Attached files
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-49654
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CIRTRAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 68-0121636
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4125 South 6000 West, West Valley City, Utah 84128
-------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(801) 963-5112
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding at May 21,
2010 was 1,498,972,923 shares.
1
CIRTRAN CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 31, 2010
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets ..................... 3
Condensed Consolidated Statements of Operations ........... 4
Condensed Consolidated Statements of Cash Flows ........... 5
Notes to Condensed Consolidated Financial Statements ...... 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 22
Item 3 Quantitative and Qualitative Disclosures About Market Risk ... 31
Item 4 Controls and Procedures ...................................... 31
PART II - OTHER INFORMATION
Item 1 Legal Proceedings ............................................ 32
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds .. 33
Item 3 Defaults Upon Senior Securities .............................. 34
Item 4 Other Information ............................................ 34
Item 5 Exhibits ..................................................... 34
Signatures ............................................................ 39
2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2010 2009
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ASSETS
Current assets
Cash and cash equivalents $ 10,148 $ 8,588
Trade accounts receivable, net of
allowance for doubtful accounts of
$267,928 and $290,806, respectively 519,483 472,947
Receivable due from related party 33,076 670,266
Inventory, net of reserve of $2,001,052
and $2,045,458, respectively 560,320 873,650
Prepaid deposits 82,011 82,011
Other 628,263 720,712
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Total current assets 1,833,301 2,828,174
Investment in securities, at cost 300,000 300,000
Investment in related party, at cost 750,000 750,000
Long-term receivable due from related party 6,841,083 6,285,551
Long-term receivable 1,647,895 1,647,895
Property and equipment, net 491,798 544,705
Intellectual property, net 1,159,245 1,270,358
Other assets, net 14,538 14,538
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Total assets $ 13,037,860 $ 13,641,221
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Checks written in excess of bank balance $ 326,113 $ 217,361
Accounts payable 2,786,203 3,047,592
Short term advances payable 3,157,759 2,962,339
Accrued liabilities 4,672,959 3,889,412
Deferred revenue 2,146,764 2,275,967
Derivative liability 275,992 523,349
Convertible debenture 3,161,355 3,161,355
Current portion of refundable customer
deposits 822,579 828,933
Current maturities of long-term debt 789,542 578,226
Note payable to stockholders 205,077 208,014
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Total current liabilities 18,344,343 17,692,548
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Refundable customer deposits, net of
current portion 1,575,000 1,719,000
Long-term debt, less current maturities - 196,614
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Total liabilities 19,919,343 19,608,162
Stockholders' deficit
CirTran Corporation stockholders' deficit:
Common stock, par value $0.001; authorized
1,500,000,000 shares; issued and
outstanding shares: 1,498,972,923 1,498,968 1,498,968
Additional paid-in capital 29,125,683 29,117,928
Subscription receivable (17,000) (17,000)
Accumulated deficit (40,062,365) (39,140,068)
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Total CirTran Corporation stockholders'
deficit (9,454,714) (8,540,172)
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Noncontrolling interest 2,573,231 2,573,231
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Total stockholders' deficit (6,881,483) (5,966,941)
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Total liabilities and stockholders' deficit $ 13,037,860 $ 13,641,221
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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 March 31, 2010 2009
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Net sales $ 2,183,838 $ 1,922,382
Cost of sales (1,528,712) (1,403,457)
Royalty expense (531,448) (147,189)
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Gross profit 123,678 371,736
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Operating expenses
Selling, general and administrative expenses 790,608 1,149,982
Non-cash compensation expense 43,577 996
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Total operating expenses 834,185 1,150,978
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Loss from operations (710,507) (779,242)
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Other income (expense)
Interest expense (248,600) (326,566)
Interest income 29,185 124,590
Separation expense - related party (260,000) -
Gain on sale/leaseback 20,268 20,268
Gain (loss) on derivative valuation 247,357 (1,288,607)
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Total other expense, net (211,790) (1,470,315)
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Net loss $ (922,297) $ (2,249,557)
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Basic and diluted loss per common share $ (0.00) $ (0.00)
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Basic and diluted weighted-average
common shares outstanding 1,498,972,923 1,466,039,049
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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 Three Months Ended March 31, 2010 2009
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Cash flows from operating activities
Net loss $ (922,297) $ (2,249,557)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 164,021 166,544
Accretion expense 57,640 177,531
Recovery of doubtful accounts (22,877) -
Provision for obsolete inventory (44,407) -
Gain on sale - leaseback 20,268 20,000
Non-cash compensation expense 43,577 996
Loan costs and interest withheld from
loan proceeds - 12,474
Litigation settled through accrued
liability - (52,906)
Options issued for services 6,758 822
Change in valuation of derivative (247,357) 1,288,607
Changes in assets and liabilities:
Trade accounts receivable (23,659) (107,781)
Receivable due from related parties 81,657 (348,823)
Inventory 357,737 (85,755)
Prepaid deposits and other current assets 92,449 (3,386)
Accounts payable (210,169) 394,442
Accrued liabilities 720,698 669,910
Deferred revenue (129,203) (68,326)
Refundable customer deposits (150,354) (103,080)
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Net cash used in operating activities (205,518) (288,288)
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Cash flows from financing activities
Proceeds from notes payable to stockholders - 4,612
Payments on notes payable to stockholders (2,937) (5,221)
Principal payments on long-term debt (42,937) -
Checks written in excess of bank balance 108,752 79,313
Proceeds from short-term advances payable 144,200 210,200
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Net cash provided by
financing activities 207,078 288,904
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Net increase in cash and cash equivalents 1,560 616
Cash and cash equivalents at beginning of period 8,588 8,701
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Cash and cash equivalents at end of period $ 10,148 $ 9,317
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
For the Three Months Ended March 31, 2010 2009
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Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 7,863 $ -
Noncash investing and financing activities:
Stock issued in payment of notes payable
and accrued interest - $ 110,000
Accounts payable settled on behalf of the
Company for issuance of short term advances 51,220 -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - CirTran Corporation and its subsidiaries (collectively,
the "Company" or "CirTran") 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 can exert
significant influence using the cost method.
Condensed Financial Statements - The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiaries. These financial statements have been prepared in
accordance with Article 10 of Regulation S-X promulgated by the Securities and
Exchange Commission ("SEC" or "Commission"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted pursuant to such rules and regulations. These
statements should be read in conjunction with the Company's annual financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2009. 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 months ended March 31, 2010, are
not necessarily indicative of the results that may be expected for the twelve
months ending December 31, 2010.
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 Corp., CirTran
Media Corp., CirTran Online Corp., and CirTran Beverage Corp.
The consolidated financial statements also include the accounts of After
Beverage Group LLC ("AfterBev"), a majority controlled entity. At March 31,
2010, the Company had a four percent share of AfterBev's profits and losses, but
maintained a 52 percent voting control interest. AfterBev has a 51 percent share
of the eventual cash distributions of Play Beverages, LLC ("PlayBev"), and the
president and one of the directors of the Company own membership interests in
PlayBev totaling 28.35 percent. As of September 30, 2008, the members of PlayBev
had amended PlayBev's operating agreement to require a 95 percent membership
vote on major managerial and organizational decisions. None of the other members
of PlayBev are affiliated with the Company. Accordingly, while the Company
president and one of its directors own membership interests and currently hold
the executive management positions in PlayBev, the Company or its affiliates
nevertheless cannot exercise unilateral control over significant decisions, and
the Company has accounted for its investment in PlayBev under the cost method of
accounting.
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. At each
balance sheet date, the Company evaluates 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.
Long-lived asset costs are amortized over the estimated useful life of the
asset, which are typically five to seven years. Amortization expense was
$111,114 and $111,114 for the three months ended March 31, 2010 and 2009,
respectively.
Financial Instruments with Derivative Features - The Company does not hold or
issue derivative instruments for trading purposes. However, the Company has
financial instruments that are considered derivatives, or contain embedded
features subject to derivative accounting. Embedded derivatives are valued
separate from the host instrument and are recognized as derivative liabilities
in the Company's balance sheet. The Company measures these instruments at their
estimated fair value, and recognizes changes in their estimated fair value in
results of operations during the period of change. The Company has estimated the
fair value of these embedded derivatives using the Black-Scholes model. The fair
value of the derivative instruments are re-measured each quarter.
7
Loss Per Share - Basic loss per share is calculated by dividing net loss
available to common shareholders by the weighted-average number of common shares
outstanding during each period. Diluted loss per share is similarly calculated,
except that the weighted-average number of common shares outstanding would
include common shares that may be issued subject to existing rights with
dilutive potential when applicable. The Company had 974,512,842 and 64,863,976
in potentially issuable common shares at March 31, 2010 and 2009, respectively.
These potentially issuable common shares were excluded from the calculation of
diluted loss per share because the effects were anti-dilutive.
Use of Estimates - In preparing the Company's 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.
Reclassifications - Certain reclassifications have been made to the financial
statements to conform to the current year presentation.
Recent Accounting Pronouncements
In January 2009, the Securities and Exchange Commission ("SEC") issued Release
No. 33-9002, "Interactive Data to Improve Financial Reporting." The final rule
requires companies to provide their financial statements and financial statement
schedules to the SEC and on their corporate websites in interactive data format
using the eXtensible Business Reporting Language ("XBRL"). The rule was adopted
by the SEC to improve the ability of financial statement users to access and
analyze financial data. The SEC adopted a phase-in schedule indicating when
registrants must furnish interactive data. Under this schedule, the Company will
be required to submit filings with financial statement information using XBRL
commencing with its June 30, 2011, quarterly report on Form 10-Q. The Company is
currently evaluating the impact of XBRL reporting on its financial reporting
process.
In January 2010, the Financial Accounting Standards Board ("FASB") issued
guidance which clarifies and provides additional disclosure requirements related
to recurring and non-recurring fair value measurements. The Company implemented
these new requirements in the first quarter of fiscal 2010. Certain additional
disclosures about purchases, sales, issuances and settlements in the roll
forward of activity in Level 3 fair value measures are not effective until
fiscal years beginning after December 15, 2010. Other than requiring additional
disclosures, implementation of this new guidance will not have a material impact
on the Company's financial statements.
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, which contemplate continuation of the Company as a going concern.
However, the Company sustained losses of $922,297 and $2,249,557 for the three
months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, the
Company had an accumulated deficit of $40,062,365. In addition, the Company used
cash in its operations in the amount of $205,518 and $288,288 during the three
months ended March 31, 2010 and 2009, respectively. The Company has borrowed
funds in the form of short-term advances, notes, and convertible debentures. In
2009 the Company assumed a total of $890,000 in the form of four short-term
promissory notes. As of March 31, 2010 the balance of the loans totaled $755,000
and all four notes were in default. (See Note 7) 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
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence. The Company feels that its beverage
business has the potential to have a substantial impact on its business. The
Company plans to focus on the beverage business and the contract manufacturing
business. For the beverage business, the Company plans to sell existing products
and develop new products under the license agreement with Playboy to a globally
expanding market. With regard to contract manufacturing, the Company goal is to
provide customers with manufacturing solutions for both new and more mature
products, as well as across product generations.
8
The Company currently provides product marketing services to the direct response
and retail markets for both proprietary and non-proprietary products. This
segment provides campaign management and marketing services for both the Direct
Response, Retail and Beverage Distribution markets. The Company intends to
continue to provide marketing and media services to support its own product
efforts, and offer to customers marketing service in channels involving
television, radio, print media, and the internet.
With respect to electronics assembly and manufacturing, the Company intends to
continue to serve these industries, although it anticipates that its focus will
shift more to providing services on a sub-contract basis.
NOTE 3 - INVENTORY
Inventory consisted of the following:
March 31, December 31,
2010 2009
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Raw Materials $ 1,691,164 $ 1,638,256
Work in Process 139,947 313,302
Finished Goods 730,261 967,550
Allowance / Reserve (2,001,052) (2,045,458)
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Totals $ 560,320 $ 873,650
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NOTE 4 - INTELLECTUAL PROPERTY
Intellectual property and estimated service lives consisted of the following:
Estimated
March 31, December 31, Service Lives
2010 2009 in Years
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Infomercial development costs $ 61,445 $ 61,445 7
Patents 38,056 38,056 7
ABS Infomerical 1,186,382 1,186,382 5
Trademark 1,227,673 1,227,673 7
Copyright 115,193 115,193 7
Website Development Costs 150,000 150,000 5
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Total intellectual property $ 2,778,749 $ 2,778,749
Less accumulated amortization (1,619,504) (1,508,391)
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Intellectual property, net $ 1,159,245 $ 1,270,358
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9
The estimated amortization expenses for the next five years are as follows:
Year Ending December 31,
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2010 $ 351,636
2011 356,783
2012 254,916
2013 142,063
2014 32,418
Thereafter 21,429
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Total $ 1,159,245
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NOTE 5 - RELATED PARTY TRANSACTIONS
Play Beverages, LLC
During 2006, Playboy Enterprises International, Inc. ("Playboy"), entered into a
licensing agreement with Play Beverages, LLC ("PlayBev"), then an unrelated
Delaware limited liability company, whereby PlayBev agreed to internationally
market and distribute a new energy drink carrying the Playboy name and "Rabbit
Head" logo symbol. In May 2007, PlayBev entered into an exclusive agreement with
the Company to arrange for the manufacture, marketing and distribution of the
energy drinks, other Playboy-licensed beverages, and related merchandise through
various distribution channels throughout the world.
