10KSB/A 1 form10ksba.htm FORM 10K SBA Form 10K SBA

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB/A
 
             x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005
 
             o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 
Commission file number 0-27419

AMERICAN SECURITY RESOURCES CORPORATION
(Exact name of small business issuer as specified in its charter)

Nevada
90-0179050
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)


9601 Katy Freeway, Suite 220 Houston, Texas
77024
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:  (713) 465-1001
 
Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: $.001 Par Value Common Stock

Check whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [ ] (2) Yes [X] No [ ]  

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB/A or any amendment to this Form 10-KSB/A. [X]

Issuer’s revenues for the fiscal year ended December 31, 2005, were $0.00.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Issuer as of December 31, 2005 based upon the average bid and asked price as of such date on the OTC Bulletin Board was $8,672,654.

The Registrant’s common stock outstanding as of December 31, 2005 was 61,700,766 shares.

Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]

 

 
 
 

AMERICAN SECURITY RESOURCES CORPORATION

INDEX TO FORM 10-KSB/A
December 31, 2005

     
Page No.
Part I
Item 1.
Description of Business
3
 
Item 2.
Description of Property
5
 
Item 3.
Legal Proceedings
5
 
Item 4.
Submission of Matters to a Vote of Security Holders
5
       
Part II
Item 5.
Market for Common Equity and Related Stockholder Matters
5
 
Item 6.
Management’s Discussion and Analysis and Results of
Operations and Financial Condition
 
7
 
Item 7.
Financial Statements
12
 
Item 8.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
 
23
 
Item 8A.
Controls and Procedures
23
       
Part III
Item 9.
Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act
 
24
 
Item 10.
Executive Compensation
26
 
Item 11.
Security Ownership of Certain Beneficial Owners and
Management
 
26
 
Item 12.
Certain Relationships and Related Party Transactions
27
 
Item 13.
Principal Accountant Fees and Services
27
 
Part IV
 
Item 14.
 
Exhibits and Reports on Form 8-K
 
29

Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition, or state other "forward-looking" information. The words "believe," "intend," "plan," "expect," "anticipate," "estimate," "project" and similar expressions identify such statement was made. These statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and is derived using numerous assumptions:
 
- changes in general economic and business conditions affecting security technology;
- technical developments that make the Company's products or services obsolete;
- changes in the Company's business strategies;
- the level of demand for the Company's products or services;
- the Company's ability to develop or maintain strategic relationships; and
- global economic conditions.

The Company does not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. Future events and actual results could materially differ from those expressed in, contemplated by, or underlying such forward-looking statements.


 
 
 
 


PART I

ITEM 1. DESCRIPTION OF BUSINESS
-----------------------------------------------------
Overview

AMERICAN SECURITY RESOURCES CORPORATION (the “Company” or ARSC) is a holding company with a wholly owned subsidiary, Hydra Fuel Cell Corporation, that is developing advanced hydrogen fuel cells based on its proprietary intellectual property. Hydra is in the development stage of its fuel cell, and is refining and fine tuning the design to maximize output, efficiency and minimize heat generated to provide maximum life of the unit. Hydra has designed two models of its fuel cell, the first to be used as either backup power or in some cases primary power for remote radio transmission facilities and cell phone towers. The second is a larger unit which can be used for backup power in critical commercial operations such as hospitals, computer centers and emergency operations centers.

Hydra is concentrating on a “Proton Exchange Membrane” PEM fuel cell which utilizes a specialized flexible milar film which allows the electron which is split from the Hydrogen atom to pass through the membrane onto the “Cathode”. This stream of electrons develops a continuous flow which becomes the electrical power output of the fuel cell.

The design of Hydra’s fuel cell is a unique design because it utilizes a Silicon board which has been laser drilled with thousands of tiny holes. The design also includes a proprietary gasket and manifold which supplies Hydrogen across the entire area of the PEM, thus significantly increasing the efficiency of the unit. Hydra’s target markets are stationery fuel cells between 500 watts and 40 Kw and can be used as either backup power sources or primary power sources.

The Company’s Internet address is http://www.americansecurityresources.com. Information contained on the Company’s web site is not a part of this report. The Company’s stock is traded on the OTC Bulletin Board under the symbol “ARSC.”

 
Organizational History
------------------------------
 
The Company, previously known as Computer Automation Systems, Inc., was reorganized and recapitalized in 2004 changing its name, first to Kahuna Network Security, Inc. and in July, 2004, to American Security Resources Corporation with a business focus of acquiring companies in homeland security and national defense. With the acquisition of eGO Design Inc. in October, 2005, the Company changed its focus to the development and commercialization of technologically advanced, high volume mass producible, hydrogen fuel cells.
 

The Company’s Products and Services
--------------------------------------------------
The Company is developing hydrogen fuel cells which it expects to begin delivering in the fourth quarter of 2006.

Employees
--------------
As of December 31, 2005, the Company had two full-time employees. None of the Company’s employees is covered by any collective bargaining agreements. Management believes that its relations with its employees are good and the Company has not experienced any work stoppages attributable to employee disagreements.

The Company’s subsidiary, Hydra Fuel Cell Corporation, has approximately twelve employees or contractors working on the development of the Company’s proprietary HydraStax™ hydrogen fuel cells.


RISK FACTORS

Limited History
----------------------
The Company is a startup with limited operating history and faces challenges typical of new businesses in highly competitive markets with many other providers of the same or essentially the same products and services.

Limited Revenue and Resources
----------------------------------------- 
The Company has acquired a start up business. There is no assurance that the Company will be able to finance its development, or that the Company will be able profitably to operate such business.

Limited Staff
-------------------
The Company has two officers and two additional directors charged with the responsibility of executing the Company’s business strategy. Any death, injury or other incapacity of one or more of them could adversely affect the Company’s ability to complete its business strategy.

