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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 000-49654
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CIRTRAN CORPORATION
(Exact name of registrant as specified in its charter)
Nevada 68-0121636
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4125 South 6000 West, West Valley City, Utah 84128
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(Address of principal executive offices) (Zip Code)
(801) 963-5112
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding at November 8,
2008 was 1,364,912,893 shares.
CIRTRAN CORPORATION
FORM 10-Q
For the Quarterly Period Ended September 30, 2008
INDEX
Page
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets.................... 3
Condensed Consolidated Statements of Operations.......... 4
Condensed Consolidated Statements of Cash Flows.......... 5
Notes to Condensed Consolidated Financial Statements..... 7-20
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 21-27
Item 3 Quantitative and Qualitative Disclosures About Market Risk. 27
Item 4 Controls and Procedures.................................... 28
PART II - OTHER INFORMATION
Item 1 Legal Proceedings.......................................... 28
Item 1A Risk Factors............................................... 29
Item 2 Unregistered Sales of Equity Securities and Use
of Proceeds............................................... 29
Item 5 Other Information.......................................... 30
Item 6 Exhibits................................................... 30-35
Signatures 36
2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31,
2008 2007
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ASSETS
Current assets
Cash and cash equivalents $ 11,479 $ 82,761
Trade accounts receivable, net of allowance
for doubtful accounts of $78,121 and
$55,742, respectively 722,950 411,899
Receivable due from related party 4,720,160 1,438,967
Inventory, net of reserve of $906,733 and
$968,967, respectively 1,832,250 1,938,616
Prepaid deposits 200,690 129,592
Other 337,073 329,836
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Total current assets 7,824,602 4,331,671
Investment in securities, at cost 1,820,000 1,820,000
Investment in related party 750,000 750,000
Deferred offering costs, net 29,795 102,462
Long-term receivable 1,665,000 1,665,000
Property and equipment, net 829,021 986,184
Intellectual property, net 1,826,910 2,089,233
Other assets, net 19,781 19,781
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Total assets $ 14,765,109 $ 11,764,331
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Checks written in excess of bank balance $ 170,101 $ -
Accounts payable 2,169,193 1,326,533
Short-term advances payable 1,626,993 175,000
Distribution payable - 747,290
Accrued liabilities 2,339,717 1,595,704
Deferred revenue 585,638 159,849
Derivative liability 2,546,489 2,896,969
Convertible debenture 3,300,192 2,983,348
Current maturities of long-term debt 119,904 194,904
Notes payable to stockholders 879,647 238,891
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Total current liabilities 13,737,874 10,318,488
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Long-term debt, less current maturities 1,019,606 1,009,364
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Total liabilities 14,757,480 11,327,852
Commitments and contingencies - -
Minority interest 2,573,231 1,709,258
Stockholders' deficit
Common stock, par value $0.001; authorized
1,500,000,000 shares; issued and
outstanding shares: 1,304,912,893 and
1,101,261,449 1,304,908 1,101,256
Additional paid-in capital 28,542,120 27,057,168
Subscription receivable (17,000) (17,000)
Accumulated deficit (32,395,630) (29,414,203)
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Total stockholders' deficit (2,565,602) (1,272,779)
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Total liabilities and stockholders'
deficit $ 14,765,109 $ 11,764,331
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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 Nine months ended
September 30, September 30,
2008 2007 2008 2007
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Net sales $ 3,102,414 $ 3,533,555 $ 10,202,998 $ 8,700,004
Cost of sales 2,664,235 1,723,568 8,232,126 4,135,494
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Gross profit 438,179 1,809,987 1,970,872 4,564,510
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Operating expenses
Selling, general and
administrative expenses 1,715,313 2,529,784 4,943,186 7,077,802
Non-cash compensation expense 996 - 93,340 75,385
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Total operating expenses 1,716,309 2,529,784 5,036,526 7,153,187
-------------------------------------------------------------------------------------------------
Loss from operations (1,278,130) (719,797) (3,065,654) (2,588,677)
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Other income (expense)
Interest expense (458,539) (584,328) (1,502,540) (2,044,116)
Interest income 75,125 - 137,431 -
Settlement of distribution
agreement 250,000 - 250,000 -
Gain on sale/leaseback 20,268 19,752 61,312 40,020
Gain on settlement of
lititgation - 1,168,623 300,000 1,168,623
Gain on forgiveness of debt - - - 23,748
Gain (loss) on derivative
valuation (867,138) 198,648 838,024 (63,108)
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Total other income
(expense), net (980,284) 802,695 84,227 (874,833)
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Net income (loss) $ (2,258,414) $ 82,898 $ (2,981,427) $ (3,463,510)
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Net income (loss) per
weighted-average
common share:
Basic $ (0.002) $ - $ (0.003) $ (0.004)
Diluted $ (0.002) $ - $ (0.003) $ (0.004)
Weighted-average common shares
outstanding:
Basic 1,223,606,328 903,903,156 1,166,813,156 785,492,318
Diluted 1,223,606,328 1,817,880,929 1,166,813,156 785,492,318
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2008 2007
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Cash flows from operating activities
Net loss $ (2,981,427) $ (3,463,510)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 483,765 639,914
Accretion expense 930,446 1,633,667
Provision for doubtful accounts 22,379 -
Provision for obsolete inventory 9,135 -
Gain on forgiveness of debt - (23,748)
Gain on sale - leaseback (61,312) (40,031)
Gain on settlement - (1,168,623)
Non-cash compensation expense 93,340 75,386
Loan costs and interest withheld from
loan proceeds 72,667 -
Stock purchase rights and warrants
issued to attorneys and consultants 146,657 -
Change in valuation of derivative (838,024) 63,109
Changes in assets and liabilities:
Trade accounts receivable (3,614,623) (907,226)
Inventory 97,231 (88,970)
Prepaid expenses and deposits (56,098) (72,995)
Other current assets (7,237) (72,335)
Accounts payable 1,049,343 264,443
Accrued liabilities 866,215 352,031
Deferred revenue 425,789 (112,035)
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Net cash used in operating
activities (3,361,754) (2,920,923)
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Cash flows from investing activities
Intangibles purchased with cash (54,946) (45,202)
Amounts advanced to Diverse Talent
Group, Inc. - (109,633)
Proceeds from the sale of property
and equipment - 2,500,000
Purchase of property and equipment (9,333) (209,398)
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Net cash (used in) provided
by investing activities (64,279) 2,135,767
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Cash flows from financing activities
Proceeds from notes payable to related party 1,100,000 355,000
Payments on notes payable to related party (64,243) (210,000)
Net borrowings in connection with short-term
advances 1,757,893 -
Checks written in excess of bank balance 170,101 -
Proceeds from stock issued in private
placement 466,000 -
Principal payments on long-term debt (75,000) (1,255,452)
Proceeds of sale of a portion of initial
interest in AfterBev - 1,848,000
Exercise of stock purchase rights issued
to attorneys - 1,000
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Net cash provided by
financing activities 3,354,751 738,548
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Net decrease in cash and cash equivalents (71,282) (46,608)
Cash and cash equivalents at beginning of year 82,761 146,050
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Cash and cash equivalents at end of period $ 11,479 $ 99,442
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The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
For the Nine Months Ended September 30, 2008 2007
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Supplemental disclosure of cash flow
information:
Cash paid during the period for interest $ 86,590 $ -
Noncash investing and financing activities:
Stock issued in payment of notes payable
and accrued interest $ - $ 100,000
Common stock issued for partial conversion
of debentures 403,360 1,965,473
Stock purchase rights granted and
exercised in partial settlement payable - 9,270
Common stock issued for the 1.2 for 1
forward stock split - 140,572
Deferred gain on the sale and leaseback
of office building - 810,736
Investment in Play Beverages, LLC - 750,000
Gain on settlement - 351,377
Warrants issued with derivative liability
features 700,000 -
Exchange AfterBev membership interest for
distribution payable 863,973 -
Common stock issued in exchange for
advances payable 305,900 -
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company consolidates all of its majority-owned
subsidiaries and companies over which the Company exercises control through
majority voting rights. The Company accounts for its investments in common stock
of other companies that the Company does not control but over which the Company
can exert significant influence using the cost method.
Condensed Financial Statements - The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiaries (collectively, the "Company" or "CirTran"). These financial
statements have been prepared in accordance with Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission ("SEC" or "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. These statements should be read in conjunction with the
Company's annual financial statements included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2007. In particular, the Company's
significant accounting policies were presented as Note 1 to the consolidated
financial statements in that Annual Report. In the opinion of management, all
adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the three- and
nine-month periods ended September 30, 2008, are not necessarily indicative of
the results that may be expected for the full year ending December 31, 2008.
Principles of Consolidation - The consolidated financial statements include the
accounts of CirTran Corporation, and its wholly-owned subsidiaries Racore
Technology Corporation, CirTran - Asia, Inc., CirTran Products Corp., CirTran
Media Corp., CirTran Online Corp., CirTran Beverage Corp., and during 2007,
discontinued PFE Properties, LLC.
The consolidated financial statements also include the accounts of After Bev
Group LLC, a majority-controlled subsidiary ("AfterBev"). At September 30, 2008,
the Company had a four percent share of AfterBev's profits and losses, but
maintained a 52 percent voting control interest. AfterBev has a 51 percent share
of the eventual cash distributions of Play Beverages, LLC ("PlayBev"), and the
president and one of the directors of the Company own membership interests in
PlayBev totaling 14.35 percent. As of September 30, 2008, the members of PlayBev
had amended PlayBev's operating agreement to require a 95 percent membership
vote on major managerial and organizational decisions. None of the other members
of PlayBev are affiliated with the Company. Accordingly, while the Company
president and one of its directors own membership interests and currently hold
the executive management positions in PlayBev, the Company or its affiliates
nevertheless cannot exercise unilateral control over significant decisions, and
the Company has accounted for its investment in PlayBev under the cost method of
accounting.
Impairment of Long-Lived Assets - The Company reviews its long-lived assets,
including intangibles, for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. At each
balance sheet date, the Company evaluates whether events and circumstances have
occurred that indicate possible impairment. The Company uses an estimate of
future undiscounted net cash flows from the related asset or group of assets
over their remaining life in measuring whether the assets are recoverable. As of
September 30, 2008, the Company does not consider any of its long-lived assets
to be impaired.
Long-lived asset costs are amortized over the estimated useful life of the
asset, which is typically 5 to 7 years. Amortization expense was $105,972 and
$105,757 for the three months ended September 30, 2008 and 2007, respectively,
and was $317,269 and $316,619 for the nine months ended September 30, 2008 and
2007, respectively.
Financial Instruments with Derivative Features - The Company does not hold or
issue derivative instruments for trading purposes. However, the Company has
financial instruments that are considered derivatives, or contain embedded
features subject to derivative accounting. Embedded derivatives are valued
separate from the host instrument and are recognized as derivative liabilities
in the Company's balance sheet. The Company measures these instruments at their
estimated fair value, and recognizes changes in their estimated fair value in
results of operations during the period of change. The Company has estimated the
fair value of these embedded derivatives using the Black-Scholes model. The fair
values of the derivative instruments are remeasured each quarter.
7
Income (Loss) Per Share - Basic income (loss) per share is calculated by
dividing net income (loss) available to common shareholders by the
weighted-average number of common shares outstanding during each period. Diluted
income (loss) per share is similarly calculated, except that the
weighted-average number of common shares outstanding would include common shares
that may be issued subject to existing rights with dilutive potential when
applicable. The Company had 1,400,485,333 and 913,977,773 in potentially
issuable common shares at September 30, 2008 and 2007, respectively. These
potentially issuable common shares were excluded from diluted per-share
calculations for those net loss periods where the effect was anti-dilutive.
