ITEM 1. BUSINESS.
Overview
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 (www.otcmarkets.com), “OTC” under the symbol (BRWC). Please check us out at http://www.otcmarkets.com/stock/BRWC/quote.
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 three types of water: spring water, distilled water, enhanced water, which is customized with minerals, oxygen, and fluoride, and a fourth type to be added, sparkling water. The Company was originally founded in 1884.
Currently, we have two Officers. Mrs. Francine Lavoie is Chairman, President, CEO and Secretary. Mr. Christopher Umecki is Vice President of Operations. Mrs. Lavoie is our sole Director.
The Company has its principal executive offices at 4496 State Road 42 North Kiamesha Lake, NY 12751. The telephone number for our executive offices is 845-794-0400. Boreal Water Collection’s internet address is www.borealwater.com. Our common stock is quoted on www.otcmarkets.com (secondary market); BRWC.
Narrative Description of Business of Boreal Water Collection
Founded in 1884 with headquarters in Kiamesha Lake, NY, Leisure Time Spring Water was acquired by Boreal Water Collection Inc. (the “Company,” “Boreal Water Collection,” “Boreal,” “BRWC,” “us,” “we”), which is a contract packer of bottled water focused on value-added products/services.
Boreal Water Collection is a personalized bottled water corporation, specialized in providing premium custom bottled water for your company and customers. Whether it is for publicity, promotion, marketing, internal use or a specific event, Boreal is a one-stop shop. We offer turnkey service, with prize-winning Boreal private label water (ITQI for Boreal Water by the International Taste Quality Institute in Belgium 2012), made-to-order labeling, distinctive water containers and fully integrated services literally from the ground up. Based on our observations of the specialty bottled water industry and experience gained over the years, in the opinion of management, our production technology and our creative personnel are among the brightest and best in the industry. Boreal wishes to develop the most extensive distribution network in North America and warehouses across Canada and the United States. Unlike other bottled water companies, Boreal also has exclusive access to two springs, one an award-winning source (ITQI for Saint-Elie water by the International Taste Quality Institute in Belgium 2007, 2008 and 2009), deep in Canada and the other in the prestigious Catskills Mountains in New York. Boreal has exclusive unlimited access (40 year contract dated on November 1, 1995) to Alpine spring water and has access to 225,000,000 liters per year of Saint-Elie spring water as per a permit from the Quebec Ministry of Agriculture.
Distinct value proposition: Unlike most contract packers, BRWC can process a full range of water and bottle types. BRWC is one of the few focused on an attractive niche. Our “niche” is the premium private label specialty market (“Premium Bottled Water Industry”), wherein the customer’s name is placed on the bottle label and not the manufacturer’s (our) name. For example, we would pack water for a resort hotel or a premium, local bottling company. The bottle would have the name of the hotel on it and would have a higher price than a bottle of “national brand” bottled water purchased at a grocery store, for example; Dasani brand owned by Coca Cola.
Location: BRWC’s facility is 90 miles away from New York City in the famous Catskills Mountains and only 17 miles from Alpine Springs, the source of our natural spring water.
• Strong customer base, good customer relationships: We and our affiliated company, Les Sources Saint-Elie Inc. (Quebec, Canada), have always emphasized customization and product quality, and, this emphasis on customization and quality has helped us earn the reputation we currently enjoy in the marketplace.
We pack for a number of high-profile brands. Our Customers are a well-diversified mix of beverage and other companies and represent a variety of retail channels and include retailers and large water marketers.
• Future growth: Management believes BRWC has positioned itself for future growth, and it continues to drive the company closer to fulfilling its mission to become one of North America’s leading producers of high-end private label bottled water.
Key elements of future growth: (1) capital expenditures for new equipment, (2) enhanced customer service, (3) focusing on the non-commoditized business, and (4) a continued effort to maintain excellent relations with our vendors and customers. We also have plans to increase our bottling capabilities.
Saint-Elie is an affiliated company of BRWC. Affiliated companies are generally defined as those entities having shared management, common owners and/or shared ownership interests in other entities. This affiliation is based on the commonality of management and ownership of both companies. Mrs. Lavoie is President, CEO and the sole member of the Board of Directors of both companies. Mrs. Lavoie owns 75% of Boreal and 100% of a Canadian holding company known as 3090-8925 Quebec Inc. that, in turn, owns 90% of Saint-Elie.
We have an ongoing licensing/exclusive distribution agreement with Saint-Elie. Our first agreement was dated December 17, 2007. It was amended on June 18, 2008 and then both agreements were replaced by the current “Revised Licensing Agreement” dated June 26, 2009 (“distribution agreement” - an exhibit to this Registration Statement). The distribution agreement has a term of 5 years, with automatic one year extensions thereafter. Generally, the distribution agreement is an exclusive distribution and branding agreement for Saint-Elie products in the United States (and its possessions). The distribution agreement flat fee is $1 million (U.S.) (“flat fee”). Saint-Elie is also paid 5% of sublicensing fees and was issued 22 million shares of restricted BRWC common stock. Boreal is responsible for its own bottling, packaging, delivery and sub-marketing arrangements and expenses. BRWC co-pack one large customer for Saint-Elie because BRWC can produce distilled water and Saint-Elie does not. Saint-Elie co-packs for a few customers of BRWC; Saint-Elie produces sparkling water and BRWC does not.
Why customers choose BRWC: Value-added products and services. We believe the following factors come into play:
• Reputation: History of reliability, flexibility, and specialized packaging capability.
• Location: Close to natural spring water, good transportation corridors, good population centers.
• Flexibility and a variety of packaging and product options: Ability to fill unique bottle shapes and sizes (while most high-speed lines use only a limited bottle selection). Ability to bottle value-added water, i.e., vapor distilled water with electrolytes and/or vitamins and minerals. Customers requiring unique bottles/packaging tend to be higher margin because the product is sold at higher price points at both the retail and wholesale levels than “generic,” commoditized bottled water.
With exclusive exploitation rights (40 year contract dated on Nov 1, 1995), Boreal has the right to draw 225,000,000 liters of spring water per year as per a permit from the Quebec Ministry of Environment (please see EXHIBITS).
The nature of products or services offered.
Principal products or services, and their markets:
• BRWC currently offers three types of water: Spring water, distilled water; enhanced water which is customized with minerals, oxygen, and fluoride, and a fourth type being added will be Sparkling water (upon obtaining necessary financing).
• Bottles can be branded with clear - rather than more conventional paper - labels, which creates a clean, refreshing look; paper labels available, too.
• Customer-specific packaging: Cases or trays, registered film, different caps, etc.
