NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
NOTE
1—BASIS OF PRESENTATION
The
consolidated financial statements of Cirtran Corporation for the three- and six-month periods ended June 30, 2018 and 2017, are
not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods
and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted
in the United States of America. In the opinion of our management, the accompanying consolidated financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of June
30, 2018, and December 31, 2017, and our results of operations and cash flows for the periods ended June 30, 2018 and 2017.
The results of operations for the three and six months ended June 30, 2018 and 2017, are not necessarily indicative of the results
for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements
included in our registration statement on Form 10/A filed on June 27, 2018, with the Securities and Exchange Commission, which
became effective on July 2, 2018.
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
We
consolidate all of our majority-owned subsidiaries, companies over which we exercise control through majority voting rights, and
companies in which we have a variable interest and we are the primary beneficiary. We account for our investments in common stock
of other companies that we do not control, but over which we can exert significant influence using the cost method.
The
consolidated financial statements include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Beverage
Corp., CirTran Products Corp., CirTran Online Corp., CirTran Media Corp., CirTran Corporation (Utah), CirTran - Asia, Inc., and
Racore Network, Inc. All intercompany balances and transactions have been eliminated.
Use
of Estimates
In
preparing the financial statements in accordance with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those estimates.
Revenue
Recognition
Revenue
is recognized when products are shipped, title passes to the customer or independent sales representative at the time of shipment,
the price is fixed and determinable, and collectability of revenue is reasonably assured. Returns for defective items are either
repaired and sent back to the customer or returned for credit or replacement product. Historically, expenses associated with returns
have not been significant and have been recognized as incurred.
Royalty
income is included as part of sales. We recognize royalty revenue as it is earned. The customer distribution agreements generally
specify minimum royalty fees due to us during the contract period. We recognize royalty income on a straight-line basis over the
term of the distribution agreement when, based on management’s analysis of sales history, the customer is not expected to
meet the minimum required sales projections for the contract period. Deferred revenue on royalty income as of June 30, 2018, and
December 31, 2017, was $0 and $638, respectively.
Cash
and Cash Equivalents
We
consider all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents. We
did not hold any cash equivalents as of June 30, 2018, or December 31, 2017.
Investment
in Securities
Our
cost-method investment consists of an investment in a private digital multi-media technology company that totaled $300,000 at
June 30, 2018 and December 31, 2017. As we owned less than 20% of that company’s stock as of each date, and no significant
influence or control exists, the investment is accounted for using the cost method. We evaluated the investment for impairment
and determined there was none during the periods presented.
Property
and Equipment
We
incur certain costs associated with the design and development of molds and dies for our contract-manufacturing segment. These
costs are held as deposits on the balance sheet until the molds or dies are finished and ready for use. At that point, the costs
are included as part of production equipment in property and equipment and are amortized over their useful lives. We hold title
to all molds and dies used in the manufacture of products. The capitalized cost, net of accumulated depreciation, associated with
molds and dies included in property and equipment at June 30, 2018, and December 31, 2017, was $13,211 and $14,357, respectively.
Depreciation
expense is recognized in amounts equal to the cost of depreciable assets over estimated service lives. Leasehold improvements
are amortized over the shorter of the life of the lease or the service life of the improvements. The straight-line method of depreciation
and amortization is followed for financial reporting purposes. Maintenance, repairs, and renewals, which neither materially add
to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions
of property and equipment are included in operating results.
Depreciation
expense for the three months ended June 30, 2018 and 2017, was $573 and $573, respectively. Depreciation expense for the six months
ended June 30, 2018 and 2017, was $1,146 and $1,146, respectively.
Impairment
of Long-Lived Assets
We
review our long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. At each balance sheet date, we evaluate whether events and circumstances have
occurred that indicate possible impairment. We use an estimate of future undiscounted net cash flows from the related asset or
group of assets over their remaining life in measuring whether the assets are recoverable. We did not record expenses for the
impairment of long-lived assets during the six months ended June 30, 2018 or 2017.
