, and December 31, 2019, was $0 and $9,772, respectively.
All property and equipment that was in service during the year ended December 31, 2019, was disposed of during the current period.
Depreciation
expense is recognized in amounts equal to the cost of depreciable assets over estimated service lives. Leasehold improvements
are amortized over the shorter of the life of the lease or the service life of the improvements. The straight-line method of depreciation
and amortization is followed for financial reporting purposes. Maintenance, repairs, and renewals that neither materially add
to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions
of property and equipment are included in operating results.
Impairment
of Long-Lived Assets
We
review our long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. At each balance sheet date, we evaluate whether events and circumstances have
occurred that indicate possible impairment. We use an estimate of future undiscounted net cash flows from the related asset or
group of assets over their remaining life in measuring whether the assets are recoverable. We did not record expenses for the
impairment of long-lived assets during the periods ended September 30, 2020 or 2019.
Financial
Instruments with Derivative Features
We
do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives
or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument
and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value
and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the
fair value of these embedded derivatives using a Monte Carlo simulation. The fair values of the derivative instruments are measured
each reporting period.
Inventories
Inventories
are stated at the lower of average cost or net realizable value. Cost on manufactured inventories includes labor, material, and
overhead. Overhead cost is based on indirect costs allocated to cost of sales, work-in-process inventory, and finished goods inventory.
Indirect overhead costs have been charged to cost of sales or capitalized as inventory, based on management’s estimate of
the benefit of indirect manufacturing costs to the manufacturing process. Inventories consist of finished goods as we do not carry
raw materials for manufacturing products.
When
there is evidence that the inventory’s value is less than original cost, the inventory is reduced to market value. We determine
market value on current resale amounts and whether technological obsolescence exists. We will seek agreements with manufacturing
customers that require them to purchase their inventory items in the event they cancel their business with us.
From
time to time, we will place deposits on inventory to be delivered in the future. These deposits are carried as a separate balance
sheet component and totaled $44,559 (non-related-party) and $318,624 (related-party) as of September 30, 2020. There were no deposits
on inventory as of December 31, 2019.
Inventory
balances consisted of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Finished goods
|
|
$
|
123,661
|
|
|
|
18,814
|
|
Raw materials
|
|
|
91,968
|
|
|
|
-
|
|
Total
|
|
$
|
215,629
|
|
|
$
|
18,814
|
|
Stock-Based
Compensation
We
have outstanding stock options to directors and employees, which are described more fully in Note 12 – Stock Options
and Warrants. We account for our stock options in accordance with ASC 718-10, Accounting for Stock Issued to Employees,
and ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, as updated, which requires the recognition
of the cost of employee services received in exchanged for an award of equity instruments in the financial statements and is measured
based on the grant date fair value of the award. ASC 718-10 also requires the stock option compensation expense to be recognized
over the period during which an employee is required to provide service in exchange for the award (typically the vesting period).
There was no impact to our methodology for accounting for equity based compensation as a result of adopting ASC 718-10 and ASU
2018-07.
Stock-based
employee compensation was $56 and $600 for the nine months ended September 30, 2020 and 2019, respectively.
Fair
Value of Financial Instruments
The
carrying amounts reported in the accompanying consolidated financial statements for cash, notes payable, and accounts payable
approximate fair value because of the immediate or short-term maturities of these financial instruments.
ASC
820-10-15, Fair Value Measurement-Overall-Scope and Scope Exceptions, defines fair value, thereby eliminating inconsistencies
in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations. ASC
820-10-15 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations.
