CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2007 2006
--------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 99,442 $ 146,050
Trade accounts receivable, net of
allowance for doubtful
accounts of $14,181 and $14,181,
respectively 1,889,320 982,096
Inventory, Net of reserve of $866,354
and $866,354, respectively 2,048,984 1,960,013
Prepaid Deposits 153,920 80,925
Investment Receivables - 241,744
Other 350,564 213,212
--------------------------------------------------------------------------------
Total Current Assets 4,542,230 3,624,040
Investment in Securities, at Cost 2,570,000 300,000
Deferred Offering Costs, Net 151,072 296,103
Long Term Receivables 1,665,000 1,665,000
Property and Equipment, Net 1,020,366 2,678,454
Intellectual Property, Net 2,179,944 2,451,408
Other Assets 49,717 114,733
--------------------------------------------------------------------------------
Total Assets $ 12,178,329 $ 11,129,738
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,390,695 $ 1,135,527
Distribution payable 1,256,640 -
Accrued liabilities 1,606,637 607,649
Deferred revenue 79,361 191,396
Derivative liability 2,725,261 3,362,626
Convertible debenture 3,114,715 2,746,047
Current maturities of long-term
notes payable 462,094 444,436
Notes payable to stockholders 145,000 -
--------------------------------------------------------------------------------
Total Current Liabilities 10,780,403 8,487,681
--------------------------------------------------------------------------------
Long-Term Notes Payable, Less
Current Maturities - 1,023,110
--------------------------------------------------------------------------------
Total Liabilities 10,780,403 9,510,791
Commitments and Contingencies
Minority Interest 1,091,360 -
Stockholders' Equity
Common stock, par value $0.001;
authorized 1,500,000,000 shares;
issued and outstanding shares:
951,405,002 and 656,170,424 951,400 656,165
Employee receivable (66,000) (66,000)
Additional paid-in capital 25,066,355 23,210,461
Accumulated deficit (25,645,189) (22,181,679)
--------------------------------------------------------------------------------
Total Stockholders' Equity 306,566 1,618,947
--------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 12,178,329 $ 11,129,738
================================================================================
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2007 2006 2007 2006
-------------------------------------------------------------------------------
Net Sales $ 3,533,555 $ 3,044,853 $ 8,700,004 $ 7,007,118
Cost of Sales (1,723,568) (2,307,237) (4,135,494) (4,529,641)
-------------------------------------------------------------------------------
Gross Profit 1,809,987 737,616 4,564,510 2,477,477
-------------------------------------------------------------------------------
Operating Expenses
Selling, general and
administrative
expenses 2,529,784 1,062,570 7,077,802 3,826,899
Non-cash employee
compensation expense - - 75,385 65,616
-------------------------------------------------------------------------------
Total Operating
Expenses 2,529,784 1,062,570 7,153,187 3,892,515
-------------------------------------------------------------------------------
Income (Loss) From
Operations (719,797) (324,954) (2,588,677) (1,415,038)
-------------------------------------------------------------------------------
Other Income (Expense)
Interest (584,328) (693,494) (2,044,116) (2,330,309)
Gain on settlement 1,168,623 - 1,168,623 -
Gain on sale/leaseback 19,752 - 40,020 -
Gain on forgiveness
of debt - - 23,748 6,930
Gain (loss) on
derivative valuation 198,648 (1,961,840) (63,108) (174,187)
-------------------------------------------------------------------------------
Total Other Expense,
Net 802,695 (2,655,334) (874,833) (2,497,566)
-------------------------------------------------------------------------------
Net Income (Loss) $ 82,898 $ (2,980,288) $ (3,463,510) $ (3,912,604)
-------------------------------------------------------------------------------
Basic (income) loss per
common share $ - $ - $ - $ -
-------------------------------------------------------------------------------
Diluted (income) loss
per common share $ - $ - $ - $ -
-------------------------------------------------------------------------------
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2007 2006
--------------------------------------------------------------------------------
Cash flows from operating activities
Net income (loss) $ (3,463,510) $ (3,912,604)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 639,914 353,793
Accretion expense 1,633,667 1,924,996
Provision for doubtful accounts - (155,757)
Gain on forgiveness of debt (23,748) (6,930)
Gain on sale - leaseback (40,031) -
Gain on settlement (1,168,623) -
Non-cash compensation expense 75,386 57,756
Options issued to attorneys and consultants
for services - 59,851
Change in valuation of derivative 63,109 174,187
Changes in assets and liabilities:
Trade accounts receivable (907,226) (1,079,913)
Prepaid Deposits (72,995) 142,188
Inventories (88,970) 864,158
Prepaid expenses and other assets (72,335) (259,946)
Accounts payable 264,443 (198,967)
Accrued liabilities 352,031 45,281
Deferred revenue (112,035) 480,247
Intangibles - (120,000)
--------------------------------------------------------------------------------
Total adjustments 542,587 2,280,944
--------------------------------------------------------------------------------
Net cash used in operating activities (2,920,923) (1,631,660)
--------------------------------------------------------------------------------
Cash flows from investing activities
Intangibles purchased with cash (45,202) (556,163)
Proceeds for sale of property 2,500,000 -
ABS assets acquired with cash - (1,125,000)
Cash issued on LOC (109,633) (40,000)
Purchase of property and equipment (209,398) (262,100)
--------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities 2,135,767 (1,983,263)
--------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from notes payable to stockholders 355,000 -
Payments from notes payable to stockholders (210,000) -
Proceeds from notes payable - 1,500,000
Principal payments on LTD (1,255,452) -
Principal payments on notes payable - (26,155)
Proceeds from notes payable to related parties - 110,837
Payment on notes payable to related parties - (206,643)
Proceeds from sale of interest in AfterBev 1,848,000 -
Proceeds from stock issued in private placement - 1,500,000
Exercise of options issued to attorneys and
consultants for services 1,000 26,376
================================================================================
Net cash provided by financing activities 738,548 2,904,415
================================================================================
Net increase (decrease) in cash and cash
equivalents (46,608) (710,508)
Cash and cash equivalents at beginning of year 146,050 1,427,865
================================================================================
Cash and cash equivalents at end of period $ 99,442 $ 717,357
================================================================================
|
The accompanying notes are an integral part of these financial statements.
5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
For the Nine Months Ended September 30, 2007 2006
--------------------------------------------------------------------------------
Supplemental disclosure of cash flow
information
Cash paid during the period for interest $ - $ 119,552
Noncash investing and financing activities
Issuance of stock and options for settlement
of litigation - 464,187
Stock issued for settlement of accrued
interest 100,000 130,000
Common Stock issued for partial conversion
of Convertible Debenture 1,965,473 1,910,477
Reclassification accounts receivable to notes
receivable - 1,665,000
and accrued compensation - 54,000
ABS assets acquired in exchange for guaranteed
payment and reduction of claim - 1,185,000
Warrants issued with derivative liability
features - 955,520
Options granted and exercised in partial
settlement of payable 9,270 18,974
Common Stock issued for the 1.2 for 1
forward split 140,572 -
Deferred gain on the sale and leaseback of
office building 810,736 -
Investment in Play Beverage Group, LLC 750,000 -
Gain on settlement 351,377 -
|
The accompanying notes are an integral part of these financial statements.
6
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The Company consolidates all of its majority-owned
subsidiaries and companies over which the Company exercises control through
majority voting rights. The Company accounts for its investments in common stock
of other companies that the Company does not control but over which the Company
exert significant influence using the equity method, with its share of their
results classified as revenues.
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiaries (the "Company"). These financial statements are condensed
and, therefore, do not include all disclosures normally required by accounting
policies generally accepted in the United States of America. These statements
should be read in conjunction with the Company's annual financial statements
included in the Company's Annual Report on Form 10-KSB. In particular, the
Company's significant accounting policies were presented as Note 1 to the
consolidated financial statements in that Annual Report. In the opinion of
management, all adjustments necessary for a fair presentation have been included
in the accompanying condensed consolidated financial statements and consist of
only normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the three and nine
months ended September 30, 2007, are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2007.
Principles of Consolidation -- The consolidated financial statements include the
accounts of CirTran Corporation, and its wholly owned subsidiaries, Racore
Technology Corporation, CirTran-Asia Inc., CirTran Products, Inc., and CirTran
Media Corp. (formerly known as Diverse Media Group Corporation) (see Note 7,
Commitments And Contingencies below), PFE Properties, LLC, CirTran Online
Corporation and CirTran Beverage Corp. (see Note 4, Investments, below). All
significant intercompany transactions have been eliminated in consolidation.
Impairment of Long-Lived Assets -The Company reviews its 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. The Company
evaluates, at each balance sheet date, whether events and circumstances have
occurred that indicate possible impairment. The Company uses 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. As of
September 30, 2007, the Company does not consider any of its long-lived assets
to be impaired.
Long-lived asset costs are amortized over the estimated useful life of the
asset, which is typically 5 - 7 years. Amortization expense was $105,757 and
$3,837 for the three months ended September 30, 2007 and 2006, and $316,619 and
$11,511 for the nine months ended September 30, 2007 and 2006, respectively.
Registration Payment Arrangements - On January 1, 2007, the Company adopted FASB
Staff Position ("FSP") EITF 00-19-2, Accounting for Registration Payment
Arrangements ("FSP 00-19-2"). Under FSP 00-19-2 and Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies ("SFAS 5"), a
registration payment arrangement is an arrangement where (a) the Company
endeavors to file a registration statement for certain securities with the SEC
and have the registration statement declared effective within a certain time
period; and/or (b) the Company will endeavor to keep a registration statement
7
effective for a specified period of time; and (c) transfer of consideration is
required if the Company fails to meet those requirements. When the Company
issues an instrument with these registration payment requirements, the Company
estimates the amount of consideration that is likely to be paid out under the
agreement and offsets the amount of the liability against the proceeds of the
instrument issued. The estimate is re-evaluated at the end of each reporting
period, with any changes recorded as a registration penalty in the statements of
operations. As further described in Note 7, the Company has instruments that
contain registration payment arrangements. The effect of implementing this FSP
has not had a material effect on the financial statements because the
probability of payment under the terms of the agreements is considered to be
remote.
NOTE 2 - REALIZATION OF ASSETS
The accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America. The Company has a history of losses including a net loss of
$3,463,510 for the nine months ended September 30, 2007. As of September 30,
2007, and December 31, 2006, the Company had an accumulated deficit of
$25,645,189 and $22,181,679, respectively The Company had a working capital
deficit of $4,981,533 and $4,863,641 as of September 30, 2007, and December 31,
2006, respectively. In addition, the Company's operations used cash of
$2,920,923 and $1,631,660 for the nine months ended September 30, 2007, and
2006, respectively. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying condensed
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. Along with the continued operation of the Company, there are
several new programs in development. These programs represent a new direction
for the Company into consumer products contract manufacturing & beverage
manufacturing and distribution and marketing. These new programs have the
potential to carry higher profit margins than electronic manufacturing and as a
result, the Company is investing substantial resources into developing these
activities. 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.
NOTE 3 - Inventory
Inventories are composed of the following:
September 30, December 31,
2007 2006
------------------------------------------------------------------------
Raw Materials $ 1,955,844 $ 1,739,619
Work in Process 213,534 463,023
Finished Goods 745,960 623,725
Allowance / Reserve (866,354) (866,354)
--------------------------------
Totals $ 2,048,984 $ 1,960,013
================================
|
8
NOTE 4 - InveSTMENTS
In May 2007, the Company formed CirTran Beverage Corp. ("CBC"), a wholly owned
subsidiary to arrange for the manufacture, marketing and distribution of the
Playboy licensed energy drinks and flavored water beverages, and related
merchandise through various distribution channels, including traditional retail
channels as well as catalogs, internet, live shopping and other channels.
During the nine months ended September 30, 2007, the Company, along with several
other investors, formed After Bev Group, LLC ("AfterBev"). CBC contributed its
expertise for an 84% interest in AfterBev, and the additional investors
contributed $500,000 for a 16% interest in AfterBev. Subsequent to the
formation, After Bev purchased a 50% ownership in Play Beverage Group LLC
("PlayBev") for $500,000 using the cash received during its formation, and an
additional $250,000 raised in the form of notes payable. CirTran has recorded
the investment at its cost of $750,000, and has also recorded notes payable for
$250,000 and a minority interest of $500,000. During the third quarter, the
company met some obligations on behalf of After Bev and was able to increase its
ownership to 51% in Play Beverages, LLC.
As of September 30, 2007, additional investors purchased from CBC a 12% profit
interest in AfterBev for $748,000 and an additional 16% membership interest in
AfterBev for $1,100,000. This brought CBC's ownership in AfterBev to 68% with a
56% interest in profits of AfterBev. The sale of interest credited an additional
minority interest in AfterBev of $591,360 and distributions payable of
$1,256,640.
NOTE 5 - BASIC AND DILUTED NET LOSS PER SHARe
Basic loss per share is calculated by dividing 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 913,977,773 and 353,250,000 in potentially issuable
common shares at September 30, 2007, and September 30, 2006, respectively, that
were excluded from the calculation of diluted loss per share because the effects
would be anti-dilutive.