Use of Estimates - In preparing the Company's financial statements in accordance
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported periods. Actual results
could differ from those estimates.
Reclassifications - Certain reclassifications have been made to the financial
statements to conform to the current year presentation.
Recent Accounting Pronouncements - In September 2006, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 157, Fair Value Measurements, which defines fair value, establishes
a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. In February 2008, the FASB issued FASB Staff
Position (FSP FIN) No. 157-2, which extended the effective date for certain
nonfinancial assets and nonfinancial liabilities to fiscal years beginning after
November 15, 2008. The Company did not have any assets or liabilities that were
required to be measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS 157 at September 30, 2008, therefore the
adoption of this pronouncement had no impact on the condensed consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value. SFAS No. 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007. The Company elected not to measure any
additional financial assets or liabilities at fair value at the time SFAS 159
was adopted on January 1, 2008. As a result, implementation of SFAS 159 had no
impact on the Company's condensed consolidated financial statements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141(R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. SFAS No. 160 clarifies
that a non-controlling interest in a subsidiary should be reported as equity in
the consolidated financial statements, consolidated net income shall be adjusted
to include the net income attributed to the non-controlling interest, and
consolidated comprehensive income shall be adjusted to include the comprehensive
income attributed to the non-controlling interest. The calculation of earnings
per share will continue to be based on income amounts attributable to the
parent. SFAS No. 141(R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is
prohibited. The Company has not yet determined the effect on our consolidated
financial statements, if any, upon adoption of SFAS No. 141(R) or SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. This standard is intended to improve
financial reporting by requiring transparency about the location and amounts of
derivative instruments in an entity's financial statements; how derivative
instruments and related hedged items are accounted for under SFAS No. 133; and
how derivative instruments and related hedged items affect its financial
position, financial performance and cash flows. The provisions of SFAS No. 161
are effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company does not believe the
adoption of SFAS 161 will have a significant effect on its consolidated
financial position, results of operations or cash flows.
8
NOTE 2 - REALIZATION OF ASSETS
The accompanying condensed consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplate continuation of the Company as a going concern.
However, the Company has sustained losses of $2,981,427 and $3,463,510 for the
nine months ended September 30, 2008 and 2007, respectively. As of September 30,
2008, the Company had an accumulated deficit of $32,395,630. In addition, the
Company used, rather than provided, cash in its operations in the amount of
$3,361,754 and $2,920,923 during the nine months ended September 30, 2008 and
2007. These conditions raise substantial doubt about the Company's ability to
continue as a going concern.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying condensed
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 Company has several new programs in development. These
programs represent a new direction for the Company into the beverage industry,
and support ongoing efforts in the consumer products contract manufacturing and
media marketing industries. These new programs have the potential to carry
higher profit margins than electronic manufacturing, and as a result, the
Company is investing substantial resources into developing these activities. 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.
NOTE 3 - INVENTORY
Inventory consists of the following:
Septebmer 30, December 31,
2008 2007
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Raw materials $ 1,830,985 $ 1,910,029
Work in process 242,506 398,978
Finished goods 665,492 598,576
Allowance / reserve (906,733) (968,967)
------------------------------
Totals $ 1,832,250 $ 1,938,616
==============================
NOTE 4 - INTELLECTUAL PROPERTY
Intellectual property and estimated service lives consist of the following:
Estimated
September 30, December 31, Service Lives
2008 2007 in Years
--------------------------------------------------------------------------------
Infomercial development costs $ 217,786 $ 162,840 7
Patents 45,660 45,660 7
ABS informerical 1,186,382 1,186,382 5
Trademark 1,220,068 1,220,068 7
Copyright 115,193 115,193 7
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Total intellectual property 2,785,089 2,730,143
Less accumulated amortization (958,179) (640,910)
---------------------------------------------------------------
Intellectual property, net $ 1,826,910 $ 2,089,233
---------------------------------------------------------------
9
The estimated amortization expenses for the next five years are as follows:
Year Ending December 31,
---------------------------------------------------------------
2008 $ 105,757
2009 423,026
2010 423,026
2011 324,366
2012 222,498
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Total $ 1,498,673
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NOTE 5 - RELATED PARTY TRANSACTIONS
Play Beverages, LLC
During 2006, Playboy Enterprises, Inc. ("Playboy") entered into a licensing
agreement with PlayBev, a related party, whereby PlayBev agreed to
internationally market and distribute a new energy drink carrying the Playboy
name and "Rabbit Head" logo symbol. In 2007, PlayBev entered into an exclusive
agreement with the Company to arrange for the manufacture, marketing and
distribution of the energy drinks, other Playboy-licensed beverages, and related
merchandise through various distribution channels throughout the world.
PlayBev has no operations, so under the terms of the exclusive manufacturing and
distribution agreement the Company was appointed as master manufacturer and
distributor of the beverages and other products that PlayBev licensed from
Playboy. In so doing, the Company assumed all the risk of collecting amounts
owed from customers, and contracting with vendors for manufacturing and
marketing activities. In addition, PlayBev is owed a royalty from the Company
equal to the Company's gross profits from collected beverage sales, less 20
percent of the Company's related cost of goods sold, and 6 percent of the
Company's collected gross sales. During the three and nine months ended
September 30, 2008, the Company incurred $315,164 and $426,154 in royalty
expenses due to PlayBev.
The Company also agreed to provide services to PlayBev for initial development,
marketing, and promotion of the new beverage. These services are billed to
PlayBev and recorded as an account receivable. On March 19, 2008, the Company
agreed to increase the maximum amount from $1,000,000 to $3,000,000 that it
would carry as a receivable due from PlayBev in connection with these billed
services, and to also begin charging interest on the outstanding amounts owing
at a rate of 7 percent per annum. Interest income accrued on the amounts due for
the three and nine months ended September 30, 2008 was $75,125 and $137,431,
respectively. PlayBev has agreed to repay the receivable and accrued interest
out of the royalties due PlayBev from the Company's distribution sales as
described in the preceding paragraph. Amounts billed to PlayBev for marketing
and development services amounted to $1,040,370 and $3,569,916, respectively,
during the three and nine months ended September 30, 2008, and were included in
revenues for the Company's Marketing and Media segment. After netting this
amount plus interest with earlier amounts billed to and due from PlayBev, with
cumulative amounts due to PlayBev for royalties, the amount owed the Company was
$4,720,160 at September 30, 2008.
On August 23, 2008, PlayBev's members agreed to amend its operating agreement to
change the required membership vote on major managerial and organizational
decisions from 75 percent to 95 percent. Additionally, an unrelated executive
manager of PlayBev resigned, leaving the remaining two executive management
positions occupied by the Company president and one of the Company's directors.
After Bev Group, LLC
In an effort to finance the initial development and marketing of the new drink,
in 2007 the Company with other investors formed AfterBev, a partially-owned,
consolidated subsidiary of the Company. The Company contributed its expertise in
exchange for a membership interest in AfterBev. Following AfterBev's
organization the Company entered into consulting agreements with two
individuals, one of whom was a Company director. The agreements provided that
the Company assign to each individual approximately one-third of the Company's
share in future AfterBev cash distributions, in exchange for their assistance in
the initial AfterBev organization and planning, along with their continued
assistance in subsequent beverage development and distribution activities. The
agreements also provided that as the Company sold a portion of its membership
10
interest in AfterBev, the individuals would each be owed their proportional
assigned share distributions in the proceeds of such a sale. The actual payment
of the distributions depended on what the Company did with the sale proceeds. If
the Company used the proceeds to help finance beverage development and marketing
activities, the payment of distributions would be deferred, pending collections
from customers once beverage product sales eventually commenced. Otherwise, the
proportional assigned share distributions would be due to the two individuals.
Throughout the rest of 2007, as energy drink development and marketing
activities progressed, the Company raised additional funds by selling portions
of its membership interest in AfterBev to other investors, some of whom were
Company stockholders. In some cases, the Company sold a portion of its
membership interest, including voting rights. In other cases, the Company sold
merely a portion of its share of future AfterBev profits and losses. By the end
of 2007, after taking into account the two interests it had assigned, the
Company had retained a net 14 percent interest in AfterBev's profits and losses,
but had retained 52 percent of all voting rights in AfterBev. The Company
recorded the receipt of these net funds as increases to its existing minority
interest in AfterBev, and the rest as amounts owing as distributable proceeds
payable to the two individuals with assigned interests of the Company's original
share of AfterBev. At the end of 2007, the Company agreed to convert the amount
owing to one of the individuals into a promissory note. In exchange, the
individual agreed to relinquish his approximately one-third portion of the
Company's remaining share of AfterBev's profits and losses. Instead, the
individual received a membership interest in AfterBev. In January 2008, the
other assignee, who is one of the Company's directors, similarly agreed to
relinquish the distributable proceeds owed to him, in exchange for an interest
in AfterBev's profits and losses. Accordingly, he was granted a 24 percent
interest in AfterBev's profits and losses in exchange for foregoing $863,973 in
amounts due to him. Of this 24 percent, through the end of September 30, 2008,
the director had sold 7.5 percent to unrelated investors for a total of
$1,675,000, and had retained the remaining 16.5 percent interest in AfterBev's
profit and losses. In turn, the director loaned these sales proceeds to the
Company in the form of unsecured advances.
Transactions involving Officers, Directors, and Stockholders
Don L. Buehner was appointed to the Company's Board of Directors during 2007.
Prior to his appointment as a director, Mr. Buehner bought the Company's
building in a sale/leaseback transaction. The term of the lease is for 10 years,
with an option to extend the lease for up to three additional five-year terms.
The Company pays Mr. Buehner a monthly lease payment of $17,083, which is
subject to annual adjustments in relation to the Consumer Price Index. Mr.
Buehner retired from the Company's Board of Directors following the Company's
Annual Meeting of Shareholders on June 18, 2008.
In 2007, the Company appointed Fadi Nora to its Board of Directors. In addition
to compensation the Company normally pays to non-employee members of the Board,
Mr. Nora is entitled to a quarterly bonus equal to 0.5 percent of any gross
sales earned by the Company directly through Mr. Nora's efforts. As of September
30, 2008, the Company owed $5,114 under this arrangement. Mr. Nora also is
entitled to a bonus equal to five percent of the amount of any investment
proceeds received by the Company that are directly generated and arranged by him
if the following conditions are satisfied: (i) his sole involvement in the
process of obtaining the investment proceeds is the introduction of the Company
to the potential investor, but that he does not participate in the
recommendation, structuring, negotiation, documentation, or selling of the
investment, (ii) neither the Company nor the investor are otherwise obligated to
pay any commissions, finders fees, or similar compensation to any agent, broker,
dealer, underwriter, or finder in connection with the investment, and (iii) the
Board in its sole discretion determines that the investment qualifies for this
bonus, and that the bonus may be paid with respect to the investment. So far
during 2008, Mr. Nora has received no compensation under this arrangement, and
at September 30, 2008, the Company owed him $49,850 stemming from investment
proceeds received under various financing arrangements during the first nine
months of 2008.