The three levels of inputs are defined as follows:
|
Level
1—Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets
or liabilities.
|
|
Level
2—Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for
the asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical
assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived
valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market
data.
|
|
Level
3—Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that
are significant to the measurement of the fair value of the assets or liabilities.
|
Accounts
payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these
instruments. Derivative liabilities are measured using level 3 inputs.
|
|
Total Fair Value
at September 30, 2020
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable
inputs (Level 2)
|
|
|
Significant
unobservable
inputs (Level 3)
|
|
Derivative liabilities
|
|
$
|
1,218,396
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,218,396
|
|
|
|
Total Fair Value at December 31, 2019
|
|
|
Quoted prices in active markets (Level 1)
|
|
|
Significant other observable inputs (Level 2)
|
|
|
Significant unobservable inputs (Level 3)
|
|
Derivative liabilities
|
|
$
|
894,079
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
894,079
|
|
Loss
per Share
Basic
loss per share (EPS) is calculated by dividing net loss available to common shareholders by the weighted-average number of common
shares outstanding during each period. Diluted EPS is similarly calculated, except that the weighted-average number of common
shares outstanding would include common shares that may be issued subject to existing rights with dilutive potential when applicable.
There were 160,186,365 potentially issuable shares from the conversions of convertible debentures outstanding that were excluded
in dilutive outstanding shares for the three and nine months ended September 30, 2020, due to the anti-dilutive effect these would
have on net loss per share. There were 133,107,973 such shares issuable as of September 30, 2019. We do not currently have adequate
authorized but unissued shares to satisfy our obligations should all instruments eligible to convert to common stock be exercised.
We are not currently contemplating an increase in our authorized shares but may do so in the future.
Short-term
Advances
We
have short-term advances with various individuals. These advances are due upon demand, carry no interest, and are not collateralized.
These advances are classified as short-term liabilities.
Recently
Issued Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06 “Debt with Conversion and Other Options,” which will be effective
for fiscal years beginning after December 15, 2021. We are evaluating the impacts this new pronouncement will have on our financial
statements.
NOTE
3—GOING CONCERN AND REALIZATION OF ASSETS
In
October 2016, we lost our ability to continue energy drink distribution, our principal source of revenue, after receiving an unfavorable
ruling in our suit against Playboy Enterprises, Inc.
The
accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate our continuation as a going concern. We had a working capital deficiency
of $38,433,552 and $37,994,597 as of September 30, 2020, and December 31, 2019, respectively, and a net loss from continuing operations
of $660,896 and $709,453 during the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020, and
December 31, 2019, we had an accumulated deficit of $79,237,906 and $78,461,806, respectively. These conditions raise substantial
doubt about our ability to continue as a going concern.
Our
ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in
the following paragraphs and eventually attain profitable operations. The accompanying financial statements do not include any
adjustments that may be necessary if we are unable to continue as a going concern.
In
the coming year, our foreseeable cash requirements will relate to development of business operations and associated expenses.
We may experience a cash shortfall and be required to raise additional capital.
Historically,
we have mostly relied upon shareholder loans and advances to finance operations and growth. Management may raise additional capital
by retaining net earnings, if any, or through future public or private offerings of our stock or loans from private investors,
although we cannot assure that we will be able to obtain such financing. Our failure to do so could have a material and adverse
effect upon us and our shareholders.
NOTE
4—PROPERTY AND EQUIPMENT
Property
and equipment and estimated service lives consist of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
Useful Life (years)
|
Furniture and office equipment
|
|
$
|
-
|
|
|
$
|
177,900
|
|
|
5-10
|
Leasehold improvements
|
|
|
-
|
|
|
|
997,714
|
|
|
7-10
|
Production equipment
|
|
|
-
|
|
|
|
2,886,267
|
|
|
5-10
|
Vehicles
|
|
|
-
|
|
|
|
53,209
|
|
|
3-7
|
Total
|
|
|
-
|
|
|
|
4,115,090
|
|
|
|
Less: accumulated depreciation
|
|
|
-
|
|
|
|
(4,105,318
|
)
|
|
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
9,772
|
|
|
|
During
the nine months ended September 30, 2020, we disposed of all of our remaining assets as part of our adoption of our new agreement
to develop and distribute certain products. There was no consideration received upon disposal resulting in a net loss equal to
the net book value of $9,771 during the nine months ended September 30, 2020. We recorded $0 and $573 of depreciation expense
during the three months ended September 30, 2020 and 2019, respectively. We recorded $0 and $1,719 of depreciation expense during
the nine months ended September 30, 2020 and 2019, respectively.
