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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark one)
 
þ
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  _______ to _____                    
 
Commission File Number: 000-18235
 
ELDORADO ARTESIAN SPRINGS, INC.
(Exact name of registrant as specified in its charter)

Colorado
 
84-0907853
(State or Other Jurisdiction of
Incorporation or Organization)
 
(IRS Employer
Identification No.)
     
1783 Dogwood Street
Louisville, Colorado
 
 
80027
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s Telephone Number, Including Area Code: (303) 499-1316
 
Indicate by check mark whether the registrant: (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, and (2) has been subject to such filing requirements for the past 90 days. Yes þ  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer   o
(Do not check if a smaller reporting company)
Smaller reporting company   þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  On November 12, 2012 there were 6,036,091 shares of the registrant’s common stock, $.001 par value, outstanding.
 


 
 

 
ELDORADO ARTESIAN SPRINGS, INC.
 
FORM 10-Q

INDEX
    Page  
Part I - Financial Information
     
         
Item 1 - Financial Statements
    3  
           
 
Balance Sheets as of September 30, 2012 (Unaudited) and March 31, 2012
    3  
           
  Unaudited Statements of Operations for the Three and Six Months Ended September 30, 2012 and September 30, 2011     4  
           
  Unaudited Statements of Cash Flows for the Six Months Ended September 30, 2012 and September 30, 2011     5  
           
 
Notes to Unaudited Financial Statements
    6  
           
Item 2 –
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    8  
           
Item 3 –
Quantitative and Qualitative Disclosures About Market Risk
    12  
           
Item 4(T) –
Controls and Procedures
    12  
           
Part II – Other Information
       
           
Item 1 –
Legal Proceedings
    13  
           
Item 1A –
Risk Factors
    13  
           
Item 2 –
Unregistered Sales of Equity Securities and Use and Proceeds
    13  
           
Item 3 –
Defaults Upon Senior Securities
    13  
           
Item 4 –
[Removed and Reserved]
    13  
           
Item 5 –
Other Information
    13  
           
Item 6 –
Exhibits
    13  
           
Signatures
    14  
           
Exhibit Index
    15  
 
 
2

 

ITEM 1.  FINANCIAL STATEMENTS
 
Balance Sheets

   
September 30, 2012
   
March 31, 2012
 
   
(unaudited)
       
Assets
 
Current assets
           
Cash
  $ 658,335     $ 250,083  
Accounts receivable - trade, net
    1,045,207       944,807  
Inventories
    373,324       336,671  
Prepaid expenses and other
    23,031       49,748  
Total current assets
    2,099,897       1,581,309  
Non-current assets
               
Property, plant and equipment, net
    3,745,271       3,738,335  
Investments
    361,196       361,196  
Water rights, net
    71,675       71,675  
Deposits
    108,204       108,204  
Other, net
    130,227       95,297  
Total non-current assets
    4,416,573       4,374,707  
Total assets
  $ 6,516,470     $ 5,956,016  
 
Liabilities and Stockholders' Equity
 
Current liabilities
           
Accounts payable
  $ 470,162     $ 237,591  
Accrued expenses
    274,660       326,971  
Customer deposits
    93,259       80,874  
Line of credit
    370,051       370,051  
Current portion of capital lease obligations
    61,371       26,321  
Current portion of long-term debt
    137,613       126,583  
Total current liabilities
    1,407,116       1,168,391  
Non-current liabilities
               
Capital lease obligations, less current portion
    62,313       16,531  
Long-term debt, less current portion
    4,066,582       4,097,506  
Total non-current liabilities
    4,128,895       4,114,037  
Total liabilities
    5,536,011       5,282,428  
Commitments and contingency
               
Stockholders' equity
               
Preferred stock, par value $.001 per share; 10,000,000 shares authorized; 0  shares issued and outstanding
    -       -  
Common stock, par value $.001 per share; 50,000,000 shares authorized; 6,036,091  issued and outstanding
    6,036       6,036  
Additional paid-in capital
    1,683,678       1,673,617  
Accumulated deficit
    (709,255 )     (1,006,065 )
Total stockholders' equity
    980,459       673,588  
Total liabilities and stockholders' equity
  $ 6,516,470     $ 5,956,016  

See notes to financial statements.
 