In 2007, the Company also entered into a consulting agreement with Mr. Nora,
whereby the Company assigned to him approximately one-third of the Company's
share in future AfterBev cash distributions. In return, Mr. Nora assisted in the
initial AfterBev organization and planning, and continued to assist in
subsequent beverage development and distribution activities. The agreement also
provided that as the Company sold a portion of its membership interest in
AfterBev, Mr. Nora would be owed his proportional assigned share distribution in
the proceeds of such a sale. Distributable proceeds due to Mr. Nora at the end
of 2007 were $747,290. In January 2008, he agreed to relinquish this amount,
plus an additional $116,683, in exchange for a 24 percent interest in AfterBev's
profits and losses. Including the $1,675,000 obtained from his sales of AfterBev
membership interests, and after offsetting advance amounts subsequently repaid
to him by the Company, Mr. Nora had loaned the Company a net $1,041,404 in the
form of unsecured advances during the nine months ended September 30, 2008.
Accordingly, at September 30, 2008, the Company owed Mr. Nora $924,721.
11
Prior to his appointment with the Company, Mr. Nora was also involved in the
ANAHOP private placement of common stock. On April 11, 2008, Mr. Nora
disassociated himself from the other principals of ANAHOP, and as part of the
asset settlement relinquished ownership to the other principals of 12,857,144
shares of CirTran Corporation common stock, along with all of the warrants
previously assigned to him.
In 2007, the Company issued a 10 percent promissory note to a family member of
the Company president in exchange for $300,000. The note was due on demand after
May 2008. During the nine months ended September 30, 2008, along with interest,
the Company repaid principal of $6,048. At September 30, 2008, the principal
amount owing on the note was $232,843. On March 31, 2008, the Company issued to
this same family member, along with four other Company shareholders, promissory
notes totaling $315,000. The family member's note was for $105,000. Under the
terms of all the notes, the Company received total proceeds of $300,000, and
agreed to repay the amount received plus a five percent borrowing fee. The notes
were due April 30, 2008, after which they were due on demand, with interest
accruing at 12 percent per annum. During the six months ended September 30,
2008, the Company repaid $58,196 in principal to the family member.
As of September 30, 2008, the Company president had advanced the Company
$134,000.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Guthy-Renker - In 2006, the Company filed a lawsuit against Guthy-Renker
("Guthy"), alleging breach of a 2005 manufacturing and distribution agreement,
and seeking unspecified damages in excess of several million dollars. On March
25, 2008, the parties settled the matter, and Guthy paid the Company $300,000
under the settlement agreement to resolve all claims.
Registration rights agreements - In May 2005, in connection with the Company's
issuance of a convertible debenture to Highgate House Funds, Ltd. ("Highgate")
(see Note 8), the Company granted to Highgate registration rights pursuant to
which the Company agreed to file, within 120 days of the closing of the purchase
of the debenture, a registration statement to register the resale of shares of
the Company's common stock issuable upon conversion of the debenture. The
Company also agreed to use its best efforts to have the registration statement
declared effective within 270 days after filing the registration statement. The
Company agreed to register the resale of up to 100,000,000 shares, and to keep
such registration statement effective until all of the shares issuable upon
conversion of the debenture were sold. The Company filed the registration
statement in September 2005, and the registration statement was declared
effective in August 2006.
In December 2005, in connection with the Company's issuance of a convertible
debenture to YA Global Investments, L.P., formerly known as Cornell Capital
Partners, L.P. ("YA Global") (see Note 8), the Company granted to YA Global
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The Company also agreed to use its best efforts to
have the registration statement declared effective within 270 days after filing
the registration statement. The Company agreed to register the resale of up to
32,608,696 shares and 10,000,000 warrants, and to keep the registration
statement effective until all of the shares issuable upon conversion of the
debenture have been sold.
In August 2006, in connection with the Company's issuance of a second
convertible debenture to YA Global (See Note 8), the Company granted YA Global
registration rights, pursuant to which the Company agreed to file, within 120
days of the closing of the purchase of the debenture, a registration statement
to register the resale of shares of the Company's common stock issuable upon
conversion of the debenture. The Company also agreed to use its best efforts to
have the registration statement declared effective within 270 days after filing
the registration statement. The Company agreed to register the resale of up to
74,291,304 shares and 15,000,000 warrants, and to keep such registration
statement effective until all of the shares issuable upon conversion of the
debenture have been sold.
Previously, YA Global has agreed to extensions of the filing deadlines inherent
in the terms of the two convertible debentures mentioned above, and in February
2008 agreed to extend the filing deadlines to January 1, 2009.
12
In May 2006, the Company closed a private placement of shares of its common
stock and warrants in which it issued 14,285,715 shares of the Company's common
stock to ANAHOP, Inc., a California corporation, and issued warrants to purchase
up to 30,000,000 additional shares of common stock to designees of ANAHOP for a
price of $1,000,000. With respect to the shares underlying the warrants, the
Company granted piggyback registration rights as follows: (A) once all of the
warrants with an exercise price of $0.15 per share have been exercised, the
Company agreed to include in its next registration statement the resale of those
underlying shares; (B) once all of the warrants with an exercise price of $0.25
per share have been exercised, the Company agreed to include in its next
registration statement the resale of those underlying shares; and (C) once all
of the warrants with an exercise price of $0.50 per share have been exercised,
the Company agreed to include in its next registration statement the resale of
those underlying shares. The Company did not grant any registration rights with
respect to the original 14,285,715 shares of common stock.
NOTE 7 - NOTES PAYABLE
In February 2008, the Company issued a 10 percent, three-year, $700,000
promissory note to an investor. No interim principal payments are required, but
accrued interest is due quarterly. The investor also received five-year warrants
to purchase up to 75,000,000 shares of common stock at exercise prices ranging
from $0.02 to $0.50 per share. The Company determined that the warrants fell
under derivative accounting treatment, and recorded the initial carrying value
of a derivative liability equal to the fair value of the warrants at the time of
issuance. At the same time, a discount equal to the face amount of the note was
recorded, to be recognized ratably to interest expense. During the nine months
ended September 30, 2008, $137,694 was accreted to interest expense, and equaled
the carrying value of the note as of that date. The carrying value will continue
to be accreted over the life of the note until the carrying value equals the
face value of $700,000. The fair value of the derivative liability stemming from
the associated warrants as of September 30, 2008 was $113,409.
In March 2008, the Company converted $75,000 owed to an unrelated member of
AfterBev into a one-year, 10 percent promissory note, with interest payable
quarterly.
In April 2008, the Company issued a 12 percent promissory note to an individual
for $315,000. As in the case with similar notes issued in March 2008, the
Company received proceeds of $300,000, and agreed to repay the amount received
plus a five percent borrowing fee. This note was due in May 2008, after which it
became due on demand, with interest accruing at 12 percent per annum. The
Company president also agreed to personally guarantee the payment of this note.
NOTE 8 - CONVERTIBLE DEBENTURES
Highgate - In May 2005, the Company entered into an agreement with Highgate to
issue to Highgate a $3,750,000, 5 percent Secured Convertible Debenture (the
"Debenture"). The Debenture was originally due December 2007, and is secured by
all of the Company's assets. The Company and Highgate subsequently agreed to
extend the maturity date to December 31, 2008.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The balance of accrued
interest owed at September 30, 2008 was $232,166.
At any time, Highgate may elect to convert principal amounts owing on the
Debenture into shares of the Company's common stock at a conversion price equal
to the lesser of $0.10 per share or an amount equal to the lowest closing bid
price of the Company's common stock for the twenty trading days immediately
preceding the conversion date. The Company has the right to redeem a portion of
the entire Debenture outstanding by paying 105 percent of the principal amount
redeemed plus accrued interest thereon.
Highgate's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) Highgate may convert up to $250,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the market price of the
Company's stock is $0.10 per share or less at the time of
conversion;
13
(ii) Highgate may convert up to $500,000 worth of the principal
amount plus accrued interest of the Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.10 per share at the time of
conversion; provided, however, that Highgate may convert in
excess of the foregoing amounts if the Company and Highgate
mutually agree; and
(iii) Upon the occurrence of an event of default, Highgate may,
in its sole discretion, accelerate full repayment of all
debentures outstanding and accrued interest thereon, or may
convert the Debentures and accrued interest thereon into
shares of the Company's common stock.
Except in the event of default, Highgate may not convert the Debenture for a
number of shares that would result in Highgate owning more than 4.99 percent of
the Company's outstanding common stock.
As discussed in Note 6, the Company granted Highgate registration rights related
to the issuance of the debenture.
The Company determined that certain conversion features of the Debenture fell
under derivative accounting treatment. Since May 2005, the carrying value was
accreted over the life of the debenture until December 31, 2007, the original
maturity date. After reflecting such accretions, as well as principal
conversions since May 2005, the remaining carrying value of the Debenture was
$620,136 as of September 30, 2008. The fair value of the derivative liability
stemming from the debenture's conversion feature as of September 30, 2008 was
$392,105.
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were used to repay earlier promissory notes. Fees of $256,433, withheld from the
proceeds, were capitalized and are being amortized over the life of the note.
During 2006, Highgate converted $1,000,000 of debenture principal and accrued
interest into a total of 37,373,283 shares of common stock. During 2007,
Highgate converted $1,979,864 of debenture principal and accrued interest into a
total of 264,518,952 shares of common stock. During the nine months ended
September 30, 2008, Highgate converted $350,000 of debenture principal into a
total of 36,085,960 shares of common stock.
YA Global December Debenture - In December 2005, the Company entered into an
agreement with YA Global to issue a $1,500,000, 5 percent Secured Convertible
Debenture (the "December Debenture"). The December Debenture was originally due
July 30, 2008 and has a security interest of all the Company's property,
subordinate to the Highgate security interest. The Company and YA Global
subsequently agreed to extend the maturity date to December 31, 2008.
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made.
At any time, YA Global may elect to convert principal amounts owing on the
December Debenture into shares of the Company's common stock at a conversion
price equal to an amount equal to the lowest closing bid price of the Company's
common stock for the twenty trading days immediately preceding the conversion
date. The Company has the right to redeem a portion or the entire December
Debenture then outstanding by paying 105 percent of the principal amount
redeemed plus accrued interest thereon. The balance of accrued interest owed at
September 30, 2008 was $285,534.
YA Global's right to convert principal amounts into shares of the Company's
common stock is limited as follows:
(i) YA Global may convert up to $250,000 worth of the principal
amount plus accrued interest of the December Debenture in
any consecutive 30-day period when the market price of the
Company's stock is $0.10 per share or less at the time of
conversion;
(ii) YA Global may convert up to $500,000 worth of the principal
amount plus accrued interest of the December Debenture in
any consecutive 30-day period when the price of the
Company's stock is greater than $0.10 per share at the time
of conversion; provided, however, that YA Global may
convert in excess of the foregoing amounts if the Company
and YA Global mutually agree; and
14
(iii) Upon the occurrence of an event of default, YA Global may,
in its sole discretion, accelerate full repayment of the
debenture outstanding and accrued interest thereon or may
convert the December Debenture and accrued interest thereon
into shares of the Company's common stock.
Except in the event of default, YA Global may not convert the December Debenture
for a number of shares that would result in YA Global owning more than 4.99
percent of the Company's outstanding common stock.
The YA Global Debenture was issued with 10,000,000 warrants with an exercise
price of $0.09 per share that vest immediately and have a three-year life.
As discussed in Note 6, the Company granted YA Global registration rights
related to the issuance of the December Debenture and warrants.
The Company determined that the conversion features on the December Debenture
and the associated warrants fell under derivative accounting treatment. The
carrying value was accreted over the life of the December Debenture until August
31, 2008, a former maturity date, at which time the value of the December
Debenture reached $1,500,000. The fair value of the derivative liability
stemming from the December Debenture's conversion feature as of September 30,
2008 was $948,433.
In connection with the issuance of the December Debenture, fees of $130,000,
withheld from the proceeds, were capitalized and are being amortized over the
life of the December Debenture.
As of September 30, 2008, YA Global had not converted any of the December
Debenture into shares of the Company's common stock.