In an effort to finance the initial development and marketing of the new drink,
the Company with other investors formed After Bev Group LLC ("AfterBev"), a
California limited liability company and partially owned, consolidated
subsidiary of the Company. The Company contributed its expertise in exchange for
an initial 84 percent membership interest in AfterBev. The other initial
AfterBev members contributed $500,000 in exchange for the remaining 16 percent.
The Company borrowed an additional $250,000 from an individual, and contributed
the total $750,000 to PlayBev in exchange for a 51 percent interest in PlayBev's
cash distributions. The Company recorded this $750,000 amount as an investment
in PlayBev, accounted for under the cost method. PlayBev then remitted these
funds to Playboy as part of a guaranteed royalty prepayment. Along with the
membership interest granted the Company, PlayBev agreed to appoint the Company's
president and one of the Company's directors to two of PlayBev's three executive
management positions. Additionally, an unrelated executive manager of PlayBev
resigned, leaving the remaining two executive management positions occupied by
the Company president and one of the Company's directors. On August 23, 2008,
PlayBev's members agreed to amend its operating agreement to change the required
membership vote on major managerial and organizational decisions from 75 percent
to 95 percent. Since 2007, the two affiliates have personally purchased
membership interests from PlayBev directly and from other PlayBev members
constituting an additional 23.1 percent, which aggregated 34.35 percent. Despite
the combined 90.5 percent interest owned by these affiliates and the Company,
the Company cannot unilaterally control significant operating decisions of
PlayBev, as the amended operating agreement requires that various major
operating and organizational decisions be agreed to by at least 95 percent of
all members. The other members of PlayBev are not affiliated with the Company.
Accordingly, while PlayBev is now a related party, the Company cannot
unilaterally control significant operating decisions of PlayBev, and therefore
has not accounted for PlayBev's operations as if it was a consolidated
subsidiary.
PlayBev has no operations, so under the terms of the exclusive manufacturing and
distribution agreement, the Company was appointed as the master manufacturer and
distributor of the beverages and other products that PlayBev licensed from
Playboy. In so doing, the Company assumed all the risk of collecting amounts
owed from customers, and contracting with vendors for manufacturing and
marketing activities. In addition, PlayBev is owed a royalty from the Company
equal to the Company's gross profits from collected beverage sales, less 20
percent of the Company's related cost of goods sold, and 6 percent of the
Company's collected gross sales. The Company incurred $531,448 and $147,189 in
royalty expenses due to PlayBev during the three months ended March 31, 2010 and
2009, respectively.
10
The Company also agreed to provide services to PlayBev for initial development,
marketing, and promotion of the new beverage. These services are billed to
PlayBev and recorded as an account receivable from PlayBev. The Company
initially agreed to carry up to a maximum of $1,000,000 as a receivable due from
PlayBev in connection with these billed services. On March 19, 2008, the Company
agreed to increase the maximum amount it would carry as a receivable due from
PlayBev, in connection with these billed services, from $1,000,000 to
$3,000,000. The Company has advanced amounts beyond $3,000,000 in order to
continue the market momentum internationally. As of March 19, 2008, the Company
also began charging interest on the outstanding amounts owing at a rate of 7
percent per annum. PlayBev has agreed to repay the receivable and accrued
interest out of the royalties due PlayBev. The Company has billed PlayBev for
marketing and development services totaling $399,767 and $371,133 for the three
months ending March 31, 2010 and 2009, respectively, which have been included in
revenues for our marketing and media segment. As of March 31, 2010, the interest
accrued on the balance owing from PlayBev totaled $765,016. The net amount due
the Company from PlayBev for marketing and development services, after netting
the royalty owed to PlayBev, totaled $6,874,159 at March 31, 2010.
Global Marketing Alliance
The Company entered into an agreement with Global Marketing Alliance ("GMA"),
and hired GMA's owner as the Vice President of CirTran Online Corp. ("CTO"), one
of the Company's subsidiaries. Under the terms of the agreement, the Company
outsources to GMA the online marketing and sales activities associated with the
Company's CTO products. In return, the Company provides bookkeeping and
management consulting services to GMA, and pays GMA a fee equal to five percent
of CTO's online net sales. In addition, GMA assigned to the Company all of its
web-hosting and training contracts effective as of January 1, 2007, along with
the revenue earned thereon, and the Company also assumed the related contractual
performance obligations. The Company recognizes the revenue collected under the
GMA contracts, and remits back to GMA a management fee approximating their
actual costs. The Company recognized net revenues from GMA related products and
services in the amount of $490,435 and $616,185 for the three months ended March
31, 2010 and 2009, respectively.
Transactions involving Officers, Directors, and Stockholders
In 2007, the Company appointed Fadi Nora to its Board of Directors. In addition
to compensation the Company normally pays to non-employee members of the Board,
Mr. Nora is entitled to a quarterly bonus equal to 0.5 percent of any gross
sales earned by the Company directly through Mr. Nora's efforts. As of March 31,
2010, the Company owed $24,571 under this arrangement. Mr. Nora also is entitled
to a bonus equal to five percent of the amount of any investment proceeds
received by 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 proceeds is the introduction of the Company to the
potential investor, but that he does not participate in the recommendation,
structuring, negotiation, documentation, or selling of the investment, (ii)
neither the Company nor the investor are otherwise obligated 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. During 2008 and 2009,
Mr. Nora earned no compensation under this arrangement, and at March 31, 2010,
the Company did not owe him any amounts under the arrangement.
In 2007, the Company also entered into a consulting agreement with Mr. Nora,
whereby the Company assigned to him approximately one-third of the Company's
share in future AfterBev cash distributions. In return, Mr. Nora assisted in the
initial AfterBev organization and planning, and continued to assist in
subsequent beverage development and distribution activities. The agreement also
provided that as the Company sold a portion of its membership interest in
AfterBev, Mr. Nora would be owed his proportional assigned share distribution in
the proceeds of such a sale. Distributable proceeds due to Mr. Nora at the end
of 2007 were $747,290. In January 2008, he agreed to relinquish this amount,
plus an additional $116,683, in exchange for a 24 percent interest in AfterBev's
profits and losses. Accordingly, he purchased from CirTran a 24 percent interest
in AfterBev's profits and losses in exchange for foregoing $863,973 in amounts
due to him. Of this 24 percent, through the end of December 31, 2008, Mr. Nora
had sold or transferred 23 percent to unrelated investors and retained the
remaining 1 percent interest in AfterBev's profits and losses. In turn, Mr. Nora
loaned $834,393 to the Company in the form of unsecured advances. Of the amounts
loaned, $600,000 was used to purchase a 6 percent interest in PlayBev directly
which resulted in a reduction of $600,000 of amounts owed by PlayBev to the
Company. During 2009, Mr. Nora advanced an additional $500,000 to the Company
for his purchase of an additional 3 percent interest in Playbev, which resulted
in a reduction of $500,000 of amounts owed by PlayBev to the Company. During the
three months ended March 31, 2010 Mr. Nora loaned the Company a total of
$71,720. Mr. Nora received cash payments totaling $65,000 from the Company
during the three months ended March 31, 2010. As of March 31, 2010, the Company
still owed Mr. Nora $71,439 in the form of short-term advances.
11
In addition, on July 14, 2009, the Company entered into a Stock Purchase
Agreement with Mr. Nora to purchase 75,000,000 shares of common stock of the
Company at a purchase price of $.003 per share, for a total of $225,000, payable
through the conversion of outstanding loans made by the director to the Company.
Mr. Nora and the Company acknowledged in the purchase agreement that the Company
did not have sufficient shares to satisfy the issuances, and agreed that the
shares would be issued once the Company has sufficient shares to do so. As of
March 31, 2010, the Company showed the balance of $225,000 as an accrued
liability on the balance sheet.
In 2007, the Company issued a 10 percent notes payable to a family member of the
Company president in exchange for $300,000. The note was due on demand after May
2008. During the years ended December 31, 2009 and 2008, the Company repaid
principal and interest totaling $22,434 and $8,444, respectively. During the
three months ended March 31, 2010 the Company repaid principal and interest
totaling $10,500. At March 31, 2010, the principal amount owing on the note was
$205,077. On March 31, 2008, the Company issued to this same family member,
along with four other Company shareholders, notes payable totaling $315,000. The
family member's note was for $105,000. Under the terms of all the notes, the
Company received total proceeds of $300,000, and agreed to repay the amount
received plus a five percent borrowing fee. The notes were due April 30, 2008,
after which they were due on demand, with interest accruing at 12 percent per
annum. During the year ended December 31, 2008, the Company paid two of the
notes in full for a total of $105,000. In addition, the Company repaid $58,196
in principal to the family member during the year ended December 31, 2008.
During 2009, the Company paid $52,000 towards the outstanding notes, of which
$10,000 was paid in principal to the family member. During the three months
ended March 31, 2010 the Company paid $31,500 towards the outstanding notes. The
principal balance owing on the notes payable as of March 31, 2010, totaled
$72,915.
During 2009, the Company president advanced an additional $500,000 to the
Company for his purchase of an additional 3 percent interest in PlayBev, which
resulted in a reduction of $500,000 of amounts owed by Playbev to the Company.
As of March 31, 2010, the Company owed the Company president a total of $325,300
in unsecured advances, and $136,827 in accrued options.
On July 14, 2009, the Company entered into a Stock Purchase Agreement with the
president of the Company to purchase 50,000,000 shares of common stock of the
Company at a purchase price of $.003 per share, for a total amount of $150,000,
payable through the conversion of outstanding loans made by the president of the
Company to the Company. Mr. Hawatmeh and the Company acknowledged in the
purchase agreement that the Company did not have sufficient shares to satisfy
the issuances, and agreed that the shares would be issued once the Company has
sufficient shares to do so. As of March 31, 2010, the Company showed the balance
of $150,000 as an accrued liability on the balance sheet.
On March 5, 2010 the Company entered into a Separation Agreement ("Agreement")
with Shaher Hawatmeh. As of the date of the "Agreement" Shaher Hawatmeh's
employment with the Company was terminated and he no longer has any further
employment obligations with the Company. In consideration of his execution of
this "Agreement" the Company will pay Shaher Hawatmeh's "Separation Pay" of
$210,000 in twenty-six bi-weekly payments. The first payment of the Separation
Pay was to begin on March 19, 2010. On April 2, 2010 the Company made the first
payment to Shaher Hawatmeh. Additional terms of the separation agreement include
payment of all amounts necessary to cover health and medial premiums on behalf
of Shaher Hawatmeh, his spouse and dependents through April 20, 2010, all
outstanding car allowances and expense ($750) due and owing as of February 28,
2010, satisfaction and payment by the Company (with a complete release of Shaher
Hawatmeh) of all outstanding amounts due and owing on the Company Corporate
American Express Card (issued in the name of Shaher) and the issuance and
delivery to Shaher Hawatmeh of ten million (10,000,000) shares of the Company's
common stock within a reasonable time following authorization by the Company's
shareholders of sufficient shares to cover such issuance. The fair market value
of the shares aggregated to $50,000 as of March 5, 2010 based on the $.005 per
share value as of the effective date of the separation agreement, and has been
included in accrued liabilities as of March 31, 2010. The total value of
$260,000 was recorded as a related party separation expense.
In an effort to operate more efficiently and focus resources on higher margin
areas, on March 5, 2010, the Company entered into certain agreements with a
related party, Katana Electronics, LLC, a Utah limited liability company
("Katana"). The Agreements include an Assignment and Assumption Agreement, an
Equipment Lease, and a Sublease Agreement relating to the Company's property.
Pursuant to the terms of the Sublease, the Company will sublease a certain
portion of the Premises to Katana consisting of the warehouse and office space
used as of the close of business on March 4, 2010. The term of the Sublease is
for two (2) months with automatic renewal periods of one month each, subject to
land lord authorization. The base rent under the Sublease is $8,500 per month.
The Sublease contains normal and customary use restrictions, indemnification
rights and obligations, default provisions and termination rights. Under
Agreements signed, the Company continues to have rights to operate as a contract
manufacturer in the future in the US and off-shore.
12
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Litigation and Claims - Various vendors and service providers have notified the
Company that they believe they have claims against the Company totaling
approximately $1,500,000.
Advanced Beauty Solutions, LLC, v. CirTran Corporation, Case No.
1:08-ap-01363-6M. In connection with prior litigation between Advanced Beauty
Solutions ("ABS") and the Company, ABS claimed non-performance by the Company
and filed an adversary proceeding in ABS's bankruptcy case proceeding in the
United States Bankruptcy Court, Central District of California, San Fernando
Valley Division. On March 17, 2009, the Bankruptcy Court entered judgment in
favor of ABS and against the Company in the amount of $1,811,667 plus interest.
On September 11, 2009, the Bankruptcy Court denied the Company's motion to set
aside the judgment. As of the date of this report, ABS was pursuing collection
efforts on this judgment. The Company is in negotiations to settle the judgement
for a lesser amount. The Company does not expect the settlement to exceed
$500,000.
Fortune Resources LLC v. CirTran Beverage Corp, Civil No. 090401259, Third
Judicial District Court, Salt Lake County, State of Utah. On February 5, 2009,
the plaintiff filed a complaint against CirTran Beverage, claiming non-payment
for goods in the amount of $121,135. CirTran Beverage filed its answer on March
10, 2009, denying the allegations in the Complaint. The case is presently in the
discovery phase. An order requiring CirTran Beverage to produce certain
documents and information was entered on or about February 19, 2010. The
plaintiff says that CirTran Beverage did not comply with the order and seeks
entry of judgment for the amount claimed in the complaint. CirTran Beverage and
Fortune Resources engaged in settlement negotiations, and on May 3, 2010,
pursuant to which Fortune Resources agreed to dismiss the suit upon receipt from
CirTran of $50,000.