 
3

 

Unaudited Statements of Operations

   
For the Three Months Ended
   
For the Six Months Ended
 
   
September 30,
   
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
                       
Water and related
  $ 2,578,015     $ 2,583,282     $ 5,100,363     $ 4,865,844  
Resort operations
    115,032       122,050       185,482       161,418  
Net revenue
    2,693,047       2,705,332       5,285,845       5,027,262  
                                 
Cost of goods sold
    637,659       815,224       1,312,544       1,453,504  
                                 
Gross profit
    2,055,388       1,890,108       3,973,301       3,573,758  
                                 
Operating expenses
                               
Salaries and related
    910,527       891,432       1,779,068       1,669,879  
Administrative and general
    443,676       420,161       909,944       862,316  
Delivery
    229,390       197,656       447,704       389,433  
Advertising and promotions
    84,207       81,401       149,463       153,624  
Depreciation and amortization
    129,947       125,783       254,107       236,668  
      1,797,747       1,716,433       3,540,286       3,311,920  
                                 
Operating income
    257,641       173,675       433,015       261,838  
                                 
Other income (expense)
                               
Interest income
    819       611       1,129       1,046  
Interest expense
    (70,430 )     (89,546 )     (137,334 )     (187,652 )
      (69,611 )     (88,935 )     (136,205 )     (186,606 )
                                 
Net income before provision for income taxes
    188,030       84,740       296,810       75,232  
                                 
Income tax (expense) benefit
                               
Current
    65,100       29,200       102,000       26,000  
Deferred
    (65,100 )     (29,200 )     (102,000 )     (26,000 )
      -       -       -       -  
                                 
Net income
  $ 188,030     $ 84,740     $  296,810     $  75,232  
                                 
Basic and dilutive income per common share
  $ 0.03     $ 0.01     $ 0.05     $ 0.01  
                                 
Weighted average number of common shares outstanding – basic and dilutive
    6,036,091       6,036,091       6,036,091       6,036,091  
 
See notes to financial statements.
 
 
4

 

Unaudited Statements of Cash Flows

   
Six Months Ended
 
   
September 30,
 
   
2012
   
2011
 
Cash flows from operating activities
           
Net income
  $ 296,810     $ 75,232  
Adjustments to reconcile net loss to net cash provided by operating activities
               
Depreciation and amortization
    254,107       236,668  
Stock based compensation
    10,061       10,060  
                 
Changes in certain assets and liabilities
               
Accounts receivable
    (100,400 )     38,032  
Inventories
    (36,653 )     (95,213 )
Prepaid expenses and other
    25,938       16,262  
Deposits
    -       8,751  
Accounts payable
    232,571       42,578  
Accrued expenses
    (52,311 )     (88,431 )
Customer deposits
    12,385       12,758  
Net cash provided by operating activities
    642,508       256,697  
Cash flows from investing activities
               
Purchases of property and equipment
    (152,349 )     (73,346 )
Net cash flows used in investing activities
    (152,349 )     (73,346 )
                 
Cash flows from financing activities
               
Payments on long-term obligations
    (81,907 )     (52,618 )
                 
Net cash flows provided by (used in) financing activities
    (81,907 )     (52,618 )
                 
Net increase in cash
    408,252       130,733  
                 
Cash — beginning of period
    250,083       79,202  
                 
Cash — end of period
  $ 658,335     $ 209,935  
 
Supplemental disclosures of cash flow information:

Cash paid for interest for the six months ended September 30, 2012 and September 30, 2011 was $137,334 and $187,652, respectively.

Cash paid for income taxes for the six months ended September 30, 2012 and September 30, 2011 was $0.

The Company acquired $101,062 in fixed assets through capital leases during the six months ended September 30, 2012. The Company acquired $75,120 in fixed assets through capital leases during the six month period ended September 30, 2011.
 
In May 2012, the Company obtained an SBA loan in the amount of $1,457,000 of which $1,415,216 was used to pay off a short term note with a bank and $41,784 represents loan fees which is included in other long term assets in the accompanied balance sheet.

In April 2011, the Company capitalized equipment with a deposit of $31,245.

See notes to the financial statements.
 
 
5

 
 
ELDORADO ARTESIAN SPRINGS, INC.

