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.

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). 

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. 

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

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

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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:

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).

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.

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.

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.

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. 

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. 

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:

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:

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:

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.

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. 

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.

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.

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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.

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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.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In re Play Beverages, LLC, United 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. 

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.

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