UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
CIRTRAN CORPORATION
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For the quarter ended September 30, 2001 Commission file number 0-26059
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Nevada 68-0121636
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(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
4125 South 6000 West
West Valley City, Utah 84128
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(Address of Principal Executive Offices) (Zip Code)
(801) 963-5112
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
As of October 31, 2001, the number of shares outstanding of the registrant's
only class of common stock was 158,926,005.
Transitional Small Business Disclosure Format (check one): Yes No X
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Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Condensed Financial Statements
Balance Sheets as of September 30, 2001 (unaudited) and 3
December 31, 2000
Statements of Operations (unaudited) for the Three 4
Months ended September 30, 2001 and 2000 and
for the Nine Months ended September 30, 2001 and 2000
Statements of Cash Flows (unaudited) for the Nine Months 5
ended September 30, 2001 and 2000
Notes to Consolidated Condensed Financial Statements 6
(unaudited)
Item 2 Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
PART I. FINANCIAL INFORMATION
CirTran Corporation and Subsidiary
CONSOLIDATED CONDENSED BALANCE SHEETS
Assets
September 30, December 31,
2001 2000
--------------- -----------------
(Unaudited) (restated)
CURRENT ASSETS
Cash and cash equivalents $ 200 $ 11,068
Trade accounts receivable, net of allowance for doubtful
accounts of $113,900 in 2001 and $82,502 in 2000 384,203 874,097
Inventories 1,772,722 1,755,786
Other 293,693 94,176
--------------- -----------------
Total current assets 2,450,818 2,735,127
PROPERTY AND EQUIPMENT, NET 1,498,128 1,871,076
OTHER ASSETS, NET 9,572 10,587
--------------- -----------------
$ 3,958,518 $ 4,616,790
=============== =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Checks written in excess of cash in bank $ 140,332 $ 5,491
Accounts payable 1,958,992 1,561,752
Accrued liabilities 3,111,687 2,339,949
Notes payable to stockholders 1,020,966 1,020,966
Current maturities of capital lease obligations 39,274 39,274
Current maturities of long-term obligations 3,421,990 3,432,090
----------------- -----------------
Total current liabilities 9,693,241 8,399,522
LONG-TERM OBLIGATIONS, less current maturities 534,227 529,964
CAPITAL LEASE OBLIGATIONS, less current maturities 9,707 14,257
COMMITMENTS - -
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value; Authorized 750,000,000 shares; issued and
outstanding; 158,926,005 in 2001 and 156,301,005 in 2000 158,926 156,301
Additional paid-in capital 5,861,529 5,664,154
Accumulated deficit (12,299,112) (10,147,408)
----------------- -----------------
Total stockholders' deficit (6,278,657) (4,326,953)
----------------- -----------------
$ 3,958,518 $ 4,616,790
================= =================
The accompanying notes are an integral part of these
statements.
CirTran Corporation and Subsidiary
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
----------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- ----------------- ---------------- ---------------
(restated) (restated)
Net sales $ 279,055 $ 2,501,970 $ 1,350,020 $ 5,182,008
Cost of sales 308,262 2,024,026 1,159,513 4,207,133
---------------- ----------------- ---------------- ---------------
Gross profit (29,207) 477,944 191,507 974,875
Selling, general and administrative expenses 584,878 698,231 1,873,377 2,070,028
---------------- ----------------- ---------------- ---------------
Income (loss) from operations (614,085) (220,287) (1,682,870) (1,095,153)
---------------- ----------------- ---------------- ---------------
Other income (expense)
Interest expense (124,452) (18,220) (667,959) (326,537)
Other, net 195,025 70,918 199,125 71,318
---------------- ----------------- ---------------- ---------------
70,573 52,698 (468,834) (255,219)
---------------- ----------------- ---------------- ---------------
Income (loss) before income taxes (543,512) (167,589) (2,151,704) (1,350,372)
Income tax expense - - - -
---------------- ----------------- ---------------- ---------------
NET LOSS $ (543,512) $ (167,589) $ (2,151,704) $ (1,350,372)
================ ================= ================ ===============
Net loss per common share
Basic $ (0.00) $ (0.00) $ (0.01) $ (0.01)
Diluted (0.00) (0.00) (0.01) (0.01)
Weighted-average common and
diluted common equivalent
shares outstanding
Basic 157,947,744 152,153,505 156,855,950 138,893,986
Diluted 157,947,744 152,153,505 156,855,950 138,893,986
The accompanying notes are an integral part of these
statements.
