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 September 30, 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
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4125 South 6000 West, West Valley City, Utah 84128
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(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 November
23, 2010, was 1,498,972,923 shares.
CIRTRAN CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 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.................................... 21
Item 3 Quantitative and Qualitative Disclosures About Market Risk.... 30
Item 4 Controls and Procedures....................................... 30
PART II - OTHER INFORMATION
Item 1 Legal Proceedings............................................. 30
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds... 32
Item 3 Defaults Upon Senior Securities............................... 32
Item 4 (Removed and Reserved)........................................ 32
Item 5 Other Information............................................. 32
Item 6 Exhibits...................................................... 33
Signatures............................................................. 39
2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2010 2009
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 10,318 $ 8,588
Trade accounts receivable, net of allowance
for doubtful accounts of $267,928 and
$209,806, respectively 1,264,635 472,947
Receivable due from related party 453,680 670,266
Inventory, net of reserve of $2,001,052
and $2,045,458, respectively 609,027 873,650
Prepaid deposits 537,077 82,011
Other 348,519 720,712
--------------------------------------------------------------------------------
Total current assets 3,223,256 2,828,174
Investment in securities, at cost 300,000 300,000
Investment in related party 750,000 750,000
Long-term receivable due from related party 8,433,827 6,285,551
Long-term receivable 1,647,895 1,647,895
Property and equipment, net 387,031 544,705
Intellectual property, net 937,017 1,270,358
Other assets, net 14,538 14,538
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Total assets $ 15,693,564 $ 13,641,221
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Checks written in excess of bank balance $ 281,737 $ 217,361
Accounts payable 4,092,535 3,047,592
Short term advances payable 3,281,877 2,962,339
Accrued liabilities 6,705,270 4,061,727
Deferred revenue 1,238,987 2,275,967
Derivative liability 124,955 523,349
Convertible debenture 3,161,355 3,161,355
Current portion of refundable customer
deposits 822,579 828,933
Current maturities of long-term debt 703,839 578,226
Note payable to stockholders 163,153 208,014
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Total current liabilities 20,576,287 17,864,863
Refundable customer deposits, net of
current portion 1,760,000 1,719,000
Long-term debt, less current maturities 191,703 196,614
--------------------------------------------------------------------------------
Total liabilities 22,527,990 19,780,477
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 and
1,498,972,923, respectively 1,498,968 1,498,968
Additional paid-in capital 29,125,683 29,117,928
Subscription receivable (17,000) (17,000)
Accumulated deficit (40,015,308) (39,312,383)
--------------------------------------------------------------------------------
Total CirTran Corporation stockholders'
deficit (9,407,657) (8,712,487)
--------------------------------------------------------------------------------
Noncontrolling interest 2,573,231 2,573,231
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Total stockholders' deficit (6,834,426) (6,139,256)
--------------------------------------------------------------------------------
Total liabilities and stockholders'
deficit $ 15,693,564 $ 13,641,221
================================================================================
The accompanying notes are an integral part of
these consolidated financial statements.
3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
2010 2009 2010 2009
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Net sales $ 2,263,661 $ 2,690,941 $ 9,455,775 $ 7,712,530
Cost of sales (782,566) (2,025,803) (5,882,731) (6,255,929)
Royalty Expense (1,167,315) (374,220) (2,323,439) (603,852)
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Gross profit 313,779 290,918 1,249,605 852,749
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Operating expenses
Selling, general and administrative expenses 453,385 1,051,578 1,718,923 3,391,308
Non-cash compensation expense - 996 43,577 2,989
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Total operating expenses 453,385 1,052,574 1,762,500 3,394,297
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Loss from operations (139,606) (761,656) (512,895) (2,541,548)
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Other income (expense)
Interest expense (251,625) (301,158) (786,710) (868,965)
Interest income 159,896 132,857 340,659 375,772
Settlement Income (Expense) - 43,500 (260,000) 43,500
Gain on sale/leaseback 20,268 20,268 60,805 60,805
Gain (loss) on settlement of lititgation/debt 57,978 40,989 56,822 158,704
Gain on derivative valuation 30,385 (382,940) 398,394 22,216
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Total other gain (expense), net 16,902 (446,484) (190,030) (207,968)
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Net loss $ (122,704) $ (1,208,140) $ (702,925) $ (2,749,516)
==================================================================================================================
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.00)
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Basic and diluted weighted-average
common shares outstanding 1,498,972,923 1,498,972,923 1,498,972,923 1,487,752,669
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The accompanying notes are an integral part of these consolidated financial statements.
