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 June 30, 2004
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
-------------------
(Exact name of registrant as specified in its charter)
Nevada 68-0121636
---------------------------- -----------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
4125 South 6000 West
West Valley City, Utah 84128
---------------------- ------
(Address of Principal Executive Offices) (Zip Code)
(801) 963-5112
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
----- ----
The number of shares outstanding of the registrant's common stock as of August
18, 2004: 411,123,012.
Transitional Small Business Disclosure Format (check one): Yes ______ NO X
--
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements
Balance Sheets as of June 30, 2004, (unaudited) and 3
December 31, 2003
Statements of Operations for the Three ended 4
June 30, 2004, (unaudited) and 2003 (unaudited)
Statements of Cash Flows for the Three Months ended 5
June 30, 2004, (unaudited) and 2003 (unaudited)
Notes to Condensed Consolidated Financial Statements 7
(unaudited)
Item 2 Management's Discussion and Analysis of or Plan of Operation 17
Item 3 Evaluation of Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities 27
Item 6 Exhibits and Reports on Form 8-K 28
Signatures 28
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
CIRTRAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BANANCE SHEETS
June 30, December 31,
2004 2003
---------------- ----------------
ASSETS
Current Assets
Cash and cash equivalents $ 35,089 $ 54,135
Trade accounts receivable, net of allowance for doubtful
accounts of $28,876 1,038,259 89,187
Inventory 1,590,014 1,247,428
Other 179,334 165,091
---------------- ----------------
Total Current Assets 2,842,696 1,555,841
---------------- ----------------
Property and Equipment, Net 704,198 577,603
Investment in Securities at Cost 300,000 -
Other Assets, Net 13,247 10,390
Deferred Offering Costs 96,000 26,000
---------------- ----------------
Total Assets $ 3,956,141 $ 2,169,834
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks written in excess of cash in bank $ - $ 9,623
Accounts payable 944,159 1,300,597
Accrued liabilities 3,886,477 3,615,264
Current maturities of long-term notes payable 2,731,199 1,964,021
Notes payable to stockholders 86 31,838
Notes payable to related parties 409,256 163,742
---------------- ----------------
Total Current Liabilities 7,971,177 7,085,085
---------------- ----------------
Long-Term Notes Payable, Less Current Maturities - -
---------------- ----------------
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001; authorized 750,000,000 shares;
issued and outstanding shares: 411,123,012 and 349,087,699
net of 3,000,000 shares held in treasury at no cost at
March 31, 2004 and December 31, 2003, respectively 411,123 349,088
Additional paid-in capital 14,660,707 12,876,941
Accumulated deficit (19,086,866) (18,141,280)
---------------- ----------------
Total Stockholders' Deficit (4,015,036) (4,915,251)
---------------- ----------------
Total Liabilities and Stockholders' Deficit $ 3,956,141 $ 2,169,834
---------------- ----------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-2
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net Sales $ 1,924,242 $ 416,762 $ 2,603,604 $ 686,536
Cost of Sales (1,562,788) (271,211) (1,996,547) (456,927)
------------ ------------ ------------ ------------
Gross Profit 361,454 145,551 607,057 229,609
------------ ------------ ------------ ------------
Operating Expenses
Selling, general and administrative expenses 650,759 559,545 1,364,576 1,115,099
Non-cash employee compensation expense 45,000 - 78,750 72,500
------------ ------------ ------------ ------------
Total Operating Expenses 695,759 559,545 1,443,326 1,187,599
------------ ------------ ------------ ------------
Loss From Operations (334,305) (413,994) (836,269) (957,990)
------------ ------------ ------------ ------------
Other Income (Expense)
Interest (233,031) (138,284) (314,593) (249,027)
Other, net (61) - (157) -
Gain on forgiveness of debt 205,433 - 205,433 -
------------ ------------ ------------ ------------
Total Other Expense, Net (27,659) (138,284) (109,317) (249,027)
------------ ------------ ------------ ------------
Net Loss $ (361,964) $ (552,278) $ (945,586) $ (1,207,017)
------------ ------------ ------------ ------------
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.00) $ (0.00)
------------ ------------ ------------ ------------
Basic and diluted weighted-average
common shares outstanding 402,089,809 256,305,246 387,597,854 253,676,241
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-3
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2004 2003
-------------------- --------------------
Cash flows from operating activities
Net loss $ (945,586) $ (1,207,017)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 116,228 157,154
Loss on disposal of equipment 2,305 -
Gain on forgiveness of debt (205,433) -
Non-cash compensation expense - 72,500
Settlement expense 60,000 -
Loan costs and interest paid from loan proceeds 145,000 -
Options exercised in lieu of board compensation 78,750
Options issued to attorneys and consultants for services 143,601 -
Changes in assets and liabilities:
Trade accounts receivable (949,072) (52,164)
Inventories (342,586) 12,147
Prepaid expenses and other assets (17,100) 3,713
Accounts payable 355,456 187,312
Accrued liabilities 427,143 455,767
-------------------- --------------------
Total adjustments (185,708) 836,429
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Net cash used in operating activities (1,131,294) (370,588)
-------------------- --------------------
Cash flows from investing activities
Purchase of investment (300,000) -
Purchase of property and equipment (245,128) (4,495)
-------------------- --------------------
Net cash used in investing activities (545,128) (4,495)
-------------------- --------------------
Cash flows from financing activities
Change in checks written in excess of cash in bank (9,623) (19,531)
Payments for deferred offering costs - (30,753)
Proceeds from notes payable to stockholders - 107,725
Payments on notes payable to stockholders (31,752) (96,551)
Proceeds from notes payable, net of cash paid for offering costs 2,927,000 230,800
Principal payments on notes payable (290,500) (59,081)
Proceeds from notes payable to related parties 1,895,233 100,000
Payment on notes payable to related parties (2,913,432) -
Proceeds from exercise of options and warrants to purchase
common stock 80,000 187,500
Exercise of options issued to attorneys and consultants
for services 450 -
-------------------- --------------------
Net cash provided by financing activities 1,657,376 420,109
-------------------- --------------------
Net increase in cash and cash equivalents (19,046) 45,026
Cash and cash equivalents at beginning of year 54,135 500
-------------------- --------------------
Cash and cash equivalents at end of year $ 35,089 $ 45,526
-------------------- --------------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-4
CIRTRAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
For the Six Months Ended June 30, 2004 2003
-------------------- --------------------
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 59,263 $ 85,804
Noncash investing and financing activities
Notes issued for accounts payable and capital lease obligations $ 711,894 $ 47,561
Common stock issued for settlement of note payable $ 30,000 $ -
Common stock issuance in which proceeds were retained
as payment of notes payable $ 1,450,000 $ -
Common stock issued for accrued compensation $ - $ 10,000
Accrued interest converted to notes payable $ 9,160 $ 32,054
Stock options exercised for settlement of accrued interest
and accrued compensation $ 61,000 $ 90,000
Note issued for settlement of notes payable and accrued
interest $ 551,819 $ -
Fees withheld from notes payable for Equity Line Agreement $ 58,000 $ 1,840
Deferred offering costs withheld from notes payable proceeds $ 128,000 $ 9,200
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-5
CIRTRAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED 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
principles 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/A. In particular, the
Company's significant accounting principles were presented as Note 1 to the
consolidated financial statements in that Report. In the opinion of management,
all adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the three and six
months ended June 30, 2004, are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2004.
