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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended March 31, 2012
For the transition period from _______ to _______
Commission File Number: 000-18235
ELDORADO ARTESIAN SPRINGS, INC.
(Exact name of registrant as specified in its charter)
Registrant’s Telephone Number, Including Area Code: (303) 499-1316
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ
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 o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.
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
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $876,750.
As of June 29, 2012, the Issuer had a total of 6,036,091 shares of common stock, $.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s definitive proxy statement for the 2012 Annual Meeting of Stockholders, expected to be held in September 2012, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Introductory Note. Cautionary Statement Regarding Forward-Looking Information and Risk Factors Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Eldorado to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Eldorado’s plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions, availability of debt and equity financing, ability to purchase additional water rights, interest rate fluctuations, labor and marketing costs, operating costs, packaging costs, competition, legal claims and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Eldorado. Although Eldorado believes that its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by Eldorado or any other person that the objectives and plans of Eldorado will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.
All references in this report to “Company,” “we,” “us,” “our,” or “Eldorado” refer to Eldorado Artesian Springs, Inc.
ITEM 1. BUSINESS.
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.
Bottled water is perceived by many consumers as being a healthy, natural beverage, and this perception has driven demand for this product among many consumers. Recently, reports have been released that show that many water systems in America are contaminated with the residual waste of pharmaceutical drugs, caffeine, steroids and countless other chemicals that are nearly impossible for the municipal treatment systems today to eliminate from the water supply. Further fuel to the water market was provided by the rising health consciousness of people in general, as they have turned away from high caloric and alcoholic beverages in favor of products that are perceived as natural and beneficial.
Bottles used for the smaller packaging, typically in sizes 1.5 liters and smaller, are made of polyethylene terephtalate (PET), a premium clear plastic. These bottles are commonly referred to in the beverage industry as PET bottles. The PET market has been driven by manufacturers who sell their water in smaller, more portable sizes, which are sold at retail and intended to fit the active lifestyles of bottled water consumers. The PET category has been the driving force behind the explosive growth in bottled water consumption. It is the most competitive market, dominated by four of the largest food and beverage companies in the world.
While much of the bottled water market is still highly fragmented and controlled by local brands, consolidation is rapidly occurring, as four companies have come to dominate much of the market. Larger multi-national companies have been active in acquisitions of smaller more regional bottled water companies. Coca-Cola (Dasani) and PepsiCo (Aquafina) have both been successful in producing and marketing their own brands, creating much competition for the smaller regional producers that typically have higher costs of production and distribution.
Eldorado Artesian Springs, Inc. was formed under the laws of the State of Colorado on April 15, 1986, under the name Lexington Funding, Inc. ("Lexington"). Effective April 10, 1987, Lexington acquired all of the shares of Eldorado Artesian Springs, Inc. ("Eldorado") of Eldorado Springs, Colorado. Eldorado, a Colorado corporation, was formed in 1983. In June 1988, Eldorado was merged into Lexington and Lexington changed its name to Eldorado Artesian Springs, Inc. The primary business of the Company is the bottling and sale of spring water from springs located in Eldorado Springs, Colorado on property owned by the Company. In addition to real property, the wells and springs thereon, and water rights, the Company owns a bottling plant in Louisville, Colorado (including a building and bottling equipment), associated containers and equipment, resort buildings, a residential home, and an outdoor swimming pool which are located on the property in Eldorado Springs, Colorado.
The Company began operations by delivering 5 gallon bottles and renting equipment to homes and offices as well as delivering 1 gallon bottles to retailers. In 1994, the Company introduced the 1.5 liter bottle, which was followed, in 1995, with the 1.0 liter, 0.5 liter and 24 ounce bottles.
The Company bottles the same natural spring water that emanates from the source in Eldorado Springs, Colorado. The Company also utilizes additional high speed bottling equipment that is utilized at the Louisville warehouse. By utilizing high speed equipment, and the additional warehouse, bottling and office space, the Company has been able to realize benefits in increased bottling speeds as well as efficiencies in transporting and storing raw materials and finished goods.
