|
|
|
|
Page 11 21 22 23 23 31 31 31 33 34 registrant’sregistrant's most recently completed second fiscal quarter. As of June 30, 2012,2013, the aggregate market value of the voting and nonvoting common equity held by nonaffiliates of the issuer was $1,539,747.$1,248,178.registrant’sregistrant's classes of common stock, as of the latest practicable date. As of April 15, 2013,May 27, 2014, issuer had 3,106,415,9104,499,918,984 shares of issued and outstanding common stock, par value $0.001.Business.....................................................................................................314Properties...................................................................................................1414Management’s323434343435Signatures...................................................................................................371statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).statements. Forward-looking statements are typically identified by the use of the words “believe,” “may,” “could,” “should,” “expect,” “anticipate,” “estimate,” “project,” “propose,” “plan,” “intend,”"believe," "may," "could," "should," "expect," "anticipate," "estimate," "project," "propose," "plan," "intend," and similar words and expressions. Statements that describe our future strategic plans, goals, or objectives are also forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. The forward-looking statements included in this report are made only as of the date of this report.management’smanagement's current beliefs, expectations, anticipations, estimations, projections, strategies, proposals, plans, or intentions, are not guarantees of future performance or results of events and involve risks and uncertainties, such as:·We may be deemed to be insolvent and may face liquidation.·The auditors’ report for our most recent fiscal year contains an explanatory paragraph about our ability to continue as a going concern.·Our ability to continue energy drink distribution, our only source of revenue, is subject to interruption or termination because of disputes respecting the status of the Play Beverages, LLC, license to market Playboy-licensed energy drinks.·All of our assets are encumbered to secure the payment of an aggregate of $5.7 million in indebtedness that requires substantial monthly payments, and our default could result in the loss of all of our assets.·We are parties to numerous lawsuits that require significant management attention and funds for attorney’s fees and that subject us to risk of damages.·We will require substantial amounts of additional capital from external sources.·Any substantial increase in sales will require skilled management of growth.·We cannot predict the impact on our activities of the current economic crises. ·We are authorized to issue substantial additional shares of stock, which would dilute the ownership of our stockholders.·Penny stock regulations will impose certain restrictions on resales of our securities, which may cause an investor to lose some or all of its investment. ·The factors set forth under “Management’s Discussion and Analysis of Analysis of Financial Condition and Results of Operation” and other factors that are not currently known to us that may emerge from time to time.· We may be deemed to be insolvent and may face liquidation. · The auditors' report for our most recent fiscal year contains an explanatory paragraph about our ability to continue as a going concern. · Our ability to continue energy drink distribution, our only source of revenue, is subject to interruption or termination because of disputes respecting the status of the Play Beverages, LLC, license to market Playboy-licensed energy drinks. · All of our assets are encumbered to secure the payment of an aggregate of $5.7 million in indebtedness that requires substantial monthly payments, and our default could result in the loss of all of our assets. · We are parties to numerous lawsuits that require significant management attention and funds for attorneys' fees and that subject us to risk of damages. · We will require substantial amounts of additional capital from external sources. · Any substantial increase in sales will require skilled management of growth. · We cannot predict the impact on our activities of the current economic crises. · We are authorized to issue substantial additional shares of stock, which would dilute the ownership of our stockholders. · · The factors set forth under "Management's Discussion and Analysis of Analysis of Financial Condition and Results of Operation" and other factors that are not currently known to us that may emerge from time to time. 2
Revenues 2012 2011 South America $ 908,334 $ 1,042,539 India 774,772 - Middle East 513,429 Africa 494,418 Eastern Europe 399,204 329,600 United States of America 341,685 772,816 China 291,667 - Western Europe 243,049 747,223 Canada 96,843 172,260 Other 197,016 - $ 4,260,417 $ 3,064,438 Through CirTran - Asia, we design, engineer, manufacture, and supply products in the international electronics, consumer products, and general merchandise industries for various marketers, distributors, and retailers selling overseas. This subsidiary provides manufacturing services to the direct-response and retail consumer markets. Our experience and expertise in manufacturing enables CirTran - Asia to enter a project at various phases: engineering and design; product development and prototyping; tooling; and high-volume manufacturing. This presence with Asian suppliers helps us maintain an international contract manufacturer status for multiple products in a wide variety of industries and has allowed us to target larger-scale contracts. We compete not only for consumer acceptance, but also for maximum marketing efforts by multi-brand licensed bottlers, brokers, and distributors, many of which have a principal affiliation with competing companies and brands. Our products compete with all liquid refreshments and with products of much larger and substantially better financed competitors, including the products of numerous nationally and internationally known producers such as All of our assets are encumbered to secure the payment of an aggregate of $5.7 million in indebtedness that requires substantial monthly payments, and our default could result in the loss of all of our assets. We may also seek additional capital through strategic alliances, joint ventures, or other collaborative arrangements. Any such relationships may dilute our interest in any specific project and decrease the amount of revenue that we may receive from such project. There can be no assurance that we will be able to negotiate any strategic investment or obtain required additional funds on acceptable terms, if at all. In addition, our cash requirements may vary materially from those now planned because of the results of future research and development; results of product testing; potential relationships with our strategic or collaborative partners; changes in the focus and direction of our research and development programs; competition and technological advances; issues related to patent or other protection for proprietary technologies; and other factors. ability to obtain necessary financing. stock to permit the conversion and exercise of all of those securities. If those holders of our convertible debentures and options attempted to convert and exercise those securities, we would be unable to do so, which would subject us to liability. The SEC has adopted regulations that generally define a In connection with our prior litigation with Advanced Beauty Solutions, or ABS, it claimed nonperformance by us and filed an adversary proceeding in its 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 us in the amount of $1,811,667, plus interest. On September 11, 2009, the Bankruptcy Court denied our motion to set aside the judgment. Our appeal of the approximately $1.8 million judgment that had been remanded in the ABS bankruptcy proceedings to conclusively determine the amount of credit due us for the conveyance of the intellectual property has been dismissed. All litigation and disputes between ABS and its affiliates, on the one hand, and us and our affiliates, on the other hand, has been dismissed, including the pending order to show cause regarding contempt against us, our subsidiaries, and Iehab Hawatmeh. On March 22, 2012, we entered into a formal forbearance agreement with YA Global, dated as of March 1, 2012 (the Ratification Agreement. counterclaim. Playtime Distributing of Oklahoma LLC v. CirTran Corporation, CirTran Beverage Corporation, and Play Beverages LLC, in the District Court of Oklahoma County, State of Oklahoma, Case No. CJ-2010-1058. distribution agreement. American Express Travel Related Services Company, Inc. v. CirTran Corporation d/b/a Diverse Media Group and Iehab Hawatmeh, in the Third District Court, State of Utah, Salt Lake County. In this action, American Express attorneys' fees, which was denied in April 2014. Low High 2013: Second Quarter (through April 16, 2013)......................................... $0.0013 $0.0017 First Quarter..................................................................................... 0.0014 0.0018 2012: Fourth Quarter................................................................................. 0.0007 0.0009 Third Quarter................................................................................... 0.0006 0.0008 Second Quarter................................................................................ 0.0007 0.0008 First Quarter..................................................................................... 0.0009 0.0010 2011: Fourth Quarter................................................................................. 0.0006 0.0020 Third Quarter................................................................................... 0.0011 0.0029 Second Quarter................................................................................ 0.0022 0.0059 First Quarter..................................................................................... 0.0015 0.0063 500 shareholders of record. Trading in shares of penny stock is subject to additional sales practice requirements for broker-dealers that sell penny stocks to persons other than established customers and accredited investors. Accredited investors, in general, include individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 (or $300,000 together with their spouse), and certain institutional investors. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of the security and must have received the Not required. OVERVIEW Beverage Distribution( respectively. " 2012 nonperformance. The following chart presents comparisons of sales, cost of sales, royalty expense, and gross profit or loss margin generated by our four operating segments, i.e., beverage distribution, contract manufacturing, marketing and media, and electronics assembly during Segment Year Sales Cost of Sales Royalty Expense Gross Loss / Margin Beverage Distribution 2012 4,177,624 375,757 614,721 3,187,146 2011 2,943,921 677,204 2,142,765 123,952 Contract Manufacturing 2012 81,361 - - 81,361 2011 120,517 441,314 - (320,797) Electronics Assembly 2012 $ 1,432 $ - $ - $ 1,432 2011 - - - - We recorded a gain on the settlement of debt of $2,159,919 and $154,850 for the year, from operating activities. refundable customer deposits. In the 2011 YA Forbearance Agreement, we ratified our previous obligations under the debentures; provided the guaranty of our president, Iehab Hawatmeh, secured by one-half of his interest in PlayBev; provided a confession of judgment in litigation by YA Global against Katana, to whom we had transferred certain collateral pledged to YA Global, and issued a new warrant to purchase to purchase 25,000,000 shares of our common stock at an exercise price of $0.02 per share, expiring December 2015. Additionally, we agreed to pay the debentures, $225,000 at signing the 2011 YA Forbearance Agreement ($75,000 to be applied to transaction costs), $75,000 per month for February through April 2011, $200,000 per month for May through December 2011, and the balance on December 31, 2011 (the 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 our common stock, until the earlier of our default under the 2012 YA Forbearance Agreement or the Termination Date. The principal amount of $1,835,000 due under the ABS Forbearance Agreement would be reduced by the greater of the amount of credit granted in the bankruptcy proceedings for the value of the intellectual property we previously conveyed to ABS and the amount received by ABS from the sale of such intellectual property to a third party during the term of the ABS Forbearance Agreement, plus the amount of any distribution to which we are entitled as a creditor of ABS,provided, however,that in no event would the amount due under the ABS Forbearance Agreement be reduced below $90,000, which is the amount payable during the first 12 months under the ABS Forbearance Agreement. ABS entered into a subordination agreement subordinating the obligation under the ABS Forbearance Agreement in favor of the obligations and first-priority security interest of YA Global. We conveyed to ABS the trademarks and intellectual property previously conveyed by ABS to us. 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 whereby: (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; (b) we will endeavor to keep a registration statement effective for a specified period; and (c) transfer of consideration is required if we fail to meet those requirements. When we issue an instrument coupled with these registration payment requirements, we estimate the amount of consideration likely to be paid under the agreement, and offset such amount against the proceeds of the instrument issued. The estimate is then reevaluated at the end of each reporting period and any changes recognized as a registration penalty in the results of operations. As further described in Note [9] to the consolidated financial statements, we have instruments that contain registration payment arrangements. The effect of implementing this has not had a material effect on the financial statements because we consider probability of payment under the terms of the agreements to be remote. A material weakness in internal controls is a deficiency in internal control, or combination of control deficiencies, that adversely affects our ability to initiate, authorize, record, process, or report external financial data reliably in accordance with accounting principles generally accepted in the United States of America such that there is more than a remote likelihood that a material misstatement of our annual or interim financial statements that is more than inconsequential will not be prevented or detected. 2013. Item 3. Articles of Incorporation and Bylaws 3.1 Articles of Incorporation 3.2 Amended and Restated Bylaws 3.3 Articles of Amendment to Articles of Incorporation Item 10. Material Contracts 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 Lockdown Agreement by and between CirTran Corporation and Cornell Capital Partners, LP, dated as of July 20, 2006 10.20 10.21 10.22 10.23 Amended Lock Down Agreement by and among the Company and ANAHOP, Inc., Albert Hagar, and Fadi Nora, dated as of November 15, 2006 10.24 Amended Lock Down Agreement by and between the Company and Cornell Capital Partners, L.P., dated as of October 30, 2006 10.25 Amendment to Debenture and Registration Rights Agreement between the Company and Cornell Capital Partners, L.P., dated as of October 30, 2006 10.26 10.27 10.28 Amendment to Employment Agreement for Iehab Hawatmeh, dated January 1, 2007 10.29 10.30 10.31 10.32 10.33 10.34 10.35 Agreement between and among CirTran Corporation, YA Global Investments, L.P., and Highgate House Funds, LTD 10.36 Promissory Note 10.37 Form of Warrant 10.38 Subscription Agreement between the Company and Haya Enterprises, LLC 10.39 Amended and Restated Forbearance Agreement, with exhibits, including form of Warrant 10.40 Incorporated by reference from our Current Report on Form 8-K filed March 27, 2012. 10.41 Incorporated by reference from our Current Report on Form 8-K filed March 27, 2012. 10.42 Employment Agreement with Iehab Hawatmeh dated August 1, 2009 10.43 Incorporated by reference from our Current Report on Form 8-K filed September 10, 2012. 10.44 Incorporated by reference from our Current Report on Form 8-K filed September 10, 2012. 10.45 Incorporated by reference from our Current Report on Form 8-K filed September 10, 2012. 10.46 Incorporated by reference from our Current Report on Form 8-K filed September 10, 2012. 10.47 Incorporated by reference from our Current Report on Form 8-K filed March 27, 2013. 10.48 Incorporated by reference from our Current Report on Form 8-K filed March 27, 2013. 10.49 CirTran Corporation 2012 Incentive Plan Item 21. Subsidiaries of the Registrant 21.01 Schedule of subsidiaries Item 31. Rule 13a-14(a)/15d-14(a) Certifications This filing. Item 32. Section 1350 Certifications This filing. Item 101. Interactive Data 101 Interactive Data files This filing. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CirTran Corporation Date: By: Iehab J. Hawatmeh President Principal Executive Officer Iehab J. Hawatmeh, President, Chief Executive Officer, Director, and Principal Financial and Accounting Officer Fadi Nora, Director Kathryn Hollinger, Director Page December 31, December 31, 2012 2011 ASSETS Current assets Cash and cash equivalents $7,883 $173,780 Trade accounts receivable, net of allowance for doubtful accounts of $832,093 and $1,023,156, respectively 162,468 27,585 Inventory, net of reserve of $2,256,399 and $2,271,008 , respectively 98,343 465,074 Other 7,866 26,136 Total current assets 276,560 692,575 Investment in securities, at cost 300,000 300,000 Long-term receivable, net of allowance of $1,582,895 - - Property and equipment, net 86,034 172,480 Other assets, net 224,488 2,010 Total assets $887,082 $1,167,065 LIABILITIES AND STOCKHOLDERS' DEFICIT - Current liabilities Checks written in excess of bank balance $17,118 $208,193 Accounts payable 4,681,114 4,079,330 Related-party payable 955,656 705,056 Short-term advances payable 3,088,945 3,800,263 Accrued liabilities 2,445,167 2,589,709 Accrued payroll and compensation expense 2,599,533 1,913,075 Accrued interest 2,417,834 2,054,148 Deferred revenue 2,984,119 3,485,463 Derivative liability 829,090 294,717 Convertible debenture 3,132,855 3,161,355 Refundable customer deposits 200,201 1,317,387 Liabilities subject to compromise - 1,122,154 Current maturities of long-term debt 236,585 906,585 Current liabilities to non-controlling interest holders 2,570,000 443,696 Note payable to stockholders and members 576,833 151,833 Total current liabilities 26,735,050 26,232,964 Total liabilities 26,735,050 26,232,964 Stockholders' deficit CirTran Corporation stockholders' deficit: Common stock, par value $0.001; authorized 4,500,000,000 shares; issued and outstanding shares: 2,541,502,289 and 1,819,302,289 2,541,502 1,819,297 Additional paid-in capital 29,451,824 29,872,151 Subscription receivable (17,000) (17,000) Accumulated deficit (48,514,796) (48,267,171) Total CirTran Corporation and subsidiaries stockholders' deficit (16,538,470) (16,592,723) Non-controlling interest (9,309,498) (8,473,176) Total stockholders' deficit (25,847,968) (25,065,899) Total liabilities and stockholders' deficit $887,082 $1,167,065 The accompanying notes are an integral part of these consolidated financial statements. F-4 For the Years ended December 31, 2012 2011 Net sales $4,260,417 $3,064,438 Cost of sales (375,757) (1,118,518) Royalty Expense (614,721) (2,142,765) Gross profit 3,269,939 (196,845) Operating expenses Selling, general and administrative expenses 3,606,672 6,246,311 Non-cash compensation expense 39,080 132,063 Total operating expenses 3,645,752 6,378,374 Loss from operations (375,813) (6,575,219) Other income (expense) Interest expense (1,141,171) (966,419) Gain on sale/leaseback - 507,216 Other income 108,864 76,547 Loss on settlement of litigation - (1,305,871) Gain on settlement of litigation / debt 154,850 186,914 Impairment of intellectual properties - (142,917) Gain (loss) on derivative valuation (534,373) 1,176,339 Total other income (expense), net (1,411,830) (468,191) Net loss (1,787,643) (7,043,410) Net loss attributable to non-controlling interest $1,540,018 746,147 Net loss attributable to CirTran Corporation and subsidiaries $(247,625) $(6,297,263) Basic and diluted loss per common share $(0.00) $(0.00) Basic and diluted weighted-average common shares outstanding 1,925,943,819 1,590,409,839 CIRTRAN CORPORATION AND SUBSIDIARIES Common Stock Additional Non- Number paid-in Subscription Accumulated controlling of shares Amount capital receivable deficit interest Total Balances at December 31, 2010 1,498,972,923 $ 1,498,968 $ 29,128,672 $ (17,000) $ (41,969,908) $ (7,752,529) $ (19,111,797) Capital contributions - - - - - 25,500 25,500 Options granted to consultants - - 56,014 - - - 56,014 Shares issued in settlement of debt 280,329,366 280,329 723,465 - - - 1,003,794 Exercise of stock options by consultants 40,000,000 40,000 (36,000) - - - 4,000 Net loss - - - - (6,297,263) (746,147) (7,043,410) Balances at December 31, 2011 1,819,302,289 $ 1,819,297 $ 29,872,151 $ (17,000) $ (48,267,171) $ (8,473,176) $ (25,065,899) Capital contributions - - - - - 703,696 703,696 Options granted to consultants - - 61,153 - - - 61,153 Shares issued in settlement of debt 650,000,000 650,005 (416,500) - - - 233,505 Exercise of stock options by consultants 72,200,000 72,200 (64,980) - - - 7,220 Net loss - - - - (247,625) (1,540,018) (1,787,643) Balances at December 31, 2012 2,541,502,289 $ 2,541,502 $ 29,451,824 $ (17,000) $ (48,514,796) $ (9,309,498) $ (25,847,968) The accompanying notes are an integral part of these consolidated financial statements F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2012 2011 Cash flows from operating activities Net loss $(1,787,643) $(7,043,410) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 86,446 189,609 Accretion expense - 36,065 Loss on disposal of PP&E - 529 Gain on sale - leaseback - (507,216) Non-cash compensation expense 61,153 46,053 Gain on settlement of debt 154,850 (186,914) Issuance of warrants for settlement - 58,410 Loss on impairment of intellectual properties - 142,917 Options issued for services - 27,601 Change in valuation of derivative 534,374 (1,176,339) Assignment of receivable for settlement - 1,305,871 Current liabilities to non-controlling interest holders - - Expenses paid by third-party on behalf of the company 735,000 - Changes in assets and liabilities: Trade accounts receivable (134,883) 602,245 Inventories 366,731 77,282 Prepaid expenses and other current assets 18,270 616,131 Other assets (222,479) 353,793 Accounts payable 656,784 780,647 Related party payable 250,600 285,056 Accrued liabilities 1,130,891 2,468,283 Current portion of refundable customer deposits (1,117,186) - Deferred revenue (501,343) 1,603,272 Net cash provided by (used in) operating activities 231,565 (320,115) Cash flows from financing activities Proceeds from notes payable 200,000 - Checks written in excess of bank balance (191,075) 4,733 Contributions by noncontrolling interest - 25,500 Proceeds from short-term advances 108,419 1,128,190 Payment on accrued interest (197,158) - Stock issued in exercise of options 7,220 - Payments on short-term advances (324,868) (669,295) Net cash used in (provided by) financing activities (397,462) 489,128 Net decrease (increase) in cash and cash equivalents (165,897) 169,013 Cash and cash equivalents at beginning of period 173,780 4,767 Cash and cash equivalents at end of period $7,883 $173,780 The accompanying notes are an integral part of these consolidated financial statements. F-7 For the Years Ended December 31, 2012 2011 Supplemental disclosure of cash flow information: Cash paid during the period for interest $197,158 $382,431 Noncash investing and financing activities: Conversion of liabilities to shareholders for non-controlling interest $703,696 $- Accounts payable settled on behalf of the company for issuance of short term advances $- $363,880 Issuances of stock options in settlement of accounts $- $28,414 Debt and accrued liabilitities converted to equity $650,000 $1,003,794 Non-cash exercise of options for prepaid expenses $- $40,000 Payment of short-term advances through issuance of note payable $- $30,000 Debt and accrued liabilities converted to current liabilities to non-controlling interest holders $2,100,000 $- Inventory written off $14,609 $- Accounts receivable written off $191,063 $- 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. $0. Investment in Securities - The cost of the Company's cost-method investment consist of an investment in a private digital multi-media technology company that totaled $300,000 at December 31, 2013 and 2012. As the Company owned less than 20% of 2013. $0. 2012. 2012. Income Taxes - The Company used. 11% of net sales. Short-term Advances – The Company has short-term advances with various individuals. These advances are due upon demand, carry no interest and are not collateralized. These advances are classified as short-term liabilities. With respect to electronics assembly and manufacturing, the Company intends to serve these industries, although it anticipates that its focus will shift more to providing services on a subcontract basis. December 31, 2012 December 31, 2011 Other Assets $361 $1,681 Prepaid Expenses 224,128 - Total Assets $224,489 $1,681 Accrued Interest $593,418 $417,174 Accrued Liabilities $197,345 Royalty Payable 734,143 644,759 Current Liabilities 2,570,000 - Notes Payable to Shareholders 250,000 250,000 Total Liabilities $4,344,906 $1,311,933 December 31, December 31, 2012 2011 Raw Materials $1,691,500 $2,076,066 Work in Process 221,225 157,534 Finished Goods 442,017 502,482 Allowance / Reserve (2,256,399) (2,271,008) Totals 98,343 $465,074 Pursuant to the terms of the asset purchase agreement, in 2006 the Company acquired substantially all of ABS's assets in exchange for a cash payment of $1,125,000, a reduction by $750,000 in the amount owing to the Company, and the obligation to pay to ABS a royalty equal to $3.00 per True Ceramic Pro ("TCP") flat iron unit sold by the Company. Estimated Service Lives 2012 2011 in Years Production equipment $4,025,924 5-10 Leasehold improvements 997,714 7-10 Office equipment 220,762 5-10 Other 53,209 3-7 Total property and equipment 5,297,609 Less accumulated depreciation (5,211,575) (5,125,129) Property and equipment, net $86,034 $172,480 2012. Transactions involving Officers, Directors, and Stockholders The Company has agreed to issue 6,000,000 options each year tothe Company Presidentas compensation for services provided as an officer of the Company. The terms of the employment agreement requires the Company to grant to the Company President options to purchase 6,000,000 shares of the December 31, December 31, 2012 2011 Tax liabilities 871,357 1,103,044 Related party expenses 448,719 1,208,756 Royalty expense 734,143 92,559 Other accrued expenses 390,948 185,350 Totals $2,445,167 $2,589,709 December 31, December 31, 2012 2011 Administrative payroll expenses 1,677,086 945,188 Stock option expenses 438,308 511,097 Commisions expenses 245,451 173,305 Bonus expenses 138,688 176,858 Director fees 100,000 75,000 Other accrued compensation expenses - 31,627 Totals $2,599,533 $1,913,075 December 31, December 31, 2012 2011 Short-term advances payable $3,088,945 $3,800,263 Accrued interest on short-term advances payable 683,651 299,388 Totals $3,772,596 $4,099,651 entities (the "2011 Forbearance Agreement"), as discussed below. The Company is in disagreement with its former legal counsel over On May 1, 2009, PlayBev, a consolidated variable interest entity, entered into compensation agreements with its managers, Mr. Hawatmeh and Mr. Nora. The agreed compensation consists of a monthly fee of $10,000 for each manager, reimbursement of reasonable expenses on its behalf, a car allowance for Mr. Nora of $1,000 per month to cover the cost of use, fuel and repairs. The Company has accrued The fraud and negligent misrepresentations and sought a declaratory judgment determining the rights of the parties, damages to be determined at trial, costs, and attorney's fees. A default certificate was filed by the plaintiffs for the failure of the defendants to respond and then withdrawn. Under a settlement and release agreement in April 2013, the parties exchanged mutual general releases without the payment by any party of any amounts to any other. Accordingly, PlayBev was relieved of approximately $1.4 million in amounts due LIB-MP without any payment. 2012 2011 Settlement note, ten monthly payments, no interest, in default. $59,120 $59,120 Promisory note to a stockholder, 10% stated interest rate, unsecured, interest due quarterly, due on demand to related party. 151,833 151,833 Promisory note to an investor, 10% stated interest rate, face value discounted and to be accreted over the life of the note. Due on demand. - 700,000 Promisory note to a member of AfterBev, 10% stated interest, interest payable quarterly. Due on demand, in default. 75,000 75,000 Promisory notes to 3 investors, 12% stated interest, 5% borrowing fee, due on demand to related party, in default. 72,465 72,465 Promisory note to a members of Playbev, 10% stated interest, interest payable quarterly, unsecured. Due on demand, in default. 250,000 250,000 Promisory note to a investor, 10% stated interest, interest payable quarterly, unsecured. Due on demand. 175,000 - Promisory note to an investor, 18% stated interest, interest payable quarterly, unsecured. Due on demand, in default. 30,000 - Total 813,418 1,308,418 Less current maturities (813,418) (1,308,418) Long-term portion of notes payable $- $- 2013. 2013. December 31, December 31, 2012 2011 Convertible debenture, 12% stated interest rate, secured by all of the Company’s assets, Due on January 31, 2013. $591,637 $620,137 Convertible debenture, 12% stated interest rate, secured by all of the Company’s assets, Due on January 31, 2013. 1,500,000 1,500,000 Convertible debenture, 12% stated interest rate, secured by all of the Company’s assets, Due on January 31, 2013. 1,041,218 1,041,218 3,132,855 3,161,355 Less current maturities (3,132,855) (3,161,355) Long-term portion of convertible debentures $- $- As of December 31, summarized as follows: Level 1 Level 2 Level 3 Total Fair value of derivatives $- $829,090 $- $829,090 Level 1 Level 2 Level 3 Total Fair value of derivatives $- $294,717 $- $294,717 2012. respectively. 2012 2011 Deferred income tax assets: Capital loss carryforward $170,645 $170,645 Loss on sale of assets 725,876 725,876 Loss from subdivisions not consolidated for tax purposes 1,562,959 991,688 Inventory reserve 841,637 847,086 Bad debt reserve 900,790 972,057 Vacation reserve 17,312 23,781 Stock based compensation 203,630 189,054 Net operating loss carryforward 11,713,571 11,790,805 Depreciation 87,316 90,976 Intellectual property 60,544 78,420 Derivative liability 309,251 109,929 Total deferred income tax assets 16,593,531 15,990,317 Valuation allowance (16,593,531) (15,990,317) Net deferred income tax asset $- $- 2012. 2012 2011 Benefit at statuatory rate (34%) $(607,798) $(2,358,388) Non-deductible expenses 63,575 87,600 Change in valuation allowance 677,572 3,179,279 State tax benefit, net of federal tax benefit (58,992) (228,902) Return to provision (74,357) (679,589) Net benefit from income taxes $- to consultants. Weighted- Weighted- Average Aggregate Average Remaining Intrinsic Shares Exercise Price Contractual Life Value Outstanding at December 31, 2010 40,800,000 $0.0150 1.45 $- Granted 40,000,000 $0.0001 Exercised (40,000,000) $0.0001 Expired (3,000,000) $0.0330 Outstanding at December 31, 2011 37,800,000 $0.0130 0.51 $- Granted 72,200,000 $0.0001 Exercised (72,200,000) $0.0001 Expired (34,200,000) $0.0140 Outstanding at December 31, 2012 3,600,000 $0.0123 0.013 $- Exercisable at December 31, 2012 3,600,000 $0.0123 0.013 $- Electronics Contract Marketing Beverage Assembly Manufacturing and Media Distribution Total Year ended December 31, 2012 Sales to external customers $1,432 $81,361 $- $4,177,624 $4,260,417 Segment income (loss) (782,661) 63,109 8,412 (1,076,503) (1,787,643) Segment assets 429,988 53,342 - 403,752 887,082 Depreciation and amortization 19,876 66,570 - 86,446 Year ended December 31, 2011 Sales to external customers $- $120,517 $- $2,943,921 $3,064,438 Segment income (loss) (1,005,066) (666,274) (196,140) (5,175,930) (7,043,410) Segment assets 380,759 290,090 - 496,216 1,167,065 Depreciation and amortization 26,030 141,991 21,588 - 189,609 Revenues Revenue-producing assets 2012 2011 2012 2011 South America $908,334 $1,042,539 $- $- India 774,772 - - - Middle East 513,429 Africa 494,418 Eastern Europe 399,204 329,600 - - United States of America 341,685 772,816 48,984 68,860 China 291,667 - 37,050 103,620 Western Europe 243,049 747,223 - - Canada 96,843 172,260 - - Other 197,016 - - - $4,260,417 $3,064,438 $86,034 $172,480 thoughthrough our subsidiary, CirTran Beverage Corporation. CirTran Beverage manufactures, markets, and distributes Playboy-branded energy drinks in accordance with an agreement we entered into with Play Beverages, LLC, or PlayBev, a consolidated variable interest entity, which holds the Playboy license. Playboy asserts that the license is no longer valid and that PlayBev is no longer authorized to market the Playboy branded energy drink, which is now being litigated. See Item 3. Legal Proceedings.2012,2013, our activities continued to be significantly restrained by the necessity to devote priority to efforts to obtaining the forbearance of our principal secured and judgment creditors, seeking to resolve disputes respecting the PlayBev license to market Playboy-licensed energy drinks, defending the numerous lawsuits to which we are a party, and obtaining additional capital. Disputes respecting the status of the PlayBev license to market Playboy-licensed energy drinks impaired our ability to establish new distributors, damaged some of our relationships with existing distributors, and depressed revenues significantly. On December 6, 2012, theJanuary 9, 2014, PlayBev's bankruptcy proceeding of PlayBev was dismissed, freeing PlayBev and, in turn, us to pursue our beverage distribution business without court supervision. However, the validity of the license from Playboy, under which we conduct these activities, remains in dispute. See Item 3. Legal Proceedings.98%97% and 96%98% of total revenue during 2013 and 2012, and 2011, respectively)2%3% and 4%2% of total revenue during 2013 and 2012, and 2011, respectively)yearyears ended December 31, 2013 and 2012, we recognized royalty revenue of approximately $90,000 and $77,000, of royalty revenue.3“Other"Other Business Segments”Segments" below.“us,” “we,”"us," "we," and “our”"our" and correlative terms refer to CirTran Corporation and the subsidiaries and divisions through which we conduct our activities.PlayBev’sPlayBev's bankruptcy proceeding, which was dismissed in December 2012,2012. Our expansion efforts continue to be adversely affected by pending litigation against Playboy about the validity of our license to distribute a Playboy-branded nonalcoholic beverage. We will continue to try to expand our sales and distribution network and to overcome or resolve impediments attributable to the ongoing Playboy litigation. Energy drink sales and royalties in 20122013 and 20112012 accounted for 98%97% and 96%98% of total sales, respectively.4 Revenues 2013 2012 South America $ 884,320 $ 908,334 India - 774,772 Middle East - 513,429 Africa - 494,418 Eastern Europe 397,029 399,204 United States of America 1,658,699 341,685 China 150,000 291,667 Western Europe - 243,049 Canada 176,782 96,843 Other 202,176 197,016 $ 3,469,006 $ 4,260,417 As discussed in detail inItem 3. Legal Proceedings, on December 6, 2012, the bankruptcy court dismissed the PlayBev bankruptcy case that had been initiated by creditors that filed an involuntary bankruptcy petition against PlayBev in April 2011. Shortly after filing, the bankruptcy proceeding was converted into a Chapter 11 reorganization proceeding, with PlayBev acting as debtor-in-possession. Playboy initially sought to terminate its product license agreement with PlayBev, but thereafter stipulated to suspend further proceedings pending the exploration of settlement. PlayBev reached a settlement with Playboy that would have provided for a new license, conditioned on bankruptcy court approval of PlayBev’s reorganization plan, PlayBev’s payment of $2.0 million to Playboy, and other provisions, but PlayBev was unable to obtain the funding needed to pay Playboy the initial amount or otherwise implement the reorganization plan, so the plan was abandoned and the settlement agreement and the new Playboy license did not become effective.Playboy’sPlayboy's breach, of the previous product license agreement and interfered with the plaintiffs’plaintiffs' established distributorship network. The plaintiffs seek compensatory and punitive damages, an injunction against termination of the previous product license and continuing interference, and other equitable and ancillary relief. Our complaint has survived an initial motion of the defendants to dismiss and is now proceeding. Playboy has filed a third-party complaint against us, alleging that we are the alter ego of PlayBev and, as such, should answer for any adverse judgment entered against PlayBev in the underlying trademark infringement counterclaim. We have moved to dismiss that third-party complaint and that motion is currently pending. See Item 3. Legal Proceedings.“new age”"new age" or alternative beverage industry. This beverage category includes noncarbonated, ready-to-drink iced teas, lemonades, juice cocktails, single-serve juices and fruit beverages, ready-to-drink dairy and coffee drinks, energy drinks, sports drinks, single-serve still water (flavored, unflavored, and enhanced), sodas that are considered natural, sparkling juices, and flavored sparkling beverages.“private label”"private label" soft drink suppliers. We believe that our leading energy drink competitors are Red Bull and Monster.5“just-in-time”"just-in-time" inventory management techniques that minimize the customer’scustomer's investment in component inventories, personnel, and related facilities, thereby reducing their costs.“Concept"Concept to Consumer.”During 2011, we closed our dedicated office in Bentonville, Arkansas, in an effort to reduce costs.6“box-build”"box-build" or “turn-key”"turn-key" relationships in the electronics, retail, and direct consumer markets.2%3% and 4%2% of revenues reported in 20122013 and 2011,2012, respectively. We anticipate that offshore contract manufacturing will play an increased role moving forward as resources will become available to us.werewas derived from new customers, whereas during 2011, 13.4% of our net sales were sourced from new customers. The increase in new customer sales was caused by opening new national and international beverage sales marketing territories.20132014 and 2023.2024. If the full minimum quantity orders are purchased under these current agreements, they would generate sizeable revenues to us. The majority of these international distribution contracts are based on minimum orders they are required to purchase during the term of the contract to maintain their rights to sell the Playboy energy drink. Revenue under these contracts is not recognized until ordered products have been shipped. There is no assurance, except for the upfront deposits, that the parties to these agreements will meet their obligations for the minimum quantity or any level of purchases required under their respective agreements.7other’sother's products.8Hansen’sHansen's Energy, Diet Red, Monster Energy, Lost Energy, Joker Mad Energy, Ace Energy, Unbound Energy, Rumba energy juice, Red Bull, Rockstar, Full Throttle, No Fear, Amp, Adrenaline Rush, 180, Extreme Energy Shot, Red Devil, Rip It, NOS, Boo Koo, Vitaminenergy, and many other brands. We also compete with companies that are smaller or primarily local in operation. Our products also compete with private label brands such as those carried by grocery store chains, convenience store chains, and club stores.market’smarket's size and diversity, we do not typically compete for contracts with a discreet group of competitors. We compete with different companies depending on the type of service or geographic area. Certain of our competitors have greater manufacturing, financial, research and development, and marketing resources. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally.April 15, 2013,May 9, 2014, we employed a total staff of three full-time employees in our Utah headquarters: two in administrative and clerical positions and one in project management. In addition, we engage six other professional consultants to provide contract services in the United States in accounting, information technology and quality control and 2050 others to provide promotional services. We believe that our relationship with our employees is good.9(“SEC”("SEC") concerning our business and operations. Accordingly, we file annual, quarterly, and interim reports and other information with the SEC. You can inspect and copy this information at the public reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, and Washington, D.C. 20549. You can get additional information about the operation of the SEC’sSEC's public reference facilities by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site (http://www.sec.gov) at which you can read or download our reports and other information.10auditors’auditors' report for our most recent fiscal year, like previous years, contains an explanatory paragraph about our ability to continue as a going concern.a net lossincome of $1.8$1.2 million during 20122013 and an accumulated deficit of $48.5$47.6 million as of December 31, 2012.2013. In addition, during 2012 we2013 cash used cash ofin operations was approximately $232,000 in our operations.$268,000. We have borrowed funds in the form of short-term advances, notes, and convertible debentures with an aggregate outstanding principal and interest balance of $8.8$7.0 million as of December 31, 2012.2013. We had a negative working capital balance of $26.5$22.9 million as of December 31, 2012.2013. The report of our auditors on our consolidated financial statements for the years ended December 31, 20122013 and 2011,2012, contains an explanatory paragraph about our ability to continue as a going concern.PlayBev’sPlayBev's license to market Playboy-licensed energy drinks and has fought vigorously to obtain a judicial determination that the current license has been breached and is no longer in effect. We cannot assure that Playboy’sPlayboy's current aggressive pursuit of such a judicial determination in our pending Illinois litigation will not continue. See Item 3. Legal Proceedings. If the Playboy licensing dispute is not resolved satisfactorily through a negotiated settlement or litigation in such proceeding, we would be required to terminate its beverage distribution activities, which are currently the source of our only revenue. Such termination may require us to cease our activities and seek protection from creditors.11$3.9$3.0 million in indebtedness due YA Global Investments, L.P., or YA Global, which requires payments of $100,000 per month through the balance of 2013.2014. We also have to meet certain financial and operating covenants in order to avoid default under our obligation to YA Global.$1.8$0.7 million in indebtedness due to Advanced Beauty Solutions, LLC, or ABS, which requires monthly payments of $7,500 through 2013,2014, with the balance due in January 2016.attorney’sattorney's fees and subject us to risks of damages or other adverse judgments.attorney’sattorney's fees and other costs and devote management time and attention. Litigation respecting the status of the PlayBev license to market Playboy-licensed energy drinks places the validity of that license at issue and may result in termination of that license, which is the principal source of our revenue. Successful suits by creditors for the collection of debts may require that we pay judgment amounts, subject to the priority encumbrances in favor of secured creditors. We may incur significant costs to pursue litigation in which we are the plaintiff without any recovery or other favorable outcome. Any judgments we may obtain against third parties may not be collectible.financialcondition,financial condition, and prospects at the time of the proposed offering; our ability to identify and reach a satisfactory arrangement with prospective underwriters; and various other factors, many of which are outside our control. There can be no assurance that we will be able to complete an offering on terms favorable to us or at all. The issuance of additional equity securities may dilute the interest of our existing shareholders or may subordinate their rights to the superior rights of new investors.12substantial additional shares of stock, which would dilute the ownership ofmay limit our stockholders.about 3.1 billionhas been issued as of May 22, 2014. The Company has issued 9,100,000 shares in excess of its authorized. Being unable to issue additional shares of common stock may limit our ability to obtain the financing we need. It will take a vote of our stockholders to increase the number of shares we are issuedauthorized to issue, and we cannot be sure that our stockholders will vote and approve any increase. If we are unable to increase our authorized capital, YA Global will be unable to make any conversions under the 2013 Ratification Agreement. If we were then unable to make cash payments as necessary, we would be in default under the Ratification Agreement. See Item 3. Legal Proceedings.asoptions to acquire approximately 22.4 million shares of the date of April 15, 2013. Our board of directors has the authority, without action or vote of the shareholders, to issue all or part of theour common stock. We do not have enough authorized but unissued shares. Any such issuance will dilute the percentage ownership of shareholders and may further dilute the book value of the shares of common stock.13“penny stock”"penny stock" to be any equity security that has a market price (as defined) of less than $5.00 per share that is not traded on a national securities exchange or that has an exercise price of less than $5.00 per share, subject to certain exceptions. As a result, our common stock is subject to rules that impose additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’spurchaser's written consent to the transaction prior to the purchase. Further, if the price of the stock is below $5.00 per share and the issuer does not have $2.0 million or more net tangible assets or is not listed on a registered national securities exchange, sales of such stock in the secondary trading market are subject to certain additional rules promulgated by the SEC. These rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices, and disclosure of the compensation to the broker-dealer and the salesperson working for the broker-dealer in connection with the transaction. These rules and regulations may affect the ability of broker-dealers to sell our common stock, thereby effectively limiting the liquidity of our common stock. These rules may also adversely affect the ability of persons that acquire our common stock to resell their securities in any trading market that may exist at the time of such intended sale.14“Copyrights”"Copyrights") to ABS, without reservation or exclusion, making ABS the owner of the Copyrights.ABS’sABS's judgment in violation of the court’scourt's orders. At the hearing on April 6, 2011, the court denied our motion to declare the judgment fully satisfied and granted ABS’sABS's motion, but did not hold us in civil contempt. The court also set a hearing on the ABS motion for the order to show cause for July 8, 2011, regarding our compliance with collection orders, which the parties stipulated should be postponed until August 3, 2011. The parties attended mediation on July 11, 2011, but no formal settlement resulted. At the hearing in August, the court found that a basis existed to hold us in contempt and set an evidentiary hearing for October 6, 2011, to determine whether to issue a contempt citation. We appealed the denial of the motion to declare judgment satisfied.“ABS"ABS Forbearance Agreement”Agreement"), whereby ABS agreed to take no further judgment enforcement actions in consideration of the payment of $25,000 upon execution of the definitive ABS Forbearance Agreement and satisfaction of applicable conditions precedent. The ABS Forbearance Agreement calls for us to pay $7,500 per month for 46 consecutive months (except for a payment of $15,000 in December 2012), commencing in March 2012, with the unpaid balance, as finally determined as provided below, due and payable in January 2016. No interest on the principal would accrue unless the note is in default, in which case, it would bear interest at 10% per annum from the date of the ABS Forbearance Agreement. In addition, we stipulated to an additional judgment for attorney’sattorney's fees incurred in negotiating the ABS Forbearance Agreement and entering into the related definitive agreements and in related post-judgment collection efforts. The obligation to pay $1,835,000 under the ABS Forbearance Agreement would be secured by an encumbrance on all of our assets, subject to the prior lien and encumbrance in favor of YA Global.15court’scourt's order that we pay approximately $35,000 in legal fees to ABS. In its motion, YA Global notified us that it intended to conduct a secured party’sparty's public auction of all of our assets. YA Global also informed us that we had defaulted under our January 2011 Forbearance Agreement and declared that all of our obligations to YA Global were immediately due and owing. Further, YA Global stated that it intended to commence action to collect on our obligations and instructed us to assemble the assets.Global’sGlobal's motion to stay enforcement, YA Global noted that the date of the proposed secured party’sparty's public auction was August 30, 2011. At the same time, YA Global notified us that the proposed sale of assets would be held on August 30, 2011.Global’sGlobal's motion to stay the payment of attorneys’attorneys' fees by us. Subsequently, the parties to the January 2011 settlement with YA Global entered into an agreement whereby YA Global agreed to cancel the proposed asset sale without waiver.Global’sGlobal's forbearance from collection.16“2012"2012 YA Forbearance Agreement”Agreement") in which we ratified our previous obligations under the debentures and agreed to pay the debentures, $25,000 at signing the 2012 YA Forbearance Agreement, $25,000 per month in March through June 2012, $50,000 per month in July through September 2012, $75,000 in the months of October and November 2012, $100,000 per month in the months of December 2012 through May 2013, $125,000 per month in the months of June through December 2013, and the balance in December 2014 (the “Termination Date”"Termination Date"). In addition to the above minimum payments to YA Global, we are required to pay monthly excess cash flow, to the extent cumulatively available, consisting of consolidated earnings before interest, taxes, depreciation and amortization, less cash deposits for product orders received but not yet shipped, actual cash taxes paid, actual cash principal and interest paid, and reasonable out-of-pocket cash paid together with reasonable cash reserves in an amount not to exceed 5% of total net sales, provided that such excess cash flow payments shall not to exceed $50,000 in March 2012 and $25,000 per month in April 2012 and thereafter, until the balance is paid. As of December 31, 2012, the balance due YA Global was $3,161,355 in principal plus $856,546 in accrued interest.lender’slender's exercise of the right to convert the outstanding balance due under the debentures into common stock, as provided in the original convertible debentures as well as in the Consolidated Debenture. Any amount credited against the debenture obligation in excess of $100,000 per month shall be credited against the amounts due in the next succeeding month.In re Play Beverages, LLC, United States Bankruptcy Court for the District of Utah, Case No. 11-26046, Between April 2013 and related matters.On April 26, 2011, three alleged creditors, LIB-MP Beverage, LLC, George Denney, and Warner K. Depuy, filed an involuntary Chapter 7 petition against Play Beverages, LLC, a consolidated entity of our subsidiary (“PlayBev”), seeking its liquidation. Thereafter, management decided that reorganizing PlayBev as a debtor-in-possession under Chapter 11, of Title 11,2014, YA Global converted approximately $1.3 million of the United States Bankruptcy Code, wasConsolidated Debenture; however, our lack of authorized capital going forward will limit YA Global's ability to make further conversion, which may result in the best interests of PlayBev and its creditors and equity holders. Accordingly, on August 12,2011, PlayBev consented to the entry of an order for relief in the pending involuntary bankruptcy case and immediately exercised its right under Section 706(a) of the Bankruptcy Code to convert the case to a voluntary Chapter 11 reorganization case. That same day, the court entered an Order for Relief under Chapter 11 based on PlayBev’s elections, and PlayBev became a debtor-in-possession and thereafter worked to resolve the claims of creditors and to resolve disputes about its nonalcoholic beverage distribution license with Playboy.17Playboy initially sought to terminate its product license agreement with PlayBev, but thereafter stipulated to suspend further proceedings pending the exploration of settlement. PlayBev reached a settlement with Playboy that would have provided for a new license, conditioned on bankruptcy court approval of PlayBev’s reorganization plan, PlayBev’s payment of $2.0 million to Playboy, and other provisions, but PlayBev was unable to obtain the funding needed to pay Playboy the initial amount or otherwise implement the reorganization plan, so the plan was abandoned and the settlement agreement and the new Playboy license did not become effective.On December 6, 2012, the bankruptcy court dismissed PlayBev’s bankruptcy case based on the evidence, PlayBev’s stipulation, and the U.S. Trustee’s recommendation. The order followed a two-day evidentiary hearing on a motion of the unsecured creditors, led by the three alleged creditors that had filed the initial involuntary Chapter 7 petition against PlayBev in April 2011, to again have the case converted to a liquidation. CirTran participated in the hearing and requested that the case be dismissed. All other pending motions and proceedings were similarly dismissed, and the automatic stay is no longer in effect. PlayBev is precluded from refiling for bankruptcy court protection for 180 days after the dismissal.In its findings accompanying the dismissal order, the court observed that a principal of one of the petitioning creditors had signed the exclusive manufacturing, marketing, and distribution agreement that established the business relationship between CirTran Beverage Corp. and PlayBev for the distribution of the Playboy-branded energy drink that resulted in PlayBev’s large obligation due CirTran Beverage Corp. The court further noted that there was no evidence that our chief executive officer, Iehab Hawatmeh, had engaged in any self-dealing where a liquidation trustee might be helpful in recovering assets for the benefit of the bankruptcy estate or that the creditors would be treated unfairly outside of bankruptcy as the petitioning creditors claimed.We intend to continue to manufacture, market, and distribute the Playboy-branded, nonalcoholic energy drinkdefault under the Playboy license, which we and PlayBev assert still remains in effect that and the manufacturing, marketing, and distribution agreement between CirTran Beverage Corp. and PlayBev continues in effect.Playboy’sPlayboy's breach, of the previous product license agreement and interfered with the plaintiffs’plaintiffs' established distributorship network. The plaintiffs seek compensatory and punitive damages, an injunction against termination of the previous product license and continuing interference, and other equitable and ancillary relief. Our complaint has survived an initial motion of the defendants to dismiss and is now proceeding.18Play Beverages, LLC, After Bev Group, LLC, CirTran Beverage Corporation, CirTran Corporation, Iehab Hawatmeh, Playboy has filed a counterclaim alleging trademark infringement and Fadi Nora v. Warner K Depuy, et al., Third District Court, Salt Lake City, Utah, case no. 100907700. The plaintiffs allege tortuous interference with contractual relations, breachesa third-party complaint against us alleging that we are the alter ego of fiduciary duty,PlayBev, and fraud and negligent misrepresentations and seek a declaratoryas such, should answer for any adverse judgment determining the rights of the parties, damages to be determined at trial, costs, and attorney’s fees. A default certificate was filed by the plaintiffs for the failure of the defendants to respond and then withdrawn, and there have been no further proceedings. In April 2013, we entered into a Settlement Agreement and Mutual Release with the plaintiffsagainst PlayBev in the Utah action. Under the recent settlement and release agreement, the parties exchanged mutual general releases without the payment by any party of any amounts to any other. Accordingly, the plaintiffs were relieved of about $1.4 million in amounts due LIB-MP without any payment. attorneys’attorneys' fees and seeking judgment in the amount of $49,999, plus interest and attorneys fees. WeA default judgment in the amount of $93,855.60 was entered against CirTran Beverage Corp. in February 2012 and thedomesticated in Utah in January 2013. The plaintiff obtained a supplemental order to conduct a debtor examination in April 2013, but did not serve that order in a timely fashion and has made no other defendants have answered the complaint and denied liability. Because of the effect of the automatic stay in connection with thecollection efforts.In Re Play Beverages, LLC bankruptcy matter (discussed above), the litigation in this matter was stayed until dismissal of the PlayBev bankruptcy in December 2012. There has been no subsequent action in this matter. We do not consider it necessary to accrue a liability for the potential liability.ThereIn April 2013, discovery resumed and in