Principles of Consolidation -- In June 2004, the Company incorporated
CirTran-Asia, Inc., a Utah corporation, as a wholly owned subsidiary.
CirTran-Asia was formed to manufacture, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement.
Other such agreements will be sought in the future.
The condensed consolidated financial statements include the accounts of CirTran
Corporation, and its wholly owned subsidiaries, Racore Technology Corporation
and CirTran-Asia Inc. All significant intercompany transactions have been
eliminated in consolidation.
Stock-Based Compensation -- At June 30, 2004, the Company has one stock-based
employee compensation plan, which is described more fully in Note 8. The Company
accounts for the plan under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25") and related
interpretations. During the six months ended June 30, 2004 and 2003, the Company
recognized compensation expense relating to stock options and warrants of
$78,750 and $72,500, respectively. The following table illustrates the effect on
net loss and basic and diluted loss per common share as if the Company had
applied the fair value recognition provisions of Financial Accounting Standards
Board ("FASB") Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ------------------------------------
2004 2003 2004 2003
------------ -------------------- ------------- --------------------
Net loss, as reported $ (361,964) $ (552,278) $ (945,586) $ (1,207,017)
Add: Stock-based employee compensation expense
included in net loss 45,000 - 78,750 72,500
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (168,993) 57,863 (304,466) (199,528)
------------ -------------------- ------------- --------------------
Pro forma net loss $ (485,957) $ (494,415) $ (1,171,302) $ (1,334,045)
------------ -------------------- ------------- --------------------
Basic and diluted loss per common share as reported $ (0.00) $ (0.00) $ (0.00) $ (0.01)
------------ -------------------- ------------- --------------------
Basic and diluted loss per common share pro forma $ (0.00) $ (0.00) $ (0.00) $ (0.01)
------------ -------------------- ------------- --------------------
NOTE 2 - REALIZATION OF ASSETS
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
6
America, which contemplate continuation of the Company as a going concern.
However, the Company sustained losses of $945,586 and $2,910,978 for the six
months ended June 30, 2004 and the year ended December 31, 2003, respectively.
As of June 30, 2004 and December 31, 2003, the Company had an accumulated
deficit of $19,086,866 and $18,141,280, respectively, and a total stockholders'
deficit of $4,015,036 and $4,915,251, respectively. In addition, the Company
used, rather than provided, cash in its operations in the amounts of $1,131,294
and $1,123,818 for the six months ended June 30, 2004, and the year ended
December 31, 2003, respectively.
Since February of 2000, the Company has operated without a line of credit. Many
of the Company's vendors stopped credit sales of components used by the Company
to manufacture products, and as a result, the Company converted certain of its
turnkey customers to customers that provide consigned components to the Company
for production. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In addition, the Company is a defendant in numerous legal actions (see Note 5).
These matters may have a material impact on the Company's financial position,
although no assurance can be given regarding the effect of these matters in the
future.
In view of the matters described in the preceding paragraphs, recoverability of
a major portion of the recorded asset amounts shown in the accompanying
consolidated balance sheets is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain or replace present
financing, to acquire additional capital from investors, and to succeed in its
future operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
Abacas Ventures, Inc. ("Abacas") purchased the Company's line of credit from the
lender. During 2002, the Company entered into agreements whereby the Company has
issued common stock to certain principals of Abacas in exchange for a portion of
the debt. The Company's plans include working with vendors to convert trade
payables into long-term notes payable and common stock, and to cure defaults
with lenders through forbearance agreements that the Company will be able to
service. During the six months ended June 30, 2004, and the year ended December
31, 2003, the Company successfully converted trade payables, notes payable, and
accrued interest of approximately $1,263,713 and $2,986, respectively, into
notes. Accrued interest of $27,020 associated with the notes payable was not
converted to the note payable with Abacus; therefore, a gain on forgiveness of
debt was recorded for $27,020 for the six months ended June 30, 2004. The
Company intends to continue to pursue this type of debt conversion going forward
with other creditors. As discussed in Note 7, the Company has entered into an
equity line of credit agreement with a private investor. Realization of
additional proceeds under the equity line of credit is not assured.
NOTE 3 - INVESTMENT IN SECURITIES AT COST
On April 13, 2004, the Company entered into a stock purchase agreement with an
unrelated party under which the Company purchased 400,000 shares of the
investee's Series B Preferred Stock (the "Preferred Shares") for an aggregate
purchase price of $300,000 cash. This purchase was made at fair value. The
Preferred Shares are convertible, at the Company's option, into an equivalent
number of shares of investee common stock, subject to adjustment. The Preferred
Shares are not redeemable by the investee. As a holder of the Preferred Shares,
the Company has the right to vote the number of shares of investee common stock
7
into which the Preferred Shares are convertible at the time of the vote. The
investment represents less than a 5% interest in the investee.
Separate from the purchase of the Preferred Shares, the Company and the investee
also entered into a Preferred Manufacturing Agreement. Under this agreement, the
Company will perform exclusive "turn-key" manufacturing services handling most
of the investee's manufacturing operations from material procurement to complete
finished box-build of all of investee products. The initial term of the
agreement is three years, continuing month to month thereafter unless terminated
by either party.
NOTE 4 - RELATED PARTY TRANSACTIONS
Stockholder Notes Payable -- The Company had amounts due to stockholders from
two separate notes. The balance due to stockholders at June 30, 2004, and
December 31, 2003, was $86 and $31,838, respectively. Interest associated with
amounts due to stockholders is accrued at 10 percent. Unpaid accrued interest
was $7,178 and $6,900 at June 30, 2004, and December 31, 2003, respectively, and
is included in accrued liabilities. These notes are due on demand.
Related Party Notes Payable -- The Company had amounts due to Abacas Ventures,
Inc., a related party, under the terms of a note payable and a bridge loan.
During 2002, the Company entered into a bridge loan agreement with Abacas. This
agreement allows the Company 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 six
months ended June 30, 2004, and the year ended December 31, 2003, the Company
was advanced $3,158,946 and $350,000, respectively, and made cash payments of
$2,913,431 and $875,000, respectively, for an outstanding balance on the bridge
loan of $409,256 and $163,742, respectively.
The balance due to Abacas related to the note payable was paid in full at
December 31, 2002. The note accrued interest at 10%. The amounts owed were due
on demand with no required monthly payments. This note was collateralized by
assets of the Company.
The total principal amount owed to Abacas between the note payable and the
bridge loan was $409,256 and $163,742 as of March 31, 2004, and December 31,
2003, respectively. The total accrued interest owed to Abacas between the note
payable and the bridge loan was $325,916 and $230,484 as of June 30, 2004, and
December 31, 2003, respectively, and is included in accrued liabilities.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Settlement of Litigation -- During January 2002, the Company settled a lawsuit
that had alleged a breach of facilities sublease agreement involving facilities
located in Colorado. The Company's liability in this action was originally
estimated to range up to $2.5 million. The Company had filed a counter suit in
the same court for an amount exceeding $500,000 for missing equipment.