• Customers may specify different formulations of water (different minerals, etc.).
• Smaller custom production runs are possible; minimum order size is relatively low (one truckload).
• We believe we supply responsive, customized solutions for each customer. Understanding that unique appearance of product may drive customer interest and loyalty and enable the customer to compete less on price and more on a premium quality product.
The bottled water industry is one of long and sustained growth, with sales and volume increases far outpacing the beverage industry for the last 20 years. Above-average growth rates of 6%-9% should continue in coming years, making bottled water a $10.59 Billion (US) market in the United States in 2009 (according to Beverage Marketing Corporation)
• Key players in the industry include Coca Cola (Dasani and Glaceau), PepsiCo (Aquafina), Nestle Waters North America (Nestle Pure, Poland Spring, and various regional brands), and Danone (Dannon Spring).
The industry has grown along 2 divergent paths, one focused on low-margin, undifferentiated, commoditized product and the other centered on innovative packaging, labeling and marketing (the Premium Bottled Water Industry; our niche). We believe the evidence shows BRWC is well positioned to benefit from this latter trend.
Distribution methods of the products or services;
• BRWC has our own sales force and in house consultant to direct customers into their choice of a private label program. Our sales staff attends tradeshows to meet new customers. Our sales staff also arranges for the delivery of products to our customers.
• Bottles: A full range of sizes are available, from 8 ounces to 1 gallon. BRWC has many styles of bottles with many shapes so that the customers can select from a variety of styles, colors and shapes.
• We now offer “Eco-Pure”, a biodegradable bottle which was introduced at the 2009 PLMA Trade show in Chicago, IL. BRWC gives this choice of bottle material so that the environmentally conscientious customers are satisfied.
• BRWC now offers “Revert,” an oxo-degradable bottle and also offers “R-PET,” recycled Polyethylene terephthalate (“PET”). BRWC also offers these bottle materials as a good option to reducing the use of plastic.
• Bottles may be ordered by BRWC or by the customer from the bottle makers. In either case, the customer is not confined to industry-standard bottles as we have our own designs of bottles.
• Our customers can choose from a wide variety of bottles and packaging.
• Labels: BRWC offers many types of labels materials and designs: Clear labels, Bi-axially oriented polypropylene (“BOPP”) or standard paper labels in either Pressure sensitive or Cut and stack are offered.
• Packaging: BRWC packages products to suit customers’ needs. Packaging has included a variety of trays and cases, caps, registered film, etc.
• Shipping: We use commercial common carriers to deliver to our customers.
Status of any publicly announced new product or service:
The Company’s 75,000 square foot facility has 3 flexible Polyethylene terephthalate (“PET”) lines. Our PET lines are unique in that they can accommodate various bottle sizes, labels, and production runs. When investment or operationally supplied funds are available, BRWC intends to install two new lines in the near future, one being a sparkling water bottling line and the second one being a glass bottling line.
As mentioned, BRWC now offers “Eco-Pure,” a bio-degradable bottle which was introduced at the 2009 Private Label Manufacturers Association (“PLMA”) Trade Show in Chicago, IL.
Competitive business conditions, the issuer’s competitive position in the industry, and methods of competition:
• While many bottlers will place custom printed paper labels on blown bottles, the Company is not aware of any contract packers that offer our full range of products and services.
• Distinct value proposition: We believe variety and uniqueness are the cornerstones of BRWC’s value proposition. Unlike most contract packers, BRWC can process a full range of water and bottle types and our creative staff can address our customers’ private labeling needs.
• Location: BRWC’s facility is located in the famous Catskills Mountains, 90 miles away from New York City, and only 17 miles from Alpine Springs, the source of our natural spring water. Most competitors in this class are smaller in scale and at a competitive disadvantage in the markets BRWC currently serves due to a more limited range of services and geographical location. (For bottlers in other geographies, freight costs may make shipping to BRWC’s coverage area prohibitive.).
• We do not view traditional high-speed contract bottlers (primarily “national brands” offering standard bottles) as direct competition. Bottling on high-speed lines tends to cost less but is also undifferentiated, which is part of the reason that prices for this type of bottled water have been falling. Compared to Boreal Water Collection’s competition class, a cheaper product does not always guarantee a higher margin.
• BRWC conducts our business with customers largely through purchase orders. Occasionally we have “co-packing” arrangements with some major customers. We have three pricing methods:
(1) Fee based: BRWC charges co-pack fee; customer provides materials.
(2) Material and fee: BRWC purchases materials for customers and charges cost of materials plus a fee.
(3) Finished case basis: BRWC commits to a price for each finished case delivered to the customer.
Sources and availability of raw materials and the names of principal suppliers:
• Spring Water: The Company purchases spring water from Alpine Farms, Inc. under a 40-year purchase agreement dated November 1, 1995 and modified April 28, 2000. The agreement provides for the sole and exclusive right to draw water from the source and sell spring water to third parties. The spring is located 17 miles from the bottling facility. At the source, the spring water flows underground and is naturally filtered through the stratum. The entire system is designed to ensure that this pure spring water remains natural and unadulterated. Water is then transported by our employees and company tank trucks to BRWC’s bottling plant in Kiamesha Lake, where it is passed through a series of multimedia particulate filters to remove any sediment. After treating the water with ozone, an oxygen molecule used to ensure sanitation, the water is then bottled with its natural mineral content intact.
• Distilled Water: BRWC has two private wells on-site, which provide water that is passed through a series of multimedia particulate, and activated carbon filters, to remove chlorine, phenols, taste, odor compounds and organic minerals. The water is then distilled in a vapor compression steam unit. All dissolved minerals are left behind as the water is vaporized and condensed in a stainless steel still, which yields high purity finished water. After filtration and ozonation, the product is promptly bottled.
• Enhanced Water: BRWC offers customers the option of enhancing their Private label water by adding minerals, oxygen, and even fluoride. This process is usually done after the distillation process; our quality control (“QC”) specialist carefully measures out the various additives per customer request and adds these to the customer’s specific batch before bottling.
• Sparkling Water: BRWC is looking to add a sparkling water line to our plant in Kiamesha Lake to appeal to a wider customer base. Sparkling water is currently available at BRWC’s sister (“affiliate”) company, Saint-Elie in Canada.
No Dependence on one or a few major customers:
We do not rely or depend on one or only a few major customers. For the year ended December 31, 2013 and 2012, respectively, we reported sales of $2,151,513 and $2,680,429, a decrease of $528,916, or 19.7%. The decrease is attributable to a decrease of $119,743 in one gallon product sales, $109,306 in 3/5/6 gallon products, $292,735 in co-packing, $8,827 in house brand and $7,408 in label sales, partially offset by increases of $7,448 for transport sales and $1,655 pallets sales. The decrease in sales of our one gallon and co-packing resulted from the loss of two customers, and the decrease in sales of our 3/5/6 gallon products resulted from shutting down the production line during September 30, 2012 in accordance with a legal settlement (See Settlement of Lawsuit).
Patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts, including their duration:
BRWC owns a license from Les Sources Saint-Elie Inc. in Canada, for the exclusive rights for the United States to distribute Saint-Elie brand, for the use of its proprietary bottle designs and proprietary know-how of the private labeling business. BRWC owns the registered trademarks ‘Leisure Time Spring Water’ and ‘Boreal Water’.
Need for any government approval of principal products or services and the status of
any requested government approvals.
BRWC has all the necessary State of New York (Department of Health), Food and Federal Drug Administration (FDA) and the Quebec Ministry of Environment required government approvals.
PRODUCT LIABILITY
By designing and manufacturing a reliable, high quality product, the Company will minimize, but not eliminate, the possibility and occurrence of defective products.
The Company has incorporated preventive measures aimed at reducing its potential exposure to liability risk. The product development and manufacturing program includes high product reliability standards meant to result in high mean times between failures (“MTBF”). The Company plans to achieve a high MTBF factor by pursuing strict quality control procedures.
The manufacturing and marketing of the Company's products, incorporating new technology and processes, has an inherent risk. No one can be sure how each product will be constituted over time and under various conditions of actual consumption. Even if the products are successfully bottled and marketed, the occurrence of product liability, or retraction of market acceptance due to the failure of the product to meet expectations could prevent the Company from ever becoming profitable. Development of new technologies for manufacture (bottling; product composition) is frequently subject to unforeseen expenses, difficulties and complications, and in some cases cannot be accomplished. In the opinion of Management, our water products and bottling, as designed, have many positive attributes, but such attributes must be balanced against field operating experience and unknown technological changes.
Financial Information
The sole source of Boreal Water Collection’s revenue and income is our water bottling and sales activity. The following table sets forth our total gross revenues and net income (loss) reported by the Company for the years ended December 31, 2013 and 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.
Competition
The bottled water industry is one of long and sustained growth, with sales and volume increases far outpacing the beverage industry for the last 20 years. According to the Alexandria, VA-based International Bottled Water Association (in a press release dated May 21, 2012), United States per-capita consumption of bottle water was up 3.2% in 2011, with every American now drinking an average of 29.2 gallons of bottled water annually. During the same period, global consumption of bottled water rose by 4.1%.
• Key players in the industry include Coca Cola (Dasani and Glaceau), PepsiCo (Aquafina), Nestle Waters North America (Nestle Pure, Poland Spring, and various regional brands), and Danone (Dannon Spring).
Boreal faces two main classes of competition, neither of which rivals the flexible, customizable product and service mix that the Company offers. BRWC does not have a significant competitive environment in our niche (the Premium Bottled Water Industry) and does not currently experience much, if any, competitive pressure. However, it should be pointed out that marketing plans of others can change at any time and there is always the possibility that competitors may decide to offer contract packing competitive with our products and services. Our competitors can also attempt to change the market perception by differing types of promotional activities and/or launch divisions competing more directly with us.
Intellectual Property
Boreal Water Collection uses a variety of trade names, service marks and trademarks (collectively, the “Marks”) in its operations and believes that we have or will have all licenses for the third-party Marks necessary to conduct our continuing operations following the Registration Effective Date. BRWC owns a license from Les Sources Saint-Elie Inc. in Canada, for the exclusive rights for the United States to distribute Saint-Elie brand, for the use of its proprietary bottle designs and proprietary know-how of the private labeling business. BRWC owns the registered trademarks ‘Leisure Time Spring Water’ and ‘Boreal Water’.
Management
The Company is managed by a Board of Directors. Currently we have one member on our Board of Directors, Mrs. Francine Lavoie. Our Director has been selected due to, among other things, her experience and expertise in the bottled water industry and other business ventures. Mrs. Lavoie is also our majority shareholder. We have no current plans to add members to our Board of Directors. However, should we do so, membership on the Board of Directors is not expected to require the full professional time of the individuals serving on the board. As such, the members of the Company’s Board of Directors may, from time to time, be engaged in other business endeavors, including but not limited to those business endeavors in which they are currently involved, aside from their commitments to the Company or Boreal Water Collection. Mrs. Lavoie is not currently involved in other businesses that are in direct competition with the Company. See “Item 10. Management and Executive Officers” for details on the member of our Board of Directors and certain of her past and present business endeavors. There are no compensation plans or benefit packages established or currently planned for management.
Costs and effects of compliance with environmental laws (federal, state and local):
1. CUSTOMER STANDARDS: We always strive to live up to our customers’ expectations. BRWC’s customers require regular inspections of BRWC’s operations, which are performed by customers or by third-party auditors, i.e., AIB International (“AIB”) and National Science Foundation International (“NSF”).
2. FEDERAL REGULATIONS: Bottled water is fully regulated as a packaged food product by the US Food and Drug Administration (“FDA”). As such, bottled water companies must adhere to FDA’s Standard of Quality, labeling standards and Good Manufacturing Practices (“GMPs”).
3. STATE STANDARDS: In addition to FDA’s extensive regulatory requirements, the bottled water industry is subject to state regulatory requirements. State governments typically sample, analyze and approve water sources. Under the federal GMPs, only approved water sources can be used to supply a bottling plant. Many states also require bottled water plants to be registered with the state and comply with their specific requirements. States also certify testing laboratories. As with any food production establishment, states can perform unannounced plant inspections. Some states perform annual inspections.
4. INDUSTRY STANDARDS: In addition to the federal and state standards for bottled water, International Bottled Water Association (“IBWA”) members are subject to another level of oversight through the IBWA Model Code, which in several cases contains standards that are stricter than FDA, state or public drinking water standards. As a condition of membership, bottlers must submit to an annual, unannounced plant inspection administered by an independent, internationally recognized third-party inspection organization. This inspection audits quality and testing records, reviews all areas of plant operation from source to finished product, and checks compliance with FDA’s Standard of Quality, GMPs, principles of the Hazard Analysis and Critical Control Points (“HACCP”) management system and any state regulation. At this time BRWC is not member of the IBWA but intends to become member in 2012.
Employees
Company presently has 18 full time employees and is running solely on a day shift time schedule.
Regulation and Licensing
BRWC has all the necessary State of New York (Department of Health), Food and Federal Drug Administration (FDA) and the Quebec Ministry of Environment required government approvals.
