The accompanying notes are an integral part of these condensed consolidated financial statements.

CIRTRAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

CIRTRAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATEDUNAUDITED CONSOLDIATED STATEMENTS OF CASH FLOWS (UNAUDITED)OPERATIONS

Our appeal of the Company’s assets, subjectapproximately $1.8 million judgment that had been remanded in the ABS bankruptcy proceedings to a prior lienconclusively determine the amount of credit due us for the conveyance of the intellectual property has been dismissed. All litigation and encumbrance in favor of YA Global.disputes between ABS and its affiliates, on the one hand, and us and our affiliates, on the other hand, have been dismissed.

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.

The Company hasWe have assigned to ABS itsour creditor claim against the estate of ABS, to the extent of the balance due under the ABS Forbearance Agreement. Any distribution from the ABS estate in excess of the adjusted amounts due under the ABS Forbearance Agreement will be paid to us.

Because ABS’s lien is subordinate to liens on all of our assets, ABS is unable to presently take any steps to enforce its judgment. If that changes, we would potentially face collection actions on the Company. Pending the determination of the amount of the credit duejudgment, subject to our offset claims for the value of the intellectual property conveyed,and creditor claim.

We had accrued the Company accrued a balanceminimum liability of $90,000, forof which $45,000 has been paid leaving $45,000 due, which is included in accrued liabilities as of September 30, 2019 and December 31, 2018. Because the minimum required payment under the ABS Forbearance Agreement. Itremaining liability is unknown and cannot be reasonably possible that this estimate may change in the near future based on the events of the ABS settlement.estimated, no additional amounts have been accrued.

Delinquent Payroll Taxes, Interest, and Penalties

UnderIn November 2004, the ABS Forbearance Agreement,IRS accepted our amended offer in compromise (the “Offer”) to settle delinquent payroll taxes, interest, and penalties, which requires us to pay $500,000, remain current in our payment of taxes for five years, and forego claiming any net operating losses for the Company accrued $90,000years 2001 through 2015 or until we pay taxes on future profits in an amount equal to the taxes of $1,455,767 waived by the Offer. In June 2013, we entered into a partial installment agreement to pay $768,526 in unpaid 2009 payroll taxes, which requires us to pay the IRS 5% of cash deposits. The monthly payments are to continue until the account balances are paid in full or until the collection statute of limitation expires on October 6, 2020. There was $424,158 and $424,158 due as of September 30, 2019 and December 31, 2011,2018.

Employment Agreements

We engage Iehab Hawatmeh, our president and made paymentschief executive officer, through an employment agreement entered in August 2009 and amended in September 2017. In July 2017, Mr. Hawatmeh had resigned all positions with us to pursue other business activities, thereby effectively terminating the agreement. However, the amendment to his employment agreement in September 2017 reinstated Mr. Hawatmeh to his previous positions, with a salary in an amount to be determined. Among other things, the reinstated employment agreement: (a) grants options to purchase a minimum of $06,000 shares of our stock each year, with an exercise price equal to the market price of our common stock as of the grant date, for the maximum term allowed under our stock option plan; (b) provides for health insurance coverage, cell phone, car allowance, life insurance, and $70,000director and officer liability insurance, as well as any other bonus approved by our board; and (c) includes additional incentive compensation as follows: (i) a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization for the applicable quarter; (ii) bonuses equal to 1% of the net purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and (iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of all products, net of returns and allowances.

In addition to the employment agreement above, we have verbal contracts with our employees that require payment of noncash compensation in a fixed number of shares. During the nine months ended September 30, 2019 and 2018, we did not grant options to purchase shares of common stock to employees due to the insufficient common shares available. We recorded expenses totaling $600 and $480 during the nine months ended September 30, 20142019 and 2013, respectively. The royalty accrual as2018, respectively, for employee options relating to the employment contracts of September 30, 2014 and 2013, was $0 and $20,000, respectively.these employees.

NOTE 6 – 8—NOTES PAYABLE

Notes payable to stockholders and members consisted of a promissory note to a stockholder due on demand with a 10% stated interest rate, unsecured, with interest due quarterly. The principal balance was $151,833 as of September, 30, 2014, and December 31, 2013.

Notes payable consisted of the following at September 30, 2014, and December 31, 2013:following:

As of September 30, 2014,

There was $145,562 and December 31, 2013, the Company had accrued interest owed on the notes payable in the amounts of $369,679 and $312,917, respectively. The Company recorded interest expense of $56,763 and $284,376 for the nine months September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, the Company paid $0$110,035 of accrued interest due on the notes.

Short-term advances payable

As of September 30, 2014 and December 31, 2013, the Company had $2,165,322 and $1,982,212, respectively, in short-term advances payable to unrelated parties. The short-term advances to unrelated parties also had accrued interest expense of $147,821 and $79,864these notes as of September 30, 20142019, and December 31, 2013,2018, respectively.

