UNITED
STATES
  S ECURITIES
AND E XCHANGE C OMMISSION
  Washington,
D.C. 20549
 
 FORM
10-QSB
 
 
 x
    Quarterly
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended March 31, 2005
 
 or
 
 o
    Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934.
 
 
 333-86830(Commission
      File No.)
  
  **ELECTRIC
AQUAGENICS UNLIMITED, INC.**
 (name of
small business issuer in its charter)
  Delaware
    
    87-0654478(State
      or other jurisdiction of incorporation or organization)
    
    (I.R.S.
      Employer Identification No.)1464
      W. 40 S. Suite #200, Lindon, Utah
    
    84042-1629(Address
      of principal executive offices)
    
    (Zip
      Code)
 Issuer’s
telephone number:(801)
443-1031
 
 As of May
10, 2005, the Registrant had 8,008,373 shares of
Common Stock, $0.0001 par value outstanding.
 
 
 
   PART I -
FINANCIAL INFORMATION
 
 **ELECTRIC
AQUAGENICS UNLIMITED, INC.**
 
 ***CONSOLIDATED
BALANCE SHEET***
 **(Unaudited)**
 
 ***MARCH
31, 2005***
  ASSETSCURRENT
      ASSETSCash
      and cash equivalents
    
    $
    834,108Accounts
      receivable, net
    
    
    157,305Receivables
      from affiliate
    
    
    327,026Inventory
    
    
    1,343,172Total
      current assets
    
    
    2,661,611PROPERTY
      AND EQUIPMENT, net ofaccumulated depreciation of
      $145,561
    
    
    868,279OTHER
      ASSETSPatents,
      trademarks and intellectual property
    
    
    1,030,800Investments
    
    
    898,275Goodwill
    
    
    160,259Deposits
    
    
    5,758Total
      assets
    
    $
    5,624,982LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
    
    $
    739,734Accrued
      expenses
    
    
    47,748Notes
      payable
    
    
    14,900Current
      portion of long-term debt
    
    
    43,660Total
      current liabilities
    
    
    846,042LONG
      TERM DEBT,net
      of current portion
    
    
    222,858STOCKHOLDERS’
      EQUITYCommon
      stock, $.0001 par value; 50,000,000 shares authorized;
      7,154,761issued and outstanding
    
    
    715Additional
      paid in capital
    
    
    11,348,141Stock
      issuance obligation
    
    
    1,125,000Accumulated
      deficit
    
    
    (7,917,774
    )Total
      stockholders’ equity
    
    
    4,556,082Total
      liabilities and stockholders’ equity
    
    $
    5,624,982
 
 
   See
accompanying notes to consolidated financial statements.
 - 2
-
  **ELECTRIC
AQUAGENICS UNLIMITED, INC.**
 
 ***CONSOLIDATED
STATEMENTS OF OPERATIONS***
 **(Unaudited)**
 
 ***THREE
MONTHS ENDED*** **MARCH
31, 2005 AND 2004**
 
 
 **2005**
    
    **2004**NET
      SALES
    
    $
    87,880
    
    $
    100,000COST
      OF GOODS SOLD
    
    
    23,175
    
    
    33,600GROSS
      PROFIT
    
    
    64,705
    
    
    66,400OPERATING
      EXPENSESMarketing
      and promotion
    
    
    204,964
    
    
    203,797Research
      and development
    
    
    299,889
    
    
    118,361General
      and administrative
    
    
    1,287,590
    
    
    1,399,851Total
      operating expenses
    
    
    1,792,443
    
    
    1,722,009LOSS
      FROM OPERATIONS
    
    
    (1,727,738
    )
    
    (1,655,609
    )OTHER
      INCOME (EXPENSE)Loss
      from equity method investee
    
    
    (27,000
    )
    
    —Interest
      expense
    
    
    (13,389
    )
    
    (74,227
    )Interest
      income
    
    
    15,699
    
    
    —Other
      income (expense)
    
    
    998
    
    
    —Total
      other income (expense)
    
    
    (23,692
    )
    
    (74,277
    )LOSS
      BEFORE PROVISION FOR INCOME TAXES
    
    
    (1,751,430
    )
    
    (1,729,836
    )PROVISION
      FOR INCOME TAXES
    
    
    —
    
    
    —NET
      LOSS
    
    $
    (1,751,430
    )
    $
    (1,729,836
    )NET
      LOSS PER SHARE
    
    $
    (0.31
    )
    $
    (0.41
    )WEIGHTED
      AVERAGE OF SHARES OUTSTANDING
    
    
    5,605,500
    
    
    4,145,628
 
  See
accompanying notes to consolidated financial statements.
 - 3
-
  **ELECTRIC
AQUAGENICS UNLIMITED, INC.**
 
 ***CONSOLIDATED
STATEMENTS OF CASH FLOWS***
 **(Unaudited)**
 
 ***THREE
MONTHS ENDED*** **MARCH
31, 2005 AND 2004** ****
 
 
 
 **2005**
    
    **2004****CASH
      FLOWS FROM OPERATING ACTIVITIES**Net
      loss
    
    $
    (1,751,430
    )
    $
    (1,729,836
    )Adjustments
      to reconcile net loss to net cashused
      in operating activities:Depreciation
    
    
    32,500
    
    
    1,211Loss
      from equity method investee
    
    
    27,000
    
    
    —Changes
      in operating assets and liabilities:Decrease
      in accounts receivable
    
    
    26,706
    
    
    25,000(Increase)
      in receivables from affiliates
    
    
    —
    
    
    (25,913
    )(Increase)
      decrease in inventory
    
    
    (839,856
    )
    
    15,177Increase
      (decrease) in accounts payable
    
    
    450,914
    
    
    (43,583
    )Increase
      (decrease) in accrued expenses
    
    
    24,336
    
    
    (9,623
    )Net
      cash used in operating activities
    
    
    (2,029,830
    )
    
    (1,767,567
    )**CASH
      FLOWS FROM INVESTING ACTIVITIES**Acquisition
      of property and equipment
    
    
    (362,916
    )
    
    (216,831
    )Investments
    
    
    (120,556
    )
    
    (160,259
    )Net
      cash used in investing activities
    
    
    (483,472
    )
    
    (1,289,258
    )**CASH
      FLOWS FROM FINANCING ACTIVITIES**Payments
      on notes payable
    
    
    —
    
    
    (79,900
    )Payments
      on long term debt
    
    
    (10,479
    )
    
    (134,957
    )Proceeds
      from issuance of common stock
    
    
    2,975,000
    
    
    3,178,500Net
      cash provided by financing activities
    
    
    2,964,521
    
    
    2,963,643NET
      DECREASE IN CASH
    
    
    451,219
    
    
    1,196,076CASH
      and cash equivalents, beginning of period
    
    
    382,889
    
    
    593,175CASH
      and cash equivalents, end of period
    
    $
    834,108
    
    $
    1,789,251
 
   See
accompanying notes to consolidated financial statements.
 - 4
-
  **ELECTRIC
AQUAGENICS UNLIMITED, INC.**
 
 ***NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS***
 
 **MARCH
31, 2005**
 
 **NOTE
1 - BASIS OF PRESENTATION**
  The
accompanying consolidated financial statements as of March 31, 2005 and 2004
were prepared by the Company without audit pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
In management’s opinion that all necessary adjustments, which consist primarily
of normal recurring adjustments, to the financial statements have been made to
present fairly the financial position and results of operations and cash flows.
The results of operations for the respective periods presented are not
necessarily indicative of the results for the respective complete years. The
Company has previously filed with the SEC an annual report on Form 10-KSB which
included audited financial statements for the two years ended December 31, 2004.
It is suggested that the financial statements contained in this filing be read
in conjunction with the statements and notes thereto contained in the Company’s
10-KSB filing.
 
 **NOTE** **2 - PRINCIPLES OF CONSOLIDATION**
 
 The
accompanying consolidated financial statements include the accounts of Electric
Aquagenics Unlimited, Inc. and its wholly owned subsidiaries Equilease, Inc. and
Aquagen International, Inc. (collectively, the “Company”). All significant
intercompany accounts and transactions have been eliminated.
 
 **NOTE
3** **- COMMON STOCK**
  In
February 2005, the Company successfully completed additional private placement
offering of $2,975,000 for 850,000 shares of its common stock at $3.50 per
share. Under this offering, the Company received proceeds of $2,630,600, net of
offering costs of approximately $344,000 plus placement agent warrants of 73,800
shares.
 
 **NOTE
4** **- STOCK OPTION PLAN**
 
 In
February 2005, the Company’s board of directors approved and adopted its 2005
Omnibus Stock Option Plan. Under the plan, the Company may issue both Incentive
Stock Options to employees only and Non-Qualified Stock Options to employees and
consultants at its discretion. The exercise price of the incentive stock options
are 100% of the fair market value at grant date. The exercise price of the
non-qualified options are at not less than 85% of the fair market value at grant
date.
 
 **NOTE
5** **- GOING CONCERN**
  During
the current period, the Company incurred significant losses and a negative cash
flow from operations. As a result, at March 31, 2005, the Company had a high
level of equity financing transactions and additional financing will be required
by the Company to fund its future activities and to support its operations.
However, there is no assurance that the Company will be able to obtain
additional financing. Furthermore, there is no assurance that rapid
technological changes, changing customer needs and evolving industry standards
will enable the Company to introduce new products and services on a continual
and timely basis so that profitable operations can be attained. The Company’s
ability to achieve and maintain profitability and positive cash flows is
dependent upon its ability to increase sales and profit margins and control
operating expenses. Management plans to mitigate its losses in the near term
through the further development and marketing of its patents, trademarks, brand
and product offerings.
 
  - 5
-
  **ELECTRIC
AQUAGENICS UNLIMITED, INC.**
 
 ***NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS***
 
 **MARCH
31, 2005**
 
 
 
 **NOTE
6** **- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION**
 
 For the
three months ended March 31, 2005, the Company paid cash for the
following:
 
 Interest
    
    $
    13,389Income
      taxes
    
    $
    —
 **NOTE
7** **- SUBSEQUENT EVENTS**
 
 In April
2005, the Company sold its investment in Biofilm Strategies Corporation, a
privately held Delaware corporation (“Biofilm”), consisting of 359,000 shares of
common stock (the “Shares”), to an unrelated third party for a total
consideration of $718,000, which was paid in cash at the closing.  The
Shares represented approximately thirty-six percent (36%) of the total issued
and outstanding capital stock of Biofilm, and were acquired by the Company in
increments between April 2004 and January 2005 for total cash consideration of
$359,000.  The sale resulted in a gain to the Company of $359,000.
 The reason for the sale was that the Board of Directors of the Company
determined that the business of Biofilm no longer fit into the Company’s
strategic plans.
 
  - 6
-
   **Item
2.**  **** **Management's
Discussion and Analysis or Plan of Operation**
 
 We are in
the business of developing, manufacturing and marketing equipment that uses
water electrolysis to create fluids that clean, disinfect, remediate, and
hydrate; and developing, manufacturing and marketing consumer products that
support a healthy lifestyle. The fluids generated by our machines are
environmentally safe and free from toxins and harmful residues associated with
chemical based disinfecting and cleaning agents. The electrolyzed fluids
generated by our machines will replace many of the traditional products used in
commercial, industrial and residential disinfecting and cleaning.
  Our
consumer products currently consist of Aquagen ® oxygen
supplement and wellness products sold primarily through the health food and
nutraceutical markets, and Perfect Empowered Drinking WaterTM, a drinking water
that we bottle at a newly constructed bottling facility located at our corporate
offices. We plan to expand the market for our Aquagen ® products
and to develop other personal use products, such as skin care products,
periodontal products and a hand sanitizer product. We also intend to continue to
develop and market commercial and residential cleaning products, such as a
bottled surface cleaning product
  Our
revenues in the past have been derived primarily from equipment sales to
franchisees of our affiliated carpet cleaning company. However, we are
continuing to work on diversifying into
other high demand areas such as poultry processing, consumer products and
grocery produce spraying systems, and we are beginning to generate limited
revenues in those areas. As we move into those areas, we hope to develop a model
whereby we derive revenue from a combination of equipment leases, metering,
piecing and entering into distributorships and joint ventures with various
specific industry leading companies. Piecing is the process in which we place
and maintain machines at commercial facilities, such as processing plants, and
the facility is charged per unit of product processed at a designated price.
 
 Our
operations are currently funded by a combination of revenues and capital
funding.
 
 Results
of Operations
 
 The
following discussion should be read in conjunction with selected financial data
and the financial statements and notes to financial statements.
 
 Selected
Financial Information
  Three
      months endedMarch
      31,2005
    
    2004Revenue,
      net
    
    $
    87,880
    
    $
    100,000Gross
      profit (loss)
    
    
    64,705
    
    
    66,400Operating
      loss
    
    
    (1,727,738
    )
    
    (1,655,609
    )Other
      income (expense)
    
    
    (23,692
    )
    
    (74,227
    )Net
      income (loss)
    
    
    (1,751,430
    )
    
    (1,729,836
    )
  - 7
-
  March
      31,
      2005
    
    December
      31,
      2004Balance
      Sheet Data:Cash
      and Cash Equivalents
    
    $
    834,108
    
    $
    382,889Total
      Current Assets
    
    
    2,661,611
    
    
    1,389,556Total
      Assets
    
    
    5,624,982
    
    
    3,906,959Total
      Current Liabilities
    
    
    846,042
    
    
    370,792Long
      Term Debt
    
    
    222,858
    
    
    233,337Total
      stockholders’ equity
    
    $
    4,556,082
    
    $
    3,302,830
 
 Discussion
 
 The
Company’s revenue from operations has remained fairly level over the last few
quarters, with most of the Company’s revenues coming from sales of its equipment
to franchisees of ZEROREZ Franchising Systems, Inc., an affiliate of the Company
that is in the business of offering carpet cleaning franchises to the public. At
the present time, there are almost thirty ZEROREZ outlets in operation in
several cities throughout the United States. ZEROREZ franchisees are required to
obtain and use certain equipment from the Company. Since each ZEROREZ franchisee
is required to purchase or lease at least one of our fluid generators for each
five carpet cleaning trucks it has in operation, the anticipated growth in
ZEROREZ franchisees should translate directly into revenue growth for the
Company. We expect that revenue from the sale of our fluid generators to ZEROREZ
franchisees will continue to increase as ZEROREZ more actively promotes the
franchises.
 
 We have
successfully installed our equipment in one poultry processing plant, and
we should begin generating revenue from that plant in the near future. We are
continuing to actively market our equipment to the poultry processing industry,
and we anticipate that revenue generated by that industry segment will represent
a significant addition to our total revenue in future years.
 
 In
February, 2005, we completed development of our new advanced P-6000 Electrolyzed
Oxidative Water System that is capable of producing up to 6,000 gallons of
electrolyzed oxidative water per hour, and we are currently equipment to produce
even larger quantities of electrolyzed oxidative water. This increased capacity
allows us to scale and customize flow volumes to support several different
commercial applications, including poultry processing, beef processing and other
high volume food processing facilities.
 
 In March
2005 we entered into a manufacturing agreement with a third party to manufacture
our expanding product line. Previously, all equipment was manufactured in-house
in our Kennesaw, Georgia facility. However, as orders for our larger capacity
equipment have begun to be received, we made the determination to outsource some
of our manufacturing to assure a constant supply of our equipment.
 
 In April
2005, we launched our new bottled drinking water product, known as “Perfect
Empowered Drinking Water TM .” So
far, we have signed with one local distributor to distribute our bottled
drinking water through local and regional grocery outlets. We expect to begin
obtaining revenues from our bottled drinking water during the second and third
quarter of 2005, and we anticipate that our drinking water revenues will
eventually become a significant portion of our total revenue.
 
 - 8
-
 
 Also in
April 2005, we completed a beta installation of our Empowered Water TM pathogen
intervention system at a supermarket in Georgia. The system, which was jointly
developed with KES Science and Technology located in Kennesaw, Georgia, is
designed to spray our specially treated electrolyzed oxidative water on produce
and floral products in the store. Tests have shown that spraying fruits,
vegetables and floral products with our electrolyzed oxidative water
dramatically increases the freshness and shelf life of such
products.
 
 The
Company had total revenues of $87,880 for the three months ended March 31, 2005,
which represents a decline of 12% from the $100,000 in total revenues for the
same period one year earlier. Management believes that it will begin generating
significant revenues from its bottled drinking water sales and poultry
processing plant operations during the next few quarters, beginning with the
second quarter of 2005.
 
 Marketing
and promotion expenses remained flat in the first quarter of 2005 when compared
to those expenses during the same period one year earlier.
 
 Research
and development expenses incurred in the first quarter of 2005 were 153% higher
than those expenses incurred during the same period one year earlier. This
increase is attributable to several factors, including the Company’s stepped up
development of higher capacity electrolyzed oxidative water generators, the
conducting of beta testing in the supermarket area, activities undertaken to
refine the production of the Company’s bottled drinking water, and the Company’s
increased activities in the poultry processing industry. It is anticipated that
the Company’s research and development expenditures will continue at
approximately the same level as during the first quarter of 2005.
 
 The
Company’s general and administrative expenses totaled $1,287,590 during the
first quarter of 2005, compared to $1,399,851 during the first quarter of 2004.
This 8% decline in general and administrative expenses is attributable to the
issuance of common stock for services during the first quarter of 2004 vs. 2005,
offset by increases in capital funding fees and legal and accounting expenses.
The Company anticipates that its general and administrative expenses will remain
fairly constant during the next several quarters, while the Company anticipates
that its total revenues during such period will increase substantially.
 
 **Liquidity
And Capital Resources**
 
 At March
31, 2005, we had cash and cash equivalents of $834,108, compared to $1,789,251
on the same date one year earlier, and $382,889 at December 31, 2004. At March
31, 2005, the Company’s inventory was $1,343,172, representing an increase of
167% from the $503,316 on hand at December 31, 2004 and a 3,895% increase over
the $33,623 on hand at March 31, 2004. This substantial inventory buildup is
primarily a result of the Company’s anticipated sales of bottled drinking water
during the second and third quarter of 2005 and the anticipated increase in
orders of equipment for the poultry processing industry. The Company’s total
accounts receivable from related parties and others has remained fairly constant
from December 31, 2004 to March 31, 2005.
 
 The
Company’s cash balance and the Company’s large increase in inventory during the
first three months of 2005 is largely attributable to the offering and sale of
the Company’s common stock during the first quarter of 2005 in a private
offering. In the private offering, the Company offered and sold a total of
850,000 shares of common stock for a purchase price of $3.50 per share.
 
 - 9
-
 
 The
Company raised gross proceeds of $2,975,000 in the private offering, of which a
total of approximately $344,000 was paid to the placement agent in commissions
and fees, resulting in net proceeds to the Company of approximately $2,631,000.
The Company also granted to the placement agent five (5) year warrants to
purchase a total of 73,800 shares of the Company’s common stock at an initial
exercise price of $5.00 per share.
 
 Proceeds
from the private offering should be sufficient to fund our continuing operations
at their current level through at least the third quarter of 2005. Management
recognizes that additional funding will be required to finance growth and to
achieve our strategic objectives. Management is actively pursuing additional
sources of funding. In addition, management is expecting an increase in cash
flows through anticipated increases in revenue.
 
 If we do
not raise sufficient funds in the future, we may not be able to fund expansion,
take advantage of future opportunities, meet our existing debt obligations or
respond to competitive pressures or unanticipated requirements. Financing
transactions in the future may include the issuance of equity or debt
securities, obtaining credit facilities, or other financing
mechanisms.
 
 ***All
forward-looking statements contained herein are deemed by the Company to be
covered by and to qualify for the safe harbor protection provided by the Private
Securities Litigation Reform Act of 1995. Prospective shareholders should
understand that several factors govern whether any forward-looking statement
contained herein will be or can be achieved. Any one of those factors could
cause actual results to differ materially from those projected herein. These
forward-looking statements include plans and objectives of management for future
operations, including plans and objectives relating to the products and the
future economic performance of the Company. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions, future business decisions, and the
time and money required to successfully complete development projects, all of
which are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in any of the
forward-looking statements contained herein will be realized. Based on actual
experience and business development, the company may alter its marketing,
capital expenditure plans or other budgets, which may in turn affect the
company’s results of operations. In light of the significant uncertainties
inherent in the forward-looking statements included therein, the inclusion of
any such statement should not be regarded as a representation by the Company or
any other person that the objectives or plans of the company will be
achieved.***
 
 **Item
3.** **Controls
and Procedures**
 
 Within
the ninety (90) day period prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company’s management, including the principal executive officer and principal
financial officer, of the effectiveness of t h e design
and operation of the Company’s disclosure controls and procedures pursuant to
the Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s
principal executive officer and principal financial officer concluded that the
Company’s disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
the Company’s periodic SEC filings. It should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.
 
 - 10
-
 
 There
have been no significant changes
in the Company’s internal controls or in other factors which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
 
 **PART
II - OTHER INFORMATION**
 
 **Item
6.**  **Exhibits
and Reports on Form 8-K**
 
 (a)
    Exhibits.
 
 10.1
    2005
      Omnibus Stock Option Plan adopted by the Board of Directors on February
      10, 2005
  10.2*
    Selling
      Agent Agreement between the Company and Nexcore Capital, Inc. dated
      February 10, 2005
  10.3**
    Agreement
      and Plan of Acquisition between the Company and Aquagen International,
      Inc. dated March 11, 2005
  31.1
    Rule
      302 Certification of Chief Executive Officer and Chief Financial
      Officer
 32.1
    Rule
      906 Certification of Chief Executive Officer and Chief Financial
      Officer
 *Incorporated
by reference to our Current Report on Form 8-K filed February 15,
2005
 **  Incorporated
by reference to our Current Report on Form 8-K filed March 18, 2005
 
 (b)
    Reports
      on Form 8-K.
 
 During
the quarter ended March 31, 2005, we filed with the Securities and Exchange
Commission Current Reports on Form 8-K as follows:
 
 On
January 11, 2005, we filed a Current Report on Form 8-K regarding our entry into
a material definitive agreement in principle to acquire all of the assets of
Aquagen International, Inc.
 
 On
February 15, 2005, we filed a Current Report on Form 8-K regarding our entry
into a Selling Agreement with Nexcore Capital, Inc. for the private offering of
up to 850,000 shares of our common stock, and regarding the termination of a
Standby Equity Distribution Agreement and related agreements between the Company
and Cornell Capital Partners, Ltd., and regarding the unregistered sale of
shares of our common stock pursuant to the private offering of up to 850,000
shares of our common stock.
 
 On March
18, 2005, we filed a Current Report on Form 8-K regarding our entry into a
definitive Agreement and Plan of Acquisition with Aquagen International, Inc.
pursuant to which we agreed to acquire all of the assets of Aquagen
International, Inc.
 
 - 11
-
   SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) 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, on May 16, 2005.
 
 ELECTRIC AQUAGENICS
      UNLIMITED,INC.By:
    /s/ Gaylord M.
    KarrenGaylord M. KarrenChief
      Executive Officer
      Principal
      Executive Officer and
      Principal
      Financial Officer
 
 
 - 12
-