RELATED-PARTY TRANSACTIONS

3 Months Ended

Mar. 31, 2012

Related Party Disclosures

Related Party Transactions Disclosure [Text Block]

NOTE 4 – RELATED-PARTY TRANSACTIONS

Transactions Involving Officers, Directors, and Stockholders

In 2007, the Company appointed Fadi Nora to its Board of Directors.  In addition to compensation the Company normally pays to nonemployee members of the Board, Mr. Nora is entitled to a quarterly bonus equal to 0.5% of any gross sales earned by the Company directly through Mr. Nora’s efforts.  As of March 31, 2012, the Company owed $54,453 under this arrangement.  During the three months ended March 31, 2012, Mr. Nora received cash payments totaling $99,000 in payment of unsecured advances.  As of March 31, 2012, the Company still owed Mr. Nora $1,200,829 in the form of unsecured advances.  These advances and short-term bridge loans were approved by the Board of Directors under a 5% borrowing fee.  The borrowing fees were waived by Mr. Nora on these loans.  In addition, the Company owed Mr. Nora $1,138,756 in accrued liabilities as of March 31, 2012, for selling, general, and administrative expenses that were paid for by Mr. Nora on a personal credit card.

The Company has agreed to issue 2,400,000 options to Mr. Nora as compensation for services provided as a director of the company.  The terms of the director agreement requires the Company to grant to Mr. Nora options to purchase 2,400,000 shares of the Company’s stock each year, with the exercise price of the options being the market price of the Company’s common stock as of the grant date.  During the three months ended March 31, 2012, the Company accrued for 2,400,000 stock options relating to the director agreement with Mr. Nora.  The fair market value of the options was $2,341, using the following assumptions: 2.5-year term, estimated volatility of 200.04% and a discount rate of 0.34% (see also Note 10).

In 2007, the Company issued a 10% promissory note to a family member of the Company president in exchange for $300,000.  The note was due on demand after May 2008.  During the three months ended March 31, 2012, the Company made no payments towards the outstanding note.  At March 31, 2012, the principal amount owing on the note was $151,833.  On March 31, 2008, the Company issued to this same family member, along with four other Company shareholders, promissory notes totaling $315,000.  The family member’s note was for $105,000.  Under the terms of all the notes, the Company received total proceeds of $300,000, and agreed to repay the amount received plus a five percent borrowing fee.  The notes were due April 30, 2008, after which they were due on demand, with interest accruing at 12% per annum.  During the three months ended March 31, 2012, the Company made no payments towards the outstanding notes.  The principal balance owing on the promissory notes as of March 31, 2012, totaled $72,465.

On April 2, 2009, the Company President and a Director of the Company borrowed from a third party a total of $890,000 in the form of four short-term promissory notes.  The Company President and the Director of the Company signed personally for the notes.  Because the loans were used to pay obligations of the Company, the Company has assumed full responsibility for the notes.  Two of the notes were for a term of 60 days, with a 60 day grace period; a third note was for a term of 90 days, and a fourth note was for 24 days.  Loan fees totaling $103,418 were incurred with the issuance of the notes and are payable upon maturity of the notes.  At March 31, 2012, the Company showed the balance of $681,912 as part of short-term advances payable on the balance sheet.  As of March 31, 2012, all four notes were in default and are accruing interest at the default rate of 36% per year.

The Company has agreed to issue 6,000,000 options each year to the Company President as compensation for services provided as an officer of the Company.  The terms of the employment agreement requires the Company to grant to the Company President options to purchase 6,000,000 shares of the Company’s stock each year, with the exercise price of the options being the market price of the Company’s common stock as of the grant date.  During the three months ended March 31, 2012, the Company accrued for 6,000,000 stock options relating to the employee agreement with Mr. Hawatmeh.  The fair market value of the options was $5,852, using the following assumptions: estimated 2.5-year term, estimated volatility of 200.04% and a discount rate of 0.34% (see also Note 10).

As of March 31, 2012, the Company owed the Company president a total of $180,102 in short-term advances payable, and $154,537 in accrued options.  These advances and short-term bridge loans were approved by the Board of Directors under a 5% borrowing fee.  The borrowing fees were waived by the Company’s president on these loans.

On March 5, 2010, the Company entered into a Separation Agreement (“Agreement”) with Shaher Hawatmeh.  As of the date of the Agreement, Shaher Hawatmeh’s employment with the Company was terminated and he no longer had any further employment obligations with the Company. The Company recorded $0 and $40,385 of compensation expense for the three months ended March 31, 2012 and 2011, under the terms of the settlement agreement, respectively.

Sublease

In an effort to operate more efficiently and focus resources on higher margin areas of the Company’s business, on March 5, 2010, the Company and Katana Electronics, LLC, a Utah limited liability company (“Katana”) entered into certain agreements (collectively, the “Agreements”) to reduce the Company’s costs.  The Agreements include an Assignment and Assumption Agreement, an Equipment Lease, and a Sublease Agreement relating to the Company’s property.  Pursuant to the terms of the Sublease, the Company agreed to sublease a certain portion of the Company’s Premises to Katana, consisting of the warehouse and office space used as of the close of business on March 4, 2010.  The term of the Sublease is for two (2) months with automatic renewal periods of one month each.  The base rent under the Sublease is $8,500 per month.  The Sublease contains normal and customary use restrictions, indemnification rights and obligations, default provisions and termination rights.  Under Agreements signed, the Company continues to have rights to operate as a contract manufacturer in the future in the US and offshore.  The income from the sublease to Katana for the three months ended March 31, 2011 was $28,500 and was recognized as other income.  On July 1, 2011, Katana had assumed the full lease payment and the Company agreed to pay Katana $5,000 per month for the use of office space and utilities. The Company recorded a rent expense of $15,000 for the three months ended March 31, 2012.