ITEM 2.
ITEM 2. PROPERTIES.
Boreal Water’s Bottling facility and bottling capabilities are flexible and can service a broad range of customers of all sizes, fulfilling their specialized water and packaging needs.
Size: BRWC occupies approximately 75,000 square feet, at 4496 State Road 42N, Kiamesha Lake, NY 12751. 55,000 square feet of this space is used for manufacturing purposes.
Facility Enhancements: Subject to the availability of financing, BRWC is currently planning to install a glass bottling line and a sparkling water line.
ITEM 3.
ITEM 3. 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:”
In another matter; Boreal Water Collection, Inc. (“company” or “BRWC”) and Mrs. Francine Lavoie, CEO and controlling shareholder of the company, received multiple offers for the purchase of her shares in 2011. Mr. Andrea Cortellazi (“Cortellazi”) made three such offers in succession; first through a company known as “Kochi,” then personally, and finally on or about May 17, 2011 from a company named Monticello Water Company (“Monticello”).
Cortellazi brought 2 gentlemen on board to assist in his buy-out bid (“proposed management”). One was proposed as CEO (to replace Mrs. Lavoie) and the other was a former member of BRWC management. Cortellazi stated to Mrs. Lavoie that financing for the buy-out could not proceed with Mrs. Lavoie remaining as management of the company. They also stated that she should open a new Boreal bank account with Cortellazi as signatory (to receive buy out investment funds) (“Cortellazi BRWC account”). Mrs. Lavoie agreed to this new account with an understanding that it would not be used until the buy-out transaction was completed. Mrs. Lavoie resigned, but only with the understanding the transaction would close within a week’s time and would include the transfer of her personal guarantee of the company’s bank credit line to Cortellazi. Eventually, it was determined that Mr. Cortellazi was using the account without authority, allegedly converting invested funds for his personal use, including funds invested by the 2 individuals brought in as part of the alleged buy-out scheme.
Mrs. Lavoie was restored as the President, CEO and sole Director of the Company. She then received demands and threatened legal action from Cortellazi’s proposed management stating that BRWC owed money in NSF checks issued from the Cortellazi BRWC account.
A “Summons with Notice” (but not a Complaint), naming BRWC, Mrs. Lavoie and Cortellazi as defendants, was filed on March 14th, 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). 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. Plaintiffs are identified as Michael Gambino and Alan Silverstein. Defendants BRWC and Mrs. Lavoie have filed an Answer and Counterclaims, dated September 24, 2012. Counterclaims have been filed against Cortellazi, who has basically admitted his role in the scheme as part of an out of court settlement, as well as Gambino and Silverstein for fraud, defamation and slander, and damages, including punitive damages and attorney’s fees.
In October 2013, the parties to this action reached a settlement in the amount of $30,000, which provided that the Company would make monthly cash payments of $1,000 per month over a 30 month period of time and also reissue three million shares in exchange for the same shares in Gambino’s possession.
The Company may be a 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, if any, will not likely materially affect the Company’s financial position, liquidity, or results of operations.
ITEM 4.
ITEM 4. Mine Safety Disclosures.
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a) Market Information
Our common stock is traded under the symbol BRWC on www.otcmarkets.com.
(b) Holders
Period end date; December 31, 2013.
(i) Number of shares authorized;
600,000,000.
(ii) Number of shares outstanding;
322,447,351
(iii) Freely tradable shares (public float);
45,708,326
(iv) Total number of beneficial shareholders
Francine Lavoie is the only beneficial shareholder.
(v) Total number of shareholders on record;
997 shareholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
ITEM 7.
ITEM 7. MANAGEMENTS 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 YEAR ENDED DECEMBER 31, 2013 COMPARED TO THE YEAR ENDED DECEMBER 31, 2012
Comparison of year ended December 31, 2013 to year ended December 31, 2012
For the years ended December 31, 2013 and 2012, we reported sales of $2,151,513 and $2,680,429, a decrease of $528,916, or 19.7%. The decrease is attributable to a decrease of $119,743 in one gallon product sales, $109,306 in 3/5/6 gallon products, $292,735 in co-packing, $8,827 in house brand and $7,408 in label sales, partially offset by increases of $7,448 for transport sales and $1,655 pallets sales. The decrease in sales of our one gallon and co-packing resulted from the loss of two customers, and the decrease in sales of our 3/5/6 gallon products resulted from shutting down the production line during September 30, 2012 in accordance with a legal settlement (See Settlement of Lawsuit).
For the years ended December 31, 2013 and 2012, cost of sales and the gross profit percentages were 84% and 80% and 16% and 20%, respectively. The decrease in gross profit resulted from lower sales levels in 2013 absorbing the same fixed factory overhead.
Selling and general administrative expenses decreased $223,127, or 27.3% to $594,215 for the year ended December 31, 2013 from $817,342 reported for the comparable period in 2012. As a percentage of sales, selling and general administrative expenses decreased to 27.6% for the year ended December 31, 2013 from 30% for the same period in 2012. Direct selling expenses decreased $92,947, or 84%, to $18,159 for the year ended December 31, 2013 from $111,107 reported for the comparable period in 2012. Direct selling expenses are comprised of sales compensation costs, advertising, and related travel costs. This decrease in direct selling expenses is attributable to the Company’s commitment to reduce expenses in light of lower sales. General administrative expenses decreased $118,854, or 24.4%, to $367,793 for the year ended December 31, 2013 from $486,647 reported for the comparable period in 2012. The decrease is attributable to $162,217 in decreases in stock based compensation, salaries-supervision, fringe benefits, professional fees, property taxes, office supplies, utilities, postage, dues, bad debts and telephone, partially offset by increases of $43,363 in salaries - office, insurance, bank charges, bad debts, late fees and other miscellaneous expenses. Delivery expenses decreased $51,491 or 23.4%, to $168,096 for the year ended December 31, 2013 from $219,588 reported for the comparable period in 2012. Delivery expenses are comprised of outside trucking, salaries and related benefits, insurance, repairs and permits. This decrease in delivery expenses is mainly attributable to the lower sales volume in 2013 compared to 2012.
For year ended December 31, 2013, extraordinary items of $1,347,188, are comprised of a $30,000 legal settlement expense relating to settlement of a lawsuit (See Settlement of Lawsuit) and a gain of $1,377,178 on extinguishment of debt which are discussed in Notes 9-10 to our financial statements.
For the years ended December 31, 2013 and 2012, we reported interest expense of $109,404 and $127,704, respectively. Debt obligations and interest paid against these debt obligations are discussed in Notes 9-10 to our financial statements for the twelve month ended December 31, 2013 and 2012.
