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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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 0-26059
CIRTRAN CORPORATION
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(Exact name of registrant as specified in its charter)
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Nevada 68-0121636
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(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
4125 South 6000 West
West Valley City, Utah 84128
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(Address of Principal Executive Offices) (Zip Code)
(801) 963-5112
(Registrant's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding
12 months and (2) has been subject to such filing requirements for the past 90
days. Yes X No
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes X No
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The number of shares outstanding of the issuer's common stock as of May 18,
2007: 701,832,788.
Transitional Small Business Disclosure Format (check one): Yes NO X
--- ---
1
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Balance Sheets as of March 31, 2007, and 3
December 31, 2006 (unaudited)
Statements of Operations for the Three Months ended 4
March 31, 2007, and 2006 (unaudited)
Statements of Cash Flows for the Three Months ended 5
March 31, 2007, and 2006 (unaudited)
Notes to Condensed Consolidated Financial Statements 7
(unaudited)
Item 2. Management's Discussion and Analysis or Plan of Operation 21
Item 3. Controls and Procedures 42
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 4. Submission of Matters to a Vote of Security Holders 47
Item 5. Other Information 48
Item 6 Exhibits 51
Signatures 53
2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31,
2007 2006
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ASSETS
Current Assets
Cash and cash equivalents $ 146,932 $ 146,050
Trade accounts receivable, net of
allowance for doubtful accounts of
$14,181 and $14,181, respectively 963,962 982,096
Inventory, Net of reserve of $866,354
and $866,354, respectively 1,730,735 1,960,013
Prepaid Deposits 77,181 80,925
Investment Receivables 351,377 241,744
Other 249,256 213,212
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Total Current Assets 3,519,443 3,624,040
Investment in Securities, at Cost 1,050,000 300,000
Deferred Offering Costs, Net 247,761 296,103
Long Term Receivables 1,665,000 1,665,000
Property and Equipment, Net 2,617,612 2,678,454
Intellectual Property, Net 2,347,150 2,451,408
Other Assets 117,833 114,733
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Total Assets $ 11,564,799 $ 11,129,738
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,138,675 $ 1,135,527
Accrued liabilities 673,770 607,649
Deferred revenue 400,617 191,396
Derivative liability 2,910,181 3,362,626
Convertible debenture 3,050,763 2,746,047
Current maturities of long-term notes payable 406,165 444,436
Notes payable to stockholders 30,000 -
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Total Current Liabilities 8,610,171 8,487,681
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Long-Term Notes Payable, Less Current
Maturities 1,270,738 1,023,110
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Commitments and Contingencies
Minority Interest 500,000 -
Stockholders' Equity
Common stock, par value $0.001; authorized
1,500,000,000 shares; issued and
outstanding shares: 679,658,221 and
656,170,424 679,653 656,165
Employee receivable (66,000) (66,000)
Additional paid-in capital 23,730,953 23,210,461
Accumulated deficit (23,160,716) (22,181,679)
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Total Stockholders' Equity 1,183,890 1,618,947
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Total Liabilities and Stockholders'
Equity $ 11,564,799 $ 11,129,738
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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)
For the Three Months Ended March 31, 2007 2006
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Net Sales $ 2,288,293 $ 1,737,824
Cost of Sales (1,198,348) (990,370)
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Gross Profit 1,089,945 747,454
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Operating Expenses
Selling, general and administrative
expenses 1,636,185 837,520
Non-cash employee compensation expense 75,385 -
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Total Operating Expenses 1,711,570 837,520
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Loss From Operations (621,625) (90,066)
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Other Income (Expense)
Interest (710,466) (1,086,253)
Gain on forgiveness of debt 19,206 4,670
Gain on derivative valuation 333,850 893,651
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Total Other Expense, Net (357,410) (187,932)
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Net Loss $ (979,035) $ (277,998)
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Basic and diluted loss per common share $ (0.00) $ (0.00)
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Basic and diluted weighted-average common
shares outstanding 656,170,242 630,467,984
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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 Three Months Ended March 31, 2007 2006
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Cash flows from operating activities
Net loss $ (979,035) $ (277,998)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 222,284 114,939
Accretion expense 554,716 965,512
Gain on forgiveness of debt (19,206) -
Non-cash compensation expense 75,385 -
Change in valuation of derivative (333,848) (893,651)
Accrued interest expense - 61,586
Changes in assets and liabilities:
Trade accounts receivable 18,134 366,021
Prepaid deposits 3,744 142,188
Inventories 229,278 68,067
Prepaid expenses and other assets (39,144) (255,318)
Accounts payable 3,143 (710,556)
Accrued liabilities 185,327 (214,368)
Deferred revenue 209,221 (86,320)
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Total adjustments 1,109,034 (441,900)
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Net cash provided by (used in) operating
activities 129,999 (719,898)
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Cash flows from investing activities
Purchase of investment (750,000) (166,730)
Intangibles purchased with cash (51,174) -
Cash issued on line of credit (59,633) -
Purchase of property and equipment (7,668) -
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Net cash used in investing activities (868,475) (166,730)
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Cash flows from financing activities
Proceeds from notes payable to
stockholders 30,000 -
Payments on notes payable to stockholders - (95,806)
Proceeds from notes payable 250,000 -
Proceeds from minority interest holders 500,000 -
Principal payments on notes payable (40,642) (1,994)
Exercise of options issued to attorneys
and consultants for services - 200
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Net cash provided by (used in) financing
activities 739,358 (97,600)
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Net increase (decrease) in cash and
cash equivalents 882 (984,228)
Cash and cash equivalents at beginning
of period 146,050 1,427,865
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Cash and cash equivalents at end of
period $ 146,932 $ 443,637
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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 Three Months Ended March 31, 2007 2006
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Supplemental disclosure of cash flow
information
Cash paid during the period for interest $ 32,460 $ 22,765
Noncash investing and financing activities
Issuance of stock and options for settlement
of litigation - 464,187
Stock issued for settlement of notes payable
and accrued interest - 81,000
Common Stock issued for partial conversion
of Convertible Debenture 468,595 1,630,491
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Condensed Financial Statements -- The accompanying unaudited condensed
consolidated financial statements include the accounts of CirTran Corporation
and its subsidiaries (the "Company"). These financial statements are condensed
and, therefore, do not include all disclosures normally required by accounting
policies generally accepted in the United States of America. 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. 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 months
ended March 31, 2007, are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2007.
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, Inc., Diverse Media
Group Corporation, PFE Properties, LLC, and CirTran Online Corporation. All
significant intercompany transactions have been eliminated in consolidation.
In April 2007, the Company formed CirTran Online Corp. ("CTO"), a wholly owned
subsidiary to sell products via the internet, to offer training, software,
marketing tools, web design and support as well as other E-commerce related
services to internet entrepreneurs, and to telemarket directly to buyers of its
products and services.
Stock-Based Compensation -- Effective January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123R, Share Based
Payment ("SFAS 123R") for its one stock-based compensation plan. The Company
previously accounted for this plan under the recognition and measurement
principles of Accounting Standards No. 25, Accounting for Stock Issued to
Employees, ("APB 25") and related interpretations and disclosure requirements
established by SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
123") as amended by SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure.
Under APB 25, no compensation expense was recorded in earnings for the Company's
stock-based options granted under its compensation plans. The pro forma effects
on net income and earnings per share for the options and awards granted under
the plans were instead disclosed in a note to the consolidated financial
statements. Under SFAS 123R, all stock-based compensation is measured at the
grant date, based on the fair value of the option or award, and is recognized as
an expense in earnings over the requisite service period, which is typically
through the date the options vest.
The Company adopted SFAS 123R using the modified prospective method. Under this
method, for all stock-based options and awards, granted prior to January 1, 2006
that remain outstanding as of that date, compensation cost is recognized for the
7
unvested portion over the remaining requisite service period, using the
grant-date fair value measured under the original provisions of SFAS 123 for pro
forma and disclosure purposes. No such options were outstanding as of January 1,
2006.
The Company utilized the Black-Scholes model for calculating the fair value pro
forma disclosures under SFAS 123 and will continue to use this model, which is
an acceptable valuation approach under SFAS 123R. The following table summarizes
the Black-Scholes option-pricing model assumptions used to compute the
weighted-average fair value of stock options granted during the periods below:
Three Months Ended
March 31,
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2007 2006
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Expected dividend yield 0.0% N/A*
Risk free interest rate 4.54% N/A*
Expected volatility 152.3% N/A*
Expected life 0.10 years N/A*
Weighted average fair value per share $0.004 N/A*
* Not applicable as there were no options granted during the period
All previously issued options were fully vested prior to January 1, 2006.
Therefore, there were no compensation costs relating to stock-based compensation
from previous periods including the effects from adoption of SFAS 123R. There
were 18,000,000 employee options deemed granted during the three months ended
March 31, 2007, as per the terms of amendments to employee agreements. The
options were granted with exercise prices equal to the fair market value of the
stock ($0.02) on the grant date, January 4, 2007.
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. The Company
evaluates, at each balance sheet date, 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
March 31, 2007, 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 - 7 years. Amortization expense was $105,431 and
$3,837 for the three months ended March 31, 2007 and 2006, respectively.
Registration Payment Arrangements - On January 1, 2007, the Company adopted FASB
Staff Position ("FSP") EITF 00-19-2, Accounting for Registration Payment
Arrangements ("FSP 00-19-2"). Under FSP 00-19-2 and Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies ("SFAS 5"), a
registration payment arrangement is an arrangement where (a) the Company
endeavors to file a registration statement for certain securities with the SEC
and have the registration statement declared effective within a certain time
period; and/or (b) the Company will endeavor to keep a registration statement
effective for a specified period of time; and (c) transfer of consideration is
required if the Company fails to meet those requirements. When the Company
issues an instrument with these registration payment requirements, the Company
estimates the amount of consideration that is likely to be paid out under the
agreement and offsets the amount of the liability against the proceeds of the
instrument issued. The estimate is re-evaluated at the end of each reporting
period, with any changes recorded as a registration penalty in the statements of
8
operations. As further described in Note 7, the Company has instruments that
contain registration payment arrangements. The effect of implementing this FSP
has not had a material effect on the financial statements because the
probability of payment under the terms of the agreement are considered to be
remote.
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. The Company had a net loss of $979,035 for the three months ended
March 31, 2007, compared to a net loss of $277,998 for the three months ended
March 31, 2006. As of March 31, 2007, and December 31, 2006, the Company had an
accumulated deficit of $23,160,716 and $22,181,679, respectively, and a total
stockholders' equity of $1,183,890 and $1,618,947, respectively. The Company
also had a working capital deficit of $5,090,728 and $4,863,641 as of March 31,
2007, and December 31, 2006, respectively. In addition, the Company's operations
provided cash of $129,999 for the three months ended March 31, 2007, and used,
rather than provided, cash from operation of $719,898 for the three months ended
March 31, 2006, respectively. 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 consumer products
contract manufacturing, and marketing. 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
Inventories are composed of the following:
Inventory Summary
March 31, March 31,
2007 2006
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Raw Materials $ 1,660,782 $ 1,564,556
Work in Process 218,848 207,276
Finished Goods 717,459 1,183,001
Allowance / Reserve (866,354) (751,296)
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Totals $ 1,730,735 $ 2,203,537
==================================
NOTE 4 - INVESTMENTS
During the three months ended March 31, 2007, the Company, along with several
other investors formed After Bev Group, LLC ("After Bev"). CirTran contributed
its expertise for an 84% interest in After Bev, and the additional investors
contributed $500,000 for a 16% interest in After Bev. Subsequent to the
formation, After Bev purchased a 50% ownership in Play Bev LLC ("Play Bev") for
$750,000 using the cash received during its formation, and an additional
$250,000 raised in the form of notes payable. CirTran has recorded the
9
investment at its cost of $750,000, and has also recorded notes payable for
$250,000 and a minority interest of $500,000. Neither After Bev nor Play Bev
has had any activity to date.
NOTE 5 - BASIC AND DILUTED NET LOSS PER SHARE
Basic loss per share is calculated by dividing loss available to common
shareholders by the weighted-average number of common shares outstanding during
each period. Diluted loss per share is similarly calculated, except that the
weighted-average number of common shares outstanding would include common shares
that may be issued subject to existing rights with dilutive potential when
applicable. The Company had 493,565,315 and 440,178,571 in potentially issuable
common shares at March 31, 2007 and December 31, 2006, respectively, that were
excluded from the calculation of diluted loss per share because the effects
would be anti-dilutive.
NOTE 6 - RELATED PARTY TRANSACTIONS
Notes Payable to Stockholders -- During February and March 2007, the President
of the Company loaned the Company a net amount of $30,000 which was recorded as
a note payable to a stockholder.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Registration Rights -In December 2005, in connection with the Company's issuance
of a convertible debenture to Cornell Capital Partners, L.P. ("Cornell")
(discussed below in Note 9), the Company granted to Cornell 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. In the event the initial registration statement is not
filed by the scheduled filing deadline then as partial relief for the damages to
any holder of registrable securities, the Company will pay as liquidated damages
either a cash amount or in shares of the Company's common stock, within three
business days, equal to two percent of the liquidated value of the convertible
debentures outstanding for each thirty day period after the scheduled filing
deadline, during which the initial registration statement has not been filed.
The Company agreed to register the resale of up to 32,608,696 shares and
10,000,000 warrants, and to keep such registration statement effective until all
of the shares issuable upon conversion of the debenture have been sold. The
Company subsequently entered into an agreement with Cornell to extend the filing
date of the registration statement to October 30, 2006, and then again to June
1, 2007.
In August 2006, in connection with the Company's issuance of another convertible
debenture to Cornell, the Company entered into an amended and restated
registration rights agreement with Cornell, which superseded the registration
rights agreement from the December 2005 debenture transaction. Pursuant to the
amended registration rights agreement, the Company agreed to file a registration
statement to register the resale of shares of the Company's common stock
issuable upon conversion of both debentures. In the event the initial
registration statement is not filed by the scheduled filing deadline then as
partial relief for the damages to any holder of registrable securities, the
Company will pay as liquidated damages either a cash amount or in shares of the
Company's common stock, within three business days, equal to two percent of the
liquidated value of the convertible debentures outstanding for each thirty day
period after the scheduled filing deadline, during which the initial
registration statement has not been filed. The Company agreed to file the
registration statement by October 30, 2006. The agreement was subsequently
amended to extend the filing date of the registration to December 31, 2006, and
10
then again to June 1, 2007. 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. As of the date of this Report, no such registration
statement has been filed. The Company has evaluated the registration payment
arrangement under FSP EITF 00-19-2 and has determined that the likelihood of
payment under this provision is remote. Accordingly, no registration payment
arrangement liability has been recorded as of March 31, 2007.