YA Global August Debenture - In August 2006, the Company entered into another
agreement with YA Global relating to the issuance by the Company of another 5
percent Secured Convertible Debenture, due in April 2009, in the principal
amount of $1,500,000 (the "August Debenture").
Accrued interest is payable at the time of maturity or conversion. The Company
may, at its option, elect to pay accrued interest in cash or shares of the
Company's common stock. If paid in stock, the conversion price shall be the
closing bid price of the common stock on either the date the interest payment is
due or the date on which the interest payment is made. The balance of accrued
interest owed at September 30, 2008 was $236,848.
YA Global is entitled to convert, at its option, all or part of the principal
amount owing under the August Debenture into shares of the Company's common
stock at a conversion price equal to 100 percent of the lowest closing bid price
of the Company's common stock for the twenty trading days immediately preceding
the conversion date.
YA Global's right to convert principal amounts owing under the August Debenture
into shares of the Company's common stock is limited as follows:
(i) YA Global may convert up to $500,000 worth of the principal
amount plus accrued interest of the August Debenture in any
consecutive 30-day period when the price of the Company's
stock is $0.03 per share or less at the time of conversion;
(ii) YA Global may convert any amount of the principal amount
plus accrued interest of the August Debenture in any
consecutive 30-day period when the price of the Company's
stock is greater than $0.03 per share at the time of
conversion; and
(iii) Upon the occurrence of an Event of Default (as defined in
the Debenture), YA Global may, in its sole discretion,
accelerate full repayment of all debentures outstanding and
accrued interest thereon or may, notwithstanding any
limitations contained in the August Debenture and/or the
Purchase Agreement, convert all debentures outstanding and
accrued interest thereon in to shares of the Company's
Common Stock pursuant to the August Debenture.
Except in the event of default, YA Global may not convert the August Debenture
for a number of shares of common stock that would cause the aggregate number of
shares of Common Stock beneficially owned by Cornell and its affiliates to
exceed 4.99 percent of the outstanding shares of the common stock following such
conversion.
15
In connection with the August Purchase Agreement, the Company also agreed to
grant to YA Global warrants (the "Warrants") to purchase up to an additional
15,000,000 shares of the Company's common stock. The Warrants have an exercise
price of $0.06 per share, and expire three years from the date of issuance. The
Warrants also provide for cashless exercise if at the time of exercise there is
not an effective registration statement or if an event of default has occurred.
In connection with the issuance of the August Debenture, the Company granted YA
Global registration rights related to the issuance of the August Debenture and
warrants (See Note 6).
The Company determined that the conversion features on the August Debenture and
the associated warrants fell under derivative accounting treatment. As of
September 30, 2008, the carrying value of the August Debenture was $1,180,055.
The carrying value will be accreted each quarter over the life of the August
Debenture until the carrying value equals the face value of $1,500,000. The fair
value of the derivative liability stemming from the August Debenture's
conversion feature as of September 30, 2008 was $1,049,206.
In connection with the issuance of the August Debenture, fees of $135,000,
withheld from the proceeds, were capitalized and are being amortized over the
life of the August Debenture.
In September 2008, YA Global converted $53,360 of debenture principal into a
total of 17,786,667 shares of common stock.
NOTE 9 - STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2008, the Company issued the
following shares of common stock:
53,872,627 restricted shares for payment of $403,360 of principal on
the debentures to Highgate and YA Global (see Note 8). Associated with
these debenture conversion payments was a related decrease in the
derivative liability of $212,455.
A total of 63,142,857 restricted shares were sold in six separate
private placement transactions for $441,000. A total of 73,635,960
restricted shares were issued in four private placement transactions
involving the conversion of $305,900 in advances investors had
previously loaned to the Company, along with additional proceeds of
$25,000. Included in these sets of transactions was the conversion of
accrued liabilities totaling $39,890. All dollar amounts were based on
the fair market value on the day the shares were sold as determined by
the closing price bid price.
In April 2008, the Company's attorneys exercised a share purchase right
for 10,000,000 shares of common stock. The right was issued earlier in
the year in connection with payment arrangements covering legal
services.
In August 2008, the Company issued 3,000,000 restricted shares to a
former employee as part of a final payment of an accrued settlement
obligation in the amount of $21,000, which was the fair market value of
the shares required to be issued when the settlement was made.
NOTE 10 - STOCK OPTIONS AND WARRANTS
Stock Option Plans - As of September 30, 2008, there were no more options
outstanding from the three Stock Option Plans adopted during 2003 and 2004. As
of that same date, options to purchase a total of 56,800,000 shares of common
stock had been issued from the 2006 Stock Option Plan, out of which a maximum of
60,000,000 can be issued. As of September 30, 2008, options and share purchase
rights to acquire a total of 22,960,000 shares of common stock had been issued
from the 2008 Stock Option Plan, also out of which a maximum of 60,000,000 can
be issued. The Company's Board of Directors administers the plans, and has
discretion in determining the employees, directors, independent contractors, and
advisors who receive awards, the type of awards (stock, incentive stock options,
non-qualified stock options, or share purchase rights) granted, and the term,
vesting, and exercise prices.
16
Employee Options - During the nine months ended September 30, 2008, the Company
granted options to purchase 12,960,000 shares of common stock to employees. The
fair market value of the options aggregated $105,296.
Option awards to employees are granted with an exercise price equal to the
market price of the Company's stock at the date of grant, most granted in the
past have vested immediately, and most have had four-year contractual terms.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model, using the assumptions noted in the
following table. Expected volatilities are based on the historical volatility of
the Company's common stock over the most recent period commensurate with the
expected term of the option. Prior to 2007, at times the Company granted options
to employees in lieu of salary payments, and the pattern of exercise experience
was known. Beginning in 2007, options were granted under different
circumstances, and the Company has insufficient historical exercise data to
provide a reasonable basis upon which to estimate the expected terms.
Accordingly, in such circumstances, the Company in 2007 began using the
simplified method for determining the expected term of options granted with
exercise prices equal to the stock's fair market value on the grant date. The
risk-free rate for periods within the contractual life of the option is based on
the U.S. Treasury yield curve in effect at the time of grant.
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
-------- --------- ----------- ------------
Expected dividend yield - - - -
Risk free interest rate - 5.02% 1.44%-2.73% 4.71%-5.02%
Expected volatility - 145% 118%-120% 108%-145%
Weighted average volatility - 145% 119% 117%
Expected term (in years) - - 2.5 - 2.6 0.0 - 2.5
Weighted average fair value
per share - $0.007 $0.008 $0.009
A summary of the stock option activity under the Plans as of September 30, 2008,
and changes during the nine months then ended is presented below:
Weighted
Weighted- Average
Average Remaining Aggregate
Exercise Contactual Intrinsic
Shares Price Life Value
---------- -------- ------------- --------------
Outstanding at
December 31, 2007 46,800,000 $0.013
Granted 12,960,000 $0.018
Exercised - $ -
Forfeited (3,600,000) $0.013
---------
Outstanding at
September 30, 2008 56,160,000 $0.014 3.77 $ -
========= ============= ==============
Excercisable at
September 30, 2008 54,360,000 $0.013 3.79 $ -
========= ============= ==============
There were no options exercised during the nine months ended September 30, 2008.
During the nine months ended September 30, 2007, options for 10,000,000 shares
were exercised that had an intrinsic value of $69,000. As of September 30, 2008,
there was $11,956 in unrecognized compensation cost related to nonvested options
outstanding that is expected to be recognized over a weighted average period of
3.0 years.
Share Purchase Rights - In January 2008, the Company granted share purchase
rights to its outside legal counsel to acquire 10,000,000 shares of common stock
at a price of $0.0001 per share. The purchase rights were granted in order that
the attorneys could sell the underlying shares and thus satisfy amounts due for
legal services rendered. Additional legal expense of $130,000 was recognized as
the fair market value at the time the stock purchase rights were awarded. Fair
market value was estimated using the Black-Scholes valuation model, and using
assumptions for volatility and estimated term as being close to zero since it
was assumed that the rights would be exercised almost immediately. As a result,
the valuation of the stock purchase rights was calculated to be virtually the
same as the fair value of the underlying common stock on the date of issuance.
17
Warrants - In connection with the YA Global convertible debenture issued in
December 2005, the Company issued three-year warrants to purchase 10,000,000
shares of the Company's common stock. The warrants had an exercise price of
$0.09 per share, and vested immediately, and had a three-year contractual life.
In connection with the YA Global convertible debenture issued in August 2006,
the Company issued three-year warrants to purchase 15,000,000 shares of the
Company's common stock. The warrants had an exercise price of $0.06 per share,
and vested immediately. In connection with the private placement with ANAHOP,
the Company issued five-year warrants to purchase 30,000,000 shares of common
stock at prices ranging from $0.15 to $0.50. All of these warrants were subject
to adjustment in the event of a stock split. Accordingly, as a result of the
1:1.20 forward stock split that occurred in 2007, there are warrants outstanding
at September 30, 2008 to purchase a total of 66,000,000 shares of common stock
in connection with these transactions. The exercise price per share of each of
the aforementioned warrants was likewise affected by the stock split, in that
each price was reduced by 20 percent.
In February 2008, in connection with issuing a promissory note, the Company also
issued five-year warrants to purchase up to 75,000,000 shares of common stock at
exercise prices ranging from $0.02 to $0.50 per share. In April 2008, in
connection with entering into an agreement with an outside consultant, the
Company also issued four-year warrants to purchase up to 6,000,000 shares of
common stock at an exercise price of $0.0125 per share. The Company accounts for
these consultant warrants under the provisions of EITF No. 96-18, Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring or in
Conjunction with Selling Goods or Services.
The Corporation currently has an insufficient number of authorized shares to
enable warrant holders to fully exercise their warrants, assuming all warrants
holders desired to do so. Accordingly, the warrants are subject to derivative
accounting treatment, and are included in the derivative liability related to
the convertible debentures (See Notes 6 and 7).
NOTE 11 -SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131,
Disclosure About Segments of an Enterprise and Related Information. The Company
has four reportable segments: Electronics Assembly, Contract Manufacturing,
Marketing and Media, and Beverage Distribution. The Electronics Assembly segment
manufactures and assembles circuit boards and electronic component cables. The
Contract Manufacturing segment manufactures, either directly or through foreign
subcontractors, various products under manufacturing and distribution
agreements. The Marketing and Media segment provides marketing services to
online retailers, along with beverage development and promotional services to
Play Beverages, LLC. The Beverage Distribution segment includes the results of
operations relating to beverage distribution. Prior to the quarter ended
September 30, 2008, such operations were not significant enough to warrant
allocation in a separate segment. As a result of Beverage Distribution
activities becoming increasingly significant, beginning with the third quarter
of 2008 they have been allocated separately. In addition, the various segment
amounts for prior periods shown below have been reallocated in order to reflect
consistent historical comparability.