NOTE 6 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholders -- During the second quarter 2007, the President
of the Company loaned the Company a net amount of $70,000, of which $10,000 was
repaid in the third quarter of 2007. Another shareholder, loaned the Company
$450,000, of which $200,000 was repaid in third quarter 2007. The balance of the
loan remains due on demand. The loans were recorded as notes payable to
stockholders.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Registration Rights -In December 2005, in connection with the Company's issuance
of a convertible debenture to Cornell Capital Partners, L.P. ("Cornell")
(discussed below in Note 9), the Company granted to Cornell registration rights,
pursuant to which the Company agreed to file, within 120 days of the closing of
the purchase of the debenture, a registration statement to register the resale
of shares of the Company's common stock issuable upon conversion of the
debenture. The Company also agreed to use its best efforts to have the
registration statement declared effective within 270 days after filing the
registration statement. In the event the initial registration statement is not
filed by the scheduled filing deadline then as partial relief for the damages to
any holder of registrable securities, the Company will pay as liquidated damages
either a cash amount or in shares of the Company's common stock, within three
9
business days, equal to two percent of the liquidated value of the convertible
debentures outstanding for each thirty day period after the scheduled filing
deadline, during which the initial registration statement has not been filed.
The Company agreed to register the resale of up to 32,608,696 shares and
10,000,000 warrants, and to keep such registration statement effective until all
of the shares issuable upon conversion of the debenture have been sold.
In August 2006, in connection with the Company's issuance of another convertible
debenture to Cornell, the Company entered into an amended and restated
registration rights agreement with Cornell, which superseded the registration
rights agreement from the December 2005 debenture transaction. Pursuant to the
amended registration rights agreement, the Company agreed to file a registration
statement to register the resale of shares of the Company's common stock
issuable upon conversion of both debentures. In the event the initial
registration statement is not filed by the scheduled filing deadline then as
partial relief for the damages to any holder of registrable securities, the
Company will pay as liquidated damages either a cash amount or in shares of the
Company's common stock, within three business days, equal to two percent of the
liquidated value of the convertible debentures outstanding for each thirty day
period after the scheduled filing deadline, during which the initial
registration statement has not been filed. The Company agreed to file the
registration statement by October 30, 2006. The Company also agreed to use its
best efforts to have the registration statement declared effective within 270
days after filing the registration statement. The Company agreed to register the
resale of up to 74,291,304 shares and 15,000,000 warrants, and to keep such
registration statement effective until all of the shares issuable upon
conversion of the debenture have been sold. The Company subsequently entered
into several extension agreements with Cornell to extend the filing date of the
registration statement to December 15, 2007. As of the date of this Report, no
such registration statement has been filed.
On July 20, 2006, the Company entered into a lockdown agreement with Cornell
(the "Cornell Agreement") related to the first Cornell Debenture (See Note 9.)
Pursuant to the Cornell Agreement, Cornell agreed that it would not convert any
of the principal or interest on the Cornell Debenture or exercise any of the
Warrants granted to Cornell until the Company had taken the steps necessary to
increase its authorized capital. As such, the Company was able to lock down
106,900,000 shares underlying the Cornell Debenture and 25,000,000 shares
underlying the Cornell Warrants (See Note 9.) On April 30, 2007 the Company
increased the number of its authorized shares to 1,500,000,000. The increase in
the number of authorized shares provided adequate coverage for the conversion of
the Cornell Debenture and therefore negated the need for the Cornell Lockdown
Agreement.
Diverse Talent Group Transaction - In March 2006, the Company formed a new
subsidiary, Diverse Media Group Corporation ("DMG"), to provide end-to-end
services to the direct response and entertainment industries. The new division
provides product marketing, production, media funding and merchandise
manufacturing services. On May 26, 2006, DMG entered into an assignment and
exclusive services agreement with Diverse Talent Group, Inc., a California
corporation, ("DT"). The Services Agreement had a 5-year term and was made
effective as of April 1, 2006. Pursuant to the Services Agreement, DMG and DT
entered into an exclusive operating relationship whereby DMG agreed to outsource
its talent agency operations to DT and to provide financing to DT to assist in
DT's growth. Under the Services Agreement, DMG and DT created a relationship
whereby DT would operate exclusively under the DMG business structure. The
project did not generate the type of synergy that was anticipated, and it was
concluded that it would be in the best interest of the Company to terminate the
relationship with DT.
10
On March 29, 2007, the Company entered into a term sheet agreement with DT,
which was followed up with a definitive Settlement and Release Agreement,
Investor Registration Agreement, and an Escrow Agreement all executed on May 15,
2007. These documents contain virtually the same terms and conditions as were
proposed in the term sheet. As a result, the Company reached the following
settlement with DT as of March 30, 2007:
(i) The parties agreed to terminate the original agreements and the
Company assigned back to DT all talent contracts and the name
"Diverse Media Group." DT will cause Diverse Media Group, Inc., to
issue 9,000,000 shares of its common stock, which are currently
traded on the pink sheets, to an escrow account. All shares held
in escrow will be subject to the following instructions issued to
the escrow agent:
a. The Company may sell shares under the terms and conditions
of Rule 144;
b. The Company may sell shares pursuant to an effective
registration under the Securities Act of 1933;
c. The Company and Diverse Media Group, Inc. may jointly
instruct the agent to disburse shares from escrow;
d. In the case of bankruptcy the agent may distribute shares;
and
e. Once the aggregate amount of all net proceeds equals or
exceeds $2,000,000 the agent shall deliver any unsold
shares to Diverse Media Group, Inc.
(ii) Sale and registration of the shares are limited and are subject to
Diverse Media Group's first right of refusal on any proposed stock
sale.
The sale and registration limitations are as follows:
(a) No stock may be sold during the first year unless a
registration statement is filed.
(b) The number of shares subject to registration rights is
limited based on the total number of outstanding shares of
Diverse Media Group, Inc. stock.
(c) Sales of stock in subsequent years are restricted based on
trading volume.
The emphasis on involvement with talent agencies has been reduced because of the
name change from Diverse Media Group to CirTran Media Corp. as per the terms of
the agreement, and because of the termination of Trevor Saliba, who was
responsible for talent agency related activities. It is anticipated that with
the Company's continued emphasis in marketing products to the direct-to-TV sales
channel and the marketing of the PlayBev energy drink, both of which use
celebrity endorsements, that the Company will renew its development efforts with
the talent agencies when the opportunity presents itself.
On August 14, 2007, 9,000,000 shares of DT common stock had been issued to the
Company and are being held in escrow as per the terms of the agreement. As a
result of the receipt of the DT common stock, the Company recorded a gain of
$1,168,623.
Manufacturing Agreement - On June 10, 2004, the Company entered into an
exclusive manufacturing agreement with certain developers. Under the terms of
the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia,
had the exclusive right to manufacture certain products developed by the
developers or any of their affiliates. Had the developers terminated the
agreement prior to June 10, 2007, they would have been required to pay the
Company $150,000. The developers did not terminate the agreement, and on June
10, 2007, the agreement expired according to the terms of the agreement.
11
New Directors - As of February 1, 2007, Fadi Nora was appointed to the Company's
Board of Directors. As compensation, he is entitled to a cash payment of $5,000
per quarter, and stock options to purchase up to a total of 2,000,000 shares of
the Company's common stock as determined by the board. Mr. Nora is also entitled
to a quarterly bonus equal to 0.5% of the Company's gross sales generated
directly by Mr. Nora for each quarter. In addition, Mr. Nora receives 5% of all
gross investments made into the Company that are directly generated and arranged
by him if the following conditions are satisfied: (i) His sole involvement in
the process of obtaining the investment is the introduction of the Company to
the potential investors and that he does not participate in the recommendation,
structuring, negotiation, documentation or selling of the investment, (ii)
neither the Company nor the investor are required to pay any commissions,
finders fees or similar compensation to any agent, broker, dealer, underwriter
or finder in connection with the investment, and (iii) the Board in its sole
discretion determines that the investment qualifies for this bonus and that the
bonus may be paid with respect to the investment. Mr. Nora will also be
reimbursed for certain pre-approved expenses.
As of October 1, 2007, Don L. Buehner was appointed to the Company's Board of
Directors. As compensation, he is entitled to a cash payment of $5,000 per
quarter, and stock options to purchase up to a total of 2,000,000 shares of the
Company's common stock as determined by the board. CirTran has agreed to cover
Mr. Buehner under its D&O Insurance Policy. CirTran will reimburse Mr. Buehner
for his expenses incurred in connection with CirTran's business, including
expenses for travel, lodging, meals, beverages, entertainment and other items in
accordance with policies established by CirTran.
NOTE 8 - SALE OF PROPERTY
Property Sale - On May 4, 2007, PFE Properties LLC ("PFE"), a Utah limited
liability company and subsidiary of the Company, sold and leased back the land
and building where the Company presently has its headquarters and manufacturing
facility, for $2,500,000. Of that amount, an aggregate of $1,233,288 went to
repay PFE's mortgage loan, taxes, fees, commissions, and other expenses. The net
amount to PFE was $1,266,712, which was paid at closing.
In connection with the sale, the Company entered into a Triple Net Lease (the
"Lease") whereby the Company agreed to lease the property from the buyer. The
term of the lease is for 10 years, with an option to extend the lease for up to
three additional five-year terms. The monthly lease payment will be $17,083.
The Company recorded a gain on the sale of the property of $810,736 which is
being deferred over the life of the lease, in accordance with Statement of
Financial Accounting Standards No. 13.
NOTE 9 - CONVERTIBLE DEBENTURES
Highgate - On May 26, 2005, the Company entered into an agreement with Highgate
House Funds Ltd. ("Highgate") to issue to Highgate a $3,750,000, 5% Secured
Convertible Debenture (the "Debenture"). Highgate subsequently changed its name
to Yorkville Advisors, LLC ("Yorkville"), which will be used in this report. The
Debenture is due December 2007 and is secured by all of the Company's property.
12
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The balance of accrued
interest owed at September 30, 2007, and December 31, 2006, was $148,335 and
$163,884, respectively.
At any time, Yorkville may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share, or an amount equal to the lowest closing bid
price of the Company's common stock for the twenty trading days immediately
preceding the conversion date. The Company has the right to redeem a portion or
the entire Debenture then outstanding by paying 105% of the principal amount
redeemed plus accrued interest thereon.
Yorkville's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) Yorkville may convert up to $250,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the market price of the
Company's stock is $0.10 per share or less at the time of
conversion;
(ii) Yorkville may convert up to $500,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Yorkville may convert in
excess of the foregoing amounts if the Company and Yorkville
mutually agree; and
(iii) Upon the occurrence of an event of default, Yorkville may, in
its sole discretion, accelerate full repayment of all
debentures outstanding and accrued interest thereon or may
convert the Debentures and accrued interest thereon into
shares of the Company's common stock.
Except in the event of default, Yorkville may not convert the Debenture for a
number of shares that would result in Yorkville owning more than 4.99% of the
Company's outstanding common stock.
In connection with the issuance of the Yorkville Debenture, the Company granted
Yorkville registration rights related to the issuance of the debenture.
The Company determined that the features of the Debenture fell under derivative
accounting treatment. As of September 30, 2007, the carrying value of the
Debenture was $1,372,301. The carrying value will be accreted each quarter over
the life of the Debenture until the carrying value equals the unconverted face
value of $1,585,000. The fair value of the derivative liability as of September
30, 2007, was $636,911. The amount remaining as deferred loan fees, of $151,072,
are being amortized over the remaining life of the debenture.
During the nine months ended September 30, 2007, Yorkville converted $1,265,000
of its convertible debenture and $100,000 of accrued interest into 144,662,491
shares of the Company's common stock at conversion rates ranging from $0.00513
to $0.01613 per share, which was the lower of $0.10 or 100% of the lowest
closing bid price of the Company's common stock over the 20 trading days
preceding each conversion. As of September 30, 2007, Yorkville had converted
$2,165,000 of principal on the convertible debenture which leaves an outstanding
balance of $1,585,000.
13
Cornell - On December 30, 2005, the Company entered into an agreement with
Cornell Capital Partners, L.P. ("Cornell") to issue to Cornell a $1,500,000, 5%
Secured Convertible Debenture (the "Cornell Debenture"). The Cornell Debenture
is due July 30, 2008, and is secured by all the Company's property, junior to
the Yorkville security interest.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The accrued interest on
the debenture was $130,890 and $74,795 as of September 30, 2007 and December 31,
2006, respectively.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of the Company's common stock at a conversion price equal
to an amount equal to the lowest closing bid price of the Company's common stock
for the twenty trading days immediately preceding the conversion date. The
Company has the right to redeem a portion or the entire Cornell Debenture then
outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Cornell's right to convert principal amounts into shares of the Company's common
stock is limited as follows:
(i) Cornell may convert up to $250,000 worth of the principal
amount plus accrued interest of the Cornell Debenture in any
consecutive 30-day period when the market price of the
Company's stock is $0.10 per share or less at the time of
conversion;
(ii) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the Cornell Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Cornell may convert in
excess of the foregoing amounts if the Company and Cornell
mutually agree; and
(iii) Upon the occurrence of an event of default, Cornell Capital
Partners, LP may, in its sole discretion, accelerate full
repayment of the debenture outstanding and accrued interest
thereon or may convert the Debenture and accrued interest
thereon into shares of the Company's common stock.
Except in the event of default, Cornell may not convert the Cornell Debenture
for a number of shares that would result in Cornell owning more than 4.99% of
the Company's outstanding common stock.
The Cornell Debenture was issued with 10,000,000 warrants with an exercise price
of $0.09 per share that vest immediately and have a three year life.