4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
For the Nine Months Ended September 30, 2010 2009
--------------------------------------------------------------------------------
Cash flows from operating activities
Net loss $ (702,925) $ (2,749,516)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 491,015 499,386
Accretion expense 174,640 384,896
Provision for (recovery of) doubtful accounts 58,123 -
Provision for obsolete inventory (44,408) -
Gain on sale - leaseback 60,805 60,805
Non-cash compensation expense 43,577 (526)
Loan costs and interest withheld from loan
proceeds - 15,662
Options issued to attorneys for services 6,759 2,270
Change in valuation of derivative (398,394) (22,216)
Borrowing fee - 103,418
Changes in assets and liabilities:
Trade accounts receivable (849,811) (124,557)
Related party receivable (1,931,690) (2,526,682)
Inventories 309,030 (19,618)
Prepaid expenses and other current assets (82,873) (287,389)
Accounts payable 1,190,320 470,285
Accrued liabilities 2,540,119 821,434
Deferred revenue (1,036,980) 254,908
Customer deposits 34,646 648,782
--------------------------------------------------------------------------------
Net cash used in operating activities (138,047) (2,468,658)
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Cash flows from financing activities
Proceeds from notes payable to related party - 4,611
Payments on notes payable to related party (44,861) (18,113)
Principal payments on long-term debt (53,938) (35,354)
Checks written in excess of bank balance 64,376 44,256
Proceeds from short-term advances 174,200 2,616,380
Payments on short-term advances - (126,100)
--------------------------------------------------------------------------------
Net cash provided by financing activities 139,777 2,485,680
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Net decrease in cash and cash equivalents 1,730 17,022
Cash and cash equivalents at beginning of year 8,588 8,701
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Cash and cash equivalents at end of year $ 10,318 $ 25,723
================================================================================
The accompanying notes are an integral part of
these consolidated financial statements.
5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- CONTINUED
For the Nine Months Ended September 30, 2010 2009
--------------------------------------------------------------------------------
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest $ 62,640 $ -
Noncash investing and financing activities:
Stock issued in payment of notes payable and
accrued interest $ - $ 117,622
Debt settled on behalf of Company for
issuance of short term advances 145,338 1,000,000
Accrued liabilities settled on behalf of
the Company for issuance of short term
advances - 1,315,000
The accompanying notes are an integral part of
these 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
non-public 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 nine months ended September 30, 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 Bev
Group LLC ("AfterBev"), a majority controlled entity. At September 30, 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
Company's 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 September 30, 2010 and 2009,
respectively and was $333,341 and $333,341 for the nine months ended September
30, 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 is 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 1,438,682,338 and
800,182,111 in potentially issuable common shares at September 30, 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 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.
In March 2010, the FASB issued guidance to clarify the scope exception for
certain embedded derivative features on debt instruments. The guidance is
effective for the first fiscal quarter after June 15, 2010, with early adoption
permitted. The Company is currently evaluating the impact of this new guidance.
In April 2010, the FASB issued guidance to clarify classification of an employee
stock-based payment award when the exercise price is denominated in the currency
of a market in which the underlying equity security trades. The guidance is
effective for fiscal years and interim periods beginning after December 15,
2010, with early adoption permitted. The Company is currently evaluating the
impact of this new guidance on its financial statements.
Corrected prior year financial - During the course of preparing the financial
statements for the three and nine months ended September 30, 2010, the Company
identified certain prior period misstatements whose impact was not material,
either individually or in aggregate, to the Company's financial statements for
the year ended December 31, 2009. However, these misstatements were considered
material to the Company's financial statements for the three and nine months
ended September 30, 2010. As a result, the Company corrected the financial
statements for the year ended December 31, 2009. The corrected balance sheet and
the effects on retained earnings as of December 31, 2009 is included in these
financial statements. These misstatements relate to recognizing executive
compensation accruals related to earned but unpaid bonuses and stock options
due, which are included in the employment agreement. The effect of correcting
these misstatements resulted in an increase in total liabilities of $172,315 and
an increase in general and administrative expenses of $172,315, resulting in a
decrease in net income of $172,315 for the prior year ended December 31, 2009.
8
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 $702,925 and $2,749,516 for the nine
months ended September 30, 2010 and 2009, respectively. As of September 30,
2010, the Company had an accumulated deficit of $40,015,308. In addition, the
Company used cash in its operations in the amount of $138,047 and $2,468,658
during the nine months ended September 30, 2010 and 2009, respectively. In
addition, on August 11, 2009, the Company and YA Global, 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. Since then, the Company defaulted on its payment obligation but
is in the process of negotiating another forbearance agreement extending
payments until August 2011, although no agreement had been finalized as of the
date of this Report. 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.
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:
September 30, December 31,
2010 2009
--------------------------------------------------------------------------------
Raw Materials $ 1,691,164 $ 1,638,256
Work in Process 139,947 313,302
Finished Goods 778,968 967,550
Allowance / Reserve (2,001,052) (2,045,458)
--------------------------------
Totals $ 609,027 $ 873,650
================================
9
NOTE 4 - INTELLECTUAL PROPERTY
Intellectual property and estimated service lives consisted of the following:
Estimated
September 30, December 31, Service Lives
2010 2009 in Years
--------------------------------------------------------------------------------
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
---------------------------------------------------------------
Total intellectual property $ 2,778,749 $ 2,778,749
Less accumulated amortization (1,841,732) (1,508,391)
---------------------------------------------------------------
Intellectual property, net $ 937,017 $ 1,270,358
---------------------------------------------------------------
The estimated amortization expenses for the next five years are as follows:
Year Ending December 31,
----------------------------------------------
2010 $ 129,408
2011 356,783
2012 254,916
2013 142,063
2014 32,418
Thereafter 21,429
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Total $ 937,017
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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 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.
