UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012March 31, 2013

 

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to ___________

 

 

Commission File Number 000-49654

 

CirTran Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

68-0121636

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

4125 South 6000 West, West Valley City, Utah 84128

(Address of principal executive offices, including zip code)

 

(801) 963-5112

(Registrant’s telephone number, including area code)

 

n/a

(Former name, former address and former fiscal year, if changed since last report)

   

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

ox

No

x¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 

Yes

x

No

o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer 

Accelerated filer ¨ 

Non-accelerated filer 

Smaller reporting company 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 

Yes

o

No

x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 19, 2012,May 20, 2013, issuer had 1,921,502,2893,240,165,910 outstanding shares of common stock, par value $0.001.  

 

 


 

 

CIRTRAN CORPORATION

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2012March 31, 2013

 

INDEX

 

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

Item1

Financial Statements (unaudited)(unaudited)

 

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Notes to Condensed Consolidated Financial Statements

7

6

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

18

 

 

 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

25

24

 

 

 

Item 4

Controls and Procedures

26

24

 

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1

Legal Proceedings

26

Item 6

Exhibits

27

25

 

 

Signatures

27

26



 

 

 

2



 

PART I – FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

CIRTRAN CORPORATION AND SUBSIDIARIES

CIRTRAN CORPORATION AND SUBSIDIARIES

CIRTRAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED BALANCE SHEETS

        

June 30,

 

December 31,

March 31,

 

December 31,

2012

 

2011

2013

 

2012

(Unaudited)

  

(Unaudited)

   

ASSETS

        

Current assets

        

Cash and cash equivalents

$                          -

 

$             173,780

$

10,721

 

$

7,883

Trade accounts receivable, net of allowance for doubtful

        

accounts of $935,111 and $1,023,156, respectively

155,817

 

27,585

Inventory, net of reserve of $2,270,430 and $2,271,008 , respectively

291,715

 

465,074

accounts of $832,093 and $832,093, respectively

 

83,285

  

162,468

Inventory, net of reserve of $2,256,223 and $2,256,399 , respectively

 

9,860

  

98,343

Other

6,529

 

26,136

 

81,115

 

 

7,866

Total current assets

454,061

 

692,575

 

184,981

  

276,560

        

Investment in securities, at cost

300,000

 

300,000

 

300,000

  

300,000

Long-term receivable, net of allowance of $1,582,895

-

 

-

 

-

  

-

Property and equipment, net

122,635

 

172,480

 

70,896

  

86,034

Other assets, net

21,269

 

2,010

 

109,774

 

 

224,488

        

Total assets

$               897,965

 

$       1,167,065

$

665,651

 

$

887,082

        

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

      
        

Current liabilities

        

Checks written in excess of bank balance

$ 50,042

 

$ 208,193

$

8,925

 

$

17,118

Accounts payable

4,540,417

 

4,079,330

 

4,629,852

  

4,681,114

Related party payable

771,174

 

705,056

Short term advances payable

3,860,163

 

3,800,263

Related-party payable

 

1,017,368

  

955,656

Short-term advances payable

 

3,146,912

  

3,088,945

Accrued liabilities

 

2,454,257

  

2,445,167

Accrued payroll and compensation expense

2,297,319

 

1,913,075

 

2,698,604

  

2,599,533

Accrued liabilities

2,445,637

 

2,589,709

Accrued interest

2,478,296

 

2,054,148

 

2,313,669

  

2,417,834

Deferred revenue

4,460,501

 

3,485,463

 

2,593,750

  

2,984,119

Derivative liability

461,248

 

294,717

 

458,475

  

829,090

Convertible debenture

3,161,355

 

3,161,355

 

3,007,228

  

3,132,855

Refundable customer deposits

506,754

 

1,317,387

 

200,000

  

200,201

Liabilities subject to compromise

1,122,154

 

1,122,154

Current maturities of long-term debt

936,585

 

906,585

 

281,585

  

236,585

Current liabilities to minority interest holders

619,786

 

443,696

Current liabilities to non-controlling interest holders

 

2,683,134

  

2,570,000

Note payable to stockholders and members

151,833

 

151,833

 

401,833

 

 

576,833

Total current liabilities

27,863,264

 

26,232,964

 

25,895,592

 

 

26,735,050

        

Total liabilities

27,863,264

 

26,232,964

 

25,895,592

  

26,735,050

        

Stockholders' deficit

        

CirTran Corporation stockholders' deficit:

        

Common stock, par value $0.001; authorized 4,500,000,000 shares;

        

issued and outstanding shares: 1,921,502,289 and 1,819,302,289

1,921,502

 

1,819,297

issued and outstanding shares: 3,156,415,910 and 2,541,502,289

 

3,156,416

  

2,541,502

Additional paid-in capital

29,864,129

 

29,872,151

 

29,887,417

  

29,451,824

Subscription receivable

(17,000)

 

(17,000)

 

(17,000)

  

(17,000)

Accumulated deficit

(49,990,814)

 

(48,267,171)

 

(48,620,372)

  

(48,514,796)

Total CirTran Corporation stockholders' deficit

(18,222,183)

 

(16,592,723)

Total CirTran Corporation and subsidiaries stockholders' deficit

 

(15,593,539)

  

(16,538,470)

Non-controlling interest

(8,743,116)

 

(8,473,176)

 

(9,636,402)

 

 

(9,309,498)

Total stockholders' deficit

(26,965,299)

 

(25,065,899)

 

(25,229,941)

 

 

(25,847,968)

        

Total liabilities and stockholders' deficit

$          897,965

 

$          1,167,065

$

665,651

 

$

887,082

        

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

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

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


3

CIRTRAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

      
 

Three months ended

 

March 31,

      
 

2013

 

2012

      
      

Net sales

$

868,152

 

$

618,700

Cost of sales

 

(234,515)

  

(238,150)

Royalty Expense

 

(37,494)

 

 

(521,004)

  

 

   

Gross profit

 

596,143

  

(140,454)

  

 

   

Operating expenses

 

 

   

Selling, general and administrative expenses

 

833,452

  

738,479

Non-cash compensation expense

 

29,872

 

 

19,897

Total operating expenses

 

863,324

 

 

758,376

  

 

   

Loss from operations

 

(267,181)

  

(898,830)

  

 

   

Other income (expense)

 

 

   

Interest expense

 

(209,495)

  

(255,661)

Gain on settlement of debt

 

38,352

  

-

Gain on derivative valuation

 

5,844

 

 

(133,605)

Total other expense, net

 

(165,299)

 

 

(389,266)

  

 

   

Net loss

 

(432,480)

  

(1,288,096)

  

 

   

Net loss attributable to non-controlling interest

 

326,904

 

 

153,970

  

 

   

Net loss attributable to CirTran Corporation and subsidiaries

$

(105,576)

 

$

(1,134,126)

  

 

   

Basic and diluted loss per common share

$

(0.00)

 

$

(0.00)

Basic and diluted weighted-average

 

 

   

common shares outstanding

 

2,864,128,141

 

 

1,827,524,511

      

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

 

4



 

CIRTRAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

        
 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

        

 

2012

 

2011

 

2012

 

2011

        
        

Net sales

$           315,755

 

$               685,625

 

$               934,455

 

  $            2,080,825

Cost of sales

(8,814)

 

(133,130)

 

(246,964)

 

(328,417)

Royalty Expense

(5,011)

 

(534,296)

 

(526,015)

 

(1,078,361)

 

 

 

 

 

 

 

 

Gross profit

301,930

 

18,199

 

161,476

 

674,047

 

 

      

Operating expenses

 

      

Selling, general and administrative expenses

672,868

 

1,175,606

 

1,411,347

 

2,247,754

Non-cash compensation expense

19,183

 

5,703

 

39,080

 

104,462

Total operating expenses

692,051

 

1,181,309

 

1,450,427

 

2,352,216

 

 

      

Loss from operations

(390,121)

 

(1,163,110)

 

(1,288,951)

 

(1,678,169)

 

 

      

Other income (expense)

 

      

Interest expense

(282,441)

 

(232,722)

 

(538,102)

 

(504,512)

Gain on sale/leaseback

-

 

20,269

 

-

 

40,537

Other income

-

 

28,500

 

-

 

57,000

Gain on settlement of litigation / debt

-

 

45,187

 

-

 

45,187

Gain (loss) on derivative valuation

(32,925)

 

6,005,885

 

(166,530)

 

(1,865,826)

Total other income (expense), net

(315,366)

 

5,867,119

 

(704,632)

 

(2,227,614)

 

 

      

Net income (loss)

(705,487)

 

4,704,009

 

(1,993,583)

 

(3,905,783)

 

 

      

Net loss attributable to non-controlling interest

115,970

 

559,097

 

269,940

 

1,134,933

 

 

      

Net income (loss) attributable to CirTran

$        (589,517)

 

$      5,263,106

 

$      (1,723,643)

 

$       (2,770,850)

 

 

      

Basic and diluted loss per common share

$ (0.00)

 

$ 0.00

 

$ (0.00)

 

$ (0.00)

Basic and diluted weighted-average

 

 

 

 

 

 

 

common shares outstanding

1,881,061,840

 

1,498,972,923

 

1,863,764,859

 

1,498,972,923

        

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

CIRTRAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

      

For the Three Months Ended March 31,

 

2013

 

 

2012

      

Cash flows from operating activities

     

Net loss

$

(432,480)

 

$

(1,288,096)

Adjustments to reconcile net loss to net

     

cash used in operating activities:

     

Depreciation and amortization

 

15,138

  

27,509

Inventory reserves

 

(176)

  

-

Non-cash compensation expense

 

-

  

19,897

Gain on derivative valuation

 

5,844

  

133,605

Gain on settlement of debt

 

38,352

  

-

Loan fees

 

-

  

5,000

Changes in assets and liabilities:

     

Trade accounts receivable

 

79,183

  

(30,314)

Inventory

 

88,659

  

186,593

Other current assets

 

(73,249)

  

(32,494)

Other assets

 

114,714

  

(39,028)

Accounts payable

 

(51,262)

  

530,976

Related-party payable

 

61,712

  

66,118

Accrued liabilities

 

56,059

  

516,341

Accrued payroll and compensation expense

 

149,071

  

-

Refundable customer deposits

 

(201)

  

-

Accrued interest

 

184,986

  

-

Deferred revenue

 

(390,369)

 

 

(68,765)

Net cash provided by (used in) operating activities

 

(154,019)

  

27,342

      

Cash flows from financing activities

     

Proceeds from notes payable

 

-

  

25,000

Checks written in excess of bank balance

 

(8,194)

  

(118,130)

Proceeds from non-controlling interest

 

113,134

  

15,000

Proceeds from short-term advances

 

117,365

  

1,000

Payments on convertible debenture accrued interest

 

(26,854)

  

-

Payments on short-term advances

 

(38,599)

 

 

(99,000)

Net cash provided by (used in) financing activities

 

156,852

 

 

(176,130)

      

Net increase (decrease) in cash and cash equivalents

 

2,833

  

(148,788)

Cash and cash equivalents at beginning of period

 

7,883

 

 

173,780

      

Cash and cash equivalents at end of period

$

10,716

 

$

24,992

      

Supplemental disclosure of cash flow information:

     

Cash paid during the period for interest

$

26,851

 

$

-

      

Noncash investing and financing activities:

     

Debt and accrued liabilities converted to equity

$

1,050,508

 

$

-

      

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


5


 

CIRTRAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

    

For the Six Months Ended June 30,

2012

 

2011

    

Cash flows from operating activities

   

Net loss

$           (1,993,583)

 

$          (3,905,783)

Adjustments to reconcile net loss to net

   

cash used in operating activities:

   

Depreciation and amortization

49,845

 

108,765

Accretion expense

-

 

35,865

Gain on sale - leaseback

-

 

(40,537)

Non-cash compensation expense

-

 

46,053

Issuance of warrants for settlement

39,183

 

58,410

Change in valuation of derivative

166,531

 

1,865,826

Current liabilities to non-controlling interest holders

181,090

 

-

Changes in assets and liabilities:

   

Trade accounts receivable

(128,233)

 

(364,470)

Inventories

173,359

 

(250,037)

Prepaid expenses and other current assets

19,607

 

527,994

Other assets

(19,259)

 

-

Accounts payable

516,087

 

(239,482)

Related party payable

66,118

 

126,000

Accrued liabilities

(46,314)

 

808,322

Deferred revenue

975,038

 

698,029

 

 

 

 

Net cash used in operating activities

(531)

 

(525,045)

 

 

 

 

Cash flows from financing activities

   

Proceeds from notes payable

25,000

 

-

Checks written in excess of bank balance

(158,149)

 

53,359

Proceeds from short-term advances

206,700

 

916,190

Payment on accrued interest

(100,000)

 

-

Payments on short-term advances

(146,800)

 

(447,364)

  

 

 

Net cash provided by (used in) financing activities

(173,249)

 

522,185

  

 

 

Net increase (decrease) in cash and cash equivalents

(173,780)

 

(2,860)

    

Cash and cash equivalents at beginning of period

173,780

 

4,767

  

 

 

Cash and cash equivalents at end of period

$                    -

 

$            1,907

    

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 Six Months Ended June 30,

2012

 

2011

    

Supplemental disclosure of cash flow information:

   

Cash paid during the period for interest

$          100,000

 

$            499,934

    

Noncash investing and financing activities:

   

Accounts payable settled on behalf of the company

$                     -

 

$           119,960

Common stock issued in exchange for forgiveness of

   

related party payable

$          55,000

 

$                       -

    

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


 

CIRTRAN CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements include the accounts of CirTran Corporation and its subsidiaries (the “Company”).  These financial statements have been prepared in accordance with Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.  These statements should be read in conjunction with the Company’s annual financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.2012.  In particular, the Company’s significant accounting policies were presented as Note 2 to the consolidated financial statements in that Annual Report.  In the opinion of management, all adjustments necessary for a fair presentation have been included in the accompanying condensed consolidated financial statements and consist of only normal recurring adjustments.  The results of operations presented in the accompanying condensed consolidated financial statements for the sixthree months ended June 30, 2012,March 31, 2013, are not necessarily indicative of the results that may be expected for the 12 months ending December 31, 2012.2013.

 

NOTE 2 - REALIZATION OF ASSETS

 

The accompanying condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates continuation ofon the assumption that the Company will continue as a going concern.  The Company had a net loss of $1,993,583$432,480 and $3,905,783of $1,288,096 for the sixthree months ended June 30,March 31, 2013 and 2012, and 2011, respectively.  As of June 30, 2012,March 31, 2013, the Company had an accumulated deficit of $49,990,814.$48,620,372.  In addition, the Company used cash in operations in the amountsamount of $531 and $525,045$154,019 during the sixthree months ended June 30, 2012March 31, 2013 and 2011, respectively.provided cash from operations in the amount of $27,342 during the three months ended March 31, 2012.  The Company also had a negative working capital balance of $27,409,203$25,710,611 as of June 30, 2012,March 31, 2013, and $25,662,248$26,458,490 as of December 31, 2011.2012.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has limited assets, has incurred continual losses, has negative cash flows from operations, and has limited revenue-generating activities.  Its activities have been limited for the past several years and it is dependent upon financing to continue operations.  These factors raise substantial doubt about the ability of the Company to continue as a going concern.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.   

 

The Company’s ability to continue energy drink distribution, its principal source of revenue, is subject to interruption or termination because of the ongoing Chapter 11 reorganization proceedings of Play Beverages, LLC (“PlayBev”), a consolidated variable interest entity and a debtor-in-possession in such proceedings.  PlayBev entered into a 2006 license agreement with Playboy Enterprises International, Inc., (“Playboy”) to market a Playboy-branded nonalcoholic energy drink.  Among other things, Playboy has stated its position that PlayBev’s 2006 license agreement has expired.  PlayBev disputes Playboy’s position and has filed the litigation described below to protect its rights and business interests and disputes respecting the status of the Play Beverages, LLC, or PlayBev license to market Playboy-licensed energy drinks. Playboy sought in PlayBev’s Chapter 11 reorganization proceedings to terminate PlayBev’s license to market Playboy-licensed energy drinks, but in March 2012 extended the licensing agreement through July 31,2012, to allow PlayBev and Playboy to negotiate a potential new licensing agreement.  The Company cannot assure thatis continuing its suit against Playboy Enterprises, Inc., or Playboy in Illinois in an effort to enjoin Playboy’s current willingnesstermination of the license so the Company will be able to discuss a possible settlement rather than aggressively pursue a judicial determination will continue.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 ofsourceof the Company’s principal revenues. Such termination may require the Company to cease its activities and seek protection from creditors.

 


6


 

 

In view of the matters described in the preceding paragraphs, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain or replace present financing, to acquire additional capital from investors, and to succeed in its future operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

The Company feelsbelieves that its beverage business segment has the potential to have a substantial impact on its overall business.  The Company plans to focus on the beverage business and the contract manufacturing business.  For the beverage business, the Company plans to sell existing products and develop new products under the license agreement with Playboy to a globally expanding market.  With regard to contract manufacturing, the Company’s goal is to provide customers with manufacturing solutions for both new and more mature products, as well as across product generations.

 

The Company provides product marketing services to the direct response and retail markets for both proprietary and nonproprietary products.  This segment provides campaign management and marketing services for the beverage distribution, direct response, and retail 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.Internet.  The Company intends to serve the electronics assembly and manufacturing industries, although it anticipates that its focus will shift more to providing services on a subcontract basis.

 

NOTE 3 - INVENTORIES

 

Inventories are stated at the lower of average cost or market and consisted of the following:

 

Inventory Summary

  

June 30,

December 31,

 

March 31,

  

December 31,

2012

2011

 

2013

 

 

2012

Raw Materials

$        1,798,498

$         2,076,066

$

1,675,341

 

$

1,691,500

Work in Process

314,252

157,534

 

148,573

  

221,225

Finished Goods

449,395

502,482

 

442,169

  

442,017

Allowance / Reserve

(2,270,430)

(2,271,008)

 

(2,256,223)

 

 

(2,256,399)

Totals

$          291,715

$          465,074

$

9,860

 

$

98,343

 

NOTE 4 – RELATED-PARTY TRANSACTIONS

 

Transactions Involving Officers, Directors, and Stockholders- In 2007, the Company appointed Fadi Nora to its Board of Directors.  In addition to compensation the Company normally pays to nonemployeemembersnonemployee 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 June 30, 2012,March 31, 2013, the Company owed $0$64,916 under this arrangement.  During the six months ended June 30, 2012, Mr. Nora advanced the company cash totaling $50,000.  During the six months ended June 30, 2012, Mr. Nora received cash payments totaling $124,000 in payment of unsecured advances.  As of June 30, 2012,March 31, 2013, the Company still owed Mr. Nora $1,225,829$1,040,829 in the form of unsecured advances.  These advances and short-term bridge loans were approved by the Board of Directors under a 5% borrowing fee.  The borrowing fees were waived by Mr. Nora on these loans.  In addition,Inaddition, the Company owed Mr. Nora $1,036,734$366,635 in accrued liabilities as of June 30, 2012,March 31, 2013, for selling, general, and administrative expenses that were paid to third partiesfor by Mr. Nora on behalf of the Company.a personal credit card.


7


 

 

The Company has agreed to issue 2,400,000 options to Mr. Nora as compensation for services provided as a Director of the Company.  The terms of the Directordirector agreement requiresrequire the Company to grant to Mr. Nora options to purchase 2,400,000 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.  During the sixthree months ended June 30, 2012,March 31, 2013, the Company accrued for 2,400,000 stock options relating to the Directordirector agreement with Mr. Nora.  The fair market value of the options was $2,341,$4,069, using the following assumptions: 2.5-year7.0-year term, estimated volatility of 200.04%224.82%, and a discount rate of 0.34%0.0% (see also Note 10).

 

In 2007, the Company issued a 10% promissory note to a family member of the Company presidentPresident in exchange for $300,000.  The note was due on demand after May 2008.  During the sixthree months ended June 30, 2012,March 31, 2013, the Company made no payments towards the outstanding note.  At June 30, 2012,March 31, 2013, the principal amount owing on the note was $151,833.  On March 31, 2008, the Company issued to this same family member, along with four other Company shareholders, promissory notes totaling $315,000.  The family member’s note was for $105,000.  Under the terms of all the notes, the Company received total proceeds of $300,000 and agreed to repay the amount received plus a 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 the sixthree months ended June 30, 2012,March 31, 2013, the Company made no payments towards the outstanding notes.  The principal balance owing on the promissory notes as of June 30, 2012,March 31, 2013, totaled $72,465.

 

On April 2, 2009, the Company presidentPresident and a Director of the Company borrowed from a third party a total of $890,000 in the form of four short-term promissory notes.  The Company presidentPresident and the Director of the Company signed personally for the notes.  Because the loans were used to pay obligations of the Company, the Company has assumed full responsibility for the notes.  Two of the notes were for a term of 60 days, with a 60-day grace period; a third note was for a term of 90 days,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.  At June 30, 2012, the Company showed the balance of $681,912 as partMarch 31, 2013, these notes comprise a portion of short-term advances payable on the balance sheet.of $3,146,911.  As of June 30, 2012,March 31, 2013, all four notes were in default and are accruing interest at the default rate of 36% per year.

 

The Company has agreed to issue 6,000,000 options each year tothe Company presidentPresidentas compensation for services provided as an officer of the Company.  The terms of the employment agreement require the Company to grant to the Company presidentPresident options to purchase 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.  During the sixthree months ended June 30, 2012,March 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 $5,852,$10,171, using the following assumptions: estimated 2.5-year7.0-year term, estimated volatility of 200.04%224.82%, and a discount rate of 0.34%0.0% (see also Note 10).

 


As of June 30, 2012,March 31, 2013, the Company owed the Company presidentPresident a total of $163,002$179,773 in short-term advances payable and $154,537 in accrued options.30,000,000 stock options with an aggregated fair value at time of grant of $154,537.  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 the Company’s presidentPresident on these loans.

 

Sublease - In an effort to operate more efficiently and focus resources on higher margin areas of the Company’s business, on March 5, 2010, the Company and Katana Electronics, LLC, a Utah limited liability company (“Katana”), entered into certain agreements (collectively, the “Agreements”) to reduce the Company’s costs.  The Agreements include an Assignment and Assumption Agreement, an EquipmentanEquipment Lease, and a Sublease Agreement relating to the Company’s property.  Pursuant to the terms of the Sublease, the Company agreed to sublease a certain portion of the Company’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.  The income from the sublease to Katana for the six months ended June 30, 2011, was $57,000 and was recognized as other income.  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 six months ended June 30, 2012.  The Company recorded a rent expense of $30,000$15,000 and $15,000 for the sixthree months ended June 30, 2012.March 31, 2013 and 2012, respectively.


8

 

NOTE 5 - COMMITMENTS AND CONTINGENCIES

 

Litigation and Claims - Various vendors and service providers have notified the Company that they believe they have claims against the Company totaling approximately $2,250,000.  The Company has determined the probability of realizing any loss on these claims is remote.  The Company has made no accrual for these claims and is currently in the process of negotiating the dismissal of these claims.

 

PlayBev Petition for Relief under Chapter 11 - The Company’s ability to continue energy drink distribution, its principal source of revenue, through PlayBev, a consolidated variable interest entity, under a 2006 license agreement with Playboy, is subject to possible interruption because of disputes between PlayBev and Playboy.  Among other things, Playboy has stated its position that PlayBev’s 2006 license agreement has expired.  PlayBev disputes Playboy’s position and has filed the litigation described below to protect its rights and business interests. 

As described in previous filings, in August 2012, PlayBev entered into two interdependent and contingent agreements with Playboy.  Subject to confirmation of PlayBev’s Chapter 11 plan of reorganization, certain payments to Playboy, and other conditions precedent, the proposed transaction would have resulted in both: (a) a settlement of all claims by and between PlayBev and Playboy; and (b) a new license agreement in favor of the anticipated reorganized debtor under PlayBev’s proposed plan.  PlayBev did not deposit into escrow by the agreed deadline the initial payment required to be paid to Playboy upon the effective date of PlayBev’s proposed plan.  Further, PlayBev did not obtain confirmation of its proposed plan, and the agreements between PlayBev and Playboy were not approved by the bankruptcy court.  As such, Playboy has declared the new, contingent license agreement to be void and without effect.  Similarly, the conditions precedent to the effectiveness of PlayBev’s settlement with Playboy did not occur.  Accordingly, the proposed, contingent license and settlement agreements are ineffective and without any legal force or effect. 

As part of its efforts to develop a new plan of reorganization, PlayBev has proposed to Playboy modified terms for a proposed new license to market Playboy-branded energy drinks, but no substantivediscussions are underway.  Meanwhile, motions to dismiss or convert PlayBev’s reorganization case to a liquidation are scheduled to be heard in late November 2012.


10

In October 2012, the Company and PlayBev jointly filed a lawsuit in Chicago, Illinois, alleging various breaches by Playboy and others of the previous product license agreement and interference with the plaintiffs’ established distributorship network and seeking compensatory and punitive damages, an injunction against termination of the previous product license and continuing interference, and other equitable and ancillary relief.  Playboy and the other defendants have not responded to the lawsuit.  If the Playboy licensing dispute is not resolved satisfactorily to the Company through a negotiated settlement or litigation, PlayBev may be required to terminate its beverage distribution activities, which are currently the source of the Company’s principal revenues.  Such termination may require the Company to cease its activities and seek protection from creditors.

Registration Rights Agreements - In connection with the Company’s issuance of convertible debentures to YA Global Investments, L.P., formerly known as Cornell Capital Partners, L.P. (“YA Global”), the Company granted to YA Global certain registration rights, pursuant to which the Company agreed to file a registration statementsstatement to register the resale of shares of the Company’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.

 

Previously, YA Global 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 or its predecessor entities.

 

YA Global Forbearance Agreements -On 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 attorneys fees, as well as a writ of replevin to compel the Company to turn over equipment and other property that YA Global claims was pledged as collateral to secure obligations owing to YA Global.

 

On January 24, 2011, the Company entered into a forbearance agreement with YA Global, including a confession of judgment in its favor.  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.

 

On July 22, 2011, YA Global filed a motion in the ABS lawsuit (discussed below) seeking an order clarifying its position with respect to ABS and staying enforcement of that court’s order that the Company pay approximately $35,000 in legal fees to ABS.  In its motion, YA Global notified the Company that it intended to conduct a secured party’s public auction of all of the Company’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’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’s obligations and instructed it to assemble its assets.

 


9

At a hearing held on August 3, 2011, in the ABS reorganization proceeding on YA Global’s motion to stay enforcement, YA Global noted that the date of the proposed secured party’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.

 


At the hearing in the ABS matter, the Bankruptcy Court denied YA Global’s motion to stay the payment of 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.

 

On September 30, 2011, YA Global directed the Company to assemble the collateral in order to enable it to take possession on or before October 6, 2011.  Following negotiations with YA Global, the Company confirmed its indebtedness to YA Global and arranged for it to take possession of collateral on October 17, 2011, on which date, all accounts receivable, collections, and other proceeds and products of the collateral would be held in trust by the Company for YA Global and immediately forwarded to it.  Before the Company was required to surrender possession of the collateral, it initiated negotiations to obtain YA Global’s forbearance from collection.

 

On March 22, 2012, the Company entered into a formal forbearance agreement with YA Global, dated as of March 1, 2012 (the “2012 YA Global Forbearance 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 June 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 June through December 2013, and the balance in December 2014 (the “Termination“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 $25,000 per month in April through September 2012.  

 

The Company continues to have the right, subject to the consent of YA Global, to pay all or any portion of the payments listed above in common stock, with the conversion price to be used to determine the number of shares being equal to the lowest closing bid price of the Company’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.

 

YA Global agreed to forbear from enforcing its rights and remedies as a result of the existing defaults and/or converting the debentures into shares of the Company’s common stock, until the earlier of the Company’s default under the 2012 YA Global Forbearance Agreement or the Extended Termination Date.

On February 22, 2013, the Company entered into a Ratification Agreement with YA Global(the “2013 Ratification Agreement”).  Under the 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. 


10

The 2013 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 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’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’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.

 

During the sixthree months ended September 30, 2012,March 31, 2013, the Company paid $100,000issued common stock valued at $387,836 towards the required payments.  As of the date of this filing it had made the required payments for the subsequent months.

 

Delinquent Payroll Taxes, Interest, and 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.  The Company has defaulted on the original agreement and is currently working with the IRS to pay the 2009 tax liabilities.  The Company is also not current on its payroll taxes as of November 19, 2012, and is working with the IRS to pay these liabilities.

 


Disputed Account Payable -The Company is in a disagreement with its former legal counsel over charges incurred and the amount due to this provider for billed services, charges and interest expense. The Company is currentlyvigorously working with this provider to settle the outstanding balance. IfManagement assesses the Company islikelihood to be remote that it will not be able to settle the outstanding balance it is possible that it may need to accrue an additional $267,000 in addition toat or below the balancecurrently accrued as of June 30, 2012.balance.

 

Employment Agreements - On August 1, 2009, the Company entered into a new employment agreement with Mr. Hawatmeh, the Company’s president.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 Agreementemployment 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 the sixthree months ended June 30,March 31, 2013 and 2012, and 2011, the Company incurred $39,080$10,171 and $11,868,$5,582, respectively, of non-cash compensation expense related to accrual for employee stock options to be awarded per the employment contract with the president of the Company.

 

Pursuant to the employment agreement, Mr. Hawatmeh'sHawatmeh’s employment may be terminated for cause or upon death or disability, in which event, the Company is required to pay Mr. Hawatmeh any unpaid base salary and unpaid earned bonuses.  In the event that Mr. Hawatmeh is terminated without cause, the Company is required to pay to Mr. Hawatmeh: (i) within 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 to himMr. Hawatmeh if employed; (ii) within 30 days following such termination (or on the earliesttheearliest later date as may be required by Internal Revenue Code Section 409A to the extent applicable), a lump sum equal to 30 months of his  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 months of 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.


11

 

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, and a car allowance for Mr. Nora of $1,000 per month to cover the cost of use, fuel, and repairs.  The Company has accrued $798,000$1,008,150 in compensation, which is included in related-party payables as of June 30, 2012.March 31, 2013.

 

Advanced Beauty Solutions, LLC -In connection with prior litigation with Advanced Beauty Solutions, (“ABS”), itor ABS, ABS claimed nonperformance by the Company 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 the Company in the amount of $1,811,667, plus interest.  On September 11, 2009, the Bankruptcy Court denied the Company’s motion to set aside the judgment. 

 


On September 8, 2010, the Company executed an Assignment of Copyrights, thereby assigning Copyright Registration No. TX-6-064-955, Copyright Registration No. TX-6-064-956, and Copyright to the True Ceramic Pro - Live Ops (TCPS) infomercial and related master tapes (collectively the “Copyrights”) to ABS, without reservation or exclusion, making ABS the owner of the Copyrights. 

 

On February 23, 2011, the Company filed a Motion to Declare Judgment Fully Satisfied or Alternatively to Recoup Mutual Debts, requesting that the court determine that its assignment of the Copyrights resulted in full satisfaction of the ABS judgment.  On March 3, 2011, ABS brought a Motion for Order to Show Cause re Civil Contempt alleging that the Company had failed to make payments on ABS’s judgment in violation of the court’s orders.  At the hearing on April 6, 2011, the court denied the motion to declare the judgment fully satisfied and granted ABS’s motion, but did not hold the Company in civil contempt.  The court also set a hearing on the ABS motionMotion for the orderOrder to show causeShow Cause for July 8, 2011, regarding the Company’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 theits motion to declare judgment satisfied. 

 

On March 22, 2012, the Company and ABS entered into a formal forbearance agreement, dated as of March 1, 2012 (the “ABS Forbearance 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’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$1,835,000under the ABS Forbearance Agreement would be secured by an encumbrance on all of the Company’s assets, subject to a prior lien and encumbrance in favor of YA Global. 


12

 

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 the Company 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 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. 

 

The Company’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.President. 