Financial
Instruments with Derivative Features
We
do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives
or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument
and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value
and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the
fair value of these embedded derivatives using a Multi-NomialLattis model. The fair values of the derivative instruments are measured
each reporting period. We recorded a loss of $0 and $8,456 on the change in fair market values of derivative liabilities during
the six months ended June 30, 2018 and 2017.
During
the three months ended March 31, 2017, our common stock was suspended from trading. Because of this, the convertible note no longer
met the criteria to bifurcate the instrument under Financial Accounting Standards Board (“FASB”) Accounting Standard
Codification (“ASC”) 815,
Derivatives and Hedging
. As such, we determined the underlying common stock of the
instruments being accounted for as derivative liabilities had no value. As a result, the fair value of the derivative liabilities
as of the date our common stock was no longer available to trade was written off to additional paid-in capital in accordance with
ASC 815-15-35-4. We are no longer accounting for these instruments as derivative liabilities.
Stock-Based
Compensation
We
have outstanding stock options to directors and employees, which are described more fully in Note 11—Stock Options and Warrants.
We account for stock options in accordance with ASC 718-10,
Accounting for Stock Issued to Employees
, which requires the
recognition of the cost of employee services received in exchanged for an award of equity instruments in the financial statements
and is measured based on the grant date fair value of the award. ASC 718-10 also requires the stock option compensation expense
to be recognized over the period during which an employee is required to provide service in exchange for the award, typically
the vesting period.
Stock-based
employee compensation was $480 and $1,340 for the six months ended June 30, 2018 and 2017, respectively.
Fair
Value of Financial Instruments
The
carrying amounts reported in the accompanying consolidated financial statements for cash, notes payable, and accounts payable
approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts
of our debt obligations approximate fair value.
ASC
820-10-15,
Fair Value Measurement-Overall-Scope and Scope Exceptions
, defines fair value, thereby eliminating inconsistencies
in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations. ASC
820-10-15 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations.
The three levels of inputs are defined as follows:
Level
1—Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level
2—Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the
asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level
3—Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or liabilities.
Accounts
payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these
instruments.
Earnings
(Loss) Per Share
Basic
earnings (loss) per share (EPS) is calculated by dividing net earnings (loss) available to common shareholders by the weighted-average
number of common shares outstanding during each period. Diluted EPS is similarly calculated, except that the weighted-average
number of common shares outstanding would include common shares that may be issued subject to existing rights with dilutive potential
when applicable. We had nil in potentially issuable common shares at June 30, 2018 and 2017. The potentially issuable common shares
as of June 30, 2018 and 2017, were excluded from the calculation of diluted EPS because the effects were antidilutive.
Short-term
Advances
We
have short-term advances with various individuals. These advances are due upon demand, carry no interest, and are not collateralized.
These advances are classified as short-term liabilities.
Recently
Issued Accounting Pronouncements
Recently
issued accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that require adoption
and that do not require adoption until a future date are not expected to have a material impact on our financial statements upon
adoption.
NOTE
3—GOING CONCERN AND REALIZATION OF ASSETS
In
October 2016, we lost our ability to continue energy drink distribution, our principal source of revenue, after receiving an unfavorable
ruling in our suit against Playboy Enterprises, Inc.
The
accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate our continuation as a going concern. We had a working capital deficiency
of $36,209,179 and $35,750,688 as of June 30, 2018, and December 31, 2017, respectively, and a net loss of $518,888 and $1,526,753
during the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, and December 31, 2017, we had an accumulated
deficit of $77,118,187 and $76,599,299, respectively. These conditions raise substantial doubt about our ability to continue as
a going concern.
Our
ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in
the following paragraphs and eventually attain profitable operations. The accompanying financial statements do not include any
adjustments that may be necessary if we are unable to continue as a going concern.
In
the coming year, our foreseeable cash requirements will relate to development of business operations and associated expenses.
We may experience a cash shortfall and be required to raise additional capital.