Effective January 18, 2002, the Company entered into a settlement agreement
which required the Company to pay the plaintiff the sum of $250,000. Of this
amount, $25,000 was paid upon execution of the settlement, and the balance,
together with interest at 8% per annum, was payable by July 18, 2002. As
security for payment of the balance, the Company executed and delivered to the
plaintiff a Confession of Judgment and also issued 3,000,000 shares of common
stock, which are currently held in escrow and have been treated as treasury
stock recorded at no cost. The fair value of the 3,000,000 shares was less than
the carrying amount of the note payable. Because 75 percent of the balance had
8
not been paid by May 18, 2002, the Company was required to prepare and file with
the Securities & Exchange Commission, at its own expense, a registration
statement with respect to the escrowed shares. The remaining balance has not
been paid, and the registration statement with respect to the escrowed shares
has not been declared effective and the Company has not replaced the escrowed
shares with registered free-trading shares pursuant to the terms of the
settlement agreement; therefore, the plaintiff filed the Confession of Judgment
and proceeded with execution thereon. The Company is currently negotiating with
the plaintiff to settle this obligation without the release of the shares held
in escrow.
In connection with a separate sublease agreement of these facilities, the
Company received a settlement from the sublessee during May 2002, in the amount
of $152,500, which has been recorded as other income. The Company did not
receive cash from this settlement, but certain obligations of the Company were
paid directly. $109,125 of the principal balance of the note related to the
settlement mentioned above was paid. Also, $7,000 was paid to the Company's
legal counsel as a retainer for future services. The remaining $36,375 was paid
to the above mentioned plaintiff as a settlement of rent expense.
During September 2002, the plaintiff filed a claim that the $109,125 portion of
the payment was to be applied as additional rent expense rather than a principal
payment on the note payable. The Company estimates that the probability of the
$109,125 being considered additional rent expense is remote and disputes the
claim. The Company intends to vigorously defend the action.
On April 14, 2004 an unrelated party filed a claim against the Company alleging
that the Company stopped paying amounts due under a note entered into in June
1998. The suit seeks $90,500 plus fees and costs. During May 2004, the Company
settled this claim by issuing 1,000,000 shares of common which resulted in a
settlement expense of $60,000.
Litigation - During 2000, the Company settled a lawsuit filed by a vendor by
issuing 5,281,050 shares of the Company's common stock valued at $324,284,
paying $83,000 in cash and issuing two notes payable totaling $239,000. During
2002, the vendor filed a confession of judgement claiming that the Company
defaulted on its agreement and claims the 2000 lawsuit was not properly
satisfied. At December 31, 2003, the Company owed $60,133 of principal under the
terms of the remaining note payable. The Company denies the vendor's claims and
intends to vigorously defend itself against the confession of judgement.
During 2003, an investment firm filed suit in the U.S. District Court, District
of Utah seeking finders fees, consisting of common stock valued at $350,000 for
allegedly introducing the Company to the Equity Line Investor. The case was
previously dismissed in a New York court. The Company estimates that the risk of
loss is remote, therefore no accrual has been made.
In December 1999, a vendor of the Company filed a lawsuit that alleges breach of
contract and seeks payment in the amount of approximately $213,000 of punitive
damages from the Company related to the Company's non-payment for materials
provided by the vendor. Judgment was entered against the Company in May 2002 in
the amount of $213,718. During 2004, this claim was purchased by Abacus and
recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
During October 1999, a former vendor of the Company brought action against the
Company alleging that the Company owed approximately $199,600 for materials and
services and pursuant to the terms of a promissory note. The Company entered a
settlement agreement under which the Company is to pay $6,256 each month until
the obligation and interest thereon are paid. This did not represent the
forgiveness of any obligation, but rather the restructuring of the terms of the
previous agreement. At December 31, 2003, the Company owed $183,429 for this
9
settlement. The Company has defaulted on its payment obligations under the
settlement agreement. During 2004, this claim was purchased by Abacus and
recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
Judgment was entered in favor of a vendor during March 2002, in the amount of
$181,342 for nonpayment of costs of goods or services provided to the Company.
At December 31, 2003, the Company had accrued the entire amount of the claim.
During 2004, this claim was purchased by Abacus and recorded as an increase to
the amount owed to Abacus under the terms of the bridge loan.
In December 1999, a vendor of the Company filed a lawsuit that seeks payment in
the amount of $44,269 for the cost of goods provided to the Company. The Company
admits owing certain amounts to the vendor and has accrued the entire amount
claimed as of December 31, 2003. During 2004, this claim was purchased by Abacus
and recorded as an increase to the amount owed to Abacus under the terms of the
bridge loan.
During 2002, a vendor of the Company filed a lawsuit that seeks payment in the
amount of $31,745 for the cost of goods provided to the Company. The Company has
accrued the entire amount claimed. No trial date has been set. During 2004, this
claim was purchased by Abacus and recorded as an increase to the amount owed to
Abacus under the terms of the bridge loan.
An individual filed suit during January 2001, seeking to recover the principal
sum of $135,941, plus interest on a promissory note. During 2004, this claim was
purchased by Abacus and recorded as an increase to the amount owed to Abacus
under the terms of the bridge loan.
During March 2000, a vendor brought suit against the Company under allegations
that the Company owed approximately $97,000 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company issued a
note payable to the vendor in settlement of the amount owed and is required to
pay the vendor $1,972 each month until paid. At December 31, 2003, the Company
owed $87,632 on this settlement agreement. During 2004, this claim was purchased
by Abacus and recorded as an increase to the amount owed to Abacus under the
terms of the bridge loan.
A financial institution brought suit against the Company during February 2000,
alleging that the Company owed approximately $439,000 for a loan provided to the
Company for the Company's use and benefit. Judgment was entered against the
Company and certain guarantors in the amount of $427,292 plus interest at the
rate of 8.61% per annum from June 27, 2000. The Company has made payments to the
financial institution, reducing the obligation to $215,516 at December 31, 2003,
plus interest accruing from January 1, 2002. The Company has settled this claim
in full as discussed in Note 5.
Suit was brought against the Company during April 2001, by a former shareholder
alleging that the Company owed $121,825 under the terms of a promissory note. A
Stipulation for Settlement and for Entry of Judgment was executed by the parties
wherein the Company agreed to arrange for payment of a principal amount of
$145,000 in 48 monthly installments. The Company made seven payments and then
failed to make subsequent payments, at which time the shareholder obtained a
consent judgment against the Company. The Company is currently in settlement
negotiations with the former shareholder regarding the judgment.
Various vendors have notified the Company that they believe they have claims
against the Company totaling $127,236. None of these vendors have filed lawsuits
in relation to these claims. The Company has accrued the entire amount of these
claims and it is included in accounts payable.
10
The Company is the defendant in numerous legal actions, primarily resulting from
nonpayment of vendor invoices for goods and services received, that it has
determined the probability of realizing any loss is remote. The total amount of
these legal actions is $102,447. The Company has made no accrual for the legal
actions and is currently in the process of negotiating the dismissal of these
claims with the various vendors.