Notes to Unaudited Financial Statements
 
Note 1 - Summary of Significant Accounting Policies

The Company bottles, markets and distributes natural spring water under the Eldorado Artesian Spring Water brand. The Company also markets and distributes organic vitamin charged spring water under the Eldorado Artesian Spring Water brand. The Company distributes to businesses, homes and offices using its own trucks for distribution primarily in Colorado. The Company also distributes directly to regional warehouses for major grocery store chains and distribution companies.

Interim Unaudited Financial Statements

The interim financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods.  The results of operations for the six months ended September 30, 2012 and 2011 are not necessarily indicative of the results of the entire year. The financial statements included herein are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally made in the registrant's annual report on Form 10-K. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's Form 10-K for the year ended March 31, 2012.

Investments

The Company owns investments of capital stock in an investee. This investment entitles the Company to an equal pro rata share of this investee’s irrigation system. As the ownership represents less than 20% ownership of the Company the value of this investment is stated at cost and evaluated for impairment if there are indications of such.

Revenue Recognition
 
Revenue is recognized on the sale of products as customer shipments are made.  Returns are estimated and recorded at the time of sale.  Rental revenue is recognized on a monthly basis upon commencement of the lease agreement. Water utility revenue is recognized on a monthly basis based upon the monthly contracted rate.
 
Litigation
 
The Company is not currently involved in any legal proceedings.  The Company maintains insurance to cover certain actions and believes that resolution of such litigation will not have a material adverse effect on the Company. 
 
Note 2 - Stockholders' Equity

Stock Option Plans

The Company has a qualified stock plan, the 2008 Incentive Stock Plan, pursuant to which 2,000,000 shares were reserved for issuance.  As of September 30, 2012, 1,950,000 shares were available for future grant.  Additionally, the Company previously had a qualified stock plan, the 1997 Stock Option Plan, which expired in 2007, pursuant to which 875,000 shares were reserved for issuance and as of September 30, 2012, 56,000 shares were reserved for issuance pursuant to outstanding grants and no shares were available for future grant as the plan has expired.  The 2008 Incentive Stock Plan and the 1997 Stock Option Plan, referred to herein as the Plans, and the shares issuable there under, are both registered on Form S-8 with the Securities and Exchange Commission.  The Plans provide for the grant of options and other equity based awards to employees, directors and consultants of the Company and are administered by the Company’s Board of Directors.
 
 
6

 

Note 3 – Contingencies

Water Rights Contingency

When the Company purchased mountain property in 1983, included in the purchase price were certain water rights for Eldorado Springs.  These water rights are relatively junior to other water rights in the South Boulder Creek and South Platte Basins.  The Company has the right to beneficially use all of the water that emanates from the springs in accordance with its water rights unless a more senior rights holder makes a call on the water.  A senior call might occur in the winter or when runoff is low and insufficient to meet the water needs of more senior water users below Eldorado Springs.  Because of Colorado's drought conditions, the possibility of a senior call has increased.  For many years, the Company had enrolled its water rights in a substitute supply plan approved by the Colorado State Engineer, which serves to protect the Company's water supply in the event of a senior call.
 
The Company is also pursuing other possible supply sources for use in augmenting the stream flows as a result of the Company's withdrawals of water.  There is no assurance that any of the renewal applications, Colorado Water Court applications for permanent augmentation, or any other alternative arrangements being sought by the Company will be approved.  Denial of the Company's applications for substitute or for a permanent augmentation plan coupled with a senior call on the Company's water will likely result in a significant financial impact on the Company.  The Company will also incur significant expenses in connection with its efforts to obtain approval of these plans.  In the event of the approval of a permanent augmentation plan, the Company will also incur additional expenses associated with its required purchase of additional water rights.
 
Note 4 – Commitments

Line of Credit

The Company has a line of credit with Great Western Bank in the amount of $475,000. As of September 30, 2012, the Company had a balance on the line of credit of $370,051. The line of credit is subject to certain borrowing base requirements, requires monthly interest payments calculated at Prime plus 1% with a minimum rate of 5.5%. The borrowing base was approximately $585,000 as of September 30, 2012. The line includes certain reporting and financial covenants, is collateralized by accounts receivable and inventory and is guaranteed by three company executives. The line has a maturity date of November 18, 2012. The Company intends to enter into a new line of credit agreement prior to the maturity date of the current agreement.