During the nine months ended September 30, 2014, the Company made cash payments of $76,000 and recorded a loss from settlement of short-term advances payable in the amount of $41,385. The additional accrual is included in the loss on settlement of debt. The Company also increased short-term advances payable to unrelated parties by $125,000 for expenses, $25,000 of which relates to loan fees, paid on behalf of the company by outside parties and approximately $93,000 for cash received from third parties.

During the nine months ended September 30, 2014, the Company recorded interest expense of $82,957 and paid $15,000 of accrued interest on the unrelated party short-term advances.

NOTE 7 – 9—CONVERTIBLE DEBENTURES

Convertible Debenturedebentures consisted of the following as of September 30, 2014, and December 31, 2013:following:

The convertible debentures and accrued interest are convertible into shares of the Company’sour common stock at the lower of $100 or the lowest bid price for the 20 trading days prior to conversion ($0.0002 as of December 31, 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 (see Note 5). The Company subsequently defaulted under the terms of the agreement and the debenture holders are seeking their rights as secured creditors. See Note 12 regarding the actions taken by the holder of the convertible debentures in connection with the Company’s noncompliance with the Amended and Restated Forbearance Agreement.

As of September 30, 2014 and December 31, 2013, the fair value of the conversion feature for the convertible debt and associated warrants was determined to be $464,961 and $158,396, respectively, which has been recorded as a derivative liability on the balance sheet.conversion.

As of September 30, 20142019, and December 2013,31, 2018, we had accrued interest on the convertible debentures totaling $1,370,966 and $1,268,556, of which $25,038 and $16,986 was current and $1,345,928 and $1,251,570 was long term, respectively. As of September 30, 2019 and December 31, 2018, the debentures were convertible into 133,107,973 and an undeterminable number of shares of our common stock.

NOTE 10—STOCKHOLDERS’ DEFICIT

We are authorized to issue up to 100,000,000 shares of $0.001 par value common stock. No shares were issued during the periods presented. We had a total of 4,499,919 common shares issued and outstanding as of September 30, 2019, and December 31, 2018.

During the nine months ended September 30, 2019, we effected a 1:1000 reverse stock split. The impacts of the reverse stock split have been retroactively stated for all periods presented.

NOTE 11—STOCK OPTIONS AND WARRANTS

Stock Incentive Plans

During the nine months ended September 30, 2019 and 2018, we did not grant options to purchase shares of common stock to employees or consultants. However, we have committed to issue stock options and have recorded a corresponding liability (as described inNote 6 – Other Accrued Liabilities) for commitments to issue a balance of 180,600 and 172,600 stock options as of September 30, 2019 and December 31, 2018, respectively.

There were 8,000 stock options accrued during the nine months ended September 30, 2019. The accrued options were valued using the following assumptions: estimated five-year term, estimated volatility of 567% and a risk-free rate of 2.31%.

During the nine months ended September 30, 2018, we accrued for 6,000 stock options relating to the employment agreement with Mr. Hawatmeh. The fair market value of the conversion feature foroptions was $600, using the convertible debtfollowing assumptions: estimated seven-year term, estimated volatility of 567% and associated warrants was determined to be $464,961 and $158,396, respectively which has been recorded as a derivative liability on the balance sheet.risk-free rate of 2.38%.

NOTE 8As of September 30, 2019 and December 31, 2018, we had no unrecognized compensation costs related to outstanding options that have not yet vested at year-end that would be recognized in subsequent periods. SeeNote 6 – FINANCIAL INSTRUMENTSOther Accrued Liabilities for a description of amounts of option expenses included in accrued payroll and compensation expense.

The Company has financial instruments that are considered derivativesNOTE 12 – DERIVATIVE LIABILITIES

As discussed inNote - Convertible Debentures, we have entered into four separate agreements to borrow a total of $2,640,528 with the outstanding principal and interest being convertible at the holder’s option into common stock of the company at the lesser of $100 or contain embedded features subject to derivative accounting.the lowest closing bid price in the prior 20 trading days. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company has estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a multinomial latticeMonte Carlo simulation model as of September 30, 2014, and December 31, 2013. 2019 using the following assumptions:

The fair values of the derivative instruments are measured each quarter, which resulted in a gain (loss)loss of ($306,566) and $475,560$7,431 during the three and nine months ended September 30, 2014 and 2013, respectively.2019. As of September 30, 2014,2019, and December 31, 2013,2018, the fair market value of the derivatives aggregated $464,962$818,451 and $158,396, respectively, using the following assumptions: estimated 1.5-0.25-year term, estimated volatility of 419.37-32.87%, and a discount rate of 0.02-0.36%.$0, respectively.