The Company is also the defendant in numerous immaterial legal actions primarily
resulting from nonpayment of vendors for goods and services received. The
Company has accrued the payables and is currently in the process of negotiating
settlements with these vendors.
Registration Rights - In connection with the conversion of certain debt to
equity during 2000, the Company has granted the holders of 5,281,050 shares of
common stock the right to include 50% of the common stock of the holders in any
registration of common stock of the Company, under the Securities Act for offer
to sell to the public (subject to certain exceptions). The Company has also
agreed to keep any filed registration statement effective for a period of 180
days at its own expense.
Additionally, in connection with the Company's entering into an Equity Line of
Credit Agreement (described in Note 6), the Company granted to the equity line
investor (the "Equity Line Investor") registration rights, in connection with
which the Company is required to file a registration statement covering the
resale of shares put to the Equity Line Investor under the equity line. The
Company is also required to keep the registration statement effective until two
years following the date of the last advance under the equity line. The Company
has not yet filed such registration statement.
Accrued Payroll Tax Liabilities -- As of June 30, 2004, the Company had accrued
liabilities in the amount of $2,125,183 for delinquent payroll taxes, including
interest estimated at $437,042 and penalties estimated at $230,927. Of this
amount, approximately $308,847 was due the State of Utah. During 2002, the
Company negotiated a monthly payment schedule of $4,000 to the State of Utah,
which did not provide for the forgiveness of any taxes, penalties or interest.
Approximately $1,805,397 was owed to the Internal Revenue Service as of June 30,
2004. During 2002, the Company negotiated a payment schedule with respect to
this amount, pursuant to which monthly payments of $25,000 were required. The
Company is currently renegotiating the terms of the payment schedule with the
Internal Revenue Service. Approximately $10,939 was owed to the State of
Colorado as of June 30, 2004.
NOTE 6 - NOTES PAYABLE
In March 2004, the Company settled a note payable with a financial institution.
The outstanding loan balance and accrued interest at the time of settlement was
$189,663. The balance was settled for $90,000 in cash and 542,495 shares of
common stock valued at $30,000. A gain on forgiveness of debt of $61,370 was
recorded on this transaction.
In April 2004, the Company settled three notes payable with a financing company.
The outstanding loan balances and accrued interest at the time of settlement was
$192,043. The balance was settled for $75,000 in cash. A gain on forgiveness of
debt of $117,043 was recorded on this transaction.
Notes Payable to Equity Line Investor -- At December 31, 2003, the Company owed
$650,000 to Cornell Capital Partners, LP, pursuant to prior unsecured promissory
notes. During the six months ended June 30, 2004, the Company borrowed an
additional $3,200,000 from Cornell, pursuant to four additional unsecured
promissory notes. In lieu of interest, the Company paid fees at closing of 4% to
11
5% of the loan amount to an affiliate of the lender. These fees have been
recorded as interest expense. The fees were negotiated in each instance and
agreed upon by the Company and by the lender and its affiliate. The notes were
repayable over periods ranging from 88 days to 193 days. Each of the notes
stated that if the Company did not repay the notes when due, a default interest
rate of 24% would apply to the unpaid balance. Through June 30, 2004, the
Company directed the repayment of $1,450,000 of these notes from proceeds
generated under the Amended Equity Line Agreement, discussed in Note 7 below. At
June 30, 2004, the balance owing on these notes was $2,400,000 and the Company
had not incurred the 24% penalty interest rate.
NOTE 7 - STOCKHOLDER'S EQUITY
Common Stock Issuance -- As discussed in Note 6, the Company issued 542,495
shares of common stock valued at $30,000 as part of a settlement agreement for a
note payable.
As discussed in Note 5, during May 2004, the Company settled a legal claim by
issuing 1,000,000 shares of common which resulted in a settlement expense of
$60,000.
Equity Line of Credit Agreement - In conjunction with efforts to improve the
results of operations, discussed above, on November 5, 2002, the Company entered
into an Equity Line of Credit Agreement with Cornell Capital Partners, LP, a
private investor ("Cornell"). The Company subsequently terminated the original
Equity Line of Credit Agreement, and on April 8, 2003, the Company entered into
an amended equity line agreement (the "Equity Line Agreement") with Cornell.
Under the Equity Line Agreement, the Company has the right to draw up to
$5,000,000 from Cornell against an equity line of credit (the "Equity Line"),
and to put to Cornell shares of the Company's common stock in lieu of repayment
of the draw. The number of shares to be issued is determined by dividing the
amount of the draw by the lowest closing bid price of our common stock over the
five trading days after the advance notice is tendered. Cornell is required
under the Equity Line Agreement to tender the funds requested by the Company
within two trading days after the five-trading-day period used to determine the
market price.
During the six months ended June 30, 2004, the Company drew an aggregate amount
of $1,450,000 under the Equity Line Agreement, pursuant to draws on the equity
line, net of fees of $58,000, and issued a total of 43,542,818 shares of common
stock to Cornell under the Equity Line Agreement. At the Company's direction,
Cornell retained the proceeds of the draws under the Equity Line Agreement and
applied them as payments on the notes to Cornell, discussed in Note 6 above.
Pursuant to the Equity Line Agreement, in connection with each draw the Company
agreed to pay a fee of 4% of the amount of the draw to Cornell as consideration
for its providing the Equity Line. Total fees paid for the six months ended June
30, 2004 were $128,000. Of these payments, $32,000 was offset against additional
paid-in capital as shares were issued under the Equity Line Agreement and
$96,000 was classified as deferred offering costs at June 30, 2004. These
deferred offering costs will be offset against additional paid-in capital as
shares are issued under the Equity Line Agreement subsequent to June 30, 2004.
From January 1, 2004 through August 18, 2004, the Company drew an aggregate of
$2,150,000 under the Equity Line Agreement, net of deferred offering costs of
$86,000 and issued 57,464,386 shares of common stock to Cornell under the Equity
Line Agreement. At the Company's direction, Cornell has applied the proceeds of
the draws under the Equity Line Agreement as payments on the notes to Cornell,
discussed in Note 6 above.
12
NOTE 8 - STOCK OPTIONS AND WARRANTS
Stock-Based Compensation - The Company accounts for stock options issued to
directors, officers and employees under APB No. 25 and related interpretations.
Under APB 25, compensation expense is recognized if an option's exercise price
on the measurement date is below the fair value of the Company's common stock.
For options that provide for cashless exercise or that have been modified, the
measurement date is considered the date the options are exercised or expire.
Those options are accounted for as variable options with compensation adjusted
each period based on the difference between the market value of the common stock
and the exercise price of the options at the end of the period. The Company
accounts for options and warrants issued to non-employees at their fair value in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan - During February 2003, the Company adopted the 2002 Stock
Option Plan (the "2002 Plan") with 25,000,000 shares of common stock reserved
for issuance there under. Also, during November 2003, the Company adopted the
2003 Stock Option Plan (the "2003 Plan") with 35,000,000 shares of common stock
reserved for issuance there under. The Company's Board of Directors administers
the plans and has discretion in determining the employees, directors,
independent contractors and advisors who receive awards, the type of awards
(stock, incentive stock options or non-qualified stock options) granted, and the
term, vesting, and exercise prices.