10
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 $1,167,315 and $374,220 in
royalty expenses due to PlayBev during the three months ended September 30, 2010
and 2009, respectively and $2,323,439 and $603,852 during the nine months ended
September 30, 2010 and 2009, respectively.
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 $530,699 and $894,642 during the
three months ended September 30, 2010 and 2009, respectively and $3,626,562 and
$3,067,490 for the nine months ending September 30, 2010 and 2009, respectively,
which have been included in revenues for our marketing and media segment. As of
September 30, 2010, the interest accrued on the balance owing from PlayBev
totaled $1,076,690. The net amount due the Company from PlayBev for marketing
and development services, after netting the royalty owed to PlayBev, totaled
$8,887,507 at September 30, 2010.
After Bev Group, LLC
Following AfterBev's organization in May 2007, the Company entered into
consulting agreements with two individuals, one of whom had loaned the Company
$250,000 when the Company invested in PlayBev, and the other one was a Company
director. The agreements provided that the Company assign to each individual
approximately one-third of the Company's share in future AfterBev cash
distributions, in exchange for their assistance in the initial AfterBev
organization and planning, along with their continued assistance in subsequent
beverage development and distribution activities. The agreements also provided
that as the Company sold a portion of its membership interest in AfterBev, the
individuals would each be owed their proportional assigned share distributions
in the proceeds of such a sale. The actual payment of the distributions depended
on what the Company did with the sale proceeds. If the Company used the proceeds
to help finance beverage development and marketing activities, the payment of
distributions would be deferred, pending collections from customers once
beverage product sales eventually commenced. Otherwise, the proportional
assigned share distributions would be due to the two individuals.
Throughout the balance of 2007, as energy drink development and marketing
activities progressed, the Company raised additional funds by selling portions
of its membership interest in AfterBev to other investors, some of whom were
Company stockholders. In some cases, the Company sold a portion of its
membership interest, including voting rights. In other cases, the Company sold
merely a portion of its share of future AfterBev profits and losses. By the end
of 2007, after taking into account the two interests it had assigned, the
Company had retained a net 14 percent interest in AfterBev's profits and losses,
but had retained 52 percent of all voting rights in AfterBev. The Company
recorded the receipt of these net funds as increases to its existing minority
interest in AfterBev, and the rest as amounts owing as distributable proceeds
payable to the two individuals with assigned interests of the Company's original
share of AfterBev.
At the end of 2007, the Company agreed to convert the amount owing to one of the
individuals into a promissory note. In exchange, the individual agreed to
relinquish his approximately one-third portion of the Company's remaining share
of AfterBev's profits and losses. Instead, the individual received a membership
interest in AfterBev. In January 2008, the other assignee, which is one of the
Company's directors, similarly agreed to relinquish the distributable proceeds
owed to him, in exchange for an interest in AfterBev's profits and losses.
Accordingly, he purchased 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, by
the end of December 31, 2008, the director had sold or transferred 23 percent to
unrelated investors and retained the remaining 1 percent interest in AfterBev's
profits and losses. In turn, the director loaned $834,393 to the company in the
form of unsecured advances. Of the amounts loaned, $600,000 was used to purchase
interest in PlayBev directly which resulted in a reduction of $600,000 of
amounts owed by PlayBev to the Company. During the year ended December 31, 2009,
the director 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. In addition, during the year
ended December 31, 2009, one of the directors of the Company and the Company
president purchased 6 percent and 5 percent of AfterBev shares, respectively, in
private sales from existing shareholders of AfterBev. AfterBev has had no
operations since its inception.
11
Global Marketing Alliance
The Company entered into an agreement with Global Marketing Alliance ("GMA"),
and hired GMA's owner as the Vice President of 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 $163,846 and $680,778 during the three months ended
September 30, 2010 and 2009, respectively, and $932,368 and $1,998,192 for the
nine months ended September 30, 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 September
30, 2010, the Company owed $38,094 under this arrangement. During the nine
months ended September 30, 2010, Mr. Nora loaned the Company a total of
$230,500. Mr. Nora received cash payments totaling $98,000 from the Company
during the nine months ended September 30, 2010. As of September 30, 2010, the
Company still owed Mr. Nora $271,999 in the form of unsecured advances. These
advances and short term bridge loans were approved by the Board of Directors
under a 5% borrowing fee. The borrowing fees were waived by Mr. Nora on these
loans.