Other income totaled $122,557 and $11,167 for the years ended December 31, 2013 and 2012, respectively.
For the years ended December 31, 2013 and 2012, the Company did not pay any federal income taxes. For the year ended December 31, 2013 and 2012, the Company recorded income tax benefit of approximately $380,000 and $82,000, respectively, which represents the change in the difference between book and tax basis of assets originally acquired in a bargain asset purchase.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2013, the Company had an accumulated deficit since January 10, 2006 (the date of quasi reorganization) of $2,773,469. Liquid assets at December 31, 2013 consisted primarily of cash and cash equivalents of $63,420. Current liabilities of $1,994,078 exceeded current assets by $1,538,231. 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. Until the company is successful in securing funds investors they have begun to stretch payments to its vendors and thus its obligations to those vendors have increased from the prior year. There is no guarantee that the Company will be able to raise funds from outside investors or continue to rely on its vendors to help finance its operations.
Cash decreased $82,953 to $63,420 at December 31, 2013, as compared to $146,373 at December 31, 2012, which results from the following:
Cash used by our operating activities for the year ended December 31, 2012 was $185,666, comprised of a net income of $849,748, noncash reconciling adjustments of $725,905, and changes in operating assets and liabilities of $309,509. Noncash reconciling adjustments include an impairment charge of $117,077, stock issued for services of $20,000, and depreciation and amortization of $519,918, partially offset by decreases in allowance for doubtful accounts of $5,713 and an extraordinary gain on extinguishment of debt of $1,377,187.
The $309,509 change in operating assets and liabilities is primarily attributable to an increase in accounts receivable -other of $13,624, inventory of $53,860, accounts payable of $30,993, partially offset by a decrease in accounts receivable of $3,119, deferred financing costs of $22,000, prepaid expenses of $1,617, and a decrease in deferred tax liability of $ 381,250.
Cash used in investing activities of $11,939 was the result of the purchase of equipment for $11,939. Cash provided by financing activities was approximately $114,652, comprised of an increase in loan payable - other $50,000, advances from related parties of $13,273, change in mortgage payable of $112,777, payments against loan payable obligation for property taxes of $38,858, payments on equipment loan of $7,500, and payments on capital lease obligations of $ 15,040.
Comparison of cash flows for year ended December 31, 2013 to year ended December 31, 2012
Net cash used for operating activities decreased $39,504, or 18% to $185,666 for the year ended December 31, 2013 from $225,170 for the comparable period in 2012. This decrease in net cash used for operating activities, are comprised of decreases in non-cash reconciling adjustments of $1,221,202 and operating assets and liabilities of $411,944, offset by an increase in net income of $1,672,650 for the year ended December 2013 as compared to 2012.
Net cash used for investing activities increased $995, or 9% to $11,939 for the year ended December 31, 2013 from $10,944 for the comparable period in 2012. This increase in net cash used for investing activities is comprised of a decrease in purchases of property and equipment of $2,005, partially offset by a $3,000 decrease in proceeds received from sale of fixed assets.
Net cash provided from financing activities decreased $199,490, or 64% to $114,652 for the year ended December 31, 2013 from $314,142 for the comparable period in 2012. This decrease is comprised of a $145,682 decrease in related party advances, a $120,000 decrease in in issuance of common stock, a $65,000 decrease in deposit on purchases of common stock, and a $15,040 increase in payments against capital lease obligations, partially offset by $50,000 increase in proceeds from loan payable-other, a $40,000 decrease in payments on equipment loans, a $46,881 decrease in payments against a property tax loan, and a $9,351 change in mortgage payable.
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 and has been increasing the days outstanding with its vendors. 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 December 31, 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 December 31, 2013.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. Our estimates are based on assumptions we believe are reasonable under the circumstances. We will evaluate our estimates on an ongoing basis and make changes as experience develops or as we become aware of new information. Actual results may differ from these estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Off-Balance Sheet Arrangements
None.
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.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 2 of our Audited Financial Statements ending December 31, 2013. Certain of our policies require the application of management judgment in making estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes. Those estimates and assumptions are based on historical experience and various other factors deemed to be applicable and reasonable under the circumstances. The use of judgment in determining such estimates and assumptions is by nature, subject to a degree of uncertainty. Accordingly, actual results could differ from the estimates made.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Furthermore, as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
Additional Plan of Operation.
Boreal has renegotiated all contracts with suppliers and customers and has developed and designed a new marketing approach with a goal of making Boreal Water Collection one of North America’s leaders for high-end private label bottled water.
Our plan for the next three years is to provide existing customers with the additional volume they request and seek new business with a view to achieve sales in a range between $3 million to $4 million for the period ending December 31, 2015. In 2016 and 2017, the Company plans on adding equipment to its facility in order to achieve the growth plans described below. Management is currently communicating with potential investors, offering a privately placed convertible note (substantial amount; not specifically disclosed herein to maintain confidentiality).
Any such private investment sought and secured from foreign investors will be in compliance with Regulation S of the SEC. We also use the “sophistication” standard of Rule 506 of Regulation D of the SEC in helping us determine the suitability of all potential investors, including those located in other nations.
We do not anticipate the need for acquiring or licensing further water sources. We will, however, look to private funding to provide for the following:
· $800,000 working capital to build our sales force and strengthen our marketing and promotion programs, including extending our geographic coverage as our capacity increases (see new installations below).
· Install a sparkling water bottle line; $250,000 needed as a down payment on financing the line purchase ($600,000 estimated total investment).
· Install a glass bottling line; $250,000 needed as a down payment on financing the line purchase ($350,000 estimated total investment).
· Upgrade our plant facility to export standards--$250,000.
Here is our estimated cost summary:
Subsequent to that being accomplished, the company will prepare for:
a) The acquisition of a glass bottling line to better service the Tri-State high end market.
b) The acquisition of a sparkling water bottling line to be able to service that new market and develop the sales.
c) This combined growth and consolidation effort will require access to more capitalization and Interim funding on a timely basis. This will enable the company to:
· Establish a stronger management and organization structure;
· Extend our distribution network and geographic coverage so to establish our intended position as a North American’s leader of high end private label water;
· Consider the acquisition of other water springs in the US and the establishment of production plants at the chosen location, with the Southeast United States as a priority.
Settlement of Lawsuits:
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.
Accordingly, Boreal will discontinue the bottling of this kind of refillable containers. In the words of Ms. Lavoie, “will concentrate at what we are good at, which is the small format bottles and the private label business.”
The “Cortellazi, et al Matter:”
In another matter; Boreal Water Collection, Inc. (“company” or “BRWC”) and Mrs. Francine Lavoie, CEO and controlling shareholder of the company, received multiple offers for the purchase of her shares in 2011. Mr. Andrea Cortellazi (“Cortellazi”) made three such offers in succession; first through a company known as “Kochi,” then personally, and finally on or about May 17, 2011 from a company named Monticello Water Company (“Monticello”).
Cortellazi brought 2 gentlemen on board to assist in his buy-out bid (“proposed management”). One was proposed as CEO (to replace Mrs. Lavoie) and the other was a former member of BRWC management. Cortellazi stated to Mrs. Lavoie that financing for the buy-out could not proceed with Mrs. Lavoie remaining as management of the company. They also stated that she should open a new Boreal bank account with Cortellazi as signatory (to receive buy out investment funds) (“Cortellazi BRWC account”). Mrs. Lavoie agreed to this new account with an understanding that it would not be used until the buy-out transaction was completed. Mrs. Lavoie resigned, but only with the understanding the transaction would close within a week’s time and would include the transfer of her personal guarantee of the company’s bank credit line to Cortellazi. Eventually, it was determined that Mr. Cortellazi was using the account without authority, allegedly converting invested funds for his personal use, including funds invested by the 2 individuals brought in as part of the alleged buy-out scheme.
Mrs. Lavoie was restored as the President, CEO and sole Director of the Company. She then received demands and threatened legal action from Cortellazi’s proposed management stating that BRWC owed money in NSF checks issued from the Cortellazi BRWC account.
A “Summons with Notice” (but not a Complaint), naming BRWC, Mrs. Lavoie and Cortellazi as defendants, was filed on March 14th, 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). 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. Plaintiffs are identified as Michael Gambino and Alan Silverstein. Defendants BRWC and Mrs. Lavoie have filed an Answer and Counterclaims, dated September 24, 2012. Counterclaims have been filed against Cortellazi, who has basically admitted his role in the scheme as part of an out of court settlement, as well as Gambino and Silverstein for fraud, defamation and slander, and damages, including punitive damages and attorney’s fees.
In October 2013, the parties to this action reached a settlement in the amount of $30,000, which provided that the Company would make monthly cash payments of $1,000 per month over a 30 month period of time and also reissue three million shares in exchange for the same shares in Gambino’s possession.
C. Off-Balance Sheet Arrangements.
The Company has no off-balance sheets arrangements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
None.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See “Item 15. Financial Statements and Exhibits.”
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On March 31, 2014, the Company Patrtick Rodgers, CPA, P.A. (“Rodgers”) resigned from his engagement to be the independent certifying accountant for the Company.
Other than an explanatory paragraph included in Rodgers' audit report for the Company's fiscal years ended December 31, 2012 and 2011 relating to the uncertainty of the Company's ability to continue as a going concern, the audit report of Rodgers on the Company's financial statements for the last fiscal years ended December 31, 2012 and 2011 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to audit scope or accounting principles.
During the Company's 2012 and 2011 fiscal years and through the date of this Current Report on Form 10-K, there were no disagreements with Rodgers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Rodgers, would have caused Rodgers to make reference to the subject matter of the disagreements in connection with their report, and (2) there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
On April1, 2014, the Company’s Board of Directors approved the engagement of Terry L. Johnson, CPA, as the Company's independent accountant effective immediately to audit the Company’s financial statements and to perform reviews of interim financial statements. During the fiscal years ended December 31, 2012 and 2011 through April 1, 2014 neither the Company nor anyone acting on its behalf consulted with Terry L. Johnson, CPA regarding (i) either the application of any accounting principles to a specific completed or contemplated transaction of the Company, or the type of audit opinion that might be rendered by Terry L. Johnson, CPA on the Company's financial statements; or (ii) any matter that was either the subject of a disagreement with Rodgers or a reportable event with respect to Rodgers.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Management’s Report on Disclosure Controls and Procedures
We seek to improve and strengthen our control processes to ensure that all of our controls and procedures are adequate and effective. We believe that a control system, no matter how well designed and operated, can only provide reasonable, not absolute, assurance that the objectives of the controls system are met. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In addition, the design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company will be detected.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our President/Chief Executive Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer/Chief Financial Officer concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective at the reasonable assurance level discussed above.
There were no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d that occurred during the last quarter that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our Chief Executive Officer/Chief Financial Officer is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for our Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2013 based on criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our management concluded that, as of December 31, 2013, our internal control over financial reporting was effective.
This annual report does not include an attestation report of our registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered independent public accounting firm.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Currently, we have one Director and two officers.
Set forth below are the names, ages, positions, and biographical information of our Director and executive officers.
A. The name of the Chief Executive Officer, sole member of the Board of Directors and control person.
1.
Mrs. Francine Lavoie is the President, Chief Executive Officer, Treasurer, and currently the sole Director of the Company, located at 4496 State Road 42N, Kiamesha Lake, NY 12751, positions she has held since May 2008. Mrs. Francine Lavoie has been in the bottling and distribution of natural spring water since 2000. Ms. Lavoie has a B.A.Sc. in chemical engineering from the University of Ottawa and a M.B.A. from University of Western Ontario. She also holds several awards from Best Business of the Year, Excellence in Export from the Minister of Agriculture, and Best Business Builder of the Year, to Best Women Entrepreneur of the Year. In addition to serving as President and CEO of Boreal Water Collection, Inc., Ms. Lavoie is also President and owner of Les Sources Saint-Elie, a three time award winner for superior taste from the International Taste and Quality Institute. She has previously demonstrated her business abilities in real estate development, product conception, and international sales as the President and owner of DeLaVoie International from 1986 through 2002. In 2001, Mrs. Lavoie became the President of Les Sources Saint-Elie and restructured the entire company after a near bankruptcy situation. She developed and designed a new marketing approach and managed the whole plant operation from sales, finance, and manufacturing at the natural spring water bottling plant to obtaining a permit to increase production from regulatory agencies, which makes Saint-Elie one of Canada’s largest sources in Quebec. In April of 2009, Ms. Lavoie acquired A.T. Reynolds dba Leisure Time Spring Water (LTSW) from the bankruptcy courts. Based on her experience in business and specifically in the bottle water industry, she quickly determined that it would be in the Company’s best interest to sell the Home and Office Division (“Division”), which ultimately resulted in the successful sale of the Division to LTSW to a NJ distributor, with a four year bottling contract. She has renegotiated all contracts with suppliers and customers, restructured and conducted a successful turnaround strategy, and has developed and designed a new marketing approach, with a goal of making Boreal Water Collection a North Eastern USA leader for high-end private label bottled water.