NOTE
5—RELATED-PARTY TRANSACTIONS
Transactions
Involving Officers, Directors, and Stockholders
In
2007, we issued a 10% promissory note to a family member of our president in exchange for $300,000. The note was due on demand
after May 2008. There were no repayments made during the periods presented. At September 30, 2020, and December 31, 2019, the
principal amount owing on the note was $151,833 and $151,833, respectively.
On
March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $315,000
($105,000 each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the
amount received plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest
accruing at 12% per annum. We made no payments towards the outstanding notes during the periods presented. The principal balance
owing on the notes as of September 30, 2020, and December 31, 2019, totaled $72,466 and $72,466, respectively.
During
the nine months ended September 30, 2020, we made repayments to related parties of $270,150 and advances of $10,700 were received
from related parties. Additionally, related parties paid expenses totaling $1,940 directly to vendors on our behalf. There were
$484,235 and $738,655 of short-term advances due to related parties as of September 30, 2020, and December 31, 2019, respectively.
The advances are due on demand and as such included in current liabilities.
We
have agreed to issue stock options to Iehab Hawatmeh, our president, as compensation for services provided as our chief executive
officer. The terms of this employment agreement require us to grant options to purchase 6,000 shares of our stock each year, with
an exercise price equal to the fair market price of our common stock as of the grant date. During the nine months ended September
30, 2020, we granted options to purchase 6,000 shares of common stock relating to this employee agreement. There were also options
to purchase 6,000 shares of common stock that expired during the nine months ended September 30, 2020. There was 30,000 and 30,000
outstanding stock options held by Iehab Hawatmeh as of September 30, 2020, and December 31, 2019, respectively. See Note 6
– Other Accrued Liabilities and Note 12 – Stock Options and Warrants.
As
of September 30, 2020, and December 31, 2019, we owed our president a total of $900,339 and $903,740 in unsecured advances. The
advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee. The borrowing fees were
waived by our president on these loans. These amounts are included in our liabilities from discontinued operations.
As
of September 30, 2020 and December 31, 2019, we owed a total of $13,740 to a related party through trade payables incurred in
the normal course of business. These amounts are shown as a separate related-party payable on the balance sheet as of each reporting
date.
During
the nine months ended September 30, 2020, we made deposits with a related-party inventory supplier totaling $318,624. The related
party is an entity controlled by our CEO. All transactions were at a 2% markup over the related-party’s cost paid for inventory
in arm’s-length transactions. Total inventory purchases from the related party were $240,803 during the nine months ended
September 30, 2020.
NOTE
6—OTHER ACCRUED LIABILITIES
Accrued
tax liabilities consist of delinquent payroll taxes, interest, and penalties owed by us to the Internal Revenue Service (“IRS”)
and other tax entities.
Accrued
liabilities consist of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Tax liabilities
|
|
$
|
800,970
|
|
|
$
|
806,331
|
|
Other
|
|
|
569,068
|
|
|
|
271,668
|
|
Total
|
|
$
|
1,370,038
|
|
|
$
|
1,077,999
|
|
Other
accrued liabilities as of September 30, 2020, and December 31, 2019, include a non-interest-bearing payable totaling $45,000 that
is due on demand.