In connection with the issuance of the Cornell Debenture, the Company granted
Cornell registration rights related to the issuance of the Cornell Debenture and
Warrants.
The Company determined that the features on the Cornell Debenture and the
associated Warrants fell under derivative accounting treatment.. As of September
30, 2007, the carrying value of the Debenture was $1,014,846. The carrying value
will be accreted each quarter over the life of the Debenture until the carrying
14
value equals the unconverted face value of $1,500,000. The fair value of the
derivative liability related to the Cornell Debenture, as of September 30, 2007,
was $979,099. The fair value of the warrants was $5,476 as of September 30,
2007.
In connection with the issuance of the Cornell Debenture, fees of $130,000 were
withheld from the proceeds, capitalized, and are being amortized over the life
of the Cornell Debenture.
As of September 30, 2007, Cornell had not converted any of the Cornell Debenture
into shares of the Company's common stock.
Cornell - On August 23, 2006, the Company entered into another securities
purchase agreement (the "Purchase Agreement") with Cornell, relating to the
issuance by the Company of a 5% Secured Convertible Debenture, due April 23,
2009, in the aggregate principal amount of $1,500,000 (the "August Debenture").
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The accrued interest on
the debenture was $82,603 and $26,507 as of September 30, 2007 and December 31,
2006, respectively.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of the Company's common stock at a conversion price equal
to an amount equal to the lowest closing bid price of the Company's common stock
for the twenty trading days immediately preceding the conversion date. The
Company has the right to redeem a portion or the entire Cornell Debenture then
outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Cornell's right to convert principal amounts owing under the August Debenture
into shares of the Company's common stock is limited as follows:
(i) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the August Debenture in any
consecutive 30-day period when the price of the Company's
stock is $0.03 per share or less at the time of conversion;
(ii) Cornell may convert any amount of the principal amount plus
accrued interest of the August Debenture in any consecutive
30-day period when the price of the Company's stock is greater
than $0.03 per share at the time of conversion; and
(iii) Upon the occurrence of an Event of Default, Cornell may, in
its sole discretion, accelerate full repayment of the
debentures outstanding and accrued interest thereon or may,
convert all debentures outstanding and accrued interest
thereon into shares of the Company's common stock.
Except in the event of default, Cornell may not convert the August Debenture for
a number of shares of common stock that would cause the aggregate number of
shares of Common Stock beneficially owned by Cornell and its affiliates to
exceed 4.99% of the outstanding shares of the common stock following such
conversion.
In connection with the Purchase Agreement, the Company also agreed to grant to
Cornell warrants (the "Warrants") to purchase up to an additional 15,000,000
shares of the Company's common stock. The Warrants have an exercise price of
15
$0.06 per share, and expire three years from the date of issuance. The Warrants
also provide for cashless exercise if at the time of exercise there is not an
effective registration statement or if an event of default has occurred.
In connection with the issuance of the August Debenture, the Company granted
Cornell registration rights related to the issuance of the August Debenture and
Warrants.
The Company determined that the features on the August Debenture and the
associated warrants fell under derivative accounting treatment. As of September
30, 2007, the carrying value of the Debenture was $727,568. The carrying value
will be accreted each quarter over the life of the Debenture until the carrying
value equals the unconverted face value of $1,500,000. The fair value of the
derivative liability related to the Cornell Debenture, as of September 30, 2007,
was $1,014,846. The fair value of the warrants was $10,582 as of September 30,
2007.
In connection with the issuance of the August Debenture, fees of $135,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the August Debenture.
As of September 30, 2007, Cornell had not converted any of the August Debenture
into shares of the Company's common stock.
Lockdown Agreement - In connection with the Cornell Debenture and the August
Debenture, Cornell agreed that it could not convert any amount of principal or
interest, until the Company has effectuated an increase in its authorized
capital. The Company and Cornell also agreed that in the event that the Company
had not effectuated such increase in its authorized capital by October 30, 2006,
which was subsequently extended to June 1, 2007, such failure would constitute
an event of default on parallel with those set forth in the Purchase Agreement
and subject to the same consequences as those listed in the Purchase Agreement.
On April 30, 2007, the Company received shareholder approval to increase its
authorized capital to include 1,500,000,000 shares of common stock as a result
of the increase in the authorized shares. The increase in the authorized capital
provided adequate coverage for the conversion of the Cornell Debenture and the
August Debenture, and therefore negated the need for the Cornell Lockdown
Agreement.
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock Issuances -During the nine months ended September 30, 2007, the
Company issued to Yorkville 144,662,491, shares of restricted common stock in
connection with a conversion by Yorkville of $1,165,000 principal amount of the
convertible debenture and $100,000 of accrued interest on the debenture. (See
Note 9.)
May 2006 Private Offering - On May 24, 2006, the Company entered into a private
placement agreement whereby the Company sold 14,285,715 shares of its common
stock to ANAHOP, Inc. ("ANAHOP"), an unrelated party, for $1,000,000. In
addition to the shares, the Company issued warrants to designees of Anahop as
follows:
- A warrant to purchase up to 15,000,000 shares, with an
exercise price of $0.15 per share, exercisable upon the date
of issuance.
- A warrant to purchase up to 5,000,000 shares, with an exercise
price of $0.25 per share, exercisable upon the date of
issuance.
- A warrant to purchase up to 10,000,000 shares, with an
exercise price of $0.50 per share.
16
The warrants are exercisable as of the date of issuance and through and
including the date which is five years following the date on which the Company's
common stock is listed for trading on either the Nasdaq Small Cap Market, the
Nasdaq Capital Market, the American Stock Exchange, or the New York Stock
Exchange.
The Company determined that because it does not have sufficient authorized
shares of common stock to settle the exercise of the 30,000,000 warrants in
shares of its common stock the warrants should be recorded as a derivative
liability at fair value. The fair value of the derivative liability as of
September 30, 2007, was $58,691.
The Company granted piggyback registration rights for the shares underlying the
warrants, effective only after the warrants have been exercised. The Company did
not grant any registration rights with respect to the 14,285,715 shares of
common stock.
June 2006 Private Offering - On June 30, 2006, the Company entered into a second
private placement agreement whereby, the Company agreed to sell 28,571,428
shares of its common stock to ANAHOP. The total consideration to be paid for the
Shares will be $2,000,000 if all tranches of the sale close.
Pursuant to the Agreement, ANAHOP agreed to pay $300,000 at the time of closing,
and an additional $200,000 within 30 days of the closing. The payments of
$300,000 and $200,000 are referred to collectively as the "First Tranche
Payments." The First Tranche Payments have been received, $300,000 on June 30,
2006 and $200,000 on July 27, 2006. The Company issued 7,142,857 shares of
common stock upon receipt of the First Tranche Payment.
The remaining $1,500,000 is to be paid by ANAHOP as follows:
(i) No later than thirty calendar days following the date on which
any class of the Company's capital stock is first listed for
trading on either the Nasdaq Small Cap Market, the Nasdaq
Capital Market, the American Stock Exchange, or the New York
Stock Exchange, ANAHOP agreed to pay an additional $500,000;
and
(ii) No later than sixty calendar days following the date on which
any class of the Company's capital stock is first listed for
trading on the above listed markets, ANAHOP agreed to pay an
additional $1,000,000. (The payments of $500,000 and
$1,000,000 are referred to collectively as the "Second Tranche
Payment.")
Upon receipt of the Second Tranche Payment, the Company agreed to issue ANAHOP
21,428,571 shares of common stock and to issue warrants to designees of ANAHOP
as follows:
- A warrant to purchase up to 30,000,000 shares, with an
exercise price of $0.15 per share, exercisable upon the date
of issuance.
- A warrant to purchase up to 10,000,000 shares, with an
exercise price of $0.25 per share, exercisable upon the date
of issuance.
- A warrant to purchase up to 23,000,000 shares, with an
exercise price of $0.50 per share, exercisable upon the date
of issuance.
The Warrants are exercisable as of the date of issuance and through and
including the later of the fifth anniversary of the date of the warrant or the
fifth anniversary of the date on which the Company's common stock is first
listed for trading on either the Nasdaq Small Cap Market, the Nasdaq Capital
Market, the American Stock Exchange, or the New York Stock Exchange.
The Company granted piggyback registration rights for the shares underlying the
warrants, effective only after the warrants have been exercised. The Company did
not grant any registration rights with respect to the common shares issued or to
be issued in connection with the June 2006 private offering.
17
Lockdown Agreements - On July 20, 2006, the Company entered into a lockdown
agreement with ANAHOP, (the "ANAHOP Agreement"), Albert Hagar, and Fadi Nora,
and related to the May and June private placement transactions discussed above.
Albert Hagar and Fadi Nora were the designees to whom ANAHOP assigned the
30,000,000 warrants. Pursuant to the ANAHOP Agreement, Hagar and Nora agreed
that they would not exercise any of the warrants they received in connection
with the May or June private offerings until the Company had taken the steps
necessary to increase its authorized capital. Additionally, ANAHOP agreed that
it would not make the Second Tranche Payment to purchase the Second Tranche
Shares until the Company had taken the steps necessary to increase its
authorized capital. As such, under the ANAHOP Agreement, the Company was able to
lock down 21,428,571 shares (the "Second Tranche Shares"), and 93,000,000 shares
underlying the warrants issued to Hagar and Nora in the May and June private
placements.
As noted above, on April 30, 2007, the Company received shareholder approval to
increase its authorized capital to include 1,500,000,000 shares of common stock.
The increase in the authorized capital provided adequate coverage for the
conversion of the ANAHOP warrants and therefore negated the need for the
lockdown agreement.
Increase in Authorized Shares - On April 30, 2007, the Company held a special
meeting of shareholders to vote on increasing the authorized capital of the
Company to include 1,500,000,000 shares of common stock and to effectuate a 1.2
shares for one share forward stock split. These proposals were approved by the
shareholders.
Ticker symbol change - In conjunction with the forward stock split, on May 25,
2007, Nasdaq also notified the Company that the Company's new ticker symbol as
of the opening of business on May 29, 2007, would be CIRC.
NOTE 11 - STOCK OPTIONS AND WARRANTS
A summary of the stock option activity for the nine months ended September 30,
2007, is as follows:
Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding at December 31, 2006 10,750,500 $ 0.03
Granted 18,000,000 $ 0.02
Exercised -
Forfeited 7,500,000 $ 0.03
----------
Outstanding at September 30, 2007 21,250,500 $ 0.02
==========
Exercisable at September 30, 2007 21,250,500 $ 0.02
==========
|
Pursuant to an employment agreement, dated May 25, 2006, Mr. Nassif, of DMG, was
granted options to purchase 2,500,000 shares of the Company's stock at an option
price of $0.05 per share. Those options were to vest over a five year period.
Since that time the Company and Mr. Nassif have agreed to terminate the
employment agreement at which point the options granted under the agreement are
forfeited by Mr. Nassif.
18
Pursuant to an amended employment agreement, dated January 25, 2007, Mr. Saliba,
was granted options to purchase 4,000,000 shares of the Company's stock at an
option price of $0.016 per share. Those options were to vest over a five year
period. Since that time the Company and Mr. Saliba have agreed to terminate the
employment agreement at which point the options granted under the agreement are
forfeited by Mr. Saliba.
NOTE 12 - SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." The
Company has three reportable segments: electronics assembly, contract
manufacturing, and marketing and media. The electronics assembly segment
manufactures and assembles circuit boards and electronic component cables, along
with the contract manufacturing segment which manufactures, either directly or
through foreign subcontractors, certain products are under an exclusive
manufacturing agreement. The marketing and media segment includes sales from
infomercials and talent agency fees. The Company evaluates performance of each
segment based on earnings or loss from operations. Selected segment information
is as follows:
Electronics Contract Marketing
Assembly Manufacturing and Media Total
--------------------------------------------------------------------------------
September 30, 2007
Sales to external
customers $ 2,538,464 $ 2,461,879 $ 3,699,660 $ 8,700,004
Intersegment sales - - - -
Segment income (loss) (3,706,882) (631,371) 874,743 (3,463,510)
Segment assets 8,180,962 206,525 3,790,842 12,178,329
Depreciation and
amortization 307,560 186,626 696 494,882
September 30, 2006
Sales to external
customers $ 1,962,065 $ 4,212,188 $ 832,865 $ 7,007,118
Intersegment sales 12,499 - - 12,499
Segment loss (3,301,127) (504,695) (106,785) (3,912,607)
Segment assets 9,229,841 3,586,199 103,088 12,919,128
Depreciation and
amortization 135,309 99,321 - 234,630
September 30,
--------------------------------
Sales 2007 2006
------------------------------------------------------------------------------
Total sales for reportable segments $ 8,700,004 $ 7,019,617
Elimination of intersegment sales - (12,499)
------------------------------------------------------------------------------
Consolidated net sales $ 8,700,004 $ 7,007,118
------------------------------------------------------------------------------
September 30,
--------------------------------
Total Assets 2007 2006
------------------------------------------------------------------------------
Total assets for reportable segments $ 12,178,329 $ 12,919,128
Adjustment for intersegment amounts - -
------------------------------------------------------------------------------
Consolidated total assets $ 12,178,329 $ 12,919,128
------------------------------------------------------------------------------
|
19
NOTE 13 - SUBSEQUENT EVENTS
Yorkville
In October 2007, Yorkville converted $160,000 of its convertible debenture into
31,189,084 shares of the Company's common stock at a conversion rate of $0.005
per share, which was the lower of $0.10 or 100% of the lowest closing bid price
of the Company's common stock over the 20 trading days preceding the conversion.