NOTE 9 – FAIR VALUE MEASUREMENTS13—DISCONTINUED OPERATIONS

For assetAt October 21, 2016, we exited the beverage licensing and distribution business. The assets and liabilities measured at fair value, the Company uses the following hierarchyassociated with this business are displayed as assets and liabilities from discontinued operations as of inputs:

Liabilities measured at fair value on a recurring basis at September 30, 2014, are summarized as follows:

Liabilities measured at fair value on a recurring basis at2019 and December 31, 2013, are summarized as follows:

NOTE 10 – STOCKHOLDERS’ DEFICIT

The Company’s stockholders’ deficit increased by $681,3912018, as a result ofresult. Additionally, the net loss attributable to CirTran Corporationrevenues and costs associated with this business are displayed as losses from discontinued operations for the nine months ended September 30, 2014. The Company’s noncontrolling interest2019 and 2018.

Total assets and liabilities included in consolidated subsidiaries increased stockholders’ deficit by $386,035discontinued operations were as follows:

Net loss from discontinued operations for the three months ended September 30, 2019 and 2018 were comprised of the following components:

Net loss from discontinued operations for the nine months ended September 30, 2014, due to the operating losses2019 and 2018 were comprised of the noncontrolled subsidiary.following components:

Loss Per ShareNOTE 14—SUBSEQUENT EVENTS - Basic loss per share is calculated by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted loss per share is similarly calculated, except that the weighted-average number of common shares outstanding would include common shares that may be issued subject to existing rights with dilutive potential when applicable. The Company had 3,210,783,000 and 3,186,357,000 in potentially issuable common shares at September 30, 2014, and December 31, 2013, respectively. These potentially issuable common shares were excluded from the calculation of diluted loss per share because the effects were antidilutive.

NOTE 11 – CAPITAL STOCK

During the nine months ending September 30, 2014, the Company issued 40,900,000 shares of common stock for conversion of liabilitiesWe have evaluated all events occurring subsequent to multiple nonrelated parties for convertible notes and liabilities of $16,360. This resulted in a gain of $24,540.

NOTE 12 – STOCK OPTIONS AND WARRANTS

Stock Incentive Plans - As of September 30, 2014, a total of 201,000,000 shares of common stock had been issued from the 2012 Stock Incentive Plan, out of which a maximum of 403,000,000 can be issued. The Company’s Board of Directors administers the plan and has discretion in determining the employees, directors, independent contractors, and advisors who receive awards, the type of awards (stock, incentive stock options, nonqualified stock options, or share purchase rights) granted, and the term, vesting, and exercise prices.

Employee Options - During the nine months ended September 30, 2014 and 2013, the Company did not grant any options to purchase shares of common stock to employees.

During 2013, the Company accrued for 18,800,000 employee options relating to the employment contract of the Company’s president, directors, and officers. The fair market value of the options accrued aggregated $28,423, using the following assumptions: seven-year term, volatility of 212.05%, and a discount rate of 1.31%.

During 2014, the Company accrued for 18,800,000 employee options relating to the employment contract of the Company’s president, directors, and officers. The fair market value of the options accrued aggregated $5,634, using the following assumptions: seven-year term, volatility of 246.35%, and a discount rate of 2.42%.

As of September 30, 2014, and December 31, 2013, the Company had a total of 125,600,000 and 106,800,000, respectively, in options not issued but accrued.

Warrants -In connection with the YA Global convertible debenture issued in August 2006, the Company issued three-year warrants to purchase 15,000,000 shares of the Company’s common stock. The initial expiration date of the warrants was August 23, 2009. As part of the Forbearance Agreement (see Note 5), 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 and expires December 2015.

NOTE 13 – SEGMENT INFORMATION

Segment information has been prepared in accordance with Financial Accounting Standards Board Accounting Standards Codification 280-10, Disclosure about Segments of an Enterprise and Related Information. The Company has four reportable segments: electronics assembly, contract manufacturing, marketing and media, and beverage distribution. The electronics assembly segment manufactures and assembles circuit boards and electronic component cables. The contract manufacturing segment manufactures, either directly or through foreign subcontractors, various products under manufacturing and distribution agreements. The marketing and media segment provides marketing services to online retailers, along with beverage development and promotional services to PlayBev. The beverage distribution segment manufactures, markets, and distributes Playboy-licensed energy drinks domestically and internationally.

The accounting policies of the segments are consistent with those described in the summary of significant accounting policies. The Company evaluates performance of each segment based on earnings or loss from operations. Selected segment information is as follows:

NOTE 14 – GEOGRAPHIC INFORMATION

The Company currently maintains $7,842 of capitalized tooling costs in China. All other revenue-producing assets are located in the United States of America. Revenues are attributed to the geographic areas based on the location of the customers purchasing the products.

NOTE 15 – RECLASSIFICATIONS

Certain amounts have been reclassified in the 2013 financial statements to conform to the 2014 presentation, short-term advances payable – non-related parties of $45,000 was reclassified to accrued liabilities.