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:
18
Electronics Contract Marketing Beverage
Assembly Manufacturing and Media Distribution Total
-------------------------------------------------------------------------------------------------------------------
Three months ended
September 30, 2008
Sales to external customers $ 250,621 $ 207,982 $ 2,086,489 $ 557,322 $ 3,102,414
Intersegment sales - - - - -
Segment income (loss) (1,863,270) (127,643) (551,027) 283,526 (2,258,414)
Segment assets 4,761,123 2,103,364 7,761,986 138,636 14,765,109
Depreciation and amortization 96,152 65,182 214 - 161,548
Three months ended
September 30, 2007
Sales to external customers $ 586,193 $ 1,032,501 $ 1,914,861 $ - $ 3,533,555
Intersegment sales - - - - -
Segment income (loss) (886,887) (88,902) 1,058,687 - 82,898
Segment assets 8,180,962 206,525 3,790,842 - 12,178,329
Depreciation and amortization 92,676 64,303 484 - 157,463
Nine months ended
September 30, 2008
Sales to external customers $ 1,287,316 $ 1,729,694 $ 6,303,870 $ 882,118 $ 10,202,998
Intersegment sales - - - - -
Segment income (loss) (2,935,892) 101,289 (536,149) 389,325 (2,981,427)
Segment assets 4,761,123 2,103,364 7,761,986 138,636 14,765,109
Depreciation and amortization 288,227 194,573 965 - 483,765
Nine months ended
September 30, 2007
Sales to external customers $ 2,538,464 $ 2,461,879 $ 3,699,661 $ - $ 8,700,004
Intersegment sales - - - - -
Segment income (loss) (3,706,882) (631,371) 874,743 - (3,463,510)
Segment assets 8,180,962 206,525 3,790,842 - 12,178,329
Depreciation and amortization 307,560 186,626 696 - 494,882
Three months Nine months
ended September 30, ended September 30,
----------------------------- --------------------------------
Sales 2008 2007 2008 2007
--------------------------------------------------------------------------------------------------
Total sales for reportable
segments $ 3,102,414 $ 3,533,555 $ 10,202,998 $ 8,700,004
Elimination of intersegment sales - - - -
--------------------------------------------------------------------------------------------------
Consolidated net sales $ 3,102,414 $ 3,533,555 $ 10,202,998 $ 8,700,004
--------------------------------------------------------------------------------------------------
September 30,
------------------------------
Total assets 2008 2007
--------------------------------------------------------------------------------
Total assets for reportable segments $ 14,765,109 $ 12,178,329
Adjustment for intersegment amounts - -
--------------------------------------------------------------------------------
Consolidated total assets $ 14,765,109 $ 12,178,329
--------------------------------------------------------------------------------
19
NOTE 12 - GEOGRAPHIC INFORMATION
The Company currently maintains approximately $726,000 of capitalized tooling
costs in China. All other revenue-producing assets are located in the U.S. While
the Company ships products overseas on behalf of its customers, those customers
are located almost exclusively in the United States.
NOTE 13 - SUBSEQUENT EVENTS
In October 2008, YA Global converted a total of $187,800 of principal on its
convertible August Debenture into 60,000,000 shares of the Company's common
stock at an aggregate conversion rate of $0.00313 per share.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with Management's Discussion and
Analysis or Plan of Operation included in our Annual Report on Form 10-KSB for
the year ended December 31, 2007.
Overview
In our U.S. operations, we provide a mix of high and medium size volume turnkey
manufacturing services and products using various high-tech applications for
leading electronics OEMs in the communications, networking, peripherals, gaming,
law enforcement, consumer products, telecommunications, automotive, medical, and
semiconductor industries. 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
also market an energy drink under the Playboy brand pursuant to a license
agreement with Playboy Enterprises, Inc.
We conduct business through our subsidiaries and divisions: CirTran USA, CirTran
Asia, CirTran Products, CirTran Media Group, CirTran Online, and CirTran
Beverage.
CirTran USA accounted for eight percent and 17 percent of our total revenues
during the three months ended September 30, 2008 and 2007, respectively, and
accounted for 13 percent and 29 percent, respectively, of total revenues for the
nine months then ended. Revenues were generated by low-volume electronics
assembly activities consisting primarily of the placement and attachment of
electronic and mechanical components on printed circuit boards and flexible
(i.e., bendable) cables.
Through CirTran Asia we manufacture and distribute electronics, consumer
products and general merchandise to companies selling in international markets.
Such sales were four and 29 percent of our total revenues during the three
months ended September 30, 2008 and 2007, respectively. Sales for the nine-month
periods were 16 and 28 percent, respectively.
CirTran Products pursues contract manufacturing relationships in the U.S.
consumer products markets, including licensed merchandise sold in the sports and
entertainment markets. These sales comprised two and less than one-half of one
percent of total sales for both of the quarters ended September 30, 2008 and
2007, and comprised less than one-half of one percent of total sales for the
first nine months of both 2008 and 2007.
CirTran Media provides end-to-end services to the direct response and
entertainment industries. During the third quarters of 2008 and 2007, this
subsidiary's revenues were one percent and six percent of total sales,
respectively. During the nine months ended September 30, 2008 and 2007, this
subsidiary's revenues were, respectively, three percent and eight percent.
CirTran Online sells products via the internet, and provides services and
support to internet retailers. In conjunction with partner GMA, revenues from
this division were 33 percent and 26 percent of total revenues during the three
months ended September 30, 2008 and 2007, respectively, and were 24 percent and
23 percent of total revenues during the nine months ended September 30, 2008 and
2007, respectively.
CirTran Beverage manufactures, markets, and distributes Playboy-licensed energy
drinks, which in the future are anticipated to include flavored water beverages,
and related merchandise. We have also entered into an agreement with PlayBev, a
related party who holds the Playboy license. We provide development and
promotional services to PlayBev, and pay a royalty based on our product sales
and manufacturing costs. Services billed to PlayBev during the three months
ended September 30, 2008 and 2007 under this arrangement accounted for 34
percent and 22 percent, respectively, of total sales, and were 35 percent and 12
percent, respectively during the nine months ended September 30, 2008 and 2007.
We also sold a certain amount of energy drink beverages during 2008, which
amounted to 18 and nine percent of total sales, respectively, for the three- and
nine-month periods ended September 30, 2008.
During the three months ended September 30, 2008, the Company was engaged in
Playboy Energy Drink beverage distributorship negotiations with a few different
parties overseas. Such negotiations continued into the fourth quarter of 2008 at
different stages of completion, and with what the Company anticipates to be
21
varying degrees of eventual success. At the end of October 2008, a 10-year
agreement became effective between the Company and a beverage distributor in
Mexico, as the distributor fulfilled the terms of its initial order.
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 for the reasons detailed in
our most recent Annual Report on Form 10-KSB at pages 13 through 22. 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 detailed here and in our other SEC filings 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.
Results of Operations
Revenue and Cost of Sales
Net revenue decreased 12 percent to $3,102,414 for the quarter ended September
30, 2008, as compared to $3,533,555 for the quarter ended September 30, 2007,
and revenue increased 17 percent to $10,202,998 for the nine months ended
September 30, 2008, as compared to $8,700,004 for the same period of the prior
year. The nine-month increase was primarily attributable to new revenue provided
by the CirTran Online and CirTran Beverage subsidiaries, the significant effects
of which began to be experienced during the latter half of 2007. Revenues from
services billed within those two divisions aggregated $6,898,096 during the
first nine months of 2008, as compared to $3,027,266 during the same period
during the prior year. This included revenue from the sale of Playboy Energy
Drink, which was $882,118 during the first nine months of 2008. Of this amount,
$557,322 was realized during the three months ended September 30, 2008. We
believe we will experience higher energy drink revenues throughout the rest of
2008 and into 2009.
These sales increases were offset by sales decreases in CirTran USA and CirTran
Asia, which experienced a decline in sales of $1,216,882, or 76 percent, during
the third quarter of 2008 as compared to the prior year's third quarter, and
which sales also declined by $2,060,621, or 42 percent during the nine months
ended September 30, 2008 as compared to the same period of the prior year. This
third-quarter decline was also the reason for the overall revenue decrease for
the third quarter of 2008. The decline was mainly attributable to (1) a
"one-time" order shipped in 2007 that was not duplicated during 2008, (2) a
decrease in the number of exercise products shipped from China, and (3) the
effects of the continuing national economic decline that has resulted in a
decrease in cable assembly and electronic orders from our traditional customers.
These customers are placing orders with us in the current period at lower
amounts than in 2007. Shipments of CirTran Product items remained relatively
insignificant during both comparative periods, as shipments of True Ceramic Pro
("TCP") flat hair iron units virtually ceased at the beginning of 2007.
Revenue derived by CirTran Media also declined by 90 percent and 58 percent,
respectively, during the three- and nine-month periods ended September 30, 2008,
as compared to the same periods during the prior year. The reason for the
decline was our disposal during early 2007 of the Diversified Talent Group
business and its related revenue source. However, this decline was offset
somewhat by increased TCP sales via our website, which during the first half of
2008 increased when compared to 2007.
Cost of sales, as a percentage of sales, increased to 86 percent from 49 percent
for the three months ended September 30, 2008, as compared to the prior year,
and increased to 81 percent from 48 percent during the first nine months of 2008
as compared to 2007. Consequently, the gross profit margin decreased to 14
percent from 51 percent and to 19 percent from 52 percent, respectively, for the
same time periods. The decrease in gross profit margin was attributable to the
22
significant shift in the sales mix of products and services experienced during
2008 as compared to 2007. One of the primary reasons for the difference was due
to the nature of our manufacturing and distribution agreement with PlayBev.
CirTran Beverage invoices PlayBev for beverage development and marketing
services, which are very low margin projects. However, we anticipate that gross
profit margins for CirTran Beverage will improve during the rest of 2008 and
into 2009, as we distribute more of the Playboy Energy Drink beverages, and to
what extent beverage distribution sales compare with service sales billed to
PlayBev. Another reason the gross profit margin decrease was the arrangement we
have with GMA. Pursuant to our Assignment and Exclusive Services Agreement, we
recognize the revenue collected under the GMA contracts, and remit back to GMA a
management fee approximating their actual costs. This management fee is included
in our cost of revenue. The PlayBev and GMA relationships were not significantly
in place during the first half of 2007.
Selling, General and Administrative Expenses
During the third quarter ended September 30, 2008, selling, general and
administrative expenses decreased by 32 percent as compared to the same period
during 2007. For the nine months ended September 30, 2008, selling, general, and
administrative expenses decreased by 30 percent. The primary reason for the
decrease was the absence during 2008 of significant costs associated with our
former business partner, Diverse Talent Group. However, these cost savings were
offset somewhat by increases in legal, travel, and advertising expenses
associated with expanding activities in connection with finishing our
TCP-related infomercial, and completing litigation efforts.
Non-cash compensation expense
Compensation expense in connection with granting options to employees to
purchase common stock increased by 24 percent for the nine months ended
September 30, 2008 as compared to the prior year. The increase resulted
primarily from the difference in the expected term used in calculating the
valuation attributable to the option awards. The expected term presumed for
options awarded during the first part of 2007 was significantly lower than that
used during 2008.
Other income and expense
Major components of other income and expense were as follows:
o Interest expense for the three months ended September 30, 2008 was
$458,539 as compared to $584,328 for the comparative period in
2007, a decrease of 22 percent. The decrease related primarily to
elimination of the mortgage on our building through a sale and
leaseback arrangement. This was also the primary reason why
interest expense for the first nine months of 2008 declined 27
percent as compared to the same period of the previous year.
o We began accruing interest income during 2008 due to a
modification of our agreement with PlayBev that took effect on
March 19, 2008.
o During the third quarter of 2008, we received $250,000 as part of
the settlement of an agreement with an overseas distributor with
whom contract negotiations eventually terminated.
o During the first quarter of 2008, we arrived at a settlement
agreement in connection with litigation, and received $300,000 to
resolve all related claims.
o We also recorded a loss of $867,138 on our derivative valuation
for the quarter ended September 30, 2008, as compared to a gain of
$198,648 derived during the quarter ended September 30, 2007. We
also recorded a derivative valuation-related gain of $838,024 for
the first nine months of 2008, as compared to a loss of $63,108
for the same period of 2007. The differences resulted from the
varying valuations calculated during the respective periods,
taking into account differing debt levels of the underlying
convertible debentures, along with the different market values of
our common stock.