2.
Christopher Umecki is Vice President of Operations and also in charge of the design department and IT department located at 4496 State Road 42N, Kiamesha Lake, NY 12751. Mr. Umecki is a results-driven operating executive with 10 years’ progressive experience in plant, manufacturing and distribution management, with the ability to combine modern manufacturing philosophies and systematic approaches to consistently deliver strong operating and financial results. He has over 15 years of experience in publicity, graphic design, and photography, which includes photo art, logos and brochures, infography, graphics and design, and production of electronic and printed material. Mr. Umecki had experience with organizations such as Alfred Sung, Tropicana, and L'Oreal; he is recognized in the industry for his innovations and creativity. He also manages all the bottling, ordering and deliveries process, directly from the Boreal plant.
3.
None of the officers or our sole director have been the subject of a conviction in a criminal proceeding, or named as a defendant in a pending criminal proceeding, or had an order, judgment or decree entered by a court of competent jurisdiction that in any way enjoined, barred, suspended or otherwise limited that officers or directors involvement in any business, securities, commodities or banking activities; nor has any officer or director been the subject of any finding or judgment by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission, the Commodity Futures Trading Commission, or a state securities regulator of a violation of federal or state securities or commodities law, which finding or judgment has not been reversed, suspended or vacated; or been the subject of the entry of an order by self-regulatory organization that permanently or temporarily barred, suspended or otherwise limited any officer’s or director’s involvement in any type of business of securities activities.
Our director has the business address as the corporate headquarters. There are no relationships by, between or among the officers, and director, and shareholders of the Company not disclosed in this document.
4.
Board memberships and other affiliations:
Mrs. Lavoie is an officer, Director and principal shareholder of 3090-8925 Quebec Inc.; which is the holding company owning Saint-Elie.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation for the management and the sole member of the Board of Directors has been determined by the sole member of our Board of Directors, and to date is unpaid, and accrued on the books and records of the Company.
Summary Compensation Table
There are no performance based, warrant, option, incentive, retirement, pension, plan-based, non-qualified deferred, golden parachute or other plans for management. No director compensation has been paid by the Company. We do not have a Compensation Committee of the board of directors.
A. Number and class of the issuer’s securities beneficially owned by each such person.
Francine Lavoie owns 225,000,000 shares of common stock.
B. Legal/Disciplinary History.
None for the foregoing persons have a legal or disciplinary history.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The Company’s beneficial owners and management follow:
Security Ownership of Management:
(1) Title of class (2) Name and address of beneficial owner (3) Amount and nature of beneficial ownership (4) Percent of class
Common
Mrs. Francine Lavoie,
4496 State Road 42 North
Kiamesha Lake, NY 12751
225,000,000 shares 75%
Common
Mr. Christopher Umecki
4496 State Road 42 North
Kiamesha Lake, NY 12751
2,000,000 shares 0.66%
Note: none of the above shares are pledged as security.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
A. Mrs. Lavoie is married to Mr. Christopher Umecki. She is not an independent Director.
B. Disclosure of Related Party Transactions
At December 31, 2013 and 2012, the Company owed a related party approximately $298,000 and $284,000, respectively, for ongoing operating and purchase transactions with the related party company.
(c) Distributions
We have not made, and do not anticipate making in the foreseeable future, any distributions to our common stockholders
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billed for the year that ended on December 31, 2013 for professional services rendered by the independent auditor for the audit of our annual financial statements and review of financial statements included in our Form 10-Q, or services that are normally provided by the accountant in connection with the statutory and regulatory filings or engagements for such fiscal year, amount to approximately $18,715.
The aggregate fees billed for the year that ended on December 31, 2012 for professional services rendered by the independent auditor for the audit of our annual financial statements and review of financial statements included in our Form 10-Q, or services that are normally provided by the accountant in connection with the statutory and regulatory filings or engagements for such fiscal year, amount to approximately $18,200.
Audit -Related Fees
For the years ended on December 31, 2013 and 2012, there were no fees billed for assurance and related services by the independent auditor that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Item 9(e) (1) of Schedule 14A.
Tax Fees
The aggregate fees billed during the fiscal years ended December 31, 2013 and 2012, for professional services rendered by our principal independent accountant for tax compliance, tax advice and tax planning were $1,000 and $1,000 respectively.
All Other Fees
The aggregate fees billed for the years ended on December 31, 2013 and 2012 for products and services by the principal independent accountant (other than services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A) were $9,000 and $9,000 respectively.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Audited Financial Statements for our fiscal years 2013 and 2012 are included herewith. Our Articles of Incorporation, with all amendments thereto and our Bylaws are included as exhibits.
Exhibit Index
________________
* Previously filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: June 26, 2014
BOREAL WATER COLLECTION, INC.
By: /s/ Francine Lavoie
Francine Lavoie
Francine Lavoie, Principal Executive Officer, Principal Financial Officer, Controller and Sole Member of the Board of Directors
Boreal Water Collection Inc.
Financial statements table of contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and shareholders of
Boreal Water Collection, Inc.
Kiamesha Lake, New York
I have audited the accompanying consolidated balance sheets of Boreal Water Collection, Inc. (the “Company”) as of December 31, 2013 and 2012 and the related statements of operations, stockholders’ deficit and cash flows for the years ended December 31, 2013 and 2012, and the related notes to the financial statements.
Management’s Responsibility for Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United State of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
My responsibility is to express an opinion on these consolidated financial statements based on my audits. I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audits 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, I express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
Opinion
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2013 and 2012 and the consolidated results of its operations and its cash flows for the years ended December 31, 2013 and 2012, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of Matter
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 of the financial statements, the Company has incurred a deficit of approximately $2.5 million and has used approximately $400,000 of cash due to its operating activities in the two years ended December 31, 2013. The Company may not have adequate readily available resources to fund operations through December 31, 2014. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Terry L. Johnson, CPA
Casselberry, Florida
June 26, 2014
Boreal Water Collection Inc.
BALANCE SHEETS
The accompany notes are an integral part of these financial statements.
Boreal Water Collection Inc.
STATEMENTS OF OPERATIONS
The accompany notes are an integral part of these financial statements.
Boreal Water Collection Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
The accompany notes are an integral part of these financial statements.
Boreal Water Collection, Inc.
STATEMENTS OF CASH FLOWS
The accompany notes are an integral part of these financial statements.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
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 three types of water: spring water, distilled water, enhanced water, which is customized with minerals, oxygen, and fluoride, and a fourth type to be added, sparkling water. 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 returned, the customer’s account is credited for the full value of the returned product. 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.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Principles (continued)
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, and for the years ended December 31, 2013 and 2012, these expenses totaled $168,096 and $219,588, respectively.
