NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2021
NOTE
1—BASIS OF PRESENTATION
The
consolidated financial statements of CirTran Corporation for the three-month periods ended March 31, 2021 and 2020, are not audited.
Our consolidated financial statements are prepared in accordance with the requirements for unaudited interim periods and,
consequently, do not include all disclosures required to be made in conformity with accounting principles generally accepted in the
United States of America. In the opinion of our management, the accompanying consolidated financial statements contain all
adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial position as of March 31,
2021, and December 31, 2020, and our results of operations and cash flows for the periods ended March 31, 2021 and 2020. The results
of operations for the three months ended March 31, 2021 and 2020, are not necessarily indicative of the results for a full-year
period. These interim consolidated financial statements should be read in conjunction with the financial statements included in our
annual report on Form 10-K for the year ended December 31, 2020.
NOTE
2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
We
consolidate all of our majority-owned subsidiaries, companies over which we exercise control through majority voting rights, and companies
in which we have a variable interest and we are the primary beneficiary. We account for our investments in common stock of other companies
that we do not control, but over which we can exert significant influence, using the cost method.
The
consolidated financial statements as of and for the periods ended March 31, 2021 and 2020, include the accounts of CirTran Corporation
and our wholly owned subsidiaries: CirTran Products Corp., LBC Products, Inc., and CirTran - Asia, Inc. All intercompany balances and
transactions have been eliminated.
Use
of Estimates
In
preparing the financial statements in accordance with accounting principles generally accepted in the United States of America, management
is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Revenue
Recognition
We
follow Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue
from Contracts with Customers, for revenue recognition. Adoption of ASC 606 did not have a significant impact on our financial statements.
We generate revenue by providing product design services and through the sales of tangible product. We recognize revenue upon transfer
of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange
for those products or services. We determine the transaction price associated with each deliverable based on the unique contract with
the customer, which is considered to be a stand-alone contract that we retain the right to accept or reject. Revenue is recognized
net of allowances for returns and any taxes collected from customers, which are subsequently remitted to governmental authorities.
During
the three months ended March 31, 2021, we recognized revenue of $15,000 related to the performance obligations under product development
service agreements with customers. These contracts are long term in nature and revenue is recognized at certain milestone intervals upon
our delivery and customer acceptances of work product related to those milestones, namely product design, packaging, branding display,
and prototypes. There were no costs to obtain the contracts identified and, as such, no asset has been recorded for customer acquisition
costs. Additionally, we have not recognized impairment losses related to the receivables from these contracts during the three months
ended March 31, 2021.
Additionally,
we recognized revenues of $604,399 during the three months ended March 31, 2021, related to the delivery of product to our customers.
Each delivery is based on a unique customer purchase order which is considered to be a stand-alone contract that we retain the right
to accept or reject. Upon acceptance, we oblige delivery of such product to the customer at an agreed-upon place, time, and price. We
recognize revenue under the unique purchase order contract upon fulfillment of our performance obligations therein, typically limited
to the delivery of product.
Cash
and Cash Equivalents
We
consider all highly liquid, short-term investments with an original maturity of three months or less to be cash equivalents. We did not
hold any cash equivalents as of March 31, 2021, or December 31, 2020.
Leases
In
February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842), which superseded guidance
in ASC 840, Leases, which we adopted for the year ended December 31, 2019, under the modified retrospective transition approach
by applying the new standard to all leases existing at the date of initial application. We account for short-term leases, those
lasting fewer than 12 months, using the practical expedient as outlined in the guidance, which does not include recording such leases
on the balance sheet.
The
adoption of the standard resulted in recording right-of-use (“ROU”) assets and operating lease liabilities of $43,511 as
of March 31, 2021. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future
minimum lease payments over the lease term at commencement date. As the lease does not provide an implicit rate, we use our incremental
borrowing rate based on information available at the commencement date in determining the present value of future payments. The operating
lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Lease terms may
include options to extend or terminate the lease when it is reasonably certain we will exercise that option. Although considered, we
determined it was appropriate to exclude future renewal terms from the capitalization of our operating lease.
