AQUA DYNE INCORPORATED
c/o WILLIAM D. LINDBERG
23011 MOULTON PARKWAY, SUITE A-10
LAGUNA HILLS
CALIFORNIA 92653
TEL : 1 949 380 4033
FAX : 1 949 380 1781
www.aquadyne.us.com
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July 28, 2006
VIA EDGAR AND FACSIMILE
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U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549
Attention: Mr. George F. Ohsiek, Jr.
Mr. Adam Phippen
Dear Messrs. Ohsiek and Phippen:
This letter responds to the comment letter dated June 30, 2006 from your office
with respect to our Form 10-KSB for the fiscal year ended December 31, 2005 and
our Form 10-QSB for the quarterly period ended March 31, 2006. The text of your
letter has been included for your reference and our response is presented below
each comment.
Please note that our name changed from "Aqua Dyne, Inc." to "EESTech, Inc."
effective as of June 26, 2006. Our trading symbol is now "EESH.OB." However, in
the interest of avoiding confusion, our responses are being provided on Aqua
Dyne, Inc. letterhead.
FORM 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2005
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Item 7. Financial Statements, page 15
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Report of Independent Registered Public Accounting Firm, page 17
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1. Please have your auditors revise their audit report to make
reference to the cumulative data included in your financial
statements. Such auditor association with the cumulative data is
required on an annual basis as long as you are in the development
stage.
RESPONSE
The audit report has been revised as requested. We have attached a
revised version of the audit report as APPENDIX A to this response
letter. In addition, we will amend our Form 10-KSB for the fiscal
year ended December 31, 2006 to provide the revised version of the
audit report upon completion of your review of our response letter.
1
Consolidated Balance Sheets, page 19
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2. Please tell us and disclose the nature and terms of your common
stock subscription agreements. Also tell us how you account for the
subscriptions at the date you enter into the subscription agreements
and at the date that you receive cash for and actually issue the
fully paid shares. Ensure in your response you address the basis for
both your balance sheet classification of the consideration received
as well as the cash flows presentation related to these agreements.
RESPONSE
We relied on the exemption under Section 4(2) of the Securities Act
of 1933, as amended, in connection with the offer and sale of shares
of our common stock to certain investors.
The company has a number of U.S. resident and international
stockholders.
Under the subscription agreement, an investor choosing to purchase
shares of our common stock is required to send payment for the
agreed number of shares to either our U.S. or Australian bank
accounts. Once we receive confirmation that the agreed amount has
been received, we complete a confirmation letter (referred to as a
Stock Pledge) that is signed confirming the terms of the stock
issuance. This letter contains details such as the name of the
investor, number of restricted shares being subscribed for, the
purchase price, and if the funds are not in USDollars, the relevant
exchange rate to convert the local currency to an equivalent USD
equivalent.
We then forward an advice to our U.S. transfer agent confirming the
details of the stock issuance and authorizing the transfer agent to
issue the stock certificates. Following a period of up to three
weeks, the transfer agent sends the stock certificates by overnight
courier to our Australian office. Our corporate secretary validates
the information contained in the stock certificate and sends the
certificates to the respective investor.
In the event payment is received from the investor close to the end
of a fiscal quarter, we may not be able to issue the stock
certificates to the investor before the end of that fiscal quarter
because of administrative delays in connection with processing the
stock certificates by us and the transfer agent. When this does
occur, we record the transaction in the following manner:
(i) in the balance sheet, we include the transaction in the line
item "Cash" under the "Current Assets" heading and in the line
item "Common stock subscribed" under the "Stockholders'
equity" heading; and
(ii) in the statement of cash flows, we include the cash received
under the line item "Common shares subscribed" under the "Cash
flows from financing activities" heading.
Item 8. Controls and Procedures, page 28
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3. Please revise to disclose your conclusions about the effectiveness
of your disclosure controls and procedures as of the end of the
period covered by the report. Your current disclosure regarding your
conclusions as of December 31, 2004 is out of date. Please similarly
revise your Item 3 disclosures in your Form 10-QSB for the quarterly
period ended March 31, 2006. Your current disclosure in the Form
10-QSB which does not specify the date of your evaluation or
conclusions is not sufficient.
2
RESPONSE
As requested, we have revised the disclosure under Item 8A "Controls
and Procedures" to our Form 10-KSB for the fiscal year ended December
31, 2005 as follows:
"EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Chief
Executive Officer and Chief Financial officer, after
evaluating the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of the end of the period covered by this Form
10-KSB, have concluded that its disclosure controls and
procedures are effective to reasonably ensure that material
information required to be disclosed by the Company in the
reports that are filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specific by Securities and Exchange Commissions' rules
and forms and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There
were no changes made during our most recently completed fiscal
quarter in our internal control over financial reporting that
have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting."
Our Chief Executive Officer and Chief Financial Officer
supplementally confirm that a review of our disclosure controls and
procedures was conducted at the time of the annual audit and was
completed in February 2006.
As requested, we have revised the disclosure under Item 3 "Controls
and Procedures" to our Form 10-QSB for the quarterly period ended
March 31, 2006 as follows:
"EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Chief
Executive Officer and Chief Financial officer, after
evaluating the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of the end of the period covered by this Form
10-KSB, have concluded that its disclosure controls and
procedures are effective to reasonably ensure that material
information required to be disclosed by the Company in the
reports that are filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specific by Securities and Exchange Commissions' rules
and forms and that such information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There
were no changes made during our most recently completed fiscal
quarter in our internal control over financial reporting that
have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting."
4. Please revise your disclosures regarding the definition of
disclosure controls and procedures to ensure it encompasses the
entire definition of disclosure controls and procedures in Exchange
Act Rules 13a-15(e) and 15d-15(e). Your current disclosures do not
achieve this objective. Please similarly revise your disclosures
under Item 3 or your Form 10-QSB for the quarterly period ended
March 31, 2006.
3
RESPONSE
Please see our response to comment 3 above, which we incorporate
herein by reference.
5. Please revise your disclosure regarding changes to internal controls
over financial reporting to identify ANY CHANGES, not just
significant changes, that occurred DURING THE MOST RECENT FISCAL
QUARTER which have materially affected, or are reasonably likely to
materially affect, your internal controls over financial reporting.
See Item 308(c) of Regulation S-B. Please similarly revise your
disclosures under Item 3 of your Form 10-QSB for the quarterly
period ended March 31, 2006.
RESPONSE
Please see our response to comment 3 above, which we incorporate
herein by reference.
6. Please revise your certifications here and in your Form 10-QSB for
the quarterly period ended March 31, 2006 to use the exact wording
specified in Item 601(b)(31) of Regulation S-B. The only
modification to the wording that would be acceptable is the
modification contemplated in Question and Answer 10 of the Division
of Corporation Finance's Sarbanes-Oxley Act of 2002 Frequently Asked
Questions, issued November 8, 2002 and available on our website at
www.sec.gov.
RESPONSE
As requested, Exhibit 31 has been revised. We have attached a
revised version of Exhibit 31 as Appendix B to this response letter.
We will amend our Form 10-QSB for the quarterly period ended March
31, 2006 to provide the revised version of Exhibit 31 upon
completion of your review of our response letter.
FORM 10-QSB FOR QUARTERLY PERIOD ENDED MARCH 31, 2006
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Item 1. Financial Statements
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Consolidated Statement of Cash Flows, page 6
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7. Based on review of your consolidated statement of operations, we
note that you recorded a gain on the disposition of fixed assets
during the three months ended March 31, 2006. Please tell us where
the proceeds from the disposition of these fixed assets are included
in your statements of cash flows. If the cash flows are not included
in investing cash flows, please revise your financial statements
accordingly, as SFAS 95 requires that cash flows from the sale of
fixed asserts be classified as an investing activity.
RESPONSE
Since incorporation we have incurred research and development
expenses associated with the development and operation of the
JETWATER Pilot Plant. These costs included the purchase of various
components that were used in the construction of the Pilot Plant and
ancillary infrastructure. The costs associated with the Pilot Plant
and its components were never reflected in the balance sheet as a
specific asset.
4
During the three months ended March 31, 2006, we concluded that as a
result of design changes selected components of the Pilot Plant were
superfluous to current requirements and could be disposed or
scrapped.
We disposed of a boiler component and treated the resultant cash
flow of approximately AUD 35,000 as miscellaneous income. The sale
of the boiler component of the Pilot Plant is not in the statement
of cash flows because the Pilot Plant was not recorded as an asset,
but recorded as research and development expense in accordance with
FAS 2, par 8(b).
8. Please clarify for us what the line item captioned "comprehensive
gain (loss) on translation" represents. If, as we assume, this line
item represents the effect of exchange rate changes on cash, please
explain to us how the amount for each period is computed, as we are
interested to understand why the amounts match the amount of foreign
currency translation gains and losses recorded in other
comprehensive income in each period presented.
RESPONSE
At December 31, 2005, the balance of accumulated other comprehensive
income was $10,999 (December 31, 2005, last column of Statement of
Changes in Stockholders' Equity (Deficit) and also on the December
31, 2005 column in the Balance Sheet's stockholders' equity). The
adjustment for foreign currency translation for the quarter ended
March 31, 2006 was $63,262 (see last column of Statement of Changes
in Stockholders' Equity (Deficit)). Hence, the balance for
accumulated other comprehensive for the quarter ended March 31, 2006
was $74,261.
The comprehensive gain/(loss) on translation in the statement of
cash flows was matched with the translation gains and losses in
other comprehensive income as the translation gain (loss) from
various transactions were not identified separately per account in
the statement of cash flows. Hence, the total effect was presented
as one item in the statement. Cumulative other comprehensive income
as of March 31, 2006 is the sum of foreign currency translation
adjustments relating to profit and loss accounts - $4,511, property
and equipment - ($339), long-term liabilities - ($60,840), and
equity - $130,929. The foreign currency adjustment relating to
profit and loss was considered immaterial.
Notes to Consolidated Financial Statements, page 7.
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9. As SFAS 123(R) is effective for your financial statement period
beginning January 1, 2006, please revise to provide all of the
disclosures required by that standard, including the disclosures
required in the period the statement is adopted. Refer to paragraphs
64, 84, A240 and A241 of SFAS 123(R).
RESPONSE
We will provide the following additional disclosure in Note 2,
"Summary of Significant Accounting Policies," to our Form 10-KSB for
the fiscal year ended December 31, 2005:
"In December 2004, SFAS No. 123R, "Share-based Payment" was
issued and replaces SFAS No. 123, "Accounting for Stock-Based
Compensation" and supersedes Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." SFAS 123R requires the measurement of all employee
share-based payments, including grants of employee stock
options, using a fair-value based model. Deferred compensation
calculated under the fair value method would then be amortized
into income over the respective vesting period of the stock
option. The accounting provisions of SFAS 123R are effective
for reporting periods beginning after June 15, 2005.
5
The Company accounted for employee stock-based compensation
using the intrinsic value method supplemented by pro forma
disclosures in accordance with APB 25 and SFAS 123 "Accounting
for Stock-Based Compensation" ("SFAS 123"). Under the
intrinsic value based method, compensation cost is the excess,
if any, of the quoted market price of the stock at grant date
or other measurement date over the amount an employee must pay
to acquire the stock. Under the intrinsic value method, the
Company has recognized stock-based compensation common stock
on the date of grant.
If the fair value based method under FAS 123 had been applied
in measuring stock-based compensation expense for the years
ended December 31, 2005 and 2004, the pro forma on net loss
and net loss per share would have been as follows:"
Years ended
December 31
2005 2004
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Net loss, as reported $(1,737,846) $(5,159,117)
Add: Stock based employee compensation
expense included in reported net loss,
net of related tax effects -- --
Deduct: Total Stock-based employee
compensation expense determined under
fair-value based method for all awards not
included in net loss -- --
----------- -----------
Pro-forma net loss $(1,737,846) $(5,227,946)
=========== ===========
Loss per share:
Basic and diluted - as reported $ (0.13) $ (0.56)
Basic and diluted - pro-forma $ (0.13) $ (0.56)
As requested, we will provide the following additional disclosure to
our Form 10-QSB for the quarterly period ended March 31, 2006 and
make the appropriate adjustments accordingly:
"Prior to January 1, 2006, the Company accounted for employee
stock-based compensation using the intrinsic value method
supplemented by pro forma disclosures in accordance with APB
25 and SFAS 123 "Accounting for Stock-Based Compensation"
("SFAS 123") Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market
price of the stock at grant date or other measurement date
over the amount an employee must pay to acquire the stock.
Under the intrinsic value method, the Company has recognized
stock-based compensation common stock on the date of grant.
Effective January 1, 2006 the Company adopted SFAS 123R using
the modified prospective approach and accordingly prior
periods have not been restated to reflect the impact of SFAS
123R. Under SFAS 123R, stock-based awards granted prior to its
adoption will be expensed over the remaining portion of their
vesting period. These awards will be expensed under the
straight line amortization method using the same fair value
measurements which were used in calculating pro forma
stock-based compensation expense under SFAS 123. For
stock-based awards granted on or after January 1, 2006, the
Company will amortize stock-based compensation expense on a
straight-line basis over the requisite service period, which
is generally a five-year vesting period.
6
SFAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual
forfeitures differ from initial estimates. Stock-based compensation
expense was recorded net of estimated forfeitures for the quarter
ended March 31, 2006 such that expense was recorded only for those
stock-based awards that are expected to vest. Previously under APB
25 to the extent awards were forfeited prior to vesting, the
corresponding previously recognized expense was reversed in the
period of forfeiture.
If the fair value based method under FAS 123 had been applied in
measuring stock-based compensation expense for the quarter ended
March 31, 2005, there would still have been no compensation expense
recorded, thus the pro-forma net loss and pro-forma basic and
diluted loss per share will equal the amounts as reported."
Note 8 of the Form 10-KSB as of December 31, 2005, Stock Option Plan, will be
revised as follows:
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On June 6, 2002, the Company adopted a stock option plan (amended and
restated in 2003) under which 1,000,000 shares of common stock are
available for issuance with respect to employees and service providers of
the Company. The options may be exercised at not less than 100% of the fair
value of the shares or 110% if the person is an affiliate of the Company on
the date of grant. The options expire after 10 years or 5 years from the
date of grant if the person is ten percent shareholder of the Company. The
options are exercisable at no less than 20% per year over a 5 year period
when granted and are subject to restrictions on transfer, during the term
of the option. The plan terminates 10 years from the date of adoption.
The Company applies APB Opinion 25 and related interpretation in accounting
for stock options. The Company did not record any compensation expense for
the years ended December 31, 2005 and 2004.
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
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Options outstanding at June 6, 2002 -- $ --
Granted during the year 200,000 1.05
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Outstanding at December 31, 2002 200,000 $ 1.05
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Outstanding at December 31, 2003 300,000 $ 1.05
------- --------
Outstanding at December 31, 2004 100,000 $ 1.05
------- --------
Outstanding at December 31, 2005 -- $ --
======= ========
21,667 stock options were exercisable as of December 31, 2004.
There were no options outstanding at December 31, 2005.
7
10. Please revise to provide the interim period segment disclosures
required by paragraph 33 of SFAS 131.
RESPONSE
As stated in Note 10, "Segment Information," of our Form 10-KSB for
the fiscal year ended December 31, 2005, our marketing and research
and development activity is administered in two operating segments:
United States and Australia. As stated on page 9 of our Form 10-QSB
for the quarterly period ended March 31, 2006, there were no
research and development costs for the three months ended March 31,
2006 because the research contract with Global Power & Water, Inc.
ended in June 2005, which was $25,000 per quarter.
As requested, we will provide the following additional disclosure to
our Form 10-QSB for the quarterly period ended March 31, 2006:
SEGMENT INFORMATION
The Company's marketing and research and development activity is
administered in two operating segments: United States and Australia.
United States Australia
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Net Loss, three months ended March 31, 2006 $ 159,946 $ 147,059
2005 $ 124,096 $ 585,042
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Long lived assets (net) March 31, 2006 $ 0 $ 30,607
2005 $ 0 $ 46,966
Item 3, Controls and Procedures, page 10
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11. 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 revise your rule references
accordingly.
RESPONSE
As requested, we will revise our rule references in future filings.
In connection with responding to your comments, the Company hereby
acknowledges that:
o it is responsible for the adequacy and accuracy of the
disclosure in the filings;
o staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any
action with respect to the filings; and
o it may not assert staff comments as a defense in any
proceedings initiated by the Commission or any person under
the federal securities laws of the United States.
8
In the event that the staff has any further requests or matters seeking
clarification, please feel free to contact me at your earliest convenience at 61
7 3832 9883, fax 61 7 3832 1336 or my cell phone 0418 769 124.
Sincerely,
/s/ Paul Bailey
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Paul Bailey
Chief Executive Officer
Chief Financial Officer
9
APPENDIX A
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aqua Dyne, Inc. and Subsidiary
We have audited the accompanying balance sheet of Aqua Dyne, Inc. and Subsidiary
as of December 31, 2005, and the related statements of income, stockholders'
equity and comprehensive income, and cash flows for the year ended December 31,
2005 and for the period from inception (April 26, 2000) through December 31,
2005. 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 audit. The financial statements of Aqua Dyne, Inc. and
Subsidiary as of December 31, 2004, were audited by other auditors whose report
dated May 25, 2005, on those statements included an explanatory paragraph that
described the factors that raised substantial doubt about the Company's ability
to continue as a going concern discussed in Note 3 to the financial statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aqua Dyne, Inc. and Subsidiary
as of December 31, 2005, and the results of its operations and its cash flows
for the year ended December 31, 2005 and for the period from inception (April
26, 2000) through December 31, 2005 in conformity with accounting principles
generally accepted in the United States of America..
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed further in Note
3, the Company has been in the development stage since its inception (April 26,
2000) and continues to incur significant losses. The Company's viability is
dependent upon its ability to obtain future financing and the success of its
future operations. These factors raise substantial doubt as to the Company's
ability to continue as a going concern. Management's plan in regard to these
matters is also described in Note 3. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Vasquez & Co. LLP
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Los Angeles, California
March 24, 2006
APPENDIX B
EXHIBIT 31
CERTIFICATIONS
I, Paul Bailey, Chief Executive Officer and Chief Financial Officer of Aqua
Dyne, Inc. (the "Company" or "Registrant") certify that:
1. I have reviewed this Quarterly Report on Form 10-QSB of Aqua Dyne, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under my supervision, to
ensure that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to me by others within those entities,
particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's most
recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial reporting;
and
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of Registrant's board of directors
(or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information;
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting;
Date: July 26, 2006 /s/ Paul Bailey
------------------------------------
Paul Bailey, Chief Executive Officer
and Chief Financial Officer