In November 2007, Yorkville converted $245,000 of its convertible debenture into
47,758,285 shares of the Company's common stock at a conversion rate of $0.005
per share, which was the lower of $0.10 or 100% of the lowest closing bid price
of the Company's common stock over the 20 trading days preceding the conversion.
As of the date of this Report, the remaining principal balance was $1,180,000.
As of the date of this report and subsequent to September 30, 2007, additional
investors contributed $1,550,000, for approximately 12% interest in AfterBev,
which decreased CirTran Beverage Corp's ownership interest in AfterBev to
approximately 42%.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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-KSB for the year ended December 31, 2006.
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs 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. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
We have several new programs in development. These programs represent a new
emphasis into consumer products contract manufacturing and marketing. Management
believes that these new programs have the potential to carry higher profit
margins than electronic manufacturing and as a result, through our subsidiaries,
we are investing substantial resources into developing these activities.
We are organized into five principal divisions: CirTran USA, CirTran Asia,
CirTran Products, CirTran Beverage Corp., and CirTran Media (fka Diverse Media
Group) which is responsible for marketing new programs.
CirTran Asia
During 2004, we established a new division, CirTran-Asia, Inc, which has
contributed to a large portion of the revenues since that time. This division is
an Asian-based, wholly owned subsidiary of CirTran Corporation and provides a
myriad of manufacturing services to the direct response and retail consumer
markets. Our experience and expertise in manufacturing enables CirTran-Asia to
enter a project at any phase whether it be engineering and design, product
development and prototyping, tooling, and high-volume manufacturing. We
anticipate that CirTran-Asia will pursue manufacturing relationships beyond
printed circuit board assemblies, cables, harnesses and injection molding
systems by establishing complete "box-build" or "turn-key" relationships in the
electronics, retail, and direct consumer markets. This strategic move into the
Asian market has helped to elevate CirTran to an international contract
manufacturer status for multiple products in a wide variety of industries, and
has allowed us to target large-scale contracts. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines.
CirTran Asia has established a satellite office in Shen Zhen, China, and
retained Mr. Charles Ho to lead this division.
21
CirTran Products
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. Consumer products built
by our CirTran Asia subsidiary, as well as other products, are available for
retail sale from this subsidiary.
As was recently announced, Trevor Saliba is no longer with CirTran Corporation;
this, however, does not change the original intent of CirTran Products which is
temporarily being run from the Salt Lake City headquarters. The Los Angeles
office will remain open and is currently being staffed by an office manager, who
will oversee operations, and a support person, who will attend to the daily
functions of the Los Angeles office.
CirTran Products also intends to pursue contract manufacturing relationships in
the consumer products industry which can include product lines including:
home/garden, kitchen, health/beauty, toys, and licensed merchandise and apparel
for film, television, sports and other entertainment properties. Licensed
merchandise and apparel can be defined as any item that bears the image of,
likeness, or logo of a product sold or advertised to the public. Licensed
merchandise and apparel are sold and marketed in the entertainment (film and
television) and sports (sports franchises) industries. As of November 11, 2007,
we had concentrated our product development efforts into three areas, home and
kitchen appliances, beauty products and licensed merchandise. We anticipate that
these products will be introduced into the market under one uniform brand name
or under separate trademarked names owned by CirTran Products. As of the date of
this Report, we are in the testing phase for some programs and are preparing to
launch various programs where CirTran Media Corporation will operate as the
marketer, campaign manager and distributor in various product categories
including beauty products, entertainment products, software products, and
fitness and consumer products.
As of the date of this Report, we are no longer under contract with the direct
marketing company that was selling the TCP units domestically. However, we are
currently under contract with an international direct marketing company to
supply them with the True Ceramic Pro flat irons ("TCP"). As a result of
terminating the domestic sales contract, CirTran Products has begun a direct TV
marketing program whereby all of the direct marketing functions have been
brought in-house and a direct TV marketing program currently being implemented.
The direct TV marketing program is in the test phase and a determination on
taking the program to the roll-out phase it currently being evaluated. Since
June 6, 2006, the date of the ABS bankruptcy settlement (see discussion below on
page 28) and through the date of this report, CTP generated sales of
approximately $2,299,000. CTP continues to generate sales of TCP units and other
ancillary hair care products to the direct marketing company, and the program is
expected to continue being profitable during 2007. The project has recently seen
great success in a new international territory.
CirTran Media Corp. (fka Diverse Media Group)
On March 21, 2006, we announced that we had formed a new subsidiary, Diverse
Media Group ("DMG"), to provide end-to-end services to the direct response and
entertainment industries. The new division will provide product marketing,
production, media funding and merchandise manufacturing services. Forming this
new division was a necessary step to maximize product manufacturing
opportunities for CirTran's proprietary products and to provide marketing
services for individual entrepreneurs and inventors. This division is
headquartered in CirTran's Los Angeles (Century City) offices and was previously
headed by Mr. Saliba. As of the date of this Report, we were developing
proprietary programs to be launched in the product marketing production services
and media funding divisions and we were preparing to launch various programs
22
where DMG will operate as the marketer, campaign manager and/or distributor in
various product categories including beauty products, entertainment products,
software products, and fitness and consumer products. This division currently
reports to the president of our company.
On May 26, 2006, DMG entered into an assignment and exclusive services agreement
with Diverse Talent Group, Inc., a California corporation, ("DT"). The Services
Agreement has a 5 year term and was made effective as of April 1, 2006. Pursuant
to the Services Agreement, DMG and DT entered into an exclusive operating
relationship whereby DMG agreed to outsource its talent agency operations to DT
and to provide financing to DT to assist in DT's growth. Under the Services
Agreement, DMG and DT created a relationship whereby DT would operate
exclusively under the DMG business structure. The project did not generate the
type of synergy that was anticipated, and it was concluded that it would be in
the best interest of the Company to terminate the relationship with DT.
On November 28, 2006, we announced that Diverse Media Group had signed a
two-year lease on a 1,150 sq. ft. facility in Bentonville, Arkansas, in close
proximity to Wal-Mart's world headquarter. The office, which is managed by Mr.
Oliver Mulcahy, is strategically located to help create and manage an ongoing
relationship.
On March 29, 2007, CirTran entered into a term sheet agreement with DT, which
was followed up with a definitive Settlement and Release Agreement, Investor
Registration Agreement, and an Escrow Agreement all executed on May 15, 2007.
These documents contain virtually the same terms and conditions as were proposed
in the term sheet. As a result, we reached the following settlement with DT as
of March 30, 2007:
(i) The parties agreed to terminate the original agreements and the
Company assigned back to DT all talent contracts and the name
"Diverse Media Group". DT will cause Diverse Media Group, Inc., to
issue 9,000,000 shares of its common stock, which are currently
traded on the pink sheets, to an escrow account.. As of the date
of this report, we were advised that the 9,000,000 shares had been
received by the escrow agent. All shares held in escrow will be
subject to the following instructions issued to the escrow agent:
a The Company may sell shares under the terms and conditions
of Rule 144;
b The Company may sell shares pursuant to an effective
registration under the Securities Act of 1933;
c The Company and Diverse Media Group, Inc. may jointly
instruct the agent to disburse shares from escrow;
d In the case of bankruptcy the agent may distribute shares;
and
e On the aggregate amount of all net proceeds equals or
exceeds $2,000,000 the agent shall deliver any unsold
shares to Diverse Media Group, Inc.
(ii) Sale and registration of the shares are limited and are subject
to Diverse Media Group's first right of refusal on any proposed
stock sale.
The sale and registration limitations are as follows:
(a) No stock may be sold during the first year.
(b) The number of shares subject to registration rights is
limited based on the total number of outstanding shares of
Diverse Media Group, Inc. stock.
23
(c) Sales of stock in subsequent years are restricted based on
trading volume.
DMG will continue to develop relationships with talent agencies as they have
done since inception. As part of the settlement, CirTran must change the name of
our DMG subsidiary and discontinue the use of the name "Diverse". Since the
execution of the settlement and release agreement, CirTran has filed to amend
the name of the subsidiary to CirTran Media Corp. ("CTM"). CTM will continue to
produce infomercials for the direct marketing industry and for product marketing
campaigns. CTM will also provide product marketing, production, media funding
and merchandising services to the direct response and entertainment industries
in concert with the original objectives of formation.
RCG Group
On October 3, 2006, we announced that we had engaged the services of The RCG
Group ("RCG") to assist in certain financial relations/corporate communications
and other consulting services. RCG is being retained to specifically assist us
in developing and executing an effective financial relations/corporate
communications strategy. The primary objective of such program will be to
position us to secure and then maintain a listing on the American Stock Exchange
or NASDAQ markets as soon as is reasonably possible. Additionally, RCG has been
retained to further assist us in its endeavor to secure meaningful public,
trading market sponsorship from professional investors as well as certain
members of the institutional investment community. During the second and third
quarters, RCG was not actively involved in this effort and it was agreed that we
would renew our relationship with RCG sometime in the future.
CirTran Online Corporation
During the first quarter of 2007, the Company formed CirTran Online Corporation
("CTO"), a new wholly owned marketing-driven subsidiary to sell products via the
internet, to offer training, software, marketing tools, web design and support
as well as other e-commerce related services to internet entrepreneurs, and to
telemarket directly to buyers of its products and services.
CirTran signed a three-year Assignment and Exclusive Services Agreement for its
subsidiary, CTO, with Global Marketing Alliance ("GMA"), founded by Mr. Sov Ouk,
and its affiliate companies, Online Profit Academy, LLC, and Online 2 Income,
LLC including Webprostore.com and Myitseasy.com. Based in the Salt Lake area,
the companies offer a wide range of services for E-commerce including eBay
sellers.
CirTran also signed a three-year Employment Agreement with Mr. Ouk to serve as
Senior Vice President of the new subsidiary.
GMA and its affiliates offer a range of complementary capabilities and products
for E-commerce, including seminars on how to buy and sell on the World Wide Web.
GMA is experienced in building E-commerce websites and currently host sites for
internet entrepreneurs.
CirTran Beverage Corp.
In May 2007, the Company formed CirTran Beverage Corp. ("CBC"), a wholly owned
subsidiary to arrange for the manufacture, marketing and distribution of the
Playboy-licensed energy drinks, flavored water beverages, and related
merchandise through various distribution channels, including traditional retail
channels as well as catalogs, internet, live shopping and other channels. Two
versions of the energy drink are currently being developed; a sugar-free and a
regular version, both of which will be the initial products introduced into the
market. The marketing and production phases, of which, are currently being
24
implemented. Through PlayBev's new executive director of marketing, Andrei
McQuillan, marketing has developed a program to support and stimulate sales of
the energy drink. The marketing program has made contacts with several
celebrities who have been photographed and publicized with the energy drinks.
Additionally, a college bus tour has been planed to tour the Southwest United
States in August 2007, and then tour the Southeast Football Conference as part
of a promotional effort which targets the main age groups in our demographics.
An ad was placed in the October 2007 issue of Playboy magazine, which is a
college-oriented edition of the magazine and will re-enforce our presence in the
college market. As a part of the marketing plan, we are also developing
collateral materials used to support the product in the college market place.
The production phase of the project is under the control of a team, directed by
Shaher Hawatmeh, Chief Operating Officer of CirTran Corporation. This team has
developed, and tested an energy drink formula, and the sample products are being
used in the preliminary stages of the project. A focus group taste test was
recently conducted by Alder-Weiner Research, and the results, although they are
preliminary, were very positive for the regular energy drink and while the
indicators were not as strong for the sugar-free energy drink, they were
nevertheless positive in comparison to other sugar-free energy drinks. The
distribution group is conducting negotiations with several potential production
facilities, and will be making final determinations pertaining to the selection
of a production network. While distribution is awaiting a final product, the
main focus is to develop a plan to create a national distribution network. The
two energy drinks are being currently distributed and tested in New Hampshire,
Maine, and southern California. The initial results have been promising.
CirTran USA
We have three principal business segments: electronics assembly and manufacture;
contract manufacturing; and marketing and media.
Electronics Assembly and Manufacture
For the nine months ended September 30, 2007, approximately 30% of our revenues
were generated by our low-volume electronics assembly activities as compared to
30% of revenues for the same period in 2006, which consist primarily of the
placement and attachment of electronic and mechanical components on printed
circuit boards and flexible (i.e., bendable) cables. Although the percentages of
sales were identical, we generated $576,000 more in sales in the third quarter
of 2007 when compared to the same period in 2006. The percentage is not
reflective of the dollar increase because of a $2,867,000 increase in sales
generated by our marketing and media segment. We also assemble higher-level
sub-systems and systems incorporating printed circuit boards and complex
electromechanical components that convert electrical energy to mechanical
energy, in some cases manufacturing and packaging products for shipment directly
to our customers' distributors. In addition, we provide other manufacturing
services, including refurbishment and remanufacturing. We manufacture on a
turnkey basis, directly procuring any of the components necessary for production
where the OEM customer does not supply all of the components that are required
for assembly. We also provide design and new product introduction services,
just-in-time delivery on low to medium volume turnkey and consignment projects
and projects that require more value-added services, and price-sensitive,
high-volume production. Our goal is to offer customers significant competitive
advantages that can be obtained from manufacturing outsourcing, such as access
to advanced manufacturing technologies, shortened product time-to-market,
reduced cost of production, more effective asset utilization, improved inventory
management and increased purchasing power.