We
have one lease in effect requiring minimum monthly payments of $2,500 through October 2022. We have determined the appropriate discount
rate to be 5% based on our other borrowings secured by assets. A summary of future payments due under the terms of the lease as of March
31, 2021, is as follows:
Total future payments
|
|
$
|
45,000
|
|
Implied interest
|
|
|
(1,489
|
)
|
Operating lease liability as of December
31, 2021
|
|
$
|
43,511
|
|
Investment
in Securities
Our
cost-method investment consists of an investment in a private digital multi-media technology company that totaled $300,000 at March 31,
2021, and December 31, 2020. As we owned less than 20% of that company’s stock as of each date, and no significant influence or
control exists, the investment is accounted for using the cost method. We evaluated the investment for impairment and determined there
was none during the periods presented.
Property
and Equipment
We
incur certain costs associated with the design and development of molds and dies for our contract-manufacturing segment. These costs
are held as deposits on the balance sheet until the molds or dies are finished and ready for use. At that point, the costs are included
as part of production equipment in property and equipment and are amortized over their useful lives. We hold title to all molds and dies
used in the manufacture of products. The capitalized cost, net of accumulated depreciation, associated with molds and dies included in
property and equipment at March 31, 2021, and December 31, 2020, was $19,492 and $18,299, respectively.
Depreciation
expense is recognized in amounts equal to the cost of depreciable assets over estimated service lives. Leasehold improvements are amortized
over the shorter of the life of the lease or the service life of the improvements. The straight-line method of depreciation and amortization
is followed for financial reporting purposes. Maintenance, repairs, and renewals that neither materially add to the value of the property
nor appreciably prolong its life are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included
in operating results.
Impairment
of Long-Lived Assets
We
review our long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. At each balance sheet date, we evaluate whether events and circumstances have occurred that
indicate possible impairment. We use an estimate of future undiscounted net cash flows from the related asset or group of assets over
their remaining life in measuring whether the assets are recoverable. We did not record expenses for the impairment of long-lived assets
during the periods ended March 31, 2021 or 2020.
Financial
Instruments with Derivative Features
We
do not hold or issue derivative instruments for trading purposes. However, we have financial instruments that are considered derivatives
or contain embedded features subject to derivative accounting. Embedded derivatives are valued separately from the host instrument and
are recognized as derivative liabilities in our balance sheet. We measure these instruments at their estimated fair value and recognize
changes in their estimated fair value in results of operations during the period of change. We have estimated the fair value of these
embedded derivatives using a Monte Carlo simulation. The fair values of the derivative instruments are measured each reporting period.
Inventories
Inventories
are stated at the lower of average cost or net realizable value. Cost on manufactured inventories includes labor, material, and overhead.
Overhead cost is based on indirect costs allocated to 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. Inventories consist of finished goods as we do not carry raw materials for
manufacturing products.
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 will seek agreements with manufacturing customers
that require them to purchase their inventory items in the event they cancel their business with us.
From
time to time, we will place deposits on inventory to be delivered in the future. These deposits are carried as a separate balance sheet
component and totaled $11,639 (non-related-party) and $333,007 (related-party) as of March 31, 2021, and $53,900 (non-related-party)
and $319,333 (related-party) as of December 31, 2020.
Inventory
balances consisted of the following:
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
Finished goods
|
|
$
|
673,418
|
|
|
$
|
526,372
|
|
Raw materials
|
|
|
45,240
|
|
|
|
40,803
|
|
|
|
|
(241,923
|
)
|
|
|
(241,923
|
)
|
Total
|
|
$
|
476,735
|
|
|
$
|
325,252
|
|
Stock-Based
Compensation
We
have outstanding stock options to directors and employees, which are described more fully in Note 12 – Stock Options
and Warrants. We account for our stock options in accordance with ASC 718-10, Accounting for Stock Issued to Employees, and
ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, as updated, which requires the recognition of the cost
of employee services received in exchanged for an award of equity instruments in the financial statements and is measured based on the
grant date fair value of the award. ASC 718-10 also requires the stock option compensation expense to be recognized over the period during
which an employee is required to provide service in exchange for the award (typically the vesting period). There was no impact to our
methodology for accounting for equity-based compensation as a result of adopting ASC 718-10 and ASU 2018-07.
Stock-based
employee compensation was $0and $56 for the three months ended March 31, 2021 and 2020, respectively.