Old Dominion Freight Line v. CirTran Corporation, Civil No. 090426290, Third
Judicial District Court, Salt Lake County, State of Utah. On May 5, 2010, the
Court entered an Order in Supplemental Proceedings in connection with a judgment
in favor of Old Dominion and against CirTran in the amount of $33,187.
The Company has accrued for approximately $583,000 in total for claims that the
it considers probable to be paid. The accrued amounts are recorded in accounts
payable, accrued liabilities and notes payable.
Registration rights agreements - In December 2005, in connection with the
Company's issuance of a convertible debenture to YA Global Investments, L.P.,
formerly known as Cornell Capital Partners, L.P. ("YA Global") (see Note 8), the
Company granted to YA Global 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. The Company agreed to
register the resale of up to 32,608,696 shares and 10,000,000 warrants, and to
keep the 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 a second
convertible debenture to YA Global (See Note 8), the Company granted YA Global
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. 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.
13
Previously, YA Global has agreed to extensions of the filing deadlines inherent
in the terms of the two convertible debentures mentioned above, and in February
2008 agreed to extend the filing deadlines to December 31, 2008. On August 11,
2009, the Company and YA Global entered into a forbearance agreement related to
the three convertible debentures issued by the Company to YA or its predecessor
entities (see Note 8 - Convertible Debentures).
Forbearance Agreement - Under the terms of the agreement, the Company agreed to
waive any claims against YA, entered into a Global Security Agreement (discussed
below), a Global Guaranty Agreement (discussed below), and an amendment of a
warrant granted to YA in connection with the issuance of the August Debenture;
agreed to seek to obtain waivers from the Company's landlords at its properties
in Utah, California, and Arkansas; agreed to seek to obtain deposit account
control agreements from the Company's banks and depository institutions; and to
repay the Company's obligations under the Debentures.
The repayment terms of the Forbearance Agreement required an initial payment of
$125,000 upon signing the agreement. Beginning September 1, 2009, through May 1,
2010, monthly payments ranging from $150,000 to $300,000 are due for total
payments of $2,825,000. The remaining balance is due July 1, 2010.
Pursuant to the Forbearance Agreement, the Company, subject to the consent of
YA, may choose to pay all or any portion of the monthly payments in common
stock, at a conversion price used to determine the number of shares of common
stock equal to 85 percent of the lowest closing bid price of the Company's
common stock during the ten trading days prior to the payment date.
YA agreed to forbear from enforcing its rights and remedies as a result of the
existing defaults and/or converting the Debentures into shares of the Company's
common stock, until the earlier of the occurrence of a Termination Event (as
defined in the Forbearance Agreement), or July 1, 2010. As of March 31, 2010,
the Company was not in compliance with the forbearance agreement. The Company
and YA Global are in the process of amending the Forbearance Agreement.
Subsequent to March 31, 2010, the Company has made a "good faith" payment of
$25,000 as part of the amendment process.
The Company, YA, and certain of the Company's subsidiaries also entered into a
Global Security Agreement (the "GSA") in connection with the Forbearance
Agreement. Under the GSA, the Company and the participating subsidiaries pledged
and granted to YA a security interest in all assets and personal property of the
Company and each participating subsidiary as security for the payment or
performance in full of the obligations set forth in the Forbearance Agreement.
Additionally, the Company, YA, and certain of the Company's subsidiaries also
entered into a Global Guaranty Agreement (the "GGA") in connection with the
Forbearance Agreement. Under the GGA, the Company and the participating
subsidiaries guaranteed to YA the full payment and prompt performance of all of
the obligations set forth in the Forbearance Agreement.
Authorized Capital - The Company currently has issued and outstanding options,
warrants, convertible notes and other instruments for the acquisition of the
Company's common stock in excess of the available authorized but non-issued
shares of common stock provided for under the Company's Articles of
Incorporation, as amended. As a consequence, in the event that the holders of
such instruments requiring the issuance, in the aggregate, of a number of shares
of common stock that would, when combined with the previously issued and
outstanding common stock of the Company exceed the authorized capital of the
Company, seek to exercise their rights to acquire shares under those
instruments, the Company will be required to increase the number of authorized
shares or effect a reverse split of the outstanding shares in order to provide
sufficient shares for issuance under those instruments.
14
Employment Agreements - On August 1, 2009, we entered into a new employment
agreement with Mr. Hawatmeh, our President. The term of the employment agreement
continues until August 31, 2014, and automatically extends for successive one
year periods, with an annual base salary of $345,000. The employment agreement
also grants to Mr. Hawatmeh options to purchase a minimum of 6,000,000 shares of
the Company's stock each year, with the exercise price of the options being the
market price of the Company's common stock as of the grant date. The Employment
Agreement also provides for health insurance coverage, cell phone, car
allowance, life insurance, and director and officer liability insurance, as well
as any other bonus approved by the Board. The employment agreement includes
additional incentive compensation as follows: a quarterly bonus equal to 5
percent of the Company's earnings before interest, taxes, depreciation and
amortization for the applicable quarter; bonus(es) equal to 1.0 percent of the
net purchase price of any acquisitions completed by the Company that are
directly generated and arranged by Mr. Hawatmeh; an annual bonus (payable
quarterly) equal to 1 percent of the gross sales, net of returns and allowances
of all beverage products of the Company and its affiliates for the most recent
fiscal year; and 6,000,000 company stock options at the beginning of each
calendar year. No employee stock options have been granted to Mr. Hawatmeh for
2008, 2009 and 2010. As a result, the Company has yet to grant a total of
18,000,000 company stock options to Mr. Hawatmeh. The fair market value of these
stock options have been accrued. During the three months ending March 31, 2010
the Company incurred $42,581 of non-cash compensation expense related to accrual
for employee stock options to be awarded per the employment contract with the
president of the Company.
Pursuant to the employment agreement, Mr. Hawatmeh's employment may be
terminated for cause, or upon death or disability, in which event the Company is
required to pay Mr. Hawatmeh any unpaid base salary and unpaid earned bonuses.
In the event that Mr. Hawatmeh is terminated without cause, the Company is
required to pay to Mr. Hawatmeh (i) within thirty (30) days following such
termination, any benefit, incentive or equity plan, program or practice (the
"Accrued Obligations") paid when the bonus would have been paid Employee if
employed; (ii) within thirty (30) days following such termination (or on the
earliest later date as may be required by Internal Revenue Code Section 409A to
the extent applicable), a lump sum equal to thirty (30) month's annual base
salary, (iii) bonus(es) owing under the employment agreement for the two year
period after the date of termination (net of an bonus amounts paid as Accrued
Obligations) based on actual results for the applicable quarters and fiscal
years; and (iv) within twelve (12) months following such termination (or on the
earliest later date as may be required by Internal Revenue Code Section 409A to
the extent applicable), a lump sum equal to thirty (30) month's Annual Base
Salary; provided that if Employee is terminated without cause in contemplation
of, or within one (1) year, after a change in control, then two (2) times such
annual base salary and bonus payment amounts.
NOTE 7 - NOTES PAYABLE
In February 2008, the Company issued a 10 percent, three-year, $700,000
promissory note to an investor. No interim principal payments are required, but
accrued interest is due quarterly. The investor also received five-year warrants
to purchase up to 75,000,000 shares of common stock at exercise prices ranging
from $0.02 to $0.50 per share. The Company determined that the warrants fell
under derivative accounting treatment, and recorded the initial carrying value
of a derivative liability equal to the fair value of the warrants at the time of
issuance. At the same time, a discount equal to the face amount of the note was
recorded, to be recognized ratably to interest expense. Interest expense of
$57,640 and $57,640 was accreted during the three months ended March 31, 2010
and 2009, respectively. A total of $488,015 has been accreted against the note
as of March 31, 2010. The carrying value of the note will continue to be
accreted over the life of the note until the carrying value equals the face
value of $700,000. As of March 31, 2010, the balance of the note was $488,015.
The fair value of the derivative liability stemming from the associated warrants
as of March 31, 2010, was $234,507.
15
In March 2008, the Company converted $75,000 owed to an unrelated member of
AfterBev into a one-year, 10 percent promissory note, with interest payable
quarterly. The balance as of March 31, 2010, was $75,000. The note renews
monthly.
During 2009, the Company entered into a settlement agreement in the amount of
$100,000 to be paid in ten $10,000 monthly payments which the Company recorded
as a note payable. As of March 31, 2010, the Company owed $50,000 on the note
payable.
On April 2, 2009 the Company President and a Director of the Company borrowed
from a third party a total of $890,000 in the form of four short-term promissory
notes. The Company President and a Director of the Company signed personally for
the notes. Because the loans were used to pay obligations of the Company, the
Company has assumed full responsibility for the notes. Two of the notes were for
a term of 60 days, with a 60 day grace period, a third note was for a term of 90
days, and a fourth note was for 24 days. Loan fees totaling $103,418 were
incurred with the issuance of the notes and are payable upon maturity of the
notes. During the three months ended March 31, 2010, the Company paid $10,000
against one of the loans. As of March 31, 2010, the balance of the loans totaled
$755,000. As of March 31, 2010, all four notes were in default.
NOTE 8 - CONVERTIBLE DEBENTURES
Highgate House Funds, Ltd. - In May 2005, the Company entered into an agreement
with Highgate, to issue a $3,750,000, 5 percent Secured Convertible Debenture
(the "Debenture"). The Debenture was originally due December 2007, and is
secured by all of the Company's assets. Highgate extended the maturity date of
the Debenture to December 31, 2008. As of January 1, 2008 the interest rate
increased to 12 percent. On August 11, 2009, the Company and YA Globa,l an
assignee of Highgate, entered into a forbearance agreement and related
agreements. The Company agreed to repay the Company's obligations under the
Debentures per an agreed schedule.
Accrued interest was originally payable at the time of maturity or conversion.
Per the Forbearance Agreement, the scheduled payments are to be applied first to
outstanding accrued interest. The Company may, at its option, elect to pay
accrued interest in cash or shares of our common stock, with the conversion
price to be used to determine the number of shares of common stock being equal
to 85 percent of the lowest closing bid price of the Company's common stock
during the ten trading days prior to the payment day. Interest accrued during
the three months ending March 31, 2010, totaled $18,349. The balance of accrued
interest owed at March 31, 2010, was $73,332.
In consideration of the Company's performance under the Forbearance Agreement,
YA Global agreed to forbear from enforcing its rights and remedies as a result
of the existing defaults under the Debenture, and/or converting the Debenture
into shares of the Company's common stock, until the earlier of (i) the
occurrence of a termination event (as defined in the Forbearance Agreement), or
(ii) the termination date of the Forbearance Agreement. Nothing contained in the
Forbearance Agreement constitutes a waiver by YA Global of any default or event
of default, whether existing at the time of the Forbearance Agreement or
thereafter arising, and/or its right to convert the Debenture into shares of
Common Stock. The Forbearance Agreement only constitutes an agreement by YA
Global to forbear from enforcing its rights and remedies and/or converting the
Debenture into shares of common stock of the Company upon the terms and
conditions set forth in the agreement. The Company and YA Global are in the
process of amending the Forbearance Agreement. The Company has made a "good
faith" payment of $25,000 as part of the amendment process (see Note 6).
The Company determined that certain conversion features of the Debenture fell
under derivative accounting treatment. Since May 2005, the carrying value has
been accreted over the life of the debenture until December 31, 2007, the
original maturity date. As of that date, the carrying value of the Debenture was
$970,136, which was the remaining face value of the debenture.
16
In connection with the issuance of the Debenture, $2,265,000 of the proceeds was
used to repay earlier promissory notes. Fees of $256,433, withheld from the
proceeds, were capitalized and were amortized over the life of the note.
During 2006, Highgate converted $1,000,000 of Debenture principal and accrued
interest into a total of 37,373,283 shares of common stock. During 2007,
Highgate converted $1,979,864 of Debenture principal and accrued interest into a
total of 264,518,952 shares of common stock. During the year ended December 31,
2008 Highgate converted $350,000 of debenture principle into a total of
36,085,960 shares of common stock. The carrying value of the Debenture as of
March 31, 2010 was $620,136. The fair value of the derivative liability stemming
from the debenture's conversion feature was determined to be $0 as of March 31,
2010.
YA Global December Debenture - In December 2005, the Company entered into an
agreement with YA Global to issue a $1,500,000, 5 percent Secured Convertible
Debenture (the "December Debenture"). The December Debenture was originally due
July 30, 2008, and has a security interest in all the Company's assets,
subordinate to the Highgate security interest. YA Global also agreed to extend
the maturity date of the December Debenture to December 31, 2008. As of January
1, 2008, the interest rate was increased to 12 percent. The Company agreed to
repay the Company's obligations under the Debentures per an agreed schedule.
Accrued interest was originally payable at the time of maturity or conversion.
Per the Forbearance Agreement, the scheduled payments are to be applied first to
outstanding accrued interest. The Company may, at its option, elect to pay
accrued interest in cash or shares of our common stock, with the conversion
price to be used to determine the number of shares of common stock being equal
to 85 percent of the lowest closing bid price of the Company's common stock
during the ten trading days prior to the payment day. Interest accrued during
the three months ending March 31, 2010, totaled $44,384. The balance of accrued
interest owed at March 31, 2010, was $216,496.