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
September 30, 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 promissory note to a family member of
the Company president in exchange for $300,000. The note was due on demand after
May 2008. During the nine months ended September 30, 2010, the Company repaid
principal and interest totaling $57,500. At September 30, 2010, the principal
amount owing on the note was $161,563. On March 31, 2008, the Company issued to
this same family member, along with four other Company shareholders, promissory
notes totaling $315,000. The family member's note was for $105,000. Under the
terms of all the notes, the Company received total proceeds of $300,000, and
agreed to repay the amount received plus a 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 nine months ended September 30,
2010, the Company paid $63,000 towards the outstanding notes. The principal
balance owing on the promissory notes as of September 30, 2010, totaled $41,415.
As of September 30, 2010, the Company owed the Company president a total of
$289,757 in unsecured advances, and $136,827 in accrued options. These advances
and short term bridge loans were approved by the Board of Directors under a 5%
borrowing fee. The borrowing fees were waived by our president on these loans.
12
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 September 30, 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) share 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 September 30, 2010.
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,
Katana Electronics, LLC, a Utah limited liability company ("Katana"). Katana
Electronics, LLC is owned by Shaher Hawatmeh, former employee and a related
party. 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.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Convertible debentures - 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 Global, 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.
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.
13
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.
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):
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 were due for total
payments of $2,825,000.
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 the date of this
Report, the Company was in default under this forbearance agreement.
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.
As of the date of this Report, the Company had defaulted on its payment
obligations under the Forbearance Agreement, and the Company was in the process
of negotiating another forbearance agreement to extend the payment dates,
although no agreement had been executed as of the date of this Report.
Issuable Common Stock - 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 to provide sufficient shares for issuance under those instruments.
14
Employment Agreements - On August 1, 2009, the Company 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; and 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. During the nine months ending September 30, 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
$58,920 and $58,920 was accreted during the three months ended September 30,
2010 and 2009, respectively and $174,640 and $174,839 during the nine months
ended September 30, 2010 and 2009, respectively. A total of $605,015 has been
accreted against the note as of September 30, 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 September 30, 2010, the balance
of the note was $605,015. The fair value of the derivative liability stemming
from the associated warrants as of September 30, 2010, was $115,346.
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 September 30, 2010, was $75,000. The note renews
monthly.
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. Since 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 nine months ended September 30, 2010, the Company paid $40,000
against one of the loans. As of September 30, 2010, the balance of the loans
totaled $725,000. As of September 30, 2010, all four notes were in default.
15
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 Global, 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. Since then, the Company defaulted on its
payment obligation but was in the process of negotiating another forbearance
agreement to extend the payments.
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 nine months ending September 30, 2010, totaled $55,659. The balance of
accrued interest owed at September 30, 2010, was $60,642.
The Company determined that certain conversion features of the Debenture fell
under derivative accounting treatment. The carrying value of the Debenture as of
September 30, 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
September 30, 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. On August 11, 2009, the
Company and YA Global, 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.
Since then, the Company defaulted on its payment obligation but was in the
process of negotiating another forbearance agreement to extend the payments.
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 nine months ending September 30, 2010, totaled $134,630. The balance of
accrued interest owed at September 30, 2010, was $306,743.
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. As of the date of this Report, no registration statement had been
filed.
As of September 30, 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 September 30, 2010, remained $1,500,000. The
Company determined that the conversion features on the December Debenture fell
under derivative accounting treatment. The fair value of the derivative
liability stemming from the December Debenture's conversion feature as of
September 30, 2010, was determined to be $0.
16
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 nine months ending September 30, 2010, totaled $93,453. The balance of
accrued interest owed at September 30, 2010, was $495,453.
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. As of September 30, 2010 these are expired.
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.
As of September 30, 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 $0 as of September 30, 2010.
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 September 30,
2010 are summarized as follows:
Level 1 Level 2 Level 3 Total
--------------------------------------------------------------------------------
Fair value of
derivatives $ - $ 124,955 $ - $ 124,955
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
17
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 September 30, 2010, the Company had made
a total of $331,388 on the long-term note payable. As of September 30, 2010, the
note balance totaled $103,612.
NOTE 11 - STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2010, the Company did not issue
shares of common stock.
NOTE 12 - STOCK OPTIONS AND WARRANTS
Stock Option Plans - As of September 30, 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 September 30,
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.
Employee Options - During the nine months ended September 30, 2010 and 2009, the
Company did not grant options to purchase shares of common stock to employees.
During the nine months ending September 30, 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 September 30, 2010,
and changes during the nine 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
September 30,
2010 53,160,000 $ 0.014 2.23 $ -
================================================================================
Exercisable at
September 30,
2010 51,960,000 $ 0.014 2.25 $ -
================================================================================
18
As of September 30, 2010, vested options totaled 51,960,000, leaving 1,200,000
that have yet to completely vest. As a result, as of September 30, 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.