Fair
Value of Financial Instruments
The
carrying amounts reported in the accompanying consolidated financial statements for cash, notes payable, and accounts payable approximate
fair value because of the immediate or short-term maturities of these financial instruments.
ASC
820-10-15, Fair Value Measurement-Overall-Scope and Scope Exceptions, defines fair value, thereby eliminating inconsistencies
in guidance found in various prior accounting pronouncements, and increases disclosures surrounding fair value calculations. ASC 820-10-15
establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The
three levels of inputs are defined as follows:
|
Level
1—Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
Level
2—Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the
asset or liability, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
Level
3—Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant
to the measurement of the fair value of the assets or liabilities.
|
Accounts
payable and related-party payables have fair values that approximate the carrying value due to the short-term nature of these instruments.
Derivative liabilities are measured using level 3 inputs.
|
|
Total
Fair
Value at
March 31,
2021
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Derivative liabilities
|
|
$
|
1,050,445
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,050,445
|
|
|
|
Total
Fair
Value at
December 31,
2020
|
|
|
Quoted
prices in
active markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
Derivative liabilities
|
|
$
|
922,654
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
922,654
|
|
Loss
per Share
Basic
loss per share (EPS) is calculated by dividing net loss available to common shareholders by the weighted-average number of common shares
outstanding during each period. Diluted EPS is similarly calculated, except that the weighted-average number of common shares outstanding
would include common shares that may be issued subject to existing rights with dilutive potential when applicable. There were 140,896,716
potentially issuable shares from the conversions of convertible debentures outstanding that were excluded in dilutive outstanding shares
for the three months ended March 31, 2021, due to the anti-dilutive effect these would have on net loss per share. There were 254,654,532
such shares issuable as of March 31, 2020. We do not currently have adequate authorized but unissued shares to satisfy our obligations
should all instruments eligible to convert to common stock be exercised. We are not currently contemplating an increase in our authorized
shares but may do so in the future.
Short-term
Advances
We
have short-term advances with various individuals. These advances are due upon demand, carry no interest, and are not collateralized.
These advances are classified as short-term liabilities.
Recently
Issued Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options, which will be effective for fiscal
years beginning after December 15, 2021. We are evaluating the impacts this new pronouncement will have on our financial statements.
NOTE
3—GOING CONCERN AND REALIZATION OF ASSETS
In
October 2016, we lost our ability to continue energy drink distribution, our principal source of revenue, after receiving an unfavorable
ruling in our suit against Playboy Enterprises, Inc.
The
accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America, which contemplate our continuation as a going concern. We had a working capital deficiency of $37,384,422
and $37,109,751 as of March 31, 2021, and December 31, 2020, respectively, and a net loss from continuing operations of $289,714
and $277,111 during the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, and December 31, 2020,
we had an accumulated deficit of $78,257,227 and $77,929,672, respectively. These conditions raise substantial doubt about our ability
to continue as a going concern.
Our
ability to continue as a going concern is dependent upon our ability to successfully accomplish our business plan described in the following
paragraphs and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may
be necessary if we are unable to continue as a going concern.
In
the coming year, our foreseeable cash requirements will relate to development of business operations and associated expenses. We may
experience a cash shortfall and be required to raise additional capital.
Historically,
we have mostly relied upon shareholder loans and advances to finance operations and growth. Management may raise additional capital by
retaining net earnings, if any, or through future public or private offerings of our stock or loans from private investors, although
we cannot assure that we will be able to obtain such financing. Our failure to do so could have a material and adverse effect upon us
and our shareholders.
NOTE
4—PROPERTY AND EQUIPMENT
Property
and equipment and estimated service lives consist of the following:
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
|
Useful
Life (years)
|
Furniture and office equipment
|
|
$
|
1,624
|
|
|
$
|
-
|
|
|
5-10
|
Vehicles
|
|
|
18,672
|
|
|
|
18,672
|
|
|
3-7
|
Total
|
|
|
20,296
|
|
|
|
18,672
|
|
|
|
Less: accumulated depreciation
|
|
|
(804
|
)
|
|
|
(373
|
)
|
|
|
Property and equipment,
net
|
|
$
|
19,492
|
|
|
$
|
18,299
|
|
|
|
We
recorded $431 and $0 of depreciation expense during the three months ended March 31, 2021 and 2020, respectively.