Historically,
we have mostly relied upon shareholder loans and advances to finance operations and growth. Management may raise additional capital
by retaining net earnings, if any, or through future public or private offerings of our stock or loans from private investors,
although we cannot assure that we will be able to obtain such financing. Our failure to do so could have a material and adverse
effect upon us and our shareholders.
NOTE
4—PROPERTY AND EQUIPMENT
Property
and equipment and estimated service lives consist of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
Useful
Life (years)
|
|
Furniture
and office equipment
|
|
$
|
177,900
|
|
|
$
|
177,900
|
|
|
|
5-10
|
|
Leasehold
improvements
|
|
|
997,714
|
|
|
|
997,714
|
|
|
|
7-10
|
|
Production
equipment
|
|
|
2,886,267
|
|
|
|
2,886,267
|
|
|
|
5-10
|
|
Vehicles
|
|
|
53,209
|
|
|
|
53,209
|
|
|
|
3-7
|
|
Total
|
|
|
4,115,090
|
|
|
|
4,115,090
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
(4,101,879
|
)
|
|
|
(4,100,733
|
)
|
|
|
|
|
Property
and equipment, net
|
|
$
|
13,211
|
|
|
$
|
14,357
|
|
|
|
|
|
We
recorded $573 and $573 of depreciation expense during the three months ended June 30, 2018 and 2017, respectively, and $1,146
and $1,146 during the six months ended June 30, 2018 and 2017, respectively.
NOTE
5—RELATED-PARTY TRANSACTIONS
Transactions
involving Officers, Directors, and Stockholders
In
2007, we issued a 10% promissory note to a family member of our president in exchange for $300,000. The note was due on demand
after May 2008. There were no repayments made during the periods presented. At June 30, 2018, and December 31, 2017, the principal
amount owing on the note was $151,833 and $151,833, respectively.
On
March 31, 2008, we issued to this same family member, along with two other Company shareholders, promissory notes totaling $315,000
($105,000 each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the
amount received plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest
accruing at 12% per annum. We made no payments towards the outstanding notes during the periods presented. The principal balance
owing on the notes as of June 30, 2018, and December 31, 2017, totaled $72,466 and $72,466, respectively, and are presented in
liabilities from discontinued operations.
We
have agreed to issue options to Iehab Hawatmeh, our president, as compensation for services provided as our chief executive officer.
The terms of this employment agreement require us to grant options to purchase 6,000,000 shares of our stock each year, with an
exercise price equal to the fair market price of our common stock as of the grant date. During the six months ended June 30, 2018,
we accrued for 6,000,000 stock options relating to this employee agreement, resulting in 66.0 million and 60.0 million accrued
stock options as of June 30, 2018, and December 31, 2017, respectively. See Note 6–Other Accrued Liabilities and Note 11–Stock
Options and Warrants.
As
of June 30, 2018, and December 31, 2017, we owe our president a total of $898,215 and $898,215 in unsecured advances, of which
$890,000 and $890,000 were included in liabilities from discontinued operations. Additionally, 66.0 million and 60.0 million accrued
stock options, with an aggregate value at time of grant of $169,496 and $168,896, respectively, were owed as of June 30, 2018
and December 31, 2017. The advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee.
The borrowing fees were waived by our president on these loans.
NOTE
6—OTHER ACCRUED LIABILITIES
Accrued
tax liabilities consist of delinquent payroll taxes, interest, and penalties owed by us to the Internal Revenue Service (“IRS”)
and other tax entities.
Accrued
liabilities consist of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Tax
liabilities
|
|
$
|
679,769
|
|
|
$
|
685,004
|
|
Other
|
|
|
30,638
|
|
|
|
44,380
|
|
Total
|
|
$
|
710,407
|
|
|
$
|
729,384
|
|
Other
accrued liabilities as of December 31, 2017, include a non-interest bearing payable totaling $44,380 that is due on demand. This
was repaid during the six months ended June 30, 2018.
Accrued
payroll and compensation liabilities consist of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Stock
option expenses
|
|
$
|
480,453
|
|
|
$
|
479,973
|
|
Director
fees
|
|
|
135,000
|
|
|
|
135,000
|
|
Bonus
expenses
|
|
|
126,858
|
|
|
|
121,858
|
|
Commissions
|
|
|
2,148
|
|
|
|
2,148
|
|
Administrative
payroll
|
|
|
3,437,139
|
|
|
|
3,414,258
|
|
Total
|
|
$
|
4,181,598
|
|
|
$
|
4,153,237
|
|
Stock
option expenses consist of accrued employee stock option expenses. These stock options have been granted but were not issued due
to the limited number of authorized and available shares (see Note 11–Stock Options and Warrants for further discussion).
The
fair market value of the options issued during the six months ended June 30, 2018, was $480, using the following assumptions:
estimated seven-year term, estimated volatility of 567%, and a risk-free rate between 2.38%. During the three months ended March
31, 2018, we accrued for 6,000,000 stock options relating to the employee agreement with Mr. Hawatmeh. The fair market value of
the options was $600, using the following assumptions: estimated seven-year term, estimated volatility of 567%, and a risk-free
rate of 2.38%.
NOTE
7—COMMITMENTS AND CONTINGENCIES
Litigation
and Claims
Various
vendors, service providers, and others have asserted legal claims in previous years. These creditors generally are not actively
seeking collection of amounts due them, and we have determined that the probability of realizing any loss on these claims is remote
and will seek to compromise and settle at a deep discount any of such claims that are asserted for collection. These amounts are
included in our current liabilities. We have not accrued any liability for claims or judgments that we have determined to be barred
by the applicable statute of limitations, which generally is eight years for judgments in Utah.
Noble
Gate
In
September 2015, we obtained a judgment in the amount of $287,000 against Noble Gate Industrial, a former authorized distributor
of the Playboy-branded energy drink. We believe the judgment is uncollectible and have not undertaken collection efforts in view
of our analysis of the costs of collection as compared to any likely recovery. No gain has been recorded for the periods presented.
Playboy
Enterprises, Inc.
Our
wholly-owned subsidiary, Play Beverages, LLC, whose operations have now been discontinued, filed suit against Playboy Enterprises,
Inc., in Cook County, Illinois, Circuit Court in October 2012 asserting numerous claims, including breach of contract and tortious
interference. Playboy responded with a counterclaim of breach of contract and trademark infringement. After proceedings in October
2016, the court awarded a judgment to Playboy of $6.6 million against Play Beverages and us. The court denied our motion for a
new trial and awarded Playboy treble patent infringement damages and attorney’s fees. We filed a notice of appeal in July
2017 and again in March 2018. Playboy has initiated collection efforts but has recovered no funds. We have accrued $17,205,599
as of June 30, 2018, and December 31, 2017, related to this judgment, which is included in liabilities from discontinued operations
(see Note 12–Discontinued Operations).
Redi
FZE
During
the year ended December 31, 2011, Redi FZE sued us claiming alleged breach of contract, and we counterclaimed against it. On November
2, 2011, the court issued an injunction against Redi FZE prohibiting it from selling and distributing Playboy-branded products
in conjunction with its distribution agreement with us. On August 16, 2012, Redi FZE withdrew the suit, and on October 30, 2012,
we were awarded a default judgment against Redi in the amount of $1,225,155. We have not collected on this judgment and are weighing
the cost of collection against the likelihood of success. No gain or receivable has been recorded in the financial statements
for the periods presented in connection with this case.
Old
Dominion Freight Line
In
December 2009, Old Dominion Freight Line filed suit against us for unpaid freight services in the amount of $30,464 and was awarded
a default judgment of $33,187 in March 2010. The amount due is included in accounts payable as of June 30, 2018, and December
31, 2017, respectively.
RDS
Touring
In
September 2011, RDS Touring and Promotions, Inc. was awarded a default judgment of $118,426 against us. In September 2012, RDS
domesticated the default judgment in the state of Utah and sought to enforce the judgment against us. We have and will continue
to resist the collection efforts by RDS. We had recorded a loss equal to the judgment of $118,426, of which $18,491 was previously
paid leaving $99,935 included in liabilities from discontinued operations as of June 30, 2018, and December 31, 2017.
Esebag
In
July 2010, Jimmy Esebag was awarded a judgment against us for breach of contract. A judgment debtor examination of an affiliate
took place in October 2013, and there have been no further recovery efforts to date. We will continue to resist the collection
efforts from this judgment. We had recorded a loss equal to the judgment of $100,000, of which $40,881 was previously paid leaving
$59,119 included in liabilities from discontinued operations as of June 30, 2018, and December 31, 2017, respectively.
General
Distributors, Inc.
In
February 2012, General Distributors, Inc. (“General”) and was awarded a default judgment of $93,856 against us. In
January 2013, General domesticated the default judgment in the state of Utah and sought to enforce the judgment against the Company.
We have and will continue to resist the collection efforts by General. We had recorded a loss equal to the judgment of $93,856,
which is included in liabilities from discontinued operations as of June 30, 2018, and December 31, 2017.
Advanced
Beauty Solutions
In
connection with prior litigation with Advanced Beauty Solutions (“ABS”), it claimed nonperformance by us and filed
an adversary proceeding in its bankruptcy case in the United States Bankruptcy Court. On March 17, 2009, the bankruptcy court
entered judgment in favor of ABS and against us in the amount of $1,811,667, plus interest. On September 11, 2009, the bankruptcy
court denied our motion to set aside the judgment.
On
September 8, 2010, we executed an Assignment of Copyrights, thereby assigning our Copyright Registration No. TX-6-064-955, Copyright
Registration No. TX-6-064-956, and Copyright to the True Ceramic Pro-Live Ops (TCPS) infomercial and related master tapes (collectively
the “Copyrights”) to ABS, without reservation or exclusion, making ABS the owner of the Copyrights.
Despite
motions, hearings, appeals, and mediation in 2011, both parties were unable to resolve their outstanding issues.
On
March 22, 2012, we entered into a formal forbearance agreement with ABS, dated as of March 1, 2012 (the “ABS Forbearance
Agreement”), whereby ABS agreed to take no further judgment enforcement actions in consideration of our payment of $25,000
upon execution, satisfaction of applicable conditions precedent, return of the trademarks and intellectual property previously
conveyed by ABS to us, and our obligation to pay $1,835,000 secured by an encumbrance on all of our assets, subject and subordinate
to the prior lien and encumbrance in favor of YA Global. In addition, we stipulated to an additional judgment for attorney’s
fees incurred in negotiating the ABS Forbearance Agreement and related post-judgment collection efforts. The ABS Forbearance Agreement
also provided that our obligation would be reduced by the greater of the amount of credit granted in the bankruptcy proceedings
for the value of the intellectual property we previously conveyed to ABS and the amount received by ABS from the sale of such
intellectual property to a third party during the term of the ABS Forbearance Agreement, plus the amount of any distribution to
which we are entitled as a creditor of ABS, subject to other limitations.
In
May 2013, ABS sent us a notice of default under the ABS Forbearance Agreement. Although there were some negotiations between us
and ABS following the notice of default, this matter has not been resolved.
Our
appeal of the approximately $1.8 million judgment that had been remanded in the ABS bankruptcy proceedings to conclusively determine
the amount of credit due us for the conveyance of the intellectual property has been dismissed. All litigation and disputes between
ABS and its affiliates, on the one hand, and us and our affiliates, on the other hand, have been dismissed.
We
have assigned to ABS our creditor claim against the estate of ABS, to the extent of the balance due under the ABS Forbearance
Agreement. Any distribution from the ABS estate in excess of the adjusted amounts due under the ABS Forbearance Agreement will
be paid to us.
Because
ABS’s lien is subordinate to liens on all of our assets in favor of Y.A. Global and/or Tekfine, LLC, ABS is unable to presently
take any steps to enforce its judgment. If that changes, we would potentially face collection actions on the judgment, subject
to our offset claims for the intellectual property and creditor claim.