April 2014, the court granted our attorney's motion to withdraw. We have retained new counsel in Oklahoma and intend to defend the lawsuit vigorously.been no further action sincealleged that it was unable to obtain necessary approvals and distribute the dismissalPlayboy energy drink in Asia as a result of the PlayBev bankruptcylitigation between Play Beverages, CirTran Beverage Corp., and Playboy. The complaint was filed in February 2014 seeking $500,000 in damages and/or rescission. We filed an answer to the liftingcomplaint in April 2014 and filed amended answer and counter claims in May 2014. We intend to vigorously defend this litigation and may file counterclaims against Noble Gate for breach of the automatic stay in December 2012. We do not consider it necessary to accrue a liability for the potential liability.attorneys’attorneys' fees. A default judgment for $133,897 was entered against defendants on the amended complaint in late 2011.OnJanuaryOn January 31, 2011, RDS Touring and Promotions, Inc., filed a complaint asserting claims for breach of settlement agreement, fraud in the inducement, and fraud and deceit (false promise). Following a motion filed by us, plaintiffs amended their complaint including only the contract claim. We have answered the amended complaint. Our California counsel withdrew from representing us and a default judgment for $118,426 was taken against us, which the plaintiffs are now seeking to collect in Utah.assertsasserted a claim for $108,029 in principal and $24,269 in interest due on a credit card account. In January 2014, we obtained an order and judgment dismissing the claim. We have answered denying liability and intend to defend the claims and discovery is now proceeding. These amounts have been accruedthen filed a claim for approximately $31,000 in full as a liability.Globe Express Services,Jimmy Esebag v. CirTran Beverage Corp., Third District Court, Salt Lake County, Case No. 110914239. In June 2011, we were sued by plaintiff, which seeks approximately $58,000 for services rendered. We did not file a responsive pleading and after December 31, 2011, settled this matter for $15,000, payable in monthly installments of $5,000. The full $15,000 was paid when due.Alix Technologies v. CirTran d/b/a CirTran Beverage Corp, Third District Court, West Jordan, Case No. 110407015. Plaintiff filed suit in May 2011 claiming that CirTran Beverage had failed to pay for goods, services, or merchandise provided by plaintiff. A default judgment for $5,712 was entered, which has been satisfied. Other MattersUnited Medical Devices, LLC, v. PlaySafe, LLC, Iehab Hawatmeh,Corporation and Fadi Norain and for the County of Los Angeles West District,County, Case No. SC113081 (“UMD #1”)BC296162. On July 15, 2010, the court entered judgment against us in the amount of $68,270 based upon our failure to make payments when due under a settlement with Mr. Esebag. Mr. Esebag has engaged in some actions to collect on the judgment, with a judgment debtor examination of an affiliate of ours in October 2013. These amounts have been accrued in full as a liability.andPlaySafe, LLC and Play Beverages, LLC, v. United Medical Devices, LLC, United Licensing Group, Jimmy Esebag, Patrick Bertranou, and Does 1 through 50, inclusive, SuperiorThird District Court of thefor Salt Lake Count, State of California, in and for the County of Los Angeles, West District,Utah, Case No. SC113149 (“UMD #2”). In May 2011, Plaintiffs PlaySafe, LLC (“PlaySafe”) and Play Beverages, LLC (“PlayBev”), brought suit090905567. Judgment was entered against United Medical Devices (“UMD”), United Licensing Group (“ULG”), Jimmy Esebag, and Patrick Bertranouour Utah subsidiary in Utah, alleging breachApril 2009 in the amount of contract, breach of the covenant of good faith and fair dealing, tortious interference with contract, fraud, and negligent misrepresentation, and seeking damages and punitive damages. That case was dismissed for lack of personal jurisdiction over defendants. Subsequently,$125,922.75. The plaintiff continues to engage in June 2011, UMD sued PlaySafe, Iehab Hawatmeh, and Fadi Nora, alleging breach of contract, fraudulent misrepresentation, promissory fraud, and fraudulent concealment. Also in June 2011, PlaySafe and PlayBev sued UMD, ULG, Esebag, and Bertranou alleging breach of contract, breach of thecovenant of good faith and fair dealing, tortious interference with contract, tortious interference with prospective business relationship, fraud/deceit, negligent misrepresentation, and misappropriation of trade secrets. In UMD #1, defendants PlaySafe, and Messrs. Hawatmeh and Nora filed demurrers on all claims except the breach of contract claims. In UMD #2, plaintiffs PlaySafe and PlayBev filed a motion seeking a temporary restraining order requiring defendants to provide products and to cease contacting plaintiffs’ distributor contacts, but it was not granted. UMD #2 has been consolidated into UMD #1 for further proceedings. We are pursuing this litigation, now in trial, vigorously. 20REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESLow High 2014: 0.0002 0.0005 0.0002 0.0006 2013: 0.0002 0.0009 0.0002 0.0009 0.0004 0.0009 0.0012 0.0026 2012: 0.0007 0.0009 0.0006 0.0008 0.0007 0.0008 0.0009 0.0010 2011: 0.0006 0.0020 0.0011 0.0029 0.0022 0.0059 0.0015 0.0063 April 16, 2013,May 27, 2014, we had approximately 3,000 shareholders.corporation’scorporation's assets exceed its liabilities and it is able to pay its debts as they become due in the usual course of business.“penny stock”"penny stock" rules of the Securities Exchange Act of 1934 and various rules under this Act. In general terms, “penny stock”"penny stock" is defined as any equity security that has a market price less than $5.00 per share, subject to certain exceptions. The rules provide that any equity security is considered to be a penny stock unless that security is registered and traded on a national securities exchange meeting specified criteria set by the SEC, authorized for quotation from the NASDAQ stock market, issued by a registered investment company, and excluded from the definition on the basis of price (at least $5.00 per share), or based on the issuer’sissuer's net tangible assets or revenues. In the last case, the issuer’sissuer's net tangible assets must exceed $3,000,000 if in continuous operation for at least three years, $5,000,000 if in operation for less than three years, or the issuer’sissuer's average revenues for each of the past three years must exceed $6,000,000.purchaser’spurchaser's written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the security. Finally, monthly statements must be sent disclosing recent price information for the penny stocks. These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock, to the extent it is penny stock, and may affect the ability of shareholders to sell their shares.MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEW2012,2013, our activities continued to be significantly restrained by the necessity to devote priority to efforts to obtaining the forbearance of our principal secured and judgment creditors, seeking to resolve disputes respecting the PlayBev license to market Playboy-licensed energy drinks, defending the numerous lawsuits to which we are a party, and obtaining additional capital. Disputes respecting the status of the PlayBev license to market Playboy-licensed energy drinks impaired our ability to establish new distributors, damaged our relationships with existing distributors, and depressed revenues, significantly. On December 6, 2012, thePlayBev's bankruptcy proceeding of PlayBev was dismissed, freeing PlayBev and, in turn, us to pursue our beverage distribution business without court supervision. However, the validity of the license from Playboy under which we conduct these activities remains in dispute. See Item 3. Legal Proceedings.consumerproducts,consumer products, telecommunications, automotive, medical, and semiconductor industries. 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 are engaged in the following business segments.2398%97% and 96%98% of total revenue during 2013 and 2012, and 2011, respectively)2%3% and 4%2% of total revenue during 2013 and 2012, and 2011, respectively)yearyears ended December 31, 2011,2013 and 2012, we recognized royalty revenue of approximately $90,288 and $77,000, of royalty revenue.“Other"Other Business Segments.”20122013 and 20112012,2013, totaled $4,260,417,$3,469,006, as compared to $3,064,438$4,260,417 for the year ended December 31, 2011.2012. The increasedecrease is primarily attributable to our ability to manage the disruption we experienced in 20112012 and into 2013 with the unexpected bankruptcy proceedings initiated against PlayBev, the continuing uncertainty created by Playboy in relation to the interference with our beverage distributors, and defendingour defenses against numerous lawsuits. Disputes respecting the status of the PlayBev license to market Playboy-licensed energy drinks resulted in lower revenues in 2011 that we struggled to improve in 2012. Net sales in the contract manufacturing segment fell $39,156increased $11,529 in the year ended December 31, 2012,2013, as compared to the same period in 2011.2012. Beverage distribution revenue increaseddecreased to $3,375,012 for the year ended December 31, 2013, as compared to $4,177,624 for the year ended December 31, 2012, as compared to $2,943,921 for the year ended December 31, 2011.2012. The increasedecrease was driven by newdecreases in product sales and royalty revenues, as well as recognition of deferred revenue. During the yearyears ended December 31, 2013, and 2012, and 2011, the Companywe recognized approximately $0 and $2,296,000, and $0respectively, in revenue from prepayments under contracts that were in default and/or were terminated due to non-performance.decreasedincreased to 9%32% for the year ended December 31, 2012,2013, as compared to 36%9% for the prior year ended December 31, 2011.2012. Consequently, the gross profit margin increaseddecreased to 77%67% from -6%77%, respectively, for the same period. The increasedecrease in gross profit margin is attributable to an increase in revenues from royalty agreements, which have an overall lower cost, a large portion of which is revenue from prepayments under contracts that were in default and/or were terminated due to non-performance.nonperformance. These revenues had no significant associated cost of sales.20122013 and 2011:Segment Year Sales Cost of Sales Royalty Expense Gross Loss / Margin Beverage Distribution 2013 3,375,012 1,119,498 37,494 2,218,020 2012 4,177,354 375,757 614,721 3,186,876 Contract Manufacturing 2013 92,890 - - 92,890 2012 81,631 - - 81,631 Electronics Assembly 2013 $ 1,104 $ - $ - $ 1,104 2012 1,432 - - 1,432 2012,2013, selling, general, and administrative expenses decreased by 42%9% as compared to the year ended December 31, 2011.2012. The decrease of $2,639,639$321,214 in selling, general, and administrative expenses was driven primarily by a decrease in bad debt expense of $1,396,885, a decrease in depreciation and amortization of $103,163, a decrease in administrative salaries of $148,816, tax and interest of $157,045, a decrease in promotional and travel expense of approximately $309,000, and varied other expenses related to promotional and development activities.decreasedincreased to $41,872 during the year ended December 31, 2013, compared to $39,080 during the year ended December 31, 2012, compared to $132,063 during the year ended December 31, 2011.2012. No stock options were granted to employees during the yearyears ended December 31, 2012 or 2011.2013 and 2012. The decreaseincrease in noncash compensation expense relates to the vesting of previously granted options and the measurement of stock options required to be granted per their employment contracts.2012,2013, was $1,141,171,$662,120, as compared to $966,419$1,141,171 for the year ended December 31, 2011, an increase2012, a decrease of 18%42%. The interest expense recorded in the consolidated statements of operations combines both accretion expense and interest expense. The increasedecrease in interest expense was driven by an increasea decrease in accrued royalty liabilities and other accrued liabilities on which balances interest is due.loss of $534,373gain $741,760 due to the valuation of our derivative liability on the convertible debenture for the year ended December 31, 2012,2013, as compared to a gainloss of $1,176,339$534,373 recorded for the year ending December 31, 2011.2012. The unfavorablefavorable swing in the derivative valuation is primarily the result of factors relating to the differing debt levels of the underlying convertible securities, together with the varying market values of our common stock.25yearyears ended December 31, 2013 and 2012. This gain on settlement related to settlement and conversion of short-term advances payable for common stock and current maturities of long-term debt for current liabilities to non-controllingnoncontrolling interest holders.decreased toof $1,787,643 for the year ended December 31, 2012, as compared to a net loss of $7,043,410 for the year ended December 31, 2011, of which $1,539,619$368,335 and $746,147$1,539,619 was attributable to our non-controllingnoncontrolling equity interest in PlayBev, during the years ended December 31, 2013 and 2012, and 2011, respectively.$48,514,796$47,674,008 at December 31, 2012,2013, and $48,267,171$48,529,916 at December 31, 2011.2012. Net lossincome before non-controllingnoncontrolling interest for the year ended December 31, 2012,2013, was $1,787,643,$1,224,243, as compared to $7,043,410a loss of $1,787,643 for the year ended December 31, 2011.2012. Our current liabilities exceeded our current assets by $22,934,058 and $26,458,490 as of December 31, 2013 and 2012, and by $25,540,389 as of December 31, 2011.respectively. For the year ended December 31, 2012,2013, we experienced positive cash flows from operating activities of $231,565,$467,339, compared to negativepositive cash flows of $320,115$231,565 for the prior year.2012,2013, increased by $551,680,$235,774, as compared to the year ended December 31, 2011,2012, driven primarily by the decreasedecreases of inventoriesdeferred revenues, and an increase in accounts payable and accrued expenses. increaseddecreased to $162,468$6,561 during the year ended December 31, 2012.2013. The allowance for doubtful accounts decreased by $191,063did not change during the year ended December 31, 2012.2013. We continue to monitor individual customer accounts and are working to improve collections on trade accounts receivable.2012,2013, accounts payable, accrued liabilities, advances payable, interest payable and short-term debt increaseddecreased by $3,172,972$1,325,097 to a combined balance of $18,758,249$17,999,070 as of December 31, 2012.2013. The increasedecrease includes an increasea decrease of $905,802$342,438 in accrued liabilities, $711,318a decrease of $294,794 in short-term debt,advances, and $852,384 increasea decrease of $511,473 in accounts payable. The increasedecrease in accounts payable activity is a result of continued PlayBev-related services performed during the year for beverage development, distribution, marketing, and legal services.services in 2012 that were reduced in 2013. At December 31, 2012,2013, we owed $3,088,945$2,794,151 to various investors from whom we had borrowed funds in the form of either unsecured or short-term advances.“2011"2011 YA Forbearance Agreement”Agreement").26“Termination Date”"Termination Date").“2012"2012 YA Forbearance Agreement”Agreement") in which we ratified our previous obligations under the debentures and agreed to pay the debentures, $25,000 at signing the 2012 YA Forbearance Agreement, $25,000 per month in March through June 2012, $50,000 per month in July through September 2012, $75,000 in the months of October and November 2012, $100,000 per month in the months of December 2012 through May 2013, $125,000 per month in the months of June through December 2013, and the balance in December 2014 (the “Termination Date”"Termination Date"). In addition to the above minimum payments to YA Global, we are required to pay monthly excess cash flow, to the extent cumulatively available, consisting of consolidated earnings before interest, taxes, depreciation and amortization, less cash deposits for product orders received but not yet shipped, actual cash taxes paid, actual cash principal and interest paid, and reasonable out-of-pocket cash paid together with reasonable cash reserves in an amount not to exceed 5% of total net sales, provided that such excess cash flow payments shall not to exceed $50,000 in March 2012 and $25,00 per month in April 2012 and thereafter, until the balance is paid.totheto the payment date. The amount applied as a payment on the note and accrued interest will be adjusted to the value of the actual proceeds from the sale of the stock.27lender’slender's exercise of the right to convert the outstanding balance due under the debentures into common stock, as provided in the original convertible debentures as well as in the Consolidated Debenture. Any amount credited against the debenture obligation in excess of $100,000 per month shall be credited against the amounts due in the next succeeding month.court’scourt's order for making subsidiary distributions to us of over $150,000. YA Global asserted its priority lien in all of such distributions and proceeded with steps to execute on all of our assets encumbered in favor of YA Global, as noted above.“ABS"ABS Forbearance Agreement”Agreement"). On March 22, 2012, we entered into a formal forbearance agreement with ABS, dated as of March 1, 2012 (the “ABS"ABS Forbearance Agreement”Agreement"), whereby ABS agreed to take no further judgment enforcement actions in consideration of the payment of $25,000 upon execution of the definitive ABS Forbearance Agreement and satisfaction of applicable conditions precedent. The ABS Forbearance Agreement calls for us to pay $7,500 per month for 46 consecutive months (except for a payment of $15,000 in December 2012), commencing in March 2012, with the unpaid balance, as finally determined as provided below, due and payable in January 2016. No interest on the principal would accrue unless the note is in default, in which case, it would bear interest at 10% per annum from the date of the ABS Forbearance Agreement. In addition, we stipulated to an additional judgment for attorney’sattorney's fees incurred in negotiating the ABS Forbearance Agreement and entering into the related definitive agreements and in related post-judgment collection efforts. The obligation to pay $1,835,000 under the ABS Forbearance Agreement would be secured by an encumbrance on all of our assets, subject to the prior lien and encumbrance in favor of YA Global.28$48,514,796,$47,674,008, along with a total stockholders’stockholders' deficit of $16,538,470,$13,962,306, at December 31, 2012.2013. During 2012, we have2013, cash provided rather than used, cash inby our operations of $231,565,$467,339 increased compared to cash used inprovided by operations of $320,115$231,565 in the prior year. During 2012, we have2013, financing activities used rather than provided,cash of $474,941, compared to cash used in financing activities of $397,462 compared to cash provided in financing activities of $489,128 in the prior year. During the year ended December 31, 2012, our monthly operating costs and interest expense averaged approximately $399,000 per month. recent execution of the 2013 Ratification Agreement with YA Global and the ABS Forbearance Agreement, we have fixed payments due on these secured obligations in 20132014 aggregating $107,500$100,000 per month, less the amount YA Global converts to common stock. We are dependent on ongoing revenue from the distribution of Playboy-licensed energy drinks, and ongoing dispute respecting the status of the PlayBev license to market Playboy-licensed energy drinks makes it uncertain whether we will be able to continue those activities. We cannot assure that our efforts to resolve those disputes will enable us to continue our energy drink distribution segment or that, if resolved, the terms would be favorable to us. In any event, we will likely need to fund increased energy drink distribution activities from external sources, either directly or through PlayBev, and we cannot assure that we will be able to obtain such funding. If we are able to facilitate obtaining new funding for PlayBev, such funding would likely not be available to us to meet our general company needs.inobtainingin 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’shareholders' positions. We also have very little authorized but unissued capital available, and we will have to have the shareholders approve an increase in our authorized shares in order to obtain any new equity financing.29There can be no assuranceWe cannot assure 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, which would raise substantial doubt about our ability to continue as a going concern.GMA’sGMA'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 CirTran Online revenue.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 Financial Accounting Standards Board Accounting Standards Codification, or ASC, 840-10, Accounting for Leases. The lease agreement was terminated during 2011 and the remainder of the deferred revenue was recognized upon this termination event.thehostthe 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 Multi-nomial Lattis model. The fair value of the derivative instruments is measured each quarter, with the change recorded in earnings.30As reported in our Current Report on Form 8-K, on September 18, 2012 the Company dismissed Hansen, Barnett & Maxwell, P.C., as our independent registered public accounting firm and on the same dateengaged Sadler Gibbs and Associates, LLC Certified Public Accountants, as our independent registered public accounting firm.31SEC’sSEC's rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officer (whom we refer to in this periodic report as our Certifying Officer), as appropriate to allow timely decisions regarding required disclosure. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our management evaluated, with the participation of our Certifying Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2012,2013, pursuant to Rule 13a-15(b) under the Exchange Act. Based upon that evaluation, our Certifying Officer concluded that, as of December 31, 2012,2013, our disclosure controls and procedures were not effective to provide reasonable assurance as of December 31, 2012,2013, because of certain deficiencies involving internal controls constituted material weaknesses, as discussed below. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, and management does not believe that the material weaknesses had any effect on the accuracy of our financial statements for the current reporting period.Management’s2011,2013, using the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”("COSO") Internal Control - Integrated Framework as a basis for our assessment.designofdesign of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.322012.2012,2013, management identified the following material weaknesses:·Control Environment - We did not maintain an effective control environment for internal control over financial reporting. Specifically, we concluded that we did not have appropriate controls in the following areas.·Segregation of Duties - As a result of limited resources and staff, we did not maintain proper segregation of incompatible duties. The effect of the lack of segregation of duties potentially affects multiple processes and procedures.·Entity Level Controls - We failed to maintain certain entity-level controls as defined by the framework issued by COSO. Specifically, our lack of staff does not allow us to effectively maintain a sufficient number of adequately trained personnel necessary to anticipate and identify risks critical to financial reporting. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, due to lack of adequate staff with such expertise.·Access to Cash - Our president has debit cards for most of our bank accounts and the ability to transfer from his personal bank account and our bank accounts.· · · · Management’sManagement's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’smanagement's report in this annual report.Iehab Hawatmeh 47 President, Chief Executive Officer, Chief Financial Officer, Chairman July 2000 to date Fadi Nora 53 Director February 2007 to date Kathryn Hollinger 63 Director, Controller August 2011 to date informationboard has reviewed Mr. Hawatmeh's business background and service with our Company in connection with his qualification to sit as a member of our board. Based on his years of service as our executive officer, his background in the electronics assembly industry, and his engineering, financial, and corporate strategic planning background, the board has concluded that Mr. Hawatmeh is qualified to serve as a member of our board.definitive proxy statementboard. Based on Mr. Nora's prior work as a business consultant and his experience with investment opportunities, capital-raising transactions, and financial planning, the board has concluded that Mr. Nora is qualified to serve as a member of our board2013 annual meetingdirectors, officers, and employees. This Code of stockholdersEthics is available on our website at www.cirtran.com under the captions “Corporate Governance,” “Proposal 1. Election of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference."Investor Relations--Corporate Governance."information fromfollowing table sets forth, for each of our definitive proxy statementlast two completed fiscal years, the dollar value of all cash and noncash compensation earned by any person who was our principal executive officer during the preceding fiscal year and each of our other highest compensated executive officers earning more than $100,000 during the last fiscal year ("Named Executive Officer"):Name and Principal Position Total ($) (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) 2013 465,000 19,726 -- 10,171 -- -- 518,029 President, Chief Executive Officer 2012 465,000 66,376 -- 5,852 -- -- 563,306 (1) The amount is the fair value of the option awards on the date of grant in accordance with Financial Accounting Standards Board Accounting Standards Codification Top 718. See notes 1 and 21 to our consolidated financial statements. (2) Mr. Hawatmeh did not receive cash payments for his salary or bonus during the 2012 and 2013 fiscal years. His salary and bonus expense have been accrued. Of the amounts reported for 2012 and 2013, $345,000 was accrued by us and $120,000 was accrued by our variable interest subsidiary, Play Beverages, LLC, respectively. (3) Includes $12,000 for car allowance and $11,132 for medical insurance premiums. (4) Includes $12,000 for car allowance and $14,078 for medical insurance premiums. 2013stock each year, with the exercise price of the options being the market price of our 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 our board. The Employment Agreement includes additional incentive compensation as follows: a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization for the applicable quarter; bonuses equal to 1% of the net purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and an annual meetingbonus (payable quarterly) equal to 1% of stockholdersthe gross sales, net of returns, and allowances of all beverage products of our Company and our affiliates for the most recent fiscal year.caption “Executive Compensation”Employment Agreement for the two-year period after the date of termination (net of any bonus amounts paid as Accrued Obligations) based on actual results for the applicable quarters and fiscal years; and (iv) within 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 30 months' annual base salary; provided that if Mr. Hawatmeh is incorporated hereinterminated without cause in contemplation of, or within one year, after a change in control, then two times such annual base salary and bonus payment amounts.reference.the Named Executive Officer as of December 31, 2013:Option Awards Stock Awards Iehab J. Hawatmeh -- 6,000,000 -- 0.0020 01/01/14 -- -- -- -- Iehab J. Hawatmeh -- 6,000,000 -- 0.0078 01/01/15 -- -- -- -- Iehab J. Hawatmeh -- 6,000,000 -- 0.0021 01/01/16 -- -- -- -- Iehab J. Hawatmeh -- 6,000,000 -- 0.0010 01/02/19 -- -- -- -- Iehab J. Hawatmeh -- 6,000,000 -- 0.0017 01/02/20 -- -- -- -- (1) During the years ended December 31, 2013, 2012, 2011, 2010, 2009, and 2008, we did not issue stock options to the named executive officer due to the limited number of available shares under the employee incentive plan. These options have been earned by our named executive officer and we have accrued the stock option expense in the respective periods. These stock options can be issued upon the discretion of the board of directors based upon the number of available shares of the 2012 Stock Option Plan. Name Total ($) -- -- -- -- -- -- -- 120,000 -- 4,069 9,863 -- 32,000 165,932 55,000 -- 1,391 10,000 -- 23,280 89,671 (1) The amounts in this column reflect the dollar amount recognized for financial statement reporting purposes, excluding the effect of estimated forfeitures, for the fiscal year ended December 31, 2012, in accordance with accounting principles. Assumptions used in the calculation of these amounts are included in Note 21 to our audited financial statements for the year ended December 31, 2012. (2) Iehab Hawatmeh also served as our chief executive officer during 2012. He received compensation for his services as an executive officer, as set forth above in the Summary Compensation Table. He did not receive any additional compensation for his services as director of our board. (3) Fadi Nora's compensation was accrued, but not paid. (4) Kathryn Hollinger also served as our Controller during 2013. She received compensation for her services as a Controller. She did not receive any additional compensation for her services as director of our board in addition to the compensation that has been disclosed in the table above. fromas of May 22, 2014, respecting the beneficial ownership of our definitive proxy statementoutstanding common stock by: (i) any holder of more than 5%; (ii) each of the Named Executive Officers and directors; and (iii) our directors and Named Executive Officers as a group, based on 4,487,991,910 shares of common stock outstanding. Except as otherwise indicated, each stockholder listed below has sole voting and investment power over the shares beneficially owned:Principal Stockholders: Iehab J. Hawatmeh Common stock 301,533,877 6.70% 4125 South 6000 West West Valley City, Utah 84128 Directors: Iehab J. Hawatmeh --SEE ABOVE-- Fadi Nora Common stock 225,476,100 5.01% Kathryn Hollinger Common stock 39,335,853 0.87% Common Stock 566,345,830 12.59% Total 566,345,830 12.59% (1) Excludes options to purchase up to 30,000,000 shares that have been accrued for services provided during 2008, 2009, 2010, 2011, 2012, and 2013. These options can be exercised any time upon issuance at exercise prices ranging between $0.001 and $0.016 per share. (2) Excludes options to purchase up to 15,000,000 shares that have been accrued for services provided during 2008, 2009, 2010, 2011, 2012, and 2013. These options can be exercised any time upon issuance at exercise prices ranging between $0.001 and $0.016 per share. (3) Excludes options to purchase up to 6,000,000 shares that have been accrued for services provided during 2011, 2012, and 2013. These options can be exercised any time upon issuance at an exercise prices ranging from $0.0007 and $0.0021 per share. 2013 annual meeting of stockholders under the captions “Principal Stockholders” and “Equity Compensation Plans” is incorporated herein by reference.stock plans at December 31, 2013:-- -- -- -- -- 275,800,000 Total -- 275,800,000 informationborrowing fees were waived by Mr. Nora on these loans. In addition, we owed Mr. Nora $326,373 and $448,719, respectively, in accrued liabilities as of December 31, 2013 and 2012, for selling, general, and administrative expenses that were paid for by Mr. Nora on a personal credit card.definitive proxy statementobligations, we have 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 2012, two of the notes with a combined balance of $411,912 were converted from short-term advances to a notes payable on CirTran's books, with the intent to convert the liability to membership interest in Play Beverages, LLC, a consolidated variable interest entity. As of December 31, 2013 the notes have been restructured and signed directly with the Company without our president and director's personal guaranty.annual meetingwe accrued for 6,000,000 stock options relating to this employee agreement. The fair market value of stockholdersthe options was $10,151, using the following assumptions: estimated five-year term, estimated volatility of 212.05, and a discount rate of 1.31%. During the years ended December 31, 2012, we accrued for 6,000,000 stock options relating to this employee agreement. The fair market value of the options was $5,852, using the following assumptions: estimated five-year term, estimated volatility of 200.04, and a discount rate of 0.34%.captions “Certain Relationshipsdebentures and Related-Party Transactions”agreed to pay the debentures under a payment plan. In addition to the above minimum payments to YA Global, we were required to pay monthly excess cash flow, to the extent cumulatively available, consisting of consolidated earnings before interest, taxes, depreciation, and “Director Independence” is incorporated herein by reference.amortization, less cash deposits for product orders received but not yet shipped, actual cash taxes paid, actual cash principal and interest paid, and reasonable out-of-pocket cash paid together with reasonable cash reserves in an amount not to exceed 5% of total net sales, provided that such excess cash flow payments did not exceed $50,000 in March 2012 and $25,000 per month in April through September 2012.information fromaggregate fees billed to us by Sadler Gibb & Associates, LLC, our definitive proxy statementindependent registered public accounting firm and auditor for the fiscal year 2013, for the fiscal years ended December 31, 2013 and 2012, are as follows: December 31, 2013 December 31, 2012 $ 80,780 $ 99,729 Audit-Related Fees -- -- 8,205 1,062 All Other Fees -- -- Total Fees $ 88,985 $ 100,791 (1) Audit fees consist of the audit of our annual financial statements included in our Annual Report on Form 10-K for our 2012 fiscal year and review of 2013 financial statements and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. (2) Tax fees consist of fees for tax consultation and tax compliance services. 2012 annual meetingindependent registered public accountants and nominate an independent registered public accounting firm for stockholder approval. While ratification of the selection of the independent registered public accounting firm by the stockholders underis not required and is not binding upon our board, in the caption “Relationshipevent of a negative vote on such ratification, our board might choose to reconsider its selection.Independent Auditors”maintaining the independence of Sadler Gibb and Associates, LLC, and has concluded that the provision of such services is incorporated herein by reference. compatible with maintaining the independence of our auditors.34* The number preceding the decimal indicates the applicable SEC reference number in Item 601, and the number following the decimal indicating the sequence of the particular document. Omitted numbers in the sequence refer to documents previously filed with the SEC as exhibits to previous filings, but no longer required. 35_______________* The number preceding the decimal indicates the applicable SEC reference number in Item 601, and the number following the decimal indicating the sequence of the particular document. Omitted numbers in the sequence refer to documents previously filed with the SEC as exhibits to previous filings, but no longer required. 36SIGNATURESApril 16, 2013/s/ Iehab Hawatmeh April 16, 2013/s/ Iehab Hawatmeh April 16, 2013/s/ Fadi Nora April 16, 2013/s/ Kathryn Hollinger 37F-2Report of Independent Registered Public Accounting FirmF-3F-4F-5F-6F-7F-9
F-1 and subsidiariessheetsheets of CirTran Corporation and subsidiaries (the Company) as of December 31, 2013 and 2012 and the related consolidated statements ofoperations, stockholders’ deficitstockholders' equity (deficit) and cash flows for the yearyears then ended. These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements based on our audit.audits. auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditaudits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditaudits provide a reasonable basis for our opinion.yearyears then ended, in conformity with U.S. generally accepted accounting principles.$48,514,796$47,674,008 as of December 31, 20122013 which raises substantial doubt about its ability to continue as a going concern. Management’sManagement's plans concerning these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and the ShareholdersCirTran CorporationWe have audited the accompanying consolidated balance sheet of CirTran Corporation and subsidiaries as of December 31, 2011, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CirTran Corporation and subsidiaries as of December 31, 2011, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.The accompanying consolidated financial statements, as of and for the year ended December 31, 2011 have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has an accumulated deficit, has suffered losses from operations, has negative working capital and one of the consolidated subsidiaries has filed for Chapter 11 bankruptcy which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty./s/HANSEN, BARNETT & MAXWELL, P.C.Salt Lake City, UtahApril 16, 2012F-3
CIRTRAN CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSCIRTRAN CORPORATION AND SUBSIDIARIES December 31, December 31, 2013 2012 ASSETS Current assets Cash and cash equivalents $ 281 $ 7,883 Trade accounts receivable, net of allowance for doubtful accounts of $832,093 and $832,093, respectively 6,561 162,468 Inventory, net of reserve of $2,255,041 and $2,256,399, respectively 188,634 98,343 Other 52,555 7,866 Total current assets 248,031 276,560 Investment in securities, at cost 300,000 300,000 Long-term receivable, net of allowance of $1,582,895 - - Property and equipment, net 39,856 86,034 Other assets, net 40,733 224,488 Total assets $ 628,620 $ 887,082 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities Checks written in excess of bank balance $ 41,925 $ 17,118 Accounts payable 4,169,641 4,696,234 Related-party payable 1,193,901 955,656 Short-term advances payable - non-related parties 2,027,212 1,932,558 Short-term advances payable - related parties 766,939 1,156,387 Accrued liabilities 2,102,729 2,445,167 Accrued payroll and compensation expense 2,961,993 2,599,533 Accrued interest 1,482,181 2,417,834 Deferred revenue 2,592,170 3,184,320 Derivative liability 158,396 829,090 Convertible debenture 2,390,528 3,132,855 Current maturities of long-term debt 414,085 236,585 Current liabilities to non-controlling interest holders 2,728,556 2,570,000 Note payable to stockholders and members 151,833 576,833 Total current liabilities 23,182,089 26,750,170 Total liabilities 23,182,089 26,750,170 Stockholders' deficit CirTran Corporation stockholders' deficit: Common stock, par value $0.001; authorized 4,500,000,000 shares; issued and outstanding shares: 4,457,991,910 and 2,541,502,289 4,457,992 2,541,502 Additional paid-in capital 29,270,710 29,451,824 Subscription receivable (17,000 ) (17,000 ) Accumulated deficit (47,674,008 ) (48,529,916 ) Total CirTran Corporation and subsidiaries stockholders' deficit (13,962,306 ) (16,553,590 ) Non-controlling interest (8,591,163 ) (9,309,498 ) Total stockholders' deficit (22,553,469 ) (25,863,088 ) Total liabilities and stockholders' deficit $ 628,620 $ 887,082 CIRTRAN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS The accompanying notes are an integral part of these condensed consolidated financial statements. CIRTRAN CORPORATION AND SUBSIDIARIES For the Years ended December 31, 2013 2012 Net sales $ 3,469,006 $ 4,260,417 Cost of sales (1,119,498 ) (375,757 ) Royalty Expense (37,494 ) (614,721 ) Gross profit 2,312,014 3,269,939 Operating expenses Selling, general and administrative expenses 3,285,458 3,606,672 Non-cash compensation expense 41,872 39,080 Total operating expenses 3,327,330 3,645,752 Loss from operations (1,015,316 ) (375,813 ) Other income (expense) Interest expense (662,120 ) (1,141,171 ) Other income - 108,864 Gain on settlement of debt and liabilities 2,159,919 154,850 Gain (loss) on derivative valuation 741,760 (534,373 ) Total other income (expense), net 2,239,559 (1,411,830 ) Net income (loss) 1,224,243 (1,787,643 ) Net gain (loss) attributable to non-controlling interest $ (368,335 ) $ 1,540,018 Net gain (loss) attributable to CirTran Corporation and subsidiaries $ 855,908 $ (247,625 ) Basic and diluted income (loss) per common share $ 0.00 $ (0.00 ) Basic weighted-average common shares outstanding 4,389,209,389 1,925,943,819 Diluted weighted-average common shares outstanding 7,644,348,910 1,925,943,819 The accompanying notes are an integral part of these condensed consolidated financial statements. CIRTRAN CORPORATION AND SUBSIDIARIES FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 Common Stock Additional Non- Number paid-in Subscription Accumulated controlling of shares Amount capital receivable deficit interest Total Balances at December 31, 2011 1,819,302,289 $ 1,819,297 $ 29,872,151 $ (17,000 ) $ (48,282,291 ) $ (8,473,176 ) $ (25,081,019 ) Capital contributions - - - - - 703,696 703,696 Options granted to consultants - - 61,153 - - - 61,153 Shares issued in settlement of debt 650,000,000 650,005 (416,500 ) - - - 233,505 Exercise of stock options by consultants 72,200,000 72,200 (64,980 ) - - - 7,220 Net loss - - - - (247,625 ) (1,540,018 ) (1,787,643 ) Balances at December 31, 2012 2,541,502,289 $ 2,541,502 $ 29,451,824 $ (17,000 ) $ (48,529,916 ) $ (9,309,498 ) $ (25,863,088 ) Capital contributions - - - - - 350,000 350,000 Shares issued in settlement of debt and liabilities 1,916,489,621 1,916,490 (181,114 ) - - - 1,735,376 Net loss - - - - 855,908 368,335 1,224,243 Balances at December 31, 2013 4,457,991,910 $ 4,457,992 $ 29,270,710 $ (17,000 ) $ (47,674,008 ) $ (8,591,163 ) $ (22,553,469 ) CIRTRAN CORPORATION AND SUBSIDIARIES For the Years Ended December 31, 2013 2012 Cash flows from operating activities Net income (loss) $ 1,224,243 $ (1,787,643 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 46,178 86,446 Inventory allowance (1,358 ) - Non-cash compensation expense 30,872 61,153 Gain on settlement of debt (2,159,919 ) 154,850 Change in valuation of derivative (741,760 ) 534,374 Current liabilities to non-controlling interest holders 350,000 - Expenses paid by third-party on behalf of the company 85,200 735,000 Changes in assets and liabilities: Trade accounts receivable 140,787 (134,883 ) Inventories (88,933 ) 366,731 Prepaid expenses and other current assets - 18,270 Other current assets 5,313 (222,479 ) Other assets 183,755 - Accounts payable (45,190 ) 656,784 Accrued payroll and compensation 444,960 - Related party payable 238,245 250,600 Accrued liabilities 957,754 1,130,891 Current portion of refundable customer deposits (200,201 ) (1,117,186 ) Accrued interest 389,342 - Deferred revenue (391,949 ) (501,343 ) Net cash provided by operating activities 467,339 231,565 Cash flows from financing activities Proceeds from notes payable - 200,000 Checks written in excess of bank balance 24,807 (191,075 ) Proceeds from short-term advances 232,958 108,419 Payment on accrued interest (104,110 ) (197,158 ) Stock issued in exercise of options - 7,220 Payments on short-term advances (628,596 ) (324,868 ) Net cash (used in) financing activities (474,941 ) (397,462 ) Net decrease in cash and cash equivalents (7,602 ) (165,897 ) Cash and cash equivalents at beginning of period 7,883 173,780 Cash and cash equivalents at end of period $ 281 $ 7,883 The accompanying notes are an integral part of these condensed consolidated financial statements. CIRTRAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -CONTINUED For the Years Ended December 31, 2013 2012 Supplemental disclosure of cash flow information: Cash paid during the period for interest $ 96,593 $ 197,158 Noncash investing and financing activities: Conversion of liabilities to shareholders for non-controlling interest $ 350,000 $ 703,696 Debt and accrued liabilitities converted to equity $ 1,679,737 $ 650,000 Debt and accrued liabilities converted to current liabilities to non-controlling interest holders $ 158,556 $ 2,100,000 Accounts payable written off $ 486,785 $ - Assignment of short-term advances to current debt $ 100,000 $ - Inventory written off $ - $ 14,609 Accounts receivable written off $ - $ 191,063 The accompanying notes are an integral part of these condensed consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICITFOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011 CIRTRAN CORPORATION AND SUBSIDIARIES OF CASH FLOWSCIRTRAN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)The accompanying notes are an integral part of these consolidated financial statements.F-8CirTran’sCirTran's services include pre-manufacturing, manufacturing, and post-manufacturing services. CirTran’sCirTran's goal is to offer customers the significant competitive advantages that can be obtained from manufacture outsourcing.“Company”"Company" or “CirTran”"CirTran") consolidates all of its majority-owned subsidiaries, companies over which the Company exercises control through majority voting rights and companies in which it has a variable interest and the Company is the primary beneficiary. The Company accounts for its investments in common stock of other companies that the Company does not control but over which the Company can exert significant influence using the cost method.2011 was $2,984,119 and $3,485,463,$3,184,320, respectively.and 2011 was $200,201 and $1,317,387, respectively.included in the amount of deferred revenue.F-911)10).The Company sold its 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 Accounting Standards Codification ("ASC 840-10"), Accounting for Leases (see also Note 7).and 2011 was $0 and $1,396,885, respectively.and $2,010 in deposits at December 31, 20122013 and 2011, respectively.2012. The capitalized cost, net of accumulated depreciation, associated with molds and dies included in property and equipment at December 31, 2013 and 2012, was $39,858 and 2011, was $36,847, and $100,761, respectively.F-10the company’sthat company's stock as of December 31, 20122013, and no significant influence or control exists, the investment is accounted for using the cost method. The Company evaluated the investment for impairment. No impairment was noted as of December 31, 2012.2011 was $86,446, and $163,067, respectively.and 2011 was $0, and $26,542, respectively.and $142,917, respectively during the years ended December 31, 20122013, and 2011.lossgain of $534,374$741,760 on derivative valuation for the year ended December 31, 2012,2013, and a gainloss of $1,176,339$534,373 for the year ended December 31, 2011.2011 were $650, and $0, respectively, and are included as a component of selling, general, and administrative expenses.2011, was $19,891, and $132,063, respectively.F-11utilizesuses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets, liabilities, the carry forward of operating losses and tax credits, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized. Research tax credits are recognized as utilized.20122013 and 2011,2012, this allowance was $832,093$832,093.$1,023,156, respectively.During the year ended December 31, 2011, sales to four customers of the beverage distribution segment accounted for 24%, 16%, 16%, and 11% of net sales.Company’sCompany's ability to continue energy drink distribution, its principal source of revenue, is subject to interruption or termination because of PlayBev’sPlayBev's ongoing disputes respecting the status of the PlayBev license to market Playboy-licensed energy drinks (see Note 3).Company’sCompany's results of operations and financial position.LossEarnings /Loss Per Share - Basic lossearnings /loss per share (EPS) is calculated by dividing net lossearnings /loss available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted loss per shareEPS 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 4,401,029,0003,186,357,000 and 4,245,301,0504,401,029,000 in potentially issuable common shares at December 31, 2013 and 2012, and 2011,respectively. These potentially issuable common shares were excluded from the calculation of diluted loss per shareEPS because theeither their effects were anti-dilutive.anti-dilutive or their exercise prices were greater than the trading price of the stock at period end.F-12Company’sCompany's financial statements upon adoption, therefore they have not been discussed here.$1,787,643$1,224,243 and $7,043,410$1,787,643 for the years ended December 31, 20122013 and 2011,2012, respectively. As of December 31, 20122013 and 2011,2012, the Company had an accumulated deficit of $48,514,796$47,674,008 and $48,267,171,$48,529,916, respectively. During the year ended December 31, 2012, the Companyoperations provided rather than used, cash in its operations in the amounts of $231,565. However, the Company has a history of using cash in operations. During the year ended December 31, 2011 the Company used2013, operations provided cash in operations of $320,115. These$467,339.These conditions raise substantial doubt about the Company's ability to continue as a going concern.Company’sCompany's ability to continue energy drink distribution, its principal source of revenue, is subject to interruption or termination because of PlayBev’sPlayBev's ongoing disputes respecting the status of the PlayBev license to market Playboy-licensed energy drinks. The Company is continuing its suit against Playboy in Illinois in an effort to enjoin Playboy’sPlayboy's termination of the license so the Company will be able to continue its beverage distribution segment. If the Playboy licensing dispute is not resolved satisfactorily through a negotiated settlement or litigation in such proceeding, PlayBev would be required to terminate its beverage distribution activities, which are currently the source of the Company’sCompany's principal revenues. Such termination may require the Company to cease its activities and seek protection from creditors.non-proprietarynonproprietary products. This segment provides campaign management and marketing services for the Direct Response, Retaildirect response, retail and Beverage Distributionbeverage 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.F-13·The nature of the credit facility has changed dramatically since it was established.·The credit facility originally was to be used to develop and market the energy drinks. Even though the product has been developed, significant costs are continually being added. PlayBev still has no operations of its own and the Company is providing all or a majority of the operating activity of PlayBev. These costs are being pushed through the credit facility.·The Company has continually made the royalty payment owed to Playboy on behalf of PlayBev.·The credit facility was originally limited to a $2.0 million balance and the intent was for it to be a revolving line of credit. Currently the balance owed under the credit facility is $8,022,124.·PlayBev has not established that it can generate cash to pay for its own operations. Instead royalty payments owed to PlayBev by the Company are offset by the large amount owed to CirTran under the credit facility.Included in the accompanying financial statements are the following assets and liabilities of PlayBev as of December 31, 2012, and December 31, 2011:F-14· The nature of the credit facility has changed dramatically since it was established. The liabilities above include royalties payable under a license agreement with LIB-MP on beverage sales.· The credit facility originally was to be used to develop and market the energy drinks. Even though the product has been developed, significant costs are continually being added. PlayBev still has no operations of its own and the Company is providing all or a majority of the operating activity of PlayBev. These costs are being pushed through the credit facility. · The Company has continually made the royalty payment owed to Playboy on behalf of PlayBev. · The credit facility was originally limited to a $2.0 million balance and the intent was for it to be a revolving line of credit. Currently the balance owed under the credit facility is $5,517,650. · PlayBev has not established that it can generate cash to pay for its own operations. Instead royalty payments owed to PlayBev by the Company are offset by the large amount owed to CirTran under the credit facility. · Included in the accompanying financial statements are the following assets and liabilities of PlayBev as of December 31, 2013, and December 31, 2012: December 31, 2013 December 31, 2012 Other Assets $ 361 $ 361 Prepaid Expenses 40,000 224,128 Total Assets $ 40,361 $ 1,681 Accrued Interest $ 197,801 $ 593,418 Accrued Liabilities 476,851 197,345 Royalty Payable - 734,143 Current Liabilities 2,728,556 2,570,000 Notes Payable 100,000 250,000 Total Liabilities $ 3,503,208 $ 1,311,933 December 31, December 31, 2013 2012 Raw Materials $ 1,682,099 $ 1,691,500 Work in Process 255,934 221,225 Finished Goods 505,642 442,017 Allowance / Reserve (2,255,041 ) (2,256,399 ) Totals $ 188,634 $ 98,343 2011, write downs of $14,609, and $205,450, respectively, were recorded to reduce items considered obsolete or slow moving to their market value.2012,2013, royalty expense related to Playboy Enterprises was $500,000.$0. In 2012,2013, expenses were recorded as incurred. As of December 31, 2012,2013 and 2011,2012, the remaining balance in prepaid royalties was $0 and $0, respectively.NOTE 7 - SALE OF PROPERTYIn May 2007, PFE Properties LLC ("PFE"), a Utah limited liability company and wholly owned subsidiary of the Company, sold and the Company leased back the land and building where the Company presently has its headquarters and manufacturing facility. The sales proceeds were $2,500,000. With those proceeds, the Company repaid PFE's mortgage of $1,033,985, along with taxes, fees, and commissions aggregating $199,303.The Company then agreed to lease back the property from the buyer, an individual who later became one of the Company's directors for a period. The term of the lease was for 10 years, with an option to extend the lease for up to three additional five-year terms. The monthly lease payment was $10,000. The Company also recorded a gain on the sale of the property of $810,736, which is being deferred over the life of the lease. During the year ended December 31, 2011, the lease was terminated and the remaining deferred gain of $507,216 was recognized in other income. (see also Note 11).87 - ADVANCE BEAUTY SOLUTIONS RECEIVABLEF-15CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS20122013 and 20112012 was $0. During 2010, the Company executed an assignment of copyrights, thereby assigning the Company's copyrights, trademark, and infomercial received in the settlement back to ABS (see Note 10) as a reduction of its recorded liabilities of $1,582,895. Subsequently, the Company filed a motion to declare judgment fully satisfied or alternatively to recoup mutual debts, requesting that the court determine that the Company's assignment of the copyrights and related intangibles resulted in full satisfaction of the ABS judgment. The Company assigned and transferred these intangibles without reservation or exclusion, making ABS the owner of these assets. The realization of the total $1,582,895 long-term receivable due the Company from the ABS estate depends on the Company selling approximately one million TCP units in the future and gradually offsetting the Company's proportionate share of the resultant royalty obligation against the receivable. The Company recognized an allowance expense of $367,024 on the receivable, as of December 31, 2010, due to uncertainty of the timing of sales and cash collections related to this receivable. The net balance of the receivable as of December 31, 2012,2013, was $0.$90,000$0 and $45,000 as of December 31, 20112103 and made payments of $45,000.2012, respectively. The royalty accrual as of December 31, 2013 and 2012 was $0 and $45,000.98 - PROPERTY AND EQUIPMENT Estimated Service Lives 2013 2012 in Years $ 4,025,924 $ 4,025,924 5-10 997,714 997,714 7-10 220,762 220,762 5-10 53,209 53,209 3-7 5,297,609 5,297,609 (5,257,753 ) (5,211,575 ) $ 39,856 $ 86,034 109 - INTELLECTUAL PROPERTY2011,2013, the Company reviewed its other intangibles for impairment and determined that the carrying value of the assets was not recoverable and recorded an expense forno additional impairment of intellectual properties of $142,917.is required. Amortization expense was $0 and $26,543$0 for each of the years ended December 31, 20122013 and 2011, respectively.F-16CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSGlobal Marketing AllianceThe Company entered into an agreement with Global Marketing Alliance ("GMA") and hired GMA's owner as the Vice President of CirTran Online Corp., or 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 5% 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. During 2011, the Company temporarily suspended its activities under this agreement to focus solely on the distribution and marketing of energy drinks. No revenues were recognized during 2012 and 2011.non-employeenonemployee members of the Board, Mr. Nora is entitled to a quarterly bonus equal to 0.5% of any gross sales earned by the Company directly through Mr. Nora's efforts. As of December 31, 20122013 and 20112012, the Company owed $60,321$70,184 and $52,403,$60,321, respectively, under this arrangement. During the yearyears ended December 31, 20122013 and 2011,2012, Mr. Nora loaned the Company a total of $1,090,829$1,176,029 and $1,064,830,$1,090,829, respectively, through cash contributed and expenses paid on the Company’sCompany's behalf. Mr. Nora received cash payments totaling $239,500$222,700 and $172,000$239,500 from the Company to pay his personal credit card for expenses paid in behalf of the Company during the years ended December 31, 20122013 and 2011,2012, respectively. As of December 31, 20122013 and 2011,2012, the Company still owed Mr. Nora $1,040,829$703,329 and $1,299,829$1,040,829 in the form of unsecured advances, respectively. 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, the Company owed Mr. Nora $448,719$326,373 and $1,208,756$448,719 in accrued liabilities as of December 31, 20122013 and 2011,2012, respectively, for selling, general and administrative expenses that were paid for by Mr. Nora on a personal credit card.Company’sCompany's stock each year, with the exercise price of the options being the market price of the Company’sCompany's common stock as of the grant date. During the year ended December 31, 2013, the Company accrued for 2,400,000 stock options relating to the director agreement with Mr. Nora. The fair market value of the options was $4,060, using the following assumptions: estimated 5-year term, estimated volatility of 212.05 and a discount rate of 1.31% (see also Note 11). During the year ended December 31, 2012, the Company accrued for 2,400,000 stock options relating to the director agreement with Mr. Nora. The fair market value of the options was $2,341, using the following assumptions: estimated 5-year term, estimated volatility of 200.04, and a discount rate of 0.34% (see also Note 12)11). During the year ended December 31, 2011, the Company accrued for 2,400,000 stock options relating to the director agreement with Mr. Nora. The fair market value of the options was $4,747, using the following assumptions: estimated 5-year term, estimated volatility of 167.47 and a discount rate of 2.02% (see also Note 12).20122013 and 2011,2012, the Company repaid principal and interest totaling $18,270$0 and $15,040,$18,270, respectively. At December 31, 20122013 and 2011,2012, the principal amount owing on the note was $151,833 and $151,833, respectively. On March 31, 2008, the Company issued to this same family member, along with fourtwo 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 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum. During 2013 and 2012, and 2011, theCompany made no payments towards the outstanding notes. The principal balance owing on the promissory notes as of December 31, 20122013 and 2011,2012, totaled $72,465 and $72,465, respectively.CompanysignedCompany 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 2013 and 2012, a note balancebalances of $250,00 and $411,912 waswere converted from a short term advance to a current liability in PlayBev, a non-controllingnoncontrolling interest entity, with the intent to convert the liability to membership interest. As of December 31, 20122013 and 2011,2012, the Company showed the balance of $270,000$514,500 and $681,912,$270,000, respectively, as part of short-term advances payable on the balance sheet. As of December 31, 2012,2013, two of the three remaining notes were in default and are accruing interest at the default rate of 36% per year.F-17CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSCompany’sCompany's stock each year, with the exercise price of the options being the market price of the Company’sCompany's common stock as of the grant date. During the year ended December 31, 2011,2012, the Company accrued for 6,000,000 stock options relating to the employee agreement with Mr. Hawatmeh. The fair market value of the options was $11,868,$10,151, using the following assumptions: estimated 5-year term, estimated volatility of 167.47212.05 and a discount rate of 2.02%1.31% (see also Note 12). During the yearsyear ended December 31, 2012, the Company accrued for 6,000,000 stock options relating to the employee agreement with Mr. Hawatmeh. The fair market value of the options was $5,852, using the following assumptions: estimated 5-year term, estimated volatility of 200.04 and a discount rate of 0.34% (see also Note 12). During the year ended December 31, 2013, the Company accrued for 6,000,000 stock options relating to the employee agreement with Mr. Hawatmeh. The fair market value of the options was $10,151, using the following assumptions: estimated 5-year term, estimated volatility of 212.05 and a discount rate of 1.31 % (see also Note 11).20122013 and 2011,2012, the Company owed the Companyits president a total of $115,558$63,610 and $179,102$115,558 in unsecured advances, and 30,000,00036,000,000 and 24,000,00030,000,000 in stock options with an aggregated value at time of grant of $154,547$164,698 and $148,695,$154,547, respectively. The advances and short-term bridge loans were approved by the Board of Directors under a 5% borrowing fee. The borrowing fees were waived by the Company’sCompany's president on these loans.Company’sCompany's business, on March 5, 2010, the Company and Katana Electronics, LLC, a Utah limited liability company (“Katana”("Katana"), entered into certain agreements (collectively, the “Agreements”"Agreements") to reduce the Company’sCompany's costs. The Agreements include an Assignment and Assumption Agreement, an Equipment Lease, and a Sublease Agreement relating to the Company’sCompany's property. Pursuant to the terms of the Sublease, the Company agreed to sublease a certain portion of the Company’sCompany's 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 was for two 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 the Agreements signed, the Company continues to have rights to operate as a contract manufacturer in the future in the U.S. and offshore. On July 1, 2011, Katana had assumed the full lease payment, and the Company agreed to pay Katana $5,000 per month for the use of office space and utilities. The Company had no Sublease income for the yearyears ended December 31, 2013 and 2012. The Company recorded a rent expense of $55,000 and $60,000 for the year ended December 31, 2012.2013 and 2012, respectively.1211 – OTHER ACCRUED LIABILITIES(“IRS”("IRS") and other tax entities (see note 19)18). December 31, December 31, 2013 2012 Tax liabilities 965,018 871,357 Related party expenses 326,373 448,719 Royalty expense - 734,143 Other accrued expenses 811,338 390,948 Totals $ 2,102,729 $ 2,445,167 CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, December 31, 2013 2012 Administrative payroll expenses 1,946,267 1,677,086 Stock option expenses 469,180 438,308 Commisions expenses 277,188 245,451 Bonus expenses 144,358 138,688 Director fees 125,000 100,000 Other accrued compensation expenses - - Totals $ 2,961,993 $ 2,599,533 $138,500$232,958 in short termcash and $85,200 in expenses paid on behalf of the Company, which have been recognized in short-term advances during the year and made $324,336$628,596 in cash payment on short-term advances and $27,158$104,110 was paid in interest. In December 2012, two2013, a related partiesparty elected to convert short-term debt in the amount of $90,000$20,800 of liabilities into 300,000,0004,000,000 shares of the Company’sCompany's common stock at a price of $.0003$.0015 per share. In December 2012, an unrelated party elected to convert short-term debt in the amount of $30,000 of liabilities into 100,000,000 shares of the Company’sCompany's common stock at a price of $.0003$0.0003 per share. In August 2012, two unrelated parties elected to convert short-term debt in the amount of $1,193,620 in short-term debt, $700,000 in notes payable, and $338,669 in accrued interest into $2,100,000 of current liabilities in Playbev, a non-controllingnoncontrolling entity with the intend to convert the liability to membership interest at a future date. A gain of $132,289 was recognized on the conversion.F-19CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1312 - COMMITMENTS AND CONTINGENCIES(“PlayBev”("PlayBev"), a consolidated entity of the Company, filed petitions under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the District of Utah. Under Chapter 11, certain claims against PlayBev in existence before the filing of the petitions for relief under the federal bankruptcy laws are stayed while PlayBev continues business operations as Debtor-in-possession (see also Note 4). These claims are included in the December 31, 2011, balance sheet and are considered liabilities subject to compromise. Additional claims (liabilities subject to compromise) may arise after the filing date resulting from rejection of executory contracts, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts. Claims against PlayBev (secured claims) were stayed, although the holders of such claims had the right to move the court for relief from the stay. PlayBev continued as a debtor-in-possession and thereafter worked to resolve the claims of creditors and to resolve disputes about its nonalcoholic beverage distribution license with Playboy.PlayBev’sPlayBev's reorganization plan, PlayBev’sPlayBev's payment of $2.0 million to Playboy, and other provisions, but PlayBev was unable to obtain the funding needed to pay Playboy the initial amount or otherwise implement the reorganization plan, so the plan was abandoned and the settlement agreement and the new Playboy license did not become effective.PlayBev’sPlayBev's bankruptcy case and all other pending motions and proceedings, and the automatic stay terminated. PlayBev is precluded from filing for bankruptcy court protection for 180 days after the dismissal.Company’sCompany's issuance of convertible debentures to YA Global Investments, L.P., formerly known as Cornell Capital Partners, L.P. (“("YA Global”Global"), the Company granted to YA Global certain registration rights, pursuant to which the Company agreed to file a registration statement to register the resale of shares of the Company’sCompany's common stock issuable upon conversion of the debentures. The Company agreed to keep the registration statement effective until all of the shares issuable upon conversion of the debenture have been sold. The Company has not accrued a liability for potential losses. has agreed to extensions of the filing deadlines inherent in the terms of the convertible debentures mentioned above. On January 24, 2011, the Company and YA Global entered into a forbearance agreement related to the convertible debentures issued by the Company to YA Global or its predecessor entities.JuneSeptember 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 sought a judgment in the amount of $4,193,380, plus interest and attorneysattorneys' 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.a forbearance agreement with YA Global, including a confession of judgment in its favor.favor of YA Global. On February 23, 2011, the court entered judgment based on the confession of judgment against the Company in the principal amount of $3,161,354, plus interest of $825,858.court’scourt's order that the Company pay approximately$35,000approximately $35,000 in legal fees to ABS. In its motion, YA Global notified the Company that it intended to conduct a secured party’sparty's public auction of all of the Company’sCompany's assets. YA Global also informed the Company that it had defaulted under the January 2011 Forbearance Agreement and declared that all of the Company’sCompany's obligations to YA Global were immediately due and owing. Further, YA Global stated that it intended to commence action to collect on the Company’sCompany's obligations and instructed it to assemble its assets.F-20Global’sGlobal's motion to stay enforcement, YA Global noted that the date of the proposed secured party’sparty's public auction was August 30, 2011. At the same time, YA Global notified the Company that the proposed sale of assets would be held on August 30, 2011.Global’sGlobal's motion to stay the payment of attorneys’attorneys' fees by the Company. Subsequently, the parties to the January 2011 settlement with YA Global entered into an agreement whereby YA Global agreed to cancel the proposed asset sale without waiver.Global’sGlobal's forbearance from collection.“2012"2012 YA Global Forbearance Agreement”Agreement"), in which it ratified its previous obligations under the debentures and agreed to pay the debentures under the following payment plan: $25,000 at signing the 2012 YA Global Forbearance Agreement, $25,000 per month in March through JuneSeptember 2012, $50,000 per month in July through September 2012, $75,000 in the months of SeptemberOctober and OctoberNovember 2012, $100,000 per month in the months of December 2012 through May 2013, $125,000 per month in the months of JuneSeptember through December 2013, and the balance in December 2014 (the “Termination Date”"Extended Termination Date"). In addition to the above minimum payments to YA Global, the Company is required to pay monthly excess cash flow, to the extent cumulatively available, consisting of consolidated earnings before interest, taxes, depreciation and amortization, less cash deposits for product orders received but not yet shipped, actual cash taxes paid, actual cash principal and interest paid, and reasonable out-of-pocket cash paid together with reasonable cash reserves in an amount not to exceed 5% of total net sales, provided that such excess cash flow payments shall not to exceed $50,000 in March 2012 and $25,00$25,000 per month in April through September 2012.Company’sCompany's common stock during the 20 trading days prior to the payment date. The amount applied as a payment on the note and accrued interest will be adjusted to the value of the actual proceeds from the sale of the stock by YA Global, less costs associated with the sale.Company’sCompany's common stock, until the earlier of the Company’sCompany's default under the 2012 YA Global Forbearance Agreement or the Extended Termination Date.Global.Global (the "2013 Ratification Agreement"). Under thisthe 2013 Ratification Agreement, the Company ratified the obligations under three existing Convertible Debentures dated May 26, 2005, December 30, 2005, and August 23, 2006, and agreed to amend, restate, and consolidate the obligations evidenced thereby into a Consolidated Debenture.a March 1,the 2012 YA Global Forbearance Agreement among the parties. Under the 2013 Ratification Agreement payment schedule, the Company is required to make monthly payments,to be applied first to accrued interest and then to principal, in the amount of $100,000 per month, commencing in April 2013. The amount of the Company’sCompany's required monthly cash payment shall be reduced in an amount equal to the amount credited to the lender against the obligation as a result of the lender’slender's exercise of the right to convert the outstanding balance due under the debentures into common stock, as provided in the original convertible debentures as well as in the Consolidated Debenture. Any amount credited against the debenture obligation in excess of $100,000 per month shall be credited against the amounts due in the next succeeding month.F-21CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSpayroll taxes, interestPayroll Taxes, Interest, and penalties-Penalties - In November 2004, the IRS accepted the Company's Amended Offer in Compromise (the "Offer") to settle delinquent payroll taxes, interest, and penalties. The acceptance of the Offer required the Company to pay $500,000. Additionally, the Offer required the Company to remain current in its payment of taxes for five years, and not claim any net operating losses for the years 2001 through 2015, or until the Company pays taxes on future profits in an amount equal to the taxes waived by the Offer of $1,455,767. In June 2013, the Company entered into a partial installment agreement to pay $768,526 in unpaid 2009 payroll taxes. The Company has defaulted oninstallment agreement requires the original agreement and is currently working with the IRSCompany to pay the 2009 tax liabilities.IRS 5% of cash deposits. The monthly payments are to continue until the account balances are paid in full or until the collection statute of limitation expires on October 6, 2020. charges incurred and the amount due to this provider for billed services, charges, and interest expense. The Company is vigorously working with this provider to settle the outstanding balance. Management assesses the likelihood to be remote that it will not be able to settle the balance at or below the currently accrued balance.Company’sCompany's 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% of the Company's earnings before interest, taxes, depreciation and amortization for the applicable quarter; bonus(es) equal to 1.0% 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% 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 20122013 and 2011,2012, the Company incurred $5,328$15,207 and $11,868,$5,328, respectively, of non-cashnoncash compensation expense related to accrual for employee stock options to be awarded per the employment contract with the president of the Company. The Company has accrued $763,100$1,853,096 and $1,241,983$763,100 in compensation for the Company’sCompany's President, which is included in accrued payroll and compensation expense as of December 31, 2013 and 2012, and 2011, respectively.HawatmehHawatmeh: (i) within 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 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 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 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 30 month'smonths' annual base salary; provided that if Mr. Hawatmeh is terminated without cause in contemplation of, or within one year, after a change in control, then two times such annual base salary and bonus payment amounts.F-22CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS$924,000$1,176,000 and $672,000$924,000 in compensation, which is included in related-party payables as of December 31, 2013 and 2012, and 2011, respectively.Company’sCompany's President above, the Company has active employment contracts with several of its employees that require payment of non-cashnoncash compensation in a fixed number of shares. During the year ended December 31, 20122013 and 2011,2012, the Company did not grant options to purchase shares of common stock to employees. The Company accrued an expense of $19,268 and $14,563 during 2013 and $46,053 during 2012, and 2011, respectively, for employee options relating to the employment contracts of these employees.Company’sCompany's motion to set aside the judgment.“Copyrights”"Copyrights") to ABS, without reservation or exclusion, making ABS the owner of the Copyrights.ABS’sABS's judgment in violation of the court’scourt's orders. At the hearing on April 6, 2011, the court denied the motion to declare the judgment fully satisfied and granted ABS’sABS's motion, but did not hold the Company in civil contempt. The court also set a hearing on the ABS motion for the order to show cause for July 8, 2011, regarding the Company’sCompany's compliance with collection orders, which the parties stipulated should be postponed until August 3, 2011. The parties attended mediation on July 11, 2011, but no formal settlement resulted. At the hearing in August, the court found that a basis existed to hold the Company in contempt and set an evidentiary hearing for October 6, 2011, to determine whether to issue a contempt citation. The Company appealed the denial of the motion to declare judgment satisfied.