 


The Company has assigned to ABS its 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 the Company.  Pending the determination of the amount of the credit due for the value of the intellectual property conveyed, the Company accrued a balance of $90,000 for the minimum required payment under the ABS Forbearance Agreement.  It is reasonably possible that this estimate may change in the near future based on the events of the ABS settlement.

 

During the six months ended June 30, 2012,The Company entered into a forbearance agreement with ABS on March 1, 2012.  As part of that agreement, among other things, the Company paid $47,500 towardsagreed to a settlement amount that is to be reduced by any distribution to which the required payments.  AsCompany was entitled as a creditor of ABS. Under the dateABS Forbearance Agreement the minimum amount due ABS is $90,000, which is the amount payable during the first 12 months under the ABS Forbearance Agreement. The Company accrued $90,000 as of this filing it hadDecember 31, 2011 and made the required payment for the monthpayments of April.$45,000. The royalty accrual as of March 31, 2013 was $45,000.

 

NOTE 6 - NOTES PAYABLE

 

In February 2012, the Company issued an 18%, 60-day, interest, 90-day, $30,000 promissory note to an investor.  The principal balance included a $5,000 borrowing fee.  The promissory note along with accrued interest was converted to 32,000,000 shares of stock in January 2013.  There was no outstanding balance as of June 30, 2012.March 31, 2013.

 

NOTE 7 - FINANCIAL INSTRUMENTS

 

The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting.  Embedded derivatives are valued separateseparately 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

13


derivatives for convertible debentures and associated warrants using a Multi-nomial Lattismultinomial lattice model as of June 30, 2012,March 31, 2013, and December 31, 2011,2012, and used the Black-Scholes model prior to that.  The fair values of the derivative instruments are measured each quarter.  As of June 30, 2012,March 31, 2013, and December 31, 2011,2012, the fair market value of the derivatives aggregated $461,248$458,475 and $294,717,$829,090, respectively.

 

NOTE 8 - FAIR VALUE MEASUREMENTS

 

For asset and liabilities measured at fair value, the Company uses the following hierarchy of inputs:

 

·        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.

 

Liabilities measured at fair value on a recurring basis at June 30, 2012,March 31, 2013, are summarized as follows:

 

June 30, 2011

       
        
 

Level 1

 

Level 2

 

Level 3

 

Total

        

Fair value of derivatives

$ -

 

$ 461,248

 

$ -

 

$ 461,248

        
 

Level 1

 

Level 2

 

Level 3

 

Total

            

Fair value of derivatives

$

-

 

$

458,475

 

$

-

 

$

458,475


 

Liabilities measured at fair value on a recurring basis at December 31, 2011,2012, are summarized as follows:

 

December 31, 2011

       
        
 

Level 1

 

Level 2

 

Level 3

 

Total

        

Fair value of derivatives

$ -

 

$ 294,717

 

$ -

 

$ 294,717

 

Level 1

 

Level 2

 

Level 3

 

Total

            

Fair value of derivatives

$

-

 

$

829,090

 

$

-

 

$

829,090

 

NOTE 9 - STOCKHOLDERS’ DEFICIT

 

The Company’s stockholders’ deficit increased by $1,899,401$105,576 as a result of the net loss attributable to CirTran Corporation for the sixthree months ended June 30, 2012.  Non-controllingMarch 31, 2013.  Noncontrolling interest in consolidated subsidiaries increased stockholders’ deficit by $269,940$326,904 for the sixthree months ended June 30, 2012,March 31, 2013, due to the operating losses of the non-controlling subsidiary.

 

DuringLoss Per Share-Basic loss per share is calculated by dividing net loss available to common shareholders by the six months ended June 30,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 4,313,029,000 and 4,401,029,000 in potentially issuable common shares at March 31, 2013, and December 31, 2012, respectively.  These potentially issuable common shares were excluded from the Company issued 47,200,000calculation of diluted loss per share because the effects were antidilutive.

NOTE 10 – CAPITAL STOCK

In January 2013, YA Global Investments (formerly known as Cornell Capital Partners, LP) elected to convert debt on 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 $0.001 per share.

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In January 2013, three unrelated parties elected to convert debt in the amount of $32,000, $20,000, $30,000, $29,000 and $35,000 into 146,000,000 shares of the Company’s common stock at prices ranging from $0.0009 to $0.001 per share.

In January through March 2013, a related party elected to convert debt in the amount of $25,000, $25,000, $25,000 and $25,000 into 100,000,000 shares of the Company’s common stock at a price of $0.001 per share.

In January 2013, an unrelated party elected to convert debt in the amount of $28,000 and $22,100 into 20,000,000 shares of the Company’s common stock at prices ranging from $0.0017 to $0.0020 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 exerciseyear ended December 31, 2010 at a price of $0.0063 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 options valued at $39,187.prices ranging from $0.0011 to $0.0013 per share.

 

NOTE 1011 - STOCK OPTIONS AND WARRANTS

 

Stock OptionIncentive Plans - As of June 30, 2012, options to purchaseMarch 31, 2013, a total of 121,800,000316,200,000 shares of common stock had been issued from the 2012 Stock OptionIncentive Plan, out of which a maximum of 403,000,000 can be issued.  The Company’s Board of Directors administers the plansplan 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 sixthree months ended June 30,March 31, 2013 and 2012, and 2011, the Company did not grant options to purchase shares of common stock to employees.

 

During the sixthree months ended June 30, 2012,March 31, 2013, the Company accrued for 18,600,000did not issue any employee options relating to the employment contract of the Company president, directors, and officers.  The fair market value of the options accrued aggregated $1,400, using the following assumptions: 5-year term, estimated volatility of 457.98%, and a discount rate of 0.68%.options.

 

A summary of the stock option activity under the Plansplans as of June 30, 2012,March 31, 2013, and changes during the three months then ended is presented below:

 

 

Weighted-

      

Weighted-

   
 

Weighted-

Average

Aggregate

  

Weighted-

 

Average

 

Aggregate

 

Average

Remaining

Intrinsic

  

Average

 

Remaining

 

Intrinsic

Shares

Exercise Price

Contractual Life

Value

Shares

 

Exercise Price

 

Contractual Life

 

Value

  

Outstanding at December 31, 2011

37,800,000

$ 0.0130

0.51

$ -

Outstanding at December 31, 2012

3,600,000

 

$

0.0123

 

0.013

 

$

-

Granted

47,200,000

$ 0.0015

  

-

  

-

     

Exercised

(47,200,000)

$ 0.0043

  

-

  

-

     

Expired

(19,200,000)

$ 0.0512

  

(3,600,000)

 

 

0.0123

 

 

 

 

-

Outstanding at June 30, 2012

18,600,000

$ 0.0013

0.53

$ -

Outstanding at March 31, 2013

-

 

$

-

 

-

 

$

-

           

Exercisable at June 30, 2012

18,600,000

$ 0.0013

0.53

$ -

Exercisable at March 31, 2013

-

 

$

-

 

-

 

$

-

15



 

As of June 30, 2012March 31, 2013, and December 31, 2011,2012, the Company had a total of 106,000,000104,800,000 and 83,600,00088,000,000 options not issued but accrued.accrued, respectively.

 

Warrants- 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.

 

The Company currently has an insufficient number of authorized shares to enable warrant holders to fully exercise their warrants, assuming all warrants holders desired to do so.  Accordingly, the warrants are subject to derivative accounting treatment and are included in the derivative liability related to the convertible debentures (see Note 8).