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. 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 are warrants outstanding at September 30,
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 Accounting Standards
Codification ("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 will 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:
19
Electronics Contract Marketing Beverage
Assembly Manufacturing and Media Distribution Total
------------------------------------------------------------------------------------------------------------------
Three months ended
September 30, 2010
Sales to external customers $ 28,500 $ 9,724 $ 729,406 $ 1,496,031 $ 2,263,661
Segment income (loss) 5,942 66,043 1,212,866 (1,162,148) 122,703
Segment assets 2,850,506 1,063,319 10,745,697 1,034,042 15,693,564
Depreciation and amortization 93,007 64,446 5,842 - 163,295
Three months ended
September 30, 2009
Sales to external customers $ 192,660 $ 54,204 $ 1,575,421 $ 868,656 $ 2,690,941
Segment income (loss) (847,687) (37,612) 1,742 (324,583) (1,208,140)
Segment assets 3,987,843 1,524,304 8,213,494 803,756 14,529,397
Depreciation and amortization 95,923 64,482 5,894 - 166,299
Nine months ended
September 30, 2010
Sales to external customers $ 227,444 $ 37,278 $ 4,558,416 $ 4,632,637 $ 9,455,775
Segment income (loss) 394,952 183,724 1,007,044 (882,795) 702,925
Segment assets 2,850,506 1,063,319 10,745,697 1,034,042 15,693,564
Depreciation and amortization 280,151 193,340 17,524 - 491,015
Nine months ended
September 30, 2009
Sales to external customers $ 1,050,394 $ 333,162 $ 5,065,682 $ 1,263,292 $ 7,712,530
Segment income (loss) (1,484,180) (203,170) (554,424) (353,074) (2,594,848)
Segment assets 3,987,843 1,524,304 8,213,494 803,756 14,529,397
Depreciation and amortization 288,227 193,584 17,575 - 499,386
NOTE 14 - GEOGRAPHIC INFORMATION
The Company currently maintains $315,778 of capitalized tooling costs in China.
All other revenue-producing assets are located in the United States of America.
Revenues are attributed to the geographic areas based on the location of the
customers purchasing the products.
NOTE 15 - SUBSEQUENT EVENTS
The Company has evaluated for subsequent events. There are no material events
that warrant further disclosure.
20
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 September 30, 2010 and 2009, under this arrangement
accounted for 23 and 33 percent of total sales, respectively and during the nine
months ended September 30, 2010 and 2009, services billed accounted for 38 and
44 percent of total sales, respectively. Sales of energy drink beverages during
the three months ended September 30, 2010 and 2009 amounted to 68 percent and 25
percent of total sales, respectively and during the nine months ended September
30, 2010 and 2009 amounted to 49 percent and 14 percent of total sales,
respectively.
CirTran USA accounted for 1 percent and 7 percent of our total revenues during
the three months ended September 30, 2010 and 2009, respectively and 2 percent
and 12 percent of our total revenues during the nine months ended September 30,
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 its 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 1 percent and 2 percent of our total revenues during the three months
ended September 30, 2010 and 2009, respectively, and 1 percent and 2 percent of
our total revenues during the nine months ended September 30, 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 zero percent of total sales for
the three months ended September 30, 2010 and 2009, respectively, and zero and 2
percent of total sales for the nine months ended September 30, 2010 and 2009,
respectively.
CirTran Media provides end-to-end services to the direct response and
entertainment industries. Revenues for CirTran Media were zero percent total
sales for both the three months ended September 30, 2010 and 2009, respectively,
and zero percent total sales for both the nine months ended September 30, 2010
and 2009, respectively.
21
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 7 and 25 percent of total revenues during the three months
ending September 30, 2010 and 2009, respectively, and 10 and 25 percent of total
revenues during the nine months ending September 30, 2010 and 2009,
respectively.
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 and Nine months ended September 30, 2010 and 2009
Sales and Cost of Sales
Net sales decreased to $2,263,661 for the three months ended September 30, 2010,
as compared to $2,690,941 for the three months ended September 30, 2009. Sales
in CirTran Beverage were down due to manufacturing cycle; material's lead times
and orders turn around. Management does not believe that this is not an
indication of a slowdown in CirTran Beverage overall sales. Net sales increased
to $9,455,775 for the nine months ended September 30, 2010, as compared to
$7,712,530 for the nine months ended September 30, 2009, driven by partially
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, decreased to 86 percent from 89 percent
for the three months ended September 30, 2010, as compared to the three months
ended September 30, 2009, respectively, and decreased to 87 percent from 89
percent for the nine months ended September 30, 2010, as compared to the nine
months ended September 30, 2009, respectively. Consequently, the gross profit
margin increased to 14 percent from 11 percent, for the three months ended
September 30, 2010 and 2009, respectively, and increased to 13 percent from 11
percent, for the nine months ended September 30, 2010 and 2009, respectively.
The increase in gross profit margin were 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. 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,
marketing services and royalty expenses paid, 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.