Non-Employee Grants - During the six months ended June 30, 2004, the Company
granted options to purchase 4,000,000 shares of common stock to attorneys for
services at exercise prices of $0.0001 per share. The options were all five year
options and vested on the dates granted. The weighted average fair value of the
options on the grant dates was $0.048, which resulted in a fair value of
$143,701 which reduced the amount owed for prior services provided. The
attorneys exercised the 4,000,000 options for cash proceeds of $400. An
additional 500,000 of previously issued options were exercised for cash proceeds
of $50.
Employee Grants - During the six months ended June 30, 2004, the Company granted
options to purchase 13,200,000 shares of common stock to directors and employees
of the Company pursuant to the 2003 Plan. These options are five year options
that vested on the date of grant. The related exercise prices range from $0.01
to $0.03 per share. 12,450,000 of these options were exercised during the six
months ended June 30, 2004 for $80,000 of cash, $78,750 of compensation and
$61,000 of accrued compensation.
13
A summary of the stock option activity for the six months ended June 30, 2004,
is as follows:
Shares Weighted Average
Exercise Price
-------------------- --------------------
Outstanding at December 31, 2003 3,850,500 $ 0.02
Granted 17,200,000 $ 0.01
Exercised (16,950,000) $ 0.01
Cancelled - -
--------------------
Outstanding at June 30, 2004 4,100,500 $ 0.03
====================
Excercisable at June 30, 2004 4,100,500 $ 0.03
====================
The fair value of stock options was determined at the grant dates using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the six months ended June 30, 2004:
2004
--------------------
Expected dividend yield -
Risk free interest rate 3.25%
Expected volatility 216%
Expected life .07 years
Weighted average fair value per share $ 0.02
14
NOTE 9 -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, Ethernet
technology, and contract manufacturing. The electronics assembly segment
manufactures and assembles circuit boards and electronic component cables. The
Ethernet technology segment designs and manufactures Ethernet cards. The
contract manufacturing segment manufactures, either directly or through foreign
subcontractors, certain products under an exclusive manufacturing agreement. The
accounting policies of the segments are consistent with those described in the
summary of significant accounting policies. The Company evaluates performance of
each segment based on earnings or loss from operations. Selected segment
information is as follows:
Electronics Ethernet Contract
Assembly Technology Manufacturing Total
------------------- ------------------- -------------------- ------------------
June 30, 2004
Sales to external customers $ 1,594,976 $ 42,816 $ 965,812 $ 2,603,604
Intersegment sales 11,325 167 - 11,492
Segment loss (553,362) (123,166) (269,058) (945,586)
Segment assets 3,653,509 206,677 95,955 3,956,141
Depreciation and amortization 115,069 1,159 - 116,228
June 30, 2003
Sales to external customers $ 552,442 $ 134,094 $ - $ 686,536
Intersegment sales 52,242 - - 52,242
Segment loss (1,128,351) (78,666) - (1,207,017)
Segment assets 2,259,617 243,254 - 2,502,871
Depreciation and amortization 154,354 2,800 - 157,154
June 30,
-------------------------------------------
Sales 2004 2003
------------------- --------------------
Total sales for reportable segments $ 2,615,096 $ 738,778
Elimination of intersegment sales (11,492) (52,242)
------------------- --------------------
Consolidated net sales $ 2,603,604 $ 686,536
------------------- --------------------
June 30,
-------------------------------------------
Total Assets 2004 2003
------------------- --------------------
Total assets for reportable segments $ 3,956,141 $ 2,502,871
Adjustment for intersegment amounts - -
------------------- --------------------
Consolidated total assets $ 3,956,141 $ 2,502,871
------------------- --------------------
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
This discussion should be read in conjunction with Managements' Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-KSB/A for the year ended December 31, 2003.
Overview
We provide a mixture of high- and medium volume turnkey manufacturing services
using surface mount technology, ball-grid array assembly, pin-through-hole and
custom injection molded cabling for leading electronics original equipment
manufactures ("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.
During 2004, we have established a new division, CirTran-Asia, Inc., which has
contributed to a large portion of the increase in revenue for the three months
ended June 30, 2004. This new division CirTran-Asia is our 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; engineering and design, product development and
prototyping, tooling, and hi-volume manufacturing.
CirTran has established a dedicated satellite office for CirTran-Asia, and has
retained Mr. Charles Ho to lead the new division. Having proven the value and
reliability of its core products, CirTran Corporation has chosen to expand into
previously untapped product lines. 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.
We have been preparing for more than a year for this strategic move into the
Asian market. Management anticipates that this new division will elevate CirTran
to an international contract manufacturer status of multiple products in a wide
variety of industries, and will, in short order, allow us to target large-scale
contracts. We anticipate that our new clients will be leading manufacturing and
marketing firms in the retail and direct consumer markets.
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
in our Annual Report on form 10-KSB/A 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. 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.
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.
16
When there is evidence that the inventory's value is less than original cost,
the inventory is reduced to market value. The Company determines market value on
current resale amounts and whether technological obsolescence exists. The
Company has 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. The Company typically orders inventory on a
customer-by-customer basis. In doing so the Company enters 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.
Checks Written in Excess of Cash in Bank
Historically, banks have temporarily lent funds to us by paying out more funds
than were in our accounts, under existing lines of credit with those banks.
Subsequent to May 2000, when Abacas purchased our line of credit obligation, the
Company no longer had lines of credit with banks, and those loans were no longer
available or made to us. The Company acquired an equity line of credit effective
as of June of 2003, described more fully under "Liquidity and Financing
Arrangements."
Under our cash management system, checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes. These
overdrafts are included as a current liability in the balance sheets.
Related Party Transactions
Certain transactions involving Abacas Ventures, Inc., the Saliba Private Annuity
Trust and the Saliba Living Trust are regarded as related party transactions
under FAS 57. Disclosure concerning these transactions is set out in this Item 6
under "Liquidity and Capital Resources - Liquidity and Financing Arrangements,"
and in "Item 5 - Other Information."
Results of Operations - Comparison of Periods Ended June 30, 2004 and 2003
Sales and Cost of Sales
Net sales increased to $1,924,242 for the three-month period ended June 30,
2004, as compared to $416,762 during the same period in 2003 for an increase of
361.7%. The second quarter sales increase can be attributed to several factors,
including the strengthening of the overall market economy. Industry-wide, we are
seeing more OEMs release larger order commitments with extended time tables. The
second significant factor directly related to CirTran is our marketing approach.
