UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

 

S	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

Or

£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from: _____________ to _____________

 

Commission File Number:  

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BOREAL WATER COLLECTION, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		98-0453421
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
Boreal Water Collection, Inc.
4496 State Road 42 North
Kiamesha Lake, NY		12751
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: 845-794-0400

Copies of correspondence to:

Securities to be registered pursuant to Section 12(b) of the Act:

		Name of each exchange on which
Title of each class to be so registered		each class is to be registered
Not Applicable		Not Applicable

 

Securities to be registered pursuant to Section 12(g) of the Act:

Common Stock
(Title of Class)

 

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 £		Smaller Reporting Company S
(Do not check if a smaller reporting company)

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of November 15, 2013, there were 310,158,907 shares of the Registrant's Common Stock, $0.001 par value per share outstanding.

 

 

Boreal Water Collection Inc.

For The Quarterly Period Ended September 30, 2013

 

TABLE OF CONTENTS

		Page
Part I. FINANCIAL INFORMATION
ITEM 1. Financial Statements -
Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012		1
Statement of Income for the three and nine months ended September 30, 2013 and 2012 (unaudited)		2
Statement of Stockholders Equity as of September 30, 2013 (unaudited) and December 31, 2012		3
Statement of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)		4
Notes to Financial Statements		5-16
ITEM 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations		17-20
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk		20
ITEM 4. Controls and Procedures		20
Part II. OTHER INFORMATION
ITEM 1. Legal Proceedings		21
ITEM 1A. Risk Factors		22
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
ITEM 3. Defaults upon Senior Securities		22
ITEM 4. Mine Safety Disclosures		22
ITEM 5. Other Information		22
ITEM 6. Exhibits		23
Signatures		24

 

 

 

 

 

PART 1 - FINANCIAL INFORMATION      

ITEM 1.  FINANCIAL STATEMENTS      

 

Boreal Water Collection Inc.

BALANCE SHEETS

 

		September 30,				December 31,
		2013				2012
		(Unaudited)
ASSETS
Current assets
Cash		$	69,661			$	146,373
Accounts receivable, less allowance for doubtful accounts of $9,092 at September 30, 2013 and $8,219 at December 31, 2012.			81,650				90,792
Accounts receivable - other			–				13,624
Inventory			191,200				200,597
Deferred financing costs, net of accumulated amortization			160,006				–
Prepaids			58,760				16,841
Total current assets			561,276				468,227
Property and equipment, net of accumulated depreciation			3,020,412				3,181,172
Other assets
License, net of accumulated amortization			–				85,166
Security deposit			4,500				4,500
Total other assets			4,500				89,666
Total assets		$	3,586,188			$	3,739,065
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses		$	432,806			$	523,309
Line of credit			250,000				250,000
Current portion of capital lease payable			14,176				–
Loan payable - property taxes			–				38,858
Loan payable - equipment			–				7,500
Loan payable - other			50,000				–
Mortgage payable - bank			900,000				1,943,426
Deposit on purchase of common shares			–				65,000
Due to Related Party			302,516				284,367
Total current liabilities			1,949,498				3,112,460
Long-term liabilities
Deferred Tax Liability			718,440				799,690
Total long-term liabilities			718,440				799,690
Total liabilities			2,667,938				3,912,150
Stockholders' equity
Common stock, $.001 par value; 600,000,000 shares authorized, 322,447,351 and 310,158,889 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively			322,447				310,159
Additional paid-in capital			2,912,685				2,839,973
Deficit accumulated since January 10, 2006 in connection with quasi reorganization			(2,316,882	)			(3,323,217	)
Total stockholders' equity			918,250				(173,085	)
Total liabilities and stockholders' equity		$	3,586,188			$	3,739,065

 

 

The accompany notes are an integral part of these financial statements.

 

 

Boreal Water Collection Inc.

STATEMENTS OF OPERATIONS (UNAUDITED)

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2013				2012				2013				2012
Sales		$	571,794			$	779,029			$	1,640,650			$	2,127,259
Cost of sales			489,731				619,184				1,386,647				1,496,184
Gross profit			82,063				159,845				254,003				631,075
Operating Expenses
Selling and general and administrative			146,822				304,912				453,959				834,520
Depreciation and amortization			79,498				109,469				294,187				331,441
Total expenses			226,320				414,381				748,146				1,165,961
Operating income(loss)			(144,257	)			(254,536	)			(494,143	)			(534,886	)
Other income (expense)
Interest income			–				–				34				–
Rental income			450				2,600				3,700				7,800
Insurance recovery			–				–				117,473				–
Gain(loss) on sale of equipment			–				1,622				–				567
Interest expense			(22,965	)			(27,595	)			(77,667	)			(84,434	)
Total other income (expense)			(22,515	)			(23,372	)			43,540				(76,067	)
Net income (loss) before income taxes			(166,772	)			(277,908	)			(450,603	)			(610,953	)
Provision for income taxes (benefit)			(80,125	)			(1,500	)			(79,750	)			(1,500	)
Net income(loss) before extraordinary items			(86,647	)			(279,408	)			(370,853	)			(612,453	)
Extraordinary item - gain on extinguishment of debt			1,377,188				–				1,377,188				–
Net income (loss)		$	1,290,541			$	(279,408	)		$	1,006,335			$	(612,453	)
Net loss per weighted share, basic and fully diluted
Loss before extraordinary item		$	(0.000	)		$	(0.001	)		$	0.001			$	(0.002	)
Extraordinary item			0.004				–				0.004				–
Net income(loss)		$	0.004			$	(0.001	)		$	(0.003	)		$	(0.002	)
Weighted average number of common  shares outstanding, basic and fully diluted			312,521,526				309,273,193				311,373,538				301,633,905

 

 

The accompanying notes are an integral part of these financial statements.

 

 

Boreal Water Collection, Inc.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

										Additional
		Common Stock								Paid-in				Retained
		Shares				Amount				Capital				Earnings				Total
Balance, December 31, 2011			292,903,333			$	292,903			$	2,675,229			$	(2,500,315	)		$	467,817
Stock-based compensation			3,000,000				3,000				27,000								30,000
Common shares issued for services			3,255,556				3,256				28,744								32,000
Common shares issued for cash			8,000,000				8,000				112,000								120,000
Common shares issued, not previously recognized -Note 13			3,000,000				3,000				(3,000	)			–				–
Net loss - December 31, 2012															(822,902	)			(822,902	)
Balance, December 31, 2012			310,158,889			$	310,159			$	2,839,973			$	(3,323,217	)			(173,085	)
Common shares issued for services			1,538,462				1,538				18,462								20,000
Common shares issued			10,750,000				10,750				54,250								65,000
Net income - September 30, 2013															1,006,335				1,006,335
Balance, September 30, 2013			322,447,351			$	322,447			$	2,912,685			$	(2,316,882	)			918,251

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

 

Boreal Water Collection, Inc.

STATEMENTS OF CASH FLOWS

 

		September 30,
		2013				2012
Cash flows from operations
Net income (loss)		$	1,006,335			$	(612,453	)
Adjustment to reconcile net loss to net cash:
Depreciation and amortization			294,187				331,440
Stock-based compensation			–				30,000
Stock issued for services			20,000				32,000
Allowance for doubtful accounts			873				(7,886	)
Extraordinary gain on extinquishment of debt			(1,377,188	)			–
Gain on sale of fixed asset			–				(567	)
Changes in operating assets and liabilities:
Accounts receivable			8,269				(32,609	)
Accounts receivable-other			13,624				–
Inventory			9,397				(161,480	)
Deferred financing costs			(22,000	)
Security deposits refunded			–				25,340
Prepaid expenses			(30,679	)			(7,342	)
Deferred taxes			(81,250	)
Deferred revenue			–				(12,292	)
Accounts payable and accrued expenses			(33,309	)			197,363
Net cash used for operating activities			(191,741	)			(218,486	)
Cash Flows from investing activities
Proceeds from sale of fixed asset			–				3,000
Purchases of property and equipment			(9,954	)			(11,948	)
Net cash provided by (used for) investing activities			(9,954	)			(8,948	)
Cash flows from financing activities
Proceeds from loan payable- other			50,000				–
Related party advances, net			18,149				106,111
Issuance of common stock			–				120,000
Deposit on purchases of common stock			–				65,000
Payments on equipment loans			(7,500	)			(40,000	)
Payments against loan payment - property taxes			(38,858	)			(63,335	)
Payments on capital lease obligation			(9,585	)			–
Increase (decrease) in mortgage payable			112,777				–
Purchase of treasury shares, at cost			–				(1,525	)
Net cash provided by financing activities			124,983				186,251
Net increase (decrease) in cash			(76,711	)			(41,183	)
Cash, beginning of period			146,372				68,345
Cash, end of period		$	69,661			$	27,162
Supplemental disclosures:
Cash paid during the year for:
Interest		$	15,655			$	20,393
Taxes		$	1,500			$	–
Non-cash investing and financing transactions:
Issuance of 3,000,000 shares of common stock in connection with stock based compensation		$	–			$	30,000
Issuance of 3,255,556 shares of common stock in connection with professional services rendered		$	–			$	32,000
Issuance of 1,538,462 shares of common stock in connection with professional services rendered		$	20,000			$	–
Issuance of 10.750M shares of common stock for $65,000 which was received in a prior year and shown on the balance sheet as deposit on purchase		$	65,000			$	–

 

 

The accompanying notes are an integral part of these financial statements 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 1—Description of Business and Corporate Information

 

Organization

 

Boreal Water Collection, Inc. (“Boreal” or the “Company”) was incorporated in the State of Nevada on August 21, 2001. The Company is trading on the OTC under the symbol (BRWC.PK).

 

The Company has operated under various names since incorporation, most recently Canadian Blue Gold, Inc. from October 2007 to March 2008, when the name was changed to Boreal Water Collection, Inc.

 

In April 2009, the Company acquired the assets of A.T. Reynolds and Sons, Inc., operating as Leisure Time Spring Water (“Leisure”) in Kiamesha Lake, New York. The Company is a personalized bottled water company specializing in premium custom bottled water, as a contract packer of bottled water focused on value-added products and services. The Company currently offers four types of water: spring, sparkling, distilled and enhanced water, which is customized with minerals and oxygen. The Company was originally founded in 1884. 

 

Accounting period

 

The Company has adopted an annual accounting period of January through December.

 

Note 2—Summary of significant accounting principles

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities at the date of the financial statements, as well as their related disclosures. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could significantly differ from those estimates.

 

Cash and cash equivalents

 

The Company considers short-term interest bearing investments with initial maturities of three months or less to be cash equivalents. Cash and cash equivalents consist of cash in banks, free credit on investment accounts and money market accounts.

 

Foreign currency translation

 

The Company complies with Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, “Foreign Currency Matters.” Monetary items are translated at the exchange rate in effect at the balance sheet date; non-monetary items are translated at historical exchange rates. Income and expense items are translated at the average exchange rate for the year. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

Revenue recognition

In accordance with the FASB ASC Topic 605, “Revenue Recognition,” the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured. The Company recognizes revenue on the date the product is shipped, whether it is shipped f.o.b. destination or f.o.b. shipping point, due to the short distance and time it takes for the product to reach its final destination. Product is sold to customers on credit terms established on an individual basis. The credit factors used include historical performance, current economic conditions, and the nature and volume of the product. The company offers very few discounts, allowances, coupons, or other similar incentive programs. Net sales are determined after deduction of any promotional or other allowances in accordance with FASB ASC Topic 605-50. The Company offers its customers a right to return product previously shipped, and when the product is actually return, the customer’s account is credited for the full value of the returned product.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 2—Summary of significant accounting principles (continued)

 

Revenue recognition (continued)

The Company’s normal shipping terms f.o.b. destination, which designates that the Company will pay shipping costs and remain responsible for the goods until the buyer takes possession and f.o.b. shipping point, which indicates that the buyer will pay for shipping costs and takes responsibility for the product when the product is shipped from the Company’s premise. New and certain large customers, which require the purchase of unique materials, are required to pay the Company in advance of production. This helps the Company avoid bad debts and scamming customers. These advances are recorded as deferred revenue. Revenue is recognized when the product is shipped to the customer; the deferred revenue account is then reduced accordingly.

 

Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Freight-in is included in cost of sales and freight charged to customers is included in sales in the Company’s statements of operations. Delivery and related shipping costs are included in sales and general administrative expenses.

Accounts receivable

The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent loss history and an overall assessment of past due trade accounts receivable outstanding. In accordance with FASB ASC Topic 210-20-45, the Company presents accounts receivable in its balance sheet net of promotional allowances only for customers that it allows net settlement. All other accounts receivable and related promotional allowances are shown on a gross basis.   

Property and equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Repairs and maintenance are expensed as incurred while betterments and improvements are capitalized. When items are sold or retired, the related cost and accumulated depreciation is removed from the accounts and any gain or loss is included in operations.

 

The Company provides for depreciation and amortization over the following estimated useful lives:

 

Building		40	years
Land improvements		15	years
Machinery and equipment		5-7	years
Computer equipment		3	years
Office equipment		7	years
Trucks and trailers		5	years

 

Long-Lived Assets

 

In accordance with FASB ASC Topic 360 “Property, Plant, and Equipment,” the Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 2—Summary of significant accounting principles (continued)

 

Fair Value of Financial Instruments

 

The fair values of the Company’s assets and liabilities that qualify as financial instruments under FASB ASC Topic 825, “Financial Instruments,” approximate their carrying amounts presented in the accompanying balance sheet at September 30, 2013 and December 31, 2012.

 

Inventories

 

Inventory is valued at the lower of cost or market, cost being determined by the first-in, first-out (FIFO) method. Obsolete items are carried at estimated net realizable value.