NOTE 16 – SUBSEQUENT EVENTS

These financial statements considered subsequent events through November 19, 2014, the date the financial statements were availableand determined there are no additional items to be issued.disclose.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ThisThe following discussion should be read in conjunction with Management’s Discussionour condensed consolidated financial statements and Analysisnotes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of Financial Condition and Results of Operations includedvarious factors discussed elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2013.this report.

Overview

We manufacture, market,Until October 2016, we manufactured, marketed, and distributedistributed internationally an energy drink under a license now in dispute, with Playboy Enterprises, Inc. (“Playboy”), orthrough our subsidiary, CirTran Beverage Corporation (“CirTran Beverage”). CirTran Beverage manufactured, marketed, and distributed Playboy-branded energy drinks in accordance with its agreement with Play Beverages, LLC (“PlayBev”), which held the Playboy license. Disputes arose with Playboy that resulted in litigation that was finally resolved adverse to us in late 2018. The pending Playboy litigation forced us to significantly restrict our activities and insubstantially impaired our ability to establish new distributors, damaged our relationships with existing distributors, and considerably depressed revenues.

As the U.S.Playboy litigation reached resolution, we accelerated our efforts to seek to commercialize consumer products and provide a mix of high- and medium-volume turnkey manufacturing services and products using various high-tech applications for leading electronics OEMs (original equipment manufacturers) in the communications, networking, peripherals, gaming, law enforcement, consumer products, telecommunications, automotive, medical, and semiconductor industries. Our servicesWe expect our business activities may include pre-manufacturing, manufacturing, and post-manufacturing services. Our goal is to offerprovide potential customers with total manufacturing solutions through third-party providers for both new and more mature products, as well as across product generations.

On February 19, 2019, we filed articles of dissolution for CirTran Media Corp with the significant competitive advantagesstate of Utah. Additionally, articles of dissolution were filed with the state of Utah on February 20, 2019 for CirTran Beverage Corp. A certificate of cancellation was filed for Play Beverages with the state of Delaware on February 21, 2019. Additionally, a certificate of dissolution was filed for Racore Network on March 11, 2019. Lastly, CirTran Corporation (Utah) was dissolved on August 13, 2019. All dissolutions were confirmed by the prospective states where they were filed within few days of filing.

Our renewed and accelerated efforts led to an April 2019 exclusive arrangement to manufacture, market, and distribute worldwide a nonalcoholic energy drink and other beverages, electronic cigarettes and cigars, condoms, and other products for an unaffiliated company that canhas licensing agreement memorandums signed with an unaffiliated licensor. The licensor is a privately held, well-capitalized, U.S. firm with international retail and publishing operations, under the licensor’s well-established lifestyle private label. The names of the trademark owner-licensor and licensee are confidential pending the completion of trademark product category filings in additional worldwide markets and finalizing definitive agreements. See current report on Form 8-K filed April 22, 2019. This exclusive distribution agreement encompasses mass market, specialty, drug, supermarket, military, club stores, direct response, mail order, pharmacies, casinos, clubs, convenience stores, retail, internet, news/kiosks, vending machines, airport, and duty-free distribution channels. Under our arrangement, we will manufacture and distribute products and will receive a royalty based on manufacturing and marketing expenditures.

The licensee will be obtainedobligated to pay the licensor a 6% royalty fee on all sales, with advance royalties due upon signing the definitive agreements and guaranteed royalties due over the next four years. The licensee intends to fund any minimum royalty payments and budged product rollout costs with capital raised from manufacture outsourcing.private investors.

We are engaged innow negotiating definitive agreements incorporating the following business segments.

foregoing terms and identifying possible contract fulfillment sources.

Beverage Distribution(100% and 98%Results of total revenue during nine months endedOperations for the Three Months Ended September 30, 2014 and 2013, respectively):

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 holds2019, Compared to the Playboy license.Three Months Ended September 30, 2018

Contract ManufacturingRevenue(0%

We did not generate revenues during the three months ended September 30, 2019 or 2018.

Operating Expenses

During the three months ended September 30, 2019 and 2%2018, selling, general, and administrative expenses were $83,922 and $105,068, respectively, representing a decrease of total revenue$21,146, or 20%, in the current period. The decrease in selling, general, and administrative expenses is the result of one time professional fees recognized during the three months ended September 30, 2018 that did not recur in the current period.

Other Income and Expense

Other income and expenses during the three months ended September 30, 2019, consisted of $187,546 in interest expense, losses on the fair value measurement of derivative liabilities of $7,431 and other income of $204. Other expenses during the three months ended September 30, 2018, included $120,004 for interest expense and other income of $22,500. The increase in interest expense in the current period is related to the recognition of $56,338 of debt discounts which were not present during the same period in 2018. The decrease in other income in the current period is due to one time forgiveness of accounts payable which was present during the prior year and not occurring during the current period.

Results of Operations for the Nine Months Ended September 30, 2019, Compared to the Nine Months Ended September 30, 2018

Revenue

We did not generate revenues during the nine months ended September 30, 2014 and 2013, respectively):

CirTran Products pursues contract-manufacturing relationships in the U.S. consumer products markets, including licensed merchandise sold in the sports and entertainment markets.

CirTran Asia manufactures and distributes electronics, consumer products, and general merchandise to companies selling in international markets.

Prior to 2012, we also conducted activities in the marketing and media and electronics assembly operating segments, which may be reactivated.

Forward-Looking Statements

The statements contained in this report that are not purely historical are considered to be “forward-looking statements.” These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future. They may be identified by the use of words2019 or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements. The forward-looking statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected in such forward-looking statements. We expressly disclaim any obligation or intention to update any forward-looking statement.

Results of Operations2018.

Comparison of the Three Months and Nine months Ended September 30, 2014 and 2013Operating Expenses

Sales and Cost of Sales

Gross profit decreased to $193,906 for the three months ended September 30, 2014, as compared to $534,126 for the three months ended September 30, 2013. Gross profit decreased to $1,013,104 for the nine months ended September 30, 2014, as compared to $2,031,007 for the nine months ended September 30, 2013. The decrease is primarily attributable to the disruption we experienced in 2013 and into 2014 with the unexpected bankruptcy proceedings initiated against PlayBev, the continuing uncertainty created by Playboy in relation to the interference with our beverage distributors, and our defenses against numerous lawsuits. Net sales in the contract manufacturing segment decreased $501 in the three months ended September 30, 2014, as compared to the same period in 2013. Beverage distribution revenue decreased to $200,871 for the three months ended September 30, 2014, as compared to $657,860 for the quarter ended September 30, 2013. Net sales in the contract manufacturing segment increased $91,247 in the nine months ended September 30, 2014, as compared to the same period in 2013. Beverage distribution revenue decreased to $951,524 for the nine months ended September 30, 2014, as compared to $2,565,491 for the quarter ended September 30, 2013. The decrease was driven by reductions in product sales and royalty revenues, as well as less recognition of deferred revenue. During each of the three months and nine months ended September 30, 2014, and 2013, we recognized no revenue from prepayments under contracts that were in default and/or were terminated due to nonperformance.

Cost of sales, including royalty expense, as a percentage of sales, decreased to 3% from 19% for the three months ended September 30, 2014, as compared to the three months ended September 30, 2013, respectively, and decreased to 19% from 21% for the nine months ended September 30, 2014, as compared to the nine months ended September 30, 2013, respectively. Consequently, the gross profit margin increased to 92% from 77%, for the nine months ended September 30, 2014 and 2013, respectively. The increase in gross profit margin is attributable to an increase in revenues from royalty agreements that have an overall lower cost and the settlement of royalty expense contracts during 2013.

The following charts present comparisons of sales, cost of sales, and gross profits generated by our two operating segments, beverage distribution and contract manufacturing, during the nine months ended September 30, 2014 and 2013:

Nine months Ended September 30:

Three months Ended September 30:

Selling, General, and Administrative Expenses

During the nine months ended September 30, 2014,2019 and 2018, selling, general, and administrative expenses decreased by $1,132,199 to $1,401,202 from $2,533,401 forwere $265,047 and $286,544, respectively, representing a decrease of $21,497 in the same period during 2013.current period. The decrease in selling, general, and administrative expenses was driven primarily by reduced consulting and accountingis the result of one time professional fees of $230,966, legal fees of $414,537, sales commission expense of $153,877, and travel expense of $102,720, and an adjustment to inventory costs of $217,914.

Noncash Compensation Expense

Compensation expense in connection with accounting for options owed or granted to employees to purchase common stock was $0 forrecognized during the three months ended September 30, 2014, as compared to $11,000 for2018 that did not recur in the three months ended September 30, 2013, and $5,633 for the nine months ended September 30, 2014, as compared to $41,872 for the nine months ended September 30, 2013, as a result of the employee stock options accrued for pursuant to the respective employment agreements.current period.

Other Income and Expense

Interest expense for the three months ended September 30, 2014 was $146,617, as compared to $198,962 for the three months ended September 30, 2013, a decrease of 26.3%. Interest expense for the nine months ended September 30, 2014, was $441,076, as compared to $564,572 for the nine months ended September 30, 2013. The decrease in the combined interest expense was driven by the reduction in interest-bearing liabilitiesOther income and expenses during the nine months ended September 30, 2014, and a decrease2019, consisted of $437,909 in the interest rateexpense, losses on the convertible debentures.