As a result of all of the above factors, we experienced an overall net loss of
$2,258,414 for the three months ended September 30, 2008, as compared to net
income of $82,898 for the same period of the previous year. Our loss for the
first nine months of 2008 decreased 14 percent to $2,981,427, as compared to
$3,463,510 for the nine months ended September 30, 2007.
23
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $32,395,630 at September 30, 2008, and
$29,414,203 at December 31, 2007. Our net loss for the nine months ended
September 30, 2008 was $2,981,427, compared to $3,463,510 for the same period of
2007. Our current liabilities exceeded our current assets by $5,913,272 as of
September 30, 2008, and $5,986,817 as of December 31, 2007. The primary reasons
for the slight change were a combination of increases in accounts receivable and
a reduction in the derivative liability, offset by increases in accounts
payable, accrued liabilities, and short-term debt. For the first nine months of
2008, we experienced negative cash flows from operating activities of
$3,361,754, as compared to $2,920,923 during the previous year.
Cash
Aside from the difference in net loss during the comparative periods, most of
the difference in cash used by operations during the nine months ended September
30, 2008, as compared to the same period in 2007 stemmed from the differences in
various non-cash elements of gain and loss such as lower accretion expenses, the
2007 gain on the settlement, and the gain relating to the change in derivative
valuations on the convertible debentures and related warrants. Aside from these
factors, operating cash flows were primarily affected by amounts spent for the
development and initial marketing efforts related to the Playboy-licensed energy
drink, and then billed to PlayBev, along with amounts spent on raising average
inventory levels in connection with the energy drink.
Accounts Receivable
The increase in accounts receivable at September 30, 2008 as compared to
December 31, 2007, resulted from additional amounts billed to PlayBev during the
first half of 2008. During 2007, we agreed to provide services to PlayBev for
initial development, marketing, and promotion of the energy drink. We bill these
services to PlayBev and record the amount as an account receivable. Beginning in
March 2008, we also began accruing interest on the amount due from PlayBev.
Accounts payable and short-term debt
Quarter-end accounts payable, short-term advances payable, distributions
payable, accrued liabilities, and notes payable to related parties and
stockholders owing at September 30, 2008 were higher by $2,932,132 when compared
to corresponding year-end amounts at December 31, 2007. Accounts payable were
higher due to activity related to PlayBev-related services performed during
2008. At September 30, 2008, we owed $1,626,993 which we had borrowed in the
form of unsecured, short-term advances from various investors. Some investors
intend to convert their advances into formal promissory note agreements, and
some have already converted their advances into shares of common stock. In
addition, we entered into promissory note agreements with other investors,
resulting in a net increase in short-term debt of $640,756. The total of all
these increases were offset somewhat by a reduction in distributions payable
owed to a member of our Board of Directors by assignment to him of a portion of
our membership interest in AfterBev, and which was subsequently relinquished in
January 2008.
Liquidity and financing arrangements
We have a history of substantial losses from operations, and of using rather
than providing cash in operations. We had an accumulated deficit of $32,395,630,
along with a total stockholders' deficit of $2,565,602 at September 30, 2008. In
addition, during the first nine months of 2008, we have used, rather than
provided, cash in our operations. As of September 30, 2008, our monthly cash
operating costs plus interest expense payable in cash averaged approximately
$383,000 per month.
In conjunction with our efforts to improve our results of operations we are also
actively seeking infusions of capital from investors, and are seeking sources to
repay our existing convertible debentures. In our current financial condition,
it is unlikely that we will be able to obtain additional debt financing at a
reasonable cost. Even if we did acquire additional debt, we would be required to
devote additional cash flow to servicing the debt, and either securing the debt
with assets, or paying a premium cost. Accordingly, we are looking to obtain
equity financing to meet our anticipated capital needs. There can be no
assurances that we will be successful in obtaining such capital. If we issue
additional shares for equity or in connection with debt, this will dilute the
value of our common stock and existing shareholders' positions.
24
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short or the long term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
Convertible Debentures
Highgate House Funds, Ltd. - In May 2005, we entered into an agreement with
Highgate to issue a $3,750,000, 5 percent Secured Convertible Debenture (the
"Debenture"). The Debenture was originally due December 2007, and is secured by
all of our assets. Highgate has agreed to extend the maturity date of the
Debenture to December 31, 2008. (See Note 8 to the unaudited condensed
consolidated financial statements included in Item 1 of this report.)
Accrued interest is payable at the time of maturity or conversion. We may, at
our option, elect to pay accrued interest in cash or shares of our common stock.
If paid in stock, the conversion price shall be the closing bid price of the
common stock on either the date the interest payment is due or the date on which
the interest payment is made. The balance of accrued interest owed at September
30, 2008 was $232,166.
We determined that certain conversion features of the Debenture fell under
derivative accounting treatment. Since May 2005, the carrying value has been
accreted over the life of the debenture until December 31, 2007, the original
maturity date. After reflecting such accretions, as well as principal
conversions since May 2005, the remaining carrying value of the Debenture was
$620,136 as of September 30, 2008. The fair value of the derivative liability
stemming from the debenture's conversion feature as of September 30, 2008 was
$392,105.
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were used to repay earlier promissory notes. Fees of $256,433, withheld from the
proceeds, were capitalized and are being amortized over the life of the note.
During the nine months ended September 30, 2008, Highgate converted $350,000 of
debenture principal into a total of 36,085,960 shares of common stock.
YA Global December Debenture - In December 2005, we entered into an agreement
with YA Global to issue a $1,500,000, 5 percent Secured Convertible Debenture
(the "December Debenture"). The December Debenture was originally due July 30,
2008 and has a security interest in all our assets, subordinate to the Highgate
security interest. YA Global also agreed to extend the maturity date of the
December Debenture to December 31, 2008. (See Note 8 to the unaudited condensed
consolidated financial statements included in Item 1.)
Accrued interest is payable at the time of maturity or conversion. We may, at
our option, elect to pay accrued interest in cash or shares of our common stock.
If paid in stock, the conversion price shall be the closing bid price of the
common stock on either the date the interest payment is due or the date on which
the interest payment is made.
At any time, YA Global may elect to convert principal amounts owing on the
December Debenture into shares of our common stock at a conversion price equal
to an amount equal to the lowest closing bid price of our common stock for the
twenty trading days immediately preceding the conversion date. We have the right
to redeem a portion or the entire December Debenture then outstanding by paying
105 percent of the principal amount redeemed plus accrued interest thereon. The
balance of accrued interest owed at September 30, 2008 was $285,534.
We determined that the conversion features on the December Debenture and the
associated warrants fell under derivative accounting treatment. The carrying
value was accreted over the life of the December Debenture until August 31,
2008, a former maturity date, at which time the value of the December Debenture
reached $1,500,000. The fair value of the derivative liability stemming from the
December Debenture's conversion feature as of September 30, 2008 was $948,433.
In connection with the issuance of the December Debenture, fees of $130,000,
withheld from the proceeds, were capitalized and are being amortized over the
life of the December Debenture.
As of September 30, 2008, YA Global had not converted any of the December
Debenture into shares of our common stock.
25
YA Global August Debenture - In August 2006, we entered into another agreement
with YA Global relating to the issuance by the Company of another 5 percent
Secured Convertible Debenture, due in April 2009, in the principal amount of
$1,500,000 (the "August Debenture"). (See Note 8 to the unaudited condensed
consolidated financial statements in Item 1.)
Accrued interest is payable at the time of maturity or conversion. We may, at
our option, elect to pay accrued interest in cash or shares of our common stock.
If paid in stock, the conversion price shall be the closing bid price of the
common stock on either the date the interest payment is due or the date on which
the interest payment is made. The balance of accrued interest owed at September
30, 2008 was $236,848.
YA Global is entitled to convert, at its option, all or part of the principal
amount owing under the August Debenture into shares of our common stock at a
conversion price equal 100 percent of the lowest closing bid price of our common
stock for the twenty trading days immediately preceding the conversion date.
We determined that the conversion features on the August Debenture and the
associated warrants fell under derivative accounting treatment. As of September
30, 2008 the carrying value of the August Debenture was $1,180,055. The carrying
value will be accreted each quarter over the life of the August Debenture until
the carrying value equals the face value of $1,500,000. The fair value of the
derivative liability stemming from the August Debenture's conversion feature as
of September 30, 2008 was $1,049,206.
In connection with the issuance of the August Debenture, fees of $135,000,
withheld from the proceeds, were capitalized and are being amortized over the
life of the August Debenture.
In September 2008, YA Global converted $53,360 of debenture principal into a
total of 17,786,667 shares of common stock.
We currently have issued and outstanding options, warrants, convertible notes
and other instruments for the acquisition of our common stock in excess of the
available authorized but unissued shares of common stock provided for under our
Articles of Incorporation, as amended. As a consequence, in the event that the
holders of such instruments requiring the issuance, in the aggregate, of a
number of shares of common stock that would, when combined with the previously
issued and outstanding common stock of the Company exceed the authorized capital
of the Company, seek to exercise their rights to acquire shares under those
instruments, we will be required to increase the number of authorized shares or
effect a reverse split of the outstanding shares in order to provide sufficient
shares for issuance under those instruments.
Critical accounting estimates
Revenue Recognition - Revenue is recognized when products are shipped. Title
passes to the customer or independent sales representative at the time of
shipment. Returns for defective items are repaired and sent back to the
customer. Historically, expenses associated with returns have not been
significant and have been recognized as incurred.
Shipping and handling fees are included as part of net sales. The related
freight costs and supplies directly associated with shipping products to
customers are included as a component of cost of goods sold.
We have also recorded revenue using a "Bill and Hold" method of revenue
recognition. The SEC in Staff Accounting Bulletin No. 104 imposes several
requirements to be met in order to recognize revenue prior to shipment of
product.
The SEC's criteria are the following:
i. The risks of ownership must have passed to the buyer;
ii. The customer must have made a fixed commitment to purchase
the goods, preferably in written documentation;
iii. The buyer, not the seller, must request that the
transaction be on a bill and hold basis. The buyer must
have a substantial business purpose for ordering the goods
on a bill and hold basis;
26
iv. There must be a fixed schedule for delivery of the goods.
The date for delivery must be reasonable and must be
consistent with the buyer's business purpose (e.g., storage
periods are customary in the industry);
v. The seller must not have retained any specific performance
obligations such that the earning process is not complete;
vi. The ordered goods must have been segregated from the
seller's inventory and not be subject to being used to fill
other orders; and
vii. The equipment (product) must be complete and ready for
shipment.
In effect, we secure a contractual agreement from the customer to purchase a
specific quantity of goods, and the goods are produced and segregated from our
inventory. Shipment of the product is scheduled for release over a specified
period of time. The result is that we maintain the customer's inventory, on
site, until all releases have been issued.
We signed an Assignment and Exclusive Services Agreement with GMA, a related
party, whereby revenues and all associated performance obligations under GMA's
web-hosting and training contracts were assigned to us. Accordingly, this
revenue is recognized in our financial statements when it is collected, along
with our revenue of CirTran Online Corporation.
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 Statement of Financial Accounting Standards ("SFAS") No.
13, Accounting for Leases.
We have entered into a Manufacturing, Marketing and Distribution Agreement with
PlayBev, a related party, whereby we are the vendor of record in providing
initial development, promotional, marketing, and distribution services.
Accordingly, all amounts billed to PlayBev in connection with the development
and marketing of its new energy drink have been included in revenue.
