Mail Stop 7010
December 28, 2005
Mr. Gaylord M. Karren
CEO and CFO
Electric Aquagenics Unlimited, Inc.
1464 W. 40 S. Suite #200
Lindon, UT 84042-1629
RE: Form 10-KSB for the fiscal year ended December 31, 2004
Forms 10-QSB for the quarters ended March 31, 2005, June 30, 2005
and
September 30, 2005
File No. 333-86830
Dear Mr. Karren:
We have reviewed these filings and have the following
comments.
If you disagree with a comment, we will consider your explanation
as
to why our comment is inapplicable or a revision is unnecessary.
Please be as detailed as necessary in your explanation. In some
of
our comments, we may ask you to provide us with information so we
may
better understand your disclosure. After reviewing this
information,
we may or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2004
General
1. Where a comment below requests additional disclosures or other
revisions to be made, please show us in your supplemental response
what the revisions will look like. With the exception of the
comments below that specifically request an amendment, all other
revisions may be included in your future filings.
2. The cover page to your Form 10-KSB states that you have common
stock registered under Section 12(g) of the Securities Exchange
Act
of 1934. Based upon review of your filing history, it does not
appear that you have filed a Form 8-A and thus you have not been
assigned a file number of a 1934 Act reporting company. Since you
have registered a class of securities under Section 12(g), please
file the required Form 8-A.
Item 5 - Market for Common Equity and Related Stockholder Matters,
page 13
3. Please disclose the range of high and low bid information for
your
common stock for the last two fiscal years. Please ensure you
meet
all disclosure requirements of Item 201(a)(1)(ii) of Regulation S-
B.
4. Please disclose the approximate number of holders of record of
your common stock. See Item 201(b) of Regulation S-B.
Item 6 - Management`s Discussion and Analysis or Plan of
Operation,
page 13
5. Please identify and disclose all of your critical accounting
policies and estimates that are critical to your consolidated
financial statements. Your disclosure should include a discussion
of
the material assumptions you made in arriving at the critical
estimate and to also advise an investor of the financial statement
impact if actual results differ from the estimate made by
management.
See the SEC Interpretive Release No. 33-8350 and SEC Other Release
No. 33-8040, which you can find on our website at www.sec.gov.
6. Please discuss your purchase of Aquagen International, Inc.
within
your MD&A, as this acquisition appears to be material to your
business.
Results of Operations, page 15
7. You disclose that the decrease in cost of sales is attributable
to
the re-allocation of true inventory costs related to the Primacide
generators in 2004 against inventory representing older models
that
have been technologically superseded or models that have been used
as
demo`s requiring repair. Please tell us what you consider to be
true
inventory costs. Please tell us the amounts of items that have
been
re-allocated, and what line items were impacted by the re-
allocation.
In addition, it is unclear as to how you have accounted for
inventory
that has been technologically superseded and the demo`s requiring
repair. Please clarify.
8. Please discuss in greater detail the business reasons for the
changes between periods in general and administrative expenses.
In
doing so, please disclose the amount of each significant change
between periods and the business reasons for it. In circumstances
where there is more than one business reason for the change,
attempt
to quantify the incremental impact of each individual business
reason
discussed on the overall change in the line item. Please also
discuss the business reasons for the changes between periods in
marketing and promotion expense, loss from equity method investee,
interest expense and income, and other income (expense). Please
show
us what your revised MD&A for 2004 as compared to 2003 will look
like. See Item 303(b) of Regulation S-B and Financial Reporting
Codification 501.04.
Liquidity and Capital Resources, page 16
9. Please discuss in your liquidity section the changes in your
operating, investing, and financing cash flows as depicted in your
statement of cash flows. See the SEC Interpretive Release No. 33-
8350.
Item 8A - Controls and Procedures, page 18
10. Please perform an evaluation of the effectiveness of the
design
and operation of your disclosure controls and procedures as of the
end of the period covered by your report. See Item 307 of
Regulation
S-B. Please disclose your conclusions regarding your evaluation
in
an amended Form 10-KSB. Please also amend your 2005 Forms 10-QSB
accordingly.
Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act, page
19
11. Please disclose if you have designated a person as a financial
expert. See Item 401(e) of Regulation S-B.
Item 11 - Security Ownership of Certain Beneficial Owners and
Management, page 22
12. Please disclose your equity plan information in the format
required by Item 201(d) of Regulation S-B.
Item 7 - Financial Statements
General
13. Please tell us whether any of your products, such as Aquagen
products and your water electrolyzing machines, represent a
separate
operating segment as defined in paragraph 10 of SFAS 131. If not,
please tell us in detail why not. If you believe that they each
represent an operating segment and you meet the criteria discussed
in
paragraph 17 of this SFAS for aggregation of all of these
operating
segments into one reportable segment, provide us with the analysis
you performed in reaching this conclusion. If after reassessing
the
criteria in SFAS 131, you now believe that more than one
reportable
segment exists, revise your financial statements accordingly.
Please
also refer to Questions 7 and 8 of the FASB Staff Implementation
Guide for SFAS 131.
14. Please provide the enterprise wide disclosures required by
paragraphs 37 and 38 of SFAS 131.
Report of Independent Registered Public Accounting Firm, page F-3
15. The introductory paragraph in the audit report includes the
following sentences:
* We have audited the accompanying consolidated balance sheet of
as
of, and the related consolidated statements of operations,
stockholders` equity, and cash flows for the year then ended.
* The consolidated financial statements of as of December 31, 2003
were audited by other auditors whose report dated March 30, 2004,
expressed an unqualified opinion.
Please make arrangements with your auditors to have them revise
these
sentences to ensure that both the name of the company, as well as
the
related time period being audited, as applicable, are included.
Please include this revised auditor`s report in your amended Form
10-
KSB. See SAS 58 for examples of audit reports.
Consolidated Balance Sheet, page F-4
16. Please disclose the amount of your allowance for doubtful
accounts on the face of the balance sheet or in a footnote.
Note 1 - Business Description and Significant Accounting Policies,
page F-8
General
17. Please disclose the types of expenses that you include in the
cost of goods sold line item and the types of expenses that you
include in general and administrative expenses line item. Please
also disclose whether you include inbound freight charges,
purchasing
and receiving costs, inspection costs, warehousing costs, internal
transfer costs, and the other costs of your distribution network
in
the cost of goods sold line item. With the exception of
warehousing
costs, if you currently exclude a portion of these costs from cost
of
goods sold, please disclose:
* in a footnote the line items that these excluded costs are
included
in and the amounts included in each line item for each period
presented, and
* in MD&A that your gross margins may not be comparable to those
of
other entities, since some entities include all of the costs
related
to their distribution network in cost of goods sold and others
like
you exclude a portion of them from gross margin, including them
instead in a line item, such as general and administrative
expenses.
Inventory, page F-8
18. Please disclose your major classes of inventory, such as raw
materials, work in process and finished goods, as well as the
corresponding amounts in each class.
Advertising Costs, page F-9
19. Please disclose the total amount charged to advertising
expense.
See paragraph 49 of SOP 93-7.
Goodwill, page F-9
20. Please provide us with a quantitative analysis performed in
accordance with paragraphs 19 and 20 of SFAS 142 supporting your
conclusion that goodwill was not impaired as of December 31, 2004.
Please identify each of the significant assumptions used in your
analysis and explain the basis for each such assumption. Please
further note that SFAS 142 does not require impairment to be
permanent as a condition of recognition.
Earnings Per Share, page F-10
21. Please disclose the number of antidilutive shares by each type
of
security. See paragraph 40(c) of SFAS 128.
22. Please disclose how you are treating the restricted shares you
have issued in computing both your basic and diluted earnings per
share. See paragraphs 10 and 13 of SFAS 128.
Note 4 - Patents, Trademarks and Intellectual Property, page F-12
23. You have determined that the intangible assets acquired in the
purchase of Aquagen International, Inc. are not subject to
amortization. Please tell us how you determined that these assets
have an indefinite life.
Note 6 - Acquisition Of Business, page F-13
24. Given the purchase price and amount of assets acquired, it is
not
clear why audited financial statements and pro forma financial
information were not previously provided in a Form 8-K for Aquagen
International, Inc. Please file a Form 8-K with the required
information. Otherwise, please provide us with your significance
tests under Rule 310(c)(2) of Regulation S-B for each period
presented, demonstrating that these financial statements are not
required.
Note 7 - Related Party Transactions, page F-13
Sales To Affiliate, page F-13
25. Please tell us how much of your accounts receivable related to
transactions with affiliates in the amount of $319,340 has been
subsequently collected. Have any of these amounts been written
off
or reserved for?
Note 9 - Common Stock, page F-14
26. For each issuance of warrants, please disclose the fair value
of
the warrants at the date of issuance, and the reason for issuance.
Please also disclose whether you used the Black-Scholes model for
your issuances of warrants to non-employees, including the
assumptions you used.
Exhibit 31 - Certifications
27. Disclosure controls and procedures are now defined in Exchange
Act Rules 13a-15(e) and 15d-15(e). See SEC Release 33-8238, which
became effective August 14, 2003. Please file an amendment to
your
Form 10-KSB to include certifications that conform to the format
provided in Item 601(b)(31) of Regulation S-B and refer to the
appropriate locations for the definitions. Please also amend your
2005 Forms 10-QSB accordingly. In doing so, please refile the
Forms
10-KSB and 10-QSB in their entirety, along with the updated
certifications.
FORM 10-QSB FOR THE PERIOD ENDED JUNE 30, 2005
General
28. Please address the above comments in your interim filings as
well.
Exhibit 32.1 - Certification
29. Your current Exhibit 32.1 certification is for the fiscal
quarter
ended March 31, 2005. Please appropriately include a
certification
for the fiscal quarter ended June 30, 2005. In doing so, please
refile the Form 10-QSB in its entirety, along with the updated
certifications.
FORM 10-QSB FOR THE PERIOD ENDED SEPTEMBER 30, 2005
Financial Statements
Consolidated Statements of Operations
30. Please explain to us how it is appropriate that you do not
have
any marketing and promotion expenses for the nine months ended
September 30, 2004, given that you had $553,220 for the year ended
December 31, 2004. Did all of these expenses occur in the fourth
quarter of 2004? Please clarify.
Note 6 - Senior Convertible Debt
31. Regarding your issuance of convertible debt, please provide us
with the assumptions you used in determining your accounting
treatment, as well as the related computations. Please also tell
us
what accounting literature you referenced in supporting your
conclusion.
Note 7 - Commitments and Contingencies
32. Please tell us how you determined it was appropriate to
immediately recognize as revenue the $1,000,000 you received per
your
license agreement, including the accounting literature that you
cited. Do you have any continuing involvement in the license
agreement, and if so, to what extent?
* * * *
Please respond to these comments within 10 business days, or
tell us when you will provide us with a response. Please provide
us
with a response letter that keys your responses to our comments
and
provides any requested information. Detailed letters greatly
facilitate our review. Please file your supplemental response on
EDGAR as a correspondence file. Please understand that we may
have
additional comments after reviewing your responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information required under the
Securities Exchange Act of 1934 and that they have provided all
information investors require for an informed decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in their filings;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement has access to all information you provide to the staff
of
the Division of Corporation Finance in our review of your filing
or
in response to our comments on your filing.
If you have any questions regarding these comments, please
direct them to Jeffrey Gordon, Staff Accountant, at (202) 551-3866
or, in his absence, to the undersigned at (202) 551-3769.
Sincerely,
Rufus Decker
Accounting Branch Chief
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Mr. Gaylord M. Karren
Electric Aquagenics Unlimited, Inc.
December 28, 2005
Page 1 of 8
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE