CIRTRAN CORP - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File No. 000-49654

CirTran Corporation

(Exact name of registrant as specified in its charter)

4125 South 6000 West, West Valley City, Utah 84128

(Address of principal executive offices and zip code)

(801) 963-5112

(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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X] No [  ]

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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

Yes [  ] No [X]

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 19, 2019, there were 4,499,919 shares of common stock, $0.001 par value, outstanding.

CirTran Corporation

Form 10-Q for the Three and Nine Months Ended September 30, 2019

TABLE OF CONTENTS

PART I–FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CIRTRAN CORPORATION

CONSOLIDATED BALANCE SHEETS

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

CIRTRAN CORPORATION

UNAUDITED CONSOLDIATED STATEMENTS OF OPERATIONS

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

CIRTRAN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

CIRTRAN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

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

CIRTRAN CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

CIRTRAN CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2019

NOTE 1—BASIS OF PRESENTATION

The consolidated financial statements of CirTran Corporation for the nine-month periods ended September 30, 2019 and 2018, are not audited. Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and, consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the United States of America. In the opinion of our management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of September 30, 2019 and December 31, 2018, and our results of operations and cash flows for the periods ended September 30, 2019 and 2018. The results of operations for the three and nine months ended September 30, 2019 and 2018, are not necessarily indicative of the results for a full-year period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our annual report on Form 10-K for the year ended December 31, 2018.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

We consolidate all of our majority-owned subsidiaries, companies over which we exercise control through majority voting rights, and companies in which we have a variable interest and we are the primary beneficiary. We account for our investments in common stock of other companies that we do not control, but over which we can exert significant influence using the cost method.

The consolidated financial statements as of and for the nine months ended September 30, 2019 include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Products Corp., CirTran Corporation (Utah), LBC Products, Inc., and CirTran - Asia, Inc. All intercompany balances and transactions have been eliminated. The results of CirTran Beverage Corp., CirTran Online Corp., CirTran Media Corp., and Racore Network have been excluded from the financial statements as of and for the periods ended September 30, 2019 due to the dissolution of these entities during the three months ended March 31, 2019.

The consolidated financial statements as of December 31, 2018 and for the nine months ended September 30, 2018 include the accounts of CirTran Corporation and our wholly owned subsidiaries: CirTran Beverage Corp., CirTran Products Corp., CirTran Online Corp., CirTran Media Corp., CirTran Corporation (Utah), CirTran - Asia, Inc., and Racore Network, Inc. All intercompany balances and transactions have been eliminated.

Use of Estimates

In preparing the 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.

Revenue Recognition

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

Cash and Cash Equivalents

We consider all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents. We did not hold any cash equivalents as of September 30, 2019, or December 31, 2018.

Investment in Securities

Our cost-method investment consists of an investment in a private digital multi-media technology company that totaled $300,000 at September 30, 2019 and December 31, 2018. As we owned less than 20% of that company’s stock as of each date, and no significant influence or control exists, the investment is accounted for using the cost method. We evaluated the investment for impairment and determined there was none during the periods presented.

Property and Equipment

We incur certain costs associated with the design and development of molds and dies for our contract-manufacturing segment. These costs are held as deposits on the balance sheet until the molds or dies are finished and ready for use. At that point, the costs are included as part of production equipment in property and equipment and are amortized over their useful lives. We hold title to all molds and dies used in the manufacture of products. The capitalized cost, net of accumulated depreciation, associated with molds and dies included in property and equipment at September 30, 2019, and December 31, 2018, was $10,346 and $12,065, respectively.

Depreciation expense is recognized in amounts equal to the cost of depreciable assets over estimated service lives. Leasehold improvements are amortized over the shorter of the life of the lease or the service life of the improvements. The straight-line method of depreciation and amortization is followed for financial reporting purposes. Maintenance, repairs, and renewals, which neither materially add to the value of the property nor appreciably prolong its life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in operating results.

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. We did not record expenses for the impairment of long-lived assets during the three or nine months ended September 30, 2019 or 2018.

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 separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these embedded derivatives using a Multinomial Lattice model. The fair values of the derivative instruments are measured each reporting period.

During the year ended December 31, 2017, our common stock was suspended from trading. Because of this, the convertible note no longer met the criteria to bifurcate the instrument under FASB ASC 815, Derivatives and Hedging. Accordingly, we determined the underlying common stock of the instruments being accounted for as derivative liabilities had no value. As a result, the fair value of the derivative liabilities, as of the date our common stock was no longer available to trade, was written off to additional paid-in capital in accordance with ASC 815-15-35-4. During the year ended December 31, 2018, we became current with our filing requirements with the SEC and FINRA approved our common stock to continue trading during the nine months ended September 30, 2019. Accordingly, we recorded derivative liabilities as of the date our stock resumed trading, or September 13, 2019, and revalued the liability as of September 30, 2019.

Stock-Based Compensation

We have outstanding stock options to directors and employees, which are described more fully in Note 11 – Stock Options and Warrants. We account for our stock options in accordance with ASC 718-10, Accounting for Stock Issued to Employees, as updated, which requires the recognition of the cost of employee services received in exchanged for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718-10 also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (typically the vesting period). There was no impact to our methodology for accounting for equity based compensation as a result of adopting ASU 2018-07.

Stock-based employee compensation was $800 and $480 for the nine months ended September 30, 2019 and 2018, respectively.

Fair Value of Financial Instruments

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

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

Level 1—Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2—Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3—Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Accounts payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these instruments. Derivative liabilities are measured using level 3 inputs.

Loss Per Share

Basic loss per share (EPS) is calculated by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted EPS 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. There were 133,107,973 potentially issuable shares from the conversions of convertible debentures outstanding which were excluded in dilutive outstanding shares for the three and nine months ended September 30, 2019 due to the anti-dilutive effect these would have on net loss per share. There were no such shares issuable as of September 30, 2018.

Short-term Advances

We have short-term advances with various individuals. These advances are due upon demand, carry no interest, and are not collateralized. These advances are classified as short-term liabilities.

Recently Issued Accounting Pronouncements

Recently issued accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that require adoption and that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

Reclassification of Prior Year Information

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the consolidated balance sheet for the year ended December 31, 2018 to present $125,088 of short term advances payable which were previously presented as short term advances payable from related parties.

NOTE 3—GOING CONCERN AND REALIZATION OF ASSETS

In October 2016, we lost our ability to continue energy drink distribution, our principal source of revenue, after receiving an unfavorable ruling in our suit against Playboy Enterprises, Inc.

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. We had a working capital deficiency of $38,112,928 and $36,653,372 as of September 30, 2019, and December 31, 2018, respectively, and a net loss from operations of $709,453 and $637,100 during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, and December 31, 2018, we had an accumulated deficit of $78,524,975 and $77,710,520, respectively. These conditions raise substantial doubt about our ability to continue as a going concern.

Our ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in the following paragraphs and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if we are unable to continue as a going concern.

In the coming year, our foreseeable cash requirements will relate to development of business operations and associated expenses. We may experience a cash shortfall and be required to raise additional capital.

Historically, we have mostly relied upon shareholder loans and advances to finance operations and growth. Management may raise additional capital by retaining net earnings, if any, or through future public or private offerings of our stock or loans from private investors, although we cannot assure that we will be able to obtain such financing. Our failure to do so could have a material and adverse effect upon us and our shareholders.

NOTE 4—PROPERTY AND EQUIPMENT

Property and equipment and estimated service lives consist of the following:

We recorded $573 and $573 of depreciation expense during the three months ended September 30, 2019 and 2018, respectively. We recorded $1,719 and $1,719 of depreciation expense during the nine months ended September 30, 2019 and 2018, respectively.

NOTE 5—RELATED-PARTY TRANSACTIONS

Transactions Involving Officers, Directors, and Stockholders

In 2007, we issued a 10% promissory note to a family member of our president in exchange for $300,000. The note was due on demand after May 2008. There were no repayments made during the periods presented. At September 30, 2019 and December 31, 2018, the principal amount owing on the note was $151,833 and $151,833, respectively.