Impairment of Long-Lived Assets - We review our long-lived assets, including
intangibles, for impairment when events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. At each balance
sheet date, we evaluate whether events and circumstances have occurred that
indicate possible impairment. We use an estimate of future undiscounted net cash
flows from the related asset or group of assets over their remaining life in
measuring whether the assets are recoverable. As of September 30, 2008, we do
not consider any of our long-lived assets to be impaired.
Long-lived asset costs are amortized over the estimated useful life of the
asset, which is typically 5 to 7 years. Amortization expense was $105,972 and
$105,757, respectively, for the three and nine months ended September 30, 2008.
Amortization expense was $317,269 and $316,619 for the three and nine months
ended September 30, 2007, respectively.
Financial Instruments with Derivative Features - We do not hold or issue
derivative instruments for trading purposes. However, we have financial
instruments that are considered derivatives, or contain embedded features
subject to derivative accounting. Embedded derivatives are valued separate from
the host instrument and are recognized as derivative liabilities in our balance
sheet. We measure these instruments at their estimated fair value, and recognize
changes in their estimated fair value in results of operations during the period
of change. We have estimated the fair value of these embedded derivatives using
the Black-Scholes model. The fair values of the derivative instruments are
remeasured each quarter.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is limited to interest rate sensitivity, which is
affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of the cash
equivalents, we believe that we are not subject to any material interest rate
risk as it relates to interest income. All outstanding debt instruments at
September 30, 2008 have fixed interest rates and are therefore not subject to
interest rate risk.
We did not have any foreign currency hedges or other derivative financial
instruments as of September 30, 2008. We do not enter into financial instruments
for trading or speculative purposes and do not utilize derivative financial
instruments. Our operations are conducted in the United States and as such are
not subject to foreign currency exchange rate risk.
27
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding any required
disclosure. In designing and evaluating these disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures.
As of the end of the period covered by this report, our Chief Executive Officer
and Chief Financial Officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Exchange Act). Based on this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the disclosure controls
and procedures were effective to provide reasonable assurance as of September
30, 2008.
Changes in Internal Control Over Financial Reporting
During the nine months ended September 30, 2008 there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
CirTran Asia, et al. v. International Edge, et al., Civil No. 2:05 CV 413BSJ,
U.S. District Court, District of Utah. On May 11, 2005, CirTran Asia, UKing
System Industry Co., Ltd. ("UKing") and Charles Ho ("Ho") filed suit against
International Edge, Inc. ("IE"), Michael Casey Enterprises, Inc. ("MCE"),
Michael Casey ("Casey"), David Hayek ("Hayek"), and HIPMG, Inc. ("HIPMG"), for
breach of contract, breach of the implied covenant of good faith and fair
dealing, interference with economic relationships, fraud, and breach of
provisions of Utah and New Jersey statutes in relation to certain licensing
issues relating to the Ab King Pro. IE, MCE and Casey counterclaimed, alleging
breach of contract, fraud, defamation and related claims. The status of the
parties' various claims is as follows:
CirTran Asia's Claims:
----------------------
On June 5, 2008, the Court entered summary judgment for CirTran Asia on
some of its claims against MCE and Casey, and entered judgment against
MCE and Casey in the amount of $788,875. Various claims of CirTran Asia
remain. On September 17, 2008, pursuant to a stipulation of the
parties, the Court dismissed CirTran Asia's claims against Hayek and
HIPMG. On October 21, 2008, pursuant to a stipulation of the parties,
the Court dismissed CirTran Asia's claims against IE.
Ho's and UKing's Claims:
------------------------
On September 12, 2008, pursuant to a stipulation of the parties, the
Court dismissed the claims of Ho and UKing against Hayek and HIPMG. On
September 12, 2008, pursuant to a stipulation of the parties, the Court
dismissed the claims of Ho and UKing against Casey. However, the claims
of Ho and UKing against MCE remain. On July 11, 2008, the Court granted
summary judgment for IE on Ho's and UKing's claims against IE.
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IE's Counterclaims:
-------------------
On October 21, 2008, pursuant to a stipulation of the parties, the
Court dismissed IE's counterclaims against CirTran Asia. IE's
counterclaims against Ho and UKing remain.
Casey's Counterclaims:
----------------------
Casey's counterclaims against CirTran Asia, Ho and UKing remain.
MCE's Counterclaims:
--------------------
On February 7, 2008, the Court dismissed all of MCE's counterclaims
against plaintiffs.
There is a pretrial conference scheduled for December 9, 2008, where the
remaining claims and counterclaims of all parties will be considered. We intend
to vigorously pursue our remaining claims, and to defend counterclaims against
us, however at this time we cannot determine the eventual outcome of our claims
or the potential success or effect any counterclaims may have on us when
resolved.
With respect to all other legal proceedings described in our most recent Annual
Report on Form 10-KSB at pages 23 through 25, there were no further material
developments that occurred during the quarter ended September 30, 2008.
ITEM 1A. RISK FACTORS
Various risk factors associated with our business are included under the heading
"Risk Factors" in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2007. In addition, we note the following risk:
General economic conditions may affect our revenue and harm our business.
As widely reported, financial markets in the United States, Europe and Asia have
been experiencing extreme disruption in recent months. Unfavorable changes in
economic conditions, including declining consumer confidence, inflation,
recession or other changes, may lead our customers to delay or reduce purchases
of our products and our results of operations and financial condition could be
adversely affected thereby. Challenging economic conditions also may impair the
ability of our customers or distributors to pay for products they have
purchased, and as a result, our reserves for doubtful accounts and write-offs of
accounts receivable could increase. Our cash flows may be adversely affected by
delayed payments or underpayments by our customers. We are unable to predict the
duration and severity of the current disruption in financial markets and adverse
economic conditions in the U.S. and other countries.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the period covered by this report, we issued shares of our common stock
without registering those securities under the Securities Act of 1933, as
amended ("Securities Act") as follows:
o 17,786,667 shares of common stock were issued on September 19,
2008 to YA Global as a conversion payment of $53,360 of principal
on our debenture obligation. The conversion rate of $0.003 was
determined as being the lesser of $0.10 per share or an amount
equal to the lowest closing bid price of our common stock during
the twenty trading days immediately preceding the conversion date,
pursuant to the terms of the debenture agreement.
o A total of 73,635,960 shares were sold in four separate private
placement transactions for $352,955, one on September 9, 2008, and
three on September 23, 2008. One of the September 23 transactions
included the conversion of $22,055 in accrued liabilities. In each
of the four sales, the proceeds were determined based on the fair
market value on the day the shares were sold.
o On August 5, 2008, we issued 3,000,000 restricted shares to a
former employee as part of a final payment of an accrued
settlement obligation.
In each case, we relied on exemptions provided under the Securities Act. We took
steps to see that the investors had available the same type of information that
would be included in a registration statement. In addition, each certificate
representing shares issued pursuant to those exemptions was inscribed by the
restricted legend required by Rule 144.
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Item 5. Other Information
At present we have no separate Audit, Nominating, Compensation, or Corporate
Governance committees of the Board of Directors. All decisions and activities
normally conducted by such committees are performed by the full Board of
Directors.
Item 6. Exhibits
Exhibit No. Document
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3.1 Articles of Incorporation (previously filed as Exhibit No. 2 to
our Current Report on Form 8-K, filed with the Commission on July
17, 2000, and incorporated herein by reference).
3.2 Bylaws (previously filed as Exhibit No. 3 to our Current Report on
Form 8-K, filed with the Commission on July 17, 2000, and
incorporated herein by reference).
10.1 Securities Purchase Agreement between CirTran Corporation and
Highgate House Funds, Ltd., dated as of May 26, 2005 (previously
filed as an exhibit to the Company's Current Report on Form 8-K,
filed with the Commission on June 3, 2005, and incorporated herein
by reference).
10.2 Form of 5 percent Convertible Debenture, due December 31, 2007,
issued by CirTran Corporation (previously filed as an exhibit to
the Company's Current Report on Form 8-K, filed with the
Commission on June 3, 2005, and incorporated herein by reference).
10.3 Investor Registration Rights Agreement between CirTran Corporation
and Highgate House Funds, Ltd., dated as of May 26, 2005
(previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the Commission on June 3, 2005, and
incorporated herein by reference).
10.4 Security Agreement between CirTran Corporation and Highgate House
Funds, Ltd., dated as of May 26, 2005 (previously filed as an
exhibit to the Company's Current Report on Form 8-K, filed with
the Commission on June 3, 2005, and incorporated herein by
reference).
10.5 Escrow Agreement between CirTran Corporation, Highgate House
Funds, Ltd., and David Gonzalez dated as of May 26, 2005
(previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the Commission on June 3, 2005, and
incorporated herein by reference).
10.6 Settlement Agreement and Mutual Release between CirTran
Corporation and Howard Salamon d/b/a/ Salamon Brothers, dated as
of February 10, 2006
10.7 Settlement Agreement by and among Sunborne XII, LLC, CirTran
Corporation, and others named therein, dated as of January 26,
2006
10.8 Employment Agreement with Richard Ferrone (previously filed as an
exhibit to a Current Report on Form 8-K filed with the Commission
on May 15, 2006, and incorporated here in by reference).
10.9 Marketing and Distribution Agree between CirTran Corporation and
Harrington Business Development, Inc., dated as of October 24,
2005 (previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB filed with the Commission on May 19, 2006,
and incorporated here in by reference).
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10.10 Amendment to Marketing and Distribution Agree between CirTran
Corporation and Harrington Business Development, Inc., dated as of
March 31, 2006 (previously filed as an exhibit to the Company's
Quarterly Report on Form 10-QSB filed with the Commission on May
19, 2006, and incorporated here in by reference).
10.11 Amendment No. 1 to Investor Registration Rights Agreement, between
CirTran Corporation and Highgate House Funds, Ltd., dated as of
June 15, 2006.
10.12 Amendment No. 1 to Investor Registration Rights Agreement, between
CirTran Corporation and Cornell Capital Partners, LP, dated as of
June 15, 2006.
10.13 Assignment and Exclusive Services Agreement, dated as of April 1,
2006, by and among Diverse Talent Group, Inc., Christopher Nassif,
and Diverse Media Group Corp. (a wholly owned subsidiary of
Cirtran Corporation).
10.14 Employment Agreement between Christopher Nassif and Diverse Media
Group Corp., dated as of April 1, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with the
Commission on June 2, 2006, and incorporated here in by
reference).
10.15 Loan Agreement dated as of May 24, 2006, by and among Diverse
Talent Group, Inc., Christopher Nassif, and Diverse Media Group
Corp (previously filed as an exhibit to the Company's Current
Report on Form 8-K filed with the Commission on June 2, 2006, and
incorporated here in by reference).
10.16 Promissory Note, dated May 24, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with the
Commission on June 2, 2006, and incorporated here in by
reference).
10.17 Security Agreement, dated as of May 24, 2006, by and between
Diverse Talent Group, Inc., and Diverse Media Group Corp.
(previously filed as an exhibit to the Company's Current Report on
Form 8-K filed with the Commission on June 2, 2006, and
incorporated here in by reference).
10.18 Fraudulent Transaction Guarantee, dated as of May 24, 2006
(previously filed as an exhibit to the Company's Current Report on
Form 8-K filed with the Commission on June 2, 2006, and
incorporated here in by reference).
10.19 Securities Purchase Agreement between CirTran Corporation and
ANAHOP, Inc., dated as of May 24, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with the
Commission on May 30, 2006, and incorporated here in by
reference).