CirTran Corporation and Subsidiary
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
-------------------------------
2001 2000
-------------- ---------------
(restated)
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (2,151,704) $ (1,350,372)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Depreciation and amortization 374,791 580,909
Provision for loss on trade receivables 31,399 15,028
Reserve for inventory obsolescence - 78,000
Issuance of common stock options for prepaid commission 200,000 -
Changes in assets and liabilities
Trade accounts receivable 458,496 (967,443)
Inventories (16,936) (31,013)
Other assets (198,502) (239,545)
Accounts payable 397,240 593,470
Accrued liabilities 771,738 706,836
-------------- ---------------
Total adjustments 2,018,226 736,242
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Net cash used in operating activities (133,478) (614,130)
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Net cash used in investing activities -
Purchase of property and equipment (1,844) (11,227)
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Cash flows from financing activities
Decrease in receivable from stockholders - 86,000
Increase (decrease) in checks written in excess of cash in bank 134,841 (77,656)
Principal payments on line of credit - (86,000)
Proceeds from line of credit - 27,820
Proceeds from loans to stockholders 305,625 -
Principal payments on long-term obligations (311,462) (297,102)
Principal payments on capital leases (4,550) (59,555)
Purchase of outstanding stock - (80,000)
Issuance of common stock - 1,151,600
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Net cash provided by financing activities 124,454 665,107
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Net decrease in cash and cash equivalents (10,868) 39,750
Cash and cash equivalents at beginning of period 11,068 500
-------------- ---------------
Cash and cash equivalents at end of period $ 200 $ 40,250
============== ===============
Supplemental disclosure of cash flow information
------------------------------------------------
Cash paid during the period for
Interest $ 53,013 $ 326,537
Noncash investing and financing activities
During the quarter ended September 30, 2001, the Company recorded a prepaid
commission of $200,000 by issuing 3,000,000 options to purchase common stock.
Subsequent to the issuance, 2,625,000 of options were converted to 2,625,000
shares of common stock at a nominal amount.
The accompanying notes are an integral part of these
statements.
CirTran Corporation and Subsidiary
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2001 and 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of
CirTran Corporation and Subsidiary (the Company) have been prepared in
accordance with accounting principles generally accepted in the United
States of America (US GAAP) for interim financial information and with
the instructions to Form 10-QSB. Accordingly, these financial statements
do not include all of the information and footnote disclosures required
by accounting principles generally accepted in the United States of
America for complete financial statements. These financial statements and
footnote disclosures should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended
December 31, 2000. In the opinion of management, the accompanying
unaudited consolidated condensed financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary
to fairly present the Company's consolidated financial position as of
September 30, 2001, its consolidated results of operations for the three
months ended September 30, 2001 and 2000 and its consolidated results of
operations and cash flows for the nine months ended September 30, 2001
and 2000. The results of operations for the three months and nine months
ended September 30, 2001, may not be indicative of the results that may
be expected for the year ending December 31, 2001.
NOTE B - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2001 2000
---------------- ---------------
Raw materials $ 1,700,526 $ 1,634,178
Work in process 181,300 169,676
Finished goods 436,762 497,798
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2,318,588 2,301,652
Less reserve for obsolescence (545,866) 545,866
---------------- ---------------
$ 1,772,722 $ 1,755,786
================ ===============
NOTE C - MERGER AGREEMENT
Effective July 1, 2000, all of the assets and certain liabilities of
Circuit Technology Corporation (Circuit) were acquired by CTI Systems,
Inc. (CTISI), a wholly owned subsidiary of Vermillion Ventures, Inc.
(VVI), an inactive corporation. The stockholders of Circuit received
150,000,000 shares of VVI common stock in the transaction of which
12,000,000 shares were paid by Circuit to Cogent Capital Corp. for
services performed in facilitating the transaction. CTISI subsequently
changed its name to CirTran Corporation.
The merger was accounted for as a reverse acquisition of CirTran
Corporation by Circuit. Although CirTran Corporation is the surviving
legal entity, for accounting purposes Circuit was treated as the
surviving accounting entity.
NOTE D - LITIGATION
Circuit (the surviving accounting entity, Note C) is a defendant in an
alleged breach of a facilities sublease agreement in Colorado. A lawsuit
was filed in which the plaintiff seeks to recover past due rent, future
rent, and other lease charges. Management and the Company's attorneys
have estimated the range of potential loss to be between $0 and
$2,500,000. The wide range is due to two rent calculation methods written
in the master lease. Under one calculation, the amount would be minimal.
Under the other calculation, the amount would represent all future rent
(reduced by rent received from future tenants). The Company filed a suit
against the landlord for an amount in excess of $500,000 for missing
equipment. Rent has been accrued through December 31, 2000 and is
included in accrued liabilities.
Circuit is also the defendant in numerous 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.
NOTE E - 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 two reportable segments; electronics assembly and Ethernet
technology. The electronics assembly segment manufactures and assembles
circuit boards and electronic component cables. The Ethernet technology
segment designs and manufactures Ethernet cards. The accounting policies
of the segments are consistent with those described in the summary of
significant accounting policies included in the Company's Form 10-KSB for
the year ended December 31, 2000. The Company evaluates performance of
each segment based on earnings or loss from operations. Selected segment
information is as follows:
Electronics Ethernet
Three Months ended September 30, 2001 Assembly Technology Total
------------------------------------- -------------- ------------- --------------
Sales from external customers $ 220,772 $ 58,283 $ 279,055
Intersegment sales 9,106 - 9,106
Segment loss (543,512) (479,714) (1,023,226)
Segment assets 3,250,289 410,776 3,661,065
Three Months ended September 30, 2000
-------------------------------------
Sales from external customers $ 2,099,908 $ 402,062 $ 2,501,970
Intersegment sales 236,169 - 236,169
Segment earnings (loss) (167,589) (105,456) (273,045)
Segment assets 6,801,741 1,193,165 7,994,906
Net Sales September 30, September 30,
--------- 2001 2000
-------------- --------------
Total sales for reportable segments $ 288,161 $ 2,738,139
Elimination of intersegment sales (9,106) (236,169)
-------------- --------------
Consolidated net sales $ 279,055 $ 2,501,970
============== ==============
Net Earnings (Loss)
Net loss for reportable segments $ (1,023,226) $ (273,045)
Elimination of intersegment amounts 479,714 105,456
-------------- --------------
Consolidated net earnings (loss) $ (543,512) $ (167,589)
============== ==============
NOTE E - SEGMENT INFORMATION - CONTINUED
Electronics Ethernet
Nine Months ended September 30, 2001 Assembly Technology Total
------------------------------------ -------------- ------------- --------------
Sales from external customers $ 908,295 $ 441,725 $ 1,350,020
Intersegment sales 271,938 - 271,938
Segment income (loss) (2,151,704) (471,697) (2,623,401)
Segment assets 3,250,289 410,776 3,661,065
Nine Months ended June 30, 2000
Sales from external customers $ 3,908,593 $ 1,273,415 $ 5,182,008
Intersegment sales 668,296 - 668,296
Segment loss (1,350,372) (554,157) (1,904,529)
Segment assets 6,801,741 1,193,165 7,994,906
Net Sales September 30, September 30,
2001 2000
-------------- --------------
Total sales for reportable segments $ 1,621,958 $ 5,850,304
Elimination of intersegment sales (271,938) (668,296)
-------------- --------------
Consolidated net sales $ 1,350,020 $ 5,182,008
============== ==============
Net Loss
Net loss for reportable segments $ (2,623,401) $ (1,904,529)
Elimination of intersegment amounts (471,697) (554,157)
-------------- --------------
Consolidated net loss $ (2,151,704) $ (1,350,372)
============== ==============
September 30,
-------------------------------
2001 2000
-------------- --------------
Total Assets
Total assets for reportable segments $ 3,661,065 $ 7,994,906
Elimination of intersegment amounts 297,453 (401,753)
-------------- --------------
Consolidated total assets $ 3,958,518 $ 7,593,153
============== ==============
NOTE F - RESTATEMENT
The consolidated financial statements at and for the year ended December
31, 2000 have been restated to reflect corrections to recognize $300,900
reduction in inventory, $45,213 write off of accounts receivables and
other assets, and $1,041,653 of additional accounts payable and accrued
liabilities. It has been determined that adjustments are necessary to
write down inventory purchased for specific customers that does not have
alternative use and record accounts payable and accrued liabilities that
should have been recognized in 2000.
The statement of operations for the nine months ended September 30, 2000
has also been restated to correct overstatements in accounts payable.
Accordingly, cost of sales has been decreased by $81,467 in the
consolidated statement of operations for the nine months then ended.
NOTE G - COMMON STOCK OPTIONS
On July 12, 2001, the Company entered into an agreement with an
independent sales representative that provides for the Company to pay the
sale representative either $200,000 cash or a representive value in stock
options as a retainer. The Company issued options to purchase 3,000,000
shares of common stock, exercisable at $0.00067 per share. The sales
representative subsequently exercised 2,625,000 of the options during the
quarter ended September 30, 2001. All commissions earned by the sales
representative in the future will be deducted from the retainer until the
retainer is satisfied in full.
NOTE H - SUBSEQUENT EVENTS
On October 28, 2001, the Company granted 500,000 stock options to
employees at an exercise price of $0.07 per share. On November 1, 2001,
the employees exercised the 500,000 options. Also on November 1, 2001,
the Company's independent sales representative exercised 375,000 options
at $0.00067 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We provide a mixture of high and medium size volume turnkey manufacturing
services using surface mount technology, ball-grid array assembly,
pin-through-hole and custom injection molded cabling for leading electronics
OEMs in the communications, networking, peripherals, gaming, 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.
Results of Operations
Net Sales and Cost of Sales
Net sales for the three months ended September 30, 2001 decreased by 88.8% to
$279,055 compared to $2,501,970 for the three months ended September 30, 2000.
Net sales decreased 73.9% to $1,350,020 for the nine-month period ended
September 30,2001 as compared to $5,182,008 during the same period in 2000. The
decreases primarily reflect the loss of two major customers, Andrew Corporation
and Entrada Networks, Inc. In addition, management has shifted its marketing
effort away from high-volume, low-margin orders to lower-volume, higher margin
orders, and this change has contributed to a lower sales volume. Sales have also
been affected by the Company's lack of financial resources to maintain or
increase its sales and marketing efforts. Cost of sales decreased by 84.8%, from
$2,024,026 during the three-month period ended September 30, 2000 to $308,262
during the same period in 2001. Our gross profit margin decreased from 19.1% for
the three-month period ended September 30, 2000 to (10.5%) for the same period
in 2001. Cost of sales decreased by 72.4%, from $4,207,133 during the nine-month
period ended September 30, 2000 to $1,159,514 during the same period in 2001.
Our gross profit margin decreased marginally, decreasing from 18.8% for the
nine-month period ended September 30, 2000 to 14.1% for the same period in 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
September 30, 2001 decreased by 16.2% to $584,878 compared to $698,231 for the
three months ended September 30, 2000. During the nine-month period ended
September 30, 2001 selling, general and administrative expenses were $1,873,377,
as compared to $2,070,028 during the same period in 2000, representing a 9.5%
decrease. Due to the decline in sales, however, selling, general and
administrative expenses as a percentage of sales increased during the
three-month period ended September 30, 2001 to 209.6% as compared to 27.9%
during the same period in 2000. Selling, general and administrative expenses as
a percentage of sales increased during the nine-month period ended September 30,
2001 to 138.8%, as compared to 39.9% during the same period in 2000.
Interest Expense
Interest expense for the three months ended September 30, 2001 was $124,452,
compared to $18,220 during the same period in 2000. This represents an increase
of $106,232, or 583.1%. Interest expense for the nine months ended September 30,
2001 was $667,959, compared to $326,537 during the same period in 2000. This
represents an increase of $341,422, or 104.6%. The increases are reflective of
our significant debt load.
As a result of the above factors, and primarily due to the significant decrease
in sales between the two periods, our overall net loss increased 59.3% to
$2,151,704 for the nine-month period ended September 30, 2001, from $1,350,372
during the same period in 2000.
Liquidity and Capital Resources
Our expenses are currently greater than our revenues. We have had a history of
losses and our accumulated deficit was $10,147,408 at December 31, 2000 and
$12,299,112 at September 30, 2001. Our net operating loss for the nine-month
period ending September 30, 2001 was $2,151,704, compared to $1,350,372 for the
same period in 2000. Our current liabilities exceeded our current assets by
$7,242,424 as of September 30, 2001 and $5,664,395 as of December 31, 2000.
Cash
At December 31, 2000, we had $11,068 cash on hand. By September 30, 2001, our
cash on hand was $200, a decrease of $10,868. We also increased checks written
in excess of cash in bank by $134,841 from $5,491 at December 31, 2000 to
$140,332 at September 30, 2001.
Net cash used in operating activities was $133,478 for the nine months ended
September 30, 2001, compared to $614,130 used in operations for the nine months
ended September 30, 2000. During the nine-month period ended September 30, 2001,
net cash used in operations was primarily attributable to our net loss of
$2,151,704, offset by non-cash charges, increases in accrued liabilities of
$771,738 and in accounts payable of $397,240, and a decrease in accounts
receivable of $458,496. The non-cash charges include depreciation and
amortization of $374,791 and issuance of stock for prepaid commissions of
$200,000.
Net cash used in investing activities during the nine months ended September 30,
2001 and 2000, consisted of equipment purchases of $1,844 and $11,227,
respectively.
Net cash provided by financing activities during the nine-month period ended
September 30, 2001 was $124,454, representing $134,841 provided by an increase
in checks written in excess of cash in bank and proceeds from loans to
stockholders of $305,625, less approximately $316,013 used for principal
payments on long-term obligations and capital leases.
Accounts Receivable
By September 30, 2001, net accounts receivable had decreased from $874,097 at
December 31, 2000 to $384,203. This significant decrease in accounts receivable
reflects our decrease in sales during the first nine months of 2001, as well as
our efforts to improve the aging and quality of our current receivables
Accounts Payable
Accounts payable were approximately $1,959,000 at September 30, 2001 as compared
to $1,562,000 at December 31, 2000. This increase is primarily attributable to
additional credit purchases of inventory and services and a lack of available
cash to pay vendors as invoices became due.
Liquidity and Financing Arrangements
We sustained losses of approximately $2,152,000 and $1,350,000 for the nine
months ended September 30, 2001 and 2000, respectively. We also sustained losses
of approximately $544,000 and $168,000 for the three months ended September 30,
2001 and 2000, respectively. We had accumulated deficits of $12,299,112 and
$10,147,408 at September 30, 2001 and December 31, 2000, respectively, and total
stockholders' deficits of $6,278,657 and $4,326,953 as of such dates.
Since December 1999, we have operated without a line of credit. Abacus Ventures,
Inc. purchased our line of credit of $2,792,609, and this amount was converted
into a note payable to Abacus bearing an interest rate of 10%. We have had, and
are continuing to have, discussions with Abacus concerning their willingness to
exchange the principal amount of the note and accrued interest for shares of our
common stock, and while we believe that these negotiations may ultimately be
successful, we can offer no assurance that they will agree to any such exchange
of debt for equity or upon what terms such exchange would occur.
Despite our efforts to make our debt-load more serviceable, 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. In conjunction with our efforts
to improve our results of operations, as discussed above, we are also actively
seeking infusions of capital from investors and are seeking to replace our 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 pay the debt and secure 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 any such capital. If we issue additional shares for debt and/or
equity, this will serve to 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. There can be no assurance,
however, that we will ultimately be successful in obtaining more debt and/or
equity financing 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/or
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.
Forward-looking statements
All statements made herein, 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K: None
Exhibits: None
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
CIRTRAN CORPORATION
Date: November 20, 2001 By: /s/ Iehab J. Hawatmeh, President