25
Contract Manufacturing
Through our subsidiary, CirTran-Asia, we design, engineer, manufacture and
supply products in the electronics, consumer products and general merchandise
industries for various marketers, distributors and national retailers. This new
division is our Asian-based, wholly owned subsidiary, and provides manufacturing
services to the direct response and retail consumer markets. Our experience and
expertise in manufacturing enables CirTran-Asia to enter a project at any phase:
engineering and design; product development and prototyping; tooling; and
high-volume manufacturing. This strategic move into the Asian market has helped
to elevate CirTran to an international contract manufacturer status for multiple
products in a wide variety of industries, and has, in short order, allowed us to
target large-scale contracts.
As noted above, CirTran has established a dedicated satellite office for
CirTran-Asia, and has retained Mr. Charles Ho to lead the division. Having
proven the value and reliability of its core products, CirTran Corporation has
chosen to expand into previously untapped product lines. CirTran-Asia intends to
pursue manufacturing relationships beyond printed circuit board assemblies,
cables, harnesses and injection molding systems by establishing complete
"box-build" or "turn-key" relationships in the electronics, retail, and direct
consumer markets.
In 2006 and during the second quarter of 2007, we developed several items, in
the fitness and exercise products category and in the household and kitchen
appliance, and in the health and beauty aids markets, which are being
manufactured in China through our subsidiary CirTran Asia. Sales of theses
products contributed approximately 60% of revenues reported in 2006 compared to
28% in the third quarter 2007. The decrease is the result of test marketing the
TCP units which are currently being sold in-house. The TCP units had previously
been sold at wholesale, but we are now selling the TCP products in-house to the
direct-to-TV market. The offshore contract manufacturing will continue to be an
area of emphasis.
Marketing and Media
We are also developing a new relationship with Global Marketing Alliance, LLC
("GMA") an internet sales and telemarketing company. In 2007, we signed a
three-year Assignment and Exclusive Services Agreement with GMA and a three-year
Employment Agreement with GMA founder Mr. Sov Ouk, to serve as Senior Vice
President of the new venture. We anticipate that by expanding our exposure to
the market place through internet and telemarketing capabilities we will enhance
our marketing mix with a low cost alternative to our other marketing channels
and develop market share.
Main Business Areas
We have three main business areas of focus. They are: fitness and exercise
products; household and kitchen appliances and health and beauty aids; and
electronics products and manufacturing.
Fitness and Exercise Products
We began manufacturing fitness products in May 2004. To date, we have
manufactured and sold over 12 different fitness products. We manufacture all of
our fitness products through our CirTran Asia operation.
In early June 2004, we entered into an exclusive manufacturing agreement with
certain Developers, including Charles Ho, the President of CirTran-Asia. Under
the terms of the agreement, we, through our wholly-owned subsidiary
CirTran-Asia, have the exclusive right to manufacture certain products developed
by the Developers or any of their affiliates. Pursuant to the agreement, we
could enter into addendum agreements with the developers with respect to
particular products to be produced and manufactured. The agreement was to be for
an initial term of 36 months, and may be continued after that on a
month-to-month basis unless terminated by either party by providing written
notice.
26
On September 10, 2004, we announced that CirTran-Asia had been awarded the
rights to manufacture the AbRoller, another type of an abdominal fitness
machine, for Tristar Products, under an exclusive manufacturing agreement. Since
this announcement, and through the date of this Report, CirTran-Asia had
manufactured and shipped units, and received payments of approximately
$2,800,000.
On April 28, 2005, CirTran-Asia announced that it has been awarded a contract
(the "April 2005 Agreement") from Guthy - Renker Corporation ("GRC") to be the
exclusive manufacturer of a new fitness machine (the "Fitness Product") for the
sold-on-TV direct response industry. Pursuant to the April 2005 Agreement, GRC
agreed to purchase all of its requirements of the Fitness Product during the
term of the April 2005 Agreement, which is defined as running from the signing
of the agreement through the time when the Fitness Product is not being sold in
quantity. Since these announcements, CirTran-Asia has manufactured and shipped
orders and has received $1,400,000 as payment for such shipments. A dispute
arose concerning the terms of the contract, which is now the subject of a legal
proceeding. The product was not manufactured during this quarter, and it is
unlikely that it will be until the resolution of the legal proceeding with GRC,
described in the section "Legal Proceedings."
New Fitness Products
On November 30, 2006, we announced that we signed an exclusive manufacturing
agreement to produce a new fitness product, the CorEvolution(TM), in China. The
three-year agreement involves the custom manufacturing using the capabilities of
our wholly owned subsidiary, CirTran Asia. The new customer has committed to
minimum orders, amounting to $1.2 million in revenues for the first year, $1.8
million for the second year and $2.4 million for the third year of the five-year
contract. The new fitness product is uniquely designed to strengthen and
rehabilitate the lower back and adjacent areas of human body. Since this
announcement, and through the date of this Report, CirTran-Asia had manufactured
and shipped units, and received payments of approximately $1,037,000.
On June 8, 2007, we announced that CTM, signed an exclusive agreement with Full
Moon Enterprises of Nevada to license a new product for the sold-on-TV market. A
patent application for "The Ball Blaster(TM)" has been filed by the inventor
with the U.S. Patent Office, and CTM has the right to make modifications and
improvements in the product, now and in the future. CTM has the worldwide
marketing and distribution rights via all marketing channels. CTM will pay a
royalty to the licensor for each unit sold. The agreement shall terminate five
years after the date of the agreement, although the agreement shall
automatically renew for up to two renewal terms of five years each, unless
either party gives 12 months' written notice of termination.
We have started the marketing process of identifying and meeting with potential
celebrity spokespersons who would demonstrate the Ball Blaster in TV
infomercials.
Household and Kitchen Appliances and Health and Beauty Aids
We began manufacturing household and kitchen appliance products in January 2005.
To date, we have manufactured and sold five different household and kitchen
appliance products. We manufacture a majority of our household and kitchen
appliance products through our CirTran Asia operation.
27
The household and kitchen appliance and health and beauty aids products include
the following:
On January 24, 2005, we announced a contract with a New York customer where we
became an exclusive manufacturer of the Hot Dog Express, which would be sold
nationwide on TV, primarily through infomercials. The contract runs through
2007, with minimum revenues to CirTran of $1.8 million per year, or $5.4 million
over three years. Since these announcements, and through the date of this
Report, CirTran Asia had manufactured and shipped units, and received payments
of approximately $1,850,000. As of the date of this Report, we were in the
process of exercising our rights under the contract which includes terminating
the relationship due to customer's failure to meet the minimum purchase
requirements during 2006. As a result, we are planning on marketing the product
through our retail channels.
ABS Products and ABS Bankruptcy Proceedings - On January 19, 2005, we signed an
Exclusive Manufacturing Agreement with Advanced Beauty Solutions L.L.C. ("ABS"),
a company that manufactured a hair product in California. In early October 2005,
we were notified that ABS had defaulted on its obligation to its financing
company. We stopped shipping under credit and exercised our rights permitted by
the agreements.
On July 7, 2005, we signed another Exclusive Manufacturing Agreement with ABS,
relating to the manufacture of a hair dryer product in California. We had
already begun shipment on previous contracts and were projecting to begin early
in 2006.
In October 2005, following the notice of ABS's default, we terminated the
agreement for both products based on the default. In January 2006, following
efforts to resolve the disputes with ABS, we filed a lawsuit against ABS,
claiming breach of contract, interference with contractual relationships, unjust
enrichment, and fraud, and seeking damages from ABS.
With respect to the TCP, through October 2005, we had shipped directly to ABS
approximately $4,746,000 worth of the product, and we had received from ABS or
its finance company a total amount of approximately $788,000. In November 2005,
we repossessed from ABS approximately $2,341,000 worth of the products in the
United States, as we were permitted to do pursuant to the agreement.
Since November 2005, we have been pursuing our rights under the agreement and
have been offering the TCP for sale directly to ABS's customers. In doing so, we
sold to ABS's international customers directly approximately $430,000 worth of
the TCP. The shipments have all been paid in full. These products shipped were
not part of the repossessed inventory.
On January 24, 2006, ABS filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Central District of California, San Fernando Valley Division (the
"Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
the settlement was further modified. The modifications to the proposed
28
settlement were read into the Bankruptcy Court's record at the Hearing on the
Settlement Motion and the March 24, 2006 hearing on the Sale Motion ("Proposed
Modifications"). Written notice of the Proposed Modifications was provided to
creditors and parties in interests on March 27, 2006, and the Declaration of
James C. Bastian, Jr., attesting that no objections to the Proposed
Modifications have been received by ABS, was filed with the Bankruptcy Court.
On June 6, 2006, we entered into an Asset Purchase Agreement with ABS (the
"Asset Purchase Agreement"), subject to the ABS Bankruptcy Court's approval. On
June 7, 2006, the ABS Bankruptcy Court entered orders approving the Asset
Purchase Agreement and granting the Sale Motion, and approving the settlement
and compromise of certain disputed claims against ABS. Pursuant to the
settlement of ABS's bankruptcy proceedings and the Asset Purchase Agreement, we
have an allowed claim against the ABS's estate in the amount of $2,350,000, of
which $750,000 was credited to the purchase of substantially all of ABS's
assets. Under the settlement, we shall be allowed to participate as a general
unsecured creditor of ABS's estate in the amount of $1,600,000 on a pari passu
basis with the $2,100,000 general unsecured claim of certain insiders of ABS and
subject to the prior payment of certain secured, priority, and non-insider
claims in the amount of approximately $1,507,011.
Under the Asset Purchase Agreement, we agreed to purchase substantially all of
ABS's assets ("the Assets") in exchange for:
(i) a cash payment in the amount of $1,125,000;
(ii) a reduction of CirTran's allowed claim in the Bankruptcy Case
by $750,000;
(iii) the assumption of any assumed liabilities; and
(iv) the obligation to pay ABS a royalty equal to $3.00 per True
Ceramic Pro flat iron unit sold by ABS (the "Royalty
Obligation").
The Assets include: personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings. Under the Asset Purchase Agreement, the Royalty Obligation is
capped at $4,135,000. To the extent the amounts paid to ABS on account of the
Royalty Obligation equal less than $435,000 on the 2 year anniversary of the
Closing, then, within 30 days of such anniversary, we agreed to pay ABS an
amount equal to $435,000 less the royalty payments made to date. As part of the
settlement, we agreed to exchange general releases with, among others, ABS,
Jason Dodo (the manager of ABS), Inventory Capital Group ("ICG"), and Media
Funding Corporation ("MFC"). The settlement also resolved a related dispute with
ICG in which ICG assigned $65,000 of its secured claim against ABS to us.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
(a) The Royalty Obligation payments will be made exclusively to
ICG and MFC (collectively, the "Secured Parties") until (i)
the Secured Parties have been paid in full on account of their
$1,243,208 secured claim, or (ii) the Secured Parties have
been paid $100,000 in payments under the Royalty Obligation,
whichever comes first.
(b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an
individual with an allowed claim (in the amount of $20,000).
(c) Following the payments to the Secured Parties and others as
set forth immediately above, the remaining Royalty Obligation
payments will be used for distribution to allowed general
unsecured claims not including those of the Company and
certain insiders with unpaid notes (the "Insider
Noteholders").
29
(d) Following payments as set forth in (a), (b), and (c) above,
the Royalty Obligation payments will be shared pro rata among
the Insider Noteholders (with a total allowed aggregate claim
of $2,100,000), and the Company (with a general unsecured
claim in the amount of $1,600,000), until paid in full.
The total claims against ABS's estate that must be paid before the Company
begins to share in the Royalty Obligation payments is $435,000. We had paid
$222,906 of the $435,000 obligation through September 30, 2007.
In March 2007, ABS commenced litigation against us alleging claims for breach of
contract, unjust enrichment and seeking an accounting and appointment of a
receiver in connection with the above described settlement agreement. ABS
generally alleged that we had defaulted on certain payments due under such
settlement agreement. We have been in negotiations with ABS to settle these
claims. This case was subsequently dismissed pursuant to a stipulation between
the parties. Additional information can be found in the section titled "Legal
Proceedings."
As of the date of this Report, we were no longer under contract with the direct
marketing company that was selling the TCP units domestically. However, we are
currently under contract with an international direct marketing company to
supply them with the True Ceramic Pro flat irons ("TCP"). As a result of
terminating the domestic sales contract, CirTran Products has begun a direct
sold-on TV marketing program whereby all of the direct marketing functions have
been brought in-house and a direct TV marketing program is currently being
implemented. The direct TV marketing program is in the test phase and a
determination on taking the program to the roll-out phase is currently being
evaluated. Since June 6, 2006, the date of the ABS bankruptcy settlement (see
discussion below on pages 49 and 50) and through the date of this report, CTP
generated sales of approximately $2,905,000. Sales of TCP units and other
ancillary hair care products are expected to become profitable during 2007.
With respect to the hair dryers, as of the date of this report, we had included
the hair dryers as a sales incentive to the direct marketing sold-on TV offer of
the TCP units.