In consideration of the Company's performance under the Forbearance Agreement,
YA Global agreed to forbear from enforcing its rights and remedies as a result
of the existing defaults under the December Debenture, and/or converting the
December Debenture into shares of the Company's common stock, until the earlier
of (i) the occurrence of a termination event (as defined in the Forbearance
Agreement), or (ii) the termination date of the Forbearance Agreement. Nothing
contained in the Forbearance Agreement constitutes a waiver by YA Global of any
default or event of default, whether existing at the time of the Forbearance
Agreement or thereafter arising, and/or its right to convert the December
Debenture into shares of Common Stock. The Forbearance Agreement only
constitutes an agreement by YA Global to forbear from enforcing its rights and
remedies and/or converting the December Debenture into shares of common stock of
the Company upon the terms and conditions set forth in the agreement. The
Company and YA Global are in the process of amending the Forbearance Agreement.
The Company has made a "good faith" payment of $25,000 as part of the amendment
process (see Note 6).
The YA Global Debenture was issued with 10,000,000 warrants, with an exercise
price of $0.09 per share. The warrants vest immediately and have a three-year
life. As a result of the May 2007 1.2-for1 forward stock split, the effective
number of vested warrants increased to 12,000,000. On December 31, 2008, all
12,000,000 warrants expired.
The Company also granted YA Global registration rights related to the shares of
the Company's common stock issuable upon the conversion of the December
Debenture and the exercise of the warrants. As of the date of this Report, no
registration statement had been filed.
The Company determined that the conversion features on the December Debenture
and the associated warrants fell under derivative accounting treatment. The
carrying value was accreted over the life of the December Debenture until August
31, 2008, a former maturity date, at which time the value of the December
Debenture reached $1,500,000.
In connection with the issuance of the December Debenture, fees of $130,000,
withheld from the proceeds, were capitalized and amortized over the life of the
December Debenture. The fees were fully amortized as of December 31, 2009.
As of March 31, 2010, YA Global had not converted any of the December Debenture
into shares of the Company's common stock. As a result, the carrying value of
the debenture as of March 31, 2010, remained $1,500,000. The fair value of the
derivative liability stemming from the December Debenture's conversion feature
as of March 31, 2010, was determined to be $0.
17
YA Global August Debenture - In August 2006, the Company entered into another
agreement with YA Global relating to the issuance by the Company of another 5
percent Secured Convertible Debenture, due in April 2009, in the principal
amount of $1,500,000 (the "August Debenture").
Accrued interest was originally payable at the time of maturity or conversion.
Per the Forbearance Agreement, the scheduled payments are to be applied first to
outstanding accrued interest. The Company may, at its option, elect to pay
accrued interest in cash or shares of our common stock, with the conversion
price to be used to determine the number of shares of common stock being equal
to 85 percent of the lowest closing bid price of the Company's common stock
during the ten trading days prior to the payment day. Interest accrued during
the three months ending March 31, 2010, totaled $30,809. The balance of accrued
interest owed at March 31, 2010, was $432,808.
In consideration of the Company's performance under the Forbearance Agreement,
YA Global agreed to forbear from enforcing its rights and remedies as a result
of the existing defaults under the August Debenture, and/or converting the
August Debenture into shares of the Company's common stock, until the earlier of
(i) the occurrence of a termination event (as defined in the Forbearance
Agreement), or (ii) the termination date of the Forbearance Agreement. Nothing
contained in the Forbearance Agreement constitutes a waiver by YA Global of any
default or event of default, whether existing at the time of the Forbearance
Agreement or thereafter arising, and/or its right to convert the August
Debenture into shares of Common Stock. The Forbearance Agreement only
constitutes an agreement by YA Global to forbear from enforcing its rights and
remedies and/or converting the August Debenture into shares of common stock of
the Company upon the terms and conditions set forth in the agreement. The
Company and YA Global are in the process of amending the Forbearance Agreement.
The Company has made a "good faith" payment of $25,000 as part of the amendment
process (see Note 6).
In connection with the August Purchase Agreement, the Company also agreed to
grant to YA Global 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 originally were to expire three years from the date of
issuance. In connection with the Forbearance Agreement, the term of the warrants
was extended to August 23, 2010. 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. As a result of the May 2007 1.2-for 1
forward stock split, the effective number of outstanding warrants increased to
18,000,000.
In connection with the issuance of the August Debenture, the Company also
granted YA Global registration rights related to the common stock issuable upon
conversion of the August Debenture and the exercise of the Warrants. As of the
date of this report, no registration statement had been filed.
The Company determined that the conversion features on the August Debenture and
the associated warrants fell under derivative accounting treatment. 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. During the year ended
December 31, 2008, YA Global chose to convert $341,160 of the convertible
debenture into 139,136,360 shares of common stock.
YA Global chose to convert $117,622 of the convertible debenture into 72,710,337
shares of common stock during the year ended December 31, 2009. As of March 31,
2010, the carrying value of the August Debenture was $1,041,218. The fair value
of the derivative liability arising from the August Debenture's conversion
feature and warrants was $250 as of March 31, 2010.
In connection with the issuance of the August Debenture, fees of $135,000,
withheld from the proceeds, were capitalized and amortized over the life of the
August Debenture. The fees were fully amortized as of December 31, 2009.
18
NOTE 9 - FAIR VALUE MEASUREMENTS
For asset and liabilities measured at fair value, the Company uses the following
hierarchy of inputs:
o Level one -- Quoted market prices in active markets for identical
assets or liabilities;
o Level two -- Inputs other than level one inputs that are either
directly or indirectly observable; and
o Level three -- Unobservable inputs developed using estimates and
assumptions, which are developed by the reporting entity and reflect
those assumptions that a market participant would use.
Liabilities measured at fair value on a recurring basis at March 31, 2010 are
summarized as follows:
Level 1 Level 2 Level 3 Total
---------- ---------- ----------- ---------
Fair value of derivatives $ - $ 275,992 $ - $ 275,992
Liabilities measured at fair value on a recurring basis at December 31, 2009 are
summarized as follows:
Level 1 Level 2 Level 3 Total
---------- ---------- ----------- ---------
Fair value of derivatives $ - $ 523,349 $ - $ 523,349
As further described in Note 1, the fair value of the derivative liability was
determined using the Black-Scholes option pricing model.
NOTE 10 - ROYALTY OBLIGATION TO ABS CREDITORS
Under the June 2006 agreement with ABS, which is a part of ABS's bankruptcy
proceedings, the Company has an obligation to pay a royalty equal to $3.00 per
TCP flat iron unit sold by the Company. The maximum amount of royalties the
Company must pay is $4,135,000. Regardless of sales, however, the Company agreed
to pay at least $435,000 by June 2008, and included that amount in the Company's
long-term obligations. The Company is in default on this agreement. Under the
terms of the bankruptcy court-approved agreement, royalties are to be paid to
various ABS creditors in a specified order and in specified amounts. Only after
the Company pays the total $435,000 to other creditors can it then begin to
share pro rata in part of the royalties owed by offsetting amounts owed to
reduce its long-term receivable. As of March 31, 2010, the Company has made a
total of $331,388 on the long-term note payable. As of March 31, 2010, the note
balance totaled $103,612.
NOTE 11 - STOCKHOLDERS' EQUITY
During the three months ended March 31, 2010, the Company did not issue shares
of common stock.
NOTE 12 - STOCK OPTIONS AND WARRANTS
Stock Option Plans - As of March 31, 2010, options to purchase a total of
59,200,000 shares of common stock had been issued from the 2006 Stock Option
Plan, out of which a maximum of 60,000,000 can be issued. As of March 31, 2010,
options and share purchase rights to acquire a total of 22,960,000 shares of
common stock had been issued from the 2008 Stock Option Plan, also, out of which
a maximum of 60,000,000 can be issued. The Company's Board of Directors
administers the plans, and has discretion in determining the employees,
directors, independent contractors, and advisors who receive awards, the type of
awards (stock, incentive stock options, non-qualified stock options, or share
purchase rights) granted, and the term, vesting, and exercise prices.
19
Employee Options - During the three months ended March 31, 2010 and 2009, the
Company did not grant options to purchase shares of common stock to employees.
Option awards to employees are granted with an exercise price equal to the
market price of the Company's stock at the date of grant, most granted in the
past have vested immediately, and most have had four-year contractual terms.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. Expected volatilities are based on the
historical volatility of the Company's common stock over the most recent period
commensurate with the expected term of the option. Prior to 2007, at times the
Company granted options to employees in lieu of salary payments, and the pattern
of exercise experience was known. Beginning in 2007, options were granted under
different circumstances, and the Company has insufficient historical exercise
data to provide a reasonable basis upon which to estimate the expected terms.
Accordingly, in such circumstances, the Company in 2007 began using the
simplified method for determining the expected term of options granted with
exercise prices equal to the stock's fair market value on the grant date. The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant. During the three
months ending March 31, 2010 the Company accrued for 6,000,000 employee options
relating to the employment contract of the Company president. The fair market
value of the options accrued aggregated $42,581, using the following
assumptions: 5 year term, volatility of 148.71 percent and a discount rate of
2.65 percent.
A summary of the stock option activity under the Plans as of March 31, 2010, and
changes during the three months then ended is presented below:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Life Value
--------------------------------------------------------------------------------
Outstanding at
December 31, 2009 53,160,000 $ 0.014 2.48 $ -
================================================================================
Granted - $ 0.000
Exercised - $ 0.000
Expired - $ 0.000
Outstanding at
March 31, 2010 53,160,000 $ 0.014 2.23 $ -
================================================================================
Exercisable at
March 31, 2010 51,960,000 $ 0.014 2.25 $ -
================================================================================
As of March 31, 2010, vested options totaled 51,960,000, leaving 1,200,000 that
have yet to completely vest. As a result, as of March 31, 2010, unrecognized
compensation costs related to options outstanding that have not yet vested at
year-end that would be recognized in subsequent periods totaled $5,978.
20
Warrants - In connection with the YA Global convertible debenture issued in
August 2006, the Company issued three-year warrants to purchase 15,000,000
shares of the Company's common stock. The initial expiration date of the
warrants was August 23, 2009. As part of the Forbearance Agreement (see Note 6),
the life of the warrants was extended one year to August 23, 2010. The warrants
had an exercise price of $0.06 per share, and vested immediately.
In connection with the private placement with ANAHOP, the Company issued
five-year warrants to purchase 30,000,000 shares of common stock at prices
ranging from $0.15 to $0.50. All of these warrants were subject to adjustment in
the event of a stock split. Accordingly, as a result of the 1:1.20 forward stock
split that occurred in 2007, there were warrants outstanding at March 31, 2010,
to purchase a total of 36,000,000 shares of common stock in connection with
these transactions. The exercise price per share of each of the aforementioned
warrants was likewise affected by the stock split, in that each price was
reduced by 20 percent.
The Corporation currently has an insufficient number of authorized shares to
enable warrant holders to fully exercise their warrants, assuming all warrants
holders desired to do so. Accordingly, the warrants are subject to derivative
accounting treatment, and are included in the derivative liability related to
the convertible debentures (see Note 8).
NOTE 13 - SEGMENT INFORMATION
Segment information has been prepared in accordance with ASC 280-10, Disclosure
about Segments of an Enterprise and Related Information. The Company has four
reportable segments: Electronics Assembly, Contract Manufacturing, Marketing and
Media, and Beverage Distribution. The Electronics Assembly segment manufactures
and assembles circuit boards and electronic component cables. The Contract
Manufacturing segment manufactures, either directly or through foreign
subcontractors, various products under manufacturing and distribution
agreements. The Marketing and Media segment provides marketing services to
online retailers, along with beverage development and promotional services to
Play Beverages, LLC. The Beverage Distribution segment manufactures, markets,
and distributes Playboy-licensed energy drinks domestically and internationally.
The Beverage Distribution segment continues to grow, and the distribution
channels, across the country and internationally, continues to gain traction.
The Company anticipates this segment to become more significant in relation to
overall Company operations.
The accounting policies of the segments are consistent with those described in
the summary of significant accounting policies. The Company evaluates
performance of each segment based on earnings or loss from operations. Selected
segment information is as follows:
Electronics Contract Marketing Beverage
Assembly Manufacturing and Media Distribution Total
----------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2010
Sales to external customers $ 170,444 $ 1,045 $ 891,415 $ 1,120,934 $ 2,183,838
Segment income (loss) (414,849) (64,948) (481,061) 38,561 (922,297)
Segment assets 2,954,277 1,185,025 8,607,013 291,545 13,037,860
Depreciation and amortization 93,733 64,447 5,841 - 164,021
Three months ended March 31, 2009
Sales to external customers $ 488,172 $ 175,148 $ 987,220 $ 271,842 $ 1,922,382
Segment income (loss) (1,915,652) (83,084) (277,281) 26,460 (2,249,557)
Segment assets 2,056,422 7,051,690 4,254,571 126,745 13,489,428
Depreciation and amortization 96,152 64,551 5,841 - 166,544
NOTE 14 - GEOGRAPHIC INFORMATION
The Company currently maintains $408,844 of capitalized tooling costs in China.
All other revenue-producing assets are located in the United States of America.
Revenues are attributed to the geographic areas based on the location of the
customers purchasing the products.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended December 31, 2009.
Overview
Our services include pre-manufacturing, manufacturing and post-manufacturing
services. Our goal is to offer customers the significant competitive advantages
that can be obtained from manufacture outsourcing. We market and manufacture an
energy drink under the Playboy brand pursuant to a license agreement with
Playboy Enterprises, Inc. We also provide a mix of high and medium size volume
turnkey manufacturing services and products using various high-tech applications
for leading electronics OEMs in the communications, networking, peripherals,
gaming, law enforcement, consumer products, telecommunications, automotive,
medical, and semiconductor industries.