We recorded a gainfair value measurement of $169,379 on our derivative valuation for the three months ending September 30, 2014, as compared to a gainliabilities of $104,494 recorded for the three months ended September 30, 2013. We recorded a loss$7,431 and other income of $306,566 on our derivative valuation for$934. Other expenses during the nine months ended September 30, 2014, as compared to a gain of $475,560 recorded2018, included $373,056 for the nine months ended September 30, 2013.interest expense and other income totaling $22,500. The swingincrease in interest expense in the derivative valuationcurrent period is primarilyrelated to the resultrecognition of the change in estimating the fair value of convertible debentures and associated warrants from using the Black-Scholes model to a multinomial lattice model, together with the varying market values of our common stock.

We recorded a gain of $57,587 on our settlement$56,338 of debt fordiscounts which were not present during the nine months ended September 30, 2014.

We recorded no gain or loss on our settlementsame period in 2018. The decrease in other income in the current period is due to one time forgiveness of debt for the three months ended September 30, 2014. This was a result of settling accounts payable which was present during the prior year and accrued liabilities with various vendors.

As a result of these factors, our overall net loss decreased to $102,845 fornot occurring during the three months ended September 30, 2014, as compared to net loss of $192,526 for the three months ended September 30, 2013. The net income attributable to the Company was $9,554 for the three months ended September 30, 2014, and a net loss of $112,399 was attributable to a non-controlling equity interest in PlayBev. Net loss increased to $1,083,786 for the nine months ended September 30, 2014, as compared to net income of $1,070,340 for the nine months ended September 30, 2013. The net loss attributable to the Company was $697,751 for the nine months ended September 30, 2014, and net loss of $386,035 was attributable to a non-controlling equity interest in PlayBev.

current period.

Liquidity and Capital Resources

We have had a history of losses from operations, as our expenses have been greater than our revenues.declining revenues, which have now ceased entirely. Our accumulated deficit was $48,371,759$78.5 million at September 30, 2014, and $47,674,0082019, compared to $77.7 million at December 31, 2013. Our2018. As of September 30, 2019, and December 31, 2018, we had current assets of $2,891 and $336, respectively, and current liabilities exceeded our current assets by $23,988,375of $38.1 million and $36.7 million, respectively, creating working capital deficits as of September 30, 2014,2019, and by $22,934,058 as of December 31, 2013.2018, of approximately $38.1 million and $36.7 million, respectively.

CashOperating Activities

The amountWe have only nominal cash or short-term assets while our current liabilities aggregate $38.1 million as of September 30, 2019. During the nine months ended September 30, 2019, we used $115,140 of net cash in operations, comprised of a net loss from continuing operations of $709,453, noncash items totaling $70,816 mostly comprised of interest recorded from the amortization of debt discounts, and changes in working capital totaling $527,789. During the nine months ended September 30, 2018, we generated net cash of $4,800 from operations, comprised of a net loss of $637,100, noncash items totaling $397,042 mostly comprised of expenses paid by related parties on our behalf, and changes in working capital totaling $249,733.

Financing Activities

During the nine months ended September 30, 2019, financing activities generated $116,607 of cash, provided by operating activitiescompared to $7,940 of cash during the nine months ended September 30, 2014, decreased2018. Cash provided by $187,249, driven primarily by deferred expenses and expenses paid by third-parties on our behalf. The amount of cash used in financing activities during the nine months ended September 30, 2014, increased2019, consisted of advances from related-party loans totaling $74,477, proceeds from convertible loans payable of $50,000, repayments on related party payables of $18,270, repayments on loans payment of $5,000 and proceeds from notes payable of $15,400. Cash provided by $161,810, driven primarily from conversion of debt to equity and checks written in excess of our bank balance.

Accounts Receivable

Trade accounts receivable, net of allowance for doubtful accounts, increased $30,984financing activities during the nine months ended September 30, 2014. We continue to monitor individual customer accounts and are working to improve collections on trade accounts receivable. We eliminate the receivables associated with PlayBev as part2019, consisted of consolidation in accordance with GAAP treatment as a variable interest entity.net advances from related-party loans of $7,940.

Accounts PayableOur Capital Resources and Accrued Liabilities

During the nine months ended September 30, 2014, accounts payable, accrued liabilities, advances payable, interest payable, and short-term debt increased by $798,542 to a combined balance of $15,503,138 as of September 30, 2014. The increase includes a decrease of $355,492 in accrued liabilities, a $389,850 increase in interest payable, an increase of $509,919 in accrued payroll and compensation, and a $128,952 decrease in accounts payable. The decrease in accounts payable activity is a result of payments made by outside investors for continued PlayBev-related services performed during the nine months ended September 30, 2014, for beverage development, distribution, marketing, and legal services. At September 30, 2014, we owed $2,165,321 to various investors from whom we had borrowed funds in the form of either unsecured or short-term advances.