10.20 Warrant for 10,000,000 shares of CirTran Common Stock, exercisable
at $0.15, issued to Albert Hagar (previously filed as an exhibit
to the Company's Current Report on Form 8-K filed with the
Commission on May 30, 2006, and incorporated here in by
reference).
10.21 Warrant for 5,000,000 shares of CirTran Common Stock, exercisable
at $0.15, issued to Fadi Nora (previously filed as an exhibit to
the Company's Current Report on Form 8-K filed with the Commission
on May 30, 2006, and incorporated here in by reference).
10.22 Warrant for 5,000,000 shares of CirTran Common Stock, exercisable
at $0.25, issued to Fadi Nora (previously filed as an exhibit to
the Company's Current Report on Form 8-K filed with the Commission
on May 30, 2006, and incorporated here in by reference).
10.23 Warrant for 10,000,000 shares of CirTran Common Stock, exercisable
at $0.50, issued to Albert Hagar (previously filed as an exhibit
to the Company's Current Report on Form 8-K filed with the
Commission on May 30, 2006, and incorporated here in by
reference).
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10.24 Asset Purchase Agreement, dated as of June 6, 2006, by and between
Advanced Beauty Solutions, LLC, and CirTran Corporation
(previously filed as an exhibit to the Company's Current Report on
Form 8-K filed with the Commission on June 13, 2006, and
incorporated here in by reference).
10.25 Securities Purchase Agreement between CirTran Corporation and
ANAHOP, Inc., dated as of June 30, 2006 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with the
Commission on July 6, 2006, and incorporated here in by
reference).
10.26 Warrant for 20,000,000 shares of CirTran Common Stock, exercisable
at $0.15, issued to Albert Hagar (previously filed as an exhibit
to the Company's Current Report on Form 8-K filed with the
Commission on July 6, 2006, and incorporated here in by
reference).
10.27 Warrant for 10,000,000 shares of CirTran Common Stock, exercisable
at $0.15, issued to Fadi Nora (previously filed as an exhibit to
the Company's Current Report on Form 8-K filed with the Commission
on July 6, 2006, and incorporated here in by reference).
10.28 Warrant for 10,000,000 shares of CirTran Common Stock, exercisable
at $0.25, issued to Fadi Nora (previously filed as an exhibit to
the Company's Current Report on Form 8-K filed with the Commission
on July 6, 2006, and incorporated here in by reference).
10.29 Warrant for 23,000,000 shares of CirTran Common Stock, exercisable
at $0.50, issued to Albert Hagar (previously filed as an exhibit
to the Company's Current Report on Form 8-K filed with the
Commission on July 6, 2006, and incorporated here in by
reference).
10.30 Marketing and Distribution Agreement, dated as of April 24, 2006,
by and between Media Syndication Global, LLC, and CirTran
Corporation (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Commission on July 10,
2006, and incorporated here in by reference).
10.31 Lockdown Agreement by and between CirTran Corporation and Cornell
Capital Partners, LP, dated as of July 20, 2006 (previously filed
as an exhibit to the Company's Registration Statement on Form
SB-2/A (File No. 333-128549) filed with the Commission on July 27,
2006, and incorporated herein by reference).
10.32 Lockdown Agreement by and among CirTran Corporation and ANAHOP,
Inc., Albert Hagar, and Fadi Nora, dated as of July 20, 2006
(previously filed as an exhibit to the Company's Registration
Statement on Form SB-2/A (File No. 333-128549) filed with the
Commission on July 27, 2006, and incorporated herein by
reference).
10.33 Talent Agreement between CirTran Corporation and Holyfield
Management, Inc., dated as of March 8, 2006 (previously filed as
an exhibit to the Company's Registration Statement on Form SB-2/A
(File No. 333-128549) filed with the Commission on July 27, 2006,
and incorporated herein by reference).
10.34 Amendment No. 2 to Investor Registration Rights Agreement, between
CirTran Corporation and Highgate House Funds, Ltd., dated as of
August 10, 2006 (filed as an exhibit to Registration Statement on
Form SB-2 (File No. 333-128549) and incorporated herein by
reference).
10.35 Amendment No. 2 to Investor Registration Rights Agreement, between
CirTran Corporation and Cornell Capital Partners, LP, dated as of
August 10, 2006 (filed as an exhibit to Registration Statement on
Form SB-2 (File No. 333-128549) and incorporated herein by
reference).
10.36 Amended Lock Down Agreement by and among the Company and ANAHOP,
Inc., Albert Hagar, and Fadi Nora, dated as of November 15, 2006
(filed as an exhibit to the Company's Quarterly Report for the
quarter ended September 30, 2006, filed with the Commission on
November 20, 2006, and incorporated herein by reference).
32
10.37 Amended Lock Down Agreement by and between the Company and Cornell
Capital Partners, L.P., dated as of October 30, 2006 (filed as an
exhibit to the Company's Quarterly Report for the quarter ended
September 30, 2006, filed with the Commission on November 20,
2006, and incorporated herein by reference).
10.38 Amendment to Debenture and Registration Rights Agreement between
the Company and Cornell Capital Partners, L.P., dated as of
October 30, 2006 (filed as an exhibit to the Company's Quarterly
Report for the quarter ended September 30, 2006, filed with the
Commission on November 20, 2006, and incorporated herein by
reference).
10.39 Amendment Number 2 to Amended and Restated Investor Registration
Rights Agreement, between CirTran Corporation and Cornell Capital
Partners, LP, dated January 12, 2007 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with the
Commission on January 19, 2007, and incorporated here in by
reference).
10.40 Amendment Number 4 to Investor Registration Rights Agreement,
between CirTran Corporation and Cornell Capital Partners, LP,
dated January 12, 2007(previously filed as an exhibit to the
Company's Current Report on Form 8-K filed with the Commission on
January 19, 2007, and incorporated here in by reference).
10.41 Licensing and Marketing Agreement with Arrowhead Industries, Inc.
dated February 13, 2007 (previously filed as an exhibit to the
Company's Annual Report for the year ended December 31, 2006,
filed with the Commission on April 17, 2007, and incorporated
herein by reference).
10.42 Amendment to Employment Agreement for Iehab Hawatmeh, dated
January 1, 2007 (previously filed as an exhibit to the Company's
Annual Report for the year ended December 31, 2006, filed with the
Commission on April 17, 2007, and incorporated herein by
reference)
10.43 Amendment to Employment Agreement for Shaher Hawatmeh, dated
January 1, 2007 (previously filed as an exhibit to the Company's
Annual Report for the year ended December 31, 2006, filed with the
Commission on April 17, 2007, and incorporated herein by
reference)
10.44 Amendment to Employment Agreement for Trevor Siliba, dated January
1, 2007 (previously filed as an exhibit to the Company's Annual
Report for the year ended December 31, 2006, filed with the
Commission on April 17, 2007, and incorporated herein by
reference)
10.45 Amendment to Employment Agreement for Richard Ferrone dated
February 7, 2007 (previously filed as an exhibit to the Company's
Annual Report for the year ended December 31, 2006, filed with the
Commission on April 17, 2007, and incorporated herein by
reference).
10.46 Assignment and Exclusive Services Agreement with Global Marketing
Alliance, LLC, dated April 16, 2007 (previously filed as an
exhibit to the Company's' Current Report on Form 8-K filed with
the Commission on April 20, 2007, and incorporated herein by
reference).
10.47 Employment Agreement for Mr. Sovatphone Ouk dated April 16, 2007
(previously filed as an exhibit to the Company's' Current Report
on Form 8-K filed with the Commission on April 20, 2007, and
incorporated herein by reference).
10.48 Triple Net Lease between CirTran Corporation and Don L. Buehner,
dated as of May 4, 2007 (previously filed as an exhibit to the
Company's' Current Report on Form 8-K filed with the Commission on
May 10, 2007, and incorporated herein by reference).
10.49 Commercial Real Estate Purchase Contract between Don L. Buehner
and PFE Properties, L.L.C., dated as of May 4, 2007 (previously
filed as an exhibit to the Company's' Current Report on Form 8-K
filed with the Commission on May 10, 2007, and incorporated herein
by reference).
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10.50 Exclusive Manufacturing, Marketing, and Distribution Agreement,
dated as of May 25, 2007 (previously filed as an exhibit to the
Company's' Current Report on Form 8-K filed with the Commission on
June 1, 2007, and incorporated herein by reference).
10.51 Exclusive Manufacturing, Marketing, and Distribution Agreement,
with Full Moon Enterprises, Inc. dated as of June 8, 2007,
pertaining to the Ball Blaster(TM) (previously filed as an exhibit
to the Company's' Quarterly Report on Form 10-QSB filed with the
Commission on August 20, 2007, and incorporated herein by
reference).
10.52 Amended and Restated Exclusive Manufacturing, Marketing, and
Distribution Agreement, dated as of August 21, 2007 (previously
filed as an exhibit to the Company's Current Report on Form 8-K
filed with the Commission on September 24, 2007, and incorporated
herein by reference).
10.53 Exclusive Sales Distribution/Representative Agreement, dated as of
August 23, 2007 (previously filed as an exhibit to the Company's
Current Report on Form 8-K filed with the Commission on September
24, 2007, and incorporated herein by reference).
10.54 Settlement Agreement between CirTran Corporation and Trevor M.
Saliba, dated as of August 15, 2007 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed with the
Commission on September 24, 2007, and incorporated herein by
reference).
10.55 Exclusive Manufacturing, Marketing and Distribution Agreement
between CirTran Corporation and Shaka Shoes, Inc., a Hawaii
corporation (previously filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on February
11, 2008, and incorporated herein by reference).
10.56 Amendment Number 3 to Amended and Restated Investor Registration
Rights Agreement, between CirTran Corporation and YA Global
Investments, L.P. (previously filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Commission on February
12, 2008, and incorporated herein by reference).
10.57 Amendment Number 6 to Investor Registration Rights Agreement,
between CirTran Corporation and YA Global Investments, L.P.
(previously filed as an exhibit to the Company's Current Report on
Form 8-K, filed with the Commission on February 12, 2008, and
incorporated herein by reference).
10.58 Agreement between and among CirTran Corporation, YA Global
Investments, L.P., and Highgate House Funds, LTD (previously filed
as an exhibit to the Company's Current Report on Form 8-K, filed
with the Commission on February 12, 2008, and incorporated herein
by reference).
10.59 Promissory Note (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on March 5, 2008,
and incorporated herein by reference).
10.60 Form of Warrant (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on March 5, 2008,
and incorporated herein by reference).
10.61 Subscription Agreement between the Company and Haya Enterprises,
LLC (previously filed as an exhibit to the Current Report on Form
8-K, filed with the Commission on March 5, 2008, and incorporated
herein by reference).
10.62 Promissory Note (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on April 7, 2008,
and incorporated herein by reference).
10.63 Subscription Agreement (previously filed as an exhibit to the
Current Report on Form 8-K, filed with the Commission on April 7,
2008, and incorporated herein by reference).
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10.64 Promissory Note (previously filed as an exhibit to the Current
Report on Form 8-K, filed with the Commission on May 1, 2008, and
incorporated herein by reference).
31.1 Certification of President
31.2 Certification of Chief Financial Officer
32.1 Certification pursuant to 18 U.S.C. Section 1350 - President
32.2 Certification pursuant to 18 U.S.C. Section 1350 - Chief Financial
Officer
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CIRTRAN CORPORATION
/s/ Iehab Hawatmeh
-------------------------------------
Dated: November 14, 2008 By: Iehab Hawatmeh
President and Principal Executive
Officer
/s/ David Harmon
-------------------------------------
Dated: November 14, 2008 By: David Harmon
Principal Financial and Accounting
Officer
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