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:
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.
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 December 31, 2013 and 2012.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Principles (continued)
Inventories
Inventory is valued at the lower of cost or market, cost being determined by the first-in, first-out (FIFO) method. Inventory costs include direct material, direct labor and a systematic allocation of fixed and variable overhead. Obsolete items are carried at estimated net realizable value.
Prior to December 31,2012, the company charged director 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. The effect of this change was to increase operating income by $28,307 for the year ended December 31, 2012.
Cost of sales
Cost of sales, includes normal direct costs, such as direct labor, freight, purchases of raw materials (caps, water, bottles, boxes, wrapping, ingredients, etc.), adjusted for inventory at the end of each reporting period. Costs of sales also includes indirect costs, such as salary costs for maintenance personnel, supervisors, operation of the quality control lab, equipment and building maintenance, miscellaneous warehouse expenses, licenses and taxes, and payroll taxes and other benefit costs for direct labor and indirect labor personnel.
Selling and General Administrative Expenses
Selling and general administrative expenses include those type of costs normally included in this functional classification: sales salaries, delivery salaries, repairs, payments made to outside sales representatives, travel related costs, and benefit costs, salaries paid administrative and executive personnel, insurance, benefit costs, office supplies, professional fees, subcontract costs taxes, bank charges, stock-based compensation, postage and shipping, telephone and related communications costs, and similar 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.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Principles (continued)
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 2010. 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.
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 year ended December 31, 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 years ended December 31, 2013 and 2012, the Company recorded $0 and $30,000, respectively, as compensation expense under FASB ASC 718.
Nonemployee awards
The fair value of equity instruments issued to a nonemployee is measured by using the stock price and other measurement assumptions as of the date of either: (i) a commitment for performance by the nonemployee has been reached; or (ii) the counterparty’s performance is complete. Expenses related to nonemployee awards are generally recognized in the same period and in the same period as the Company incurs the related liability for goods and services received. The Company recorded stock compensation of approximately $20,000 and $32,000 during the year ended December 31, 2013 and 2012, respectively, related to consulting services.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Principles (continued)
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.
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.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 2 - Summary of Significant Accounting Principles (continued)
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.
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 July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) which provides guidance on financial statement presentation of an un recognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exits. The update is effective for hears beginning after December 15, 2013. The Company does not expect the implementation of this standard to have a material impact on its financial position or results of operations.
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (ASU 2013-05). ASU 2013-05 provides guidance on releasing cumulative translation adjustments when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or a business within a foreign entity. ASU 2013-05 is effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-05 is not expected to have a material impact on our financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified out of Accumulative Other Comprehensive Income (ASU 2013-02), which replaces the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and to present significant amounts reclassified out of accumulated other comprehensive income by respective line items of net income if the amount reclassified is required to be reclassified to net income in its entirety. The adoption of ASU 2013-02 did not have any impact on our financial position, results of operations or cash flows.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future financial statements.
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.
The Company’s two largest customers accounted for approximately 24% and 28% of sales for the years ended December 31, 2013 and December 31, 2012, respectively.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
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. Since January 10, 2006 (date of quasi reorganization), the Company has accumulated a deficit of approximately $2,773,469. 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:
Note 5 - Property and Equipment
Equipment consists of the following categories at December 31, 2013 and December 31, 2012:
The Company periodically reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. The company determined that its fixed assets were impaired, which resulted in impairment loss of $117,077. The impairment loss is recorded as a component of operating expenses in the statement of operations for 2013.
Depreciation expense for the year ended December 31, 2013 and 2012 totaled $376,568 and $237,350, respectively.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 6 - 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 December 31, 2013 and 2012, the unamortized balance is as follows:
Amortization expense for the year ended December 31, 2013 and 2012 totaled $85,166 and $218,734, respectively
Note 7 - 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, which 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
December 31, 2013
Note 8 - Income Taxes
At December 31, 2013, the Company had approximately $2.4 million of net operating losses (“NOL”) carry-forwards for federal and state income purposes. These losses are available for future years and expire through 2034. 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:
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 $960,000 and $1,560,000 at December 31, 2013 and 2012, respectively, due to the uncertainty of realizing the future tax benefits.
The Company did not pay any income taxes during the years ended December 31, 2013 or 2012.
Note 9 - 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 December 31, 2013, the Company owed $250,000 against the line of credit at an annual interest rate of 5.25%.
Note 10 - 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 was based on 90-day Libor at 4.50%. The $1.9 million mortgage was personally guaranteed by the Company’s Chief Executive Officer. The balance due against this mortgage at December 31, 2012 was $1,943,426. 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 of its mortgage obligation.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 10 - Short-Term Debt (continued)
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 agreed 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. The company continued to accrue interest on this obligation until such time as a refinancing plan was finalized.
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 statements of operations 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 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 acknowledges that it would not take title of the property, unless and until the Company is 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 December 31, 2013 and 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.
Note 11 - Related Party
At December 31, 2013 and December 31, 2012, the Company owed a related party approximately $298,000 and $284,000, respectively, for ongoing operating and purchase transactions with the related party company.
For the year ended 2013 and 2012 the Company made purchases from the third party of $41,456 and $156,463, respectively and made sales to the related party of $36,063 and $32,978, respectively
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 12 - 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:
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. The $75,000 settlement payment is shown as an extraordinary item on the statement of operations.
Boreal Water Collection, Inc.
Notes to Financial Statements
December 31, 2013
Note 13 - Litigation (continued)
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 was 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 filed an Answer and Counterclaims, dated September 24, 2012. Counterclaims were filed against Cortellazi, who 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).
In October 2013, the parties to this action reached a settlement in the amount of $30,000, which provided that the Company would make monthly cash payments of $1,000 per month over a 30 month period of time and also reissue three million shares in exchange for the same shares in Gambino’s possession.
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.
Note 14 - Subsequent Event
During May and June 2014, the Company entered into a series of unsecured convertible promissory note agreements ("Notes") with JSJ Investments, Inc. ("JSJ" or "holder"). The principal amount for these two Notes total $131,256 with interest from 12% to 15% per annum. The maturity dates are November 2014. There is a 150% cash redemption premium on the principal amount only, upon approval by JSJ. The Note is convertible into the Company’s common stock. The conversion amount is the Note principal plus default interest, if any. The company also entered into another unsecured promissory note dated May 25, 2014 for $68,082 with interest at 12% per annum. This note for $68,082 was immediately converted into the company’s stock of 10,621,266 shares at an exercise price of $0.00641 per share.