NOTE
5—RELATED-PARTY TRANSACTIONS
Transactions
Involving Officers, Directors, and Stockholders
In
2007, we issued a 10% promissory note to a family member of our president in exchange for $300,000. The note was due on demand after
May 2008. There were no repayments made during the periods presented. At March 31, 2021, and December 31, 2020, the principal
amount owing on the note was $151,833 and $151,833, respectively.
On
March 31, 2008, we issued to this same family member, along with two other company shareholders, promissory notes totaling $315,000 ($105,000
each). Under the terms of these three $105,000 notes, we received total proceeds of $300,000 and agreed to repay the amount received
plus a 5% borrowing fee. The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum.
We made no payments towards the outstanding notes during the periods presented. The principal balance owing on the notes as of March
31, 2021, and December 31, 2020, was $72,466 and $72,466, respectively.
During
the three months ended March 31, 2021, we made repayments to related parties of $15,000 and had other noncash reductions of $87,625.
There were $200,151 and $287,776 of short-term advances due to related parties as of March 31, 2021, and December 31, 2020, respectively.
The advances are due on demand and as such included in current liabilities.
We
have agreed to issue stock options to Iehab Hawatmeh, our president, as compensation for services provided as our chief executive officer.
The terms of this employment agreement require us to grant options to purchase 6,000 shares of our stock each year, with an exercise
price equal to the fair market price of our common stock as of the grant date. There were no options issued under this agreement during
the three months ended March 31, 2021. There were options to purchase 6,000 shares of common stock that expired during the three months
ended March 31, 2021. There were outstanding options to purchase 24,000 and 30,000 shares of common stock held by Iehab Hawatmeh as of
March 31, 2021, and December 31, 2020, respectively. See Note 6 – Other Accrued Liabilities and Note 12 – Stock
Options and Warrants.
As
of March 31, 2021, and December 31, 2020, we owed our president a total of $780,903 and $868,528, respectively, in unsecured advances.
The advances and short-term bridge loans were approved by our board of directors under a 5% borrowing fee. The borrowing fees were waived
by our president on these loans. These amounts are included in our liabilities from discontinued operations.
As
of March 31, 2021, and December 31, 2020, we owed a total of $13,740 to a related party through trade payables incurred in the
normal course of business. These amounts are shown as a separate related-party payable on the balance sheet as of each reporting date.
During
the three months ended March 31, 2021, we had a net increase in deposits with a related-party inventory supplier totaling $13,674. The
related party is an entity controlled by our chief executive officer. All transactions were at a 2% markup over the related-party’s
cost paid for inventory in arm’s-length transactions. Total inventory purchases from the related party were $277,275 during the
three months ended March 31, 2021.
NOTE
6—OTHER ACCRUED LIABILITIES
Accrued
tax liabilities consist of delinquent payroll taxes, interest, and penalties owed by us to the Internal Revenue Service (“IRS”)
and other tax entities.
Accrued
liabilities consist of the following:
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Tax liabilities
|
|
$
|
555,169
|
|
|
$
|
557,894
|
|
Other
|
|
|
891,816
|
|
|
|
796,645
|
|
Total
|
|
$
|
1,446,985
|
|
|
$
|
1,354,539
|
|
Other
accrued liabilities as of March 31, 2021, and December 31, 2020, include a non-interest-bearing payable totaling $45,000 that
is due on demand. Additionally, other accrued liabilities as of March 31, 2021, and December 31, 2020, include customer
deposits totaling $840,816 and $751,645, respectively.
Accrued
payroll and compensation liabilities consist of the following:
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Stock option expenses
|
|
$
|
-
|
|
|
$
|
-
|
|
Director fees
|
|
|
135,000
|
|
|
|
135,000
|
|
Bonus expenses
|
|
|
121,858
|
|
|
|
121,858
|
|
Commissions
|
|
|
2,148
|
|
|
|
2,148
|
|
Administrative payroll
|
|
|
3,969,237
|
|
|
|
3,874,340
|
|
Total
|
|
$
|
4,228,243
|
|
|
$
|
4,133,346
|
|
Stock
option expenses consist of employee stock option expenses. A total of $86,250 was accrued during the three ended March 31, 2021as wages
for our chief executive officer.