The Company has reacted to consumer demands by adding additional products to its service and delivery operations. In order to handle competition from other companies, the Company added filtration products in July 2003. Currently, the Company services approximately 600 filter accounts.
In October 2005, the Company added coffee products and coffee equipment as products to be delivered off of existing route vehicles. The coffee is provided by Green Mountain Coffee Roasters utilizing their various coffee brands to be delivered by our employees. Coffee has been integrated into the Company’s current distribution channel and is a product that is counter-seasonal to water. The Company obtained the initial customers utilizing leads from the existing account base as well as new customers from sales personnel. The Company expects to continue to grow the coffee sector of the business.
In September 2007, the Company introduced a line of Organic Vitamin Charged spring water. The beverage industry has been influenced by the Enhanced segment of the beverage market. The Company believes the Organic Vitamin Charged spring water will compete based on the organic ingredients, superior taste and brand recognition in the Colorado area where we currently distribute our water products. The Company expects to grow the distribution of this product off of existing delivery vehicles as well as through other independent distribution companies.
Water Source and Bottling
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 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.
Water is produced at two springs and eleven wells on the Company's property. The well heads are in close proximity to the fill station and nothing is added to or removed from the water during the bottling process. In Eldorado Springs, the water is loaded into stainless steel tanker trucks and transported to the bottling facility in Louisville, Colorado. Once at the facility, the water is transferred into stainless steel tanks until bottled. The Company installed all stainless steel piping in the bottling facility and monitors quality on a regular basis to assure the highest quality products. As a safeguard to any contamination, the water passes through a protective filter and ultra-violet light. The product is packaged in high quality plastic bottles, and each bottle is sealed with a tamper evident cap.
The Company is principally in the business of selling bottled artesian spring water. Sales of the Company's water have historically been made by selling five gallon and three gallon bottles of water directly to homes and businesses, retail grocery stores and distributors located in Colorado. The Company also sells its water at wholesale to retail food stores (grocery chains), by packaging the water into smaller, more convenient sizes which are suitable for retail distribution. The Company rents coolers to customers to dispense the bottled water. The Company also rents and sells filtration equipment to customers for home and office accounts. The Company added coffee and coffee equipment to its product mix delivered to customers from route delivery vehicles. The coffee is packaged by Green Mountain Coffee Roasters and is delivered by the Company’s employees. The Company’s water bottling operation accounted for approximately 98% of the Company’s revenues for the fiscal year ended March 31, 2012. The Company added a line of organic vitamin charged spring water to the product line and those products were available for distribution in September 2007. Additionally, in Eldorado Springs, the Company owns and operates a resort on its property during the summer months and rents a single-family home.
Sales and Distribution
Home/Commercial Delivery Business
Direct delivery of bottled water to homes and businesses has historically been the focus of the Company’s business. The Company’s bottled water delivery business primarily consists of the sale of five gallon and three gallon containers of water to customers who lease water dispensers from the Company. The Company delivers these bottles directly to customers using trucks owned or leased by the Company. The Company’s delivery sales are made primarily in the Denver/Boulder, Colorado metropolitan area (but also in selected other cities along the front range). As of March 31, 2012, the Company had approximately 14,000 active delivery accounts, and the delivery business currently accounts for roughly 62% of the Company's revenues. Of the five and three gallon accounts, approximately 50% were home accounts and 50% were commercial accounts.
PET Packaging/Retail Distribution Business
The PET business consists principally of the wholesale distribution of the Company’s PET products to grocery store chains with operations primarily in Colorado. The Company uses its own trucks to deliver its PET water products to grocery customers’ warehouses in the Denver metropolitan area. From there, the water is shipped to customers’ grocery stores throughout Colorado. In addition, because some of the grocery customers’ warehouse distribution extends beyond the State of Colorado, the Company receives some distribution at these customers’ grocery stores located in New Mexico, Wyoming, Kansas, Utah, Oklahoma and Texas.
The Company focuses on three major areas in marketing its products: five gallon and three gallon sales, small package products, and brand name recognition.
The five gallon and three gallon products are primarily sold through the acquisition of new accounts attracted by personal sales representatives at local events strategically located throughout the area. The efforts of the staff are augmented by yellow pages, the Company’s web site, radio, and occasional television advertisements and by product donation to local events.