CapitalAnticipated Requirements

In conjunction withOur regular monthly operating costs and interest expense average approximately $90,000 per month, excluding capital expenditures and expanded costs to support our new contract manufacturing and distribution activities as discussed above.

Our existing personnel will be primarily involved in negotiating definitive agreements for our new contract manufacturing and distribution activities and finalizing a short list of potential manufacturers for each of the product categories—beverages, tobacco products, and condoms. We do not expect to incur significant additional costs for these efforts, although we may incur some increased costs for travel and professional support during this phase.

As we develop and prepare to launch our new efforts, we expect that initially we will ship products to the brand licensor for stocking its own several dozen brick and mortar stores and online distribution network. We will seek order advance payments to fund any manufacturing deposits that may be required. Based on our previous experience, we expect these types of arrangements will likely be successful based on the name recognition, reputation, and financial stability of the brand licensor. As production and distribution activities commence, we expect to require additional operating and administrative personnel, although at this juncture we cannot reliably predict the scope of this expansion or the related cost. We may need to seek external company funding, for which we have no arrangements or commitments. Any limitations on available funding will curtail our efforts to improvelaunch this line of business.

As our resultsmanufacturing and distribution volume grows, as we expect, later in 2019 and into early 2020, we anticipate adding qualified employees to assume specific manufacturing management, sales support, and administrative and clerical services as required, all of operations, we are also actively seeking infusions of capital from investors and are seeking sources to repay our existing convertible debentures. In our current financial condition and with ongoing activities substantially dependentwhich depend on the outcomelevel of future growth, which we cannot predict. During this period, we may also seek to establish foreign distribution in selected markets, which will depend on the Playboy litigation, itnature and location of distribution outlets, anticipated market size, product shipping costs and logistics, sales opportunities, and management details. Initial market focuses are likely to be in Europe. Depending on the specific characteristics of particular markets, we may initiate efforts to develop international manufacturing relationships for some products, such as beverages, for which shipping is unlikelya significant component of price of delivered goods. Again, additional funding from external sources will likely be required.

In addition to seeking funding for our expansion requirements through collaborative order advances and similar arrangements with our customers, we expect that we will be able to obtain additional debt financing. Even if we did acquire additional debt, we would be required to devote additional cash flow to servicing the debt and securing the debt with assets. Accordingly, we are looking to obtainseek equity financing to meet our anticipated capital needs. We cannot assure that we will be successful in obtaining such capital. If we were to issue additional shares for debt and/or equity, this willwould dilute the value of our common stock and existing shareholders’stockholders’ positions.

Convertible Debentures

We currently have an amended, restated, and consolidated secured convertible debenture with Tekfine, LLC, an unrelated entity, with a maturity date of April 30, 2027, to the extent not previously converted. The amended debenture had a total outstanding principal balance of $2.4 million, with accrued interest of $1.3 million as of September 30, 2019. We also have a $200,000 convertible debenture with a maturity date of October 20, 2018 and two separate $25,000 convertible debentures with a maturity dates of June 3, 2020 and August 9, 2020, unless earlier converted. Each additional convertible debenture is with Tekfine. The convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or the lowest bid price for the 20 trading days prior to conversion. As of the date of this report, we are unable to convert this debenture in full because we have insufficient authorized but unissued shares to issue upon conversion. As of September 30, 2019, there were 95,500,081 common shares available to issue while the outstanding principal and interest on the convertible debentures would yield a total of 133,107,973 common shares if converted in full.

We cannot assureGoing Concern

These interim unaudited financial statements have been prepared on the going concern basis, which assumes that weadequate sources of financing will be successful in obtaining more debt and/or equity financingobtained as required and that our assets will be realized and liabilities settled in the future orordinary course of business. Accordingly, the interim unaudited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that our results of operations will materially improve in either the short- or the long-term. Ifmight be necessary should we fail to obtain such financing and improve our results of operations, we willnot be unable to meet our obligations as they become due. These conditions raise substantial doubt about our ability to continue as a going concern.

Convertible DebenturesOff-Balance Sheet Arrangements

We had an outstanding Convertible Debenture with an aggregate outstanding balance of $2,390,528 as of September 30, 2014, including accrued interest of $748,291. We have entered into forbearance agreements following our previous defaults in payments in order to obtain extended payment terms. Under our most recent agreement reached with the lender in the second quarter of 2013, we were 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 payments is 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. Any amount credited against the debenture obligation in excess of $100,000 per month is credited against the amounts due in the next succeeding month.