Most contract manufacturers approach customers on a job-by-job basis. CirTran
approaches customers on a partner basis. We have developed a program where we
can be more effective when we control the material procurement, purchasing, and
final assembly, providing the customer a final quality product delivered on time
and at a lower market cost. And the biggest factor is establishing a new
division CirTran-Asia, which has contributed to a large portion of the increase
in revenue. This new division CirTran-Asia, is our Asian based wholly-owned
subsidiary of CirTran Corporation provides a myriad of manufacturing services to
the Direct Response and Retail consumer markets. Our vast experience and
expertise in manufacturing enables CirTran-Asia to enter a project at any phase;
Engineering and Design, Product Development and Prototyping, Tooling, Hi-Volume
Manufacturing etc.. Cost of sales increased by 476.2%, from $271,211 during the
three-month period ended June 30, 2003, to $1,562,788 during the same period in
2004. The increase in cost of sale is due to increase in revenue. Our gross
profit margin for the three-month period ended June 30, 2004, was 18.8%, down
17
from 34.9% for the same period in 2003. The decrease is due to the increase of
cost of sales for CirTran-Asia sales that have smaller gross margin.
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 June 30, 2004, was $1,590,014, as
compared to $1,247,248 at December 31, 2003. The increase in inventory is
required to facilitate the increase in turnkey sales.
Selling, General and Administrative Expenses
During the quarter ended June 30, 2004, selling, general and administrative
expenses were $650,759 versus $559,545 for the same period in 2003, a 16.3%
increase. The increase was due to a $315,000 increase in our acquisition and
organizational costs in starting up CirTran-Asia division, along with our
efforts to aggressively market our products during a period of economic
downturn. Selling, general and administrative expenses as a percentage of sales
as of June 30, 2004 were 33.8% as compared to 134.3% during the same period in
2003. This decrease is due in part to an increase in sales and better management
of expenses.
Interest Expense
Interest expense for quarter ended June 30, 2004, was $233,031 as compared to
$138,284 for the same period in 2003, an increase of 68.5%. The increase is
primarily due to interest expense related to notes payable to the Equity Line
Investor. As of June 30, 2004, and December 31, 2003, the amount of our
liability for delinquent state and federal payroll taxes and estimated penalties
and interest thereon was $2,125,183 and $2,107,930, respectively.
As a result of the above factors, our overall net loss decreased 34.5% to
$361,964 for the quarter ended June 30, 2004, as compared to $552,278 for the
quarter ended June 30, 2003. This decrease was in part attributed to a
substantial increase in sales and better cost controls.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses, and our accumulated deficit was $19,086,866 at June 30, 2004, and
$18,141,280 at December 31, 2003. Our net operating loss for the quarter ending
June 30, 2004, was $361,964, compared to $552,278 for the quarter ended June 30,
2003. Our current liabilities exceeded our current assets by $5,128,208 as of
June 30, 2004, and $5,529,244 as of December 31, 2003. The decrease was mostly
attributable to decreasing account payables, and in increase in accounts
receivable and inventory. For the six months ended June 30, 2004 and 2003, we
had negative cash flows from operations of $1,131,294 and $370,588,
respectively.
Cash
We had cash on hand of $35,089 at June 30, 2004, and $54,135 at December 31,
2003.
Net cash used in operating activities was $1,131,294 for the six months ended
June 30, 2004. During six months ended June 30, 2004, net cash used in
operations was primarily attributable to $945,586 in net losses from operations
and an increase in accounts receivable of $949,072, partially offset by
increases in accrued liabilities and accounts payable of $427,143 and $355,456,
18
respectively. The non-cash charges were for depreciation and amortization of
$166,228 and loan costs and interest paid from loan proceeds of $145,000.
Net cash used in investing activities during the six months ended June 30, 2004,
consisted of equipment purchases of $245,128 and a purchase of investment
securities I the amount of $300,000.
Net cash provided by financing activities was $1,657,376 during the six months
ended June 30, 2004. Principal sources of cash were proceeds of $1,895,233 from
notes payable to related parties, proceeds from notes payable of $2,927,000, and
proceeds from the exercise of options to purchase common stock of $80,000. These
proceeds were offset by principal payments on notes payable to related parties
in the amount of $2,913,432.
Accounts Receivable
At June 30, 2004, we had receivables of $1,038,259, net of a reserve for
doubtful accounts of $28,876, as compared to $89,187 at December 31, 2003, net
of a reserve of $28,876. This increase was primarily attributed to sales having
substantially increased in the last month of the second quarter as compared to
the last two months in 2003.
Accounts Payable
Accounts payable were $944,159 at June 30, 2004, as compared to $1,300,597 at
December 31, 2003. This decrease is primarily attributed to conversions of
accounts payable to notes payable in relation to settlements made by Abacas
Ventures.
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 $19,086,866 and a
total stockholders' deficit of $3,956,141 at June 30, 2004. As of June 30, 2004,
our monthly operating costs and interest expenses averaged approximately
$280,000 per month.
Significant amounts of additional cash will be needed to reduce our debt and
fund our losses until such time as we are able to become profitable. At June 30,
2004, we were in default of notes payable whose principal amount, not including
the amount owing to Abacas Ventures, Inc., was approximately $320,000. In
addition, the principal amount of notes that either mature in 2004 or are
payable on demand was approximately $2,410,000.
In conjunction with our efforts to improve our results of operations, discussed
above, we are also actively seeking infusions of capital from investors and are
seeking to replace our operating line of credit. 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 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.
Subsequent to our acquisition of Circuit in July 2000, we took steps to increase
the marketability of our shares of common stock and to make an investment in our
company by potential investors more attractive. These efforts consisted
primarily of seeking to become current in our filings with the Securities and
Exchange Commission and of seeking approval for quotation of our stock on the
NASD Over the Counter Electronic Bulletin Board. NASD approval for quotation of
our stock on the Over the Counter Electronic Bulletin Board was obtained in July
2002.
19
Notes Payable to Equity Line Investor -- At December 31, 2003, we owed $650,000
to Cornell Capital Partners, LP, pursuant to prior unsecured promissory notes.
During the six months ended June 30, 2004, we borrowed an additional $3,200,000
from Cornell, pursuant to four additional unsecured promissory notes. In lieu of
interest, we paid fees at closing of 5% of the loan amount to an affiliate of
the lender. These fees have been recorded as interest expense. The fees were
negotiated in each instance and agreed upon by us and by the lender and its
affiliate. The notes were repayable over periods ranging from 88 days to 193
days. Each of the notes stated that if we did not repay the notes when due, a
default interest rate of 24% would apply to the unpaid balance. Through June 30,
2004, we directed the repayment of $1,450,000 of these notes from proceeds
generated under the Equity Line Agreement, discussed below. At June 30, 2004,
the balance owing on these notes was $2,400,000. All notes were paid when due or
before, and at no time did we incur the 24% penalty interest rate.
There can be no assurance that we will be successful in obtaining more debt
and/or equity financing in the future or that our results of operations will
materially improve in either the short- or the long-term. If we fail to obtain
such financing and improve our results of operations, we will be unable to meet
our obligations as they become due. That would raise substantial doubt about our
ability to continue as a going concern.
In conjunction with efforts to improve the results of our operations, discussed
above, on November 5, 2002, we entered into an Equity Line of Credit Agreement
with Cornell Capital Partners, LP, a private investor ("Cornell"). We
subsequently terminated that agreement, and on April 8, 2003, we entered into an
amended equity line agreement (the "Equity Line Agreement") with Cornell. Under
the Equity Line Agreement, we have the right to draw up to $5,000,000 from
Cornell against an equity line of credit (the "Equity Line"), and to put to
Cornell shares of our common stock in lieu of repayment of the draw. The number
of shares to be issued is determined by dividing the amount of the draw by the
lowest closing bid price of our common stock over the five trading days after
the advance notice is tendered. Cornell is required under the Equity Line
Agreement to tender the funds requested by us within two trading days after the
five-trading-day period used to determine the market price.
During the three months ended June 30, 2004, we drew an aggregate amount of
$800,000 under the Equity Line Agreement, pursuant to draws on the Equity
Line, net of fees of $32,000, and issued a total of 13,467,303 shares of common
stock to Cornell under the Equity Line Agreement. At our direction, Cornell
retained the proceeds of the draws under the Equity Line Agreement and applied
them as payments on the notes to Cornell, discussed above.
Pursuant to the Equity Line Agreement, in connection with each draw, we agreed
to pay a fee of 4% of the amount of the draw to Cornell as consideration for its
providing the Equity Line. Total fees paid for the three months ended June 30,
2004 were $68,000. Of these payments, $32,000 was offset against additional
paid-in capital as shares were issued under the Equity Line Agreement and
$36,000 was recorded as deferred offering costs for total deferred offering
costs of $96,000 at June 30, 2004. These deferred offering costs will be offset
against additional paid-in capital as shares are issued under the Equity Line
Agreement subsequent to June 30, 2004.
From January 1, 2004 through August 18, 2004, we drew an aggregate of $2,150,000
under the Equity Line Agreement, net of deferred offering costs of $86,000 and
issued 57,464,386 shares of common stock to Cornell under the Equity Line
Agreement. At our direction, Cornell has applied the proceeds of the draws under
the Equity Line Agreement as payments on the notes to Cornell, discussed above.
20
Forward-looking statements
All statements made in this report, other than statements of historical fact,
which address activities, actions, goals, prospects, or new developments that we
expect or anticipate will or may occur in the future, including such things as
expansion and growth of operations and other such matters, are forward-looking
statements. Any one or a combination of factors could materially affect our
operations and financial condition. These factors include competitive pressures,
success or failure of marketing programs, changes in pricing and availability of
parts inventory, creditor actions, and conditions in the capital markets.
Forward-looking statements made by us are based on knowledge of our business and
the environment in which we currently operate. Because of the factors listed
above, as well as other factors beyond our control, actual results may differ
from those in the forward-looking statements.
Item 3. Evaluation of Disclosure Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934, Rules 13a-14(c) and 15-d-14(c)) as of
the end of the period covered by this report (the "Evaluation Date"), have
concluded that, as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities.
(b) Changes in Internal Controls. There were no significant changes in the
Company's internal controls, or, to the Company's knowledge, in other factors
that could significantly affect these controls subsequent to the Evaluation
Date.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 30, 2004, the Company had accrued liabilities in the amount
of $2,125,183 for delinquent payroll taxes, including interest estimated at
$437,042 and penalties estimated at $230,927. Of this amount, approximately
$308,847 was due the State of Utah. During the first quarter of 2003, no
payments were made to the State of Utah. During the third and fourth quarter of
2003, partial payments were made to the State of Utah. Approximately $1,805,397
was owed to the Internal Revenue Service as of December 31, 2003. The Company,
in response to collection notices, filed a due process appeal with the Internal
Revenue Service's Appeals Office. The appeal was resolved by an agreement with
the Appeals Office that allowed the Company to file an offer in compromise of
all federal tax liabilities owed by the Company based on its ability to pay. The
Company filed its offer in compromise with the IRS, and the IRS is in the
process of reviewing the offer. Further, the Utah State Tax Commission has
entered into an agreement to allow the Company to pay the liability owing to the
State of Utah in equal monthly installments over an extended period of time, yet
to be determined. Approximately $10,939 was owed to the State of Colorado as of
June 30, 2004.
We (as successor to Circuit Technology, Inc.) were a defendant in an
action in El Paso County, Colorado District Court, brought by Sunborne XII, LLC,
a Colorado limited liability company, for alleged breach of a sublease agreement
involving facilities located in Colorado. Effective January 18, 2002, we entered
into a settlement agreement with Sunborne with respect to the above-described
litigation. The settlement agreement required us to pay Sunborne the sum of
21
$250,000. Of this amount, $25,000 was paid upon execution of the agreement, and
the balance of $225,000, together with interest at 8% per annum, was payable by
July 18, 2002. As security for payment of the balance, we executed and delivered
to Sunborne a Confession of Judgment and also issued to Sunborne 3,000,000
shares of our common stock, which are held in escrow and have been treated as
treasury stock recorded at no cost. Because 75% of the balance owing under the
agreement was not paid by May 18, 2002, we were required to prepare and file a
registration statement to register the resale of the escrowed shares.
As of May 16, 2003, the Company was in default of its obligations under
the settlement agreement with Sunborne, i.e., the total payment due thereunder
had not been made, a registration statement with respect to the escrowed shares
was not filed, and the Company had not replaced the escrowed shares with
registered, free-trading shares as per the terms of the agreement. Accordingly,
Sunborne filed a foreign judgment in Salt Lake City and proceeded with execution
thereon. The Company is continuing to negotiate with Sunborne in an attempt to
settle the remaining obligation.
Pursuant to a Termination of Sublease Agreement dated as of May 22,
2002 among the Company, Sunborne and other parties, the sublease agreement that
was the subject of the Colorado litigation with Sunborne was terminated and a
payment of approximately $109,000 was credited against the amount owed by the
Company to Sunborne under the settlement agreement. Sunborne has filed a claim
that this amount was to be an additional rent expense rather than a payment on
the note payable. The Company disputes this claim and intends to vigorously
defend the action.
We also assumed certain liabilities of Circuit Technology, Inc. in
connection with our transactions with that entity 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.
Contact East has notified the Company that it believes it has a claim
against the Company in the amount of $32,129.89 for the cost of goods or
services provided to the Company for the Company's use and benefit. The Company
is reviewing its records in an effort to confirm the validity of the claims and
has been involved in settlement negotiations.
C/S Utilities has notified the Company that it believes it has a claim
against the Company in the amount of $32,472 regarding utilities services. The
Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
Future Electronics Corp v. Circuit Technology Corporation, Civil No.
000900296, Third Judicial District Court, Salt Lake County, State of Utah. Suit
was brought against the Company on or about January 12, 2000, under allegations
that the Company owed $646,283.96 for the cost of goods or services provided to
the Company for the Company's use and benefit. Claims were asserted for breach
of contract, fraud, negligent misrepresentation, unjust enrichment, account
stated and dishonored instruments. The Company answered the complaint, admitting
that it owed certain sums for conforming goods and services and denying all
other claims. Partial Summary Judgment was entered in the amount of $646,783.96
as to certain claims against the Company. Negotiations for settlement resulted
in an agreement for settlement of all claims of Future against the Company
subject to performance by the Company under the agreement. The Company also
issued to Future 352,070 shares of its restricted common stock. The Company did
not perform its obligations under the settlement agreement, and a Confession of
Judgment was entered in January 2002 in the amount of $519,052.00. The Company
disputes the amount of the judgment entered. No collection efforts have been
made. The Company is negotiating settlement.