On March 31, 2008, we issued to this same family member, along with two other Company shareholders, promissory notes totaling $315,000 ($105,000 each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the amount received plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum. We made no payments towards the outstanding notes during the periods presented. The principal balance owing on the notes as of September 30, 2019, and December 31, 2018, totaled $72,466 and $72,466, respectively.

During the nine months ended September 30, 2019, we received cash advances from related parties of $74,477 and made repayments to related parties of $18,270. There was $804,840 and $748,633 of short-term advances due to related parties as of September 30, 2019 and December 31, 2018, respectively. The advances are due on demand and as such included in current liabilities.

We have agreed to issue stock options to Iehab Hawatmeh, our president, as compensation for services provided as our chief executive officer. The terms of this employment agreement require us to grant options to purchase 6,000 shares of our stock each year, with an exercise price equal to the fair market price of our common stock as of the grant date. During the year ended December 31, 2018, we accrued for 6,000 stock options relating to this employee agreement. There were 6,000 options accrued during the nine months ended September 30, 2019. There was 72,000 and 66,000 accrued stock options as of September 30, 2019 and December 31, 2018, respectively. See Note 6 – Other Accrued Liabilities and Note 11 – Stock Options and Warrants.

As of September 30, 2019 and December 31, 2018, we owe our president a total of $908,000 and $893,000 in unsecured advances. Additionally, 72,000 and 66,000 accrued stock options, with an aggregate value at time of grant of $170,096 and $169,496, respectively, were owed as of September 30, 2019 and December 31, 2018. The advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee. The borrowing fees were waived by our president on these loans.

NOTE 6—OTHER ACCRUED LIABILITIES

Accrued tax liabilities consist of delinquent payroll taxes, interest, and penalties owed by us to the Internal Revenue Service (“IRS”) and other tax entities.

Accrued liabilities consist of the following:

Other accrued liabilities as of September 30, 2019 and December 31, 2018, include a non-interest bearing payable totaling $45,000 that is due on demand.

Accrued payroll and compensation liabilities consist of the following:

Stock option expenses consist of accrued employee stock option expenses. These stock options have been granted but were not issued due to the limited number of authorized and available shares (see Note 11–Stock Options and Warrants for further discussion).

There were 8,000 stock options accrued during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, we accrued for 6,000 stock options relating to the employment agreement with Mr. Hawatmeh. The fair market value of the options was $600, using the following assumptions: estimated five-year term, estimated volatility of 567% and a risk-free rate of 2.31%.

NOTE 7—COMMITMENTS AND CONTINGENCIES

Litigation and Claims

Various vendors, service providers, and others have asserted legal claims in previous years. These creditors generally are not actively seeking collection of amounts due them, and we have determined that the probability of realizing any loss on these claims is remote and will seek to compromise and settle at a deep discount any of such claims that are asserted for collection. These amounts are included in our current liabilities. We have not accrued any liability for claims or judgments that we have determined to be barred by the applicable statute of limitations, which generally is eight years for judgments in Utah.

Noble Gate

In September 2015, we obtained a judgment in the amount of $287,000 against Noble Gate Industrial, a former authorized distributor of the Playboy-branded energy drink. We believe the judgment is uncollectible and have not undertaken collection efforts in view of our analysis of the costs of collection as compared to any likely recovery. No gain has been recorded for the periods presented.

Playboy Enterprises, Inc.

Our affiliate, Play Beverages, LLC, filed suit against Playboy Enterprises, Inc., in Cook County, Illinois, Circuit Court in October 2012 asserting numerous claims, including breach of contract and tortious interference. Playboy responded with a counterclaim of breach of contract and trademark infringement. After proceedings in October 2016, the court awarded a judgment to Playboy of $6.6 million against Play Beverages and CirTran Beverage Corp., our subsidiary. The court denied our motion for a new trial and awarded Playboy treble patent infringement damages and attorney’s fees. We filed a notice of appeal in July 2017 and again in March 2018. Playboy has initiated collection efforts but has recovered no funds. We have accrued $17,205,599 as of September 30, 2019 and December 31, 2018 related to this judgment which is included in liabilities in discontinued operations. In September 2018, the appellate court affirmed the judgment of the circuit court.

Redi FZE

During the year ended December 31, 2011, Redi FZE sued us claiming alleged breach of contract, and we counterclaimed against it. On November 2, 2011, the court issued an injunction against Redi FZE prohibiting it from selling and distributing Playboy-branded products in conjunction with its distribution agreement with us. On August 16, 2012, Redi FZE withdrew the suit, and on October 30, 2012, we were awarded a default judgment against Redi in the amount of $1,225,155. We have not collected on this judgment and are weighing the cost of collection against the likelihood of success. No gain or receivable has been recorded in the financial statements for the periods presented in connection with this case.

Old Dominion Freight Line

In December 2009, Old Dominion Freight Line filed suit against us for unpaid freight services in the amount of $30,464 and was awarded a default judgment of $33,187 in March 2010. The amount due is included in accounts payable as of September 30, 2019 and December 31, 2018, respectively.

RDS Touring

In September 2011, RDS Touring and Promotions, Inc. was awarded a default judgment of $118,426 against us. In September 2012, RDS domesticated the default judgment in the state of Utah and sought to enforce the judgment against us. We have and will continue to resist the collection efforts by RDS. We had recorded a loss equal to the judgment of $118,426, of which $18,491 was previously paid leaving $99,935 accrued as of September 30, 2019 and December 31, 2018.

Esebag

In July 2010, Jimmy Esebag was awarded a judgment against us for breach of contract. A judgment debtor examination of an affiliate took place in October 2013, and there have been no further recovery efforts to date. We will continue to resist the collection efforts from this judgment. We had recorded a loss equal to the judgment of $100,000, of which $40,881 was previously paid leaving $59,119 accrued as of September 30, 2019 and December 31, 2018, respectively.

General Distributors, Inc.

In February 2012, General Distributors, Inc. (“General”) and was awarded a default judgment of $93,856 against us. In January 2013, General domesticated the default judgment in the state of Utah and sought to enforce the judgment against us. We have and will continue to resist the collection efforts by General. We had recorded a loss equal to the judgment of $93,856, which is included in accrued liabilities as of September 30, 2019 and December 31, 2018.

Advanced Beauty Solutions

In connection with prior litigation with Advanced Beauty Solutions (“ABS”), it claimed nonperformance by us and filed an adversary proceeding in its bankruptcy case in the United States Bankruptcy Court. On March 17, 2009, the bankruptcy court entered judgment in favor of ABS and against us in the amount of $1,811,667, plus interest. On September 11, 2009, the bankruptcy court denied our motion to set aside the judgment.

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

Despite motions, hearings, appeals, and mediation in 2011, both parties were unable to resolve their outstanding issues.

On March 22, 2012, we entered into a formal forbearance agreement with ABS, dated as of March 1, 2012 (the “ABS Forbearance Agreement”), whereby ABS agreed to take no further judgment enforcement actions in consideration of our payment of $25,000 upon execution, satisfaction of applicable conditions precedent, return of the trademarks and intellectual property previously conveyed by ABS to us, and our obligation to pay $1,835,000 secured by an encumbrance on all of our assets, subject and subordinate to the prior lien and encumbrance in favor of YA Global. In addition, we stipulated to an additional judgment for attorney’s fees incurred in negotiating the ABS Forbearance Agreement and related post-judgment collection efforts. The ABS Forbearance Agreement also provided that our obligation would be reduced by the greater of the amount of credit granted in the bankruptcy proceedings for the value of the intellectual property we previously conveyed to ABS and the amount received by ABS from the sale of such intellectual property to a third party during the term of the ABS Forbearance Agreement, plus the amount of any distribution to which we are entitled as a creditor of ABS, subject to other limitations.

In May 2013, ABS sent us a notice of default under the ABS Forbearance Agreement. Although there were some negotiations between us and ABS following the notice of default, this matter has not been resolved.

Our appeal of the approximately $1.8 million judgment that had been remanded in the ABS bankruptcy proceedings to conclusively determine the amount of credit due us for the conveyance of the intellectual property has been dismissed. All litigation and disputes between ABS and its affiliates, on the one hand, and us and our affiliates, on the other hand, have been dismissed.

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

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

We had accrued the minimum liability of $90,000, of which $45,000 has been paid leaving $45,000 due, which is included in accrued liabilities as of September 30, 2019 and December 31, 2018. Because the remaining liability is unknown and cannot be reasonably estimated, no additional amounts have been accrued.

Delinquent Payroll Taxes, Interest, and Penalties

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

Employment Agreements

We engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended in September 2017. In July 2017, Mr. Hawatmeh had resigned all positions with us to pursue other business activities, thereby effectively terminating the agreement. However, the amendment to his employment agreement in September 2017 reinstated Mr. Hawatmeh to his previous positions, with a salary in an amount to be determined. Among other things, the reinstated employment agreement: (a) grants options to purchase a minimum of 6,000 shares of our stock each year, with an exercise price equal to the market price of our common stock as of the grant date, for the maximum term allowed under our stock option plan; (b) provides for health insurance coverage, cell phone, car allowance, life insurance, and director and officer liability insurance, as well as any other bonus approved by our board; and (c) includes additional incentive compensation as follows: (i) a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation and amortization for the applicable quarter; (ii) bonuses equal to 1% of the net purchase price of any acquisitions we complete that are directly generated and arranged by Mr. Hawatmeh; and (iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of all products, net of returns and allowances.

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

NOTE 8—NOTES PAYABLE

Notes payable consisted of the following:

There was $145,562 and $110,035 of accrued interest due on these notes as of September 30, 2019, and December 31, 2018, respectively.

NOTE 9—CONVERTIBLE DEBENTURES

Convertible debentures consisted of the following:

The convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or the lowest bid price for the 20 trading days prior to conversion.

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

NOTE 10—STOCKHOLDERS’ DEFICIT

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

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

NOTE 11—STOCK OPTIONS AND WARRANTS

Stock Incentive Plans

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

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

During the nine months ended September 30, 2018, we accrued for 6,000 stock options relating to the employment agreement with Mr. Hawatmeh. The fair market value of the options was $600, using the following assumptions: estimated seven-year term, estimated volatility of 567% and a risk-free rate of 2.38%.

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

NOTE 12 – DERIVATIVE LIABILITIES

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

The fair values of the derivative instruments are measured each quarter, which resulted in a loss of $7,431 during the three and nine months ended September 30, 2019. As of September 30, 2019, and December 31, 2018, the fair market value of the derivatives aggregated $818,451 and $0, respectively.

NOTE 13—DISCONTINUED OPERATIONS

At October 21, 2016, we exited the beverage licensing and distribution business. The assets and liabilities associated with this business are displayed as assets and liabilities from discontinued operations as of September 30, 2019 and December 31, 2018, as a result. Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations for the nine months ended September 30, 2019 and 2018.

Total assets and liabilities included in discontinued operations were as follows:

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

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

NOTE 14—SUBSEQUENT EVENTS

We have evaluated all events occurring subsequent to the financial statements and determined there are no additional items to disclose.

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

The following discussion should be read in conjunction with our condensed consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

Overview

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

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

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

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

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

We are now negotiating definitive agreements incorporating the foregoing terms and identifying possible contract fulfillment sources.

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

Revenue

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

Operating Expenses

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

Other Income and Expense

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

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

Revenue

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

Operating Expenses

During the nine months ended September 30, 2019 and 2018, selling, general, and administrative expenses were $265,047 and $286,544, respectively, representing a decrease of $21,497 in the current period. The decrease in selling, general, and administrative expenses is the result of one time professional fees recognized during the three months ended September 30, 2018 that did not recur in the current period.