On July 20, 2006, the Company entered into a lockdown agreement with Cornell
(the "Cornell Agreement") related to the first Cornell Debenture (See Note 9.)
Pursuant to the Cornell Agreement, Cornell agreed that it would not convert any
of the principal or interest on the Cornell Debenture or exercise any of the
Warrants granted to Cornell until the Company had taken the steps necessary to
increase its authorized capital. As such, the Company was able to lock down
106,900,000 shares underlying the Cornell Debenture and 25,000,000 shares
underlying the Cornell Warrants (See Note 9.)
Diverse Talent Group Transaction - In March 2006, the Company formed a new
subsidiary, Diverse Media Group Corporation ("DMG"), to provide end-to-end
services to the direct response and entertainment industries. The new division
provides product marketing, production, media funding and merchandise
manufacturing services. On May 26, 2006, DMG entered into an assignment and
exclusive services agreement with Diverse Talent Group, Inc., a California
corporation, ("DT"). The Services Agreement had a 5 year term and was made
effective as of April 1, 2006. Pursuant to the Services Agreement, DMG and DT
entered into an exclusive operating relationship whereby DMG agreed to outsource
its talent agency operations to DT and to provide financing to DT to assist in
DT's growth. Under the Services Agreement, DMG and DT created a relationship
whereby DT would operate exclusively under the DMG business structure. The
project did not generate the type of synergy that was anticipated, and it was
concluded that it would be in the best interest of the Company to terminate the
relationship with DT.
On March 29, 2007, the Company entered into a term sheet agreement with DT,
which was followed up with a definitive Settlement and Release Agreement,
Investor Registration Agreement, and an Escrow Agreement all executed on May 15
2007. These documents contain virtually the same terms and conditions as were
proposed in the term sheet. As a result, the Company reached the following
settlement with DT as of March 30, 2007:
(i) The parties agreed to terminate the original agreements and
the Company assigned back to DT all talent contracts and the
name "Diverse Media Group". DT will cause Diverse Media Group,
Inc., to issue 9,000,000 shares of its common stock, which are
currently traded on the pink sheets, to an escrow account. All
shares held in escrow will be subject to the following
instructions issued to the escrow agent:
a. The Company may sell shares under the terms and conditions
of Rule 144
b. The Company may sell shares pursuant to an effective
registration under the Securities Act of 1933
c. The Company and Diverse Media Group, Inc. may jointly
instruct the agent to disburse shares from escrow
d. In the case of bankruptcy the agent may distribute shares
e. Once the aggregate amount of all net proceeds equals or
exceeds $2,000,000 the agent shall deliver any unsold
shares to Diverse Media Group, Inc.
11
(ii) Sale and registration of the shares are limited and are
subject to Diverse Media Group's first right of refusal on any
proposed stock sale.
The sale and registration limitations are as follows:
(a) No stock may be sold during the first year unless a
registration statement is filed.
(b) The number of shares subject to registration rights is
limited based on the total number of outstanding shares of
Diverse Media Group, Inc. stock.
(c) Sales of stock in subsequent years is restricted based on
trading volume.
The Company anticipates that DMG will continue to develop relationships with
talent agencies as they have done since inception.
Manufacturing Agreement - On June 10, 2004, the Company entered into an
exclusive manufacturing agreement with certain developers. Under the terms of
the agreement, the Company, through its wholly-owned subsidiary CirTran-Asia,
has the exclusive right to manufacture certain products developed by the
developers or any of their affiliates. The developers will continue to provide
marketing and consulting services related to the products under the agreement.
Should the developers terminate the agreement prior to June 10, 2007, they must
pay the Company $150,000.
Employment Agreements - During the three months ended March 31, 2007, the
Company entered into amended employment agreements with the officers of the
Company. The agreements detailed a base salary with various bonus features. As
part of these agreements the Company issued options to purchase 18,000,000
shares of the Company's common stock to its officers.
New Director - As of February 1, 2007, Fadi Nora was appointed to the Company's
Board of Directors. As compensation, he is entitled to a cash payment of $5,000
per quarter, and stock options to purchase up to a total of 2,000,000 shares of
the Company's common stock as determined by the board. Mr. Nora is also entitled
to a quarterly bonus equal to 0.5% of the Company's gross sales generated
directly by Mr. Nora for each quarter. In addition, Mr. Nora receives 5% of all
gross investments made into 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 is the introduction of the Company to
the potential investors and that he does not participate in the recommendation,
structuring, negotiation, documentation or selling of the investment, (ii)
neither the Company nor the investor are required 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. Mr. Nora will also be
reimbursed for certain pre-approved expenses.
NOTE 8 - MORTGAGE NOTE PAYABLE
In conjunction with the acquisition of PFE, the Company assumed a mortgage note
payable for $1,050,000, which is secured by the land and the building that was
acquired as part of the PFE acquisition. The note bears interest at 12.5% per
annum and is collateralized by the land and building. Interest only payments
were made through January 2006. Starting in February 2006, principal and
interest payments have been required based on a twenty-year amortization of the
note. The entire balance of principal and unpaid interest will be due in
December 2008.
12
On May 4, 2007, the land and building were sold (See Note 13.)
NOTE 9 - CONVERTIBLE DEBENTURES
Highgate - On May 26, 2005, the Company entered into an agreement with Highgate
to issue to Highgate a $3,750,000, 5% Secured Convertible Debenture (the
"Debenture"). The Debenture is due December 2007 and is secured by all of the
Company's property.
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 March 31, 2007, and December 31, 2006, was $97,836 and
$163,884, respectively.
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 or
the entire Debenture then outstanding by paying 105% 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;
(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% of the
Company's outstanding common stock.
In connection with the issuance of the Highgate Debenture, the Company granted
Highgate registration rights related to the issuance of the debenture. (See Note
7.)
The Company determined that the features of the Debenture fell under derivative
accounting treatment. As of March 31, 2007 the carrying value of the Debenture
was $1,846,997. The carrying value will be accreted each quarter over the life
of the Debenture until the carrying value equals the unconverted face value of
$2,600,000 (see below). The fair value of the derivative liability as of March
31, 2007 was $1,010,023. Fees of $256,433 were withheld from the proceeds, which
have been capitalized, and are being amortized over the life of the loan.
During the three months ended March 31, 2007, Highgate converted $100,000 of
accrued interest and $250,000 of its convertible debenture into 23,487,797
shares of the Company's common stock at a conversion rate ranging from $0.01413
to $0.01613 per share, which was the lower of $0.10 or 100% of the lowest
13
closing bid price of the Company's common stock over the 20 trading days
preceding each conversion. As of March 31, 2007, Highgate had converted
$1,450,000 of principal on the convertible debenture which leaves an outstanding
balance of $2,600,000.
Cornell - On December 30, 2005, the Company entered into an agreement with
Cornell Capital Partners, L.P. ("Cornell") to issue to Cornell a $1,500,000, 5%
Secured Convertible Debenture (the "Cornell Debenture"). The Cornell Debenture
is due July 30, 2008, and is secured by all the Company's property, junior to
the Highgate security interest.
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, Cornell may elect to convert principal amounts owing on the Cornell
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 Cornell Debenture then
outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Cornell's right to convert principal amounts into shares of the Company's common
stock is limited as follows:
(i) Cornell may convert up to $250,000 worth of the principal
amount plus accrued interest of the Cornell 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) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the Cornell 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 Cornell may convert in
excess of the foregoing amounts if the Company and Cornell
mutually agree; and
(iii) Upon the occurrence of an event of default, Cornell Capital
Partners, LP may, in its sole discretion, accelerate full
repayment of the debenture outstanding and accrued interest
thereon or may convert the Debenture and accrued interest
thereon into shares of the Company's common stock.
Except in the event of default, Cornell may not convert the Cornell Debenture
for a number of shares that would result in Cornell owning more than 4.99% of
the Company's outstanding common stock.
The Cornell 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.
In connection with the issuance of the Cornell Debenture, the Company granted
Cornell registration rights related to the issuance of the Cornell Debenture and
Warrants. (See Note 7.)
The Company determined that the features on the Cornell Debenture and the
associated Warrants fell under derivative accounting treatment. As of March 31,
2007 the carrying value of the Cornell Debenture was $723,754. The carrying
value will be accreted each quarter over the life of the Cornell Debenture until
the carrying value equals the face value of $1,500,000. The fair value of the
derivative liability relating to the Cornell debenture and warrants, as of March
31, 2007 was $738,802.
14
In connection with the issuance of the Cornell Debenture, fees of $130,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the Cornell Debenture.
As of March 31, 2007, Cornell had not converted any of the Cornell Debenture
into shares of the Company's common stock.
Cornell - On August 23, 2006, the Company entered into another securities
purchase agreement (the "Purchase Agreement") with Cornell, relating to the
issuance by the Company of a 5% Secured Convertible Debenture, due April 23,
2009, in the aggregate 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.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
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 Cornell Debenture then
outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Cornell's right to convert principal amounts owing under the August Debenture
into shares of the Company's common stock is limited as follows:
(i) Cornell 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) Cornell 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, Cornell may, in
its sole discretion, accelerate full repayment of the
debentures outstanding and accrued interest thereon or may,
convert all debentures outstanding and accrued interest
thereon into shares of the Company's common stock.
Except in the event of default, Cornell 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% of the outstanding shares of the common stock following such
conversion.
In connection with the Purchase Agreement, the Company also agreed to grant to
Cornell 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.
15
In connection with the issuance of the August Debenture, the Company granted
Cornell registration rights related to the issuance of the August Debenture and
Warrants. (See Note 7.)
The Company determined that the features on the August Debenture and the
associated warrants fell under derivative accounting treatment. As of March 31,
2007 the carrying value of the August Debenture was $480,012. The carrying value
will be accreted each quarter over the life of the Cornell August Debenture
until the carrying value equals the face value of $1,500,000. The fair value of
the derivative liability relating to the August Debenture and warrants, as of
March 31, 2007 was $900,235.
In connection with the issuance of the August Debenture, fees of $135,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the August Debenture.
As of March 31, 2007, Cornell had not converted any of the August Debenture into
shares of the Company's common stock.
Lockdown Agreement - In connection with the Cornell Debenture and the August
Debenture, Cornell agreed that it could not convert any amount of principal or
interest, until the Company has effectuated an increase in its authorized
capital. The Company and Cornell also agreed that in the event that the Company
had not effectuated such increase in its authorized capital by October 30, 2006,
which was subsequently extended to June 1, 2007, such failure would constitute
an event of default on parallel with those set forth in the Purchase Agreement
and subject to the same consequences as those listed in the Purchase Agreement.
On April 30, 2007, the Company received shareholder approval to increase its
authorized capital to include 1,500,000,000 shares of common stock.
NOTE 10 - STOCKHOLDERS' EQUITY
Common Stock Issuances -During the three months ended March 31, 2007, the
Company issued to Highgate 23,487,797, shares of restricted common stock in
connection with a conversion by Highgate of $250,000 principal amount of the
convertible debenture and $100,000 of accrued interest. (See Note 9.)
May 2006 Private Offering - On May 24, 2006, the Company entered into a private
placement agreement whereby the Company sold 14,285,715 shares of its common
stock to ANAHOP, Inc. ("ANAHOP"), an unrelated party for $1,000,000. In addition
to the shares, the Company issued warrants to designees of Anahop as follows:
- A warrant to purchase up to 15,000,000 shares, with an
exercise price of $0.15 per share, exercisable upon the date
of issuance.
- A warrant to purchase up to 5,000,000 shares, with an exercise
price of $0.25 per share, exercisable upon the date of
issuance.
- A warrant to purchase up to 10,000,000 shares, with an
exercise price of $0.50 per share.
The warrants are exercisable as of the date of issuance and through and
including the date which is five years following the date on which the Company's
common stock is listed for trading on either the Nasdaq Small Cap Market, the
Nasdaq Capital Market, the American Stock Exchange, or the New York Stock
Exchange.
The Company determined that because it did not have sufficient authorized shares
of common stock to settle the exercise of the 30,000,000 warrants in shares of
16
its common stock the warrants should be recorded as a derivative liability at a
fair value of $261,121. The remaining $44,400 was attributed to the 14,285,115
shares of common stock.
The Company granted piggyback registration rights for the shares underlying the
warrants, effective only after the warrants have been exercised. The Company did
not grant any registration rights with respect to the 14,285,715 shares of
common stock.
June 2006 Private Offering - On June 30, 2006, the Company entered into a second
private placement agreement whereby, the Company agreed to sell 28,571,428
shares of its common stock to ANAHOP. The total consideration to be paid for the
Shares will be $2,000,000 if all tranches of the sale close.
Pursuant to the Agreement, ANAHOP agreed to pay $300,000 at the time of closing,
and an additional $200,000 within 30 days of the closing. The payments of
$300,000 and $200,000 are referred to collectively as the "First Tranche
Payments." The First Tranche Payments have been received, $300,000 on June 30,
2006 and $200,000 on July 27, 2006. The Company issued 7,142,857 shares of
common stock upon receipt of the First Tranche Payment.
The remaining $1,500,000 is to be paid by ANAHOP as follows:
(i) No later than thirty calendar days following the date on which
any class of the Company's capital stock is first listed for
trading on either the Nasdaq Small Cap Market, the Nasdaq
Capital Market, the American Stock Exchange, or the New York
Stock Exchange, ANAHOP agreed to pay an additional $500,000;
and
(ii) No later than sixty calendar days following the date on which
any class of the Company's capital stock is first listed for
trading on the above listed markets, ANAHOP agreed to pay an
additional $1,000,000. (The payments of $500,000 and
$1,000,000 are referred to collectively as the "Second Tranche
Payment.")
Upon receipt of the Second Tranche Payment, the Company agreed to issue ANAHOP
21,428,571 shares of common stock and to issue warrants to designees of ANAHOP
as follows:
- A warrant to purchase up to 30,000,000 shares, with an
exercise price of $0.15 per share, exercisable upon the date
of issuance.
- A warrant to purchase up to 10,000,000 shares, with an
exercise price of $0.25 per share, exercisable upon the date
of issuance.
- A warrant to purchase up to 23,000,000 shares, with an
exercise price of $0.50 per share, exercisable upon the date
of issuance.
The Warrants are exercisable as of the date of issuance and through and
including the later of the fifth anniversary of the date of the warrant or the
fifth anniversary of the date on which the Company's common stock is first
listed for trading on either the Nasdaq Small Cap Market, the Nasdaq Capital
Market, the American Stock Exchange, or the New York Stock Exchange.
The Company granted piggyback registration rights for the shares underlying the
warrants, effective only after the warrants have been exercised. The Company did
not grant any registration rights with respect to the common shares issued or to
be issued in connection with the June 2006 private offering.
Lockdown Agreements - On July 20, 2006, the Company entered into a lockdown
agreement with ANAHOP, (the "ANAHOP Agreement"), Albert Hagar, and Fadi Nora,
and related to the May and June private placement transactions discussed above.
Albert Hagar and Fadi Nora were the designees to whom ANAHOP assigned the
30,000,000 warrants. Pursuant to the ANAHOP Agreement, Hagar and Nora agreed
17
that they would not exercise any of the warrants they received in connection
with the May or June private offerings until the Company had taken the steps
necessary to increase its authorized capital. Additionally, ANAHOP agreed that
it would not make the Second Tranche Payment to purchase the Second Tranche
Shares until the Company had taken the steps necessary to increase its
authorized capital. As such, under the ANAHOP Agreement, the Company was able to
lock down 21,428,571 shares (the "Second Tranche Shares"), and 93,000,000 shares
underlying the warrants issued to Hagar and Nora in the May and June private
placements.
As noted above, on April 30, 2007, the Company received shareholder approval to
increase its authorized capital to include 1,500,000,000 shares of common stock.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Employee Options - During the three months ended March 31, 2007, the Company
entered into Amended Employment Agreements whereby it agreed to grant options to
purchase 18,000,000 shares of common stock to employees. The options were
granted with an exercise price of $0.02 per share, a five year life and vested
immediately. The fair value of the 18,000,000 options was $69,000 as determined
by the Black Scholes model.
A summary of the stock option activity for the three months ended March 31,
2007, is as follows:
Weighted Average
Shares Exercise Price
-------------- ----------------
Outstanding at December 31, 2006 10,750,500 $ 0.03
Granted 18,000,000 $ 0.02
Exercised -
--------------
Outstanding at March 31, 2007 28,750,500 $ 0.02
==============
Excercisable at March 31, 2007 10,750,500 $ 0.02
==============
Pursuant to an employment agreement, dated May 25, 2006, Mr. Nasiff, of DMG, was
granted options to purchase 2,500,000 shares of the Company's stock at an option
price of $0.05 per share. Those options were to vest over a five year period.
Since that time the Company and Mr. Nasiff have agreed to terminate the
employment agreement at which point the options granted under the agreement are
forfeited by Mr. Nasiff.
NOTE 12 - 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 three reportable segments: electronics assembly, contract
manufacturing, and marketing and media. The electronics assembly segment
manufactures and assembles circuit boards and electronic component cables, along
with the contract manufacturing segment which manufactures, either directly or
through foreign subcontractors, certain products are under an exclusive
manufacturing agreement. The marketing and media segment includes sales from
infomercials and talent agency fees. The Company evaluates performance of each
segment based on earnings or loss from operations. Selected segment information
is as follows:
18
Electronics Contract Marketing Company
Assembly Manufacturing and Media Total
--------------------------------------------------------------------------------
March 31, 2007
Sales to external customers 1,081,000 737,631 469,663 $ 2,288,293
Intersegment sales - - -
Segment income (loss) (704,684) (214,262) (60,089) (979,035)
Segment assets 8,320,190 2,667,204 577,405 11,564,799
Depreciation and
amortization 161,687 60,544 53 222,284
March 31, 2006
Sales to external customers 796,585 941,239 - $ 1,737,824
Intersegment sales - - - -
Segment loss (88,165) (189,833) - (277,998)
Segment assets 4,724,932 4,953,570 - 9,678,502
Depreciation and
amortization 83,122 31,817 - 114,939
March 31,
----------------------------------
Sales 2007 2006
--------------------------------------------------------------------------------
Total sales for reportable segments $ 2,288,293 $ 1,737,824
Elimination of intersegment sales - -
--------------------------------------------------------------------------------
Consolidated net sales $ 2,288,293 $ 1,737,824
--------------------------------------------------------------------------------
March 31,
----------------------------------
Total Assets 2007 2006
--------------------------------------------------------------------------------
Total assets for reportable segments $ 11,564,799 $ 9,675,502
Adjustment for intersegment amounts - -
--------------------------------------------------------------------------------
Consolidated total assets $ 11,564,799 $ 9,675,502
--------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS
Highgate
--------
In April 2007, Highgate converted $300,000 of its convertible debenture into
22,174,567 shares of the Company's common stock at a conversion rate ranging
from $0.013 to $0.01381 per share, which was the lower of $0.10 or 100% of the
lowest closing bid price of the Company's common stock over the 20 trading days
preceding the conversion.
Proxy Statement
---------------
On March 30, 2007, the Company filed a definitive proxy statement in connection
with a Special Meeting of Shareholders (the "Special Meeting"). The purpose of
the Special Meeting was to vote on a proposed amendment to the Company's
Articles of Incorporation that would increase the authorized capital of the
Company to 1,500,000,000 shares of common stock and authorize a 1.2 shares for
one share forward stock split.
19
The special stockholders meeting was held on April 30, 2007, and the proposed
amendment was adopted by a vote of a substantial majority of the stockholders.
As a result the Company has filed with the State of Nevada to increase the
number of authorized shares to 1,500,000,000 and shares of stock were issued to
effectuate the 1.2 forward stock split to shareholders of record as of May 10,
2007.
Property Sale
-------------
On May 4, 2007, PFE Properties LLC ("PFE"), a Utah limited liability company and
subsidiary of the Company, sold and leased back the land and building where the
Company presently has its headquarters and manufacturing facility.
The land and building were sold for $2,500,000. Of that amount, an aggregate of
$1,233,288 went to repay PFE's mortgage loan, taxes, fees, commissions, and
other expenses. The net amount to PFE was $1,266,712, which was paid at closing.
In connection with the sale, the Company entered into a Triple Net Lease (the
"Lease") whereby the Company agreed to lease the property from the buyer. 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 monthly lease payment will be $17,083.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This discussion should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-KSB for the year ended December 31, 2006.
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling 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. Through our subsidiary, Racore Technology
Corporation, we design and manufacture Ethernet technology products. Our goal is
to offer customers the significant competitive advantages that can be obtained
from manufacture outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management, and increased
purchasing power.
We have several new programs in development. These programs represent a new
emphasis into consumer products contract manufacturing and marketing. Management
believes that these new programs have the potential to carry higher profit
margins than electronic manufacturing and as a result, through our subsidiaries,
we are investing substantial resources into developing these activities.
We are organized into four principal divisions: CirTran USA, CirTran Asia,
CirTran Products, and Diverse Media Group which is responsible for marketing the
new programs.
CirTran Asia
During 2004, we established a new division, CirTran-Asia, Inc, which has
contributed to a large portion of the revenues since that time. This division is
an Asian-based, wholly owned subsidiary of CirTran Corporation and provides a
myriad of manufacturing services to the direct response and retail consumer
markets. Our experience and expertise in manufacturing enables CirTran-Asia to
enter a project at any phase whether it be engineering and design, product
development and prototyping, tooling, and high-volume manufacturing. We
anticipate that CirTran-Asia will pursue manufacturing relationships beyond
printed circuit board assemblies, cables, harnesses and injection molding
systems by establishing complete "box-build" or "turn-key" relationships in the
electronics, retail, and direct consumer markets. This strategic move into the
Asian market has helped to elevate CirTran to an international contract
manufacturer status for multiple products in a wide variety of industries, and
has allowed us to target large-scale contracts. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines.
CirTran Asia has established a satellite office in Shen Zhen, China, and
retained Mr. Charles Ho to lead this division.
21
CirTran Products
On December 2, 2005, we announced that we had formed a new division, CirTran
Products, which will offer products for sale at retail. The Products division
will be run from our Los Angeles office, with Trevor Saliba, our executive vice
president for worldwide business development, working to develop sales. Consumer
products built by our CirTran Asia subsidiary, as well as other products, are
available for retail sale from this subsidiary.
CirTran Products also intends to pursue contract manufacturing relationships in
the consumer products industry which can include product lines including:
home/garden, kitchen, health/beauty, toys, and licensed merchandise and apparel
for film, television, sports and other entertainment properties. Licensed
merchandise and apparel can be defined as any item that bears the image of,
likeness, or logo of a product sold or advertised to the public. Licensed
merchandise and apparel are sold and marketed in the entertainment (film and
television) and sports (sports franchises) industries. As of May 18, 2007, we
had concentrated our product development efforts into three areas, home and
kitchen appliances, beauty products and licensed merchandise. We anticipate that
these products will be introduced into the market under one uniform brand name
or under separate trademarked names owned by CirTran Products. As of the date of
this Report, we were preparing to launch various programs where Diverse Media
Group will operate as the marketer, campaign manager and distributor in various
product categories including beauty products, entertainment products, software
products, and fitness and consumer products.
As of the date of this Report, we were currently under contract with two direct
marketing companies to supply them with the True Ceramic Pro flat irons ("TCP").
Since June 6, 2006, the date of the ABS bankruptcy settlement (see discussion
below on page 26) and through the date of this report, CTP generated sales of
approximately $2,087,000. CTP continues to generate sales of TCP units and other
ancillary hair care products to the direct marketing companies, and the program
is expected to continue being profitable during 2007.
Diverse Media Group
On March 21, 2006, we announced that we had formed a new subsidiary, Diverse
Media Group Corp. ("DMG"), to provide end-to-end services to the direct response
and entertainment industries. The new division will provide product marketing,
production, media funding and merchandise manufacturing services. Forming this
new division was a necessary step to maximize product manufacturing
opportunities for CirTran's proprietary products and to provide marketing
services for individual entrepreneurs and inventors. The new division is
headquartered in CirTran's Los Angeles (Century City) offices and is headed by
Mr. Saliba. As of the date of this Report, we were developing proprietary
programs to be launched in the product marketing production services and media
funding divisions and we were preparing to launch various programs where Diverse
Media Group will operate as the marketer, campaign manager and/or distributor in
various product categories including beauty products, entertainment products,
software products, and fitness and consumer products.
On May 26, 2006, DMG entered into an assignment and exclusive services agreement
with Diverse Talent Group, Inc., a California corporation, ("DT"). The Services
Agreement has a 5 year term and was made effective as of April 1, 2006. Pursuant
to the Services Agreement, DMG and DT entered into an exclusive operating
relationship whereby DMG agreed to outsource its talent agency operations to DT
and to provide financing to DT to assist in DT's growth. Under the Services
Agreement, DMG and DT created a relationship whereby DT would operate
22
exclusively under the DMG business structure. The project did not generate the
type of synergy that was anticipated, and it was concluded that it would be in
the best interest of the Company to terminate the relationship with DT.
On November 28, 2006, we announced that Diverse Media Group, had signed a
two-year lease on a 1,150 sq. ft. facility in Bentonville, Arkansas, in close
proximity to Wal-Mart's world headquarter. The office, which is managed by Mr.
Oliver Mulcahy, is strategically located to help create and manage an ongoing
relationship.
On March 29, 2007, CirTran entered into a term sheet agreement with DT, which
was followed up with a definitive Settlement and Release Agreement, Investor
Registration Agreement, and an Escrow Agreement all executed on May 15 2007.
These documents contain virtually the same terms and conditions as were proposed
in the term sheet. As a result, we reached the following settlement with DT as
of March 30, 2007:
(ii) The parties agreed to terminate the original agreements and
the Company assigned back to DT all talent contracts and the
name "Diverse Media Group". DT will cause Diverse Media Group,
Inc., to issue 9,000,000 shares of its common stock, which are
currently traded on the pink sheets, to an escrow account. All
shares held in escrow will be subject to the following
instructions issued to the escrow agent:
(a) The Company may sell shares under the terms and conditions
of Rule 144.
(b) The Company may sell shares pursuant to an effective
registration under the Securities Act of 1933.
(c) The Company and Diverse Media Group, Inc. may jointly
instruct the agent to disburse shares from escrow.
(d) In the case of bankruptcy the agent may distribute shares.
(e) On the aggregate amount of all net proceeds equals or
exceeds $2,000,000 the agent shall deliver any unsold
shares to Diverse Media Group, Inc.
(ii) Sale and registration of the shares are limited and are
subject to Diverse Media Group's first right of refusal on any
proposed stock sale.
The sale and registration limitations are as follows:
(a) No stock may be sold during the first year.
(b) The number of shares subject to registration rights is
limited based on the total number of outstanding shares of
Diverse Media Group, Inc. stock.
(c) Sales of stock in subsequent years is restricted based on
trading volume.
DMG will continue to develop relationships with talent agencies as they have
done since inception. Part of the settlement, CirTran must change the name of
our subsidiary and discontinue the use of the name "Diverse". Since the
execution of the settlement and release agreement, CirTran has filed and amended
the name of the subsidiary to CirTran Media Corp. ("CTM"). CTM will continue to
produce infomercials for the direct marketing industry and for product marketing
campaigns. CTM will also provide product marketing, production, media funding
and merchandising services to the direct response and entertainment industries
in concert with the original objectives of formation.
RCG Group
On October 3, 2006, we announced that we had engaged the services of The RCG
Group "RCG" to assist in certain financial relations/corporate communications
and other consulting services. RCG is being retained to specifically assist us
in developing and executing an effective financial relations/corporate
23
communications strategy. The primary objective of such program will be to
position us to secure and then maintain a listing on the American Stock Exchange
or NASDAQ markets as soon as is reasonably possible. Additionally, RCG has been
retained to further assist us in its endeavor to secure meaningful public,
trading market sponsorship from professional investors as well as certain
members of the institutional investment community.
CirTran Online Corporation
During the first quarter CirTran formed a new wholly owned marketing-driven
subsidiary to sell products via the internet, to offer training, software,
marketing tools, web design and support as well as other e-commerce related
services to internet entrepreneurs, and to telemarket directly to buyers of its
products and services.
CirTran signed a three-year Assignment and Exclusive Services Agreement for its
subsidiary, CirTran Online Corporation ("CTO"), with Global Marketing Alliance
("GMA"), founded by Mr. Sov Ouk, and its affiliate companies, Online Profit
Academy, LLC, and Online 2 Income, LLC including Webprostore.com and
Myitseasy.com. Based in the Salt Lake area, the companies offer a wide range of
services for E-commerce including eBay sellers.
CirTran also signed a three-year Employment Agreement with Mr. Ouk to serve as
Senior Vice President of the new subsidiary.
GMA and its affiliates offer a range of complementary capabilities and products
for E-commerce, including seminars on how to buy and sell on the World Wide Web.
GMA is experienced in building E-commerce websites and currently host sites for
internet entrepreneurs.
CirTran USA
We have three principal business segments: electronics assembly and manufacture;
contract manufacturing; and marketing and media.