Hinge Helper
On January 9, 2006, we issued a press release which referred, in the title, to
the Agreement as a "$22 Million Exclusive Manufacturing Agreement." The dollar
amount referenced relates to the potential amount of income or revenue which we
may receive over the anticipated life of the Agreement.
We announced on January 9, 2006, that Arrowhead Industries, Inc., of Windermere,
Florida, had awarded us an exclusive contract to manufacture its patented Hinge
Helper (TM) do-it-yourself utility tool for the home. The Hinge Helper will be
manufactured by CirTran Asia, the Company's China-based subsidiary. The
exclusive manufacturing contract for the product is for three years.
The Hinge Helper is a unique hand tool designed and developed for use by
household customers as well as tradesmen. Recognized by the U.S. Patent Office
(#6,308,390 B1), its trademark and patent are owned by and registered to
Arrowhead. The specific advantage of the Hinge Helper is its ease-of-use and
simplistic design. It can be applied to any residential hinge on wood, metal or
composite doors, and is being manufactured with highly-durable materials,
enabling it to carry a lifetime guarantee.
The contract (the "Arrowhead Agreement") is for three years, and Arrowhead
agreed to purchase a minimum of ten million units of the Product (the "Minimum
Quantity"), subject to the terms and conditions of the Agreement. Arrowhead and
CirTran have agreed on the Minimum Quantity in good faith, although the parties
30
acknowledged that in certain circumstances described in the agreement, the
Arrowhead Agreement may be terminated prior to the sale of the entire Minimum
Quantity. Arrowhead agreed to submit purchase orders for the Hinge Helper (TM)
from time to time in accordance with the terms of the Arrowhead Agreement.
Arrowhead agreed to pay CirTran for the Hinge Helper (TM) purchased at the
prices ranging from $2.95 to $1.90 per unit, depending on the cumulative number
of units of the Hinge Helper (TM) which have been purchased by Arrowhead.
Arrowhead will also be entitled to a rebate equal to 10% of the purchase price
paid for the Hinge Helper (TM) in the previous tier. The tiers are as follows:
Tier 1: 1,500,000 units or less, priced at $2.95 per unit
Tier 2: 1,500,001 to 3,000,000 units, priced at $2.35 per unit
Tier 3: 3,000,001 to 5,000,000 units, priced at $2.10 per unit
Tier 4: 5,000,001 to 10,000,000 units, priced at $1.90 per unit
Tier 5: More than 10,000,000 units, price to be determined
(For example, if the price is not adjusted, once Arrowhead enters Tier 3 it
would be entitled to a rebate of $325,000 (10% of 1,500,000 x $2.35) for product
purchased in tier 2.) Rebates will be payable only in the form of a credit memo
against future purchases. Rebate credit memos will not be paid in cash and may
not be applied against outstanding balances. We will calculate eligibility for
the Rebate as soon as practicable following the end of the month in which a new
tier is entered.
We have produced hand made samples, which were sent to Arrowhead. As of the date
of this report, the product samples were approved. Arrowhead had released, and
we have shipped, 1,500 units to test media. Arrowhead has filmed a Hinge Helper
infomercial for TV and tested the show in mid 2006, but results did not justify
the media spending and the roll out.
In February 2007, Arrowhead signed a licensing agreement with CirTran and DMG to
manufacture and market the product via internet, direct marketing and through
retailers. DMG will pay a royalty of 11% to Arrowhead based on a percentage of
sales in 2007. The percentage of unit sales increases by 1% per year until it
reaches 15% in the year 2011. The new contract was executed in February 2007 and
expires in 2011. As of the date of this Report, the Hinge Helper project had not
generated significant revenues. The item has been presented to buyers at several
major retailers, such as; Lowe's, Wal-Mart, Sams Club, True Value and Home Depot
and is an item of interest. The sales representative, in our Bentonville office,
will continue to promote and develop the item for inclusion in future sales
modules to the retailers. We expect to have the product at retailers some time
during the fourth quarter of 2007.
On October 11, 2006, CirTran announced that DMG had signed a retail distribution
and marketing agreement with Wines and Wines, a Miami-based distributor of fine
wines and spirits from around the world. Under the terms of the agreement, DMG
would use its best efforts to market and distribute all Wines and Wines products
exclusively into various distributors and retailers such as Southern Wine and
Spirits, Trader Joe's, Beverages and More, Wal-Mart, Sam's Club, Costco, Young's
Markets and Vendome nationally, as well as restaurants, liquor stores and
entertainment venues exclusively throughout California. As of the date of this
Report, the product had been presented to retailers and resulted in high
interest. It was decided that the labeling needed to be changed by Wines and
Wines. Once the new labeling is completed and accepted by retailers, we will be
able to place the product on retailer's shelves. It is anticipated that the
project will be to market in sometime in early 2008.
On November 7, 2006, CirTran announced that DMG signed an exclusive contract to
market and distribute the Solar Style line of solar chargers to major retailers
in the U.S. and abroad. Solar Style offers a diverse line of products with
31
multiple connectors, all based on the latest advancements in PV Solar charging
to convert sunlight into usable energy for personal electronic devices. Solar
Style also includes, or offers as options, AC car battery chargers with many of
its products. As of the date of this report we were working with the client on
developing the product and placing the product in retail channels which include
Wal-Mart and Radio Shack stores.
On November 15, 2006, CirTran announced that DMG signed an exclusive licensing,
manufacturing and marketing agreement with Beautiful Eyes(R), Inc., of Malibu,
California, for a new "hot lashes" product which it will bring to the sold-on-TV
and retail marketplaces. Under the terms of the agreement, DMG will have access
to the patented technology developed by Beautiful Eyes and its founder, former
model Alexandra Roberts, and the designs, technical drawings, manufacturing
specifications and know-how, trade secrets and other proprietary information and
technology. DMG will develop a new product for sale through TV infomercials and
at mass retail, which it will market through its personal and healthcare
products division. As of the date of this Report, we were working with the
client on developing the product and had submitted samples for their approval.
New Household and Kitchen Appliances and Health and Beauty Aids
On February 5, 2007, CirTran announced that we had completed taping a TV
infomercial with Evander Holyfield for the "The Real Deal Grill(TM)," a new
electric indoor/outdoor cooking appliance it will manufacture and market
carrying the name and endorsement of the former four-time former world
heavyweight champion. The Real Deal Grill includes a deluxe stand and multiple
interchangeable cooking surfaces, with numerous never before seen add-on items
making it the most versatile "must-have" cooking appliance for any occasion from
camping in the mountains, tailgating at a game, or grilling at home. Full
national testing of the video has been rescheduled for early September 2007 As
of the date of this Report the final edited version of the infomercial and the
web site have been completed. A national airing as a test run of the infomercial
took place in early October and the company decided that additional changes are
needed to make the marketing more profitable. The company is currently
manufacturing additional inventory in China and anticipate to be back on air
early December 2007.
On February 13, 2007, CirTran announced that we had signed an agreement to
manufacture and market a new patent pending portable luggage handle and scale
ideal for travelers weighing a suitcase or package. As of the date of this
Report, we were working with the client on developing a final version of the
product and are expecting to submit samples for final approval in May 2007. As
of the date of this Report, final samples had been submitted to the client and
we were awaiting approvals. Upon approval, we anticipate that the product will
be marketed to large retailers such as Wal-Mart, Sams Club, and Office Depot.
On March 12, 2007, CirTran announced that we had signed a contract with Easy
Life Products Corporation (ELP) of Venice, California, to manufacture and market
a new beauty product. The yet-to-be named new product is a pencil compact
combined with a sharpener and pencil holder. Planned add-ons for the product
include pencil caps, blotting tissue dispenser, eyelash curler, pencil cap
organizer, an eyebrow brush and two-in-one tweezers, patents are now pending for
the pencil sharpener, eyelash curler and the tweezers with the U.S. Patent
Office. As of the date of this Report, we were working with the client on
developing the product and building final samples for approval.
32
Electronics Business and Lines of Products
On August 9, 2005, we announced that we completed the first phase of the
redevelopment of the next-generation SafetyNet(TM) RadioBridge(TM). Since this
announcement, we have completed working on the second phase of the contract. On
March 14, 2006, we announced that we had received a $250,000 order to build and
deliver the first production run of the next generation SafetyNet(TM)
RadioBridge(TM), which we redesigned at the request and on behalf of Aegis
Assessments, Inc., a Scottsdale, Arizona-based homeland security contractor. We
delivered the new, redesigned units and received payment in full from Aegis in
April 2006. Since these announcements, we have manufactured and shipped
additional orders and have received $100,000 as payment for such shipments.
During the second quarter of 2007, Racore Technology Corporation entered into an
agreement with Aegis Assessments, Inc., to perform additional engineering work
to add features for trunked radio systems used in larger metropolitan police and
fire departments. This program is currently in the early development stage
On November 14, 2006 we announced that Racore has received, processed and
shipped its first order from Lear Siegler Services, Inc., of San Antonio, and
that Lear Siegler has opened an account to facilitate ordering and processing
add-on business. A major provider of operations, maintenance, modification,
overhaul, systems integration, logistics support and training services to
government agencies and commercial customers in the U.S. and abroad, Lear
Siegler's first order was for 100 Racore 8192 100FX 100 Mbps Fiber Optic PCI
Fast Ethernet Network Adapters with ST Fiber Connectors.
During the first nine months of 2007, Racore Technology Corporation continued to
receive add on business for its fiber optic networking products from customers
such as Dresser-Rand, Navetechgps, and PCI.
Marketing and Media
On October 11, 2005, we announced that we were opening a satellite office in Los
Angeles in accordance with our internal expansion program. The 2,500 square foot
office is located on the 17th floor at 1875 Century Park East in the Century
City Entertainment and Business District of Los Angeles. The office serves as
headquarters for CirTran's business development and strategic planning
activities for our multiple business divisions including electronics, consumer
products, direct response/retail and "as sold-on-TV" products. We opened an
additional satellite office in New York in 2006 when we leased an executive
office suite which serves as a location in which to conduct meetings and
transact business on the east coast. Plans to open an office in London have been
temporarily put on hold until the markets in Europe develop. As was recently
announced, Trevor Saliba is no longer with CirTran Corporation. Although Mr.
Saliba was in charge of the Los Angeles office, his departure does not change
the original intent of our Los Angeles office which is temporarily being run
from the Salt Lake City headquarters. The Los Angeles office will remain open
and is currently being staffed by an office manager, who will oversee
operations, and a support person, who will attend to the daily functions of the
Los Angeles office. Our Los Angeles office lease has expired at the end of
October and we are currently negotiating another lease to another office in the
same area. We anticipate moving into our new office in early December 2007. In
July 2007 we relinquished the New York executive office space.
Effective Date of Forward Stock Split
On May 25, 2007, we issued a press release in which we announced that the
Company had been informed by Nasdaq that Company shareholders of record as of
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the close of business at 4 p.m. E.D.T. on May 10, 2007, would receive shares in
a previously-announced 1.2 shares for 1 share forward split on Tuesday, May
29th.
Nasdaq also notified the Company that the Company's new ticker symbol as of the
opening of business on May 29, 2007, would be CIRC.
Sale and Lease of Property
On May 4, 2007, PFE Properties LLC ("PFE"), a Utah limited liability company and
subsidiary of the Company, sold and leased back the land and building where the
Company presently has its headquarters and manufacturing facility.
The land and building were sold for $2,500,000. Of that amount, an aggregate of
$1,233,288 went to repay PFE's mortgage loan, taxes, fees, commissions, and
other expenses. The net amount to PFE was $1,266,712, which was paid at closing.
In connection with the sale, the Company entered into a Triple Net Lease (the
"Lease") whereby the Company agreed to lease the property from the buyer. The
term of the lease is for 10 years, with an option to extend the lease for up to
three additional five-year terms. The monthly lease payment will be $17,083.
The Company recorded a gain on the sale of the property of $810,736 which is
being deferred over the life of the lease, in accordance with Statement of
Financial Accounting Standards No. 13.
PlayBev Agreement
On May 25, 2007, CirTran Beverage Corp., a Utah corporation ("CBC"), entered
into an Exclusive Manufacturing, Marketing, and Distribution Agreement (the
"Agreement") with Play Beverages, LLC, a Delaware limited liability company
("PlayBev").
By way of background, Play Beverages, LLC, is engaged in the business of
marketing and distributing beverages, including energy drinks and flavored water
beverages, and related merchandise with the Playboy and rabbit head logo (the
"Products") pursuant to a license agreement ("License Agreement ") with Playboy
Enterprises, Inc. ("Playboy").
After Bev Group LLC ("AfterBev"), was created to acquire an interest and invest
in Play Beverages LLC. In doing so, CirTran Beverage Corp. received an 84%
membership interest in After Bev for the time involved in negotiating the
investment in PlayBev and for its influence and expertise in marketing and
manufacturing. PlayBev then signed a Membership Interest Purchase Agreement with
AfterBev whereby AfterBev purchased a 50% membership interest in PlayBev for
$750,000 and acquired a proxy of 1% of the voting rights of the Members in
AfterBev for providing a $2,000,000 credit facility to PlayBev. During the third
quarter, AfterBev received the additional 1% since they met their commitments
under the contract.
CirTran Beverage Corp. was formed by the Company to arrange for the manufacture,
marketing and distribution of the Products through various distribution
channels, including traditional retail channels as well as catalogs, internet,
live shopping and other channels.