The smaller packages and the organic vitamin charged spring water, which are sold principally through retail chain stores, are effectively marketed by using point of purchase inducements to gain new trial customers, usually in the form of discounts in price in conjunction with signage.
The Company attempts to build brand name awareness by sponsoring or participating in many local events. The Company has been a sponsor of many races and events including the Bolder Boulder 10K race, the Eldorado Springs Cancer Research Run, the Taste of Colorado and many other local events.
Water bottled by the Company comes from springs located on the Company's property in Eldorado Springs, Colorado which have been flowing for many years. While the Company could lose rights to the spring water, the Company does not foresee any disruption in the flow of the spring water. The Company currently sources all of its raw materials from outside vendors. Suppliers of the bottles have experienced seasonal shortages resulting from resin shortages. Changes in the supply of the bottles can affect the prices. The Company tries to mitigate possible shortages by maintaining sufficient inventory safety stocks so as not to interrupt production.
Sales tend to be mildly seasonal in the bottled water business. A ten to fifteen percent differential in sales is normally experienced between the peak summer months from May to September and the low winter months from November to March. As a result, revenues tend to be highest in the Company’s first and second fiscal quarters, and somewhat lower in the third and fourth fiscal quarters.
The bottled water industry has numerous competitors. Generally, the industry is made up of a few large companies (who own multiple brands), smaller companies whose products are distributed only on a regional or local basis and some private label brands. The Company's competitors include more diversified corporations having substantially greater assets and larger sales organizations than the Company, as well as other small firms. The Company's competitors in the local Denver/Boulder area for home and office delivery include Deep Rock and Sierra Springs. The Company also competes in the retail area for the smaller PET packages and the organic vitamin charged spring water with products including Aquafina, Arrowhead, Evian, Deep Rock, Dasani, Vitamin Water, Propel, Snapple and various private label brands. The Company is a smaller regional company compared to the competitors as most of the Company’s products are sold in Colorado. The Company competes on the basis of product quality, customer service, and price. The Company believes that the products' superior taste, competitive pricing and attractive packaging are significant factors in maintaining the Company's competitive position.
The Company's bottling operations are subject to regulation by the U.S. Food and Drug Administration and the Colorado Department of Public Health and Environment Consumer Protection Division. Weekly product and source bacteriological tests are required, and annual inspections are performed.
The Company is also subject to regulation under the Colorado Primary Drinking Water Regulations and the United States Safe Drinking Water Act. These regulations pertain to the operation of the water utility system owned by the Company that services the town of Eldorado Springs. These regulations are administered by the State of Colorado Health Department Drinking Water Division and regular periodic testing is required for this operation.
The Company operates a swimming pool that is also subject to regulation by the State of Colorado. These regulations are administered by the Boulder County Health Department and require periodic daily testing and agency inspections.
It is the Company's understanding that it is in compliance with these regulations as communicated by representatives of the responsible local agencies. Compliance with the standards and regulations above do not require material expenditures.
As of March 31, 2012, the Company had 64 full-time employees. During the summer months, the Company employs approximately 14 seasonal employees for the operation of the pool.
ITEM 1A. RISK FACTORS.
As a smaller reporting company, this item is not required.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
The Company owns property in two locations.
Eldorado Springs, Colorado
The Company owns approximately 24 acres of land in Eldorado Springs, Colorado. The buildings owned by the Company at this location total approximately 12,000 square feet. The Company uses this warehouse space for the fill station for the spring water as well as for storage of products from time to time. The Company also continues to use office space next to the warehouse. As part of the property in Eldorado Springs, the Company owns the wells and springs thereon and certain water rights. The Company owns an outdoor swimming pool that is operated during the summer months. Virtually all of the Company's property in Eldorado Springs is pledged as collateral on Company loan balances.
In August 2001, the Company purchased a new facility in Louisville, Colorado located approximately 10 miles from Eldorado Springs. This facility is approximately 40,000 square feet. The Company utilizes approximately 9,000 square feet for office space for its corporate headquarters. The facility also serves as the bottling facility and warehouse space for raw and finished materials. The building sits on 6.6 acres owned by the Company. The facility is financed through traditional bank financing.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company is a party or to which any of it properties are subject.