22
Molex has notified the Company that it believes it has a claim against
the Company in the amount of $90,000.00 for the cost of goods or services
provided to the Company for the Company's use and benefit. The Company is
reviewing its records in an effort to confirm the validity of the claims and has
been involved in settlement negotiations.
Signal Transformer Co., Inc., has notified the Company that it believes
it has a claim against the Company in the amount of $38,989 for the cost of
goods or services provided to the Company for the Company's use and benefit.
Negotiations for settlement of this claim have resulted in an agreement in
principal whereby the Company will arrange for a cash payment to this creditor.
The parties are presently negotiating the terms of the settlement documents.
However, until the settlement documents are executed and delivered, there can be
no assurance that the creditor's claims will be settled nor that the terms will
be favorable to the Company.
SuhTech Electronics adv. Circuit Technology Corporation, Civil No.
00L14505, Circuit Court of Cook County Department, Law Division, State of
Illinois. Suit was brought against the Company on or about December 23, 1999,
under allegations that the Company owed $213,717.70 for the cost of goods or
services provided to the Company for the Company's use and benefit. Claims are
asserted for breach of contract, unjust enrichment and account stated. The
Company has answered, admitting that it owed certain sums for conforming goods
and services and denying all other claims. Judgment was subsequently entered
against the Company on May 29, 2002. The parties subsequently entered into a
settlement agreement, and the Company has paid the amounts required. Under the
settlement agreement, SuhTech is required to dismiss the case, but as of the
date of this Report, the case had not been dismissed.
University of Utah v. CirTran Corporation, Third District Court, Salt
Lake County, Civil No. 020900494 . The University of Utah filed a claim against
the Company on January 18, 2002, seeking $37,473.10 in damages. Summary judgment
was entered against the Company. The Company entered into a settlement agreement
on September 16, 2003, under which the Company is required to make monthly
payments of $5,185.47. The total settlement amount under the agreement is
$62,225.64. The Company has made all of the required payments, and the
University of Utah has agreed to dismiss the case. As of the date of this
Report, the case had not been dismissed.
Volt Temporary Services has notified the Company that it believes it
has a claim against the Company in the amount of $30,986 for the cost of goods
or services provided to the Company for the Company's use and benefit. The
Company is reviewing its records in an effort to confirm the validity of the
claims and has been involved in settlement negotiations.
George M. Madanat, Civil No. KC 035616, Superior Court of the State of
California for the County of Los Angeles, East District. Suit was brought
against the company on or about April 2, 2001, under allegations that the
company owed $121,824.90 under the terms of a promissory note. A Stipulation for
Settlement and for Entry of Judgment was executed by the parties wherein the
Company agreed to arrange for payment of a principal amount of $145,000 in 48
monthly installments. The Company subsequently defaulted on its obligations
under the settlement agreement, and judgment was entered against the Company.
The Company is attempting to settle this matter with Mr. Madanat.
Cardio Pulmonary Technologies, Inc., vs. Patrick M. Volz, Peripheral
Systems, Inc., and CirTran Corporation, Civil No. 03090501B, Third Judicial
District Court, Salt Lake County, State of Utah. On April 4, 2003, suit was
brought against the Company and two other named defendants by plaintiff Cardio
Pulmonary Technologies ("CPT"), alleging a breach of contract between CPT and
the other two named defendants. Plaintiff's claims against the Company arise out
of an alleged breach of an alleged agreement between the Company and Peripheral
Systems, Inc. The Company answered the Complaint. Cardio Pulmonary Technologies
23
has voluntarily agreed to dismiss the claims against the Company without
prejudice. As of the date of this Report, the case had not been dismissed.
Howard Salamon, dba Salamon Brothers vs. CirTran Corporation, Civil No.
2:03-00787, U.S. District Court, District of Utah. Howard Salamon originally
filed suit against the Company in the U.S. District Court, Eastern District of
New York, seeking finders fees, consisting of shares of the Company's common
stock valued at $350,000, allegedly owed in connection with Salamon's
introducing the Company to Cornell Capital Partners, L.P., the Equity Line
Investor. The Company disputes the claims in the complaint. The case was
dismissed in New York and refiled in Utah. The Company has filed its answer in
the Utah case and the lawsuit is proceeding. The Company is also currently
conducting settlement negotiations.
P R Newswire Association, Inc., v. CirTran, Superior Court of New
Jersey, DC-000359-04. On March 9, 2004, a judgment was entered against CirTran
in the amount of $5,106.28, with fees of $171.13. The Parties are presently
negotiating settlement of this matter.
RecovAR Group, LLC vs. CirTran Corporation, Inc., District Court of
Maryland. This matter arises from an agreement between the Company and United
Parcel Services, Inc. ("UPS"). UPS alleges that the Company owes approximately
$8,024 for services rendered. RecovAR Group, LLC, brought the action on behalf
of UPS. The Company is in settlement negotiations with RecovAR Group, LLC.
Item 2. Changes in Securities
Recent Sales of Unregistered Securities
Pursuant to the Equity Line of Credit Agreement (discussed above), the Company
is entitled to put to the Equity Line Investor, in lieu of repayment of amounts
drawn on the Equity Line, shares of the Company's common stock. Although the
Company has filed a registration statement to register the resale by the Equity
Line Investor of the shares put to it by the Company, the issuances of shares to
the Company are made in reliance on Section 4(2) of the Securities Act of 1933
as a transaction not involving any public offering. No advertising or general
solicitation was employed in offering the securities, and the shares have been
and will be issued to only one investor which has represented that it is an
"accredited investor" as that term is defined in Regulation D promulgated
pursuant to the Securities Act of 1933. During the quarter ended June 30, 2004,
we have issued 13,467,303 shares of common stock to the Equity Line Investor in
connection with draws on the Equity Line.
Item 5. Other Information
Abacas Ventures
Abacas Ventures, Inc. ("Abacas") purchased the Company's line of credit
from the lender. During 2002, the Company entered into agreements whereby the
Company has issued common stock to certain principals of Abacas in exchange for
a portion of the debt. The Company's plans include working with vendors to
convert trade payables into long-term notes payable and common stock, and to
cure defaults with lenders through forbearance agreements that the Company will
be able to service. During the six months ended June 30, 2004, and the year
ended December 31, 2003, the Company successfully converted trade payables,
notes payable, and accrued interest of approximately $1,263,713 and $2,986,
respectively, into notes. Accrued interest of $27,020 associated with the notes
payable was not converted to the note payable with Abacus; therefore, a gain on
forgiveness of debt was recorded for $27,020 for the six months ended June 30,
2004. The Company intends to continue to pursue this type of debt conversion
24
going forward with other creditors. As discussed above, the Company has entered
into an equity line of credit agreement with a private investor. Realization of
any proceeds under the equity line of credit is not assured.
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: The following reports on Form 8-K were filed by us
during the three-month period ended March 31, 2004:
(i) None.
Exhibits:
31 Certification
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
25
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: August 19, 2004 By: /s/ Iehab Hawatmeh
Iehab J. Hawatmeh
President and Chief Financial Officer