 

NOTE 1112 - SEGMENT INFORMATION

 

Segment information has been prepared in accordance with ASC 280-10, Disclosure about Segments of an Enterprise and Related Information.  The Company has four reportable segments: Electronics Assembly, Contract Manufacturing, 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 Marketingmarketing and Mediamedia segment provides marketing services to online retailers, along with beverage development and promotional services to PlayBev.  The Beverage Distributionbeverage 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:

 

Electronics

Contract

Marketing

Beverage

 

Electronics

Contract

Marketing

Beverage

 

Assembly

Manufacturing

and Media

Distribution

Total

Assembly

Manufacturing

and Media

Distribution

Total

Three Months Ended June 30, 2012

 

 

Three Months Ended March 31, 2013

 

Sales to external customers

$ -

$ 24,541

$ -

$ 291,214

$ 315,755

$ -

$ 31,132

$ -

$ 837,020

$ 868,152

Segment income (loss)

(47,857)

(16,656)

15

(640,989)

(705,487)

21,509

(12,454)

-

423,425

432,480

Segment assets

-

-

338,589

37,089

-

218,337

594,015

Depreciation and amortization

5,156

17,180

-

-

22,336

4,331

10,807

-

15,138

 

 

 

Three Months Ended June 30, 2011

 

 

Three Months Ended March 31, 2012

 

Sales to external customers

$ -

$ 23,407

$ -

$ 662,218

$ 685,625

$ -

$ 31,084

$ -

$ 587,616

$ 618,700

Segment income (loss)

5,674,748

(24,996)

(92,772)

(852,971)

4,704,009

(254,674)

1,923

(15)

(1,035,330)

(1,288,096)

Segment assets

1,756,790

837,102

96,518

1,480,919

4,171,329

380,021

148,887

-

377,105

906,013

Depreciation and amortization

6,258

43,448

2,631

-

52,337

5,165

22,344

-

27,509

 

 

Six Months Ended June 30, 2012

 

 

Sales to external customers

$ -

$ 55,625

$ -

$ 878,830

$ 934,455

Segment income (loss)

(302,531)

(14,733)

-

(1,676,319)

(1,993,583)

Segment assets

-

-

Depreciation and amortization

10,321

39,524

-

-

49,845

 

 

Six Months Ended June 30, 2011

 

 

Sales to external customers

$ -

$ 77,348

$ -

$ 2,003,477

$ 2,080,825

Segment income (loss)

(2,557,968)

(25,518)

(98,560)

(1,223,737)

(3,905,783)

Segment assets

1,756,790

836,559

96,518

1,480,919

4,170,786

Depreciation and amortization

14,993

85,626

8,146

-

108,765


16


 

 

 

NOTE 1213 - GEOGRAPHIC INFORMATION

 

The Company currently maintains $81,276 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 1314 - SUBSEQUENT EVENTS

 

On August 23, 2012,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 approximately $1.4 million in amounts due LIB-MP without any payment.

In April 2013, the Company issued 25,000,000 options20,000,000 shares of common stock at $0.001 per share to purchase onesettle debt to a vendor of $20,000 and 33,750,000 shares of common stock at $0.0008 per share to settle debt to a related party of $33,750.

On April 15, 2013, the Company issued 30,000,000 shares of common stock to settle an amount owed of $27,000 to a third partycreditor for services performed with an exercise price of $0.0001 per share, vesting immediately and expiring on September 13, 2012.  The Company will recognize a corresponding expense of approximately $20,035 during the period ended September 30, 2012.  These options were exercised during August 2012 and the Company correspondingly issued 25,000,000 common shares.already provided. 

 

These financial statements considered subsequent events through November 19, 2012,May 20, 2013, the date the financial statements were available to be issued.

17


 

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

 

This discussion should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.2012.

 

Overview

 

We manufacture, market, and distribute internationally an energy drink under a license, now in dispute, with Playboy Enterprises, Inc., or Playboy, and in the U.S., we 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 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.

 

Beverage Distribution(94%96% and 96%95% of total revenue during sixthree months ended June 30,March 31, 2013 and 2012, and 2011, 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 holds the Playboy license. 

 

Contract Manufacturing(6%4% and 4%5% of total revenue during the sixthree months ended June 30,March 31, 2013 and 2012, and 2011, 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. 

 

Marketing and Media(no revenues during the sixthree months ended June 30,March 31, 2013 and 2012, and 2011, respectively)

 

CirTran Online sells products via the Internet and provides services and support to Internet retailers. 

 


CirTran Media provides end-to-end services to the direct-response and entertainment industries.

 

Electronics Assembly(no revenues during the sixthree months ended June 30,March 31, 2013 and 2012, and 2011, respectively)

 

CirTran Corporation (“CirTran USA”) provides low-volume electronics assembly activities consisting primarily of placing and attaching electronic and mechanical components on printed circuit boards and flexible (i.e., bendable) cables.

 

18


Forward-Looking Statements and Certain Risks

 

The statements contained in this report that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act.  These statements represent our expectations, hopes, beliefs, anticipations, commitments, intentions, and strategies regarding the future.  They may be identified by the use of words or phrases such as “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others.  Forward-looking statements include, but are not limited to, statements contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue, and expense levels in the future and the sufficiency of our existing assets to fund future operations and capital spending needs.  Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in these forward-looking statements.  The fact that some of these risk factors may be the same or similar to our past reports filed with the SEC means only that the risks are present in multiple periods.  We believe that many of the risks are part of doing business in the industry in which we operate and compete and will likely be present in all periods reported.  The fact that certain risks are common in the industry does not lessen their significance.  The forward-looking statements contained in this report are made as of the date of this report, and we assume no obligation to update them or to update the reasons why our actual results could differ from those that we have projected in such forward-looking statements.  We expressly disclaim any obligation or intention to update any forward-looking statement.

 

Results of Operations

 

Comparison of the Three and Six Months Ended June 30,March 31, 2013 and 2012 and 2011

 

Sales and Cost of Sales

 

Net sales decreasedincreased to $315,755$868,152 for the three months ended June 30, 2012,March 31, 2013, as compared to $685,625$618,700 for the three months ended June 30, 2011.  Net sales decreased to $934,455 for the six months ended June 30, 2012, as compared to $2,080,825 for the six months ended June 30, 2011.March 31, 2012.  The decreaseincrease is primarily attributable to issues relatedour ability to PlayBev’smanage the disruption we experienced in 2012 and into 2013 with the unexpected bankruptcy case,proceedings initiated against PlayBev, the continuing uncertainty created by Playboy in relation to the interference with our beverage distributors, and our defensedefending against numerous lawsuits.  Additionally, disputes with distributors and their uncertaintyDisputes respecting the status of the PlayBev license to market Playboy-licensed energy drinks decreased revenues.resulted in lower revenues in 2011 that we struggled to improve in 2012 and into 2013.

 

Cost of sales, including royalty expense, as a percentage of sales, decreased to 4%31% from 97%123% for the three months ended June 30, 2012,March 31, 2013, as compared to the three months ended June 30, 2011, respectively, and increased to 83% from 68% for the six months ended June 30,March 31, 2012, as compared to the six months ended June 30, 2011, respectively.  Consequently, the gross profit margin increased to 96%69% from 3%23%, for the three months ended June 30,March 31, 2013 and 2012, and 2011, respectively, and decreased to 17% from 32%, for the six months ended June 30, 2012 and 2011, respectively.  The decreaseincrease in gross profit margin is attributable to a decreasean increase in revenues from royalty agreements whichthat have an overall lower cost.


 

The following charts present comparisons of sales, cost of sales, and gross profits generated by our fourtwo operating segments, i.e., Contract Manufacturing, Electronics Assembly, Marketingbeverage distribution and Media, and Beverage Distributioncontract manufacturing during the sixthree months ended June 30, 2012March 31, 2013 and 2011:

2012:

Six months Ended June 30:

 

 

 

 

 

 

 

 

Segment

Year

 

 

 

Sales

 

Cost of Sales

 

Royalty Expense

 

Gross Loss / Margin

 

Beverage Distribution

 

2012

 

$

878,830

 

$

246,763

 

$

526,015

 

$

106,052

2011

 

3,101,683

 

1,244,688

 

1,079,967

 

777,028

Contract Manufacturing

2012

 

55,625

 

201

 

-

 

55,424

2011

 

77,348

 

734

 

-

 

76,614

Electronics Assembly

2012

 

-

 

-

 

-

 

-

2011

 

-

 

-

 

-

 

-

Marketing / Media

2012

 

-

 

-

 

-

 

-

2011

 

-

 

-

 

-

 

-

Three Months Ended March 31:

 

 

 

 

Segment

Year

Sales

Cost of Sales

Royalty Expense

Gross Loss / Margin

Beverage Distribution

2013

$ 837,020

$ 234,414

$ 37,494

$ 565,112

2012

587,616

238,150

521,004

(171,538)

Contract Manufacturing

2013

31,132

101

-

31,031

2012

31,084

-

-

31,084

19

Three months Ended June 30:

 

 

 

 

 

 

 

 

Segment

Year

 

 

Sales

 

Cost of Sales

 

Royalty Expense

 

Gross Loss / Margin

Beverage Distribution

2012

 

$

291,214

 

$

8,613

 

$

5,011

 

$

277,590

2011

 

662,218

 

132,727

 

534,296

 

(4,805)

Contract Manufacturing

2012

 

24,541

 

201

 

-

 

24,340

2011

 

23,407

 

403

 

-

 

23,004

Electronics Assembly

2012

 

-

 

-

 

-

 

-

2011

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 

Marketing / Media

2012

 

-

 

-

 

-

 

-

2011

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 
 

 

 

 

 

 

 

 

 


 

 

Selling, General, and Administrative Expenses

 

During the three and six months ended June 30, 2012 and 2011,March 31, 2013, selling, general, and administrative expenses decreased $502,738 and $836,407, respectively, as comparedincreased by $94,973 to $833,452 from $738,479 for the same periodsperiod during the respective prior years.2012.  The decreaseincrease in selling, general, and administrative expenses was driven primarily by a decrease during the first six monthsan increase in legal fees of 2012 of in marketing expenses of $203,361,$139,456, a decrease of salaries expenses of $72,260,$129,136, an increase in consulting expense of $78,032, a decreaseincrease in media promotions expensesmanager fees of $160,506, and$60,000, a decrease of travel and entertainment expenses of $124,899.$6,805, a decrease in sales commission expense of $34,401, a decrease in outside contract services expense of $20,919, and a increase in accounting fees of $17,972.

 

Noncash Compensation Expense

 

Compensation expense in connection with accounting for options owed or granted to employees to purchase common stock was $19,183$29,872 for the three months ended June 30, 2012,March 31, 2013, as compared to $5,703$26,001 for the three months ended June 30, 2011, and $39,080 for the six months ended June 30,March 31, 2012, as compared to $104,462 for the six months ended June 30, 2011, as a result of the employee stock options accrued for per the respective employment agreements.

 

Other Income and Expense

 

Interest expense recorded in the Condensed Consolidated Statements of Operations combines both accretion expense and interest expense.  The combined interest expense for the three months ended June 30, 2012,March 31, 2013, was $282,441,$209,495, as compared to $232,722$255,661 for the three months ended June 30, 2011, an increaseMarch 31, 2012, a decrease of 21.4%18%.  The combined interest expense for the six months ended June 30, 2012, was $538,102, as compared to $504,512 for the six months ended June 30, 2011.  The increasedecrease in the combined interest expense was driven by the reduction in accretion expense recorded for the sixthree months ended June 30, 2012.March 31, 2013.

 

We recorded a lossgain of $32,925$5,844 on our derivative valuation for the three months ending June 30, 2012,ended March 31, 2013, as compared to a gain of $6,005,885$133,605 recorded for the three months ended June 30, 2011. We recorded a loss of $166,530 on our derivative valuation for the six months ended June 30, 2012, as compared to a loss of $1,865,826 recorded for the six months ended June 30, 2011.March 31, 2012.  The swing in the derivative valuation is primarily the result of the change in estimating the fair value of convertible debentures and associated warrants from using the Black ScholesBlack-Scholes model to a Multi-nomial Lattismultinomial lattice model, together with the varying market values of our common stock.

 

We recorded a gain of $38,352 on our settlement of debt for the three months ended March 31, 2013.  This was a result of settling payable, accrued liabilities and debt for equity.  See Note 14 – Capital Stock in the notes to the unaudited financial statements above for more details.

As a result of these factors, our overall results of operationsnet loss decreased to a loss of $705,487$432,480 for the three months ended June 30, 2012,March 31, 2013, as compared to net incomeloss of $4,704,009$1,288,096 for the three months ended June 30, 2011.March 31, 2012.  The net loss attributable to us was $589,517$105,576 for the three months ended June 30, 2012,March 31, 2013, and a net loss of $115,970$326,904 was attributable to a non-controlling equity interest in PlayBev.  Net loss decreased to $1,993,583 for the six months ended June 30, 2012, as compared to a net loss of $3,905,783 for the six months ended June 30, 2011. The net loss attributable to us was $1,723,643 for the six months ended June 30, 2012, and a net loss of $269,940 was attributable to a non-controllingnoncontrolling equity interest in PlayBev.

 

Liquidity and Capital Resources

 

We have had a history of losses from operations, as our expenses have been greater than our revenues.  Our accumulated deficit was $49,990,814$48,620,372 at June 30, 2012,March 31, 2013, and $48,267,171$48,514,796 at December 31, 2011.  Net loss for the six months ended June 30, 2012, was $1,993,583, as compared to $3,905,783 for the six months ended June 30, 2011.2012.  Our current liabilities exceeded our current assets by $27,409,203$25,710,611 as of June 30, 2012,March 31, 2013, and by $25,540,389$26,458,490 as of December 31, 2011.2012. 



Cash

 

The amount of cash used in operating activities during the sixthree months ended June 30, 2012, decreasedMarch 31, 2013, increased by $524,514,$181,361, driven primarily by reduced expenses.deferred revenue. The amount of cash provided by financing activities during the three months ended March 31, 2013, increased by $332,982, driven primarily from conversion of debt to equity.

 

Accounts Receivable

 

Trade accounts receivable, net of allowance for doubtful accounts, decreased $128,233$79,183 during the sixthree months ended June 30, 2012.March 31, 2013.  We continue to monitor individual customer accounts and are working to improve collections on trade accounts receivable.  We eliminatedeliminate the receivables associated with PlayBev as part of consolidation in accordance with GAAP treatment as a variable interest entity.

 

Accounts Payable and Accrued Liabilities

 

During the sixthree months ended June 30, 2012,March 31, 2013, accounts payable, accrued liabilities, advances payable, interest payable, and short-term debt increased by $1,251,425$72,413 to a combined balance of $16,393,006$16,260,662 as of June 30, 2012.March 31, 2013.  The increase includes an increase of $764,320$9,090 in accrued liabilities, $59,900a $104,165 decrease in interest payable, an increase of $99,071 in short-term debt,accrued payroll and $516,087 increasecompensation, and a $51,262 decrease in accounts payable.  The increase in accounts payable activity is a result of continued PlayBev-related services performed during the year for beverage development, distribution, marketing, and legal services.  At June 30, 2012,March 31, 2013, we owed $3,860,163$3,146,912 to various investors from whom we had borrowed funds in the form of either unsecured or short-term advances.

 

Liquidity and Financing ArrangementsCapital Resources

 

We have had a history of substantial losses from operations, as well as a history of using ratherour expenses have been greater than providing cash in operations.our revenues.   We had an accumulated deficit of $49,990,814$48,620,372 along with a total stockholders’ deficit of $26,965,299$15,593,539 at June 30, 2012.  We have used cash from our operations forMarch 31, 2013.  During the sixthree months ended June 30, 2012,March 31, 2013, we used net cash of $531.$154,109.   During the sixthree months ended June 30, 2011,March 31, 2012, we used $525,045provided $27,342 in cash in operations.  During the sixthree months ended June 30, 2012,March 31, 2013, our monthly operating costs and interest expense averaged approximately $129,000$357,000 per month.

 

In conjunction with our efforts to improve our results of operations, we are also actively seeking infusions of capital from investors and are seeking sources to repay our existing convertible debentures.  In our current financial condition and with ongoing activities substantially dependent on the outcome of the Playboy litigation, it is unlikely that we will be able to obtain additional debt financing.  Even if we did acquire additional debt, we would be required to devote additional cash flow to servicing the debt and securing the debt with assets.  Accordingly, we are looking to obtain equity financing to meet our anticipated capital needs.  There can be no assurancesWe cannot assure that we will be successful in obtaining such capital.  If we issue additional shares for debt and/or equity, this will dilute the value of our common stock and existing shareholders’ positions.

 

There can be no 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.  These conditions raise substantial doubt about our ability to continue as a going concern.

 

21



Convertible Debentures

 

2011 YA Forbearance Agreement

 

As of December 31, 2010, we had outstanding convertible debentures issued during previous periods to YA Global with an aggregate outstanding balance of $3,161,355, including accrued interest of $856,546,$991,329, that were then in default.  In January 2011, we and YA Global entered into a forbearance agreement and related agreements (the “2011 YA Forbearance Agreement”).