ITEM 4. Mine Safety Disclosures
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Price of Common Stock
The Company’s common stock is traded in the over-the-counter market on the Nasdaq’s OTC Bulletin Board (“OTCBB”) under the symbol “ELDO.” Corporate Stock Transfer is the Company’s transfer agent and registrar, and is able to respond to inquiries from stockholders on its website: www.corporatestock.com or at its mailing address: 3200 Cherry Creek Drive South, Suite #430, Denver, CO 80209. The quotations presented below reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. The following table sets forth, for the periods shown, high and low sales prices of our common stock, as quoted by the OTCBB:
The last price at which the Company’s common stock was sold was $0.11 on June 26, 2012.
The Company had 142 record owners of its common stock as of June 29, 2012.
No dividends have been declared or paid to date on the Company's common stock, and the Company does not anticipate paying dividends in the foreseeable future. The Company follows a policy of cash preservation for future use in the business.
Recent Sales of Unregistered Securities
During the year ended March 31, 2012, we did not have any sales of securities in transactions that were not registered under the Securities Act of 1933, as amended, that have not been reported in a Form 8-K or Form 10-Q.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, this item is not required.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand our Company. The MD&A should be read in conjunction with our consolidated financial statements and accompanying notes. The MD&A includes the following sections:
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, interest rate fluctuations, effects of regional economic and market conditions, labor and marketing costs, operating costs, packaging costs, intensity of competition and legal claims.
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
For the fiscal year ended March 31, 2012, the Company reported an increase in overall revenue of 4.2%. The increase in revenue was due to overall increase in unit volumes across all categories. The number of home and office accounts increased for the fiscal year ended March 31, 2012 and the total units for many products increased to the retail establishments.
The Company continues to utilize advertising and promotional budgets to help promote various products. The Company has been pursuing ways to offer more sizes of the products off of our own delivery vehicles to increase sales to existing customers.
The Company continues to look for ways to decrease costs and improve overall efficiencies. Overall operating expenses decreased 6.1% for the year ended March 31, 2012 as compared to the same period ended March 31, 2011. Operating expenses decreased from 75.5% of sales for the fiscal year ended March 31, 2011 to 68% of sales for the fiscal year ended March 31, 2012.
The Company believes that we are in a position to continue to grow in the markets we presently service by offering additional products and utilizing advertising and promotional budgets for promoting the products. We will continue to pursue additional business in new and emerging markets. In addition, we continue to look for ways to decrease operating costs in order to maintain profitability in the future.
Sales for the year ended March 31, 2012 were $9,227,182 compared to $8,853,631 for the same period ended March 31, 2011, an increase of 4.2%.
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% of sales and increased from $4,877,794 for fiscal year 2011 to $5,076,936 for fiscal year 2012, an increase of $199,142 or 4.1%. Total units of 5 and 3 gallon products increased less than 1% from the fiscal year ended March 31, 2011 to the fiscal year ended March 31, 2012 while the average selling price increased approximately 3.9%. The Company continues to look for additional products to distribute to existing and new customers to increase sales off of existing route vehicles. The Company began offering purified drinking water in the 5 gallon bottles for delivery off of existing route vehicles as a lower cost alternative for customers.
The Company increased filter rental and sales from $167,559 in fiscal year 2011 to $196,339 in fiscal year 2012, an increase of $28,780 or 17.2%. Consumers 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 year ended March 31, 2012, sales for coffee, coffee equipment and accessories increased from $165,069 for the fiscal year ended March 31, 2011 compared to $181,682 for the fiscal year ended March 31, 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.
Sales of the Company’s PET products (.5 liter to 1.5 liter sizes), including private label products, represented 16.9% of sales for fiscal year 2012 and 16.4% of sales for fiscal year 2011 or $1,554,938 and $1,452,159, respectively. This represented an increase of 7.1%. The Company’s gallon size products were 13% of sales or $1,202,580 in fiscal year 2012 compared to $965,334 in fiscal year 2011, an increase of 24.6%. Sales for the private label one gallon purified water products were $551,038 in fiscal year 2012 compared to $752,177 in fiscal year 2011, a decrease of 26.7%. The Company had been providing private label one gallon purified water to one of the largest retailers in the country. As of February 2012, the Company was no longer providing the private label product. However, the Company began providing one gallon branded spring water to the same retailer.