We
had accrued the minimum liability of $90,000, of which $45,000 has been paid leaving $45,000 due, which is included in accrued
liabilities as of June 30, 2018, and December 31, 2017. Because the remaining liability is unknown and cannot be reasonably estimated,
no additional amounts have been accrued.
Delinquent
Payroll Taxes, Interest, and Penalties
In
November 2004, the IRS accepted our amended offer in compromise (the “Offer”) to settle delinquent payroll taxes,
interest, and penalties, which requires us to pay $500,000, remain current in our payment of taxes for five years, and forego
claiming anynet operating losses for the years 2001 through 2015 or until we pay taxes on future profits in an amount equal to
the taxes of $1,455,767 waived by the Offer. In June 2013, we entered into a partial installment agreement to pay $768,526 in
unpaid 2009 payroll taxes, which requires us to pay the IRS 5% of cash deposits. The monthly payments are to continue until the
account balances are paid in full or until the collection statute of limitation expires on October 6, 2020. There was $367,617
due as of June 30, 2018, and December 31, 2017, of which $108,754 is included in liabilities from discontinued operations.
Employment
Agreements
We
engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended
in September 2017, with a salary in an amount and commencement date to be determined. In July 2017, Mr. Hawatmeh resigned all
positions with us to pursue other business activities, thereby effectively terminating the agreement. However, in September 2017,
we reinstated Mr. Hawatmeh to his previous positions and reinstated his employment agreement. Among other things, the reinstated
employment agreement: (a) grants options to purchase a minimum of 6,000,000 shares of our stock each year, with an exercise
price equal to the market price of our common stock as of the grant date, for the maximum term allowed under our stock option
plan; (b) provides for health insurance coverage, cell phone, car allowance, life insurance, and director and officer liability
insurance, as well as any other bonus approved by our board; and (c) includes additional incentive compensation as follows:
(i) a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization for the applicable
quarter; (ii) bonuses equal to 1% of the net purchase price of any acquisitions we complete that are directly generated and
arranged by Mr. Hawatmeh; and (iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of all products, net
of returns and allowances.
In
addition to the employment agreement above, we have verbal contracts with our employees that require payment of noncash compensation
in a fixed number of shares. During the six months ended June 30, 2018 and 2017, we did not grant options to purchase shares of
common stock to employees due to the insufficient common shares available. We recorded expenses totaling $480 and $1,340 during
the six months ended June 30, 2018 and 2017, respectively, for employee options relating to the employment contracts of these
employees.
NOTE
8—NOTES PAYABLE
Notes
payable consisted of the following:
|
|
June
30,2018
|
|
|
December
31, 2017
|
|
Note
payable to former service provider for past due account payable (current)
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
Note
payable for settlement of debt (long term)
|
|
|
500,000
|
|
|
|
500,000
|
|
Total
|
|
$
|
590,000
|
|
|
$
|
590,000
|
|
There
was $86,089 and $62,534 of accrued interest due on these notes as of June 30, 2018, and December 31, 2017, respectively.
NOTE
9—CONVERTIBLE DEBENTURES
Convertible
debentures consisted of the following:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Convertible
debenture, 5% stated interest rate, secured by all of our assets, due on October 20, 2018
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Convertible
debenture, 5% stated interest rate, secured by all of our assets, due on April 30, 2027
|
|
|
2,390,528
|
|
|
|
2,390,528
|
|
Total
|
|
$
|
2,590,528
|
|
|
$
|
2,590,528
|
|
The
convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $0.10 or the lowest
bid price for the 20 trading days prior to conversion ($nil as of June 30, 2018, and December 31, 2017).
As
of June 30, 2018, and December 31, 2017, we had accrued interest on the convertible debentures totaling $1,208,542 and $1,144,311,
of which $11,966 and $6,986 was current and $1,196,576 and $1,137,325 was long term, respectively. As of June 30, 2018 and December
31, 2017, the debentures were convertible into nil, due to the indeterminable price of our common stock.