22
The following charts present 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 nine months ended September 30, 2010 and 2009.
Three Months Ended September 30:
------------------------------------------------------------------------------------------------------------------
Cost Royalty Gross Loss
Segment Year Sales of Sales Expense / Margin
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Electronics Assembly 2010 $ 28,500 $ - $ - $ 28,500
-----------------------------------------------------------------------------------
2009 192,660 170,357 - 22,303
------------------------------------------------------------------------------------------------------------------
Contract Manufacturing 2010 9,724 202 9,156 366
-----------------------------------------------------------------------------------
2009 54,204 348 - 53,856
------------------------------------------------------------------------------------------------------------------
Marketing / Media 2010 729,406 (663,600) - 1,393,006
-----------------------------------------------------------------------------------
2009 1,575,421 1,496,649 - 78,772
------------------------------------------------------------------------------------------------------------------
Beverage Distribution 2010 1,496,031 1,445,964 1,158,159 (1,108,092)
-----------------------------------------------------------------------------------
2009 868,656 358,449 374,220 135,987
------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30:
------------------------------------------------------------------------------------------------------------------
Cost Royalty Gross Loss
Segment Year Sales of Sales Expense / Margin
------------------------------------------------------------------------------------------------------------------
Electronics Assembly 2010 $ 227,444 $ 198,341 $ - $ 29,103
-----------------------------------------------------------------------------------
2009 1,050,394 721,512 - 328,882
------------------------------------------------------------------------------------------------------------------
Contract Manufacturing 2010 37,278 (10,979) 34,356 13,901
-----------------------------------------------------------------------------------
2009 333,162 128,970 - 204,192
------------------------------------------------------------------------------------------------------------------
Marketing / Media 2010 4,558,416 1,367,293 - 3,191,123
-----------------------------------------------------------------------------------
2009 5,065,681 4,819,642 - 246,039
------------------------------------------------------------------------------------------------------------------
Beverage Distribution 2010 4,632,637 4,328,076 2,289,083 (1,984,522)
-----------------------------------------------------------------------------------
2009 1,263,292 585,805 603,852 73,635
------------------------------------------------------------------------------------------------------------------
Selling, General and Administrative Expenses
During the three months ended September 30, 2010, selling, general and
administrative expenses decreased $598,193 as compared to the same period during
2009, while during the nine months ended September 30, 2010, selling, general
and administrative expenses decreased $1,672,385 as compared to the same period
during 2009. The decrease was the result of a slowing of advertising and media
promotion spending during the nine months ended September 30, 2010, together
with the reduced payroll 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 accounting for options owed or granted
to employees to purchase common stock was $0 for the three months ended
September 30, 2010, as compared to $996 for the three months ended September 30,
2009, respectively, and $43,577 for the nine months ended September 30, 2010, as
compared to $2,989 for the nine months ended September 30, 2009, respectively,
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
three months ended September 30, 2010, was $251,625 as compared to $301,158 for
the three months ended September 30, 2009, a decrease of 16 percent and the
combined interest expense for nine months ended September 30, 2010, was $786,710
as compared to $868,965 for the nine months ended September 30, 2009, a decrease
of 9 percent. The decrease in the combined interest expense was driven by the
reduction in accretion expense recorded for the three and nine months ended
September 30, 2010. Actual interest expense decreased to $192,705 for the three
months ended September 30, 2010, as compared to the interest expense of $196,432
for the three months ended September 30, 2009, and interest expense increased to
$612,069 for the nine months ended September 30, 2010, as compared to the
interest expense of $484,070 for the nine months ended September 30, 2009, a
direct result of the decrease of short-term advances payable and notes payable.
23
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 September 30, 2010, increased to $159,896 as compared
to interest income of $132,857 for the three months ended September 30, 2009 and
for the nine months ended September 30, 2010, decreased to $340,659 as compared
to interest income of $375,772 for the nine months ended September 30, 2009. The
decrease was due to an adjustment in the interest income from prior years in the
made during the first quarter of 2010.
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 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. We have 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 us(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 nine
months ended September 30, 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 nine
months ended September 30, 2010.
As a result, we recorded a loss of $122,703 during the three months ended
September 30, 2010, as compared to a net loss for the three months ended
September 30, 2009 of $1,208,140 and a net loss of $702,925 during the nine
months ended September 30, 2010, as compared to a net loss for the nine months
ended September 30, 2009 of $2,749,516. The decrease for the 3 months ending
September 2010, compared to the September 2009 figures was primarily due to
lower selling, general and administrative expenses .
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 $40,015,308 at September
30, 2010, and $39,912,383 at December 31, 2009. Net loss for the nine months
ended September 30, 2010, was $702,925 as compared to $2,749,516 for the nine
months ended September 30, 2009. Our current liabilities exceeded our current
assets by $15,036,689 as of September 30, 2010, and by $16,952,303 as of
December 31, 2009. For the nine months ended September 30, 2010 and 2009, we
experienced negative cash flows from operating activities of $138,047 and
$2,468,658, respectively.