We conduct business through our subsidiaries and divisions: CirTran Beverage,
CirTran USA, CirTran Asia, CirTran Products, CirTran Media Group, and CirTran
Online. CirTran Beverage manufactures, markets, and distributes Playboy-licensed
energy drinks in accordance with an agreement we, entered into with PlayBev, a
related party who holds the Playboy license. We also anticipate including
flavored water beverages and related merchandise in the future. In addition, we
provide development and promotional services to PlayBev, and pay a royalty based
on our product sales and manufacturing costs. Services billed to PlayBev during
the three months ended March 31, 2010 and 2009, under this arrangement accounted
for 18 and 19 percent of total sales, respectively. Sales of energy drink
beverages during the three months ended March 31, 2010 and 2009, amounted to 51
percent and 14 percent of total sales, respectively. We also recorded product
distribution royalty revenue of $23,310 and $0 for the three and three months
ended March 31, 2010 and 2009, respectively, relating to international energy
drink beverage arrangements.
CirTran USA accounted for eight percent and 25 percent of our total revenues
during the three months ended March 31, 2010 and 2009, respectively. Revenues
were generated by low-volume electronics assembly activities consisting
primarily of the placement and attachment of electronic and mechanical
components on printed circuit boards and flexible (i.e., bendable) cables. In an
effort to operate more efficiently and focus resources on higher margin areas,
on March 5, 2010, the Company and Katana Electronics, LLC, a Utah limited
liability company ("Katana") entered into certain agreements to reduce the
Company's costs (discussed more fully in Note 5). The Agreements include an
Assignment and Assumption Agreement, an Equipment Lease, and a Sublease
Agreement relating to the Company's property. Pursuant to the terms of the
Sublease, the Company will sublease a certain portion of the Premises to Katana
consisting of the warehouse and office space used as of the close of business on
March 4, 2010. The term of the Sublease is for two (2) months with automatic
renewal periods of one month each. The base rent under the Sublease is $8,500
per month. The Sublease contains normal and customary use restrictions,
indemnification rights and obligations, default provisions and termination
rights. Under Agreements signed, the Company continues to have rights to operate
as a contract manufacturer in the future in the US and off-shore.
Through CirTran Asia, we manufacture and distribute electronics, consumer
products and general merchandise to companies selling in international markets.
Sales were zero and eight percent of our total revenues during the three months
ended March 31, 2010 and 2009, respectively.
CirTran Products pursues contract-manufacturing relationships in the U.S.
consumer products markets, including licensed merchandise sold in the sports and
entertainment markets. Sales comprised zero and two percent of total sales for
the three months ended March 31, 2010 and 2009.
CirTran Media provides end-to-end services to the direct response and
entertainment industries. Revenues for CirTran Media were zero percent of total
sales for both the three months ended March 31, 2010 and 2009, respectively.
CirTran Online sells products via the Internet, and provides services and
support to Internet retailers. In conjunction with partner GMA, revenues from
this division were 23 and 32 percent of total revenues during the three months
ending March 31, 2010 and 2009, respectively.
22
Forward-Looking Statements and Certain Risks
The statements contained in this report that are not purely historical are
considered to be "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act. These statements represent our expectations, hopes, beliefs,
anticipations, commitments, intentions, and strategies regarding the future.
They may be identified by the use of words or phrases such as "believes,"
"expects," "anticipates," "should," "plans," "estimates," and "potential," among
others. Forward-looking statements include, but are not limited to, statements
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations regarding our financial performance, revenue, and expense
levels in the future and the sufficiency of our existing assets to fund future
operations and capital spending needs. Readers are cautioned that actual results
could differ materially from the anticipated results or other expectations that
are expressed in these forward-looking statements. The fact that some of these
risk factors may be the same or similar to our past reports filed with the SEC
means only that the risks are present in multiple periods. We believe that many
of the risks are part of doing business in the industry in which we operate and
compete and will likely be present in all periods reported. The fact that
certain risks are common in the industry does not lessen their significance. The
forward-looking Statements contained in this report, are made as of the date of
this report and we assume no obligation to update them or to update the reasons
why our actual results could differ from those that we have projected in such
forward-looking Statements. We expressly disclaim any obligation or intention to
update any forward-looking statement.
Results of Operations
Comparison of the Three months ended March 31, 2010 and 2009
Sales and Cost of Sales
Net sales increased to $2,183,838 for the three months ended March 31, 2010, as
compared to $1,922,382 for the three months ended March 31, 2009, driven by
continued international growth in the beverage distribution segment. In our
Beverage Distribution segment, we continue to expand distribution channels both
domestically and internationally for our Playboy Energy Drink beverages. The
increases in the beverage distribution segment were offset by sales decreases in
the core electronics and online channels, a result of the current economic
conditions and our current corporate focus our resources in the beverage
distribution segment.
Cost of sales, as a percentage of sales, increased to 94 percent from 81 percent
for the three months ended March 31, 2010, as compared to the three months ended
March 31, 2009, respectively. Consequently, the gross profit margin decreased to
6 percent from 19 percent, for the three months ended March 31, 2010 and 2009.
The decrease in gross profit margin was attributable to the significant shift in
the sales mix of products and services experienced during 2010 as compared to
2009 and increases in product royalty expenses, which are included in the cost
of sales. Product sales and services in the CirTran Online channel are primarily
governed by the arrangement we have with GMA. Pursuant to our Assignment and
Exclusive Services Agreement, we recognize the revenue collected under the GMA
contracts, and remit back to GMA a management fee approximating their actual
costs. This management fee is included in our cost of revenue. Another important
factor driving the decrease in gross margin percentage is the nature of our
manufacturing and distribution agreement with PlayBev. Presently, CirTran
Beverage invoices PlayBev for beverage development and marketing services, on
what amounts to five percent markup basis. In addition, CirTran Beverage records
products sales and costs on sales made directly to distributors and end
customer, which sales provide a more favorable gross profit margin. We
anticipate that gross profit margins for CirTran Beverage will increase in the
future as we increase our distribution of the Playboy energy drink beverages to
both domestic and international markets.
The following chart presents comparisons of sales, cost of sales and gross
profits generated by our four operating segments, i.e., Contract Manufacturing,
Electronics Assembly, Marketing and Media and Beverage Distribution during the
three and three months ended March 31, 2010 and 2009.
23
--------------------------------------------------------------------------------
Cost of Royalty Gross Loss
Segment Year Sales Sales Expense / Margin
--------------------------------------------------------------------------------
Electronics 2010 $ 170,444 $ 198,340 $ - $ (27,896)
Assembly ------------------------------------------------------------
2009 488,172 291,941 - 196,231
--------------------------------------------------------------------------------
Contract 2010 1,045 (11,608) - 12,653
Manufacturing ------------------------------------------------------------
2009 175,148 75,941 - 99,207
--------------------------------------------------------------------------------
Marketing / 2010 891,415 844,425 - 46,990
Media ------------------------------------------------------------
2009 987,220 940,721 - 46,499
--------------------------------------------------------------------------------
Beverage 2010 1,120,934 497,555 531,448 91,931
Distribution ------------------------------------------------------------
2009 271,842 94,854 147,189 29,799
--------------------------------------------------------------------------------
Selling, General and Administrative Expenses
During the three months ended March 31, 2010, selling, general and
administrative expenses decreased $359,374 as compared to the same period during
2009. The decrease was the result of a slowing of advertising and media
promotion spending during the three months ended March 31, 2010, together with
the reduced costs in our contract manufacturing and legacy electronics segments.
As mentioned previously, not only has the effects of the national economic
decline resulted in a decrease in cable assembly and electronic orders from our
traditional customers, but we have experienced a softening of sales in all
segments, with the exception of our Beverage Distribution segment. We continue
to reposition our business structure to take advantage of our core strengths.
Non-cash compensation expense
Compensation expense in connection with granting options to employees to
purchase common stock was $43,577 for the three months ended March 31, 2010, as
compared to $996 for the three months ended March 31, 2009, as a result of the
6,000,000 options accrued for our Company President per his employment
agreement.
Other income and expense
Interest expense recorded in the Consolidated Statements of Operations combines
both accretion expense and interest expense. The combined interest expense for
the three months ended March 31, 2010, was $248,600 as compared to $326,566 for
the three months ended March 31, 2009, a decrease of 24 percent. The decrease in
the combined interest expense was driven by the reduction in accretion expense
recorded for the three months ended March 31, 2010. Actual interest expense
increased to $190,960 for the three months ended March 31, 2010, as compared to
the interest expense of $149,035 for the three months ended March 31, 2009, a
direct result of the increase of short-term advances payable and notes payable.
We began accruing interest income during 2008 as a result of a modification of
our agreement with PlayBev that took effect on March 19, 2008. Interest income
for the three months ended March 31, 2010, decreased to $29,185 as compared to
interest income of $124,590 for the three months ended March 31, 2009.
On March 5, 2010, we entered into a Separation Agreement ("Agreement") with
Shaher Hawatmeh. As of the date of the Agreement, Shaher Hawatmeh's employment
with the Company was terminated and he no longer has any further employment
obligations with the Company. In consideration of his execution of this
Agreement, we agreed to pay Shaher Hawatmeh's "Separation Pay" of $210,000 in
twenty-six bi-weekly payments. The first payment of the Separation Pay was to
begin on March 19, 2010. We made the first payment to Shaher Hawatmeh on April
2, 2010. Additional terms of the separation agreement include payment of all
amounts necessary to cover health and medial premiums on behalf of Shaher
Hawatmeh, his spouse and dependents through April 20, 2010, all outstanding car
allowances and expense ($750) due and owing as of February 28, 2010,
satisfaction and payment by the Company (with a complete release of Shaher
Hawatmeh) of all outstanding amounts due and owing on the Company Corporate
American Express Card (issued in the name of Shaher) and the issuance and
delivery to Shaher Hawatmeh of ten million (10,000,000) shares of the Company's
common stock within a reasonable time following authorization by the Company's
shareholders of sufficient shares to cover such issuance. We accrued $50,000
during the three months ended March 31, 2010 as the fair market value of the
common stock shares as of the date of the Separation Agreement. In connection
with the Separation Agreement, we recorded $210,000 of settlement expense during
the three months ended March 31, 2010.
24
As a result, we recorded a loss of $922,297 during the three months ended March
31, 2010, as compared to a net loss for the three months ended March 31, 2009 of
$2,249,557.
Liquidity and Capital Resources
We have had a history of losses from operations, as our expenses have been
greater than our revenues. Our accumulated deficit was $40,062,365 at March 31,
2010, and $39,140,068 at March 31, 2009. Net loss for the three months ended
March 31, 2010, was $922,297 as compared to $2,249,557 for the three months
ended March 31, 2009. Our current liabilities exceeded our current assets by
$16,511,042 as of March 31, 2010, and by $14,864,374 as of March 31, 2009. For
the three months ended March 31, 2010 and 2009, we experienced negative cash
flows from operating activities of $205,518 and $288,288, respectively.
Cash
The amount of cash used in operating activities during the three months ended
March 31, 2010 decreased by $82,770, as compared to the three months ended March
31, 2009, driven primarily by decreases in Accounts Payable and customer
deposits.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased
$46,536 during the three months ended March 31, 2010. We continue to monitor
individual customer accounts and are working to improve collections on trade
accounts receivable.
During 2007, we agreed to provide services to PlayBev for initial development,
marketing, and promotion of the Playboy-labeled energy beverages. We bill these
services to PlayBev and record the amount as an account receivable. The
receivable, recorded as a receivable due from related party, decreased by
$81,658 during the three months ended March 31, 2010 to a total of $6,874,159,
of which $33,076 is considered current. As per our arrangement with PlayBev, we
anticipate that PlayBev will repay the receivable by netting out royalties
PlayBev earns from beverage distribution sales, and which royalties we have
agreed to pay PlayBev out of anticipated beverage distribution sales. In March
2008, we began accruing interest on the amount due from PlayBev. Interest
accrued on the PlayBev accounts receivable balance totaled $765,016 as of March
31, 2010.
Accounts payable and accrued liabilities
During the three months ended March 31, 2010, accounts payable, accrued
liabilities and short-term debt increased $717,578 to a combined balance of
$10,616,921 as of March 31, 2010. The increase was driven primarily by an
increase of $144,200 of short-term advances and $720,698 of accrued liabilities,
offset by a decrease in accounts payable of $210,169. The balance of the
increase was the result of accrued interest expense.
Liquidity and financing arrangements
We have a history of substantial losses from operations, as well of history of
using rather than providing cash in operations. We had an accumulated deficit of
$40,062,365, along with a total stockholders' deficit of $6,881,483, at March
31, 2010. In addition, we have used, rather than provided, cash in our
operations for the three months ended March 31, 2010 and 2009, of $205,518 and
$288,288, respectively. During the three months ended March 31, 2010, our
monthly operating costs and interest expense averaged approximately $423,000 per
month.
In conjunction with our efforts to improve our results of operations we are also
actively seeking infusions of capital from investors, and are seeking sources to
repay our existing convertible debentures. In our current financial condition,
it is unlikely that we will be able to obtain additional debt financing. Even if
we did acquire additional debt, we would be required to devote additional cash
flow to servicing the debt and securing the debt with assets. Accordingly, we
are looking to obtain equity financing to meet our anticipated capital needs.
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.