Electronics Assembly and Manufacture
------------------------------------
For the three months ended March 31, 2007, approximately 47% of our revenues
were generated by our low-volume electronics assembly activities as compared to
28% of revenues for the year 2006, which consist primarily of the placement and
attachment of electronic and mechanical components on printed circuit boards and
flexible (i.e., bendable) cables. We also assemble higher-level sub-systems and
systems incorporating printed circuit boards and complex electromechanical
components that convert electrical energy to mechanical energy, in some cases
manufacturing and packaging products for shipment directly to our customers'
distributors. In addition, we provide other manufacturing services, including
refurbishment and remanufacturing. We manufacture on a turnkey basis, directly
procuring any of the components necessary for production where the OEM customer
does not supply all of the components that are required for assembly. We also
provide design and new product introduction services, just-in-time delivery on
low to medium volume turnkey and consignment projects and projects that require
more value-added services, and price-sensitive, high-volume production. Our goal
is to offer customers significant competitive advantages that can be obtained
from manufacturing outsourcing, such as access to advanced manufacturing
technologies, shortened product time-to-market, reduced cost of production, more
effective asset utilization, improved inventory management and increased
purchasing power.
Contract Manufacturing
----------------------
Through our subsidiary, CirTran-Asia, we design, engineer, manufacture and
supply products in the electronics, consumer products and general merchandise
industries for various marketers, distributors and national retailers. This new
division is our Asian-based, wholly owned subsidiary, and provides manufacturing
services to the direct response and retail consumer markets. Our experience and
expertise in manufacturing enables CirTran-Asia to enter a project at any phase:
engineering and design; product development and prototyping; tooling; and
high-volume manufacturing. This strategic move into the Asian market has helped
to elevate CirTran to an international contract manufacturer status for multiple
products in a wide variety of industries, and has, in short order, allowed us to
target large-scale contracts.
24
As noted above, CirTran has established a dedicated satellite office for
CirTran-Asia, and has retained Mr. Charles Ho to lead the division. Having
proven the value and reliability of its core products, CirTran Corporation has
chosen to expand into previously untapped product lines. CirTran-Asia intends to
pursue manufacturing relationships beyond printed circuit board assemblies,
cables, harnesses and injection molding systems by establishing complete
"box-build" or "turn-key" relationships in the electronics, retail, and direct
consumer markets.
In 2006 and during the first quarter of 2007, we have developed several items,
in the fitness and exercise products category and in the household and kitchen
appliance, and in the health and beauty aids markets, which are being
manufactured in China through our subsidiary CirTran Asia. Sales of theses
products contributed approximately 56% of revenues reported in 2006 compared to
32% in the first quarter 2007. This represents a significant portion of revenues
generated by the Company and it is anticipated that offshore contract
manufacturing will continue to be an emphasis of ours.
Marketing and Media
-------------------
We are also developing a new relationship with Global Marketing Alliance, LLC
("GMA") an internet sales and telemarketing company. In 2007, we signed a
three-year Assignment and Exclusive Services Agreement with GMA and a three-year
Employment Agreement with GMA founder Mr. Sov Ouk, to serve as Senior Vice
President of the new venture. We anticipate that by expanding our exposure to
the market place through internet and telemarketing capabilities we will enhance
our marketing mix with a low cost alternative to our other marketing channels
and develop market share.
Main Business Areas
We have three main business areas of focus. They are: fitness and exercise
products; household and kitchen appliances and health and beauty aids; and
electronics products and manufacturing.
Fitness and Exercise Products
-----------------------------
We began manufacturing fitness products in May 2004. To date, we have
manufactured and sold over 12 different fitness products. We manufacture all of
our fitness products through our CirTran Asia operation.
In early June 2004, we entered into an exclusive manufacturing agreement with
certain Developers, including Charles Ho, the President of CirTran-Asia. Under
the terms of the agreement, we, through our wholly-owned subsidiary
CirTran-Asia, have the exclusive right to manufacture certain products developed
by the Developers or any of their affiliates. Pursuant to the agreement, we
could enter into addendum agreements with the developers with respect to
particular products to be produced and manufactured. The agreement was to be for
an initial term of 36 months, and may be continued after that on a
month-to-month basis unless terminated by either party by providing written
notice.
On September 10, 2004, we announced that CirTran-Asia had been awarded the
rights to manufacture the AbRoller, another type of an abdominal fitness
machine, for Tristar Products, under an exclusive manufacturing agreement. Since
this announcement, and through the date of this Report, CirTran-Asia had
manufactured and shipped units, and received payments of approximately
$2,600,000.
25
On April 28, 2005, CirTran-Asia announced that it has been awarded a contract
(the "April 2005 Agreement") from Guthy - Renker Corporation ("GRC") to be the
exclusive manufacturer of a new fitness machine (the "Fitness Product") for the
sold-on-TV direct response industry. Pursuant to the April 2005 Agreement, GRC
agreed to purchase all of its requirements of the Fitness Product during the
term of the April 2005 Agreement, which is defined as running from the signing
of the agreement through the time when the Fitness Product is not being sold in
quantity. Since these announcements, CirTran-Asia has manufactured and shipped
orders and has received $1,400,000 as payment for such shipments. A dispute
arose concerning the terms of the contract, which is now the subject of a legal
proceeding. The product has not been manufactured during this quarter and it is
unlikely that it will be until the resolution of the legal proceeding with GRC,
described in the section "Legal Proceedings."
New Fitness Products
--------------------
On November 30, 2006, we announced that we signed an exclusive manufacturing
agreement to produce a new fitness product, the CorEvolution(TM), in China. The
three-year agreement involves the custom manufacturing using the capabilities of
our wholly owned subsidiary, CirTran Asia. The new customer has committed to
minimum orders, amounting to $1.2 million in revenues for the first year, $1.8
million for the second year and $2.4 million for the third year of the five-year
contract. The new fitness product is uniquely designed to strengthen and
rehabilitate the lower back and adjacent areas of human body. Since this
announcement, and through the date of this Report, CirTran-Asia had manufactured
and shipped units, and received payments of approximately $60,000. In 2007,
CirTran-Asia received a second order for $168,000.
Household and Kitchen Appliances and Health and Beauty Aids
-----------------------------------------------------------
We began manufacturing household and kitchen appliance products in January 2005.
To date, we have manufactured and sold 3 different household and kitchen
appliance products. We manufacture a majority of our household and kitchen
appliance products through our CirTran Asia operation.
The household and kitchen appliance and health and beauty aids products include
the following:
On January 24, 2005, we announced a contract with a New York customer where we
became an exclusive manufacturer of the Hot Dog Express, which would be sold
nationwide on TV, primarily through infomercials. The contract runs through
2007, with minimum revenues to CirTran of $1.8 million per year, or $5.4 million
over three years. Since these announcements, and through the date of this
Report, CirTran Asia had manufactured and shipped units, and received payments
of approximately $1,850,000. As of the date of this Report, we were in the
process of exercising its rights under the contract which includes terminating
the relationship due to customer's failure to meet the minimum purchase
requirements during 2006. As a result, we are planning on marketing the product
on its own through our retail channels.
ABS Products and ABS Bankruptcy Proceedings - On January 19, 2005, we signed an
Exclusive Manufacturing Agreement with Advanced Beauty Solutions L.L.C. ("ABS"),
a company that manufactured a hair product in California. In early October 2005,
we were notified that ABS had defaulted on its obligation to its financing
company. We stopped shipping under credit and exercised our rights permitted by
the agreements.
On July 7, 2005, we signed another Exclusive Manufacturing Agreement with ABS,
relating to the manufacture of a hair dryer product in California. We had
already begun shipment on previous contracts and were projecting to begin early
in 2006.
26
In October 2005, following the notice of ABS's default, we terminated the
agreement for both products based on the default. In January 2006, following
efforts to resolve the disputes with ABS, we filed a lawsuit against ABS,
claiming breach of contract, interference with contractual relationships, unjust
enrichment, and fraud, and seeking damages from ABS.
With respect to the TCP, through October 2005, we had shipped directly to ABS
approximately $4,746,000 worth of the product, and we had received from ABS or
its finance company a total amount of approximately $788,000. In November 2005,
we repossessed from ABS approximately $2,341,000 worth of the products in the
United States, as we were permitted to do pursuant to the agreement.
Since November 2005, we have been pursuing our rights under the agreement and
have been offering the TCP for sale directly to ABS's customers. In doing so, we
sold to ABS's international customers directly approximately $430,000 worth of
the TCP. The shipments have all been paid in full. These products shipped were
not part of the repossessed inventory.
On January 24, 2006, ABS filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Central District of California, San Fernando Valley Division (the
"Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
the settlement was further modified. The modifications to the proposed
settlement were read into the Bankruptcy Court's record at the Hearing on the
Settlement Motion and the March 24, 2006 hearing on the Sale Motion ("Proposed
Modifications"). Written notice of the Proposed Modifications was provided to
creditors and parties in interests on March 27, 2006, and the Declaration of
James C. Bastian, Jr., attesting that no objections to the Proposed
Modifications have been received by ABS, was filed with the Bankruptcy Court.
On June 6, 2006, we entered into an Asset Purchase Agreement with ABS (the
"Asset Purchase Agreement"), subject to the ABS Bankruptcy Court's approval. On
June 7, 2006, the ABS Bankruptcy Court entered orders approving the Asset
Purchase Agreement and granting the Sale Motion, and approving the settlement
and compromise of certain disputed claims against ABS. Pursuant to the
settlement of ABS's bankruptcy proceedings and the Asset Purchase Agreement, we
have an allowed claim against the ABS's estate in the amount of $2,350,000, of
which $750,000 was credited to the purchase of substantially all of ABS's
assets. Under the settlement, we shall be allowed to participate as a general
unsecured creditor of ABS's estate in the amount of $1,600,000 on a pari passu
basis with the $2,100,000 general unsecured claim of certain insiders of ABS and
subject to the prior payment of certain secured, priority, and non-insider
claims in the amount of approximately $1,507,011.
Under the Asset Purchase Agreement, we agreed to purchase substantially all of
ABS's assets ("the Assets") in exchange for:
(i) a cash payment in the amount of $1,125,000;
(ii) a reduction of CirTran's allowed claim in the Bankruptcy Case
by $750,000;
27
(iii) the assumption of any assumed liabilities; and
(iv) the obligation to pay ABS a royalty equal to $3.00 per
TrueCeramic Pro flat iron unit sold by ABS (the "Royalty
Obligation").
The Assets include; personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings. Under the Asset Purchase Agreement, the Royalty Obligation is
capped at $4,135,000. To the extent the amounts paid to ABS on account of the
Royalty Obligation equal less than $435,000 on the 2 year anniversary of the
Closing, then, within 30 days of such anniversary, we agreed to pay ABS an
amount equal to $435,000 less the royalty payments made to date. As part of the
settlement, we agreed to exchange general releases with, among others, ABS,
Jason Dodo (the manager of ABS), Inventory Capital Group ("ICG"), and Media
Funding Corporation ("MFC"). The settlement also resolved a related dispute with
ICG in which ICG assigned $65,000 of its secured claim against ABS to us.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
(a) The Royalty Obligation payments will be made exclusively to
ICG and MFC (collectively, the "Secured Parties") until (i)
the Secured Parties have been paid in full on account of their
$1,243,208 secured claim, or (ii) the Secured Parties have
been paid $100,000 in payments under the Royalty Obligation,
whichever comes first.
(b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an
individual with an allowed claim (in the amount of $20,000).
(c) Following the payments to the Secured Parties and others as
set forth immediately above, the remaining Royalty Obligation
payments will be used for distribution to allowed general
unsecured claims not including those of the Company and
certain insiders with unpaid notes (the "Insider
Noteholders").
(d) Following payments as set forth in (a), (b), and (c) above,
the Royalty Obligation payments will be shared pro rata among
the Insider Noteholders (with a total allowed aggregate claim
of $2,100,000), and the Company (with a general unsecured
claim in the amount of $1,600,000), until paid in full.
The total claims against ABS's estate that must be paid before the Company
begins to share in the Royalty Obligation payments is $435,000. We have paid
$43,263 of the $435,000 obligation through March 31, 2007.
In March 2007, ABS commenced litigation against us alleging claims for breach of
contract, unjust enrichment and seeking an accounting and appointment of a
receiver in connection with the above described settlement agreement. ABS
generally alleged that we had defaulted on certain payments due under such
settlement agreement. We have been in negotiations with ABS to settle these
claims. Additional information can be found in the section titled "Legal
Proceedings."
As of the date of this Report , we were currently under contract with two direct
marketing companies to supply them with True Ceramic Pro flat irons ("TCP").
Since June 6, 2006, the date of the ABS bankruptcy settlement, through the date
of this Report, CirTran Products Corporation ("CTP") received orders of
approximately $2,101,000 for the TCP product. CTP continues to generate sales to
the direct marketing companies of TCP units and other ancillary hair care
28
products and the program is expected to continue being profitable during 2007.
As of the date of this Report, we were developing a marketing campaign to sell
the TCP product on Direct TV. By taking the marketing campaign in-house, we
anticipate that we will generate sales directly to the retail market which will
generate higher margin sales than selling wholesale to a direct marketer.
With respect to the hair dryers, as of May 18, 2007, we had not received any
orders or shipped any products, either to ABS or its customers. However the hair
dryers are being approved for manufacture in China and will be marketed in
conjunction with the TCP marketing program.
Hinge Helper
On January 9, 2006, we issued a press release which referred, in the title, to
the Agreement as a "$22 Million Exclusive Manufacturing Agreement." The dollar
amount referenced relates to the potential amount of income or revenue which we
may receive over the anticipated life of the Agreement.
We announced on January 9, 2006, that Arrowhead Industries, Inc., of Windermere,
Florida, had awarded us an exclusive contract to manufacture its patented Hinge
Helper (TM) do-it-yourself utility tool for the home. The Hinge Helper will be
manufactured by CirTran Asia, the Company's China-based subsidiary. The
exclusive manufacturing contract for the product is for three years.
The Hinge Helper is a unique hand tool designed and developed for use by
household customers as well as tradesmen. Recognized by the U.S. Patent Office
(#6,308,390 B1), its trademark and patent are owned by and registered to
Arrowhead. The specific advantage of the Hinge Helper is its ease-of-use and
simplistic design. It can be applied to any residential hinge on wood, metal or
composite doors, and is being manufactured with highly-durable materials,
enabling it to carry a lifetime guarantee.
The contract (the "Arrowhead Agreement") is for three years, and Arrowhead
agreed to purchase a minimum of ten million units of the Product (the "Minimum
Quantity"), subject to the terms and conditions of the Agreement. Arrowhead and
CirTran have agreed on the Minimum Quantity in good faith, although the parties
acknowledged that in certain circumstances described in the agreement, the
Arrowhead Agreement may be terminated prior to the sale of the entire Minimum
Quantity. Arrowhead agreed to submit purchase orders for the Hinge Helper (TM)
from time to time in accordance with the terms of the Arrowhead Agreement.