 

Prior to December 31, 2012, the company charged direct labor and variable and fixed production expenses to cost of sales and only included direct material costs in its finished goods inventory. Effective December 31, 2012, the Company now includes in finished goods inventory, in addition to direct material costs, direct labor and applied variable and fixed factory overhead costs.

 

Earnings per share

 

The Company complies with the accounting and disclosure requirements of FASB ASC 260, “Earnings Per Share.” Basic earnings per common share ("EPS") calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.

 

Income Taxes

 

The Company accounts for income taxes in accordance with FASB ASC Topic 740 “Income Taxes”, which requires accounting for deferred income taxes under the asset and liability method. Deferred income tax asset and liabilities are computed for difference between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on the enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce the deferred income tax assets to the amount expected to be realized.

 

The determination of the Company’s provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in the Company’s consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities.

 

When facts and circumstances change, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate. 

 

In accordance with GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce stockholders’ equity. This policy also provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better consolidated financial statement comparability among different entities. Management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. Generally, the tax filings are no longer subject to income tax examinations by major taxing authorities for years before 2009. Any potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, state and local tax laws.  The Company's management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 2—Summary of significant accounting principles (continued)

 

Income Taxes (continued)

 

Interest and Penalty Recognition on Unrecognized Tax Benefits

 

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other operational expenses. No interest expense or penalties have been recognized as of and for the nine month period ended September 30, 2013.

 

Comprehensive Income

 

The Company complies with FASB ASC Topic 220, “Comprehensive Income,” which establishes rules for the reporting and display of comprehensive income (loss) and its components. FASB ASC Topic 220 requires the Company’ to reflect as a separate component of stockholders’ equity items of comprehensive income.

 

Stock-Based Compensation 

 

The Company complies with FASB ASC Topic 718 “Compensation – Stock Compensation,” which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. FASB ASC Topic 718 focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. FASB ASC Topic 718 requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award the requisite service period (usually the vesting period). No compensation costs are recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Based on restricted stock awards granted to employees during the nine month periods ended September 30, 2013 and 2012, the Company recorded $0 and $30,000, respectively, as compensation expense under FASB ASC 718.

 

Nonemployee awards

 

The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50. The Company recorded stock compensation of approximately $20,000 and $32,000 during the nine month periods ended September 30, 2013 and 2012, respectively, related to consulting services.

 

Valuation of Investments in Securities at Fair Value—Definition and Hierarchy

 

In accordance with GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

In determining fair value, the Company uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 2—Summary of significant accounting principles (continued)

 

Valuation of Investments in Securities at Fair Value—Definition and Hierarchy (continued)

 

The fair value hierarchy is categorized into three levels based on the inputs as follows:

 

Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities the Company has the ability to access.

 

Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined.

 

Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

 

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular instruments. Changes in assumptions or in market conditions could significantly affect the estimates. The carrying amount of all other financial assets and liabilities, including the mortgage payable, approximates fair value.

 

Valuation Techniques

 

The Company values investments in securities that are freely tradable and are listed on a national securities exchange or reported on the NASDAQ national market at their last sales price as of the last business day of the year.

 

Government Bonds

 

The fair value of sovereign government bonds is generally based on quoted prices in active markets. When quoted prices are not available, fair value is determined based on a valuation model that uses inputs that include interest-rate yield curves, cross-currency-basis index spreads, and country credit spreads similar to the bond in terms of issuer, maturity and seniority.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 2—Summary of significant accounting principles (continued)

 

Certificate of Deposits

 

The fair values of the bank certificate of deposits are based on the face value of the certificate of deposits.

 

Recently Adopted Accounting Pronouncements

 

In October 2012, the FASB issued ASU No 2012-04, “Technical Corrections and Improvement s.”This Update makes technical corrections, clarifications, and limited-scope improvements to various Topics throughout the Codification. The changes clarify the Codification or correct unintended application of guidance and are not expected to have a significant impact on current accounting practices. The majority of the amendments in this Update are effective immediately with a few limited scope amendments (mainly related to Plan Accounting) that will be effective for fiscal years beginning after December 15, 2012 for public companies. This guidance had no significant impact on the Company’s financials since it was primarily issued to provide corrections and/or clarifications of currently issued guidance.

 

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The main purpose of this Update is to clarify that the disclosures regarding offsetting assets and liabilities per ASU 2011-11 apply to derivatives including embedded derivatives, repurchase agreements and reverse repurchase agreements and securities borrowing and lending transactions that are offset or subject to a master netting agreement. Other types of transactions are not impacted. This Update is effective for fiscal years beginning on or after January 1, 2013 and for all interim periods within that fiscal year. The Company does not expect this update to impact the Company’s financials since it does not have instruments noted in the update that are offset.

 

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The main purpose of this update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The update requires that the effect of significant reclassifications out of accumulated other comprehensive income be reported on the respective line items in net income if the amount being reclassified in its entirety to net income. Furthermore, information about amounts reclassified out of accumulated other comprehensive income must be shown by component. This update is effective prospectively for reporting periods beginning after December 15, 2012 for public companies. The Company does not expect this update to impact its financials since it does not have any comprehensive income items. However, if any are noted in the future, the appropriate disclosures will be incorporated

 

Concentration of Credit Risk

 

The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. Management believes the Company is not exposed to any significant credit risk related to cash and cash equivalents.

 

 

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 3—Going concern

 

The accompanying financial statements have been prepared assuming that the company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Currently, the Company has a minimum cash balance available for the payment of ongoing operating expenses, and its operations is not providing a source of funds from revenues sufficient to cover its operational costs to allow it to continue as a going concern. The continued operations of the Company is dependent upon generating profits from operations and raising sufficient capital through placement of its common stock or issuance of debt securities, which would enable the Company to carry out its business plan.

 

In the event we do not generate sufficient funds from revenues or financing through the issuance of our common stock or from debt financing, we may be unable to fully implement our business plan and pay our obligations as they become due, any of which circumstances would have a material adverse effect on our business prospects, financial condition and results of operations.

 

The accompanying financial statements do not include any adjustments that might be required should the company be unable to recover the value of its assets or satisfy its liabilities.

 

Note 4 – Inventory

 

Inventory consists of the following categories:

 

		September 30,				December 31,
		2013				2012
Raw materials		$	153,736			$	139,547
Finished Goods			37,464				61,050
Total		$	191,200			$	200,597

 

 

Note 5—Property and Equipment

 

Equipment consists of the following categories at September 30, 2013 and December 31, 2012:

 

		September 30,				December 31,
		2013				2012
Building		$	2,376,000			$	2,376,000
Land			324,000				324,000
Leasehold improvements			39,635				33,135
Furniture & fixtures			16,997				16,997
Computer equipment			26,169				26,169
Machinery and equipment			1,075,394				1,048,179
Transportation equipment			50,250				54,000
Other			170,310				170,310
			4,078,755				4,048,790
Less: accumulated depreciation			1,058,343				867,618
Total		$	3,020,412			$	3,181,172

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 5—License

 

On December 17, 2007, the Company entered into an exclusive licensing agreement (“Agreement”) with a Canadian bottle water company to distribute, sell, advertise, promote, and market under private label, its products in the United States., with an original cost of $2.0 million. The Agreement was subsequently revised and replaced with a new Agreement on June 16, 2008 at a cost of $1.022 million. The Company’s president and CEO is the principal shareholder of the Canadian company. The license is being amortized over a five year period from June 16, 2008. At September 30, 2013 and December 31, 2012, the unamortized balance is as follows:

 

At September 30, 2013 and December 31, 2012, the unamortized balance is as follows:

 

		September 30,				December 31,
		2013				2012
License:
Cost of license		$	1,022,000			$	1,022,000
Accumulated amortization			1,022,000				936,833
License, net		$	–			$	85,166

 

Note 6—Stockholders’ Equity

  

On January 23, 2012, The Company issued 3.0 million shares of its $0.001 par value common stock to its employees as bonuses. We valued these shares at $0.01 per share.

 

On January 23, 2012, the Company issued 1.8 million shares of its $0.001 par value common stock for services rendered. We valued these shares at $0.01 per share.

 

On May 1, 2012, the Company issued 955,556 shares of its $0.001 par value common stock for services rendered. We valued these shares at $0.01 per share.

 

On May 7, 2012, the Company issued 1.5 million shares of its $0.001 par value common stock to a third party investor for a cash payment of $30,000.

 

On June 11, 2012, the Company issued 500,000 shares of its $0.001 par value common stock for services rendered. We valued these shares at $0.01 per share.

 

On July 12, 2012, the Company issued 6.5 million shares of its $0.001 par value common stock to a third party investor for a cash payment of $90,000.

 

On September 30, 2012, the Company recognized the issuance to an entity of its $0.001 par value common stock, issued at a prior date, but not previously recognized, because the shares were obtained from the Company in an illegal manner. See Note 13 for further discussion.

 

On April 16, 2013, the Company issued 1,538,462 shares of its $0.001 par value common stock for services rendered.

 

On September 11, 2013, the Company issued 10.75 million shares of its $0.001 par value common stock to a third party investor for a cash payment of $65,000 that was received in a previous year and presented on the balance sheet as a deposit on purchase of common shares.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 7—Income Taxes

 

At December 30, 2012, the Company had approximately $3.9 million of net operating losses (“NOL”) carry-forwards for federal and state income purposes. These losses are available for future years and expire through 2032. Utilization of these losses may be severely or completely limited if the Company undergoes an ownership change pursuant to Internal Revenue Code Section 382.

 

The tax effects of temporary differences and carry forwards that give rise to deferred tax assets and liabilities consist of the following:

 

		September 30,				December 31,
		2013				2012
Deferred tax assets:
Net operating loss carryforwards		$	1,560,000			$	1,560,000
Other temporary differences			–				–
Deferred tax assets			1,560,000				1,560,000
Less:  Valuation allowance			(1,560,000	)			(1,560,000	)
Net deferred tax asset		$	–			$	–
Deferred tax liabilities:
Difference between book and tax basis of assets acquired in bargain asset purchase		$	(718,440	)		$	(799,690	)
Net deferred tax assets (liabilities)		$	(718,440	)		$	(799,690	)

 

The Company has taken a full valuation allowance against the other timing differences and the deferred asset attributable to the NOL carry-forwards of approximately  $1,560,000 and $1,560,000 at September 30, 2013 and December 31, 2012, respectively, due to the uncertainty of realizing the future tax benefits.

 

The Company did not pay any income taxes during the nine month period ended September 30, 2013 or the year ended December 31, 2012.

 

Note 8—Line of Credit

 

During 2009, the Company obtained a line of credit with a commercial bank in the amount of $250,000. The line of credit is secured by the Company’s accounts receivable and inventory. At September 30, 2013, the Company owed $250,000 against the line of credit at an annual interest rate of 5.25%.

 

 

 

 

 

 

 

 

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

 

Note 9—Short-Term Debt

 

In April 2009, the Company acquired the assets of A.T. Reynolds and Sons, Inc. (“Reynolds”), operating as Leisure Time Spring Water (“Leisure”) in Kiamesha Lake, New York (See Note 12). In connection with the acquisition of these assets, the Company assumed a $1.9 million mortgage that was due a commercial bank (“Bank”) against a building and land, included as part of the total assets acquired from Reynolds. On April 3, 2009, the Company entered into a Mortgage Consolidation, Modification and Extension Agreement with the Bank. The Company was required to make interest payments only through April 3, 2011, at which time the entire principal balance was due the Bank. Monthly interest is based on 90-day Libor at 4.50%. The $1.9 million mortgage is personally guaranteed by the Company’s chief executive officer. The balance due the Bank on April 3, 2011 was not paid putting the Company in default under the terms of the original agreement. The Company entered into a Forbearance Agreement (“Agreement”) on May 31, 2011, and upon expiration of that Agreement, the Company entered into an extension to the Agreement on October 3, 2011, which extended the Agreement period until April 3, 2012. On April 3, 2012, the Agreement period was further extended until October 3, 2012. On October 3, 2012 the forbearance agreement expired and the company was in default its mortgage obligation.

 

Under the terms of the May 31, 2011 Agreement, the Company was required to make monthly principal payments of $15,000 plus all accrued and unpaid interest on the debt obligation. The Company was also assessed a forbearance fee of $19,000, and it was required to provide evidence acceptable to the commercial bank that the Company and Sullivan County had agree to a payment plan for real estate taxes that were in arrears as of the date of the Agreement. The interest rate based on 90-day Libor rate of 4.0% did not change as a result of the Forbearance Agreement. All loan documents and the Security Agreement remained in full force and effect in accordance with the original terms. Under the terms of the October 3, 2011 Agreement, the commercial bank waived the $15,000 monthly principal payments, but not the interest payments. An additional $19,000 forbearance fee was assessed. All other terms of the original note obligation and the May 31, 2011 Agreement remained in full force and effect. The interest rate based on 90-day Libor rate of 4.625% did not change as a result of this Forbearance Agreement. Under the terms of the April 3, 2012 Agreement, the commercial bank assessed an additional forbearance fee of $19,000, continued to waive the monthly $15,000 principal payment, but not the monthly interest payments. All other terms of the original note obligation and the May 31, 2011 Agreement remained in full force and effect. The 90-day Libor rate of 4.5% did not change as a result of this Forbearance Agreement.

 

In August 2013 the Company successfully completed negotiations with its Bank to accept $625,000 in satisfaction of its obligations on the mortgage. On September 5, 2013, a Satisfaction of Mortgage, as well as a Termination of Assignment of Leases and Rents, was filed in Sullivan County, New York.  Wells Fargo Bank National Association was the mortgagor and assignee.  Boreal Water Collection, Inc. was the mortgagee and assignor.  Both documents were signed by the parties on August 21, 2013, bringing to a close the loan relationship between the parties as described in previous filings of the registrant. The difference between the $1.9 mortgage obligation (plus interest) and the $625,000 accepted in satisfaction of the mortgage is shown on the Income Statement as an extraordinary gain from extinguishment of debt. Concurrently the Company secured a new $900,000 mortgage with a “Lender.” This new mortgage bears interest at 12% per annum and is due and payable on August 27, 2014. The new mortgage requires the Company to make monthly interest only payments of $9,000. Under the terms of the new mortgage, the Company has the option to extend the maturity date of the new mortgage for one year providing it pays the Lender a fee of $54,000.

 

On October 24, 2011, the Company purchased distiller equipment for $75,000. The sale contract provided for a deposit of $5,000, with an additional $5,000 on November 1, 2011 and the balance of $65,000 to be paid on or before November 16, 2011. At December 31, 2012 and 2011, the Company owed a total of $7,500 and 55,000, respectively, putting the Company in default under terms of the contract. During November and December 2012, the Company successfully negotiated a reduction in the amount owed at December 31, 2012 from $15,000 to $7,500 and this reduced amount was paid in the quarter ended March 31, 2013.

 

On May 31, 2011, the Company entered into a payment arrangement (“Agreement”) with the County of Sullivan for payment of past due property taxes. The Agreement provided for a down payment of approximately $30,000, which was equal to 15.0% of the eligible delinquent taxes, with the balance of $192,153 due in 24 monthly payments of principal and interest of $8,006. The $30,000 down payment was paid on May 31, 2011. As part of the Agreement, the County of Sullivan would obtain a Judgment of Foreclosure, however, the County of Sullivan acknowledged that it would not take title of the property, unless and until the Company was in default and breached the terms within the Agreement, and further it would not take title sooner than two years from the date of the levy of the earliest outstanding lien. At September 30, 2013 and December 31, 2012, the balance due against this note was approximately $0 and $38,000, respectively.

 

During June 2013, a third party loaned the Company $50,000 bearing interest at 4% and maturing June 2014.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 10—Related Party

 

At September 30, 2013 and December 31, 2012, the Company owed a related party approximately $303,000 and $284,000, respectively, for ongoing operating and purchase transactions with the related party company.

 

For the nine months ended 2013 and 2012 the Company made purchases from the third party of $41,456 and $38,522, respectively and made sales to the related party of $36,063 and $40,484, respectively.

 

Note 11—Commitments and Contingencies

 

The Company is party to a forty year exclusive agreement (“Agreement”), with an original effective date of November 1, 1995, modified on April 25, 2000, to reduce certain minimum guarantee and compensation provisions of the Agreement. The Agreement provides that the Company shall draw not less than seven million (7,000,000) gallons or water from certain springs on an annual basis. During the remainder of the first twenty-five (25) years of the Agreement, the Company pays one cent ($0.01 per gallon for the first five million (5,000,000) gallons of water drawn and three-fourth of one cent ($0.0075) for all gallonage thereafter, but not less than $65,000 per year regardless of the actual gallonage drawn, payable in monthly installments of $5,416. In event that drought or other conditions reduce the capacity of the springs, so that the springs cannot meet the minimum guarantee, the minimum guarantee shall be reduced in accordance with an agreed to formula. For the last fifteen years of the agreement, which expires October 31, 2035, the Agreement provides that the Company shall pay one and one-quarter cents ($0.0125) per gallon for the first five million (5,000,000) gallons and for gallons thereafter the Company shall pay one cent ($0.01) per gallon, with an annual minimum of $82,500, payable in monthly installments of $6,875. The Company is responsible for all maintenance and repairs, utilities, and capital improvement costs incurred in connection with the water collection facility, which includes storage tanks, a pump building, piping, and other related equipment necessary for and related to the harvesting of water from the springs. The Agreement also provides that the owner of springs may sell water from the springs under certain conditions, provided, however, that the charge per gallon sold shall not be less than the price per gallon paid by the Company, with such proceeds divided equally between the Company and the owner. The Company has an option of first refusal in the event that the owner enters into an agreement for the sale of all or a portion of the real property, which includes the springs located on the real property. Upon execution of a valid binding contract between the owner and a third party, which contract shall be made subject to the terms of the option, the owner shall provide the Company a copy of the contract and it shall have thirty (30) days from date of delivery or mailing within which to exercise its option by delivering to the owner a check in the amount of the contract deposit, in which event the owner and the Company shall be bound by the contract sale.

 

The future minimum payments due under the terms of the Agreement are as follows:

 

	Years Ending December 31,
	2013			$	16,250
	2014				65,000
	2015				65,000
	2016				65,000
	2017				65,000
	Thereafter				1,356,667
				$	1,632,917

 

Note 12—Acquisition 

 

On April 3, 2009, the Company acquired substantially all of the assets of A.T. Reynolds & Sons, Inc. (other than assets related to its home/office delivery business), a New York spring water company, which was at the time a debtor in possession under Chapter 11 of the US Bankruptcy Code (“Seller”). The purchase price paid by the Company was $2.050 million, consisting of $150,000 in cash and the assumption of $1.9 million of indebtedness of the Seller. The Company assumed a $1.9 million mortgage and recorded a gain on bargain purchase of the assets in the amount of $1,324,778.

 

 

 

Boreal Water Collection, Inc.

Notes to Financial Statements

September 30, 2013

(Unaudited)

 

Note 13—Litigation

 

On April 20, 2009, Dowser, LLC (“Dowser”) commenced action against the Company and Boreal Water, Inc., as defendants in the United States District Court for the Southern District of New York, alleging breach of contract arising out of the Company’s purchase of certain assets in the Chapter 11 Bankruptcy Case in Re A.T. Reynolds & Sons, Inc. Case No. 08-37739 (cgm), pending in the United States Bankruptcy Court, Southern District of New York, Poughkeepsie Division (“Reynolds Bankruptcy”). As alleged in its complaint, Dowser alleged “actual and consequential damages in the amount to be determined at trial, but believe to exceed $3.5 million plus interest.

 

On June 12, 2009, the Company submitted its answer in the Dowser Action, denying liability and asserting various affirmative defenses, including, among other things, failure to condition precedent and the Bankruptcy Court Orders regarding the sale of the assets to the Company.

 

In 2012, the parties to this action reached an out of court settlement, which provided that the Company would make a cash payment to Dowser in the amount of $75,000 and also grant Dowser exclusive master bottling rights to bottle Leisure Time water in 3, 5, and 6 gallon refillable containers. At December 31, 2012, the $75,000 settlement payment was shown as an extraordinary item on the statement of operations.

 

A “Summons with Notice” (but not a Complaint), naming BRWC, Mrs. Lavoie and Mr. Cortellazi, who was a Canadian citizen trying to buy controlling interest in the Company during 2011, as defendants, was filed on March 14, 2012 in the Sullivan County, New York Supreme Court (and later served on BRWC and Mrs. Lavoie) by counsel for plaintiffs (the proposed CEO and former Boreal employee, who were brought into the negotiations by Mr. Cortellazi, to assist him in his effort to buy controlling interest of the Company from Mrs. Lavoie). The index number of the court filing is 2012-676. The Company and Mrs. Lavoie have retained counsel.

 

A Complaint has since been served, seeking damages totaling $53,600 plus $15,000 in attorney’s fees, alleging violations of Article 11 of New York’s General Obligations Law. Defendants BRWC and Mrs. Lavoie have filed an Answer and Counterclaims, dated September 24, 2012. Counterclaims have been filed against Cortellazi, who has admitted his role in the scheme, and others for fraud, defamation and slander, and damages, including punitive damages and attorney’s fees. See Statement of Changes in Stockholders’ Equity for reference to 3.0 million shares not previously recognized.

 

The Company may be defendant in various suits and claims that arise in the normal course of business. In the opinion of management, the ultimate disposition of these other suits and claims will have no material effect on the Company’s financial position, liquidity, or results of operations.

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

THE DISCUSSION IN THIS SECTION CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR OUR FUTURE PERFORMANCE. WORDS SUCH AS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE," "MAY" AND SIMILAR EXPRESSIONS OR VARIATIONS OF SUCH WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY MEANS OF IDENTIFYING FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE ONLY PREDICTIONS AND ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY.

 

IN EVALUATING SUCH STATEMENTS, YOU SHOULD CONSIDER VARIOUS RISK FACTORS, INCLUDING BUT NOT LIMITED TO, THE INHERENT DIFFICULTY IN OPERATING A “GOING CONCERN;” THE EFFECT IF THERE WERE TO BE SIGNIFICANT CHANGES IN MANAGEMENT PERSONNEL; POTENTIAL PRODUCT LIABILITY ISSUES; DIFFICULTY IN MEETING COMPETITOR CHALLENGES SUCH AS THE INTRODUCTION OF NEW PRODUCTS; INCREASED RESEARCH AND DEVELOPMENT AND/OR EQUIPMENT ACQUISITION COSTS; CHANGES IN GENERAL ECONOMIC CONDITIONS AND/OR THE INDUSTRY IN WHICH THE COMPANY COMPETES; CHANGES IN THE QUALITY AND/OR SOURCES OF RAW MATERIALS; MAJOR GOVERNMENT REGULATION CHANGES AND/OR ISSUE(S); FLUCTUATIONS IN WORK FORCE QUALITY AND AVAILABILITY; LABOR DISRUPTIONS (SUCH AS RAW MATERIAL, CONTAINER MANUFACTURE, PRODUCT TRANSPORTATION STOPPAGES OR SLOWDOWNS); ANY OF WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.

 

A.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012

 

We are a calendar year corporation and report our financial information on both a quarterly and annual basis. Our management team is dedicated to building valuable, long-term relationships with existing and new customers. This dedication, developing and nurturing long-term relationships with our customers, old and new, drives our sales, marketing, customer service activities. We remain committed to providing our customers with a quality product, competitively priced, and delivered or made available for pickup on the dates specified in each sales order, because we recognize that long-term relationships are based on mutual trust between the supplier and the customer.

 

Comparison of three months ended September 30, 2013 to the three months ended September 30, 2012

 

The Company reported a net income of $1,290,541 and net loss $279,408 for the quarterly periods ended September 30, 2013 and 2012, respectively, a decrease in net loss of $1,569,949, or 561%. The details of this decrease in net loss are discussed in the paragraphs below.

 

For the quarters ended September 30, 2013 and 2012, we reported sales of $571,794 and $779,029, a decrease of $207,235, or 26.6%. This decrease in sales is primarily attributable to a $208,680, $8,450, $8,365 and $7,936 decrease in copacking sales, house brand products, transportation and pallets/miscellaneous sales, respectively, partially offset by an increase in one gallon sales of $12,564 and label sales of $13,632. The decrease in sales of our copacking product resulted from the loss of a large customer, The increase in one gallon and label sales resulted from our sales strategy to (i) increase sales of the Boreal brands to both new customers and existing customers, (ii) select price increases, which had a minimum impact on sales reported for the quarter ended September 30, 2013, (iii) improve our distribution network and (iv) aggressively grow our copacking and label business.

 

For the quarters ended September 30, 2013 and 2012, cost of sales were 86% and 80% and the gross profit percentages were 14% and 20%, respectively.

 

Selling and general administrative expenses decreased $158,090, or 51.8% to $146,822 for the quarterly period ended September 30, 2013 from $304,912 reported for the comparable period in 2012. As a percentage of sales, selling and general administrative expenses decreased to 26% for the quarter ended September 30, 2013 from 39% for the same period in 2012. Direct selling expenses decreased $66,927, to $49,931 in the quarterly period ended September 30, 2013 from $116,858 reported for the comparable period in 2012. Direct selling expenses are comprised of delivery, advertising, and related travel costs. This decrease in direct selling expenses is attributable to the elimination of a sales employee and delivery related expenses as a result of lower co-packing sales.

 

 

 

General administrative expenses decreased $91,163, or 48%, to $96,890 for the three month period ended September 30, 2013 from $188,053 reported for the comparable period in 2012. This $91,163 decrease is primarily attributed to a $12,943, $37,149, $1,575, $5,661, $201, $16,391 $1,384 and $50,000 decrease in payroll tax, insurance, bank charges, professional fees, 3^rd party payroll processing, utilities, postage and legal settlements, respectively, partially offset by a $1,075, $13,000, $3,201, $3,433, $4,111, $1,162, $1,609, $272 and $6,278 increase in bonus compensation, office salary, property tax, D&O insurance, health insurance, office/miscellaneous expenses, dues and subscriptions, telephone/internet and late fees, respectively. The $50,000 represents the cost of a settlement relating to product purchases.

 

For the three months ended September 30, 2013, extraordinary items are comprised of a gain of $1,377,187 as a result of an agreement with our prior mortgage holder which is discussed in Note 9 to our financial statements.

 

For the three month period ended September 30, 2013 and 2012, we reported interest expense of $22,965 and $27,595, respectively. Debt obligations and interest paid against these debt obligations are discussed in Notes 8–9 to our financial statements for the nine month periods ended September 30, 2013 and 2012.

 

Other income totaled $450 and $4,222 for the three month periods ended September 30, 2013 and 2012, respectively, a decrease of $3,772, which resulted primarily from a $2,150 in rental income of the company owned house.

 

For the three month periods ended September 30, 2013 and 2012, the Company did not pay any federal income taxes.

 

Comparison of nine months ended September 30, 2013 to the nine months ended September 30, 2012

 

The Company reported net income of $1,006,355 and a net loss of $612,453 for the nine month periods ended September 30, 2013 and 2012, respectively, a decrease in net profit of $1,618,788, or 264%. The details of this increase in net income are discussed in the paragraphs below.

 

For the nine months ended September 30, 2013 and 2012, we reported sales of $1,640,650 and $2,127,259, a decrease of $486,609, or 22.8%. This decrease in sales is primarily attributable to a $118,189, 95,383, 241,448, 6,605, 22,694 and $10,789 decrease in one gallon product sales, 3/5/6 gallon products, co-packing sales, house brand, labels and pallets/miscellaneous sales, respectively, partially offset by an increase in transport sales of $8,499. The decrease in sales of our one gallon product resulted from the loss of a large customer, and the decrease in sales of our 3/5/6 gallon products resulted from shutting down the production line during May 2012 in accordance with a legal settlement (See Settlement of Lawsuit).

 

For the nine months ended September 30, 2013 and 2012, cost of sales were 85% and 70% and the gross profit percentages were 15% and 30%, respectively. The increase in cost of sales and the resulting decrease in gross profit is a direct result of lower sales as explained above.

 

Selling and general administrative expenses decreased $380,561, or 45.6% to $453,959 for the nine month period ended September 30, 2013 from $834,520 reported for the comparable period in 2012. As a percentage of sales, selling and general administrative expenses decreased to 28% for the nine months ended September 30, 2013 from 39% for the same period in 2012. Direct selling expenses decreased $127,725, or 47%, to $142,090 in the nine months ended September 30, 2013 from $269,815 reported for the comparable period in 2012. Direct selling expenses are comprised of delivery expense, sales compensation costs, advertising, and related travel costs. This decrease in direct selling expenses is attributable to the elimination of a sales employee and delivery related expenses due to less co-packing sales. General administrative expenses decreased $252,836, or 44.8%, to $311,868 for the nine months ended September 30, 2013 from $564,705 reported for the comparable period in 2012. This $252,836 decrease is primarily attributed to $39,000, $42,664, $87,477, $415, $36,225, $62,190 $2,042, $3,220, $379 and $74,127 decrease in stock compensation expense, payroll tax, insurance, office supplies, professional fees, utilities, postage, dues and subscriptions, telephone/internet and legal settlements, respectively, partially offset by a $53,455, $9,548, $11,637, $5,476, $1,142, $6,196, and $7,451 increase in compensation expenses, property tax, D&O insurance, health insurance, bank fees, miscellaneous expenses, public trade fees, and late fees,

 

For the nine months ended September 30, 2013 2012, we reported interest expense of $77,667 and $84,434, respectively. Debt obligations and interest paid against these debt obligations are discussed in Notes 8-9 to our financial statements for the nine month periods ended September 30, 2013 and 2012.

 

Other income totaled $121,207 and $8,367 for the nine months ended September 30, 2013 and 2012, respectively, an increase of $112,840, which resulted primarily from an insurance claim.

 

For the nine months ended September 30, 2013 and 2012, the Company did not pay any federal income taxes.

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

At September 30, 2013, the Company had an accumulated deficit since January 10, 2006 (the date of quasi reorganization) of $2,316,882. Liquid assets at September 30, 2013 consisted primarily of cash and cash equivalents of $69,661. Current liabilities of $1,949,498 exceeded current assets by $1,388,222. Historically, we have financed our business through cash generated from ongoing operations, proceeds from sale of common stock to third party investors, and borrowings from financial institutions, and advances received from related parties, and officers of the Company. The company is currently pursuing financing alternatives.

 

Cash decreased $76,712 to $69,661 at September 30, 2013, as compared to $146,373 at December 31, 2012, which results from the following:

 

Net income		$	1,006,335
Adjustments to reconcile net income to net cash			(1,062,128	)
Changes in operating assets and liabilities			(135,948	)
Net cash used by operating activities			(191,741	)
Investing activities			(9,954	)
Financing activities			124,983
Net decrease in cash		$	(76,711	)

 

Cash used by our operating activities for the nine months ended September 30, 2013 was approximately $191,741, comprised of a net income of $1,006,335, noncash reconciling adjustments of $(1,062,128), changes in operating assets and liabilities of $(135,948). Noncash reconciling adjustments include stock-based compensation of $20,000, allowance for doubtful accounts of $873, extraordinary gain on extinguishment of debt of $(1,377,188), and depreciation and amortization of $294,187.

 

The $(135,948) change in operating assets and liabilities is primarily attributable to an increases in deferred financing costs of $22,000, prepaid expenses of $30,679,deferred taxes of $81,250, accounts payable and accrued expenses of $33,309, partially offset by a decreases in accounts receivable of $8,269, accounts receivable – other of $13,624, and inventory of 9,397.

 

Cash used in investing activities of $9,954 is a result of the purchase of equipment.

 

Cash provided by financing activities was approximately $189,983, comprised of advances from related parties of $18,149, proceeds from loan payable of $ 50,000, increase in mortgage payable of $112,777, partially offset by payments on equipment loans of $7,500, payments against loan payable obligation for property taxes of $38,858 and payments on capital lease obligation of $9,585.

 

On April 3, 2009, the Company acquired the assets of A.T. Reynolds and Sons, Inc. (“Reynolds”), operating as Leisure Time Spring Water (“Leisure”) in Kiamesha Lake, New York (See Note 12). In connection with the acquisition of these assets, the Company assumed a $1.9 million mortgage that was due a commercial bank (“Bank”) against a building and land, included as part of the total assets acquired from Reynolds. On April 3, 2009, the Company entered into a Mortgage Consolidation, Modification and Extension Agreement with the Bank. The Company was required to make interest payments only through April 3, 2011, at which time the entire principal balance was due the Bank. Monthly interest is based on 90-day Libor at 4.00%. The $1.9 million mortgage is personally guaranteed by the Company’s chief executive officer.. The balance due the Bank on April 3, 2011 was not paid putting the Company in default under the terms of the original agreement. The Company entered into a Forbearance Agreement (“Agreement”) on May 31, 2011, and upon expiration of that Agreement, the Company entered into an extension to the Agreement on October 3, 2011, which extended the Agreement period until April 3, 2012.

 

In August 2013 the Company successfully completed negotiations with its Bank to accept $625,000 in satisfaction of its obligations on the mortgage. The difference between the $1.9 mortgage obligation (plus interest) and the $625,000 accepted in satisfaction of the mortgage is shown on the Income Statement as an extraordinary gain from extinguishment of debt. Concurrently the Company secured a new $900,000 mortgage with a “Lender”. This new mortgage bears interest at 12% per annum and is due and payable on August 27, 2014. The new mortgage requires the Company to make monthly interest only payments of $9,000. Under the terms of the new mortgage, the Company has the option to extend the maturity date of the new mortgage for one year providing it pays the Lender a fee of $54,000.

 

 

 

Our independent registered public accounting firm has expressed substantial doubt as to our ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. Currently, we have a minimum cash balance available for the payment of ongoing operating expenses, and our operations is not providing a source of funds from revenues sufficient to cover our operational costs to allow it to continue as a going concern. The continued operations of the Company is dependent upon generating profits from operations and raising sufficient capital through placement of our common stock or issuance of debt securities, which would enable the us to carry out our business plan.

 

The company currently is consuming cash reserves at the rate of approximately $15,000 per month assuming current levels of revenue. In the ensuing months, should the company be unsuccessful in significantly increasing sources of revenue it will be forced to find additional capital to support operations and fund its growth

 

In the event we do not generate sufficient funds from revenues or financing through the issuance of our common stock or from debt financing, we may be unable to fully implement our business plan and pay our obligations as they become due, any of which circumstances would have a material adverse effect on our business prospects,

 

At September 30, 2013, we owed $250,000 to a commercial bank against a revolving line of credit of $250,000. The line of credit is secured by the Company’s accounts receivable and inventory, and carried an interest rate of 5.25% at September 30, 2013.

 

Critical Accounting Policies and Procedures and Recent Accounting Pronouncements

     

The Company’s critical accounting policies and procedures and recent accounting pronouncements are set forth in the Notes to our Financial Statements.

 

Off-Balance Sheet Arrangements

 

None

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The Company does not invest in market risk sensitive instruments. At times, the Company's cash equivalents consist of overnight deposits with banks and money market accounts.  The Company's objective in connection with its investment strategy is to maintain the security of its cash reserves without taking market risk with principal.

 

Item 4. Controls and Procedures

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

The Chief Executive Officer and Chief Financial Officer of the Company have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.  There were no changes in our internal control over financial reporting during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

No changes in the Company's internal control over financial reporting have come to management's attention during the Company's last fiscal quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.

 

 

 

PART II

OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS.

 

The “Dowser Action:”

 

On April 20, 2009, Dowser, LLC (“Dowser”) commenced action against the Company and Boreal Water, Inc., as defendants in the United States District Court for the Southern District of New York, alleging breach of contract arising out of the Company’s purchase of certain assets in the Chapter 11 Bankruptcy Case in Re A.T. Reynolds & Sons, Inc. Case No. 08-37739 (cgm), pending in the United States Bankruptcy Court, Southern District of New York, Poughkeepsie Division (“Reynolds Bankruptcy”). As alleged in its complaint, Dowser alleged “actual and consequential damages in the amount to be determined at trial, but believe to exceed $3.5 million plus interest.

 

On June 12, 2009, the Company submitted its answer in the Dowser Action, denying liability and asserting various affirmative defenses, including, among other things, failure to condition precedent and the Bankruptcy Court Orders regarding the sale of the assets to the Company.

 

In 2012, the parties to this action reached an out of court settlement, which provided that the Company would make a cash payment to Dowser in the amount of $75,000 and also grant Dowser exclusive master bottling rights to bottle Leisure Time water in 3, 5, and 6 gallon refillable containers. At December 31, 2012, the $75,000 settlement payment was shown as an extraordinary item on the statement of operations.

 

The “Cortellazi, et al Matter:”

 

A “Summons with Notice” (but not a Complaint), naming BRWC, Mrs. Lavoie and Mr. Cortellazi, who was a Canadian citizen trying to buy controlling interest in the Company during 2011, as defendants, was filed on March 14, 2012 in the Sullivan County, New York Supreme Court (and later served on BRWC and Mrs. Lavoie) by counsel for plaintiffs (the proposed CEO and former Boreal employee, who were brought into the negotiations by Mr. Cortellazi, to assist him in his effort to buy controlling interest of the Company from Mrs. Lavoie). The index number of the court filing is 2012-676. The Company and Mrs. Lavoie have retained counsel.

 

A Complaint has since been served, seeking damages totaling $53,600 plus $15,000 in attorney’s fees, alleging violations of Article 11 of New York’s General Obligations Law. Defendants BRWC and Mrs. Lavoie have filed an Answer and Counterclaims, dated September 24, 2012. Counterclaims have been filed against Cortellazi, who has admitted his role in the scheme, and others for fraud, defamation and slander, and damages, including punitive damages and attorney’s fees. See Statement of Changes in Stockholders’ Equity for reference to 3.0 million shares not previously recognized.

 

The Company may be defendant in various suits and claims that arise in the normal course of business. In the opinion of management, the ultimate disposition of these other suits and claims will have no material effect on the Company’s financial position, liquidity, or results of operations.

 

 

 

 

 

ITEM 1A.    RISK FACTORS.

 

We have elected to be treated as an Emerging Growth Company (EGC) for all purposes under Section 107(a) of the Jobs Act.  Accordingly, we will not be providing risk factors in this 10-Q report.

 

ITEM 2.   RECENT SALES OF UNREGISTERED SECURITIES.

     

The following shares were issued pursuant to Section 4(2) of the Securities Act of 1933.

 

 

On January 23, 2012, The Company issued 3.0 million shares of its $0.001 par value common stock to its employees as bonuses. We valued these shares at $0.01 per share.

 

On January 23, 2012, the Company issued 1.8 million shares of its $0.001 par value common stock for services rendered. We valued these shares at $0.01 per share.

 

On May 1, 2012, the Company issued 955,556 shares of its $0.001 par value common stock for services rendered. We valued these shares at $0.01 per share.

 

On May 7, 2012, the Company issued 1.5 million shares of its $0.001 par value common stock to a third party investor for a cash payment of $30,000.

 

On June 11, 2012, the Company issued 500,000 shares of its $0.001 par value common stock for services rendered. We valued these shares at $0.01 per share.

 

On July 12, 2012, the Company issued 6.5 million shares of its $0.001 par value common stock to a third party investor for a cash payment of $90,000.

 

On September 30, 2012, the Company recognized the issuance to an entity of its $0.001 par value common stock, issued at a prior date, but not previously recognized, because the shares were obtained from the Company in an illegal manner. See Note 13 for further discussion.

 

On April 16, 2013, the Company issued 1,538,462 shares of its $0.001 par value common stock for services rendered.

 

On September 11, 2013, the Company issued 10.75 million shares of its $0.001 par value common stock to a third party investor for a cash payment of $65,000 that was received in a previous year and presented on the balance sheet as a deposit on purchase of common shares.

 

Item 3. Defaults Upon Senior Securities

 

NONE

 

Item 4. Mine Safety Disclosures

 

Not applicable 

 

Item 5. Other Information

 

This quarterly report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subjected to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this quarterly report

 

 

 

Item 6. Exhibits

 

EXHIBIT
NUMBER		DESCRIPTION
10.1		Satisfaction of Mortgage
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
99.1		Temporary Hardship Exemption
101.INS*		XBRL Instance Document
101.SCH*		XBRL Taxonomy Extension Scheme
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
101.DEF*		XBRL Taxonomy Extension Definition Linkbase
101.LAB*		XBRL Taxonomy Extension Label Linkbase
101.PRE*		XBRL Taxonomy Presentation Linkbase

 

__________

*	To be furnished by amendment per Temporary Hardship Exemption under Regulation S-T.

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Boreal Water Collection LLC
	By:	/s/ Francine Lavoie
	Name:	Francine Lavoie
	Title:	President, Treasurer, Chief Financial Officer and Chief Executive Officer
	Date:	November 19, 2013