25
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short or the long term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
Convertible Debentures
Highgate House Funds, Ltd. - In May 2005, we entered into an agreement with
Highgate House Funds, Ltd ("Highgate"), a fund launched by Cornell Capital
Partners, to issue a $3,750,000, 5 percent Secured Convertible Debenture (the
"Debenture"). The Debenture was originally due December 2007, and is secured by
all of our assets. Highgate extended the maturity date of the Debenture to
December 31, 2008. As of January 1, 2008 the interest rate increased to 12
percent. On August 11, 2009, we entered into a forbearance agreement (the
"Forbearance Agreement") with YA Global Investment L.P. ("YA Global"), an
assignee of Highgate. We agreed to repay our obligations under the Debentures
per an agreed schedule.
Accrued interest was originally payable at the time of maturity or conversion.
Per the Forbearance Agreement, the scheduled payments are to be applied first to
outstanding accrued interest. We may, at our option, elect to pay accrued
interest in cash or shares of our common stock, with the conversion price to be
used to determine the number of shares of common stock being equal to 85 percent
of the lowest closing bid price of our common stock during the ten trading days
prior to the payment day. Interest accrued during the three months ending March
31, 2010, totaled $18,349. The balance of accrued interest owed at March 31,
2010, was $73,332.
In consideration of the Company's performance under the Forbearance Agreement,
YA Global agreed to forbear from enforcing its rights and remedies as a result
of the existing defaults under the Debenture, and/or converting the Debenture
into shares of the Company's common stock, until the earlier of (i) the
occurrence of a termination event (as defined in the Forbearance Agreement), or
(ii) the termination date of the Forbearance Agreement. Nothing contained in the
Forbearance Agreement constitutes a waiver by YA Global of any default or event
of default, whether existing at the time of the Forbearance Agreement or
thereafter arising, and/or its right to convert the Debenture into shares of
Common Stock. The Forbearance Agreement only constitutes an agreement by YA
Global to forbear from enforcing its rights and remedies and/or converting the
Debenture into shares of common stock of the Company upon the terms and
conditions set forth in the agreement. The Company and YA Global are in the
process of amending the Forbearance Agreement. The Company has made a "good
faith" payment of $25,000 as part of the amendment process (see Note 6).
We determined that certain conversion features of the Debenture fell under
derivative accounting treatment. Since May 2005, the carrying value has been
accreted over the life of the debenture until December 31, 2007, the original
maturity date. As of December 31, 2007, the carrying value of the Debenture was
$970,136, which was the remaining face value of the debenture.
In connection with the issuance of the Debenture, $2,265,000 of the proceeds was
used to repay earlier promissory notes. Fees of $256,433, withheld from the
proceeds, were capitalized and were amortized over the life of the note.
During 2006, Highgate converted $1,000,000 of Debenture principal and accrued
interest into a total of 37,373,283 shares of common stock. During 2007,
Highgate converted $1,979,864 of Debenture principal and accrued interest into a
total of 264,518,952 shares of common stock. During the year ended December 31,
2008, Highgate converted $350,000 of debenture principle into a total of
36,085,960 shares of common stock. The carrying value of the Debenture as of
March 31, 2010, was $620,136. The fair value of the derivative liability
stemming from the debenture's conversion feature was determined to be $0 as of
March 31, 2010.
26
YA Global December Debenture - In December 2005, we entered into an agreement
with YA Global to issue a $1,500,000, 5 percent Secured Convertible Debenture
(the "December Debenture"). The December Debenture was originally due July 30,
2008, and has a security interest in all the Company's assets, subordinate to
the Highgate security interest. YA Global also agreed to extend the maturity
date of the December Debenture to December 31, 2008. As of January 1, 2008, the
interest rate was increased to 12 percent. We agreed to repay our obligations
under the Debentures per an agreed schedule.
Accrued interest was originally payable at the time of maturity or conversion.
Per the Forbearance Agreement, the scheduled payments are to be applied first to
outstanding accrued interest. We may, at its option, elect to pay accrued
interest in cash or shares of our common stock, with the conversion price to be
used to determine the number of shares of common stock being equal to 85 percent
of the lowest closing bid price of the Company's common stock during the ten
trading days prior to the payment day. Interest accrued during the three months
ending March 31, 2010, totaled $44,384. The balance of accrued interest owed at
March 31, 2010, was $216,496.
In consideration of the Company's performance under the Forbearance Agreement,
YA Global agreed to forbear from enforcing its rights and remedies as a result
of the existing defaults under the December Debenture, and/or converting the
December Debenture into shares of the Company's common stock, until the earlier
of (i) the occurrence of a termination event (as defined in the Forbearance
Agreement), or (ii) the termination date of the Forbearance Agreement. Nothing
contained in the Forbearance Agreement constitutes a waiver by YA Global of any
default or event of default, whether existing at the time of the Forbearance
Agreement or thereafter arising, and/or its right to convert the December
Debenture into shares of Common Stock. The Forbearance Agreement only
constitutes an agreement by YA Global to forbear from enforcing its rights and
remedies and/or converting the December Debenture into shares of common stock of
the Company upon the terms and conditions set forth in the agreement. The
Company and YA Global are in the process of amending the Forbearance Agreement.
The Company has made a "good faith" payment of $25,000 as part of the amendment
process (see Note 6).
The YA Global Debenture was issued with 10,000,000 warrants, with an exercise
price of $0.09 per share. The warrants vest immediately and have a three-year
life. As a result of the May 2007 1.2-for1 forward stock split, the effective
number of vested warrants increased to 12,000,000. On December 31, 2008, all
12,000,000 warrants expired.
We also granted YA Global registration rights related to the shares of the
Company's common stock issuable upon the conversion of the December Debenture
and the exercise of the warrants. As of the date of this Report, no registration
statement had been filed.
We determined that the conversion features on the December Debenture and the
associated warrants fell under derivative accounting treatment. The carrying
value was accreted over the life of the December Debenture until August 31,
2008, a former maturity date, at which time the value of the December Debenture
reached $1,500,000.
In connection with the issuance of the December Debenture, fees of $130,000,
withheld from the proceeds, were capitalized and amortized over the life of the
December Debenture. The fees were fully amortized as of December 31, 2009.
As of March 31, 2010, YA Global had not converted any of the December Debenture
into shares of the Company's common stock. As a result, the carrying value of
the debenture as of March 31, 2010, remained $1,500,000. The fair value of the
derivative liability stemming from the December Debenture's conversion feature
as of March 31, 2010, was determined to be $0.
YA Global August Debenture - In August 2006, we entered into another agreement
with YA Global relating to the issuance by the Company of another 5 percent
Secured Convertible Debenture, originally due in April 2009, in the principal
amount of $1,500,000 (the "August Debenture").
Accrued interest was originally payable at the time of maturity or conversion.
Per the Forbearance Agreement, the scheduled payments are to be applied first to
outstanding accrued interest. We may, at its option, elect to pay accrued
interest in cash or shares of our common stock, with the conversion price to be
used to determine the number of shares of common stock being equal to 85 percent
of the lowest closing bid price of the Company's common stock during the ten
trading days prior to the payment day. Interest accrued during the three months
ended March 31, 2010, totaled $30,809. The balance of accrued interest owed at
March 31, 2010, was $432,808.
27
In consideration of the Company's performance under the Forbearance Agreement,
YA Global agreed to forbear from enforcing its rights and remedies as a result
of the existing defaults under the August Debenture, and/or converting the
August Debenture into shares of the Company's common stock, until the earlier of
(i) the occurrence of a termination event (as defined in the Forbearance
Agreement), or (ii) the termination date of the Forbearance Agreement. Nothing
contained in the Forbearance Agreement constitutes a waiver by YA Global of any
default or event of default, whether existing at the time of the Forbearance
Agreement or thereafter arising, and/or its right to convert the August
Debenture into shares of Common Stock. The Forbearance Agreement only
constitutes an agreement by YA Global to forbear from enforcing its rights and
remedies and/or converting the August Debenture into shares of common stock of
the Company upon the terms and conditions set forth in the agreement. The
Company and YA Global are in the process of amending the Forbearance Agreement.
The Company has made a "good faith" payment of $25,000 as part of the amendment
process (see Note 6).
In connection with the August Purchase Agreement, we also agreed to grant to YA
Global 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 originally were to expire three years from the date of issuance. In
connection with the Forbearance Agreement, the term of these warrants was
extended to August 23, 2010. 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. As a result of the May 2007 1.2-for 1 forward
stock split, the effective number of outstanding warrants increased to
18,000,000.
In connection with the issuance of the August Debenture, we also granted YA
Global registration rights related to the common stock issuable upon conversion
of the August Debenture and the exercise of the Warrants. As of the date of this
report, no registration statement had been filed.
We determined that the conversion features on the August Debenture and the
associated warrants fell under derivative accounting treatment. 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. During the year ended
December 31, 2008, YA Global chose to convert $341,160 of the convertible
debenture into 139,136,360 shares of common stock.
YA Global chose to convert $117,622 of the convertible debenture into 72,710,337
shares of common stock during the year ended December 31, 2009. As of December
31, 2009, the carrying value of the August Debenture was $1,041,218. The fair
value of the derivative liability arising from the August Debenture's conversion
feature and warrants was $250 as of December 31, 2009.
In connection with the issuance of the August Debenture, fees of $135,000,
withheld from the proceeds, were capitalized and amortized over the life of the
August Debenture. The fees were fully amortized as of December 31, 2009.
Please see the section below, "Debentures - Forbearance Agreement," for a more
complete discussion of the Forbearance Agreement.
Debentures - Forbearance Agreement. On August 11, 2009, the Company and YA
Global entered into the Forbearance Agreement related to the three convertible
debentures issued by the Company to YA Global or its predecessor entities.
Under the terms of the Forbearance Agreement, the Company agreed to waive any
claims against YA Global, entered into a Global Security Agreement (discussed
below), a Global Guaranty Agreement (discussed below), and an amendment of a
warrant granted to YA Global in connection with the issuance of the August
Debenture; agreed to seek to obtain waivers from the Company's landlords at its
properties in Utah, California, and Arkansas; agreed to seek to obtain deposit
account control agreements from the Company's banks and depository institutions;
and to repay the Company's obligations under the Debentures.
The repayment terms of the Forbearance Agreement required an initial payment of
$125,000 upon signing the agreement. Beginning September 1, 2009, through May 1,
2010, monthly payments ranging from $150,000 to $300,000 are due for total
payments of $2,825,000. The remaining balance is due July 1, 2010.
28
Pursuant to the Forbearance Agreement, the Company, subject to the consent of YA
Global, may choose to pay all or any portion of the monthly payments in common
stock, at a conversion price used to determine the number of shares of common
stock equal to 85 percent of the lowest closing bid price of the Company's
common stock during the ten trading days prior to the payment date.
YA Global agreed to forbear from enforcing its rights and remedies as a result
of the existing defaults and/or converting the Debentures into shares of the
Company's common stock, until the earlier of the occurrence of a Termination
Event (as defined in the Forbearance Agreement), or July 1, 2010.
The Company, YA Global, and certain of the Company's subsidiaries also entered
into a Global Security Agreement (the "GSA") in connection with the Forbearance
Agreement. Under the GSA, the Company and the participating subsidiaries pledged
and granted to YA a security interest in all assets and personal property of the
Company and each participating subsidiary as security for the payment or
performance in full of the obligations set forth in the Forbearance Agreement.
Additionally, the Company, YA Global, and certain of the Company's subsidiaries
also entered into a Global Guaranty Agreement (the "GGA") in connection with the
Forbearance Agreement. Under the GGA, the Company and the participating
subsidiaries guaranteed to YA Global the full payment and prompt performance of
all of the obligations set forth in the Forbearance Agreement.
As of March 31, 2010 the Company was not in compliance with the forbearance
agreement. The Company and YA Global are in the process of amending the
Forbearance Agreement. Subsequent to March 31, 2010, the Company has made a
"good faith" payment of $25,000 as part of the amendment process.
Other Convertible Instruments
We currently have issued and outstanding options, warrants, convertible notes
and other instruments for the acquisition of our common stock in excess of the
available authorized but unissued shares of common stock provided for under our
Articles of Incorporation, as amended. As a consequence, in the event that the
holders of such instruments requiring the issuance, in the aggregate, of a
number of shares of common stock that would, when combined with the previously
issued and outstanding common stock of the Company exceed the authorized capital
of the Company, seek to exercise their rights to acquire shares under those
instruments, we will be required to increase the number of authorized shares or
effect a reverse split of the outstanding shares in order to provide sufficient
shares for issuance under those instruments. Critical accounting estimates
Revenue Recognition - Revenue is recognized when products are shipped. Title
passes to the customer or independent sales representative at the time of
shipment. Returns for defective items are repaired and sent back to the
customer. Historically, expenses associated with returns have not been
significant and have been recognized as incurred.
Shipping and handling fees are included as part of net sales. The related
freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of goods sold.
We signed an Assignment and Exclusive Services Agreement with GMA, a related
party, whereby revenues and all associated performance obligations under GMA's
web-hosting and training contracts were assigned to us. Accordingly, this
revenue is recognized in our financial statements when it is collected, along
with our revenue of CirTran Online Corporation.
We sold our Salt Lake City, Utah, building in a sale/leaseback transaction, and
reported the gain on the sale as deferred revenue to be recognized over the term
of lease pursuant to ASC 840-10, Accounting for Leases.
We have entered into a Manufacturing, Marketing and Distribution Agreement with
PlayBev, a related party, whereby we are the vendor of record in providing
initial development, promotional, marketing, and distribution services marketing
and distribution services. Accordingly, all amounts billed to PlayBev in
connection with the development and marketing of its new energy drink have been
included in revenue.
29
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. Long-lived asset costs are
amortized over the estimated useful life of the asset, which is typically 5 to 7
years. Amortization expense was $111,114 and $111,114 for the three months ended
March 31, 2010 and 2009, respectively.
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 separate from
the host instrument and are recognized as derivative liabilities in our balance
sheet. We measure these instruments at their estimated fair value, and recognize
changes in their estimated fair value in results of operations during the period
of change. We have estimated the fair value of these embedded derivatives using
the Black-Scholes model. The fair value of the derivative instruments are
measured each quarter.
Registration Payment Arrangements - On January 1, 2007, we adopted ASC 815-40
Accounting for Registration Payment Arrangements. Under ASC 815-40, and ASC
450-10, Accounting for Contingencies, a registration payment arrangement is an
arrangement where (a) we have agreed 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) we will endeavor to keep a
registration statement effective for a specified period of time; and (c)
transfer of consideration is required if we fail to meet those requirements.
When we issue an instrument coupled with these registration payment
requirements, we estimate the amount of consideration likely to be paid under
the agreement, and offsets such amount against the proceeds of the instrument
issued. The estimate is then reevaluated at the end of each reporting period,
and any changes recognized as a registration penalty in the results of
operations. As further described in Note 9 to the consolidated financial
statements, we have instruments that contain registration payment arrangements.
The effect of implementing this has not had a material effect on the financial
statements because we consider probability of payment under the terms of the
agreements to be remote.
Stock-Based Compensation - Effective January 1, 2006, we adopted the provisions
of ASC 718-10, Accounting for Stock Issued to Employees, for our stock-based
compensation plans. We previously accounted for our plans under the recognition
and measurement principles of Accounting Standards No. 25, Accounting for Stock
Issued to Employees ("APB 25") and related interpretations and disclosure
requirements established by ASC 718-10, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure.
Under APB 25, no compensation expense was recorded in earnings for our
stock-based options granted under our compensation plans, since the intrinsic
value of the options was zero. The pro forma effects on net income and earnings
per share for the options and awards granted under the plans were instead
disclosed in a note to the consolidated financial statements. Under ASC 718-10,
all stock-based compensation is measured at the grant date, based on the fair
value of the option or award, and is recognized as an expense in earnings over
the requisite service period, which is typically through the date the options
vest.
We adopted ASC 718-10 using the modified prospective method. Under this method,
compensation cost would've been recognized over the remaining service periods
for the unvested portion of all stock-based options and awards granted prior to
January 1, 2006, that remained outstanding, based on the grant-date fair value
measured under the original provisions of ASC 718-10 for pro forma and
disclosure purposes. However, no such options were outstanding as of January 1,
2006. There were 5.5 million options granted from the 2004 Stock Plan during
2006 that resulted in $65,616 in compensation cost which would have previously
been presented in a pro forma disclosure, as discussed above.
We utilized the Black-Scholes model for calculating the fair value pro forma
disclosures under ASC 718-10, and will continue to use this model, which is an
acceptable valuation approach under ASC 718-10.
30
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is limited to interest rate sensitivity, which is
affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of the cash
equivalents, we believe that we are not subject to any material interest rate
risk as it relates to interest income. All outstanding debt instruments at March
31, 2010, had fixed interest rates and were therefore not subject to interest
rate risk.
We did not have any foreign currency hedges or other derivative financial
instruments as of March 31, 2010. We do not enter into financial instruments for
trading or speculative purposes and do not utilize derivative financial
instruments. Our operations are conducted in the United States and as such are
not subject to foreign currency exchange rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized, and reported within the required time periods, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer / Chief Financial Officer, as appropriate, to allow for
timely decisions regarding disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation
under the supervision of our Chief Executive Officer / Chief Financial Officer
of the effectiveness of our disclosure controls and procedures as of March 31,
2010. Based on this evaluation, our Chief Executive Officer / Chief Financial
Officer concluded that our disclosure controls and procedures were not effective
to provide reasonable assurance as of March 31, 2010, because certain
deficiencies involving internal controls constituted material weaknesses, as
discussed in our annual report on Form 10-K. The material weaknesses identified
did not result in the restatement of any previously reported financial
statements or any other related financial disclosure, and management does not
believe that the material weaknesses had any effect on the accuracy of our
financial statements for the current reporting period.
Limitations on Effectiveness of Controls
A system of controls, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the system will meet its
objectives. The design of a control system is based, in part, upon the benefits
of the control system relative to its costs. Control systems can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. In addition, over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. In addition, the design of any
control system is based in part upon assumptions about the likelihood of future
events.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Advanced Beauty Solutions, LLC, v. CirTran Corporation, Case No.
1:08-ap-01363-GM. In connection with prior litigation between Advanced Beauty
Solutions ("ABS") and the Company, ABS claimed non-performance by the Company
and filed an adversary proceeding in ABS's bankruptcy case proceeding in the
United States Bankruptcy Court, Central District of California, San Fernando
Valley Division. On March 17, 2009, the Bankruptcy Court entered judgment in
favor of ABS and against the Company in the amount of $1,811,667 plus interest.
On September 11, 2009, the Bankruptcy Court denied the Company's motion to set
aside the judgment. As of the date of this report, ABS was pursuing collection
efforts on this judgment. The Company is in negotiations to settle the judgement
for a lesser amount. The Company does not expect the settlement to exceed
$500,000.
A&A Smart Shopping v. CirTran Beverage Corp., California Superior Court, Los
Angeles County, KC054487. Plaintiff A&A Smart Shopping ("A&A") filed a complaint
against CirTran Beverage Corporation ("CirTran Beverage") and John Does 1-100,
claiming breach of contract and intentional interference with economic
relations, based on a distribution agreement between A&A and CirTran Beverage.
On February 9, 2009, CirTran Beverage filed its answer, claiming that A&A had
materially breached the Distribution Agreement, and that CirTran Beverage had
terminated the Distribution Agreement. The case was dismissed with prejudice by
the plaintiff on March 23, 2010.
Apex Maritime Co. (LAX), Inc. v. CirTran Corporation, CirTran Asia, Inc., et
al., California Superior Court, Los Angeles County, SC098148. Plaintiff Apex
Maritime Co. (LAX), Inc. ("Apex") filed a complaint on May 8, 2008, against the
Company and CirTran Asia, the Company's subsidiary, claiming breach of contract,
nonpayment on open book account, non-payment of an account stated, and
non-payment for services, seeking approximately $62,000 against the Company and
$121,000 against CirTran Asia. The Company and CirTran Asia answered on June 9,
2008. The parties subsequently entered into a Release and Settlement Agreement
pursuant to which the Company and CirTran Asia agreed to pay an aggregate of
$195,000 in monthly payments. In the event of default under the Release and
Settlement Agreement, the Plaintiffs could file a Stipulation for Entry of
Judgment in the amount of $195,000, minus any amounts paid under the Release and
Settlement Agreement. On February 26, 2009, the Stipulation of Judgment was
filed, granting the California court jurisdiction to enforce the Release and
Settlement Agreement. On March 3, 2009, the court entered its judgment pursuant
to the Release and Settlement Agreement. On April 23, 2009, a Judgment Enforcing
Settlement was entered against CirTran Corporation and CirTran Asia, Inc.,
jointly and severally in the principal amount of $173,000, plus fees of $1,800
and costs of $40. On October 28, 2009, the Third Judicial District Court,
District of Utah, West Jordan Department, entered an Order in Supplemental
Proceedings, with which the Company complied. The parties have engaged in
settlement negotiations.
Fortune Resources LLC v. CirTran Beverage Corp, Civil No. 090401259, Third
Judicial District Court, Salt Lake County, State of Utah. On February 5, 2009,
the plaintiff filed a complaint against CirTran Beverage, claiming non-payment
for goods in the amount of $121,135. CirTran Beverage filed its answer on March
10, 2009, denying the allegations in the Complaint. The case is presently in the
discovery phase. An order requiring CirTran Beverage to produce certain
documents and information was entered on or about February 19, 2010. The
plaintiff says that CirTran Beverage did not comply with the order and seeks
entry of judgment for the amount claimed in the complaint. CirTran Beverage and
Fortune Resources engaged in settlement negotiations, and on May 3, 2010,
pursuant to which Fortune Resources agreed to dismiss the suit upon receipt from
CirTran of $50,000.
32
Global Freight Forwarders v. CirTran Asia, Civil No. 080925731, Third Judicial
District Court, Salt Lake County, State of Utah. On December 18, 2008, the
plaintiff filed a complaint against CirTran Asia, claiming breach of contract,
breach of the duty of good faith and fair dealing, and unjust enrichment,
seeking approximately $260,000. The Complaint was served on CirTran Asia on
January 5, 2009. On February 12, 2009, CirTran Asia filed its answer.
Thereafter, CirTran Asia filed an amended answer and counterclaim. The case is
presently in the discovery phase. CirTran Asia intends to defend vigorously
against the allegations in the Complaint.
Dr. Najib Bouz v. CirTran Beverage Corp, Iehab Hawatmeh and Does 1-20, Superior
Court for the State of California, County of Los Angeles, Civil No. KC053818. On
September 12, 2008, the plaintiff filed a complaint, seeking a judgment for
$52,500 plus attorneys' fees and certain costs, against CirTran Beverage, Iehab
Hawatmeh and unnamed others, claiming breach of contract and fraud in connection
with a certain promissory note. CirTran Beverage and Mr. Hawatmeh answered,
denying liability. On August 11, 2009, the parties entered into a settlement
agreement whereby the claims against Mr. Hawatmeh were dismissed with prejudice,
and the Company agreed to pay Dr. Bouz $63,000 over a twelve month period. As of
the date of this Report, all required payments had been made.
Dr. Paul Bouz v. CirTran Beverage Corp, Iehab Hawatmeh and Does 1-20, Superior
Court for the State of California, County of Los Angeles, Civil No. KC053819. On
September 12, 2008, the plaintiff filed a complaint, seeking a judgment for
$52,500 plus attorneys' fees and certain costs, against CirTran Beverage, Iehab
Hawatmeh and unnamed others, claiming breach of contract and fraud in connection
with a certain promissory note. CirTran Beverage and Mr. Hawatmeh answered,
denying liability. On August 11, 2009, the parties entered into a settlement
agreement whereby the claims against Mr. Hawatmeh were dismissed with prejudice,
and the Company agreed to pay Dr. Bouz $63,000 over a twelve month period. As of
the date of this Report, all required payments had been made.
NA CL&D Graphics v. CirTran Beverage Corp., Case No. 09V01154, Circuit Ct,
Waukesha County, Wisconsin. On or about March 23, 2009, CL&D filed an action in
the above court, alleging claims for breach of contract, unjust enrichment,
promissory estoppel, and seeking damages of at least $25,488 along with
attorneys' fees and costs. CirTran Beverage Corp is reviewing the matter and
intends to defend vigorously against the allegations in the complaint.
Old Dominion Freight Line v. CirTran Corporation, Civil No. 090426290, Third
Judicial District Court, Salt Lake County, State of Utah. On May 5, 2010, the
Court entered an Order in Supplemental Proceedings in connection with a judgment
in favor of Old Dominion and against CirTran in the amount of $33,187.34.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, we did not issue shares of our common
stock.
33
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. Other Information
None.
Item 5. Exhibits
Exhibit No. Document
----------- --------
3.1 Articles of Incorporation (previously filed as Exhibit No. 2
to our Current Report on Form 8-K, filed with the Commission
on July 17, 2000, and incorporated herein by reference).
3.2 Bylaws (previously filed as Exhibit No. 3 to our Current
Report on Form 8-K, filed with the Commission on July 17,
2000, and incorporated herein by reference).
10.1 Securities Purchase Agreement between CirTran Corporation and
Highgate House Funds, Ltd., dated as of May 26, 2005
(previously filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on June 3, 2005,
and incorporated herein by reference).
10.2 Form of 5 percent Convertible Debenture, due December 31,
2007, issued by CirTran Corporation (previously filed as an
exhibit to the Company's Current Report on Form 8-K, filed
with the Commission on June 3, 2005, and incorporated herein
by reference).
10.3 Investor Registration Rights Agreement between CirTran
Corporation and Highgate House Funds, Ltd., dated as of May
26, 2005 (previously filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on June
3, 2005, and incorporated herein by reference).
10.4 Security Agreement between CirTran Corporation and Highgate
House Funds, Ltd., dated as of May 26, 2005 (previously filed
as an exhibit to the Company's Current Report on Form 8-K,
filed with the Commission on June 3, 2005, and incorporated
herein by reference).
10.5 Escrow Agreement between CirTran Corporation, Highgate House
Funds, Ltd., and David Gonzalez dated as of May 26, 2005
(previously filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on June 3, 2005,
and incorporated herein by reference).
10.6 Settlement Agreement and Mutual Release between CirTran
Corporation and Howard Salamon d/b/a/ Salamon Brothers, dated
as of February 10, 2006
10.7 Settlement Agreement by and among Sunborne XII, LLC, CirTran
Corporation, and others named therein, dated as of January 26,
2006
10.8 Employment Agreement with Richard Ferrone (previously filed as
an exhibit to a Current Report on Form 8-K filed with the
Commission on May 15, 2006, and incorporated here in by
reference).
10.9 Marketing and Distribution Agree between CirTran Corporation
and Harrington Business Development, Inc., dated as of October
24, 2005 (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB filed with the Commission on
May 19, 2006, and incorporated here in by reference).
10.10 Amendment to Marketing and Distribution Agree between CirTran
Corporation and Harrington Business Development, Inc., dated
as of March 31, 2006 (previously filed as an exhibit to the
Company's Quarterly Report on Form 10-QSB filed with the
Commission on May 19, 2006, and incorporated here in by
reference).