Pursuant to the Agreement, PlayBev granted to CBC the exclusive rights during
the term of the Agreement to manufacture, market, distribute and sell the
Products through all distribution channels in the United States. CBC will be the
exclusive manufacturer of all the Products for PlayBev to be sold in the United
States. The initial Products under the Agreement will consist of an energy drink
and flavored or unflavored water beverage (the "Initial Products"). Additionally
under the Agreement, CBC shall be the exclusive master distributor for PlayBev
for all Products to be sold in the United States.
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For its manufacturing services rendered under the Agreement, CBC shall receive
from PlayBev an amount equal to 20% of the cost of goods sold ("COGS"), as
defined in the Agreement, for the Products sold. For its distribution services
rendered under the Agreement, CBC will receive from PlayBev 6% of the gross
sales ("Gross Sales"), as defined in the Agreement, of all Products in the
United States.
The initial term of the Agreement runs through December 31, 2010, and the
Agreement provides for automatic renewal for up to two renewal terms of three
years each unless PlayBev notifies CBC or CBC notifies PlayBev in writing of its
intent not to renew at least three, but not more than 12, months prior to the
termination of the initial term or the then-current renewal term.
During the term of the Agreement, both parties agreed that they will not sell or
distribute in the United States the Product or any products that are confusingly
or substantially similar or directly competitive to the Product other than as
set forth in the Agreement.
Recent Developments
Ball Blaster Product
On June 8, 2007, we announced that CTM signed an exclusive agreement with Full
Moon Enterprises of Nevada to license a new product for the sold-on-TV market. A
patent application for "The Ball Blaster(TM)" has been filed, by the inventor,
with the U.S. Patent Office, and CTM has the right to make modifications and
improvements in the product, now and in the future. CTM has the worldwide
marketing and distribution rights via all marketing channels. CTM will pay a
royalty to the licensor for each unit sold. The agreement shall terminate five
years after the date of the agreement, although the agreement shall
automatically renew for up to two renewal terms of five years each, unless
either party gives 12 months' written notice of termination.
We have started the marketing process of identifying and meeting with potential
celebrity spokespersons who would demonstrate the Ball Blaster in TV
infomercials.
Extension of Registration Deadlines
The Company subsequently entered into an Amendment Number 3 to Amended and
Restated Investor Registration Rights Agreement ("Amendment No. 2") with
Cornell, which amended an Amended and Restated Investor Registration Rights
Agreement dated as of August 23, 2006, as amended October 30, 2006, and January
12, 2007. The purpose of Amendment No. 3 was to extend the filing deadline for a
registration statement to be filed by the Company to register the resale by
Cornell of shares of the Company's common stock issuable to Cornell upon
conversion of a convertible debenture in the aggregate principal amount of
$1,500,000 (the "August Debenture") issued to Cornell in August 2006. The new
filing deadline for the registration statement is December 15, 2007.
The Company also entered into an Amendment Number 5 to Investor Registration
Rights Agreement ("Amendment No. 5") with Cornell, which amended an Investor
Registration Rights Agreement dated as of December 30, 2005, as most recently
amended January 12, 2007. The purpose of Amendment No. 5 was to extend the
filing deadline for a registration statement to be filed by the Company to
register the resale by Cornell of shares of the Company's common stock issuable
to Cornell upon conversion of a convertible debenture in the aggregate principal
amount of $1,500,000 (the "December Debenture") issued to Cornell in December
2005. The new filing deadline for the registration statement is December 15,
2007.
35
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Financial Statements contained
in our Annual Report on Form 10-KSB includes a summary of the significant
accounting policies and methods used in the preparation of our Financial
Statements. The following is a brief discussion of the more significant
accounting policies and methods used by us.
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Estimated amounts may differ under different
assumptions or conditions, and actual results could differ from the estimates.
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. We also recognize
revenue using the Bill and Hold method prescribed by SEC Staff Accounting
Bulletin 104. The "Bill and Hold" method provides for revenue recognition when a
customer order has been completed but has not shipped as an accommodation to the
customer. This method was adopted during the quarter ended September 30, 2006,
in response to orders placed by customers in the direct sales market only,
whereby the customer order is confirmed but delivery is delayed according to a
prescribed delivery schedule. Returns for defective items are repaired and sent
back to the customer. Historically, expenses experienced with such returns have
not been significant and have been recognized as incurred.
We signed an Assignment and Exclusive Services Agreement with GMA whereby
revenues and all concomitant performance obligations, have been assigned to CTO.
As such, revenues, expenses, assets and liabilities for all periods covered by
the effective date of the Agreement (as of January 1, 2007) have been recognized
at gross amounts by the company.
Pursuant to Statement of Financial Accounting Standard No. 13, Accounting for
Leases, we have reported the gain on the sale of the building as deferred
revenue to be recognized over the term of the lease. (See Footnote 8 - Sale of
Building, to the financials statements for details.)
We have also signed a Manufacturing, Marketing and Distribution Agreement with
Play Beverages LLC, whereby CBC is acting as subcontractor to Play Beverages
LLC, as the vendor of record, in providing marketing and distribution services.
As such, revenues, expenses, assets and liabilities for all periods covered by
the effective date of the Agreement (May 25, 2007) have been recognized at gross
amounts by the company.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material, and overhead costs. Overhead costs are based on
indirect costs allocated among cost of sales, work-in-process inventory, and
36
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.
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 have agreements
with most of its customers that require the customer to purchase inventory items
related to their contracts in the event that the contracts are cancelled. The
market value of related inventory is based upon those agreements.
We typically order inventory on a customer-by-customer basis. In doing so we
enter into binding agreements that the customer will purchase any excess
inventory after all orders are complete.
Results of Operations - Comparison of the Nine Months ended September 30, 2007
and 2006
Sales and Cost of Sales
Net sales increased to $8,700,004 for the nine months period ended September 30,
2007, as compared to $7,007,118 during the same period in 2006, for an increase
of 24.2%. Net sales increased to $3,533,555 for the three months period ended
September 30, 2007, as compared to $3,044,853 during the same period in 2006,
for an increase of 16.1%. This increase is attributed to the income generated
from the marketing segments. Cost of sales decreased by 8.7%, to $4,135,494
during the nine months ended September 30, 2007, from $4,529,641 during the same
period in 2006. Cost of sales decreased by 25.3%, to $1,723,568 during the three
months period ended September 30, 2007, from $2,307,237 during the same period
in 2006. The decrease in cost of sales is due in part to the increase in revenue
of the marketing segments. Our gross profit margin for the nine months period
ended September 30, 2007, was 52.5%, up from 35.4% for the same period in 2006.
Our gross profit margin for the three months period ended September 30, 2007,
was 51.2%, up from 24.2% for the same period in 2006. The majority of the
increase is due to the increase in revenue generated by the marketing revenues,
which have more favorable margins compared to our electronics manufacturing
operations.
Inventory
We use just-in-time manufacturing in our USA factory, which is a production
technique that minimizes work-in-process inventory and manufacturing cycle time,
while enabling us to deliver products to customers in the quantities and time
frame required. This manufacturing technique requires us to maintain an
inventory of component parts to meet customer orders. Inventory at September 30,
2007, was $2,048,984, as compared to $1,960,013 at December 31, 2006. The
increase in inventory is considered to be minimal and is within a reasonable
range.
Selling, General and Administrative Expenses
During the nine months, ended September 30, 2007, selling, general and
administrative expenses were $7,077,802 versus $3,826,899 for the same period in
2006, a 84.9% increase. During the three months, ended September 30, 2007,
selling, general and administrative expenses were $2,529,784 versus $1,062,570
for the same period in 2006, a 138.1% increase. The increase is the result of
the additional expense of start up and staffing the CirTran Beverage Corp. and
CirTran Online Corp. It is anticipated that selling, general and administrative
expenses will continue to increase due to shift from manufacturing to service
and marketing oriented operations, which is the focus of our marketing and media
services. As mentioned above the marketing projects do not require inventories
to support operations, but they do require additional manpower and resources
that we anticipate will be reflected as additional selling, general and
administrative expenses.
37
Other Income and Expenses
Interest expense for the nine months ended September 30, 2007, was $2,044,116 as
compared to $2,330,309 for the same period in 2006, a decrease of 12.3%.
Interest expense for the three months ended September 30, 2007, was $584,328 as
compared to $693,494 for the same period in 2006, a decrease of 15.7%. The
changes in interest expense were primarily due to the derivative treatment of
the convertible debenture.
As a result of the above factors, we have a net gain of $82,898 for the quarter
ended September 30, 2007, as compared to a net loss of $2,980,288 for the
quarter ended September 30, 2006 and $3,463,510 for the nine months ended
September 30, 2007, and $3,912,604 for the same period in 2006. This net loss is
attributed to substantially higher operating costs associated with developing
the new projects, and company segments pertaining to direct TV and retail
marketing programs.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses preceding this quarter, and our accumulated deficit has increased to
$25,645,189 at September 30, 2007, compared to $22,181,679 at December 31, 2006.
Our net loss for the nine months ended September 30, 2007, was $3,463,510
compared to $3,912,604 for the nine months ended September 30, 2006. Our current
liabilities exceeded our current assets by $4,981,533 and $4,863,641 as of
September 30, 2007 and December 31, 2006, respectively. For the nine months
ended September 30, 2007, we had negative cash flows from operations of
$2,920,923 compared to negative cash flows from operations for the nine months
ended September 30, 2006 of $1,631,660.
Cash
We had cash on hand of $99,442 at September 30, 2007, and $146,050 at December
31, 2006.
Net cash used in operating activities was $2,920,923 for the nine months ended
September30, 2007. Cash received from customers of $$7,792,780 was not
sufficient to offset cash paid to vendors, suppliers, and employees of
$9,959,140. The non-cash charges were for depreciation and amortization of
$639,914 and accretion expense of $1,633,667. Because we have historically had
negative cash flows from operations, we must rely on sources of cash other than
customers to support our operations. It is anticipated that various methods of
equity financing will be required to support operations until cash flows from
operations are consistently positive.
Net cash provided by investing activities during the nine months ended September
30, 2007, was $2,135,767, which was primarily related to the sale of the office
building for $2,500,000.
Net cash provided in financing activities was $738,548 during the nine months
ended September 30, 2007, and was primarily related to paying off the mortgage
on the office building, in the amount of $1,233,000 which was done in
conjunction with the sale of property. The use of funds to pay off the mortgage
was offset by the cash received from the sale of a minority interest in After
Bev of $1,848,000.
38
Accounts Receivable
At September 30, 2007, we had receivables of $1,889,320, net of a reserve for
doubtful accounts of $14,181, as compared to $982,096 at December 31, 2006, net
of a reserve of $14,181.
The increase of $907,224 in accounts receivable is due to addition of the
marketing segments We have implemented an aggressive process to collect past due
accounts over the past two years. Individual accounts are continually monitored
for collectibles. As part of monitoring individual customer accounts, we
evaluate the adequacy of its allowance for doubtful accounts. Since the
implementation of the collection process, very few accounts have been deemed
uncollectible.
Accounts Payable
Accounts payable were $1,390,695 at September 30, 2007, as compared to
$1,135,527 at December 31, 2006. The increase is due to the addition of the
marketing segments.
Liquidity and Financing Arrangements
We have a history of substantial losses from operations and using rather than
providing cash in operations. We had an accumulated deficit of 25,645,189 and a
total stockholders' deficit of $306,566 at September 30, 2007. As of September
30, 2007, our monthly operating costs and interest expenses averaged
approximately $1,014,000 per month.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors. It is
unlikely that we will be able, in our current financial condition, to obtain
additional debt financing; and if we did acquire more debt, we would have to
devote additional cash flow to paying the debt and securing the debt with
assets. We may therefore have to rely on equity financing to meet our
anticipated capital needs. There can be no assurances 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.
Convertible Debentures
Highgate - On May 26, 2005, we entered into an agreement with Highgate Funds,
Ltd. ("Highgate") to issue to Highgate a $3,750,000, 5% Secured Convertible
Debenture (the "Debenture"). Highgate subsequently changed its name to Yorkville
Advisors, LLC ("Yorkville"), which will be used in this report. The Debenture is
due December 2007 and is secured by all of our property.
Accrued interest is payable at the time of maturity or conversion. We may elect,
at our option to pay accrued interest in cash or shares of the Company's common
stock. If paid in stock, the conversion price shall be the closing bid price of
the common stock on either the date the interest payment is due or the date on
which the interest payment is made. The balance of accrued interest owed at
September 30, 2007, and December 31, 2006, was $148,335 and $163,884,
respectively.
At any time, Yorkville may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share, or an amount equal to the lowest closing bid
price of our common stock for the twenty trading days immediately preceding the
conversion date. We have the right to redeem a portion or the entire Debenture
then outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Yorkville's right to convert principal amounts into shares of our common stock
is limited as follows:
39
(i) Yorkville may convert up to $250,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the market price of our stock
is $0.10 per share or less at the time of conversion;
(ii) Yorkville may convert up to $500,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the price of our stock is
greater than $0.10 per share at the time of conversion;
provided, however, that Yorkville may convert in excess of the
foregoing amounts if we and Yorkville mutually agree; and
(iii) Upon the occurrence of an event of default, Yorkville may, in
its sole discretion, accelerate full repayment of all
debentures outstanding and accrued interest thereon or may
convert the Debentures and accrued interest thereon into
shares of our common stock.