NOTE
7—COMMITMENTS AND CONTINGENCIES
Litigation
and Claims
Various
vendors, service providers, and others have asserted legal claims in previous years. These creditors generally are not actively seeking
collection of amounts due them, and we have determined that the probability of realizing any loss on these claims is remote and will
seek to compromise and settle at a deep discount any of such claims that are asserted for collection. These amounts are included in our
current liabilities. We have not accrued any liability for claims or judgments that we have determined to be barred by the applicable
statute of limitations, which generally is eight years for judgments in Utah.
Playboy
Enterprises, Inc.
Our
affiliate, Play Beverages, LLC, filed suit against Playboy Enterprises, Inc., in Cook County, Illinois, Circuit Court in October 2012
asserting numerous claims, including breach of contract and tortious interference. Playboy responded with a counterclaim of breach of
contract and trademark infringement. After proceedings in October 2016, the court awarded a judgment to Playboy of $6.6 million against
Play Beverages and CirTran Beverage Corp., our subsidiary. The court denied our motion for a new trial and awarded Playboy treble patent
infringement damages and attorney’s fees. We filed a notice of appeal in July 2017 and again in March 2018. Playboy has initiated
collection efforts but has recovered no funds. In September 2018, the appellate court affirmed the judgment of the circuit court. We
have accrued $17,205,599 as of March 31, 2021, and December 31, 2020, related to this judgment, which is included in liabilities
in discontinued operations.
Delinquent
Payroll Taxes, Interest, and Penalties
In
November 2004, the IRS accepted our amended offer in compromise (the “Offer”) to settle delinquent payroll taxes, interest,
and penalties, which requires us to pay $500,000, remain current in our payment of taxes for five years, and forego claiming any net
operating losses for the years 2001 through 2015 or until we pay taxes on future profits in an amount equal to the taxes of $1,455,767
waived by the Offer. In June 2013, we entered into a partial installment agreement to pay $768,526 in unpaid 2009 payroll taxes, which
requires us to pay the IRS 5% of cash deposits. The monthly payments are to continue until the account balances are paid in full or until
the collection statute of limitation expired on October 6, 2020. We are currently in communication with the IRS regarding the statute
of limitations on this settlement and appropriate next steps. There were $673,645 and $673,645 due as of March 31, 2021,
and December 31, 2020, respectively.
Employment
Agreements
We
engage Iehab Hawatmeh, our president and chief executive officer, through an employment agreement entered in August 2009 and amended
in September 2017. In July 2017, Mr. Hawatmeh had resigned all positions with us to pursue other business activities, thereby effectively
terminating the agreement. However, the amendment to his employment agreement in September 2017 reinstated Mr. Hawatmeh to his previous
positions, with a salary in an amount to be determined. Among other things, the reinstated employment agreement: (a) grants options to
purchase a minimum of 6,000 shares of our stock each year, with an exercise price equal to the market price of our common stock as of
the grant date, for the maximum term allowed under our stock option plan; (b) provides for health insurance coverage, cell phone, car
allowance, life insurance, and director and officer liability insurance, as well as any other bonus approved by our board; and (c) includes
additional incentive compensation as follows: (i) a quarterly bonus equal to 5% of our earnings before interest, taxes, depreciation
and amortization for the applicable quarter; (ii) bonuses equal to 1% of the net purchase price of any acquisitions we complete that
are directly generated and arranged by Mr. Hawatmeh; and (iii) an annual bonus (payable quarterly) equal to 1% of our gross sales of
all products, net of returns and allowances. On January 1, 2020, we resumed accruing wages for our CEO. A total of $86,250 was accrued
during the three months ended March 31, 2021.
We
also have an oral agreement with our other director that requires us to issue options to purchase 2,000 shares of our common stock each
year.
During
the three months ended March 31, 2021 and 2020, we granted options to purchase 0 and 8,000 shares of common stock to Mr. Hawatmeh and
Ms. Hollinger, respectively. We recorded expenses totaling $0 and $56 during the three months ended March 31, 2021 and 2020, respectively,
for these options.
We
have no other agreements requiring the grant of options.
License
Agreements
We
have entered into agreements whereby we are required to pay certain royalties for the manufacture and distribution of licensed products.
Fees are based on a percentage of sales and remitted quarterly. Such costs are included in cost of sales for financial reporting purposes.
NOTE
8—NOTES PAYABLE
Notes
payable consisted of the following:
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Note payable to former service
provider for past due account payable (current)
|
|
$
|
90,000
|
|
|
$
|
90,000
|
|
Note payable for settlement of debt (long term)
|
|
|
500,000
|
|
|
|
500,000
|
|
Small Business Administration
loan
|
|
|
156,000
|
|
|
|
156,000
|
|
Total
|
|
$
|
746,000
|
|
|
$
|
746,000
|
|
There
was $221,113 and $208,078 of accrued interest due on these notes as of March 31, 2021, and December 31, 2020, respectively.
NOTE
9—CONVERTIBLE DEBENTURES
Convertible
debentures consisted of the following:
|
|
March
31, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Convertible debenture, 5% stated
interest rate, secured by all of our assets, due on May 30, 2021
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
Convertible debenture, 5% stated interest rate,
secured by all of our assets, due on December 8, 2021
|
|
|
25,000
|
|
|
|
25,000
|
|
Convertible debenture, 5% stated interest rate,
secured by all of our assets, due on February 8, 2021
|
|
|
25,000
|
|
|
|
25,000
|
|
Convertible debenture, 5% stated interest rate,
secured by all of our assets, due on December 8, 2021
|
|
|
25,000
|
|
|
|
25,000
|
|
Convertible debenture,
5% stated interest rate, secured by all of our assets, due on April 30, 2027
|
|
|
2,390,528
|
|
|
|
2,390,528
|
|
Subtotal
|
|
$
|
2,665,528
|
|
|
$
|
2,665,528
|
|
Less: discounts
|
|
|
(590,820
|
)
|
|
|
(613,428
|
)
|
Total
|
|
$
|
2,074,708
|
|
|
$
|
2,052,100
|
|
Less: current portion
|
|
|
(264,284
|
)
|
|
|
(264,284
|
)
|
Long term portion
|
|
$
|
1,810,424
|
|
|
$
|
1,787,816
|
|
The
convertible debentures and accrued interest are convertible into shares of our common stock at the lower of $100 or the lowest bid price
for the 20 trading days prior to conversion. During the three months ended March 31, 2021, the convertible debenture holder converted
$6,750 of accrued but unpaid interest into 225,000 shares of our common stock.
As
of March 31, 2021, and December 31, 2020, we had accrued interest on the convertible debentures totaling $1,561,373 and $1,528,511,
respectively, of which $43,350 and $41,960 was current and $1,516,213 and $1,486,551 was long term, respectively. As of March 31, 2021,
and December 31, 2020, the debentures, including accrued but unpaid interest, were convertible into 140,896,716 and 167,761,552 shares
of our common stock.
NOTE
10—DERIVATIVE LIABILITIES
As
discussed in Note 9 - Convertible Debentures, we have entered into five separate agreements to borrow a total of $2,665,528 with
the outstanding principal and interest being convertible at the holder’s option into common stock of the company at the lesser
of $100 (notes one through four) or $0.10 (note five) or the lowest closing bid price in the prior 20 trading days. Embedded derivatives
are valued separately from the host instrument and are recognized as derivative liabilities in our balance sheet. We measure these instruments
at their estimated fair value and recognize changes in their estimated fair value in results of operations during the period of change.
We have estimated the fair value of these embedded derivatives for convertible debentures and associated warrants using a Monte Carlo
simulation as of March 31, 2021, using the following assumptions:
Volatility
|
|
|
107.8%
- 110.6%
|
|
Risk-free rates
|
|
|
0.08%
- 0.86%
|
|
Stock price
|
|
$
|
0.0598
|
|
Remaining life
|
|
|
0.00-
6.08 years
|
|
The
fair values of the derivative instruments are measured each quarter, which resulted in a loss of $127,791 and $69,214 during the
three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, and December 31, 2020, the fair market value of the
derivatives aggregated $1,050,445 and $922,654, respectively.
NOTE
11—STOCKHOLDERS’ DEFICIT
We
are authorized to issue up to 100,000,000 shares of $0.001 par value common stock. During the three months ended March 31, 2021, we issued
a total of 225,000 shares of common stock for the conversion of $6,750 of accrued interest. We had a total of 4,945,417and 4,720,417
common shares issued and outstanding as of March 31, 2021, and December 31, 2020, respectively.
NOTE
12—STOCK OPTIONS AND WARRANTS
Stock
Incentive Plans
During
the three months ended March 31, 2021 and 2020, we granted to employees 0 and 8,000 options, respectively, to purchase shares of common
stock.
The
8,000 options granted during the three months ended March 31, 2020, were valued using the following assumptions: estimated five-year
term, estimated volatility of 91%, and a risk-free rate of 1.61%.
As
of March 31, 2021, and December 31, 2020, we had no unrecognized compensation related to outstanding options that have not yet vested
at year-end that would be recognized in subsequent periods. See Note 6 – Other Accrued Liabilities for a description of
amounts of option expenses included in accrued payroll and compensation expense.
During
the three months ended March 31, 2021, we did not issue options to purchase common stock, and a total of 8,000 options expired unexercised.
As of March 31, 2021, there were 32,000 options issued and vested with a weighted average exercise price of $0.08 and a weighted average
remaining life of 2.35 years. Outstanding options as of March 31, 2021, consisted of:
Exercise
Price
|
|
Count
|
|
Average
Exercise
|
|
Remaining Life
|
|
Exercisable
|
$
|
0.01
|
|
8,000
|
|
$
|
0.01
|
|
|
3.77
|
|
8,000
|
$
|
0.10
|
|
24,000
|
|
$
|
0.10
|
|
|
1.87
|
|
24,000
|
Total
|
|
32,000
|
|
$
|
0.08
|
|
|
2.35
|
|
32,000
|
NOTE
13—DISCONTINUED OPERATIONS
At
October 21, 2016, we exited the beverage licensing and distribution business. The assets and liabilities associated with this business
are displayed as assets and liabilities from discontinued operations as of March 31, 2021, ad December 31, 2020, as a result.
Additionally, the revenues and costs associated with this business are displayed as losses from discontinued operations for the three
months ended March 31, 2021 and 2020.
Total
assets and liabilities included in discontinued operations were as follows:
|
|
March
31, 2021
|
|
|
December
31, 2020
|
|
|
|
|
|
|
|
|
Assets from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
|
-
|
|
Total
assets from discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Liabilities from Discontinued Operations:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
19,456,998
|
|
|
$
|
19,456,998
|
|
Accrued liabilities
|
|
|
589,380
|
|
|
|
589,380
|
|
Accrued interest
|
|
|
1,214,067
|
|
|
|
1,176,226
|
|
Accrued payroll and compensation
expense
|
|
|
131,108
|
|
|
|
131,108
|
|
Current maturities of long-term
debt
|
|
|
239,085
|
|
|
|
239,085
|
|
Related-party payable
|
|
|
1,776,250
|
|
|
|
1,776,250
|
|
Short-term
advances payable
|
|
|
2,784,773
|
|
|
|
2,784,773
|
|
Total
liabilities from discontinued operations
|
|
$
|
26,191,661
|
|
|
$
|
26,153,820
|
|
Net
loss from discontinued operations for the three months ended March 31, 2021 and 2020, were comprised of the following components:
|
|
Three
months ended March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of sales
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
-
|
|
|
|
-
|
|
Interest
expense
|
|
|
(37,841
|
)
|
|
|
(38,261
|
)
|
Total other expense
|
|
|
(37,841
|
)
|
|
|
(38,261
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued
operations
|
|
$
|
(37,841
|
)
|
|
$
|
(38,261
|
)
|
NOTE
14—SUBSEQUENT EVENTS
We
have evaluated all events occurring subsequent to the financial statements and determined there are no additional items to disclose.
On
March 11, 2020, the World Health Organization characterized COVID-19 as a global pandemic. This situation is ongoing, and we are monitoring
it closely. Although our response to the COVID-19 pandemic continues to evolve, we have taken measures to mitigate the impact on our
business operations and overall financial performance. We are also constantly evaluating and responding to the impact of the pandemic
on our supply chain as compared to product demand. In addition, we actively monitor COVID-19-related developments and may take further
actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the
best interests of our employees, customers, vendors, and stockholders. The effects of these operational modifications will be reflected
in current and future reporting periods.