In 2008, the Company began introducing an organic vitamin charged spring water for distribution off of existing route vehicles as well as through major distributors. The product is now available throughout Colorado and in portions of surrounding states. The line of organic vitamin charged spring water is available in Vitamin Cottage, King Soopers (Kroger stores), Costco and Whole Foods. Additionally, the product is available to more than 2,000 other retail outlets, convenience stores and on-premise locations by UNFI and US Food Service distributors. The Company has been able to add additional distributors. Total gross sales for the organic vitamin charge spring water were $158,278 for the fiscal year 2012 compared to $302,582 for the fiscal year 2011.
Gross Profit/Cost of Goods Sold
Cost of goods sold for fiscal year 2012 were $2,492,881, or 27.0% of sales, compared to $2,363,365, or 26.7% of sales for fiscal year 2011. Gross profit increased from $6,490,266 or 73.3% of sales for fiscal year 2011 to $6,734,301 or 73.0% of sales for fiscal year 2012. Overall, gross profit increased 3.8% from the fiscal year ended March 31, 2011.
Cost of goods for the home and office products were $367,596, or 7.2% of 5 and 3 gallon sales for fiscal year 2011, compared to $279,964, or 5.7% of 5 and 3 gallon sales for fiscal year 2011. Cost of goods for the Eldorado brand 1 gallon products were $558,881, or 46.5% of 1 gallon sales for fiscal year 2012, compared to $402,275, or 41.7% of 1 gallon sales for fiscal year 2011. Cost of goods for the private label purified water was $398,835 and $504,186, or 72.4% and 67% of sales for fiscal 2012 and 2011. The purified water has a lower average selling price which results in higher cost of goods as a percent of sales. Cost of goods for the PET products were $791,342, or 50.9% of sales for fiscal year 2012, compared to $694,718, or 47.8% of sales for fiscal year 2011. Recently, the cost of goods for the bottles and packaging of the gallon and PET products has decreased resulting in increased profit for these categories.
Total operating expenses decreased to $6,275,016 in fiscal year 2012 from $6,681,061 in fiscal year 2011, a decrease of $406,045 or 6.1%. Of the total operating expenses, salaries and related expenses decreased to $3,211,621 in fiscal year 2012, or 34.8% of sales, from $3,439,184 in fiscal year 2011, or 38.8% of sales. The decrease in salaries and related expenses is due to a one-time non cash expense of $223,076 on March 31, 2011. On March 31, 2011, the Company declared an outstanding promissory note between Douglas A. Larson, the Company’s President, Chief Executive Officer and a director, in default. In accordance with the terms of the pledge agreement, Mr. Larson consented to the transfer of the 500,000 shares of common stock to the Company. The difference between the outstanding amount of the note at the time of notice and the value of the pledged shares transferred to the Company was $223,076 which had been reported as other compensation to Mr. Larson in fiscal 2011.
Administrative and general expenses decreased 8.5% to $1,607,173 for fiscal year 2012 as compared to $1,755,868 for fiscal year 2011. The Company had fewer expenses related to property taxes. Additionally, the Company chose not to renew Water Lease Agreement with Denver Wells, LLC, for the monthly expense of $3,000.
Delivery expenses decreased from $778,781 for fiscal year 2011 to $769,422 for fiscal year 2012, a decrease of 1.2%. The Company had decreased expenses for leased vehicles and insurance by consolidating routes and using fewer delivery vehicles. Although the Company did experience an increase in fuel costs they were more than offset by decreases in lease expenses and insurance costs.
Advertising and promotion expenses decreased 12.1% for fiscal year 2012 compared to the fiscal year 2011. Advertising and promotion expenses were 2.3% and 2.7% of sales, respectively for both fiscal year 2012 and 2011. The Company did not participate in many of the larger and more expensive events. Additionally, the Company did not conduct as many on-site demos and promotions for the organic vitamin charged spring water.
Depreciation and amortization increased 1.7% for fiscal year 2012 as compared to fiscal year 2011. Depreciation and amortization for fiscal year 2012 was 5.2% of sales compared to 5.3% of sales for fiscal year 2011. The Company has purchased more equipment for use with the home and office delivery accounts resulting in a slight increase in the depreciation expense.
Interest, Taxes, Other Income and Other Expenses
For the year ended March 31, 2012, interest income decreased 94.1% to $1,960 as compared to $33,054 for the same period ended March 31, 2011. The Company no longer carries a note receivable related party balance.
Interest expense for the year ended March 31, 2012 decreased less than 1% to $345,263 as compared to $347,493 for the year ended March 31, 2011.
For the fiscal year ended March 31, 2012, the Company recorded income tax expense of $24,191 against our pretax income of $115,982 as a valuation allowance was recorded on our outstanding deferred tax assets due to uncertainty of realization, a 21% effective tax rate. The Company recorded a deferred tax expense of $24,191 for recapture of prior year deferred tax assets. For the fiscal year ended March 31, 2011, the Company recorded income tax expense of $131,114 against our pretax book loss of $326,412 as a valuation allowance was recorded on our outstanding deferred tax assets due to uncertainty of realization, a 28% effective tax rate
The Company had net income after taxes of $115,982 in fiscal year 2012 compared to a net loss of $457,526 for fiscal year 2011.
Liquidity and Capital Resources
Trade accounts receivable for the year ended March 31, 2012 were 9.9% less than at year ended March 31, 2011. This resulted from the increased efforts in collections and tighter credit policies. Days sales outstanding was approximately 37 days for March 31, 2012 and 43 days for March 31, 2011.
Cash flows from operating activities had a net inflow of $424,708 for fiscal year 2012. The cash provided by operating activities represents an increase of $334,308 from fiscal year 2011. The largest reconciling item between net income and net cash flow from operations was the $478,574 of depreciation and amortization. The change in operating activities also resulted from the change in accounts receivable and net income. The Company anticipates that cash flow from operations will be available to fund existing obligations for expected cash requirements over the next year.
Cash flows from investing activities resulted in a net outflow of $185,946 for fiscal year 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 $67,881 for fiscal year 2012.
The Company’s cash balance at March 31, 2012 increased to $250,083 by a net amount of $170,881 from $79,202 at March 31, 2011.
The Company has a line of credit with Great Western Bank in the amount of $475,000. As of March 31, 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 $498,700 as of March 31, 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.
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 (the “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 (the “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 terms of Note 3 include a fixed interest rate that was determined by the SBA debenture sale in April 2012. The effective rate for Note 3 is 4.951% for the full 20 year term. The monthly payment will be approximately $10,000. The first payment was due on May 2, 2012. Note 3 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. The Loan Agreements also include certain performance and reporting covenants.
Contractual Obligations and Commitments
The following table sets forth our contractual commitments as of March 31, 2012:
Please refer to notes 4, 5, 7 and 8 in the Consolidated Financial Statements for more information regarding the Company’s future cash commitments.
Impact of Inflation
The Company believes that the results are not dependent upon moderate changes in inflation rates.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability to the Company. Where it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company’s financials properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”).” This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations.
In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to report other comprehensive income and its components in the consolidated statement of shareholder’s equity and comprehensive income and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company believes the adoption of ASU 2011-05 concerns presentation and disclosure only and will not have an impact on its consolidated financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, this item is not required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, including the notes thereto, and the report of the independent registered public accounting firm, are included in this Annual Report and begin on page F-1.
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Eldorado Artesian Springs, Inc.
We have audited the accompanying balance sheets of Eldorado Artesian Springs, Inc. (“the Company”) as of March 31, 2012 and 2011 and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Eldorado Artesian Springs, Inc. as of March 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
Ehrhardt Keefe Steiner & Hottman PC
June 29, 2012
Liabilities and Stockholders' Equity
See notes to financial statements
Statements of Operations
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