NOTE
10—STOCKHOLDERS’ DEFICIT
We
are authorized to issue up to 4,500,000,000 shares of $0.001 par value common stock. No shares were issued during the periods
presented. We had a total of 4,498,891,910 common shares issued and outstanding as of June 30, 2018, and December 31, 2017.
NOTE
11—STOCK OPTIONS AND WARRANTS
Stock
Incentive Plans
During
the six months ended June 30, 2018 and 2017, we did not grant options to purchase shares of common stock to employees or consultants.
However, we have committed to issue stock options and have recorded a corresponding liability (as described in Note 6–Other
Accrued Liabilities) for commitments to issue a balance of 170.6 million and 165.8 million stock options as of June 30, 2018 and
December 31, 2017, respectively.
During
the six months ended June 30, 2018, we accrued for a net of 4,800,000 stock options (11,400,000 new grants, less rescission of
6,600,000) relating to the employment of our president and consultants. The fair market value of the accrued stock options aggregated
$480, using the following assumptions: seven-year term, volatility of 567%, a risk free rate of 2.38%, and exercise price of $0.0001.
During
the six months ended June 30, 2017, we accrued for 13,400,000 stock options relating to the employment of our president and consultants.
The fair market value of the accrued stock options aggregated $1,375, using the following assumptions: seven-year term, volatility
of 567%, a risk free rate of 2.26% and exercise price of $0.0001.
As
of June 20, 2018, we had no unrecognized compensation costs related to outstanding options that have not yet vested at year-end
that would be recognized in subsequent periods. See Note 6–Other Accrued Liabilities for a description of amounts of option
expenses included in accrued payroll and compensation expense.
NOTE
12—DISCONTINUED OPERATIONS
At
October 21, 2016, we exited the beverage licensing and distribution business. The assets and liabilities associated with this
business are displayed as assets and liabilities from discontinued operations as of June 30, 2018, and December 31, 2017
as a result. Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations
for the three and six months ended June 30, 2018 and 2017.
Total
assets and liabilities included in discontinued operations were as follows:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Assets
From Discontinued Operations:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
122
|
|
|
|
62
|
|
Total
assets from discontinued operations
|
|
$
|
122
|
|
|
$
|
62
|
|
|
|
|
|
|
|
|
|
|
Liabilities
From Discontinued Operations:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
19,698,096
|
|
|
$
|
19,641,248
|
|
Accrued
liabilities
|
|
|
691,436
|
|
|
|
732,548
|
|
Accrued
interest
|
|
|
791,511
|
|
|
|
715,409
|
|
Accrued
payroll and compensation expense
|
|
|
128,050
|
|
|
|
311,806
|
|
Current
maturities of long-term debt
|
|
|
239,085
|
|
|
|
239,085
|
|
Related
party payable
|
|
|
1,947,713
|
|
|
|
1,776,250
|
|
Short-term
advances payable
|
|
|
2,579,773
|
|
|
|
2,579,773
|
|
Total
liabilities from discontinued operations
|
|
$
|
26,075,664
|
|
|
$
|
25,996,119
|
|
Net
losses from discontinued operations for the three and six months ended June 30, 2018 and 2017 were comprised of the following
components:
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net
sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost
of sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Gross
profit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
400
|
|
|
|
137,792
|
|
|
|
8,258
|
|
|
|
210,649
|
|
Total
operating expenses
|
|
|
400
|
|
|
|
137,792
|
|
|
|
8,258
|
|
|
|
210,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
38,261
|
|
|
|
40,505
|
|
|
|
76,102
|
|
|
|
81,009
|
|
Total
other expense
|
|
|
38,261
|
|
|
|
40,505
|
|
|
|
76,102
|
|
|
|
81,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from discontinued operations
|
|
$
|
(38,661
|
)
|
|
$
|
(178,297
|
)
|
|
$
|
(84,360
|
)
|
|
$
|
(291,658
|
)
|
NOTE
13—SUBSEQUENT EVENTS
We
have evaluated all events occurring subsequent to the financial statements and determined there are no additional items to disclose.