Volatility of Stock Market
----------------------------------
There have been significant fluctuations in the market price for the Company's common stock. Factors such as variations in the Company's revenues, earnings, if any, and cash flow and announcements of innovations or acquisitions by the Company or its competitors could cause the market price of the common stock to fluctuate substantially. In addition, the stock market has experienced price and volume fluctuations that have particularly affected companies in the network security services markets and homeland security services, resulting in changes in the market price of the stock of many companies which may not have been directly related to the operating performance of those companies. Such broad market fluctuations may adversely affect the market price of the Company’s common stock.

ITEM 2. DESCRIPTION OF PROPERTY
--------------------------------------------------------
ASRC has leased approximately 1,800 square feet of office space at 9601 Katy Freeway, Ste 220, Houston, TX 77024, for approximately $2,300 per month until July 31, 2007. The Company believes this space will be sufficient for its needs for the term of the lease.

ITEM 3. LEGAL PROCEEDINGS
----------------------------------------------
From time to time, the Company may become involved in litigation arising in the ordinary course of its business. The Company is not presently a party to any legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------------------------------------------------------------
On November 21, 2005, the Company held a shareholders meeting at which the Company’s Chairman Joe Grace announced his resignation. The Board selected Frank Neukomm, the Company’s CFO, as Chairman. The shareholders approved the Company’s “Incentive Stock Plan”, approved the appointment of Malone & Bailey as the Company’s auditors and elected Mr. Neukomm as a Director for a two year term and Robert Wilson and Bob Farr as Directors for one year terms

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.
------------------------------------------------------------------------------------------

Market Information.
---------------------------
  The Company’s common stock trades on the OTC Bulletin Board under the symbol “ARSC”. The market for the Company’s common stock on the OTC Bulletin Board is limited, sporadic and highly volatile.

The following quotations were provided by the OTC Bulletin Board for the Company’s common stock for the last two years. The quotations represent inter-dealer prices and do not necessarily represent actual transactions. These quotations do not reflect dealer markups, markdowns or commissions.

Quarter ended:
High
Low
--------------
----
---
December 31, 2005
$0.27
$0.10
September 30, 2005
$0.24
$0.04
June 30, 2005
$0.45
$0.10
March 31, 2005
$0.55
$0.30
     
December 31, 2004
$0.55
$0.36
September 30, 2004
$0.69
$0.30
June 30, 2004
$0.75
$0.30
March 31, 2004
$1.10
$0.45

Holders
-----------
The number of record holders of the Company's securities as of the date of this Report is approximately 319.

Dividends
--------------
The Company has not declared any cash dividends with respect to its common stock, and does not intend to declare dividends in the foreseeable future. The future dividend policy of the Company cannot be ascertained with any certainty, and if and until the Company completes any acquisition, reorganization or merger, no such policy will be formulated. There are no material restrictions limiting, or that are likely to limit, the Company's ability to pay dividends on its securities.

Recent Sales of Unregistered Securities
--------------------------------------------------

Pursuant to a consulting agreement dated May 1, 2005, the Company issued 1,211,765 shares to Timothy J. Connolly on May 10, 2005 and pursuant to a Warrant granted under the consulting agreement the Company issued an additional 1,000,000 shares on June 20, 2005. In addition to certain consulting services the Company received $77,000 as consideration for these shares.

On June 15, 2005 pursuant to an authorization of the Board of Directors the Company issued shares to certain officers and directors of the Company in lieu of unpaid salary and fees. The share and dollar amounts are as follows: Joe Grace 578,571 shares $40,500; Frank Neukomm 342,857 shares $24,000; Robert Farr 321,429 shares $22,500.

On June 20,2005, pursuant to a consulting agreement, the Company issued 300,000 shares to Princeton Consulting Group.

On July 26, 2005, pursuant to a consulting services contract, the Company issued 500,000 shares to the George Miller Company. Also on July 26, 75,000 shares were issued to Jonathan Gilchrist for legal services, and 100,000 shares were issued to Robert J. Wilson as a Directors fee.

On August 3, 2005, pursuant to an authorization of the Board shares were issued to certain officers and directors in lieu of certain salaries and fees. The share and dollar amounts are as follows: Joe Grace 216,617 shares $6,500; Frank Neukomm 166,667 shares $5,000: and Robert Farr 53,333 shares $1,600.

On August 20, 2005, the Company issued 1,500,000 shares to Brewer & Pritchard, P.C. pursuant to a 3/a/9 transaction to pay legal fees. The fee amount was $81,094.

On September 8 and 27, 2005 the Company issued 60,000 shares and 40,000 shares to B&B Marketing Communications, pursuant to a consulting services agreement. Also on September 27, the Company issued 1,000,000 shares to the Owners Group, Inc. pursuant to a Consulting Services Agreement.

On October 12, 2005, pursuant to an authorization of the Board, the Company issued shares to certain officers and directors in lieu of certain salaries and fees. The share and dollar amounts are as follow: Joe Grace 37,500 shares $7,500; frank Neukomm 30,000 shares $6,000; Robert Farr 12,000 shares $2,400.

Also on October 12, pursuant to an agreement with American Enterprise Development Corp., the Company issued 500,000 shares to Jonathan Gilchrist.

On October 26, 2005, pursuant to a consulting services agreement, the Company issued 100,000 shares to The George Miller Company, 100,000 shares to Ron Hargrove and 100,000 shares to Joe K. Smith.

On October 27, the Company issued shares as directors fees to Joe Grace 200,000: Frank Neukomm 200,000 and to Robert Farr 100,000.

On October 26 and November 1, to complete the acquisition of eGo Design Inc., the Company issued 7,200,000 shares to Edward L. Davis: 3,600,000 shares to Benjamin F. Schafer; and 1,200,000 shares to James Twedt, in exchange for all the issued and outstanding stock of eGO Design, Inc.

On November 29, 2005, the Company issued shares in lieu of salary to certain contractors of its Hydra Fuel Cell Corp. subsidiary. The recipients and amounts are as follows: Larry Burgess 80,000 shares, George Hull 80,000 shares, Richard Smith 100,000 shares, James Gates 100,000 shares, Corey Davis 50,000 shares, Mark Hunt 100,000 shares, and Brenda Burres 200,000 shares. The labor amount for these contractors was $142,000.

On November 29,2005, the Company issued 1,500,000 shares to Wall Street Inside Reporter, Inc. in an equal exchange for 46,154 shares of Strategic Growth Ventures Inc. (SGWV.PK) as part of a consulting services agreement.

On December 8 and 12, 2005, pursuant to a consulting services agreement with OTC Services, Inc., the Company issued 1,400,000 shares to OTC Services, Inc. and 1,400,000 shares to Darrel T. Uselton.

On December 22, 2005, pursuant to its consulting agreement with AEDC, the Company issued 500,000 shares to Jonathan Gilchrist.

The above transactions were completed pursuant to either Section 4(2) of the Securities Act or Rule 506 of Regulation D of the Securities Act or Rule 506 of Regulation D of the Securities Act. With respect to issuances made pursuant to Section 4(2) of the Securities Act, the transactions did not involve any public offering and were sold to a limited group of persons. Each investor either received adequate information about the Company or had access to such information. The Company determined that each investor had such knowledge and experience in financial and business matters that they were able to evaluate the merits and risks of an investment in the Company.

With respect to issuances made pursuant to Regulation D of the Securities Act, the Company determined that each purchaser was an “accredited investor” as defined in Rule 501(a) under the Securities Act, or if such investor was not an accredited investor, that such investor received the information required by Regulation D.

All sales of the Company’s securities were made by officers of the Company who have received no commission or other remuneration for the solicitation of any person in connection with the respective sales of the securities described above. The recipients of securities represented their intention to acquire the securities for investment only and not with a view to sale, or for sale in connection with any distribution thereof. Appropriate legends were affixed to the share certificates issued in these transactions.

Item 6. Management's Discussion and Analysis or Plan of Operation
-----------------------------------------------------------------------------------------

Overview.
-------------
ASRC hired the three design engineers on October 28, 2005 through a purchase agreement described as the acquisition of eGO Design, Inc. which was the development-stage entity that the design engineers owed at the time. Up to that point, the engineers had spent time planning the development of a proto-type hydrogen fuel cell technology. ASRC hired these individuals to continue developing this technology. Although legally, the transaction was structured as a purchase agreement where ASRC exchanged shares for all the outstanding shares in EGO Design, the substance of the tranaction was a “hiring bonus” paid by ASRC to these design engineers in the form of ASRC stock. The accounting treatment of the transaction resulted in a recognition of compensation expense in the amount of $2,040,000, an amount equal to the market value of ASRC stock issued on the date of the transaction.

Prior to completing the transaction on October 28, 2005, the Company completed extensive due diligence on the fuel cell market and PEM based hydrogen fuel cells in particular and determined that the engineers had developed unique technology ideas worthy of development.

 
As of December 31, 2005 Hydra had designed, assembled and tested a successful prototype of the Company’s proprietary fuel cell concept.

In 2006, we intend to continue development of prototypes and conduct internal testing. We expect to submit the HydraStax™ unit to CSA International for certification in September of 2006, after which we can begin production of the units for sale. We further expect to begin shipping certified units immediately after CSA certification. To accomplish this, we will need to raise approximately $5 million to fund the research and development of the hydrogen fuel cell, and to produce and sell enough units to bring the endeavor to the point of self-sufficiency.
 
The Company generated no substantive revenue in 2005, beyond the interest it earned on its bank deposits. As discussed in Note 2, the Company has incurred recurring losses from continuing operations. We are continuing to pursue the raising of capital, through private placements of Company common stock, to fund the Company’s current expenses and projected development and production costs. However, there is no certainty that management will be successful in these efforts. If we are unable to raise the capital required to fund these items it is likely that the Company will be unable to remain as a going concern.

In February, 2005, the Company collected its note receivable from Superior Protection Inc. The principal amount due was $200,000 and was paid to the Company as $100,000 cash and the return of 500,000 shares of the Company’s common stock which were cancelled. The market value of the shares at the time was approximately $150,000.


Critical Accounting Policies
------------------------------------
Revenue Recognition

The Company recognizes revenue when products and services are delivered.

Accounting for Stock-Based Compensation

Prior to December 31, 2005, we accounted for stock-based compensation under Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation (123). As permitted under this standard, compensation cost was recognized using the intrinsic value method described in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Effective December 15, 2005, the Company has adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (FAS 123R) and applied the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 107 using the modified-prospective transition method. The Company had not issued any options to employees in the prior periods thus, there was no impact of adopting the new standard.

The Company follows the disclosure requirements of Financial Accounting Standards No. 123 as amended by FASB Statement No.148.

Recognition of Compensation Expense relating to the hiring of design engineers from eGo Design, Inc..

Although legally, the transaction was structured as a purchase agreement where ASRC exchanged shares for all the outstanding shares in EGO Design, the substance of the transaction was a “hiring bonus” paid by ASRC to these design engineers in the form of ASRC stock. The accounting treatment of the transaction resulted in a recognition of compensation expense in the amount of $2,040,000, an amount equal to the market value of ASRC stock issued on the date of the transaction. . In recording this transaction, we examined the principles of SFAS 141, “Accounting for Business Combinations” and EITF 98-3, “Determining Whether Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business” and determined that in substance this was not an acquisition of a business and as such did not meet the accounting requirements for accounting for Business Combinations under SFAS 141. .

We determined that the acquisition of eGO Design, Inc. did not meet the test of what is a business since it had no operations, employees, customer list or revenues.

Off Balance Sheet Arrangements
-----------------------------------------------
The Company has no off balance sheet arrangements.

Accounting Pronouncements
---------------------------------------
 
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB 25. SFAS No. 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The effective date of SFAS No. 123R is the first reporting period beginning after June 15, 2005, which is third quarter 2005 for calendar year companies, although early adoption is allowed. SFAS No. 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS No. 123R for all share-based payments granted after that date, and based on the requirements of SFAS No. 123 for all unvested awards granted prior to the effective date of SFAS No. 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, except that entities also are allowed to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS No. 123.

The Company currently utilizes Black-Scholes, a standard option pricing model, to measure the fair value of stock options granted to employees.

The Company has adopted these standards which have had no material effect on the Company’s financial position.

SFAS no. 150 was issued in May 2003 and requires issuers to classify as liabilities three classes of freestanding financial instruments that represent obligations for the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company’s financial, results of operations or cash flows.

Results of Operations.
-----------------------------
The Company had no revenue during the calendar years ended December 31, 2005 and 2004.

The Company had no gross profit during the calendar years 2005 and 2004. General and administrative expenses were $5,384,548 and $28,805,594 for the calendar years ended December 31, 2005 and 2004 respectively. Principal general and administrative expenses included contracted services ($5,223,768 and $28,750,432, respectively); legal expenses ($20,845 and $29,153, respectively); payroll ($108,396 and $105,164 respectively); and rent ($26,558 and $13,382).

Significant components contracted services for 2005 were:
Warrant expense
$ 1,105,897
Stock issued for hiring bonus for design engineers of eGo Design, Inc.
2,040,000
Stock issued for directors’ services
248,567
Stock issued for outside consultants
1,429,304
Total for 2005
$ 5,223,768

Significant components of contracted services for 2004 were:
Stock issued to consultant for services
$ 16,980,069
stock issued for directors’ services
10,820,000
Warrant expense
769,834
Other
180,529
Total for 2004
$ 28,750,432

The Company had a net operating loss for the years ended December 31, 2005 and 2004.

Liquidity and Capital Resources.
-------------------------------------------
In March of 2004 the Company completed a private placement of 2.5 million Units for gross proceeds of $500,000. Each Unit consists of one share of common stock and seven Warrants to purchase an additional share of stock at prices between $0.30 and $0.90 inclusive. The cash remaining from the Units offering is sufficient to fund the Company’s operations for the next four quarters, but will not be sufficient to fund the development and production of the Hydra fuel cell. Therefore, we will need to raise approximately $5 million to adequately fund Hydra through its development stage and through production and marketing, to the point of self-sufficiency.

We expect to incur costs of approximately $2 million through the end of the development phase of the unit, then to incur production and marketing costs of approximately $3 million subsequent to its CSA International certification in order to bring the project to self-sufficiency.

The Company did not generate any cash flow from operating activities during 2005 and 2004. The Company had cash assets of $11,585 and $37,852 as of December 31, 2005 and 2004 respectively.

The net change in cash position for 2005 is due primarily to operational costs of the parent company after funding $45,000 to Hydra in the 4th Quarter.

Management does not believe that SFAS No's 131 and 133 regarding segment reporting and derivatives, respectively, will have any impact on the Company's financial condition and operations.



 
 
 



ITEM 7 - FINANCIAL STATEMENTS

AMERICAN SECURITY RESOURCES CORPORATION AND SUBSIDIARIES
 

 

INDEX TO FINANCIAL STATEMENTS

 
Page
   
Report of Independent Certified Public Accountants
13
   
Financial Statements
  
   
Consolidated Balance Sheets at December 31, 2005 and 2004
14
   
Consolidated Statements of Operations for the years ended December 31, 2005 and 2004
15
   
Consolidated Statement of Shareholders’ Equity for the years ended December 31, 2005 and 2004
16
   
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004
17
   
Notes to Consolidated Financial Statements
19




 
 
 



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Shareholders of
American Security Resources Corporation
(formerly Kahuna Network Security, Inc. and Subsidiary)
Houston, Texas

We have audited the accompanying consolidated balance sheet of American Security Resources Corporation formerly, Kahuna Network Security, Inc., as of December 31, 2004, and the related consolidated statements of expenses, shareholders' equity, and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Security Resources Corporation as of December 31, 2004, and the consolidated results of their operations and cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that American Security Resources Corporation will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, American Security Resources Corporation suffered losses from operations since inception, which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty

MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas

February 29, 2005






AMERICAN SECURITY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
   
2005
  
ASSETS
      
Cash in bank
  
$
11,585
  
Prepaid expenses
    
4,015
 
Investment, available for sale
    
138,462
 
Total current assets
    
154,062
 
         
Equipment, net of depreciation of $4,129
    
15,455
 
Total Assets
  
$
169,517
  
         
LIABILITIES AND SHAREHOLDERS' EQUITY
        
CURRENT LIABILITIES
        
Accounts payable
  
$
7,953
  
Other current liabilities
    
17,525
 
Total current liabilities
    
25,478
 
         
Preferred stock - 1,000,000 shares authorized; $.001 par value; no shares issued or outstanding
   
-
 
Common stock - 200,000,000 shares authorized; $.001 par value; 61,675,766 shares issued and outstanding at December 31, 2005
    
61,676
 
Additional paid-in capital
    
35,205,849
 
Accumulated deficit
    
(35,036,948
)
Accumulated other comprehensive loss
    
(86,538
)
Total shareholders' equity
  
$
144,039
  
         
Total Liabilities and shareholders' equity
    
169,517
 





See summary of accounting policies and notes to consolidated financial statements. 
 
 
 



AMERICAN SECURITY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,

 
  
2005
  
2004
  
           
General and administrative expenses
  
$
5,384,548
  
$
28,805,594
  
Impairment of investment
    
-
   
60,000
 
Forgiveness of debt income
    
-
   
(8,167
)
Net loss
  
$
5,384,548
  
$
28,857,427
  
               
Other Comprehensive Loss:
              
Change in unrealized loss on investment available for sale
    
(86,538
)
  
-
 
Comprehensive Loss
  
$
5,471,086
  
$
28,857,427
  
               
Loss per common shares - basic and diluted
  
$
(0.13
)
$
(0.92
)
               
Weighted average shares outstanding
    
42,053,103
   
42,053,103
 




The accompanying notes are an integral part of these consolidated financial statements. 


 
 
 



AMERICAN SECURITY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2005 and 2004

           
 
 
Retained
Deficit
  
 
Other
Comprehensive
Loss
  
 
 
 
Total
  
   
Common stock
  
   
Shares
  
Amount
  
                               
Balances at December 31, 2003
    
2,862,155
 
$
612,362
  
$
(794,973
)
                  
$
(182,611
)
                                             
Shares issued for:
                                            
-- cash
    
2,755,625
   
541,450
                           
541,450
 
-- debt
    
752,168
   
158,042
                           
158,042
 
-- director services
    
12,600,000
   
10,820,000
                           
10,820,000
 
-- services
    
16,813,604
   
16,980,069
                           
16,980,069
 
-- investment
    
236,425
   
-
                           
-
 
-- shares repurchased for note receivable and cancelled
    
(500,000
)
  
(100,000
)
                          
(100,000
)
-- shares re-purchased
    
(200,000
)
  
(40,000
)
                          
(40,000
)
                                             
Fair value of warrants issued for services
          
769,834
                           
769,834
 
Net loss
                
(28,857,427
)
                    
(28,857,427
)
                                             
Balances, December 31, 2004
    
35,319,977
 
$
29,741,757
  
$
(29,652,400
)
      
$
-
        
$
89,357
  
                                             
Shares issued for:
                                            
-- cash
    
2,000,000
   
77,000
                           
77,000
 
-- directors' services
    
2,624,501
   
248,567
                           
248,567
 
-- services
--warrant expense
    
8,231,228
-
   
1,429,304
1,505,897
                           
1,429,304
1,505,897
 
-- compensation bonus
    
12,000,000
   
2,040,000
                           
2,040,000
 
-- equity swap investment
    
1,500,000
   
225,000
                           
225,000
 
                                             
Net loss
                
(5,384,548
)
                    
(5,384,548
)
                                             
Other comprehensive loss
                            
(86,538
)
        
(86,538
)
                                             
Balances, December 31, 2005
    
61,675,706
 
$
35,267,525
  
$
(35,036,948
)
      
$
(86,538
)
      
$
144,039
  

Less: par             (61,676)
Additional paid in capital    $35,205,849


The accompanying notes are an integral part of these consolidated financial statements. 


 
 
 



AMERICAN SECURITY RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,


 
2005
  
2004
Cash flows from operating activities:
      
Net loss
$ (5,384,548)
  
$ (28,857,427)
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
      
Depreciation
2,648
 
1,481
Impairment in investment in Simple Network Solutions
-
 
60,000
Forgiveness of debt income
-
 
(8,167)
Common stock for services
5,223,768
 
27,800,069
Warrants issued
-
 
769,834
       
Changes in operating assets and liabilities:
      
Prepaid expenses
(4,015)
  
-
Accounts payable
4,553
 
(13,233)
Accrued liabilities
(37,404)
  
54,929
       
Net cash used in operating activities
(194,998)
  
(192,514)
       
Cash flows from investing activities:
      
Note receivable
100,000
 
(200,000)
Investment in Simple Network Solutions
-
 
(60,000)
Purchases of property and equipment
(8,269)
  
(11,315)
       
Net cash provided by/(used in) investing activities
91,731
 
(271,315)
       
Cash flows from financing activities:
      
Proceeds from sale of common stock
77,000
 
541,450
Repurchase of common stock
-
 
(40,000)
       
Net cash provided by/(used in) financing activities
77,000
 
501,450
       
Net change in cash and cash equivalents
(26,267)
  
37,621
       
Cash and cash equivalents, beginning of year
37,852
 
231
Cash and cash equivalents, end of year
$ 11,585
 
$ 37,852

The accompanying notes are an integral part of these consolidated financial statements. 


 
 
 


 
2005
  
2004
Supplemental disclosures of cash flow information:
      
Cash paid for interest
$ -
 
$ 549
       
Schedule of non-cash investing and financing transactions:
      
Stock issued for investment
$ -
 
$ 225,000
Stock issued for debt
    
158,042
Note receivable exchanged for return of common stock
    
100,000

 

The accompanying notes are an integral part of these consolidated financial statements. 


 
 
 



NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The Company was incorporated in Nevada in 1998. It began operations as Computer Automation Systems, Inc., a company that designed and manufactured custom rack mount and industrial computer applications for the telecom and other high tech industries. In January of 2004, the Company was recapitalized and its name was changed to Kahuna Network Security Inc.

At that time the company’s shareholders voted to increase the total number of authorized shares of common stock from 15,000,000 to 200,000,000, to decrease the number of authorized shares of preferred stock from 5,000,000 to 1,000,000 and approved a 1 for 4 reverse stock split. All share and per share amounts have been restated for the split.

On July 2, 2004, the Board of Directors voted to change the name of the Company to American Security Resources Corporation (ASRC), a change that was ratified by a majority of the Company’s shareholders in July of 2004.

Basis of presentation -- The consolidated financial statements include the accounts of American Security Resources Corporation and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated.

Use of Estimates. -- In preparing financial statements, management makes estimates and assumptions that affect the reported amounts of assets and liabilities in the balance sheet and revenue and expenses in the statement of expenses. Actual results could differ from those estimates.

Cash and Cash Equivalents -- For purposes of the statement of cash flows, ASRC considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Revenue Recognition -- ASRC recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectibility is reasonably assured. This typically occurs when the services are performed. There were no revenues for 2005 and 2004.

Property and equipment is valued at cost. Additions are capitalized and maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions of equipment are reflected in operations. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which is estimated at five years.

Impairment of Long-Lived Assets -- ASRC reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may no longer be appropriate. ASRC assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and fair value.

Income taxes -- ASRC recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. ASRC provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not.


. 
 
 
 
AMERICAN SECURITY RESOURCES CORPORATION AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004


Basic and diluted net loss per share -- The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an "as if converted" basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended December 31, 2005 and 2004, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. The number of potentially dilutive securities theat were not included in the computation of diluted EPS because to do so would have been antidilutive was 19,500,000 common stock potentially issuable under outstanding options/warrants.

Stock Compensation -- ASRC adopted the disclosure requirements of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS No. 123) and FAS No. 148 with respect to pro forma disclosure of compensation expense for options issued. For purposes of the pro forma disclosures, the fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model. ASRC applies APB No. 25 in accounting for its stock option plans and, accordingly, no compensation cost has been recognized in ASRC financial statements for stock options under any of the stock plans which on the date of grant the exercise price per share was equal to or exceeded the fair value per share. However, compensation cost has been recognized for warrants and options granted to non-employees for services provided. There were no options granted or outstanding during 2004 and 2003 to employees.

Recently issued accounting pronouncements -- In December 2004, the FASB issued SFAS No.123R, “Accounting for Stock-Based Compensation” SFAS No.123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No.123R requires that the fair value of such equity instruments be recognized as expense in the historical financial statements as services are performed. Prior to SFAS No.123R, only certain pro forma disclosures of fair value were required. SFAS No.123R shall be effective for small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. While ASRC has not issued options to employees recently, it may do so in the future. The adoption of this new accounting pronouncement is not expected to have a material impact on the consolidated financial statements of ASRC during the calendar year 2006.

ASRC does not expect the adoption of any other recently issued accounting pronouncements to have a significant impact on their consolidated financial position, results of operations or cash flow.


NOTE 2 - GOING CONCERN

As shown in the accompanying consolidated financial statements, ASRC incurred recurring losses from continuing operations of $5,471,086 and $28,857,427 in the year 2005 and 2004, respectively. This condition creates an uncertainty as to ASRC’s ability to continue as a going concern. Management is trying to raise additional capital through sales of common stock either through private placements or public offerings, as well as seeking other sources of funding. There are no assurances that ASRC will be able to achieve a level of revenues adequate to generate sufficient cash flow from operations or obtain the additional financing of $5 million through private placements or public offerings to support the investment in Hydra’s fuel cell technology. If these funds are not available ASRC may not continue its operations or execute its business plan. The conditions raise substantial doubt about ASRC’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should ASRC be unable to continue as a going concern.


. 
 
 
 
AMERICAN SECURITY RESOURCES CORPORATION AND SUBSIDIARIES,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005 and 2004



NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31, 2005:

Description
  
Life
  
Amount
         
Equipment
  
5 years
  
$ 4,988
Office furniture and equipment
  
5 years
  
14,596
       
19,584
Less: accumulated depreciation
      
(4,129)
       
$ 15,455
 
Depreciation expense totaled $2,648 and $1,481 for the years December 31, 2005 and 2004, respectively.

NOTE 4- INVESTMENT, AVAILABLE FOR SALE

ASRC exchanged 1,500,000 of its common stock for 46,154 shares of common stock f Strategic Growth Ventures, Inc., which trades under the symbol: SGWV.PK. At December 31, 2005, this amount is recorded at fair value and classified as available for sale

NOTE 5 - COMMON STOCK

In 2004, $100,000 of a note receivable due to ASRC was exchanged for the return of 500,000 shares of ASRC


In 2004, ASRC repurchased 200,000 shares of its common stock for $40,000.

In 2005, ASRC issued 2,624,501 shares of common stock to directors for services valued at the then market price totaling $248,567 and issued 8,231,288 shares of common stock to outsiders for services valued at the then market price totaling $1,429,304.

During the quarter ended June 30, 2005, we issued warrants to purchase 6,000,000 common shares to an outside consultant. As such we recorded an expense of $1,505,897 during the quarter that was estimated using the Black Scholes pricing model. Significant assumpations used were (1) 2 year term, (2) volatility of 149.80%, (3) risk-free rate of 3.5% and(4) dividends of zero.. Subsequently, the consultant exercised warrants to purchase 2,000,000 shares for $77,000 in cash. The market value at the time of the exercise was $780,000, but appropriately, there was no additional compensation expense recorded. The remaining warrants were then cancelled. The warrants contained no cashless provision.

In 2005, ASRC hired the original design engineers of eGo Designs, Inc. ("eGo") by issuing 12,000,000 shares as a hiring bonus for the design engineers to work for ASRC and continue their development of the hyrdrogen fuel cell proto-type technology. Although legally, this transaction was structured as a purchase agreement of the outstanding shares of eGO Designs, ASRC examined the requirements under SFAS 141, “Accounting for Business Combinations,” and EITF 98-3, “Determining Whether Nonmonetary Transactions Involve Receipt of Productive Assets or of a Business,” to conclude that eGo Design, Inc was not a “business,” As such the transaction was accounted for as a “hiring bonus,” and recorded as compensation expense during 2005 in the amount of $2,040,000 which was equal to the market value of the shares issued by ASRC to the original design engineers.

In 2005, ASRC issued 1,500,000 shares as an equity swap for 46,154 shares of common stock of Strategic Growth Ventures, Inc. (the shares were issued to Wall Street Insider Report), valued at the then market price totaling $225,000.


NOTE 6 - WARRANTS

In March of 2004, ASRC completed a private placement of 2.5 million Units consisting of one share of its common stock and seven warrants to purchase additional shares of common stock at a prices ranging from $0.30 to $0.90. The exercise period for these warrants expire on December 31, 2006.

“In October 2004, the we issued a warrant to purchase 2,000,000 shares of common stock at an initial exercise price of $0.30. The term of these warrants are three years from the issuance date with vesting to occur (1) one-half in October 2004, and one-eighth after each of the first four six-month anniversary dates of the date of issuance. The exercise price initially was $0.30 per share. If the date of exercise is more than six months after the date of issuance, the exercise price shall be reset on each six month anniversary of the date of issuance to equal the lesser of (i) the then current exercise price, or (ii) 105% of the lowest closing bid price during the ten trading days immediately preceding the six-month anniversary date. These warrants also contain a cashless exercise provision The Holder may elect a cashless provision and receive a number of shares of common stock computed using the following formula:

X = Y ( A - B ) / A where,
X = the number of shares of common stock to be issued to the holder
A = the closing price 1 trading day before the date of exercise.
B = the exercise price

We estimated the fair market value of the warrants to be $769,834 using the Black Scholes pricing model and recorded the entire amount as expense. The significant assumptions used were (a) a computed volatility rate of 230.81%, computed using a 3-year look back period matching the term of the warrant, and (b) a discount risk free rate of 2.92% (c) zero dividend rate and (d) 3 year term.”

Summary information regarding warrants is as follows:

 
Warrants
Weighted Average Share Price
     
Year ended December 31, 2004:
    
     
Granted
17,500,000
0.60
Granted
2,000,000
0.40
     
Outstanding at
    
December 31, 2004
19,500,000
$ 0.60
     
Granted
1,000,000
$0.30
Granted
5,000,000
$0.30
Exercised for Cash
(2,000,000)
$0.04
Cancelled
(4,000,000)
$0.30
Outstanding at December 31, 2005
19,500,000
$0.60


Warrants outstanding and exercisable as of December 31, 2004 and 2005:
 
Outstanding
 
Exercise Price
Number of Shares
Remaining life
Exercisable Number of Shares
       
$0.30
2,500,000
1 year
2,500,000
0.30
2,000,000
2 years
2,000,000
0.40
2,500,000
1 year
2,500,000
0.50
2,500,000
1 year
2,500,000
0.60
2,500,000
1 year
2,500,000
0.70
2,500,000
1 year
2,500,000
0.80
2,500,000
1 year
2,500,000
0.90
2,500,000
1 year
2,500,000
       
 
19,500,000
  
19,500,000


NOTE 7 - INCOME TAXES

ASRC uses the liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. During fiscal 2005 and 2004, ASRC incurred net losses and, therefore, has no tax liability. The net deferred tax asset generated by the loss carry-forward has been fully reserved. The cumulative net operating loss carry-forward is approximately $4,200,000 at December 31, 2005 and will expire in the years 2018 through 2025.

At December 31, 2005 deferred tax assets consisted of the following:

 
2004
Deferred tax assets
$1,428,000
Less: valuation allowance
(1,428,000)
Net deferred tax asset
$ -

NOTE 8 - LEASES

ASRC leased office space under an operating lease during 2005. The lease agreement provided for monthly rent of $2,400 to be paid on a month-to-month basis. Total rent expense was $25,926 and $13,382 during 2005 and 2004, respectively.


ITEM 8

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.
-------------------------------------------------------------------------------------------------------------------------------
None.

Item 8A. Controls and Procedures.
----------------------------------------------
The Company's Chief Executive Officer and Chief Financial Officer ("Certifying Officers") are responsible for establishing and maintaining disclosure controls and procedures for the Company. The Certifying Officers have concluded (based on their evaluation of these controls and procedures as of December 31, 2004), that the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) do not adequately meet intended objectives and are not effective due to the significant audit adjustments relating to the accounting treatment for the eGo Designs transaction and the shares received from Strategic Growth Ventures. However, we believe there are no material weaknesses. As of this date, given the small size of the Company and its limited operations and over the last year, the Company utilized a preliminary and basic standard of internal controls and procedures related to its financial reporting for the period covered by this report. Management is in the process of developing and adopting new and more stringent controls and procedures and anticipates such controls and procedures to be in place prior to the end of fiscal year 2006.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act are accumulated and communicated to management, including our Chairman, to allow timely decisions regarding required disclosure.

No significant changes were made in the Company's internal controls nor other facts that would significantly affect these controls subsequent to the date of this evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


PART III

ITEM 9 - Directors, Executives Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act
------------------------------------------------------------------------------------------------
The Company has adopted a Code of Ethics that applies to all of its Directors, Officers (including its CEO, CFO and chief accounting officer and any person performing similar functions) and all employees. The Code is attached as “Exhibit 14H”.

Directors and Executive Officers
--------------------------------------------------

The following table sets forth the names of all current directors and executive officers of the Company. These persons will serve until the next annual meeting of the stockholders or until their successors are elected or appointed and qualified, or their prior resignation or termination.

Name
  
 
 
Positions Held
  
Date of Election or Designation
         
Robert C. Farr
  
President/COO
  
11/23/05
   
Director
  
10/27/04
         
Frank Neukomm
  
CFO, Director
  
02/25/04
   
Secretary
  
11/08/04
   
Chairman/CEO
  
11/21/05
         
Robert J. Wilson
  
Director
  
07/21/05
         
Edward L. Davis
  
Director
  
11/21/05


 Business Experience 
---------------------------
Frank Neukomm (56), Chairman/ CEO, has an extensive background in finance, mergers and acquisitions, and sales and marketing. Mr. Neukomm has served as a senior executive of brokerage and M & A companies, software companies and telecom companies. Mr. Neukomm has been instrumental in purchasing or starting companies in industries as diverse as insurance, consumer retail goods, industrial services and wireless telecommunications. Since 1995, Mr. Neukomm has served as President of NeuHaus Advisors, Inc., a consulting firm to the telecommunications industry.

Robert Farr (60), President/COO has extensive Fortune 500 management experience in a variety of industries. His experience extends to domestic and international finance, marketing, manufacturing and distribution. He is the Principal of Creative Equity Strategies.

Robert J Wilson, Director, is a CPA and an independent Director who serves as Audit Committee Chairman.

Edward L. Davis, Director, serves as Chairman of the Company’s Hydra Fuel Cell Corporation subsidiary. He is Chief Architect at Intel Corporation and is the principle inventor of the Company’s proprietary fuel cell technology.
 
Compliance with Section 16(a) of the Exchange Act
------------------------------------------------------------------

Each of the Company's directors and executive officers filed a Form 3 Initial Statement of Beneficial Ownership of Securities with the Securities and Exchange Commission on or after December 5, 2003, February 25, and November 2004. To the best knowledge of management, all reports required to be filed by members of management under Section 16(a) of the 1934 Act have been filed.

Item 10. Executive Compensation.
--------------------------------------------

Cash Compensation.
---------------------------


Name
Year
Other Comp
Position
Period
Salary
     
Joe Grace
12/31/04
$28,500
CEO
12/31/05
$34,500
     
Frank Neukomm
12/31/04
$24,000
CFO, Secretary
12/31/05
$35,000
     
Robert Farr
10/27/04
$0
Director
12/31/05
$10,200

Except as set forth above, no cash compensation, deferred compensation or long-term incentive plan awards were issued or granted to the Company's management during the calendar years ended December 31, 2005 and 2004.

Compensation of Directors
------------------------------------
Certain Directors were compensated with restricted stock during 2005 for attending meetings and for work performed. Total stock awarded was 2,624,501 shares.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements.
----------------------------------------------------------------------------------------------------------------------------
 
  There are no employment contracts, compensatory plans or arrangements, including payments to be received from the Company, with respect to any director or executive officer of the Company which would in any way result in payments to any such person because of his or her resignation, retirement or other termination of employment with the Company, any change in control of the Company, or a change in the person's responsibilities following a change in control of the Company.
 
Item 11. Security Ownership of Certain Beneficial Owners and Management.
----------------------------------------------------------------------------------------------------

Security Ownership of Certain Beneficial Owners.
----------------------------------------------------------------
 
The following table sets forth the share holdings of those persons who own more than five percent of the Company's common stock, including stock options, outstanding as of the date of this Report, assuming 82,497,992 shares are outstanding (the number outstanding at the date of this report):

Name & Address
Type of Ownership
No. of Shares Beneficially Owned*
  
Percentage of Class
Mr. Frank Neukomm
Personal
3,977,270
  
4.82%
9601 Katy Freeway, Suite 220
        
Houston, TX 77024
        
         
Robert Farr
Corporate
629,706
  
0.76%
9601 Katy Freeway, Suite 220
        
Houston, TX 77024
        
         
Robert J Wilson
Personal
200,000
  
0.24%
9601 Katy freeway, Suite 220
        
Houston, TX 77024
        
         
Edward L. Davis
Personal
7,623,312
  
9.24%
9601 Katy freeway, suite 220
        
Houston, TX 77024
        
         

*Mr. Neukomm’s share number includes 162,500 shares held by The Neukomm Children’s Trust for which he is the trustee.

Item 12. Certain Relationships and Related Transactions.
-----------------------------------------------

There have been no material transactions, series of similar transactions, currently proposed transactions, or series of similar transactions, to which the Company and any director, executive officer, five percent stockholder or associate of any of these persons is or was a party.

Item 13. Principal Accountant Fees and Services
--------------------------------------------------------------

AUDIT FEES

Malone & Bailey were the Company’s auditors for the fiscal years ended December 31, 2005 and 2004.

AUDIT FEES

For their audit of our annual financial statements and for their review of our Quarterly Reports on Form 10-Q, Malone & Bailey billed us a total of $9,985 for the fiscal year ended December 31, 2005 and $7,610 for the fiscal year ended December 31, 2004.

TAX FEES

For their review of tax matters, John A. Wilkinson, P.C. billed us a total of $1,500 in 2005 and $1,850 in 2004.

ALL OTHER FEES

John A. Wilkinson, P.C. billed us $ 2,075 related to general accounting services and quarterly filings of Form 10-QSB.

The Board of Directors Pre-approval Policy and Procedures

We do not have a separate Audit Committee. Our full Board of Directors performs the functions of an Audit Committee. During fiscal year 2003, the Board of Directors adopted policies and procedures for the pre-approval of audit and non-audit services for the purpose of maintaining the independence of our independent auditors. We may not engage our independent auditors to render any audit or non-audit service unless either the service is approved in advance by the Board of Directors or the engagement to render the service is entered into pursuant to the Board of Director's pre-approval policies and procedures. On an annual basis, the Board of Directors may pre-approve services that are expected to be provided to us by the independent auditors during the following 12 months. At the time such pre-approval is granted, the Board of Directors must (1) identify the particular pre-approved services in a sufficient level of detail so that management will not be called upon to make judgment as to whether a proposed service fits within the pre-approved services and (2) establish a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy.

The Board has considered whether the provision of the services described above under the caption "All Other Fees" is compatible with maintaining independence.



. 
 
 
 


PART IV

Item 14. Exhibits and Reports on Form 8-K.
---------------------------------------------------------
Reports on Form 8-K.
--------------------------------------

Form 8-K Election of Directors July and November, 2005
Departure of or Change of Corporate Officers or Directors November 2005

Index of Exhibits:

 
 
No.
 
 
Name of Exhibit
Filed Herewith
Incorporated by reference
  
 
Form
Period Ending
Exhibit
Filing Date
3.1
Initial Articles of Incorporation filed in the State of Utah.
  
10-SB
  
3.1
09/22/99
3.2
Initial Articles of Incorporation filed in the State of Nevada.
  
10-SB
  
3.1
09/22/99
3.3
Articles of Merger to change the Company's domicile filed in the State of Utah and Nevada and effecting a one for four reverse split of the outstanding securities of The Company.
  
10/SB/12GA
  
3.3
09/02/99
3.5
By-Laws
  
10/SB/12GA
  
3.5
02/02/00
10.1
Purchase agreement - eGO Design
X
        
10.2
2.0 Million Warrants issued
X
        
10.3
2.5 Million-Unit Warrants
X
        
10.4
Employment Agreement - Joe Grace
  
10-KSB
12/31/04
14B
03/31/05
10.5
Form of Warrant Agreement
X
        
21
Subsidiaries of Registrant
X
        
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
        
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
X
        
32.1
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
        
32.2
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
        
99.1
Code of Business Conduct and Ethics
X
        


. 
 
 
 



SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

October 31, 2006

/s/ Frank Neukomm
Frank Neukomm
President, Chief Executive Officer


/s/ Randall Newton
Randall Newton
Chief Financial Officer