 

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 whomwhich we had transferred certain collateral pledged to YA Global,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 “Termination“2011 Termination Date”).

 

We had the right, subject to the consent of YA Global, to pay all or any portion of the payments listed above in common stock, with the conversion price to be used to determine the number of shares being equal to 85% of the lowest closing bid price of our common stock during the 10 trading days prior to the payment date.  The amount applied as a payment on the note and accrued interest willwould be adjusted to the value of the actual proceeds from the sale of the stock.

 

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 2011 YA Agreement or the 2011 Termination Date.

 

The summaries of the terms and conditions of the 2011 YA Forbearance Agreement and the other agreements do not purport to be complete and are qualified in their entirety by reference to the full text of the agreements, which are incorporated in this report.

 

Default and 2012 YA Global Forbearance Agreement

 

We made our required payments through March 1, 2011, as required under the 2011 YA Forbearance Agreement, but thereafter did not make additional payments.  Following such defaults, YA Global initiated steps to proceed to execute on, take possession of, and sell at auction all of our assets, which had been encumbered to secure our obligations under the debentures.  We negotiated extensions of such execution efforts while we also sought to negotiate another formal forbearance agreement with YA Global.

 

On March 22, 2012, we entered into a formal forbearance agreement with YA Global, dated as of March 1, 2012 (the “2012 YA Global Forbearance Agreement”), in which we ratified our previous obligations under the debentures and agreed to pay the debentures, $25,000 at signing the 2012 YA Global 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“Extended Termination Date”).  In addition to the above minimum payments to YA Global, we arewere required to pay monthly excess cash flow, to the extenttheextent cumulatively available, consisting of consolidated earnings before interest, taxes, depreciation and amortization, less cash deposits forproduct 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 shalldid not to exceed $50,000 in March 2012 and $25,00 per month in April 2012 and thereafter, until the balance iswas paid.

22



 

We continuecontinued to have the right, subject to the consent of YA Global, to pay all or any portion of the payments listed above in common stock, with the conversion price to be used to determine the number of shares being equal to the lowest closing bid price of our common stock during the 20 trading days prior to the payment date.  The amount applied as a payment on the note and accrued interest willwould be adjusted to the value of the actual proceeds from the sale of the stock.

 

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 Global Forbearance Agreement or the Extended Termination Date.

On February 22, 2013, we entered into a Ratification Agreement with YA Global(the “2013 Ratification Agreement”).  Under the 2013 Ratification Agreement, we ratified the obligations under three existing Convertible Debentures datedMay 26, 2005, December 30, 2005, and August 23, 2006, and agreed to amend, restate, and consolidate the obligations evidenced thereby into a Consolidated Debenture. 

The 2013 Ratification Agreement also provides for a new payment schedule under the Consolidated Debenture that replaces the payment schedule that had been agreed to in the 2012, YA Global Forbearance Agreement among the parties.  Under the 2013 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.

During the three months ended March 31, 2013, we issued common stock valued at $387,836 towards the required payments.  

 

Critical Accounting Estimates

 

Revenue Recognition - Revenue is recognized when products are shipped.  Title passes to the customer or independent sales representative at the time of shipment.  Returns for defective items are repaired and sent back to the customer.  Historically, expenses associated with returns have not been significant and have been recognized as incurred.

 

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

 

We 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.23


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 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.

 

Financial Instruments with Derivative Features - We do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives or contain embedded features subject to derivative accounting. Embedded derivatives are valued separateseparately 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-ScholesMultinomial Lattice model. The fair value of the derivative instruments areis measured each quarter.quarter, with the change recorded in earnings.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.


 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer / Chief Financial Officer, of the effectiveness of the design and operation of 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 June 30, 2012.March 31, 2013.  Based on our evaluation, our Chief Executive Officer / Chief Financial Officer has concluded that our disclosure controls and procedures were not effective at June 30, 2012,March 31, 2013, 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, 2011,2012, had not been remediated as of June 30, 2012.March 31, 2013.

 

These weaknesses are continuing.  Management and the Board of Directors are aware of these weaknesses that result because of limited resources and staff.  Efforts to design and implement controls and processes have been put on hold due to limited resources, but we anticipate a renewed focus on this effort in the near future.  Due to our limited financial and managerial resources, we cannot assure when we will be able to implement effective internal controls over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred in the secondfirst quarter of 20122013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

 

In re Play Beverages, LLCUnited States Bankruptcy Court for the District of Utah, Case No. 11-26046, and related matters - PlayBev, our consolidated variable interest entity, is a debtor-in-possession in the above-referenced proceedings.  PlayBev entered into a 2006 license agreement with Playboy Enterprises International, Inc. (“Playboy”), to market a Playboy-branded non-alcoholic energy drink.  Among other things, Playboy has stated its position that PlayBev’s 2006 license agreement has expired.  PlayBev disputes Playboy’s position and has filed the litigation described below to protect its rights and business interests. 

As described in previous filings, in August 2012, PlayBev entered into two interdependent and contingent agreements with Playboy.  Subject to confirmation of PlayBev’s Chapter 11 plan of reorganization, certain payments to Playboy, and other conditions precedent, the proposed transaction would have resulted in both: (a) a settlement of all claims by and between PlayBev and Playboy; and (b) a new license agreement in favor of the anticipated reorganized debtor under PlayBev’s proposed plan.  PlayBev did not deposit into escrow by the agreed deadline the initial payment required to be paid to Playboy upon the effective date of PlayBev’s proposed plan.  Further, PlayBev did not obtain confirmation of its proposed plan and the agreements between PlayBev and Playboy were not approved by the bankruptcy court.  As such, Playboy has declared the new, contingent license agreement to be void and without effect.  Similarly, the conditions precedent to the effectiveness of PlayBev’s settlement with Playboy did not occur.  Accordingly, the proposed, contingent settlement and license agreements are ineffective and without any legal force or effect. 


As part of its efforts to develop a new plan of reorganization, PlayBev has proposed to Playboy modified terms for a proposed new license to market Playboy-branded energy drinks, but no substantive discussions are underway.  Meanwhile, motions to dismiss or convert PlayBev’s reorganization case to a liquidation are scheduled to be heard in late November 2012.  As noted above, the foregoing led to our filing of the litigation described below.

Play Beverages, LLC, et al. v. Playboy Enterprises, Inc., et al. -In October 2012, our wholly owned subsidiary, CirTran Beverage Corp., and PlayBev joined in filing a lawsuit in Cook County, Illinois, captioned,Play Beverages, LLC, and CirTran Beverage Corp. v. Playboy Enterprises, Inc., et al., Case No. 2012L012181.  In their amended complaint, the plaintiffs allege that Playboy breached, and that all defendants conspired to breach and aided and abetted Playboy’s breach, of the previous product license agreement and interfered with the 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.  Playboy and the other defendants have not responded to the lawsuit.

If the Playboy licensing dispute is not resolved satisfactorily to us through a negotiated settlement or litigation, PlayBev may be required to terminate its beverage distribution activities, which are currently the source of our principal revenues.  Such termination may require us to cease our activities and seek protection from creditors.

 

ITEM 6. EXHIBITS

 

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

 

Exhibit Number*

 

Title of Document

 

Location

 

 

 

 

 

Item 31

 

Rule 13a-14(a)/15d-14(a) Certifications

 

 

31.01

 

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rule 13a-14

 

This filing.

 

 

 

 

 

Item 32

 

Section 1350 Certifications

 

 

32.01

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief Financial Officer)

 

This filing.

 

 

 

 

 

Item 101

��

Interactive Data File

 

 

101

 

Interactive Data File

 

This filing.filing

_______________

*      All exhibits are numbered with the number preceding the decimal indicating 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 as an exhibit.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

CIRTRAN CORPORATION

 

 

(Registrant)

 

 

 

 

 

 

Date: NovemberMay 20, 20122013

By:

/s/ Iehab Hawatmeh

 

 

Iehab Hawatmeh, President,

Chief Financial Officer (Principal Executive Officer, Principal Financial Officer)

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