Notes Payable

On February 2, 2012, the Company entered into three separate loan agreements to refinance the existing debt that was due within the next 12 months and had previously been classified as current debt.  The Company entered into a Commercial Loan Agreement (the “First ANB Loan Agreement”) with ANB Bank.  Under the First ANB Loan Agreement, the Company received proceeds of $2,815,892 from the Bank pursuant to a promissory note (“Note 1”). The proceeds were used to refinance an existing note on the Company’s property in Louisville, Colorado. The terms of Note 1 include a fixed interest rate of 5.5% for five years with monthly payments of approximately $19,500 which includes principal and interest. The interest rate will remain fixed at 5.5% until February 2, 2017 after which time it may change. The interest rate will be based on the Prime Rate plus 2.00%. The interest rate may change February 2, 2017 and every 5 years thereafter.  A single “balloon payment” of the entire unpaid balance of principal and interest will be due on February 2, 2022. The Company entered into a separate Commercial Loan Agreement (the “Second ANB Loan Agreement”) with ANB Bank.  Under the Second ANB Loan Agreement, the Company received proceeds of $1,415,216 from the Bank pursuant to a promissory note (“Note 2”). The proceeds were used to refinance an existing note on the Company’s property in Eldorado Springs, Colorado. The terms of Note 2 include a fixed interest rate of 6.0% on the unpaid principal beginning March 2, 2012. The unpaid principal and accrued interest was due on May 2, 2012.
 
The Company also entered into a Commercial Loan Agreement (the “SBA Loan Agreement”) with the U.S. Small Business Administration (the “SBA”).  Under the SBA Loan Agreement, the Company received proceeds of $1,457,000 from the SBA pursuant to a Note (“Note 3”). The proceeds were used to refinance Note 2 under the Second ANB Loan Agreement as described above. The effective rate for Note 3 is 4.951% for the full 20 year term.  The monthly payment is $10,089 and the maturity date is April 1, 2032.
 
Under the First ANB Loan Agreement, the Second ANB Loan Agreement, and the SBA Loan Agreement, (collectively, the “Loan Agreements”) the Company granted the Bank security interests in the leases and rents on the property in Eldorado Springs, Colorado and Louisville, Colorado as well as deeds of trust for the same properties in Eldorado Springs and Louisville. The Loan Agreements specify events of default customary to facilities of its type, including any non-payment of principal, interest or other amounts, misrepresentation of representations and warranties, violation of covenants, certain events of bankruptcy or insolvency, certain material judgments, seizure of assets, or other material adverse changes. Upon the occurrence of an event of default, the payments by the Company of all of its outstanding obligations may be accelerated, and ANB Bank and the SBA commitments under the Loan Agreements may be terminated. The Loan Agreements are also guaranteed by three Company executives and are collateralized by substantially all assets of the Company. The Loan Agreements also include certain performance and reporting covenants.
 
 
7

 
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This filing contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby.  These forward-looking statements include the plans and objectives of management for future operations, including plans and objectives relating to services offered by and future economic performance of the Company.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties that might adversely affect the Company's operating results in the future in a material way.  Such risks and uncertainties include but are not limited to the following: availability of debt and equity financing, ability to purchase additional water rights, senior calls of water rights, interest rate fluctuations, effects of regional economic and market conditions, labor and marketing costs, operating costs, packaging costs, intensity of competition and legal claims.

Overview

Eldorado Artesian Springs, Inc. is a Colorado based company that is primarily involved in the bottling and marketing of natural artesian spring water. The spring is located in the foothills of the Colorado Rocky Mountains and is surrounded by thousands of acres of state and city park land. The water rises up through many layers of sandstone under its own artesian pressure. Currently, the Company’s operations consist of its home/commercial delivery business (5 and 3 gallon bottles) and its PET (polyethylene terephtalate, a premium clear plastic container) consumer business. The Company also has an organic vitamin charged spring water that is distributed locally off of the Company’s vehicles as well as to regional distribution facilities. The Company’s business includes the sales and rental of filtration and coffee dispensing equipment as well as the sale of coffee. During the summer months, the Company owns and operates a public swimming pool on its property and rents a single-family home on the property year round.

The Company’s headquarters and bottling facility consists of a total of approximately 40,000 square feet in Louisville, Colorado. The water is transported to the facility in stainless steel tanker trucks. Once at the bottling plant, the water is then transferred into stainless steel holding tanks until it is used for bottling.