Cash
The amount of cash used in operating activities during the nine months ended
September 30, 2010, increased by $138,047, driven by increases in accounts
payable and accrued liabilities.
Accounts Receivable
Trade accounts receivable, net of allowance for doubtful accounts, increased to
$1,264,635 during the nine months ended September 30, 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, increased
$1,931,690 during the nine months ended September 30, 2010, to a total of
$8,887,507, of which $453,680 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 $1,076,690 as of
September 30, 2010.
24
Accounts payable and accrued liabilities
During the nine months ended September 30, 2010, accounts payable, accrued
liabilities and short-term debt increased $4,008,024 to a combined balance of
$14,079,682 as of September 30, 2010. The increase was driven primarily by an
increase of $319,538 of short-term advances and an increase of $2,643,543 in
accrued liabilities which include a $260,000 of accrued settlement expense and
an increase in accounts payable of $1,044,943. The balance of the increase was
the result of financed marketing costs for PlayBev.
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
$40,015,308, along with a total stockholders' deficit of $6,834,426, at
September 30, 2010. In addition, we have used, rather than provided, cash in our
operations for the nine months ended September 30, 2010 and 2009, of $138,047
and $2,468,658, respectively. During the nine months ended September 30, 2010,
our monthly operating costs and interest expense averaged approximately $310,000
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.
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.
Since then, the Company defaulted on its payments obligation but as of the date
of this Report, the Company was in the process of negotiating another
forbearance agreement to extend the payments.
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 nine months ending
September 30, 2010, totaled $55,659. The balance of accrued interest owed at
September 30, 2010, was $60,642.
25
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. As of the date of this Report, the
Company and YA Global were in the process of amending the Forbearance Agreement.
The Company has made two payments "good faith" payments of $25,000 each for a
total of $50,000 as part of the amendment process.
We determined that certain conversion features of the Debenture fell under
derivative accounting treatment. The carrying value of the Debenture as of
September 30, 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
September 30, 2010.
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. On August 11, 2009, the Company and
YA Global, 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.
Since then, the Company defaulted on its payment obligation but was in the
process of negotiating another forbearance agreement to extending the payments
due under the December 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 nine months
ending September 30, 2010, totaled $134,630. The balance of accrued interest
owed at September 30, 2010, was $306,743.
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.
As of the date of this Report, the Company and YA Global were in the process of
amending the Forbearance Agreement. The Company has made two payments "good
faith" payments as part of the amendment process as described below.
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.
As of the date of this Report, no registration statement had been filed.
As of September 30, 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 September 30, 2010, remained $1,500,000. We
determined that the conversion features on the December Debenture and the
associated warrants fell under derivative accounting treatment. The fair value
of the derivative liability stemming from the December Debenture's conversion
feature as of September 30, 2010, was determined to be $0.
26
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. 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 nine months ending September 30, 2010, totaled $93,453. The balance of
accrued interest owed at September 30, 2010, was $495,453.
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. As of the
date of this Report, the Company and YA Global were in the process of amending
the Forbearance Agreement. The Company has made two payments "good faith"
payments as part of the amendment process as described below.
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 fair value
of the derivative liability arising from the August Debenture's conversion
feature and warrants was $250 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 YAGlobal or its predecessor entities.
Under the terms of the Forbearance Agreement, the Company agreed to waive any
claims against YAGlobal, 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.
27
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 were due for total
payments of $2,825,000. The remaining balance was due July 1, 2010.
Since then, the Company defaulted on its payment obligation but as of the date
of this Report, the Company was in the process of negotiating another
forbearance agreement to extending the payments due under the Debentures.
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 the date of this Report, the Company and YA Global were in the process of
amending the Forbearance Agreement. The Company has made two payments "good
faith" payments of $25,000 each for a total of $50,000 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.
28
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.
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
September 30, 2010 and 2009, respectively, and was $333,341 and $333,341 for the
nine months ended September 30, 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 issues 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 12 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 -
29
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.
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
September 30, 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 September 30, 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
The Company carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer / Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September
30, 2010. Based on our evaluation, our Chief Executive Officer / Chief Financial
Officer has concluded that the Company's disclosure controls and procedures were
not effective at September 30, 2010, due to the fact that the material
weaknesses in the Company's internal control over financial reporting described
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2009, had not been remediated as of September 30, 2010.
These weaknesses are continuing. Management and the Board of Directors are aware
of these weaknesses that result because of limited resources and staff.
Management has started the process of formally documenting the key processes of
the Company as a starting point for improved internal control over financial
reporting. Efforts to fully implement the processes we have designed have been
put on hold due to limited resources, but we anticipate a renewed focus on this
effort in the near future. Due to our limited financial and managerial
resources, we cannot assure when we will be able to implement effective internal
controls over financial reporting.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that
occurred in the third quarter of 2010 that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
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 is pursuing collection
efforts on this judgment.