During the nine months ended September 30, 2014, we did not issue any common stock against the required monthly payments because we had insufficient authorized but unissued common stock. Based on the prevailing market price for our common stock, which has ranged from a high bid of $0.0006 to a low bid of $0.0002 during the past six months, the terms of the Consolidated Debenture would require a conversion price of $0.001 per share, which is lower than the per-share par value, so we would be obligated to issue shares at $0.001 par value. As of September 30, 2014, we had only 81,016 authorized but unissued shares. The Consolidated Debenture provides that the holder cannot convert indebtedness to common stock if, as a result of such conversion, the holder would own more than 9.99% of the Company’s outstanding common stock. We are seeking shareholder authorization of a recapitalization of the Company to provide additional shares to issue on conversion of the Convertible Debenture but cannot assure whether the stockholders will approve such amendment.

In the absence of an amendment to our articles to provide sufficient shares to issue on conversion of the Convertible Debenture, we would be required to pay the debenture in cash. The amount of cash required to meet our payment obligations under the Convertible Debenture will depend on the lender’s decision to convert amounts to common stock, which will in turn depend on the trading market prices and volumes for our common stock, over which we have no control.off-balance sheet arrangements.

Critical Accounting EstimatesPolicies

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles in the United States, with no need for management’s judgment in their application. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the notes to our December 31, 2018 financial statements. Note that our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. We cannot assure that actual results will not differ from those estimates.

Revenue Recognition

We follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606,Revenue from Contracts with Customers, for revenue recognition. Adoption of ASC 606 did not have a significant impact on our financial statements. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services. Revenue is recognized when productsnet of allowances for returns and any taxes collected from customers, which are shipped. Title passessubsequently remitted to governmental authorities.

Stock-Based Compensation

We have outstanding stock options to directors and employees. We account for our stock options in accordance with ASC 718-10,Accounting for Stock Issued to Employees, and ASU 201-07,Improvements to Nonemployee Share-Based Payment Accounting,which requires the customer or independent sales representative atrecognition of the time of shipment. Returns for defective items are repaired and sent back to the customer. Historically, expenses associated with returns have not been significant and have been recognized as incurred.

Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold.

We sold our Salt Lake City, Utah, buildingemployee services received in a sale/leaseback transactionexchanged for an award of equity instruments in the financial statements and reported the gainis measured based on the sale as deferred revenuegrant date fair value of the award. ASC 718-10 also requires the stock option compensation expense to be recognized over the term of lease pursuantperiod during which an employee is required to Financial Accounting Standards Board Accounting Standards Codification 840-10, Accountingprovide service in exchange for Leases. The lease agreement was terminated during 2011 and the remainder ofaward, typically the deferred revenue was recognized upon this termination event.

We have entered into a Manufacturing, Marketing and Distribution Agreement with PlayBev, a consolidated variable interest entity, whereby we are the vendor of record in providing initial development, promotional, marketing, and distribution services. Accordingly, all amounts billed to PlayBev in connection with the development and marketing of its new energy drink have been eliminated in consolidation.vesting period.

Income Taxes

We use 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 used.

Fair Value of Financial Instruments

The carrying amounts reported in the accompanying condensed consolidated financial statements for cash, notes payable, and accounts payable approximate fair values because of the immediate or short-term maturities of these financial instruments. The carrying amounts of our debt obligations approximate fair value.

ASC 820-10-15,Fair Value Measurement, defines fair value, thereby eliminating inconsistencies in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations. FASB ASC 820-10-15 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:

Accounts payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these instruments. Derivative Featuresliabilities are measured using level 3 inputs. The following assumptions were made in valuing derivative liabilities as of September 30, 2019:

Recently Issued Accounting Pronouncements

WeRecently issued accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that require adoption and that do not hold or issue derivative instruments for trading purposes. However, werequire adoption until a future date are not expected to have a material impact on our financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives using the Black-Scholes model. The fair values of the derivative instruments are measured each quarter.statements upon adoption.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.As a smaller reporting company, we are not required to provide the information required by this item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

WeAs of September 30, 2019, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer / Chief Financial Officer,chief executive and financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2014.procedures. Based on ourupon that evaluation, our Chief Executive Officer / Chief Financial Officer hasmanagement concluded that our disclosure controls and procedures were not effective at September 30, 2014, due to the fact that the material weaknesses in our internal control over financial reporting described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, had not been remediated as of September 30, 2014.2019, to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods prescribed by U.S. Securities and Exchange Commission and that such information is accumulated and communicated to management, including our chief executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.

These weaknesses

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are continuing. Managementresource constraints and the Boardbenefits of Directors are awarecontrols must be considered relative to their costs. Because of these weaknessesthe inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that resultall control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of limited resourcessimple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and staff. Efforts tothere can be no assurance that any design and implement controls and processes have been put on hold due to limited resources, but we anticipate a renewed focus on this effortwill succeed in the near future. Due to our limited financial and managerial resources, we cannot assure when we will be able to implement effective internal controls over financial reporting.achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

There washas been no change in our internal control over financial reporting that occurred induring the third quarter of 2014nine months ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – II—OTHER INFORMATION

ITEM 6. EXHIBITS

The following exhibits are filed as a part of this report: