June 1, 2006
VIA EDGAR
Mr. Rufus Decker
Accounting Branch Chief
Securities and Exchange Commission
Washington, D.C. 20549-7010
Re: Form 10-KSB for the Year Ended December 31, 2005
Forms 10-QSB for the quarter ended March 31, 2006
File No. 0-51807
Dear Mr. Decker:
This letter sets forth the responses of Electric Aquagenics Unlimited, Inc. (the
"Company") to the comments made in your May 22, 2006 letter. For your
convenience, we have repeated in bold letters the staff's comments before each
of our responses.
General
1. Where a comment below requests additional disclosures or other
revisions to be made, please show us your proposed revised disclosure
in your response. With the exception of the comments below that
specifically request an amendment, all revisions may be included in
your future filings.
The staff's comment is noted.
Item 6 - Management's Discussion and Analysis or Plan of Operation, page 22
Liquidity and Capital Resources, page 30
2. Please discuss in your liquidity section the changes in your investing
and financing cash flows as depicted in your statement of cash flows.
See the SEC Interpretive Release No. 33-8350.
The Company will, in its future filings, discuss in the liquidity section of its
MD&A the changes in its cash flows as suggested in SEC Interpretive Release No.
33-8350. Specifically, we will enhance our disclosure by discussing the
following issues where material, as well as other financing and investing
activities, as applicable:
o historical information regarding sources of cash and capital
expenditures;
o an evaluation of the amounts and certainty of cash flows;
o funds necessary to maintain current operations, complete projects
underway and achieve stated objectives or plans;
o commitments for capital or other expenditures;
o the reasonably likely exposure to future cash requirements
associated with known trends or uncertainties, and an indication of
the time periods in which resolution of the uncertainties is
anticipated;
o the existence and timing of commitments for capital expenditures and
other known and reasonably likely cash requirements;
o discussion and analysis of known trends and uncertainties;
o a description of expected changes in the mix and relative cost of
capital resources;
o indications of which balance sheet or income or cash flow items
should be considered in assessing liquidity; and
o a discussion of prospective information regarding the Company's
sources of and needs for capital, except where otherwise clear from
the discussion.
To the extent material, the Company will also disclose historical financing
arrangements and their importance to cash flows, including, to the extent
material, information that is not included in the financial statements. This
disclosure will discuss and analyze, to the extent material, the Company's:
o external debt financing;
o use of off-balance sheet financing arrangements;
o issuance or purchase of derivative instruments linked to its stock;
o use of stock as a form of liquidity; and
o estimate of the potential impact of known or reasonably likely
changes in credit ratings or ratings outlook (or inability to
achieve changes).
Item 7 - Financial Statements
General
3. It appears that you have three operation segments beginning in 2005.
Please confirm that you have determined that these three operating
segments are also reportable segments. If you believe that you meet the
criteria discussed in paragraph 17 of SFAS 131 for aggregation of your
operating segments into less than three reportable segments, provide us
with the analysis you performed in reaching this conclusion. In
addition, please tell us why you have not provided the disclosures
required by paragraph 33 of SFAS 131 in your 2005 Forms 10-QSB. If the
paragraph 33 information should have been included, please amend your
2005 Forms 10-QSB accordingly to include it.
Please see the Company's response, dated May 25, 2006, to comment 5 of
the staff's letter, dated February 10, 2006.
Note 1 - Business Description and Significant Accounting Policies, page F-10
General
4. Please disclose the amounts of your actual costs for shipping and
handling excluded from cost of sales for each period presented as
required by paragraph 6 of EITF 00-10, and the line item these excluded
amounts are included in.
Please see the Company's response, dated May 25, 2006, to comment 6 of
the staff's letter, dated February 10, 2006.
Warranties, page F-11
5. Please revise to include the disclosure required by paragraph 14 of
FIN 45 for each period presented.
The Company will provide a separate footnote for warranties in all
future filings of both form 10-KSBs and 10-QSBs with the following
disclosures as applicable to the periods being reported on:
Note XX - Warranties - The Company warrants its products against
defects in materials and workmanship for a period of one to three years
on older machines sold and is moving to using machine hours on current
sales. The Company reviews the historical experience of failure rates
and estimates the rate of warranty claims that will be made and has
accrued a warranty reserve for these anticipated future warranty costs.
If actual results differ from the estimates, the Company would adjust
the estimated warranty liability. Changes in the warranty reserve are
as follows:
For the Years Ended December 31,
-----------------------------------------
2005 2004
-------------------- -------------------
Warranty reserve at beginning of period $ 95,160 $ -
Costs accrued for additional warranties 67,000 120,000
Service obligations honored (65,360) (24,840)
-------------------- -------------------
Warranty reserve at end of period $ 96,800 $ 95,160
-------------------- -------------------
Earnings Per Share, page F-12
6. Please disclose how you are treating the restricted shares you have
issued in computing your basic and diluted earnings per share. See
paragraphs 10 and 13 of SFAS 128.
Please see the Company's response, dated May 25, 2006, to comment 7 of
the staff's letter, dated February 10, 2006. In addition, for further
clarification, these shares were issued and were outstanding and
accordingly were included in the calculation of loss per share.
Note 8 - Acquisition of Business, page F-16
7. Per Items 310(c) and (d) of Regulation S-B, historical financial
statements of the acquired business and pro forma financial information
might be required to be filed, based upon the results of significance
tests performed in accordance with Items 310 (c)(2) and (3) of
Regulations S-B. Please provide us with your significance tests for
each period presented and file a Form 8-K with the required audited
financial statements and pro forma information.
Please see the Company's response, dated May 25, 2006, to comment 8 of
the staff's letter, dated February 10, 2006.
Note 9 - Related Party Transactions, page F-16
Sales to Affiliate, page F-16
8. Please tell us more regarding the conversion of your accounts
receivable to long term notes receivable. What are the stated maturity
dates of the notes receivable? Is there a minimum payment plan
associated with the notes receivable, and if so, have payments been
received in accordance with the plan? What is your basis for believing
these amounts will be collected? When do you think full payment will be
received and why has almost nothing been paid to date? Why do you think
this trend is going to change?
Please see the Company's response, dated May 25, 2006, to comment 9 of
the staff's letter, dated February 10, 2006.
Note 10 - Senior Convertible Debt, page F-17
9. Please provide us with detailed computations which support you
conclusion that you have derivative liability in the amount of
$5,353,716 at December 31, 2005.
Please see the Company's response, dated May 25, 2006, to comment 13 of
the staff's letter, dated February 10, 2006.
Note 17- Loss Per Share, page F-23
10. Please disclose the number of anti-dilutive shares by each type of
security. See paragraph 40 (c) of SFAS 128.
At December 31, 2005 and 2004, the Company had the following shares
that were not included in the computation of loss per share because
their effect would be anti-dilutive.
For the Years
Ended December 31,
-----------------------------
2005 2004
----------- -----------
Convertible notes payable 1,000,000 -
Employee stock options 605,000 -
Non-employee stock options 224,999 -
Warrants 3,403,293 585,481
--------- -------
Total potentially anti-dilutive shares 5,233,292 585,481
FORM 10-QSB FOR THE PERIOD ENDED MARCH 31, 2006
General
11. Please address the above comments in your interim filings as well.
We will address the above comments in our future interim filings if
such items are present in the filing.
Item 3 - Controls and Procedures, page 18
12. 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 and amend your Form 10-QSB to state
whether or not they are effective. See Item 307 of Regulation S-B.
We will amend our 10-QSB for the period ended March 31, 2006 to state
whether the controls and procedures are effective.
Exhibit 32
13. Please file an amendment to your Form 10-QSB to include currently
dated certifications, as opposed to the certifications presented in your filing
dated May 12, 2005. In doing so, please re-file the Form 10-QSB in its entirety.
We will file an amended Form 10-QSB in its entirety and include
currently dated certifications.
We appreciate your interest and help in adding clarifications to our
disclosures to our shareholders. Our mailing address is 1464 West 40 South,
Suite 200, Lindon, Utah 84042; telephone: (801) 443-1031; fax: (801) 443-1029;
e-mail: wjaynes@eau-x.com.
Very truly yours,
Electric Aquagenics Unlimited, Inc.
/s/ H. Warren Jaynes
H. Warren Jaynes
Chief Financial Officer