Arrowhead agreed to pay CirTran for the Hinge Helper (TM) purchased at the
prices ranging from $2.95 to $1.90 per unit, depending on the cumulative number
of units of the Hinge Helper (TM) which have been purchased by Arrowhead.
Arrowhead will also be entitled to a rebate equal to 10% of the purchase price
paid for the Hinge Helper (TM) in the previous tier. The tiers are as follows:
Tier 1: 1,500,000 units or less, priced at $2.95 per unit
Tier 2: 1,500,001 to 3,000,000 units, priced at $2.35 per unit
Tier 3: 3,000,001 to 5,000,000 units, priced at $2.10 per unit
Tier 4: 5,000,001 to 10,000,000 units, priced at $1.90 per unit
Tier 5: More than 10,000,000 units, price to be determined
(For example, if the price is not adjusted, once Arrowhead enters Tier 3 it
would be entitled to a rebate of $325,000 (10% of 1,500,000 x $2.35) for product
purchased in tier 2.) Rebates will be payable only in the form of a credit memo
against future purchases. Rebate credit memos will not be paid in cash and may
not be applied against outstanding balances. We will calculate eligibility for
the Rebate as soon as practicable following the end of the month in which a new
tier is entered.
29
We have produced hand made samples, which were sent to Arrowhead. As of May 18,
2006, the product samples were approved. Arrowhead had released, and we have
shipped, 1,500 units to test media. Arrowhead has filmed a Hinge Helper
infomercial for TV and tested the show in mid 2006, but results did not justify
the media spending and the roll out.
In February 2007, Arrowhead signed a licensing agreement with CirTran and DMG to
manufacture and market the product via internet, direct marketing and through
retailers. DMG will pay a royalty of 11% to Arrowhead based on a percentage of
sales in 2007. The percentage of unit sales increases by 1% per year until it
reaches 15% in the year 2011. The new contract was executed in February 2007 and
expires in 2011. As of the date of this Report, the Hinge Helper project had not
generated significant revenues. The item has been presented to buyers at several
major retailers, such as Lowes, Wal-Mart and Sams Club and is an item of
interest. Our sales representative, in our Bentonville office, will continue to
promote and develop the item for inclusion in future sales modules to the
retailers. We expect to have the product at retailers some time in June 2007.
On October 11, 2006, CirTran announced that DMG had signed a retail distribution
and marketing agreement with Wines and Wines, a Miami-based distributor of fine
wines and spirits from around the world. Under the terms of the agreement, DMG
would use its best efforts to market and distribute all Wines and Wines products
exclusively into various distributors and retailers such as Southern Wine and
Spirits, Trader Joe's, Beverages and More, Wal-Mart, Sam's Club, Costco, Young's
Markets and Vendome nationally, as well as restaurants, liquor stores and
entertainment venues exclusively throughout California. As of the date of this
Report, the product had been presented to retailers and resulted in high
interest. It was decided that the labeling needed to be changed by Wines and
Wines. Once the new labeling is completed and accepted by retailers, we will be
able to place the product on retailer's shelves. It is anticipated that the
project will be to market in late 2007.
On November 7, 2006, CirTran announced that DMG signed an exclusive contract to
market and distribute the Solar Style line of solar chargers to major retailers
in the U.S. and abroad. Solar Style offers a diverse line of products with
multiple connectors, all based on the latest advancements in PV Solar charging
to convert sunlight into usable energy for personal electronic devices. Solar
Style also includes, or offers as options, AC car battery chargers with many of
its products. As of the date of this report, we were working with the client on
developing the product and placing the product at the retail channels to include
Walmart and Radio Shack stores.
On November 15, 2006, CirTran announced that DMG signed an exclusive licensing,
manufacturing and marketing agreement with Beautiful Eyes(R), Inc., of Malibu,
California, for a new "hot lashes" product which it will bring to the sold-on-TV
and retail marketplaces. Under the terms of the agreement, DMG will have access
to the patented technology developed by Beautiful Eyes and its founder, former
model Alexandra Roberts, and the designs, technical drawings, manufacturing
specifications and know-how, trade secrets and other proprietary information and
technology. DMG will develop a new product for sale through TV infomercials and
at mass retail, which it will market through its personal and healthcare
products division. As of the date of this Report, we were working with the
client on developing the product and already submitted samples for their
approval.
New Household and Kitchen Appliances and Health and Beauty Aids
---------------------------------------------------------------
On February 5, 2007, CirTran announced that we had completed taping a TV
infomercial with Evander Holyfield for the "The Real Deal Grill(TM)," a new
electric indoor/outdoor cooking appliance it will manufacture and market
carrying the name and endorsement of the former four-time former world
heavyweight champion. The Real Deal Grill includes a deluxe stand and multiple
30
interchangeable cooking surfaces, with numerous never before seen add-on items
making it the most versatile "must-have" cooking appliance for any occasion from
camping in the mountains, tailgating at a game, or grilling at home. Full
national roll-out of the video and print ads set is scheduled for late May 2007.
As of the date of this Report, the final edited version of the infomercial is
undergoing a final review (re-editing), and we are currently developing the
appropriate infrastructure to support shipment of the product, which we
anticipate will occur with the airing of the commercial. The infomercial is
scheduled to debut in July 2007.
On February 13, 2007, CirTran announced that we had signed an agreement to
manufacture and market a new patent pending portable luggage handle and scale
ideal for travelers weighing a suitcase or package. As of the date of this
Report, we were working with the client on developing a final version of the
product and are expecting to submit samples for final approval in May 2007. As
of the date of this Report, final samples had been submitted to the client and
we were awaiting approvals. Upon approval, we anticipate that the product will
be marketed to large retailers such as Walmart, Sams Club, and Office Depot.
On March 12, 2007, CirTran announced that we had signed a contract with Easy
Life Products Corporation (ELP) of Venice, California, to manufacture and market
a new beauty product. The yet-to-be named new product is a pencil compact
combined with a sharpener and pencil holder. Planned add-ons for the product
include pencil caps, blotting tissue dispenser, eyelash curler, pencil cap
organizer, an eyebrow brush and two-in-one tweezers, patents are now pending for
the pencil sharpener, eyelash curler and the tweezers with the U.S. Patent
Office. As of the date of this Report, we were working with the client on
developing the product and building final samples for approval.
Electronics Business and Lines of Products
On August 9, 2005, we announced that we completed the first phase of the
redevelopment of the next-generation SafetyNet(TM) RadioBridge(TM). Since this
announcement, we have completed working on the second phase of the contract. On
March 14, 2006, we announced that we had received a $250,000 order to build and
deliver the first production run of the next generation SafetyNet(TM)
RadioBridge(TM), which we redesigned at the request and on behalf of Aegis
Assessments, Inc., a Scottsdale, Arizona-based homeland security contractor. We
delivered the new, redesigned units and received payment in full from Aegis in
April 2006. Since these announcements, we have manufactured and shipped
additional orders and has received $100,000 as payment for such shipments.
On November 14, 2006 we announced that Racore has received, processed and
shipped its first order from Lear Siegler Services, Inc., of San Antonio, and
that Lear Siegler has opened an account to facilitate ordering and processing
add-on business. A major provider of operations, maintenance, modification,
overhaul, systems integration, logistics support and training services to
government agencies and commercial customers in the U.S. and abroad, Lear
Siegler's first order was for 100 Racore 8192 100FX 100 Mbps Fiber Optic PCI
Fast Ethernet Network Adapters with ST Fiber Connectors.
Marketing and Media
On October 11, 2005, we announced that we were opening a satellite office in Los
Angeles in accordance with our internal expansion program. The 2,500 square foot
office is located on the 17th floor at 1875 Century Park East in the Century
City Entertainment and Business District of Los Angeles. The office serves as
headquarters for CirTran's business development and strategic planning
31
activities for our multiple business divisions including electronics, consumer
products, direct response/retail and "as sold-on-TV" products. We opened an
additional satellite office in New York in 2006 when we leased an executive
office suite which serves as a location in which to conduct meetings and
transact business on the east coast. Plans to open an office in London have been
temporarily put on hold until the markets in Europe develop.
Recent Developments
Proxy Statement
On March 30, 2007, we filed a definitive proxy statement in connection with a
Special Meeting of Shareholders (the "Special Meeting") that was held at our
headquarters, on Monday, April 30, 2007. The purpose of the Special Meeting was
to vote on a proposed amendment to our Articles of Incorporation (as amended)
that would increase authorized capital to include 1,500,000,000 shares of common
stock and 1.2 shares for one share forward stock split.
The proposed amendment was adopted by a vote of a substantial majority of the
stockholders. As a result we filed with the State of Nevada to increase the
number of authorized shares to 1,500,000,000 and shares of stock were issued to
effectuate the 1.2 forward stock split to shareholders of record.
Bentonville Office
On November 28, 2006, we announced that DMG had signed a two-year lease on a
1,150 sq. ft. facility in Bentonville, Arkansas, in close proximity to
Wal-Mart's world headquarters. The office, which will be managed by Mr. Oliver
Mulcahy, is strategically located to help create and manage an ongoing
relationship with Wal-Mart / Sam's Club stores to facilitate the distribution of
products through Wal-Mart stores on behalf of DMG clients. On May 7, 2007, we
received a vendor number from SamsClub.com. The vendor number will allow us to
conduct business with the SamsClub.com, a Wal-Mart affiliate. This is a
significant accomplishment in establishing a working relationship with the
national retailers Wal-Mart and Sams Club.
Highgate Debenture Conversion
In April 2007, Highgate converted $300,000 of its convertible debenture into
22,174,567 shares of our common stock at a conversion rate ranging from $0.013
to $0.01381 per share, which was the lower of $0.10 or 100% of the lowest
closing bid price of our common stock over the 20 trading days preceding the
conversion.
CirTran Online Corporation
We formed a new wholly owned marketing-driven subsidiary, CirTran Online
Corporation ("CTO"), to sell our products via the internet. CTO will also offer
training, software marketing tools, web design and support as well as other
E-commerce related services to internet entrepreneurs, and to telemarket
directly to previous buyers of its products and services.
CirTran signed a three-year Assignment and Exclusive Services Agreement for CTO
with Global Marketing Alliance ("GMA"). GMA was founded by Mr. Sov Ouk, who
signed a three-year Employment Agreement to serve as Senior Vice President of
CTO.
By joining forces, we will be able to leverage the internet sales and
telemarketing capabilities of GMA together with its consumer products
manufacturing programs. CirTran will be able to present our products to a large
audience of online internet sellers with attractive opportunities to sell
products we have manufactured on web stores or multiple auction formats. GMA and
32
its affiliates offer a range of complementary capabilities and products for
E-commerce, including seminars on how to buy and sell on the World Wide Web. GMA
has experience in building E-commerce websites and currently host sites for
internet entrepreneurs.
GMA will also develop web sites and manage online marketing for some of our
already-popular sold-on-TV products, such as the TCP flat iron and for new
programs such as; The Real Deal Grill(TM).
2006 Stock Plan (Registration Statement)
On May 1, 2007, we filed a Registration Statement on Form S-8 with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
relating to the registration of 50,000,000 shares of our common stock to be
issued in connection with our 2006 Stock Plan.
Sale of Property
On May 4, 2007, we sold and leased back the building and land, which serves as
company headquarters, for a sale price of $2,500,000. In conjunction therewith,
we also singed a triple net lease with the buyer for a term of 120 months, with
an option to extend the lease for three additional five year terms. Monthly
rental of the building will be $17,083 for the first year of the lease. The
monthly rental amount will be adjusted according to the Consumer Price Index in
subsequent years.
CirTran Beverage Corporation
During the three months ended March 31, 2007, the Company, along with several
other investors formed After Bev Group, LLC ("After Bev"). CirTran contributed
its expertise for an 84% interest in After Bev, and the additional investors
contributed $500,000 for a 16% interest in After Bev. Subsequent to the
formation, After Bev purchased a 50% ownership in Play Bev LLC for $750,000
using the cash received during its formation, and an additional $250,000 raised
in the form of notes payable. CirTran has recorded the investment at its cost of
$750,000, and has also recorded notes payable for $250,000 and a minority
interest of $500,000. Neither After Bev nor Play Bev has had any activity to
date.
On April 18, 2007, a recently created, wholly owned subsidiary, CirTran Beverage
Corp. ("CTB") signed a term sheet for an Exclusive Manufacturing, Marketing and
Distribution Agreement (the "PB Agreement") with Play Beverages, LLC. ("PB"). PB
is engaged in the business of marketing and distributing beverages, including
energy drinks and flavored water beverages, and related merchandise with the
Playboy and rabbit head logo licensed from Playboy Enterprises, Inc.
Under the term sheet, PB will grant to CTB the exclusive rights during the term
of the PB Agreement to manufacture, market, distribute and sell PB Products
through all distribution channels in the United States.
The initial term of the PB Agreement shall commence on the date the agreement is
signed and shall terminate on December 31, 2010. The PB Agreement shall
automatically renew for up to two renewal terms of three years each.
Significant Accounting Policies
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 of the Notes to the Financial Statements contained
33
in our Annual Report on Form 10-KSB includes a summary of the significant
accounting policies and methods used in the preparation of our Financial
Statements. The following is a brief discussion of the more significant
accounting policies and methods used by us.
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
These principles require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. Estimated amounts may differ under different
assumptions or conditions, and actual results could differ from the estimates.
Revenue Recognition
Revenue is recognized when products are shipped. Title passes to the customer or
independent sales representative at the time of shipment. We also recognize
revenue using the Bill and Hold method prescribed by SEC Staff Accounting
Bulletin 104. The "Bill and Hold" method provides for revenue recognition when a
customer order has been completed but has not shipped as an accommodation to the
customer. This method was adopted during the quarter ended September 30, 2006,
in response to orders placed by customers in the direct sales market only,
whereby the customer order is confirmed but delivery is delayed according to a
prescribed delivery schedule. Returns for defective items are repaired and sent
back to the customer. Historically, expenses experienced with such returns have
not been significant and have been recognized as incurred.
We signed an Assignment and Exclusive Services Agreement with GMA whereby
revenues and all concomitant performance obligations, have been assigned to CTO.
As such, revenues, expenses, assets and liabilities for all periods covered by
the effective date of the Agreement (as of January 1, 2007) have been recognized
at a net amount by the company.
Inventories
Inventories are stated at the lower of average cost or market value. Costs
include labor, material, and overhead costs. Overhead costs are based on
indirect costs allocated among cost of sales, work-in-process inventory, and
finished goods inventory. Indirect overhead costs have been charged to cost of
sales or capitalized as inventory based on management's estimate of the benefit
of indirect manufacturing costs to the manufacturing process.
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. We determine market value on current
resale amounts and whether technological obsolescence exists. We have agreements
with most of its customers that require the customer to purchase inventory items
related to their contracts in the event that the contracts are cancelled. The
market value of related inventory is based upon those agreements.
We typically order inventory on a customer-by-customer basis. In doing so we
enter into binding agreements that the customer will purchase any excess
inventory after all orders are complete. Almost 80% of the total inventory is
secured by these agreements.
34
Results of Operations - Comparison of the three months ended March 31, 2007, and
the year ended December 31, 2006
Sales and Cost of Sales
Net sales increased to $2,288,293 for the three months period ended March 31,
2007, as compared to $1,737,824 during the same period in 2006, for an increase
of 31.7%. This increase is attributed to the income generated from DMG of
$396,500 and GMA of $72,100 for a total of $468,600. Cost of sales increased by
21.0%, to $1,198,348 during the three months period ended March 31, 2007, from
$990,370 during the same period in 2006. The increase in cost of sales is due in
part to the increase in revenue. Our gross profit margin for the three months
period ended March 31, 2007, was 47.6%, up from 43.0% for the same period in
2006. The majority of the increase is due to the increase in revenue generated
by the electronics business and the media agency revenues generated in the US,
which have more favorable margins compared to our high volume contract
manufacturing business operations.
Inventory
We use just-in-time manufacturing, which is a production technique that
minimizes work-in-process inventory and manufacturing cycle time, while enabling
us to deliver products to customers in the quantities and time frame required.
This manufacturing technique requires us to maintain an inventory of component
parts to meet customer orders. Inventory at March 31, 2007, was $1,730,735, as
compared to $1,960,013 at December 31, 2006. The decrease in inventory is
nominal and is indicative of the fact that the media and marketing operations do
not have inventories associated with their operations.
Selling, General and Administrative Expenses
During the three months ended March 31, 2007, selling, general and
administrative expenses were $1,711,570, versus $837,520 for the same period in
2006, a 104.4% increase. The increase in selling, general and administrative
expenses is due to the service oriented operations of DMG, which was focused on
operating our marketing and media services which, as mentioned above do not
require inventories to support operations, but they do require additional
manpower and resources that are reflected as additional selling general and
administrative expenses.
Interest Expense
Interest expense for the three months ended March 31, 2007, was $710,466 as
compared to $1,086,253 for the same period in 2006, a decrease of 34.6%. The
decrease is primarily due to the derivative treatment of the convertible
debenture.
As a result of the above factors, we have net a loss of $979,035 for the quarter
ended March 31, 2007, as compared to $277,998 for the quarter ended March 31,
2006. This net loss is attributed to substantially higher operating costs
associated with developing the new projects, and company segments pertaining to
direct TV and retail marketing programs.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses preceding this quarter, and our accumulated deficit has increased to
$23,160,716 at March 31, 2007, compared to $22,181,679 at December 31, 2006. Our
net loss for the quarter ending March 31, 2007, was $979,035 compared to
$277,998 for the quarter ended March 31, 2006. Our current liabilities exceeded
35
our current assets by $5,090,728 and $4,863,641 as of March 31, 2007 and
December 31, 2006, respectively. For the three months ended March 31, 2007, we
had positive cash flows from operations of $129,999 compared to negative cash
flows from operations for the three months ended March 31, 2006 of $719,698.
Cash
We had cash on hand of $146,932 at March 31, 2007, and $146,050 at December 31,
2006.
Net cash provided in operating activities was $129,999 for the three months
ended March 31, 2007. Cash received from customers of $2,306,427 was not
sufficient to offset cash paid to vendors, suppliers, and employees of
$2,765,264. The non-cash charges were for depreciation and amortization of
$222,284 and accretion expense of $554,716. Because we have historically had
negative cash flows from operations, we must rely on sources of cash other than
customers to support our operations. It is anticipated that various methods of
equity financing will be required to support operations until cash flows from
operations are consistently positive.
Net cash used in investing activities during the three months ended March 31,
2007, was $868,475 which was related primarily to the purchase of a 50%
ownership interest in Play Bev. LLC. for $750,000.
Net cash provided by financing activities was $739,358 during the three months
ended March 31, 2007, and was primarily related to proceeds from notes payable
of $250,000 and proceeds from minority interests of $500,000.
Accounts Receivable
At March 31, 2007, we had receivables of $963,962, net of a reserve for doubtful
accounts of $14,181, as compared to $982,096 at December 31, 2006, net of a
reserve of $14,181.
This decrease of $18,134 is immaterial and is considered to be a normal
fluctuation in accounts receivable balances. We have implemented an aggressive
process to collect past due accounts over the past two years. Individual
accounts are continually monitored for collectiblity. As part of monitoring
individual customer accounts, we evaluate the adequacy of its allowance for
doubtful accounts. Since the implementation of the collection process, very few
accounts have been deemed uncollectible.
Accounts Payable
Accounts payable were $1,138,675 at March 31, 2007, as compared to $1,135,527 at
December 31, 2006. The increase was nominal.
Liquidity and Financing Arrangements
We have a history of substantial losses from operations and using rather than
providing cash in operations. We had an accumulated deficit of $23,160,716 and a
total stockholders' equity of $1,183,890 at March 31, 2007. As of March 31,
2007, our monthly operating costs and interest expenses averaged approximately
$807,000 per month.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors. It is
unlikely that we will be able, in our current financial condition, to obtain
additional debt financing; and if we did acquire more debt, we would have to
devote additional cash flow to paying the debt and securing the debt with
assets. We may therefore have to rely on equity financing to meet our
36
anticipated capital needs. There can be no assurances that we will be successful
in obtaining such capital. If we issue additional shares for debt and/or equity,
this will dilute the value of our common stock and existing shareholders'
positions.
Convertible Debentures
Highgate - On May 26, 2005, we entered into an agreement with Highgate Funds,
Ltd. ("Highgate") to issue to Highgate a $3,750,000, 5% Secured Convertible
Debenture (the "Debenture"). The Debenture is due December 2007 and is secured
by all of our property.
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 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 March 31, 2007 and December 31, 2006, was $97,836 and $163,884, respectively.
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 our common stock for the twenty trading days immediately preceding the
conversion date. We have the right to redeem a portion or the entire Debenture
then outstanding by paying 105% of the principal amount redeemed plus accrued
interest thereon.
Highgate's right to convert principal amounts into shares of our 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 our stock
is $0.10 per share or less at the time of conversion;
(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 our 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 we 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 our 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% of our
outstanding common stock.
In connection with the issuance of the Highgate Debenture, we granted Highgate
registration rights related to the issuance of the debenture.
We determined that the features of the Debenture fell under derivative
accounting treatment. As of March 31, 2007, the carrying value of the Debenture
was $1,846,997. The carrying value will be accreted each quarter over the life
of the Debenture until the carrying value equals the unconverted face value of
$2,600,000. The fair value of the derivative liability as of March 31, 2007 was
$1,010,023.
37
In connection with the issuance of the Debenture, $2,265,000 of the proceeds
were paid to Cornell to repay promissory notes. Fees of $256,433 were withheld
from the proceeds, were capitalized, and are being amortized over the life of
the note. As such, of the total Debenture of $3,750,000, the net proceeds to
CirTran were $1,228,567. The proceeds were used for general corporate and
working capital purposes, at our discretion.
Between the months of January 2007 and May 2007, Highgate converted $550,000 of
principal on its convertible debenture into 39,462,736 shares of our common
stock, and $100,000 of interest on its convertible debenture into 6,199,628
shares of our common stock at conversion rates of $0.01300 to $0.01613 per
share, per the terms of the debenture agreement. As of May 18, 2007, the
remaining principal balance was $2,300,000.
Cornell - On December 30, 2005, we entered into an agreement with Cornell to
issue to Cornell a $1,500,000, 5% Secured Convertible Debenture (the "Cornell
Debenture"). The Cornell Debenture is due July 30, 2008, and is secured by all
our property, junior to the Highgate security interest.
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 March 31,
2007 and December 31, 2006, was $93,700 and $62,700 respectively.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
Debenture into shares of our common stock at a conversion price 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 Cornell Debenture then outstanding by paying 105% of the principal
amount redeemed plus accrued interest thereon.
Cornell's right to convert principal amounts into shares of our common stock is
limited as follows:
(i) Cornell may convert up to $250,000 worth of the principal
amount plus accrued interest of the Cornell Debenture in any
consecutive 30-day period when the market price of our stock
is $0.10 per share or less at the time of conversion;
(ii) Cornell may convert up to $500,000 worth of the principal
amount plus accrued interest of the Cornell 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 Cornell may convert in
excess of the foregoing amounts if we and Cornell mutually
agree; and
(iii) Upon the occurrence of an event of default, Cornell may, in
its sole discretion, accelerate full repayment of the
debenture outstanding and accrued interest thereon or may
convert the Cornell Debenture and accrued interest thereon
into shares of our common stock.
Except in the event of default, Cornell may not convert the Cornell Debenture
for a number of shares that would result in Cornell owning more than 4.99% of
our outstanding common stock.
The Cornell 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.
38
In connection with the issuance of the Cornell Debenture, we granted Cornell
registration rights related to the issuance of the Cornell Debenture and
warrants.
We determined that the features on the Cornell Debenture and the associated
warrants fell under derivative accounting treatment. As of March 31, 2007 the
carrying value of the Cornell Debenture was $723,754. The carrying value will be
accreted each quarter over the life of the Cornell Debenture until the carrying
value equals the face value of $1,500,000. The fair value of the derivative
liability relating to the Cornell debenture, excluding the warrants, as of March
31, 2007 was $726,911. The fair value of the warrants was $11,891 as of March
31, 2007.
In connection with the issuance of the Cornell Debenture, fees of $130,000 were
withheld from the proceeds, capitalized, and will be amortized over the life of
the Cornell Debenture. As such, of the total Cornell Debenture of $1,500,000,
the net proceeds to CirTran were $1,370,000. The proceeds will be used for
general corporate and working capital purposes, at our discretion.
Additionally, we entered into an amended and restated investor registration
rights agreement with Cornell (the "Registration Rights Agreement"), which
superseded the Cornell registration rights agreement between CirTran and Cornell
entered into in December 2005. Pursuant to the Registration Rights Agreement, we
agreed to file, no later than October 15, 2006, a registration statement to
register the resale of shares of our common stock issuable to Cornell upon
conversion of the Cornell Debenture and exercise of the Warrants. We agreed to
register the resale of up to 42,608,696 shares, consisting of 32,608,000 shares
underlying the Debenture and and 10,000,000 shares underlying the Warrants. We
agreed to keep such registration statement effective until all of the shares
issuable upon conversion of the Debenture have been sold. In the event that we
issue more than 42,608,696 shares of common stock upon conversion of the
December Debenture, we will file additional registration statements as
necessary. The agreement was subsequently amended to extend the filing date of
the registration to June 1, 2007.
In connection with the Cornell Debenture, Cornell agreed that it could not
convert any amount of principal or interest of the Cornell Debenture in
accordance with the terms and conditions of the Lockdown Agreement by and
between CirTran and Cornell July 20, 2006, until we have effectuated an increase
in its authorized capital. CirTran and Cornell also agreed that in the event
that we have not effectuated such increase in its authorized capital by October
30, 2006, which was subsequently extended to June 1, 2007, such failure would
constitute an event of default on parallel with those set forth in the Purchase
Agreement and subject to the same consequences as those listed in the Purchase
Agreement.
As of May 18, 2007, Cornell had not converted any of the Cornell Debenture into
shares of the Company's common stock.
Cornell - On August 23, 2006, we entered into another securities purchase
agreement (the "Purchase Agreement") with Cornell, relating to the issuance by
CirTran of a 5% Secured Convertible Debenture, due April 23, 2009, in the
aggregate principal amount of $1,500,000 (the "August Debenture").
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 March 31,
2007 and December 31, 2006 was $45,200 and $26,700 respectively.
At any time, Cornell may elect to convert principal amounts owing on the Cornell
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
39
trading days immediately preceding the conversion date. We have the right to
redeem a portion or the entire Cornell Debenture then outstanding by paying 105%
of the principal amount redeemed plus accrued interest thereon.
We also paid a commitment fee of $120,000 and a structuring fee of $15,000 to
Cornell. As such, of the total purchase amount of $1,500,000, the net proceeds
to CirTran were $1,365,000. We used these proceeds for general corporate and
working capital purposes, at our discretion.
Cornell's right to convert principal amounts owing under the August Debenture
into shares of our common stock is limited as follows:
(i) Cornell 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 our stock is $0.03
per share or less at the time of conversion;
(ii) Cornell 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 our 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), Cornell 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 our Common Stock pursuant to
the August Debenture.
Except in the event of default, Cornell may not convert the August Debenture for
a number of shares of common stock in excess of that number of shares of common
stock that would result in Cornell owning more than 4.99% of our outstanding
common stock.
In connection with the Purchase Agreement, we also agreed to grant to Cornell
warrants (the "Warrants") to purchase up to an additional 15,000,000 shares of
our 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.
We determined that the features on the August Debenture and the Warrants fell
under derivative accounting treatment. As of March 31, 2007 the carrying value
of the August Debenture was $480,012. 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
relating to the August Debenture, excluding the warrants, as of March 31, 2007
was $867,746. The fair value of the warrants was $32,489 as of March 31, 2007.
As of May 18, 2007, Cornell had not converted any of the August Debenture into
shares of our common stock.
Additionally, we entered into an amended and restated investor registration
rights agreement with Cornell (the "Registration Rights Agreement"), which
superseded the Cornell registration rights agreement between CirTran and Cornell
entered into in August 2006. Pursuant to the Registration Rights Agreement, we
agreed to file, no later than October 15, 2006, a registration statement to
register the resale of shares of our common stock issuable to Cornell upon
conversion of the Cornell Debenture and exercise of the Warrants. We agreed to
register the resale of up to 89,291,304 shares, consisting of 74,291,304 shares
40
underlying the Debenture and 15,000,000 shares underlying the Warrants. We
agreed to keep such registration statement effective until all of the shares
issuable upon conversion of the Debenture have been sold. In the event that we
issue more than 89,291,304 shares of common stock upon conversion of the August
Debenture, we will file additional registration statements as necessary. The
agreement was subsequently amended to extend the filing date of the registration
to June 1, 2007.
As of March 31, 2007, no amount of the August Debenture had been converted and
no shares of our common stock had been issued to Cornell.
Lockdown Agreements
On July 20, 2006, we entered into two lockdown agreements with existing security
holders.
The first agreement (the "Cornell Agreement") was with Cornell and related to
the Cornell Debenture. Pursuant to the Cornell Agreement, Cornell agreed that it
would not convert any of the principal or interest on the Cornell Debenture or
exercise any of the Warrants granted to Cornell until we had taken the steps
necessary to increase our authorized capital. As such, we were able to lock down
106,900,000 shares underlying the Cornell Debenture and 25,000,000 shares
underlying the Cornell Warrants.
The second agreement (the "ANAHOP Agreement") was with ANAHOP, Albert Hagar, and
Fadi Nora, and related to the May and June private placement transactions
discussed above. Pursuant to the ANAHOP Agreement, Hagar and Nora agreed that
they would not exercise any of the warrants they received in connection with the
May or June private offerings until we have taken the steps necessary to
increase our authorized capital. Additionally, ANAHOP agreed that it would not
make the Second Tranche Payment to purchase the Second Tranche Shares until we
have taken the steps necessary to increase our authorized capital. As such,
under the ANAHOP Agreement, we were able to lock down 21,428,571 shares, and
93,000,000 shares underlying the warrants issued to Hagar and Nora in the May
and June private placements.
At a Special Meeting of Shareholders held April 30, 2007, we received approval
from our shareholders to amend our Articles of Incorporation to increase our
authorized capital to include 1,500,000,000 shares of common stock.
Forward-looking statements
Certain of the statements contained in this Report (other than the historical
financial data and other statements of historical fact) are forward-looking
statements. These statements include, but are not limited to our expectations
with respect to the development of a new offices or divisions; the achievement
of certain revenue goals; the receipt of new business and contracts; and our
intentions with respect to financing our operations in the future. Additional
forward-looking statements may be found in the "Risk Factors" Section of our
Annual Report on Form 10-KSB, together with accompanying explanations of the
potential risks associated with such statements. You are encouraged to review
the "Risk Factors" Section of our Annual Report.
Forward-looking statements made in this Quarterly Report, are made based upon
management's good faith expectations and beliefs concerning future developments
and their potential effect upon the Company. There can be no assurance that
future developments will be in accordance with such expectations, or that the
effect of future developments on CirTran will be those anticipated by
management. Forward-looking statements may be identified by the use of words
such as "believe," "expect," "plans," "strategy," "prospects," "estimate,"
"project," "anticipate," "intends" and other words of similar meaning in
connection with a discussion of future operating or financial performance.
41
You are cautioned not to place undue reliance on these forward looking
statements, which are current only as of the date of this Report. We disclaim
any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise. Many
important factors could cause actual results to differ materially from
management's expectations, including those listed in the "Risk Factors" Section
of our Annual Report for the year ended December 31, 2006, as well as the
following:
* unpredictable difficulties or delays in the development of new
products and technologies;
* changes in U.S. or international economic conditions, such as
inflation, interest rate fluctuations, foreign exchange rate
fluctuations or recessions in CirTran's markets;
* pricing changes to our supplies or products or those of our
competitors, and other competitive pressures on pricing and
sales;
* difficulties in obtaining or retaining the management,
engineering, and other human resource competencies that we
need to achieve our business objectives;
* collection of customer balances due on account;
* the impact on CirTran or a subsidiary from the loss of a
significant customer or a few customers;
* risks generally relating to our international operations,
including governmental, regulatory or political changes;
* transactions or other events affecting the need for, timing
and extent of our capital expenditures; and
* the extent to which we reduce outstanding debt.
Item 3. Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed,
summarized, and reported within the required time periods, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer, who was also our Chief Financial Officer, as
appropriate, to allow for timely decisions regarding disclosure. On May 15,
2006, the Company entered into an agreement with Richard T. Ferrone, CPA,
whereby Mr. Ferrone became our Chief Financial Officer. (See discussion below.)
As disclosed in our Annual Report on Form 10-KSB for the year ended December 31,
2006, as required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of December 31, 2006. In our evaluation, we identified
deficiencies that existed in the design or operation of our internal control
over financial reporting that we and our independent registered public
42
accounting firm considered to be "material weaknesses." A material weakness is a
significant deficiency or combination of significant deficiencies that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial information will not be prevented or detected.
Based on the matters identified above, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were not
effective. These deficiencies have been disclosed to our Board of Directors.
The deficiencies in our internal control over financial reporting related
primarily to the failure to properly measure and disclose equity and debt
transactions. The deficiencies were detected in the evaluation process and the
transactions have been appropriately recorded and disclosed in this Quarterly
Report on Form 10-QSB. We are in the process of improving our internal control
over financial reporting in an effort to resolve these deficiencies through
improved supervision and training of our accounting staff, but additional effort
is needed to fully remedy these deficiencies. Our management and directors will
continue to work with our new CFO, our auditors and outside advisors to ensure
that our controls and procedures are adequate and effective.
In an effort to resolve the deficiencies in internal control, mentioned above,
we, in concurrence with the recommendation of our registered independent public
accounting firm, embarked upon an executive search for a qualified candidate to
fill the position of chief financial officer. We successfully concluded the
executive search on May 15, 2006, when we signed a three year contract with
Richard T. Ferrone, CPA, as the new CFO of the Company. The addition of an
experienced financial executive is a major achievement in addressing and
resolving the deficiencies in our financial controls and also provides us with
the capacity to develop and advance our overall financial capabilities of the
Company.
Currently, our financial policies and procedures are being evaluated. As a
result, several new internal control procedures have been developed and
documented and are being implemented accordingly. The financial policies and
procedures evaluation program will be an ongoing process to insure continued
adequacy and compliance with prescribed internal control procedures, with the
initial development of the program primarily focused on the development of
internal control procedures and supporting documentation.
Quarterly Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and our Chief Financial Officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end
of the period covered by this quarterly report, has concluded that our
disclosure controls and procedures were not effective to provide reasonable
assurance that information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized, and
reported within the applicable time periods. As noted above, we are working to
remediate the weakness described above, including the hiring a new chief
financial officer.
Changes in Internal Control over Financial Reporting. As noted above, we are in
the process of improving our internal control over financial reporting in an
effort to resolve these deficiencies through improved supervision and training
of our accounting staff. Additionally, we have recently hired a new Chief
Financial Officer. However, additional effort is needed to fully remedy these
deficiencies. Our management and directors will continue to work with our new
CFO, our auditors and outside advisors to ensure that our controls and
procedures are adequate and effective.
Limitations on Effectiveness of Controls. A system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the system will meet its objectives. The design of a control system is
based, in part, upon the benefits of the control system relative to its costs.
43
Control systems can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. In addition, the design of any control system is based in part upon
assumptions about the likelihood of future events.
While our disclosure controls and procedures provide reasonable assurance that
the appropriate information will be available on a timely basis, this assurance
is subject to limitations inherent in any control system, no matter how well
designed and administered.
Section 404 Assessment. Section 404 of the Sarbanes-Oxley Act of 2002 requires
management's annual review and evaluation of our internal controls, beginning
with our Form 10-KSB for the fiscal year ending on December 31, 2007, and an
attestation of the effectiveness of these controls by our independent registered
public accountants beginning with our Form 10-KSB for the fiscal year ending on
December 31, 2008. We plan to dedicate significant resources, including
management time and effort, and to incur substantial costs in connection with
our Section 404 assessment. The evaluation of our internal controls will be
conducted under the direction of our senior management. We will continue to work
to improve our controls and procedures, and to educate and train our employees
on our existing controls and procedures in connection with our efforts to
maintain an effective controls infrastructure.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
We assumed certain liabilities of Circuit Technology, Inc., ("Circuit"), in
connection with our transactions in the year 2000, and as a result we are
defendant in a number of legal actions involving nonpayment of vendors for goods
and services rendered. We have accrued these payables and have negotiated
settlements with respect to some of the liabilities, including those detailed
below, and are currently negotiating settlements with other vendors. As of
November 14, 2006, the only remaining liability of Circuit is C/S Utilities,
discussed below.
C/S Utilities - C/S Utilities notified CirTran that (as successor to Circuit
Technology, Inc.) it believes it has a claim against CirTran in the amount of
$32,472 regarding utilities services. The claim was assigned to BC Services,
Inc., which obtained a judgment against Circuit for $37,966 in El Paso County,
Colorado, District Court on February 13, 2003. We are reviewing its records in
an effort to confirm the validity of the claims and evaluate its options, and
have been involved in settlement negotiations.
As of May 7, 2007, the Company entered into a settlement agreement with a
representative on behalf of C/S Utilities settling all claims in exchange for a
payment of $10,000, which was subsequently made in full.
CirTran Asia v. Mindstorm, Civil No. 050902290, Third Judicial District Court,
Salt Lake County, State of Utah. In February, 2005, CirTran Asia brought suit
against Mindstorm Technologies, LLC, for nonpayment for goods provided. On April
22, 2005, the defendant filed its answer and counterclaim, following which
defendant's counsel withdrew from representation. CirTran Asia notified
defendant that under governing rules it was required to appoint successor
counsel. The defendant failed to do so, and failed to prosecute its claim.
CirTran Asia moved for default judgment, which was granted. CirTran Asia
submitted a proposed order of default judgment in the amount of $288,529 to the
court in September 2005, which has been signed.
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., and Charles Ho filed suit against International Edge,
Inc., Michael Casey Enterprises, Inc., Michael Casey, David Hayek, and HIPMG,
Inc., for breach of contract, breach of the implied covenant of good faith and
fair dealing, interference with economic relationships, and fraud in relation to
certain licensing issues relating to the Ab King Pro. The defendants
44
counterclaimed, alleging breach of contract, fraud, defamation and related
claims, all related to the Ab King Pro, seeking damages in the amount of
$10,000,000. CirTran Asia and the other plaintiffs filed their reply to the
counterclaim, disputing all of the allegations and claims. International Edge
filed a motion to dismiss for lack of jurisdiction, which was denied. As of the
date of this Report, the case was proceeding in the discovery stage. Sales from
this product in the year ended December 31, 2005, were approximately $960,000,
and in the year ended December 31, 2006, were approximately $0. CirTran Asia
intends to vigorously pursue this action.
CirTran Corporation vs. Advanced Beauty Solutions, LLC, and Jason Dodo, Civil
No. 060900332, Third Judicial District Court, Salt Lake County, State of Utah.
On January 9, 2006, we brought suit against Advanced Beauty Solutions ("ABS")
and Jason Dodo, asserting claims including breach of contract, breach of the
implied covenant of good faith and fair dealing, interference with economic
relations, fraud and unjust enrichment.
On January 24, 2006, ABS filed a voluntary petition for relief under chapter 11
of the United States Bankruptcy Code in the United States Bankruptcy Court for
the Central District of California, San Fernando Valley Division (the "ABS
Bankruptcy Court"), Case No. SV 06-10076 GM. On January 30, 2006, a hearing
("Hearing") was held to consider the Emergency Motion for Order Approving the
Settlement and Compromise of the Disputed Secured Claims of Inventory Capital
Group, Inc. ("ICG"), and Media Funding Corporation ("MFC") (the "Settlement
Motion") filed by ABS. The continued Hearing on the Settlement Motion was held
on February 16, 2006, at which time the settlement was modified. Prior to a
separate hearing held on March 24, 2006, on ABS's Motion for Order: (1)
Approving Sale and Assignment of Substantially All Assets of the Estate Free and
Clear of Liens; (2) Approving Assumption and Assignment of Leases and Executory
Contracts Included in the Sale and Rejection of Leases and Executory Contracts
Not Included in the Sale; and (3) Granting Related Relief (the "Sale Motion"),
the settlement was further modified. The modifications to the proposed
settlement were read into the ABS Bankruptcy Court's record at the Hearing on
the Settlement Motion and the March 24, 2006 hearing on the Sale Motion
("Proposed Modifications"). Written notice of the Proposed Modifications was
provided to creditors and parties in interests on March 27, 2006, and the
Declaration of James C. Bastian, Jr., attesting that no objections to the
Proposed Modifications have been received by ABS, was filed with the ABS
Bankruptcy Court.
On June 6, 2006, we signed an agreement with ABS (the "Asset Purchase
Agreement"), subject to the ABS Bankruptcy Court's approval. On June 7, 2006,
the ABS Bankruptcy Court entered orders approving the Asset Purchase Agreement
and granting the Sale Motion, and approving the settlement and compromise of
certain disputed claims against ABS.
Pursuant to the settlement of ABS's bankruptcy proceedings and the Asset
Purchase Agreement, the Company has an allowed claim against the ABS's estate in
the amount of $2,350,000, of which $750,000 is to be credited to the purchase of
substantially all of ABS's assets. Under the settlement, we shall be allowed to
participate as a general unsecured creditor of ABS's estate in the amount of
$1,600,000 on a pari passu basis with the $2,100,000 general unsecured claim of
certain insiders of ABS and subject to the prior payment of certain secured,
priority, and non-insider claims in the amount of approximately $1,507,011.
Under the Asset Purchase Agreement, we agreed to purchase substantially all of
ABS's assets (the "Assets") in exchange for:
i) a cash payment in the amount of $1,125,000;
ii) a reduction of CirTran's allowed claim in the Bankruptcy Case
by $750,000;
iii) the assumption of any assumed liabilities; and
45
iv) the obligation to pay ABS a royalty equal to $3.00 per True
Ceramic Pro flat iron unit sold by ABS (the "Royalty
Obligation").
The Assets include personal property; intellectual property; certain executory
contracts and unexpired leases; inventory; ABS's rights under certain insurance
policies; deposits and prepaid expenses; books and records; goodwill; certain
causes of action; permits; customer and supplier lists; and telephone numbers
and listings.
Under the Asset Purchase Agreement, the Royalty Obligation is capped at
$4,135,000. To the extent the amounts paid to ABS on account of the Royalty
Obligation equal less than $435,000 on the 2 year anniversary of the Closing,
then, within 30 days of such anniversary, we agreed to pay ABS an amount equal
to $435,000 less the royalty payments made to date. As part of the settlement,
we agreed to exchange general releases with, among others, ABS, Jason Dodo (the
manager of ABS), Inventory Capital Group ("ICG"), and Media Funding Corporation
("MFC"). The settlement also resolved a related dispute with ICG in which ICG
assigned $65,000 of its secured claim against ABS to CirTran.
Pursuant to the court-approved settlement, payments under the Royalty Obligation
will be made in the following order:
a) The Royalty Obligation payments will be made exclusively to
ICG and MFC (collectively, the "Secured Parties") until (i) the Secured
Parties have been paid in full on account of their $1,243,208.44
secured claim, or (ii) the Secured Parties have been paid $100,000 in
payments under the Royalty Obligation, whichever comes first.
b) The next $70,000 Royalty Obligation payments will be made to a
service provider to ABS (in the amount of $50,000) and to an individual
with an allowed claim (in the amount of $20,000).
c) Following the payments to the Secured Parties and others as
set forth immediately above, the remaining Royalty Obligation payments
will be used for distribution to allowed general unsecured claims not
including those of CirTran and certain insiders with unpaid notes (the
"Insider Noteholders").
d) Following payments as set forth in (a), (b), and (c) above,
the Royalty Obligation payments will be shared pro rata among the
Insider Noteholders (with a total allowed aggregate claim of
$2,100,000), and CirTran (with a general unsecured claim in the amount
of $1,600,000), until paid in full.
The total claim against ABS's estate that must be paid before CirTran begins to
share in the Royalty Obligation payments is $435,000.
Advanced Beauty Solutions v. CirTran Corporation, Bankruptcy Court, Central
District of California, Case No. 01-10076. On or about March 9, 2007, ABS
commenced litigation in Bankruptcy Court, Central District of California,
against CirTran alleging claims for breach of contract, unjust enrichment and
seeking an accounting and appointment of a receiver in connection with the above
described settlement agreement between CirTran and ABS. ABS generally alleged
that we had defaulted on certain payments due under such settlement agreement.
As of the date of this Report, we have not yet filed an answer, but have
obtained an extension in connection with a proposed settlement agreement with
ABS, which was approved by the Bankruptcy Court, which provides for certain
payments to be made by CirTran to ABS and, if performed, could lead to the
dismissal of the litigation. We believe CirTran has valid defenses to the claims
made in the litigation.
46
CirTran v. Guthy-Renker Corporation and Ben Van De Bunt, Civil No. 20060980298,
Third Judicial District Court, Salt Lake County, State of Utah. In May 2006, we
filed suit against Guthy-Renker Corporation and one of its officers, claiming
breach of contract, breach of the implied covenant of good faith and fair
dealing, interference with economic relationships, misrepresentation, and
punitive damages. The suit seeks damages in an amount to be proven at trial. The
defendants filed a motion to stay litigation and compel arbitration in the
matter. We filed its response to the motion. On November 7, 2006, the motion was
granted. As of the date of this report, we are preparing for arbitration.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In January 2007, Highgate converted $100,000 of interest on its convertible
debenture into 6,199,628 shares of our restricted common stock at a conversion
rate of $0.01613 per share, which was the lower of $0.10 or 100% of the lowest
closing bid price of our common stock over the 20 trading days preceding the
conversion.
On February 12, 2007, Highgate converted $100,000 of its convertible debenture
into 6,807,352 shares of our restricted common stock at a conversion rate of
$0.01469 per share, which was the lower of $0.10 or 100% of the lowest closing
bid price of our common stock over the 20 trading days preceding the conversion.
On February 23, 2007, Highgate converted $50,000 of its convertible debenture
into 3,403,676 of our restricted common stock at a conversion rate of $0.01469
per share, which was the lower of $0.10 or 100% of the lowest closing bid price
of our common stock over the 20 trading days preceding the conversion.
In March 2007, Highgate converted $100,000 of its convertible debenture into
7,077,141 shares of our restricted common stock at a conversion rate of $0.01413
per share, which was the lower of $0.10 or 100% of the lowest closing bid price
of our common stock over the 20 trading days preceding the conversion.
On April 12, 2007, Highgate converted $100,000 of its convertible debenture into
7,692,308 shares of our restricted common stock at a conversion rate of $0.01413
per share, which was the lower of $0.10 or 100% of the lowest closing bid price
of our common stock over the 20 trading days preceding the conversion.
On April 26, 2007, Highgate converted $200,000 of its convertible debenture into
14,482,259 shares of our restricted common stock at a conversion rate of
$0.01381 per share, which was the lower of $0.10 or 100% of the lowest closing
bid price of our common stock over the 20 trading days preceding the conversion.
In each case, the securities were issued in connection with private transactions
with accredited investors pursuant to Section 4(2) of the Securities Act and
regulations promulgated thereunder.
Item 4. Submission of Matters to a Vote of Security Holders
Special Meeting of Shareholders
-------------------------------
On April 30, 2007, the Company held a special meeting of shareholders (the
"Special Meeting") to vote on a proposed amendment to the Company's Articles of
Incorporation, as amended to date, to increase the authorized capital of the
Company to include 1,500,000,000 shares of common stock, and to effectuate a 1.2
shares for one share forward stock split.
47
At the Special Meeting, the voting on the proposal was as follows: 542,960,370
shares voted in favor; 14,724,706 shares voted against; 187,715 shares
abstaining; and there were no broker non-votes.
Item 5. Other Information
Abacas Ventures
An explanation of the relationship between CirTran and Abacas Ventures, Inc. is
as follows:
Two trusts, the Saliba Living Trust and the Saliba Private Annuity Trust
(collectively, the "Saliba Trusts"), were investors in Circuit and predecessor
entity of CirTran. The trustees of the trusts are Tom and Betty Saliba, and Tom
Saliba, respectively. (Tom Saliba is the nephew of the grandfather of Trevor
Saliba, one of the directors of CirTran.) In July 2000, CirTran merged with
Circuit. Through that merger, the Saliba Trusts became shareholders of CirTran.
The Saliba Trusts are also two of the shareholders of an entity named Abacas
Ventures, Inc. ("Abacas"). At the time of the merger, CirTran was in default on
several of its obligations, including an obligation to Imperial Bank. The Saliba
Trusts, through Abacas, purchased the bank's claim against CirTran to protect
their investment in CirTran. Since that time, Abacas has continued to settle
debts of CirTran to improve Abacas's position and to take advantage of certain
discounts that creditors of CirTran offered to settle their claims. On two
occasions, the Abacas shareholders have agreed to convert outstanding debt owed
by CirTran to Abacas into shares of CirTran common stock (discussed below).
Abacas continues to work with the company to settle claims by creditors against
CirTran, and, on occasion, to provide funding. There can be no assurance that
Abacus will agree to convert its existing debt, or any debt it acquires in the
future, into shares of CirTran, or that conversions will occur at a price and on
terms that are favorable to CirTran. If Abacus and CirTran cannot agree on
acceptable conversion terms, Abacus may demand payment of some or all of the
debt. If CirTran does not have sufficient cash or credit facilities to pay the
amount then due and owing by CirTran to Abacus, Abacus may exercise its rights
as a senior secured lender and commence foreclosure or other proceedings against
the assets of CirTran. Such actions by Abacus could have a material adverse
effect upon CirTran and its ability to continue in business.
In January, 2002, we entered into an agreement with Abacas under which we issued
an aggregate of 19,987,853 shares of common stock to four of Abacas's
shareholders in exchange for cancellation by Abacas of an aggregate amount of
$1,499,090 in senior debt owed to the creditors by CirTran. The shares were
issued with an exchange price of $0.075 per share, for the aggregate amount of
$1,500,000.
In December, 2002, we entered into an agreement with Abacas under which we
issued an aggregate of 30,000,000 shares of common stock to four of Abacas's
shareholders in exchange for cancellation by Abacas of an aggregate amount of
$1,500,000 in senior debt owed to the creditors by CirTran. The shares were
issued with an exchange price of $0.05 per share, for the aggregate amount of
$1,500,000.
During 2002, we entered into a verbal bridge loan agreement with Abacas. This
agreement allows CirTran to request funds from Abacas to finance the build-up of
inventory relating to specific sales. The loan bears interest at 24% and is
payable on demand. There are no required monthly payments. During the years
ended December 31, 2004 and 2003, we were advanced $3,128,281 and $350,000,
respectively, and made cash payments of $3,025,149 and $875,000, respectively.
48
During the year ended December 31, 2004, Abacas completed negotiations with
several vendors of CirTran, whereby Abacas purchased various past due amounts
for goods and services provided by vendors, as well as notes payable (see Note
7). The total of these obligations was $1,263,713. We have recorded this
transaction as a $1,263,713 non-cash increase to the note payable owed to
Abacas, pursuant to the terms of the Abacas agreement.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $1,530,587 and $163,742 as of December 31, 2004 and 2003,
respectively. The total accrued interest owed to Abacas between the note payable
and the bridge loan was $430,828 and $230,484 as of December 31, 2004 and 2003,
respectively, and is included in accrued liabilities.
In March 2005, the shareholders of Abacas agreed to cancel $2,050,000 of
principal and accrued interest in return for CirTran issuing 51,250,000 shares
of our restricted common stock to certain shareholders of Abacas. No
registration rights were granted.
As of May 18, 2007, no further loans had been made to CirTran from Abacas.
As of December 31, 2001, Iehab Hawatmeh had loaned CirTran a total of
$1,390,125. The loans were demand loans, bore interest at 10% per annum and were
unsecured. Effective January 14, 2002, we entered into four substantially
identical agreements with existing shareholders pursuant to which we issued an
aggregate of 43,321,186 shares of restricted common stock at a price of $0.075
per share for $500,000 in cash and the cancellation of $2,749,090 principal
amount of our debt. Two of these agreements were with the Saliba Private Annuity
Trust, one of our principal shareholders, and a related entity, the Saliba
Living Trust. The Saliba trusts are also principals of Abacas Ventures, Inc.,
which entity purchased our line of credit in May 2000. Pursuant to the Saliba
agreements, the trusts were issued a total of 26,654,520 shares of common stock
in exchange for $500,000 cash and the cancellation of $1,499,090 of debt. We
used the $500,000 cash from the sale of the shares for working capital. As a
result of this transaction, the percentage of our common stock owned by the
Saliba Private Annuity Trust and the Saliba Living Trust increased from
approximately 6.73% to approximately 17.76%. Mr. Trevor Saliba, one of our
directors and officers, is a passive beneficiary of the Saliba Private Annuity
Trust. Pursuant to the other two agreements made in January 2002, we issued an
aggregate of 16,666,666 shares of restricted common stock at a price of $0.075
per share in exchange for the cancellation of $1,250,000 of notes payable by two
shareholders, Mr. Iehab Hawatmeh (our president, a director and our principal
shareholder) and Mr. Rajai Hawatmeh. Of these shares, 15,333,333 were issued to
Iehab Hawatmeh in exchange for the cancellation of $1,150,000 in debt.
In February 2000, prior to its acquisition of Vermillion Ventures, Inc., a
public company, Circuit, while still a private entity, redeemed 680,145 shares
(as presently constituted) of common stock held by Raed Hawatmeh, who was a
director of Circuit at that time, in exchange for $80,000 of expenses paid on
behalf of the director. No other stated or unstated rights, privileges, or
agreements existed in conjunction with this redemption. This transaction was
consistent with other transactions where shares were offered for cash.
In 1999, Circuit entered into an agreement with Cogent Capital Corporation
("Cogent") a financial consulting firm, whereby Cogent agreed to assist and
provide consulting services to Circuit in connection with a possible merger or
acquisition. Pursuant to the terms of this agreement, we issued 800,000
(pre-forward split) restricted shares (12,000,000 post-forward split shares) of
our common stock to Cogent in July 2000 in connection with our acquisition of
the assets and certain liabilities of Circuit. The principal of Cogent was
appointed a director of Circuit after entering into the financial consulting
agreement and resigned as a director prior to the acquisition of Circuit by
Vermillion Ventures, Inc. on July 1, 2000.
49
Also, as of December 31, 2004 CirTran owed I&R Properties, LLC, the previous
owner of our principal office and manufacturing facility for unpaid accrued rent
and accrued interest. We settled with owed I&R Properties, LLC., on accrued rent
and interest of $400,000 by issuing 10,000,000 shares of unregistered common
stock in March 2005.
Management believed at the time of each of these transactions and continues to
believe that each of these transactions were as fair to CirTran as could have
been made with unaffiliated third parties.
No Change in Nominating Procedures
No changes have been made to the procedures by which security holders may
recommend nominees to the Company's Board of Directors.
50
Item 6. Exhibits
Exhibits:
10.01 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). (previously
filed as an exhibit to the Company's Current Report on Form
10-KSB filed with the Commission on April 16, 2007, and
incorporated here in by reference).
10.02 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).
(previously filed as an exhibit to the Company's Current
Report on Form 10-KSB filed with the Commission on April 16,
2007, and incorporated here in by reference).
10.03 Appointment of Mr. Fadi Nora to the Board of Directors of
CirTran Corporation. (previously filed as an exhibit to the
Company's Current Report on Form 10-KSB filed with the
Commission on April 16, 2007, and incorporated here in by
reference).
10.03 Licensing and Marketing Agreement with Arrowhead Industries,
Inc. dated February 13, 2007. (previously filed as an exhibit
to the Company's Current Report on Form 10-KSB filed with the
Commission on April 16, 2007, and incorporated here in by
reference).
10.04 Amendment to Employment Agreement for Iehab Hawatmeh, dated
January 1, 2007. (previously filed as an exhibit to the
Company's Current Report on Form 10-KSB filed with the
Commission on April 16, 2007, and incorporated here in by
reference).
10.05 Amendment to Employment Agreement for Shaher Hawatmeh, dated
January 1, 2007. (previously filed as an exhibit to the
Company's Current Report on Form 10-KSB filed with the
Commission on April 16, 2007, and incorporated here in by
reference).
10.06 Amendment to Employment Agreement for Trevor Saliba, dated
January 1, 2007. (previously filed as an exhibit to the
Company's Current Report on Form 10-KSB filed with the
Commission on April 16, 2007, and incorporated here in by
reference).
10.07 Amendment to Employment Agreement for Richard Ferrone dated
February 7, 2007. (previously filed as an exhibit to the
Company's Current Report on Form 10-KSB filed with the
Commission on April 16, 2007, and incorporated here in by
reference).
10.10 Assignment and Exclusive Services Agreement with Global
Marketing Alliance, LLC, dated April 16, 2007 (previously
filed as an exhibit to the Companys' Current Report on Form
8-K filed with the Commission on April 20, 2007, and
incorporated herein by reference).
10.11 Employment Agreement for Mr. Sovatphone Ouk dated April 16,
2007 (previously filed as an exhibit to the Companys' Current
Report on Form 8-K filed with the Commission on April 20,
2007, and incorporated herein by reference).
51
10.12 Triple Net Lease between CirTran Corporation and Don L.
Buehner, dated as of May 4, 2007 (previously filed as an
exhibit to the Companys' Current Report on Form 8-K filed with
the Commission on May 10, 2007, and incorporated herein by
reference).
10.13 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 Companys' Current
Report on Form 8-K filed with the Commission on May 10, 2007,
and incorporated herein by reference).
10.14 Settlement Agreement between Diverse Talent Group, Inc. and
CirTran Corporation, dated May 15, 2007.
10.15 Diverse Media Group, Inc. Investor Rights Agreement, dated May
15, 2007.
10.16 Escrow Agreement, dated May 15, 2007.
31.1 Certification
31.2 Certification
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
52
SIGNATURES
In accordance with the Securities Exchange Act of 1934, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
CIRTRAN CORPORATION
Date: May 21, 2007 By: /s/ Iehab J. Hawatmeh
---------------------------------
Iehab J. Hawatmeh
President
(Principal Executive Officer)
Date: May 21, 2007 By: /s/ Richard Ferrone
---------------------------------
Richard Ferrone
Chief Financial Officer
(Principal Financial Officer)
53
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