“ABS"ABS Forbearance Agreement”Agreement"), whereby ABS agreed to take no further judgment enforcement actions in consideration of the payment of $25,000 upon execution of the definitive ABS Forbearance Agreement and satisfaction of applicable conditions precedent. The ABS Forbearance Agreement calls for the Company to pay $7,500 per month for 46 consecutive months (except for a payment of $15,000 in December 2012), commencing in March 2012, with the unpaid balance, as finally determined as provided below, due and payable in January 2016. No interest on the principal would accrue unless the note is in default, in which case, it would bear interest at 10% per annum from the date of the ABS Forbearance Agreement. In addition, the Company stipulated to an additional judgment for attorney’sattorney's fees incurred in negotiating the ABS Forbearance Agreement and entering into the related definitive agreements and in related post-judgment collection efforts. The obligation to pay $1,835,000 under the ABS Forbearance Agreement would be secured by an encumbrance on all of the Company’sCompany's assets, subject to a prior lien and encumbrance in favor of YA Global.thirdpartythird party during the term of the ABS Forbearance Agreement, plus the amount of any distribution to which the Company is entitled as a creditor of ABS, provided, however, that in no event would the amount due under the ABS Forbearance Agreement be reduced below $90,000, which is the amount payable during the first 12 months under the ABS Forbearance Agreement. ABS entered into a subordination agreement subordinating the obligation under the ABS Forbearance Agreement in favor of the obligations and first-priority security interest of YA Global. The Company conveyed to ABS the trademarks and intellectual property previously conveyed by ABS to the Company.F-23CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSCompany’sCompany's appeal of the approximately $1.8 million judgment has been remanded in the ABS bankruptcy proceedings to conclusively determine the amount of credit due the Company for the conveyance of the intellectual property. Except for the determination of the fair market value of the intellectual property and any enforcement or collection proceedings that may be required under the ABS Forbearance Agreement, all litigation and disputes between ABS and its affiliates, on the one hand, and the Company and its affiliates, on the other hand, would be dismissed, including the pending order to show cause regarding contempt against the Company, its subsidiaries, and its President.amountamounts of $45,000.$0 and $45,000, respectively. The accrued royalty expense accrued was $90,000$0 and $45,000$90,000 as of December 31, 2013 and 2012, respectively.2011, respectively.1413 - NOTES PAYABLE20122013 and 2011:F-24 2013 2012 Settlement note, ten monthly payments, no interest, in default. $ 59,120 $ 59,120 151,833 151,833 Promisory note to a member of AfterBev, 10% stated interest, interest payable quarterly. Due on demand, in default. 75,000 75,000 Promisory notes to 3 investors, 12% stated interest, 5% borrowing fee, due on demand to related party, in default. 72,465 72,465 Promisory note to a members of Playbev, 10% stated interest, interest payable quarterly, unsecured. Due on demand, in default. 100,000 250,000 Promisory note to a investor, 10% stated interest, interest payable quarterly, unsecured. Due on demand. 7,500 175,000 Promisory note to an investor, 18% stated interest, interest payable quarterly, unsecured. Due on demand, in default. - 30,000 Promisory note to an investor, 0% stated interest, interest payable quarterly, unsecured. Due on demand, in default. 100,000 - Total 565,918 813,418 Less current maturities (565,918 ) (813,418 ) Long-term portion of notes payable $ - $ - CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS2012.2012.2012,2013 and 2011,2012, the Company had accrued interest owed on the notes payable in the amountamounts of $363,649 and $508,322, and $612,854, respectively. The Company recorded interest expense of $244,137$105,340 and $109,227$244,137 for the years ended December 31, 2013 and 2012, and 2011, respectively. During the year ended December 31, 2012,2013, the Company paid $10,000 of accrued interest on the notes.2012,2013, an investor elected to convert $700,000$150,000 in notes payable, $45,000$34,356 in short term advances and $338,669$428,696 in accrued interest expenses in CirTran for current liabilities in PlayBev, a non-controllingnoncontrolling entity with the intend to convert the liability to membership interest at a future date.1514 - CONVERTIBLE DEBENTURES20122013 and 2011:2012: December 31, December 31, 2013 2012 Convertible debenture, 12% stated interest rate, secured by all of the Company's assets, Due on January 31, 2014. $ - $ 591,637 Convertible debenture, 12% stated interest rate, secured by all of the Company's assets, Due on January 31, 2014. - 1,500,000 Convertible debenture, 12% stated interest rate, secured by all of the Company's assets, Due on January 31, 2014. - 1,041,218 Convertible debenture, 5% stated interest rate, secured by all of the Company's assets, Due on December 31, 2014. 2,390,528 - 2,390,528 3,132,855 Less current maturities (2,390,528 ) (3,132,855 ) Long-term portion of convertible debentures $ - $ - Company’sCompany's common stock at the lowest bid price for the 20 trading days prior to conversion ($0.00030.0002 as of December 31, 2012)2013). As of December 31, 2010, the Company was in default on the all three convertible debentures. On January 24, 2011, the Company entered into an Amended and Restated Forbearance Agreement that requires the Company to make payments according to the agreement. The Company subsequently defaulted under the terms of the agreement and the debenture holders are seeking their rights as secured creditors. See Note 1312 regarding the actions taken by the holder of the convertible debentures in connection with the Company’sCompany's noncompliance with the Amended and Restated Forbearance Agreement.F-25CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS2012,2013 and 2011,2012, the Company had accrued interest owed on the convertible debentures in the amountamounts of $654,344 and $1,076,574, and $856,546, respectively. The Company recorded interest expense of $380,027$113,431 and $373,089$380,027 for the years ended December 31, 2013 and 2012, and 2011, respectively. During the yearyears ended December 31, 2012,2013, the Company paid $160,000$104,111 of accrued interest on the debentures. As of December 31, 20122013 and 20112012, the debentures were convertible into 4,209,429,0003,050,957,000 and 4,017,901,0504,209,429,000 shares of the Company’sCompany's common stock, respectively.20122013 and 2011,2012, the fair value of the conversion feature for the convertible debt and associated warrants was determined to be $158,396 and $829,191, and $294,717, respectively.1615 - FAIR VALUE MEASUREMENTS Level one -- Quoted market prices in active markets for identical assets or liabilities;· Level one -- Quoted market prices in active markets for identical assets or liabilities; · Level two -- Inputs other than level one inputs that are either directly or indirectly observable; and · 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. either directly or indirectly observable; andLevel 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. Level 1 Level 2 Level 3 Total Fair value of derivatives $ - $ 158,396 $ - $ 158,396 Liabilities measured at fair value on a recurring basis at December 31, 2011 are summarized as follows: Level 1 Level 2 Level 3 Total Fair value of derivatives $ - $ 829,090 $ - $ 829,090 20122013 and 2011.1716 – LEASESCompany’sCompany's business, on March 5, 2010, the Company and Katana Electronics, LLC, a Utah limited liability company (“Katana”("Katana"), entered into certain agreements (collectively, the “Agreements”"Agreements") to reduce the Company’sCompany's costs. The Agreements include anAssignmentan Assignment and Assumption Agreement, an Equipment Lease, and a Sublease Agreement relating to the Company’sCompany's property. Pursuant to the terms of the Sublease, the Company agreed to sublease a certain portion of the Company’sCompany's 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 was for two 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 the Agreements signed, the Company continues to have rights to operate as a contract manufacturer in the future in the U.S. and offshore. On July 1, 2011, Katana had assumed the full lease payment, and the Company agreed to pay Katana $5,000 per month for the use of office space and utilities. The Company had no Sublease income for the year ended December 31, 2013 and 2012. The Company recorded a rent expense of $60,000$55,000 and $97,860$60,000 for the years ended December 31, 2013 and 2012, and 2011, respectively.F-261817 - ROYALTY OBLIGATION TO ABS CREDITORSaccrued $90,000had royalty accrual as of $0 and $45,000 as of December 31, 20112013 and made payments of $45,000. The royalty accrual as of December 31, 2012, was $45,000.1918 - INCOME TAXES20122013 and 2011,2012, were as follows:F-27 2013 2012 Deferred income tax assets: Capital loss carryforward 1,227,927 $ 170,645 Loss on sale of assets - 725,876 Loss from subdivisions not consolidated for tax purposes 2,674,002 1,562,959 Inventory reserve 841,130 841,637 Bad debt reserve 900,790 900,790 Vacation reserve 17,746 17,312 Stock based compensation 219,249 203,630 Net operating loss carryforward 9,969,824 11,713,571 Depreciation 84,509 87,316 Intellectual property 44,822 60,544 Derivative liability 59,082 309,251 Total deferred income tax assets 16,039,081 16,593,531 Valuation allowance (16,039,081 ) (16,593,531 ) Net deferred income tax asset $ - $ - 20122013 and 2011.20122013 and 2011,2012, the Company had no accrued interest or penalties related to uncertain tax positions. The tax years that remain subject to examination by major taxing jurisdictions are for the years ended December 31, 2013 and 2012, 2011, 2010, and 2009.2011,2013, the Company had net operating loss carryforwards for tax reporting purposes of approximately $30$31.2 million. These net operating loss carryforwards, if unused, begin to expire in 2020. Utilization of approximately $1.2 million of the total net operating loss is dependent on the future profitable operation of Racore Network, Inc., a wholly-ownedwholly owned subsidiary, under the separate return limitation rules and restrictions on utilizing net operating loss carryforwards after a change in ownership. In addition, the realization of tax benefits relating to net operating loss carryforwards is limited due to the settlement related to amounts previously due to the IRS, as discussed in Note 13.20122013 and 2011:2012:Income Tax Note 2013 2012 $ 416,245 $ (607,798 ) 97,804 63,575 161,160 677,572 40,400 (58,992 ) (715,609 ) (74,357 ) $ - $ - 2019 - STOCKHOLDERS' DEFICITCommon Stock Issuances – During the year ended December 31, 2011 the Company issued 96,329,366 shares of common stock for settlement of $179,494 in accrued liabilities, 184,000,000 shares for settlement of $824,300 in debt and short-term advances and 40,000,000 shares of common stock for the exercise of stock options valued at $56,014, with $32,413 in cash proceeds applied as payment on accrued and future consulting expense, and additional noncash compensation expense of $27,601.F-28CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS2120 - STOCK OPTIONS AND WARRANTS2012,2013, options to purchase a total of 182,200,000201,000,000 shares of common stock had been issued and outstanding from the 2012 Stock Option Plan, out of which a maximum of 403,000,000 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-qualifiednonqualified stock options, or share purchase rights) granted, and the term, vesting, and exercise prices.20122013 and 2011,2012, the Company did not grant options to purchase shares of common stock to employees.2011,2013, the Company issued to consultants five yeardid not grant any options to purchase 40,000,000common shares of common stock exercisable at $0.0001. These shares were exercised during the year. The fair market value of the options aggregated $56,014, using the following assumptions: five- year term, volatility of between 284.98% and 363.49% and a discount rate of between 1.00% and 2.00%.2011,2013, the Company accrued for 22,400,00018,800,000 employee options relating to the employment contract of the Company president, directors and officers. The fair market value of the options accrued aggregated $46,053,$28,423, using the following assumptions: five-year term, volatility of between 167.47% and 174.19%212.05% and a discount rate of between 1.55% and 2.02%1.31%.2012,2013, and changes during the year then ended is presented below: F-22 Weighted- Average Aggregate Average Remaining Intrinsic Shares Exercise Price Contractual Life Value Outstanding at December 31, 2011 37,800,000 $ 0.0130 0.51 $ - Granted 72,200,000 $ 0.0001 Exercised (72,200,000 ) $ 0.0001 Expired (34,200,000 ) $ 0.0140 Outstanding at December 31, 2012 3,600,000 $ 0.0130 0.013 $ - Granted - $ - Exercised - $ - Expired (3,600,000 ) $ - Outstanding at December 31, 2013 - $ - - $ - Exercisable at December 31, 2013 - $ - - $ - 2011 was $61,153, and $27,601, respectively. As of December 31, 20122013, the Company had no unrecognized compensation costs related to options outstanding that have not yet vested at year-end that would be recognized in subsequent periods. The aggregate intrinsic value was based on a closing priceprices of $0.0123, $0.0024, $0.001, and $0.021$0.001 as of December 31, 2013, 2012 and 2011, and 2010, respectively.Company'sCompany's common stock. The initial expiration date of the warrants was August 23, 2009. As part of the Forbearance Agreement (see Note 13)12), 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. On January, 24, 2011, as part of the Forbearance Agreement, a warrant to purchase 25,000,000 shares of common stock was issued to YA Global. The warrant had an exercise price of $0.02 per share and vested immediately.2221 -SEGMENT INFORMATIONElectronics Assembly, Contract Manufacturing, Marketingelectronics assembly, contract manufacturing, marketing and Media,media, and Beverage Distribution.beverage distribution. The Electronics Assemblyelectronics assembly segment manufactures and assembles circuit boards and electronic component cables. The Contract Manufacturingcontract manufacturing segment manufactures, either directly or through foreign subcontractors, various products under manufacturing and distribution agreements. The Beverage Distributionbeverage distribution segment manufactures, markets, and distributes Playboy-licensed energy drinks domestically and internationally. The Beverage Distributionbeverage distribution segment continues to grow, and the distribution channels, across the country and internationally, continue to gain traction. The Company anticipates this segment to become more significant in relation to overall Company operations. Electronics Contract Marketing Beverage Assembly Manufacturing and Media Distribution Total Sales to external customers $ 1,104 $ 92,890 $ - $ 3,375,012 $ 3,469,006 Segment income (loss) 530,318 294,955 22,097 376,873 1,224,243 Segment assets 326,433 14,483 - 287,704 628,620 Depreciation and amortization 16,763 29,415 - - 46,178 $ 1,432 $ 81,361 $ - $ 4,177,624 $ 4,260,417 (782,661 ) 63,109 8,412 (1,076,503 ) (1,787,643 ) 429,988 53,342 - 403,752 887,082 19,876 66,570 - - 86,446 2322 - GEOGRAPHIC INFORMATION$37,050$13,247 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. The Company's revenue recognized and assets by geographic area are as follows:F-23 Revenues Revenue-producing assets 2013 2012 2013 2012 South America $ 884,320 $ 908,334 $ - $ - India - 774,772 - - Middle East - 513,429 - - Africa - 494,418 - - Eastern Europe 397,029 399,204 - - United States of America 1,658,699 341,685 26,609 48,984 China 150,000 291,667 13,247 37,050 Western Europe - 243,049 - - Canada 176,782 96,843 - - Other 202,176 197,016 - - $ 3,469,006 $ 4,260,417 $ 39,856 $ 86,034 CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS2423 - SUBSEQUENT EVENTSNotes PayablesJanuary 2013, YA Global Investments (formerly known as Cornell Capital Partners, LP) elected to convert debt onMarch 2014, two occasions in the amount of $25,536 and $100,000 of their convertible debt into 125,536,000 shares of the Company’s common stock at a price of $.001 per share.In January 2013, an unrelated party elected to convert debt in the amount of $25,000 into 25,000,000 shares of the Company’s common stock at a price of $.009 per share.In February 2013, three unrelatedrelated parties elected to convert debt in the amount of $35,000, $25,000, and $25,000$30,000 of their payables into 85,000,00030,000,000 shares of the Company’s common stock at prices ranging from $.0013 to $.0018 per share.In February 2013, an unrelated party was issued 4,000,000 shares of the Company’s stock for $20,800 in debt that was settled during the year ended December 31, 2010 at a price of $0.0063 per share.In March 2013, an unrelated party elected to convert debt in the amount of $25,000 into 25,000,000 shares of the Company’sCompany's common stock at a price of $.015 per share.In March 2013, YA Global Investments (formerly known as Cornell Capital Partners, LP) elected to convert debt on three occasions in the amount of $100,000, $67,200, and $95,100 of their convertible debt into 219,377,621 shares of the Company’s common stock at prices ranging from $.0011 to $.0013 per share.Conversion of PayablesIn January 2013, an unrelated party elected to convert debt in the amount of $28,000 of their payables into 7,000,000 shares of the Company’s common stock at a price of $.004$.001 per share. The Company also agreed to prepay for services with the samean unrelated party with the issuance of 13,000,00020,000,000 common shares at a strike price of $.0017$.0019 on the date of issuance in the amount of $22,100.In January 2013, an employee elected to convert debt in the amount of $29,000 of liabilities into 29,000,000 shares of the Company’s common stock at a price of $.001 per share.In February 2013, an unrelated party elected to convert debt in the amount of $20,800 for services into 25,000,000 shares of the Company’s common stock at a price of $.0063 per share.F-24CIRTRAN CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSPrivate PlacementIn January 2013, the Company entered into a Stock Purchase Agreement with an unrelated party for 32,000,000 shares of common stock of the Company at a purchase price of $0.001 per share, for a total amount of $32,000. In April 2013, the Company entered into a Settlement Agreement and Mutual Release with LIB-MP. Under the settlement and release agreement, the parties exchanged mutual general releases without the payment by any party of any amounts to any other. Accordingly, the Company was relieved of about $1.4 million in amounts due LIB-MP without any payment.2013 Ratification AgreementIn February 2013, the Company YA Global entered into a ratification agreement, which related to certain financing arrangements and agreements between the Company and YA and its predecessors (see Note 13).The ratification agreement also provides for a new payment schedule under the consolidated debenture that replaces the payment schedule that had been agreed to in a March 1, 2012, Forbearance Agreement among the parties. Under the ratification agreement payment schedule, we are required to make monthly payments, to be applied first to accrued interest and then to principal, in the amount of $100,000 per month, commencing in April 2013. The amount of our required monthly cash payment shall be reduced in an amount equal to the amount credited to the lender against the obligation as a result of the lender’s exercise of the right to convert the outstanding balance due under the debentures into common stock, as provided in the original convertible debentures as well as in the consolidated debenture. Any amount credited against the debenture obligation in excess of $100,000 per month shall be credited against the amounts due in the next succeeding month.