30
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. These amounts have been accrued in full as a liability.
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
March10, 2009, denying the allegations 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 pursuant to a payment schedule. The Plaintiff has filed a
request for entry of judgment against CirTran, claiming that CirTran failed to
make the required payments. These amounts have been accrued in full as a
liability.
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. Discovery is
complete, and the plaintiff filed a certificate of readiness for trial with the
Court. CirTran Asia intends to defend vigorously against the allegations in the
Complaint. These amounts have been accrued in full as a liability.
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. The
Company has made 9 monthly payments but is in default of the $5,250 monthly
payments that were due on May 28, 2010, June 28, 2010, and July 28, 2010. These
amounts have been accrued in full as a liability. As of the date of this Report,
no additional 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. The
Company has made 10 monthly payments but is in default of the $5,250 monthly
payments that were due on May 28, 2010, June 28, 2010, and July 28, 2010. These
amounts have been accrued in full as a liability. As of the date of this Report,
no additional 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. These
amounts have been accrued in full as a liability.
31
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
parties agreed to resolve this matter under terms requiring CirTran to pay
$20,000 over time. These amounts have been accrued in full as a liability. As of
the date of this Report, the parties were negotiating a settlement agreement.
YA Global Investments, LP v. CirTran Corporation, Third Judicial District Court
of Salt Lake County, State of Utah, case no. 100911400. On June 25, 2010, YA
Global filed a lawsuit against the Company asserting claims for breach of
contract, breaches of the uniform commercial code, and replevin. YA Global seeks
a judgment in the amount of $4,193,380 plus interest and attorneys fees, as well
as a writ of replevin to compel the Company to turn over equipment and other
property that YA Global claims was pledged as collateral to secure obligations
owing to YA Global. The Company does not dispute that it is indebted to YA
Global in the amount of $3,161,355 plus interest, but the Company denies that it
is in breach of its payment obligations because YA Global agreed to restructure
the payment schedule and CirTran relied on this agreement.
LIB-MP Beverage, LLC v. PlayBeverages, LLC, CirTran Beverage Corporation,
CirTran Corporation, Iehab Hawatmeh, and Fadi Nora, United States District
Court, Central District of California, Case No. CV10-2814. On March 25, 2010,
LIB-MP Beverages, LLC, filed a complaint asserting claims for fraud, specific
performance, breach of contract, breach of the implied covenant of good faith
and fair dealing, declaratory relief and accounting (the "California
Litigation"). The amount of damages claimed in the California Litigation was not
specified. On April 29, 2010, the Company filed claims against LIB-MP Beverage,
LLC, American Sales & Merchandising, LLC, Warner Depuy, Michael Liberty and
Jeffrey Pollack in the Third Judicial District Court, Salt Lake County, State of
Utah, seeking a declaratory judgment on the claims asserted in the California
litigation, and further asserting claims for tortious interference with
contractual relations, breaches of fiduciary duties, fraud and negligent
misrepresentations. On June 21, 2010, the complaint filed in the California
Litigation was dismissed without prejudice for lack of jurisdiction.
Jimmy Esebag v. CirTran Corporation and Fadi Nora, Superior Court of the State
of California, Los Angeles County, Case No. BC296162. On July 15, 2010, the
court entered judgment against the Company in the amount of $68,270 based upon
the Company's failure to make payments when due under a settlement with Mr.
Esebag. These amounts have been accrued in full as a liability.
Desiree Liston v. CirTran Media Corp. d/b/a Diverse Media Group Corp., Circuit
Court of Benton County, Arkansas, Case No. CV2010-2448-6. On July 28, 2010,
Desiree Liston filed a complaint seeking an unspecified amount in excess of
$75,000 based on allegations of breach of an Employment Agreement. The Company
has filed its answer, and the matter is proceeding in discovery. The Company
believes that this claim has no merit and intends to defend it vigorously.
Gordon Jensen, d/b/a Gordon Jensen Trucking v. CirTran Corp., Third Judicial
District Court of Salt Lake County, State of Utah, case no.108900934. On May 28,
2010, plaintiff brought an action seeking $7,145 for nonpayment of services.
Judgment was entered against CirTran on October 7, 2010, for $6,703. These
amounts have been accrued in full as a liability.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the nine months period ended September 30, 2010, we have not issued
shares of our common stock.
No shares have been issued in 2010.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. (Removed and Reserved)
None
Item 5. Other Information
None.
32
Item 6. 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.
33
10.12 Amendment No. 1 to Investor Registration Rights Agreement, between
CirTran Corporation and Cornell Capital Partners, LP, dated as of
June 15, 2006.
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).
34
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).
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).
35
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).
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).
36
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).
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).
37
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).
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
38
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: November 23, 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: November 23, 2010 By: Iehab Hawatmeh
President, Chief Financial Officer,
Principal Executive Officer, Principal
Financial Officer and Director
39
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