Other Income and Expense

Other income and expenses during the nine months ended September 30, 2019, consisted of $437,909 in interest expense, losses on the fair value measurement of derivative liabilities of $7,431 and other income of $934. Other expenses during the nine months ended September 30, 2018, included $373,056 for interest expense and other income totaling $22,500. The increase in interest expense in the current period is related to the recognition of $56,338 of debt discounts which were not present during the same period in 2018. The decrease in other income in the current period is due to one time forgiveness of accounts payable which was present during the prior year and not occurring during the current period.

Liquidity and Capital Resources

We have had a history of losses from operations, as our expenses have been greater than our declining revenues, which have now ceased entirely. Our accumulated deficit was $78.5 million at September 30, 2019, compared to $77.7 million at December 31, 2018. As of September 30, 2019, and December 31, 2018, we had current assets of $2,891 and $336, respectively, and current liabilities of $38.1 million and $36.7 million, respectively, creating working capital deficits as of September 30, 2019, and December 31, 2018, of approximately $38.1 million and $36.7 million, respectively.

Operating Activities

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

Financing Activities

During the nine months ended September 30, 2019, financing activities generated $116,607 of cash, compared to $7,940 of cash during the nine months ended September 30, 2018. Cash provided by financing activities during the nine months ended September 30, 2019, consisted of advances from related-party loans totaling $74,477, proceeds from convertible loans payable of $50,000, repayments on related party payables of $18,270, repayments on loans payment of $5,000 and proceeds from notes payable of $15,400. Cash provided by financing activities during the nine months ended September 30, 2019, consisted of net advances from related-party loans of $7,940.

Our Capital Resources and Anticipated Requirements

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

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

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

As our manufacturing and distribution volume grows, as we expect, later in 2019 and into early 2020, we anticipate adding qualified employees to assume specific manufacturing management, sales support, and administrative and clerical services as required, all of which depend on the level of future growth, which we cannot predict. During this period, we may also seek to establish foreign distribution in selected markets, which will depend on the nature and location of distribution outlets, anticipated market size, product shipping costs and logistics, sales opportunities, and management details. Initial market focuses are likely to be in Europe. Depending on the specific characteristics of particular markets, we may initiate efforts to develop international manufacturing relationships for some products, such as beverages, for which shipping is a significant component of price of delivered goods. Again, additional funding from external sources will likely be required.

In addition to seeking funding for our expansion requirements through collaborative order advances and similar arrangements with our customers, we expect that we will seek equity financing to meet our anticipated capital needs. We cannot assure that we will be successful in obtaining such capital. If we were to issue additional shares for debt and/or equity, this would dilute the value of our common stock and existing stockholders’ positions.

Convertible Debentures

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

Going Concern

These interim unaudited financial statements have been prepared on the going concern basis, which assumes that adequate sources of financing will be obtained as required and that our assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the interim unaudited financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we not be unable to continue as a going concern.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

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

Revenue Recognition

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

Stock-Based Compensation

We have outstanding stock options to directors and employees. We account for our stock options in accordance with ASC 718-10, Accounting for Stock Issued to Employees, and ASU 201-07, Improvements to Nonemployee Share-Based Payment Accounting, which requires the recognition of the cost of employee services received in exchanged for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. ASC 718-10 also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award, typically the vesting period.

Income Taxes

We use the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and the tax basis of assets, liabilities, the carry forward of operating losses and tax credits, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized. Research tax credits are recognized as used.

Fair Value of Financial Instruments

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

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

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

Recently Issued Accounting Pronouncements

Recently issued accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that require adoption and that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2019, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive and financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, management concluded that our disclosure controls and procedures were not effective as of September 30, 2019, to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the periods prescribed by U.S. Securities and Exchange Commission and that such information is accumulated and communicated to management, including our chief executive and financial officer, as appropriate, to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the nine months ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 6. EXHIBITS

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

SIGNATURE PAGE

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 hereunto duly authorized.