Accrued
payroll and compensation liabilities consist of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Stock option expenses
|
|
$
|
-
|
|
|
$
|
4,000
|
|
Director fees
|
|
|
140,000
|
|
|
|
135,000
|
|
Bonus expenses
|
|
|
129,358
|
|
|
|
121,858
|
|
Commissions
|
|
|
2,148
|
|
|
|
2,148
|
|
Administrative payroll
|
|
|
3,771,583
|
|
|
|
3,494,630
|
|
Total
|
|
$
|
4,043,089
|
|
|
$
|
3,757,636
|
|
Stock
option expenses consist of employee stock option expenses. During the nine months ended September 30, 2020, we resumed accruing
wages for our CEO, which are included in administrative payroll. A total of $258,750 was accrued during the nine months ended
September 30, 2020 of which $172,500 are included in cost of sales as a direct labor cost of fulfilling performance obligations
related to our revenue recognized and $86,250 are included in operating expenses. The allocation of wages to cost of sales and
operating expenses is based on the percentage of time spent by our CEO to directly deliver on certain performance obligations
under our contracts with our customers. Our CEP spent 100% of his time as such during the six months ended June 30, 2020 with
0% of his time spent as such during the three months ended September 30, 2020.
NOTE
7—COMMITMENTS AND CONTINGENCIES
Litigation
and Claims
Various
vendors, service providers, and others have asserted legal claims in previous years. These creditors generally are not actively
seeking collection of amounts due them, and we have determined that the probability of realizing any loss on these claims is remote
and will seek to compromise and settle at a deep discount any of such claims that are asserted for collection. These amounts are
included in our current liabilities. We have not accrued any liability for claims or judgments that we have determined to be barred
by the applicable statute of limitations, which generally is eight years for judgments in Utah.
Playboy
Enterprises, Inc.
Our
affiliate, Play Beverages, LLC, filed suit against Playboy Enterprises, Inc., in Cook County, Illinois, Circuit Court in October
2012 asserting numerous claims, including breach of contract and tortious interference. Playboy responded with a counterclaim
of breach of contract and trademark infringement. After proceedings in October 2016, the court awarded a judgment to Playboy of
$6.6 million against Play Beverages and CirTran Beverage Corp., our subsidiary. The court denied our motion for a new trial and
awarded Playboy treble patent infringement damages and attorney’s fees. We filed a notice of appeal in July 2017 and again
in March 2018. Playboy has initiated collection efforts but has recovered no funds. In September 2018, the appellate court affirmed
the judgment of the circuit court. We have accrued $17,205,599 as of September 30, 2020, and December 31, 2019, related to this
judgment, which is included in liabilities in discontinued operations.
Delinquent
Payroll Taxes, Interest, and Penalties
In
November 2004, the IRS accepted our amended offer in compromise (the “Offer”) to settle delinquent payroll taxes,
interest, and penalties, which requires us to pay $500,000, remain current in our payment of taxes for five years, and forego
claiming any net operating losses for the years 2001 through 2015 or until we pay taxes on future profits in an amount equal to
the taxes of $1,455,767 waived by the Offer. In June 2013, we entered into a partial installment agreement to pay $768,526 in
unpaid 2009 payroll taxes, which requires us to pay the IRS 5% of cash deposits. The monthly payments are to continue until the
account balances are paid in full or until the collection statute of limitation expires on October 6, 2020. There was $1,048,756
and $1,048,756 due as of September 30, 2020, and December 31, 2019, respectively.
Employment
Agreements
We
engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended
in September 2017. In July 2017, Mr. Hawatmeh had resigned all positions with us to pursue other business activities, thereby
effectively terminating the agreement. However, the amendment to his employment agreement in September 2017 reinstated Mr. Hawatmeh
to his previous positions, with a salary in an amount to be determined. Among other things, the reinstated employment agreement:
(a) grants options to purchase a minimum of 6,000 shares of our stock each year, with an exercise price equal to the market price
of our common stock as of the grant date, for the maximum term allowed under our stock option plan; (b) provides for health insurance
coverage, cell phone, car allowance, life insurance, and director and officer liability insurance, as well as any other bonus
approved by our board; and (c) includes additional incentive compensation as follows: (i) a quarterly bonus equal to 5% of our
earnings before interest, taxes, depreciation and amortization for the applicable quarter; (ii) bonuses equal to 1% of the net
purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and (iii) an annual bonus
(payable quarterly) equal to 1% of our gross sales of all products, net of returns and allowances. On January 1, 2020, we resumed
accruing wages for our CEO. A total of $258,750 was accrued during the nine months ended September 30, 2020.