Except in the event of default, Yorkville may not convert the Debenture for a
number of shares that would result in Yorkville owning more than 4.99% of our
outstanding common stock.
In connection with the issuance of the Yorkville Debenture, we granted Yorkville
registration rights related to the issuance of the debenture.
We determined that the features of the Debenture fell under derivative
accounting treatment. As of September 30, 2007, the carrying value of the
Debenture was $1,372,301. The carrying value will be accreted each quarter over
the life of the Debenture until the carrying value equals the unconverted face
value of $1,585,000. The fair value of the derivative liability as of September
30, 2007 was $636,911.
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were paid to Cornell to repay promissory notes. Fees of $256,433 were withheld
from the proceeds, were capitalized, and are being amortized over the life of
the note. As such, of the total Debenture of $3,750,000, the net proceeds to
CirTran were $1,228,567. The proceeds were used for general corporate and
working capital purposes, at our discretion.
Between the months of January 2007 and October 2007, Yorkville converted
$1,425,000 of principal on its convertible debenture into 92,220,089 shares of
our common stock, at conversion rates of $0.008 to $0.01513 per share, per the
terms of the debenture agreement. As of the date of this Report, the remaining
principal balance was $1,425,000.
Cornell - On December 30, 2005, we entered into an agreement with Cornell to
issue to Cornell a $1,500,000, 5% Secured Convertible Debenture (the "Cornell
Debenture"). The Cornell Debenture is due July 30, 2008, and is secured by all
our property, junior to the Yorkville security interest.
Accrued interest is payable at the time of maturity or conversion. We may, at
our option, elect to pay accrued interest in cash or shares of our common stock.
If paid in stock, the conversion price shall be the closing bid price of the
common stock on either the date the interest payment is due or the date on which
the interest payment is made. The balance of accrued interest owed at September
30, 2007 and December 31, 2006, was $130,890 and $74,795 respectively.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of our common stock at a conversion price equal to the
lowest closing bid price of our common stock for the twenty trading days
immediately preceding the conversion date. We have the right to redeem a portion
or the entire Cornell Debenture then outstanding by paying 105% of the principal
amount redeemed plus accrued interest thereon.
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Cornell's right to convert principal amounts into shares of our common stock is
limited as follows:
(i) Cornell may convert up to $250,000 worth of the principal
amount plus accrued interest of the Cornell Debenture in any
consecutive 30-day period when the market price of our stock
is $0.10 per share or less at the time of conversion;
(ii) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the Cornell Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Cornell may convert in
excess of the foregoing amounts if we and Cornell mutually
agree; and
(iii) Upon the occurrence of an event of default, Cornell may, in
its sole discretion, accelerate full repayment of the
debenture outstanding and accrued interest thereon or may
convert the Cornell Debenture and accrued interest thereon
into shares of our common stock.
Except in the event of default, Cornell may not convert the Cornell Debenture
for a number of shares that would result in Cornell owning more than 4.99% of
our outstanding common stock.
The Cornell Debenture was issued with 10,000,000 warrants with an exercise price
of $0.09 per share that vest immediately and have a three-year life.
In connection with the issuance of the Cornell Debenture, we granted Cornell
registration rights related to the issuance of the Cornell Debenture and
warrants.
We determined that the features on the Cornell Debenture and the associated
warrants fell under derivative accounting treatment. As of September 30, 2007,
the carrying value of the Cornell Debenture was $1,014,846. The carrying value
will be accreted each quarter over the life of the Cornell Debenture until the
carrying value equals the face value of $1,500,000. The fair value of the
derivative liability relating to the Cornell debenture, excluding the warrants,
as of September 30, 2007 was $979,099. The fair value of the warrants was $5,476
as of September 30, 2007.
In connection with the issuance of the Cornell Debenture, fees of $130,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the Cornell Debenture. As such, of the total Cornell Debenture of $1,500,000,
the net proceeds to CirTran were $1,370,000. The proceeds will be used for
general corporate and working capital purposes, at our discretion.
Additionally, we entered into an amended and restated investor registration
rights agreement with Cornell (the "Registration Rights Agreement"), which
superseded the Cornell registration rights agreement between CirTran and Cornell
entered into in December 2005. Pursuant to the Registration Rights Agreement, we
agreed to file, no later than October 15, 2006, a registration statement to
register the resale of shares of our common stock issuable to Cornell upon
conversion of the Cornell Debenture and exercise of the Warrants. We agreed to
register the resale of up to 42,608,696 shares, consisting of 32,608,000 shares
underlying the Debenture and 10,000,000 shares underlying the Warrants. We
agreed to keep such registration statement effective until all of the shares
issuable upon conversion of the Debenture have been sold. In the event that we
issue more than 42,608,696 shares of common stock upon conversion of the
December Debenture, we will file additional registration statements as
necessary. The agreement was subsequently amended to extend the filing date of
the registration to December 15, 2007.
41
In connection with the Cornell Debenture, Cornell agreed that it could not
convert any amount of principal or interest of the Cornell Debenture in
accordance with the terms and conditions of the Lockdown Agreement by and
between CirTran and Cornell July 20, 2006, until we have effectuated an increase
in its authorized capital. CirTran and Cornell also agreed that in the event
that we have not effectuated such increase in its authorized capital by October
30, 2006, which was subsequently extended to June 1, 2007, such failure would
constitute an event of default on parallel with those set forth in the Purchase
Agreement and subject to the same consequences as those listed in the Purchase
Agreement. On April 30, 2007, the Company received shareholder approval to
increase its authorized capital to include 1,500,000,000 shares of common stock.
As a result of the increase, the authorized shares provided adequate coverage
for the conversion of the Cornell Debenture and therefore negated the need for
the Cornell Lockdown Agreement.
As of the date of this Report, Cornell had not converted any of the Cornell
Debenture into shares of the Company's common stock.
Cornell - On August 23, 2006, we entered into another securities purchase
agreement (the "Purchase Agreement") with Cornell, relating to the issuance by
CirTran of a 5% Secured Convertible Debenture, due April 23, 2009, in the
aggregate principal amount of $1,500,000 (the "August Debenture").
Accrued interest is payable at the time of maturity or conversion. We may, at
our option, elect to pay accrued interest in cash or shares of our common stock.
If paid in stock, the conversion price shall be the closing bid price of the
common stock on either the date the interest payment is due or the date on which
the interest payment is made. The balance of accrued interest owed at September
30, 2007 and December 31, 2006 was $82,603 and $26,507 respectively.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of our common stock at a conversion price equal to an
amount equal to the lowest closing bid price of our common stock for the twenty
trading days immediately preceding the conversion date. We have the right to
redeem a portion or the entire Cornell Debenture then outstanding by paying 105%
of the principal amount redeemed plus accrued interest thereon.
We also paid a commitment fee of $120,000 and a structuring fee of $15,000 to
Cornell. As such, of the total purchase amount of $1,500,000, the net proceeds
to CirTran were $1,365,000. We used these proceeds for general corporate and
working capital purposes, at our discretion.
Cornell's right to convert principal amounts owing under the August Debenture
into shares of our common stock is limited as follows:
(i) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the August Debenture in any
consecutive 30-day period when the price of our stock is $0.03
per share or less at the time of conversion;
(ii) Cornell may convert any amount of the principal amount plus
accrued interest of the August Debenture in any consecutive
30-day period when the price of our stock is greater than
$0.03 per share at the time of conversion; and
(iii) Upon the occurrence of an Event of Default (as defined in the
Debenture), Cornell may, in its sole discretion, accelerate
full repayment of all debentures outstanding and accrued
interest thereon or may, notwithstanding any limitations
contained in the August Debenture and/or the Purchase
Agreement, convert all debentures outstanding and accrued
interest thereon in to shares of our Common Stock pursuant to
the August Debenture.
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Except in the event of default, Cornell may not convert the August Debenture for
a number of shares of common stock in excess of that number of shares of common
stock that would result in Cornell owning more than 4.99% of our outstanding
common stock.
In connection with the Purchase Agreement, we also agreed to grant to Cornell
warrants (the "Warrants") to purchase up to an additional 15,000,000 shares of
our common stock. The Warrants have an exercise price of $0.06 per share, and
expire three years from the date of issuance. The Warrants also provide for
cashless exercise if at the time of exercise there is not an effective
registration statement or if an event of default has occurred.
We determined that the features on the August Debenture and the Warrants fell
under derivative accounting treatment. As of September 30, 2007, the carrying
value of the August Debenture was $727,568. The carrying value will be accreted
each quarter over the life of the August Debenture until the carrying value
equals the face value of $1,500,000. The fair value of the derivative liability
relating to the August Debenture, excluding the warrants, as of September 30,
2007, was $1,014,846. The fair value of the warrants was $10,582 as of September
30, 2007.
As of the date of this Report, Cornell had not converted any of the August
Debenture into shares of our common stock.
Additionally, we entered into an amended and restated investor registration
rights agreement with Cornell (the "Registration Rights Agreement"), which
superseded the Cornell registration rights agreement between CirTran and Cornell
entered into in August 2006. Pursuant to the Registration Rights Agreement, we
agreed to file, no later than October 15, 2006, a registration statement to
register the resale of shares of our common stock issuable to Cornell upon
conversion of the Cornell Debenture and exercise of the Warrants. We agreed to
register the resale of up to 89,291,304 shares, consisting of 74,291,304 shares
underlying the Debenture and 15,000,000 shares underlying the Warrants. We
agreed to keep such registration statement effective until all of the shares
issuable upon conversion of the Debenture have been sold. In the event that we
issue more than 89,291,304 shares of common stock upon conversion of the August
Debenture, we will file additional registration statements as necessary. The
agreement was subsequently amended to extend the filing date of the registration
to December 15, 2007.
As of September 30, 2007, no amount of the August Debenture had been converted
and no shares of our common stock had been issued to Cornell.
Lockdown Agreements
On July 20, 2006, we entered into two lockdown agreements with existing security
holders.
The first agreement (the "Cornell Agreement") was with Cornell and related to
the Cornell Debenture. Pursuant to the Cornell Agreement, Cornell agreed that it
would not convert any of the principal or interest on the Cornell Debenture or
exercise any of the Warrants granted to Cornell until we had taken the steps
necessary to increase our authorized capital. As such, we were able to lock down
106,900,000 shares underlying the Cornell Debenture and 25,000,000 shares
underlying the Cornell Warrants.
The second agreement (the "ANAHOP Agreement") was with ANAHOP, Albert Hagar, and
Fadi Nora, and related to the May and June private placement transactions
discussed above. Pursuant to the ANAHOP Agreement, Hagar and Nora agreed that
they would not exercise any of the warrants they received in connection with the
May or June private offerings until we have taken the steps necessary to
increase our authorized capital. Additionally, ANAHOP agreed that it would not
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make the Second Tranche Payment to purchase the Second Tranche Shares until we
have taken the steps necessary to increase our authorized capital. As such,
under the ANAHOP Agreement, we were able to lock down 21,428,571 shares, and
93,000,000 shares underlying the warrants issued to Hagar and Nora in the May
and June private placements.
At a Special Meeting of Shareholders held April 30, 2007, we received approval
from our shareholders to amend our Articles of Incorporation to increase our
authorized capital to include 1,500,000,000 shares of common stock. The increase
in the number of authorized shares provided adequate coverage for the conversion
of the ANAHOP warrants and therefore negated the need for the ANAHOP Lockdown
Agreement.
Forward-looking statements
Certain of the statements contained in this Report (other than the historical
financial data and other statements of historical fact) are forward-looking
statements. These statements include, but are not limited to our expectations
with respect to the development of a new offices or divisions; the achievement
of certain revenue goals; the receipt of new business and contracts; and our
intentions with respect to financing our operations in the future. Additional
forward-looking statements may be found in the "Risk Factors" Section of our
Annual Report on Form 10-KSB, together with accompanying explanations of the
potential risks associated with such statements. You are encouraged to review
the "Risk Factors" Section of our Annual Report.
Forward-looking statements made in this Quarterly Report, are made based upon
management's good faith expectations and beliefs concerning future developments
and their potential effect upon the Company. There can be no assurance that
future developments will be in accordance with such expectations, or that the
effect of future developments on CirTran will be those anticipated by
management. Forward-looking statements may be identified by the use of words
such as "believe," "expect," "plans," "strategy," "prospects," "estimate,"
"project," "anticipate," "intends" and other words of similar meaning in
connection with a discussion of future operating or financial performance.
You are cautioned not to place undue reliance on these forward-looking
statements, which are current only as of the date of this Report. We disclaim
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise. Many
important factors could cause actual results to differ materially from
management's expectations, including those listed in the "Risk Factors" Section
of our Annual Report for the year ended December 31, 2006, as well as the
following:
* unpredictable difficulties or delays in the development of new
products and technologies;
* changes in U.S. or international economic conditions, such as
inflation, interest rate fluctuations, foreign exchange rate
fluctuations or recessions in CirTran's markets;
* pricing changes to our supplies or products or those of our
competitors, and other competitive pressures on pricing and
sales;
* difficulties in obtaining or retaining the management,
engineering, and other human resource competencies that we
need to achieve our business objectives;
* collection of customer balances due on account;
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* the impact on CirTran or a subsidiary from the loss of a
significant customer or a few customers;
* risks generally relating to our international operations,
including governmental, regulatory or political changes;
* transactions or other events affecting the need for, timing
and extent of our capital expenditures; and
* the extent to which we reduce outstanding debt.