10.11 Amendment No. 1 to Investor Registration Rights Agreement,
between CirTran Corporation and Highgate House Funds, Ltd.,
dated as of June 15, 2006.
10.12 Amendment No. 1 to Investor Registration Rights Agreement,
between CirTran Corporation and Cornell Capital Partners, LP,
dated as of June 15, 2006.
34
10.13 Assignment and Exclusive Services Agreement, dated as of April
1, 2006, by and among Diverse Talent Group, Inc., Christopher
Nassif, and Diverse Media Group Corp. (a wholly owned
subsidiary of Cirtran Corporation).
10.14 Employment Agreement between Christopher Nassif and Diverse
Media Group Corp., dated as of April 1, 2006 (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on June 2, 2006, and incorporated
here in by reference).
10.15 Loan Agreement dated as of May 24, 2006, by and among Diverse
Talent Group, Inc., Christopher Nassif, and Diverse Media
Group Corp (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Commission on June
2, 2006, and incorporated here in by reference).
10.16 Promissory Note, dated May 24, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with
the Commission on June 2, 2006, and incorporated here in by
reference).
10.17 Security Agreement, dated as of May 24, 2006, by and between
Diverse Talent Group, Inc., and Diverse Media Group Corp.
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on June 2, 2006,
and incorporated here in by reference).
10.18 Fraudulent Transaction Guarantee, dated as of May 24, 2006
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on June 2, 2006,
and incorporated here in by reference).
10.19 Securities Purchase Agreement between CirTran Corporation and
ANAHOP, Inc., dated as of May 24, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with
the Commission on May 30, 2006, and incorporated here in by
reference).
10.20 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on May 30, 2006, and incorporated
here in by reference).
10.21 Warrant for 5,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on May 30, 2006, and incorporated here in
by reference).
10.22 Warrant for 5,000,000 shares of CirTran Common Stock,
exercisable at $0.25, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on May 30, 2006, and incorporated here in
by reference).
10.23 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.50, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on May 30, 2006, and incorporated
here in by reference).
10.24 Asset Purchase Agreement, dated as of June 6, 2006, by and
between Advanced Beauty Solutions, LLC, and CirTran
Corporation (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Commission on June
13, 2006, and incorporated here in by reference).
10.25 Securities Purchase Agreement between CirTran Corporation and
ANAHOP, Inc., dated as of June 30, 2006 (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on July 6, 2006, and incorporated here in
by reference).
10.26 Warrant for 20,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on July 6, 2006, and incorporated
here in by reference).
10.27 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.15, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on July 6, 2006, and incorporated here in
by reference).
35
10.28 Warrant for 10,000,000 shares of CirTran Common Stock,
exercisable at $0.25, issued to Fadi Nora (previously filed as
an exhibit to the Company's Current Report on Form 8-K filed
with the Commission on July 6, 2006, and incorporated here in
by reference).
10.29 Warrant for 23,000,000 shares of CirTran Common Stock,
exercisable at $0.50, issued to Albert Hagar (previously filed
as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on July 6, 2006, and incorporated
here in by reference).
10.30 Marketing and Distribution Agreement, dated as of April 24,
2006, by and between Media Syndication Global, LLC, and
CirTran Corporation (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission
on July 10, 2006, and incorporated here in by reference).
10.31 Lockdown Agreement by and between CirTran Corporation and
Cornell Capital Partners, LP, dated as of July 20, 2006
(previously filed as an exhibit to the Company's Registration
Statement on Form SB-2/A (File No. 333-128549) filed with the
Commission on July 27, 2006, and incorporated herein by
reference).
10.32 Lockdown Agreement by and among CirTran Corporation and
ANAHOP, Inc., Albert Hagar, and Fadi Nora, dated as of July
20, 2006 (previously filed as an exhibit to the Company's
Registration Statement on Form SB-2/A (File No. 333-128549)
filed with the Commission on July 27, 2006, and incorporated
herein by reference).
10.33 Talent Agreement between CirTran Corporation and Holyfield
Management, Inc., dated as of March 8, 2006 (previously filed
as an exhibit to the Company's Registration Statement on Form
SB-2/A (File No. 333-128549) filed with the Commission on July
27, 2006, and incorporated herein by reference).
10.34 Amendment No. 2 to Investor Registration Rights Agreement,
between CirTran Corporation and Highgate House Funds, Ltd.,
dated as of August 10, 2006 (filed as an exhibit to
Registration Statement on Form SB-2 (File No. 333-128549) and
incorporated herein by reference).
10.35 Amendment No. 2 to Investor Registration Rights Agreement,
between CirTran Corporation and Cornell Capital Partners, LP,
dated as of August 10, 2006 (filed as an exhibit to
Registration Statement on Form SB-2 (File No. 333-128549) and
incorporated herein by reference).
10.36 Amended Lock Down Agreement by and among the Company and
ANAHOP, Inc., Albert Hagar, and Fadi Nora, dated as of
November 15, 2006 (filed as an exhibit to the Company's
Quarterly Report for the quarter ended September 30, 2006,
filed with the Commission on November 20, 2006, and
incorporated herein by reference).
10.37 Amended Lock Down Agreement by and between the Company and
Cornell Capital Partners, L.P., dated as of October 30, 2006
(filed as an exhibit to the Company's Quarterly Report for the
quarter ended September 30, 2006, filed with the Commission on
November 20, 2006, and incorporated herein by reference).
10.38 Amendment to Debenture and Registration Rights Agreement
between the Company and Cornell Capital Partners, L.P., dated
as of October 30, 2006 (filed as an exhibit to the Company's
Quarterly Report for the quarter ended September 30, 2006,
filed with the Commission on November 20, 2006, and
incorporated herein by reference).
10.39 Amendment Number 2 to Amended and Restated Investor
Registration Rights Agreement, between CirTran Corporation and
Cornell Capital Partners, LP, dated January 12, 2007
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on January 19,
2007, and incorporated here in by reference).
10.40 Amendment Number 4 to Investor Registration Rights Agreement,
between CirTran Corporation and Cornell Capital Partners, LP,
dated January 12, 2007(previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission
on January 19, 2007, and incorporated here in by reference).
36
10.41 Licensing and Marketing Agreement with Arrowhead Industries,
Inc. dated February 13, 2007 (previously filed as an exhibit
to the Company's Annual Report for the year ended December 31,
2006, filed with the Commission on April 17, 2007, and
incorporated herein by reference).
10.42 Amendment to Employment Agreement for Iehab Hawatmeh, dated
January 1, 2007 (previously filed as an exhibit to the
Company's Annual Report for the year ended December 31, 2006,
filed with the Commission on April 17, 2007, and incorporated
herein by reference)
10.43 Amendment to Employment Agreement for Shaher Hawatmeh, dated
January 1, 2007 (previously filed as an exhibit to the
Company's Annual Report for the year ended December 31, 2006,
filed with the Commission on April 17, 2007, and incorporated
herein by reference)
10.44 Amendment to Employment Agreement for Trevor Siliba, dated
January 1, 2007 (previously filed as an exhibit to the
Company's Annual Report for the year ended December 31, 2006,
filed with the Commission on April 17, 2007, and incorporated
herein by reference)
10.45 Amendment to Employment Agreement for Richard Ferrone dated
February 7, 2007 (previously filed as an exhibit to the
Company's Annual Report for the year ended December 31, 2006,
filed with the Commission on April 17, 2007, and incorporated
herein by reference).
10.46 Assignment and Exclusive Services Agreement with Global
Marketing Alliance, LLC, dated April 16, 2007 (previously
filed as an exhibit to the Company's' Current Report on Form
8-K filed with the Commission on April 20, 2007, and
incorporated herein by reference).
10.47 Employment Agreement for Mr. Sovatphone Ouk dated April 16,
2007 (previously filed as an exhibit to the Company's' Current
Report on Form 8-K filed with the Commission on April 20,
2007, and incorporated herein by reference).
10.48 Triple Net Lease between CirTran Corporation and Don L.
Buehner, dated as of May 4, 2007 (previously filed as an
exhibit to the Company's' Current Report on Form 8-K filed
with the Commission on May 10, 2007, and incorporated herein
by reference).
10.49 Commercial Real Estate Purchase Contract between Don L.
Buehner and PFE Properties, L.L.C., dated as of May 4, 2007
(previously filed as an exhibit to the Company's' Current
Report on Form 8-K filed with the Commission on May 10, 2007,
and incorporated herein by reference).
10.50 Exclusive Manufacturing, Marketing, and Distribution
Agreement, dated as of May 25, 2007 (previously filed as an
exhibit to the Company's' Current Report on Form 8-K filed
with the Commission on June 1, 2007, and incorporated herein
by reference).
10.51 Exclusive Manufacturing, Marketing, and Distribution
Agreement, with Full Moon Enterprises, Inc. dated as of June
8, 2007, pertaining to the Ball Blaster(TM) (previously filed
as an exhibit to the Company's' Quarterly Report on Form
10-QSB filed with the Commission on August 20, 2007, and
incorporated herein by reference).
10.52 Amended and Restated Exclusive Manufacturing, Marketing, and
Distribution Agreement, dated as of August 21, 2007
(previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on September 24,
2007, and incorporated herein by reference).
10.53 Exclusive Sales Distribution/Representative Agreement, dated
as of August 23, 2007 (previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission
on September 24, 2007, and incorporated herein by reference).
10.54 Settlement Agreement between CirTran Corporation and Trevor M.
Saliba, dated as of August 15, 2007 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with
the Commission on September 24, 2007, and incorporated herein
by reference).
10.55 Exclusive Manufacturing, Marketing and Distribution Agreement
between CirTran Corporation and Shaka Shoes, Inc., a Hawaii
corporation (previously filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on
February 11, 2008, and incorporated herein by reference).
37
10.56 Amendment Number 3 to Amended and Restated Investor
Registration Rights Agreement, between CirTran Corporation and
YA Global Investments, L.P. (previously filed as an exhibit to
the Company's Current Report on Form 8-K, filed with the
Commission on February 12, 2008, and incorporated herein by
reference).
10.57 Amendment Number 6 to Investor Registration Rights Agreement,
between CirTran Corporation and YA Global Investments, L.P.
(previously filed as an exhibit to the Company's Current
Report on Form 8-K, filed with the Commission on February 12,
2008, and incorporated herein by reference).
10.58 Agreement between and among CirTran Corporation, YA Global
Investments, L.P., and Highgate House Funds, LTD (previously
filed as an exhibit to the Company's Current Report on Form
8-K, filed with the Commission on February 12, 2008, and
incorporated herein by reference).
10.59 Promissory Note (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on March 5,
2008, and incorporated herein by reference).
10.60 Form of Warrant (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on March 5,
2008, and incorporated herein by reference).
10.61 Subscription Agreement between the Company and Haya
Enterprises, LLC (previously filed as an exhibit to the
Current Report on Form 8-K, filed with the Commission on March
5, 2008, and incorporated herein by reference).
10.62 Promissory Note (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on April 7,
2008, and incorporated herein by reference).
10.63 Subscription Agreement (previously filed as an exhibit to the
Current Report on Form 8-K, filed with the Commission on April
7, 2008, and incorporated herein by reference).
10.64 Promissory Note (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on May 1, 2008,
and incorporated herein by reference).
10.65 Agreement between and among CirTran Corporation, YA Global
Investments, L.P., and Highgate House Funds, LTD (previously
filed as an exhibit to the Current Report on Form 8-K, filed
with the Commission on October 15, 2008, and incorporated
herein by reference).
10.66 International Distribution Agreement between CirTran
Corporation and Factor Tequila SA de CV (previously filed as
an exhibit to the Current Report on Form 8-K, filed with the
Commission on November 3, 2008, and incorporated herein by
reference) (Portions of the Agreement have been redacted
pursuant to a request for confidential treatment filed with
the U.S. Securities and Exchange Commission.)
10.67 Forbearance Agreement between CirTran Corporation and YA
Global Investments (previously filed as an exhibit to a
Current Report on Form 8-K, filed with the Commission on
August 17, 2009, and incorporated herein by reference).
10.68 International Distribution Agreement between CirTran Beverage
Corp. and Tobacco Holding Group Sh.p.k. (previously filed as
an exhibit to the Annual Report on Form 10-K/A, filed with the
Commission on November 16, 2009, and incorporated herein by
reference)(Portions of the Agreement have been redacted
pursuant to a request for confidential treatment filed with
the U.S. Securities and Exchange Commission.)
10.69 Stock Purchase Agreement between CirTran Corporation and Iehab
Hawatmeh (previously filed as an exhibit to the Quarterly
Report filed August 19, 2009, and incorporated herein by
reference).
38
10.70 Stock Purchase Agreement between CirTran Corporation and Fadi
Nora Hawatmeh (previously filed as an exhibit to the Quarterly
Report filed August 19, 2009, and incorporated herein by
reference).
31 Certification of President / Chief Financial Officer
32 Certification pursuant to 18 U.S.C. Section 1350 - President /
Chief Financial Officer
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the understood thereunto duly
authorized.
CIRTRAN CORPORATION
/s/ Iehab Hawatmeh
----------------------------------------
Dated: May 24, 2010 By: Iehab Hawatmeh
President, Chief Financial Officer
(Principal Executive Officer, Principal
Financial Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Iehab Hawatmeh
----------------------------------------
Dated: May 24, 2010 By: Iehab Hawatmeh
President, Chief Financial Officer,
Principal Executive Officer, Principal
Financial Officer and Director
39
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