We
also have an oral agreement with our other director that requires us to issue options to purchase 2,000 shares of our common stock
each year.
During
the nine months ended September 30, 2020 and 2019, we granted options to purchase 8,000 and 6,000 shares of common stock to Mr.
Hawatmeh and Ms. Hollinger, respectively. We recorded expenses totaling $56 and $600 during the nine months ended September 30,
2020 and 2019, respectively, for these options.
We
have no other agreements requiring the grant of options.
NOTE
8—NOTES PAYABLE
Notes
payable consisted of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Note payable to former service provider for past due account payable (current)
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
Note payable for settlement of debt (long term)
|
|
|
500,000
|
|
|
|
500,000
|
|
Small Business Administration loan
|
|
|
156,000
|
|
|
|
-
|
|
Total
|
|
$
|
746,000
|
|
|
$
|
590,000
|
|
There
was $193,192 and $157,535 of accrued interest due on these note as of September 30, 2020, and December 31, 2019, respectively.
NOTE
9—CONVERTIBLE DEBENTURES
Convertible
debentures consisted of the following:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on May 30, 2021
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on November 30, 2020
|
|
|
25,000
|
|
|
|
25,000
|
|
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on February 8, 2021
|
|
|
25,000
|
|
|
|
25,000
|
|
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on December 23, 2020
|
|
|
25,000
|
|
|
|
10,000
|
|
Convertible debenture, 5% stated interest rate, secured by all of our assets, due on April 30, 2027
|
|
|
2,390,528
|
|
|
|
2,390,528
|
|
Subtotal
|
|
$
|
2,665,528
|
|
|
$
|
2,650,528
|
|
Less: discounts
|
|
|
(640,885
|
)
|
|
|
(722,886
|
)
|
Total
|
|
$
|
2,024,643
|
|
|
$
|
1,927,642
|
|
Less: current portion
|
|
|
(264,284
|
)
|
|
|
(248,874
|
)
|
Long term portion
|
|
$
|
1,760,359
|
|
|
$
|
1,678,768
|
|
The
convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or the lowest
bid price for the 20 trading days prior to conversion.
As
of September 30, 2020, and December 31, 2019, we had accrued interest on the convertible debentures totaling $1,499,317 and $1,399,295,
respectively, of which $38,494 and $28,199 was current and $1,460,824 and $1,371,098 was long term, respectively. As of September
30, 2020, and December 31, 2019, the debentures, including accrued but unpaid interest, were convertible into 160,186,365 and
568,989,796 shares of our common stock.
NOTE
10—DERIVATIVE LIABILITIES
As
discussed in Note 9 - Convertible Debentures, we have entered into five separate agreements to borrow a total of $2,665,528
with the outstanding principal and interest being convertible at the holder’s option into common stock of the company at
the lesser of $100 (notes one through four) or $0.10 (note five) or the lowest closing bid price in the prior 20 trading days.
Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance
sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results
of operations during the period of change. We have estimated the fair value of these embedded derivatives for convertible debentures
and associated warrants using a Monte Carlo simulation as of September 30, 2020, using the following assumptions:
Volatility
|
|
|
95.2% - 135.2
|
%
|
Risk-free rates
|
|
|
0.06% - 0.44
|
%
|
Stock price
|
|
$
|
0.0345
|
|
Remaining life
|
|
|
0.25- 6.58 years
|
|
The
fair values of the derivative instruments are measured each quarter, which resulted in a gain of $39,700 and loss of $318,564
during the three and nine months ended September 30, 2020. As of September 30, 2020, and December 31, 2019, the fair market value
of the derivatives aggregated $1,218,396 and $894,079, respectively.
NOTE
11—STOCKHOLDERS’ DEFICIT
We are authorized
to issue up to 100,000,000 shares of $0.001 par value common stock. No shares were issued during the periods presented. We had
a total of 4,500,417 common shares issued and outstanding as of September 30, 2020, and December 31, 2019. During the year ended
December 31, 2019, we effected a 1:1000 reverse stock split of our outstanding stock. The impacts of the reverse stock split have
been retroactively stated which resulted in a reclassification between common stock and additional paid in capital of $4,494,392
at September 30, 2019.
NOTE
12—STOCK OPTIONS AND WARRANTS
Stock
Incentive Plans
During
the nine months ended September 30, 2020 and 2019, we granted to employees 8,000 and 6,000 options, respectively, to purchase
shares of common stock.
The
8,000 options granted during the nine months ended September 30, 2020, were valued using the following assumptions: estimated
five-year term, estimated volatility of 91%, and a risk-free rate of 1.61%.
During
the nine months ended September 30, 2019, we granted 6,000 stock options relating to the employment agreement with Mr. Hawatmeh.
The fair market value of the options was $600, using the following assumptions: estimated seven-year term, estimated volatility
of 567%, and a risk-free rate of 2.38%.
As
of September 30, 2020, and December 31, 2019, we had no unrecognized compensation related to outstanding options that have not
yet vested at year-end that would be recognized in subsequent periods. See Note 6 – Other Accrued Liabilities for
a description of amounts of option expenses included in accrued payroll and compensation expense.
During
the nine months ended September 30, 2020, we issued a total of 8,000 options to purchase common stock, and a total of 8,000 options
expired unexercised. As of September 30, 2020, there were 40,000 options issued and vested with a weighted average exercise price
of $0.01 and a weighted average remaining life of 2.66 years.
NOTE
13—DISCONTINUED OPERATIONS
At
October 21, 2016, we exited the beverage licensing and distribution business. The assets and liabilities associated with this
business are displayed as assets and liabilities from discontinued operations as of September 30, 2020, and December 31, 2019,
as a result. Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations
for the nine months ended September 30, 2020 and 2019.
Total
assets and liabilities included in discontinued operations were as follows:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Assets from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
|
-
|
|
Total assets from discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
19,690,380
|
|
|
$
|
19,690,378
|
|
Accrued liabilities
|
|
|
704,917
|
|
|
|
704,917
|
|
Accrued interest
|
|
|
1,137,544
|
|
|
|
1,022,342
|
|
Accrued payroll and compensation expense
|
|
|
131,108
|
|
|
|
131,108
|
|
Current maturities of long-term debt
|
|
|
239,085
|
|
|
|
444,085
|
|
Related-party payable
|
|
|
1,776,250
|
|
|
|
1,776,250
|
|
Short-term advances payable
|
|
|
2,784,773
|
|
|
|
2,579,773
|
|
Total liabilities from discontinued operations
|
|
$
|
26,464,057
|
|
|
$
|
26,348,853
|
|
Net
loss from discontinued operations for the nine months ended September 30, 2020 and 2019, were comprised of the following components:
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of sales
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
|
|
|
9,782
|
|
Interest expense
|
|
|
(115,204
|
)
|
|
|
(114,784
|
)
|
Total other expense
|
|
|
(115,204
|
)
|
|
|
(105,002
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations
|
|
$
|
(115,204
|
)
|
|
$
|
(105,002
|
)
|
NOTE
14—SUBSEQUENT EVENTS
We
have evaluated all events occurring subsequent to the financial statements and determined there are no additional items to disclose.
On
March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. This situation is ongoing, and we are
monitoring it closely. Although our response to the COVID-19 pandemic continues to evolve, we have taken measures to mitigate
the impact on our business operations and overall financial performance. We are also constantly evaluating and responding to the
impact of the pandemic on our supply chain as compared to product demand. In addition, we actively monitor COVID-19-related developments
and may take further actions that alter our business operations as may be required by federal, state, or local authorities or
that we determine are in the best interests of our employees, customers, vendors, and stockholders. The effects of these operational
modifications will be reflected in current and future reporting periods.