Results of Operations

Performance Overview – Recent Trends

Revenues for the six months ended September 30, 2012 increased 5.1% to $5,285,845 from $5,027,262 for the same period ended September 30, 2011.  The increase in revenues was generated by increases in almost all products. The 1 gallon branded products increased 16.4% while categories for the PET products increased by 14.9%. Certain trends have continued that indicate that more customers are choosing larger, more economical packaging over the smaller size PET products. A warmer than average summer season resulted in an increase in revenues for the resort of almost 15%.

The Company believes that we are in a position to grow the business as the economy recovers in the markets we presently service by offering additional products we sell including coffee and vitamin water. We are also utilizing advertising and promotional budgets for promoting the products.  We will continue to pursue additional business in new areas including coffee and filtration equipment.  In addition, we continue to look for ways to decrease operating costs in order to achieve profitability in the future.
 
 
8

 

Three and Six Months Ended September 30, 2012 Compared to Three and Six Months Ended September 30, 2011

Sales

Sales for the six months ended September 30, 2012 were $5,285,845 compared to $5,027,262 for the same period ended September 30, 2011, an increase of 5.1%. Sales for the three months ended September 30, 2012 were $2,693,047 compared to $2,705,332 for the same period ended September 30, 2011, a decrease of less than 1%.

Sales of the products used in the delivery to homes and offices which include 5 and 3 gallons bottles as well as the dispenser units were 55.4% of sales and increased from $2,598,793 for the six months ended September 30, 2011 to $2,927,090 for the six months ended September 30, 2012, an increase of $328,297 or 12.6%.  Total units sales of 5 and 3 gallon products increased by approximately 10.5% while the average selling price increased 9.6%. The Company has increased the customer base and continues to attract new business through a variety of sales events and outside sales staff.

The Company increased filter rental and sales from $92,166 for the six months ended September 30, 2011 to $116,877 for the six months ended September 30, 2012, an increase of $24,711 or 26.8%. Consumers are looking for ways to decrease expenses and are substituting filtration units for the 5 and 3 gallon products. The Company also sells coffee and coffee equipment from our existing route vehicles. For the six months ended September 30, 2012, sales for coffee, coffee equipment and accessories increased from $79,789 for the six months ended September 30, 2011 compared to $114,706 for the six months ended September 30, 2012. The Company continues to experience competition for the coffee service from local distributors as well as on-line web sites that promote similar products. The commodity price of coffee has also increased which has resulted in an increase in the price of the coffee to our customers.

Sales of the Company’s PET products (.5 liter to 1.5 liter sizes), including private label products, represented 19.4% of sales for the six months ended September 30, 2012 and 17.8% of sales for the six months ended September 30, 2011 or $1,025,807 and $892,649, respectively. This represented an increase of 14.9%. The Company’s gallon size products were 15% of sales or $794,735 for the six months ended September 30, 2012 compared to 13.6% of sales or $682,672 for the six months ended September 30, 2011, an increase of 16.4%.

Sales of the Company's organic vitamin charged spring water were $86,658 for the six months ended September 30, 2012 compared to $99,334 for the six months ended September 30, 2011, a decrease of 12.8%. The decrease in sales is due to the timing of promotional deal periods for the distributors resulting in various different buying patterns throughout the year. The line of Organic Vitamin Charged Spring Water is available Vitamin Cottage, Kroger’s (King Soopers and City Markets) and Whole Foods Markets in the Midwest area. Additionally, the product is available to more than 2,000 other retail outlets, convenience stores and on-premise locations serviced by UNFI, US Food Service and KeHE Distributors.

Gross Profit/Cost of Goods Sold

Cost of goods sold for the six months ended September 30, 2012 were $1,312,544, or 24.8% of sales, compared to $1,453,504 or 28.9% of sales for the six months ended September 30, 2011. Gross profit increased from $3,573,758, or 71.1% of sales for the six months ended September 30, 2011 to $3,973,301 or 75.2% of sales for the six months ended September 30, 2012. Overall, gross profit increased 11.2% for the six months ended September 30, 2012.

Cost of goods sold related to 5 and 3 gallon sales were $189,590, or 6.5% of sales for the six months ended September 30, 2012, compared to $196,777, or 7.8% of sales for the six months ended September 30, 2011. Cost of goods for the Eldorado brand one gallon products were $396,347, or 49.9% of one gallon sales for the six months ended September 30, 2012, compared to $314,769, or 46.1% of one gallon sales for the six months ended September 30, 2011. Cost of goods for the PET products were $515,397, or 50.2% of sales for the six months ended September 30, 2012, compared to $427,925, or 47.9% of PET sales for the six months ended September 30, 2011.
 
 
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Operating Expenses
 
Total operating expenses increased to $3,540,286 for the six months ended September 30, 2012 compared to $3,311,920 for the six months ended September 30, 2011, an increase of $228,366 or 6.9%. Of the total operating expenses, salaries and related expenses increased to $1,779,068 for the six months ended September 30, 2012, or 33.7% of sales, from $1,669,879 for the six months ended September 30, 2011, or 33.2% of sales.

Administrative and general expenses increased by 5.5% to $909,944 as compared to $862,316 for the six months ended September 30, 2011.

Delivery expenses increased from $389,433 for the six months ended September 30, 2011 to $447,704 for the six months ended September 30, 2012, an increase of 15%.

Advertising and promotion expenses decreased 2.7% for the six months ended September 30, 2012 compared to the six months ended September 30, 2011.  Advertising and promotion expenses were 2.8% and 3.1% of sales, respectively for the six months ended September 30, 2012 and 2011. The decrease in advertising and promotional expenses is primarily related to a change in the quantity and type of events as well as a decrease in store promotions.

Depreciation and amortization increased 7.4% for the six months ended September 30, 2012 as compared to the six months ended September 30, 2011. Depreciation and amortization was 4.8% of sales for the six months ended September 30, 2012 compared to 4.7% of sales for the six months ended September 30, 2011.

Interest, Taxes, Other Income and Other Expenses

For the six months ended September 30, 2012, interest income increased to $1,129 as compared to $1,046 for the same period ended September 30, 2011.

Interest expense for the six months ended September 30, 2012, decreased 26.8% to $137,334 as compared to $187,652 for the six months ended September 30, 2011. The Company refinanced outstanding debt at a lower interest rate in February 2012.
 
For the six months ended September 30, 2012, the Company recorded income tax expense of $102,000 against our pretax income of $296,810 as a valuation allowance was recorded on our outstanding deferred tax assets due to uncertainty of realization, a 34% effective tax rate. The Company recorded a deferred tax expense of $102,000 for recapture of prior year deferred tax assets.

The Company had a net income after taxes of $296,810 for the six months ended September 30, 2012 compared to a net income of $75,232 for the six months ended September 30, 2011.

Liquidity and Capital Resources

Trade accounts receivable for the six months ended September 30, 2012 were 10.6% more than at year ended March 31, 2012.  This resulted from the increase in revenues for the six months ended September 30, 2012.  Days sales outstanding was approximately 36 and 37 days for September 30, 2012 and March 31, 2012, respectively.
 
 
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Cash flows from operating activities had a net inflow of $642,508 for the six months ended September 30, 2012. The cash provided by operating activities represents an increase of $385,811 from six month ended September 30, 2011. The largest reconciling item between net income and net cash flow from operations was the $254,107 of depreciation and amortization.

Cash flows from investing activities resulted in a net outflow of $152,349 for the six months ended September 30, 2012.  This total represents expenditures on equipment for electric water coolers, filtration equipment and coffee dispensing equipment that are rented to delivery customers.

Cash flows from financing activities resulted in a net outflow of $81,907 for the six months ended September 30, 2012 for payments made on long-term obligations.

The Company’s cash balance at September 30, 2012 increased to $658,335 by a net amount of $408,252 from $250,083 at March 31, 2012.

On November 18, 2010, the Company entered into an agreement with Great Western Bank for a line of credit in the amount of $475,000. As of September 30, 2012, the Company had a balance on the line of credit of $370,051. The line of credit is subject to certain borrowing base requirements, requires monthly interest payments calculated at Prime plus 1% with a minimum rate of 5.5%. The borrowing base was approximately $585,000 as of September 30, 2012. The line includes certain reporting and financial covenants, is cross-collateralized by accounts receivable and inventory and is guaranteed by three company executives.  The line has a maturity date of November 18, 2012. The Company intends to enter into a new line of credit agreement prior to the maturity date of the current agreement.

On February 2, 2012, the Company entered into three separate loan agreements to refinance the existing debt that was due within the next 12 months and had previously been classified as current debt.  The Company entered into a Commercial Loan Agreement (the “First ANB Loan Agreement”) with ANB Bank.  Under the First ANB Loan Agreement, the Company received proceeds of $2,815,892 from the Bank pursuant to a promissory note (“Note 1”). The proceeds were used to refinance an existing note on the Company’s property in Louisville, Colorado. The terms of Note 1 include a fixed interest rate of 5.5% for five years with monthly payments of approximately $19,500 which includes principal and interest. The interest rate will remain fixed at 5.5% until February 2, 2017 after which time it may change. The interest rate will be based on the Prime Rate plus 2.00%. The interest rate may change February 2, 2017 and every 5 years thereafter.  A single “balloon payment” of the entire unpaid balance of principal and interest will be due on February 2, 2022. The Company entered into a separate Commercial Loan Agreement (the “Second ANB Loan Agreement”) with ANB Bank.  Under the Second ANB Loan Agreement, the Company received proceeds of $1,415,216 from the Bank pursuant to a promissory note (“Note 2”). The proceeds were used to refinance an existing note on the Company’s property in Eldorado Springs, Colorado. The terms of Note 2 include a fixed interest rate of 6.0% on the unpaid principal beginning March 2, 2012. The unpaid principal and accrued interest was due on May 2, 2012.
 
The Company also entered into a Commercial Loan Agreement (the “SBA Loan Agreement”) with the U.S. Small Business Administration (the “SBA”).  Under the SBA Loan Agreement, the Company received proceeds of $1,457,000 from the SBA pursuant to a Note (“Note 3”). The proceeds were used to refinance Note 2 under the Second ANB Loan Agreement as described above. The effective rate for Note 3 is 4.951% for the full 20 year term.  The monthly payment is $10,089 and the maturity date is April 1, 2032.
 
 
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Under the First ANB Loan Agreement, the Second ANB Loan Agreement, and the SBA Loan Agreement, (collectively, the “Loan Agreements”) the Company granted the Bank security interests in the leases and rents on the property in Eldorado Springs, Colorado and Louisville, Colorado as well as deeds of trust for the same properties in Eldorado Springs and Louisville. The Loan Agreements specify events of default customary to facilities of its type, including any non-payment of principal, interest or other amounts, misrepresentation of representations and warranties, violation of covenants, certain events of bankruptcy or insolvency, certain material judgments, seizure of assets, or other material adverse changes. Upon the occurrence of an event of default, the payments by the Company of all of its outstanding obligations may be accelerated, and ANB Bank and the SBA commitments under the Loan Agreements may be terminated. The Loan Agreements are also guaranteed by three Company executives and are collateralized by substantially all assets of the Company. The Loan Agreements also include certain performance and reporting covenants.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 4. CONTROLS AND PROCEDURES

Conclusion Regarding The Effectiveness Of Disclosure Controls And Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Quarterly Report, under the supervision and with the participation of our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

Changes In Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Not applicable.

ITEM 1A.  RISK FACTORS

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE AND PROCEEDS

Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.  [Removed and Reserved]

Not applicable.

ITEM 5.  OTHER INFORMATION

Not applicable.

ITEM 6.  EXHIBITS

Please see the exhibit index following the signature page of this Report.
 
 
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SIGNATURES

In accordance with 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.
 
 
  ELDORADO ARTESIAN SPRINGS, INC.  
       
Date: November 13, 2012
By:
/s/ Douglas A. Larson  
    Douglas A. Larson  
    President  
    (Principal Executive Officer)  
       
Date: November 13, 2012
By:
/s/ Cathleen Shoenfeld  
    Cathleen Shoenfeld  
    Chief Financial Officer  
    (Principal Financial Officer)  

 
14

 

ELDORADO ARTESIAN SPRINGS, INC.

Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2012
Exhibits Filed Herewith

Exhibit No.
 
Description
     
 
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
 
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101.INS**
 
XBRL Instance Document
     
101.SCH**
 
XBRL Taxonomy Extension Schema
     
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase
     
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase
     
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase
     
*
 
Filed herewith.
     
**
 
Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
 
 
 
15