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TMCNet:  ELDORADO ARTESIAN SPRINGS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[February 14, 2014]

ELDORADO ARTESIAN SPRINGS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements This filing contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include, but are not limited to, statements and expectations regarding the plans and objectives of management for future operations, including plans and objectives relating to services offered by the Company, our ability to retain qualified financial personnel to enhance our financial reporting capabilities, the future economic performance of the Company and related matters.


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

Overview Eldorado Artesian Springs, Inc. is a Colorado based company that is primarily involved in the bottling and marketing of natural artesian spring water. The spring from which the Company obtains its water is located in the foothills of the Colorado Rocky Mountains and is surrounded by thousands of acres of state and city park land. The water rises up through many layers of sandstone under its own artesian pressure. As described in note 3 to our financial statements, we also have access to water from the Marshall reservoir based on our ownership of shares in FRICO and from other sources based on our Augmentation Plan.

Currently, the Company's operations consist of its home/commercial delivery business (5 and 3 gallon bottles) and its PET (polyethylene terephthalate, a premium clear plastic container) consumer business. The Company also has an organic vitamin-charged spring water that is distributed locally off of the Company's vehicles as well as to regional distribution facilities for distribution to Vitamin Cottage, Kroger's (King Soopers and City Markets) and Whole Foods Markets in the Midwest area. Additionally, the product is available at more than 2,000 other retail outlets, convenience stores and on-premise locations serviced by UNFI and independent distributors. The Company's business includes the sale and rental of filtration and coffee dispensing equipment as well as the sale of coffee. The Company owns and, during the summer months, operates a public swimming pool on its property and rents a single-family home on the property year round.

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

Results of Operations Performance Overview - Recent Trends Revenues for the nine months ended December 31, 2013 increased 13.7% to $8,603,716 from $7,565,626 for the same period ended December 31, 2012. The increase in revenues was generated by sales increases for almost all products.

The areas that had the largest increase in revenues were the 1 gallon branded products and the PET products (.5 liter to 1.5 liter sizes).

The Company believes that we are in a position to grow the business as the economy recovers in the markets we presently service by offering additional products we sell including coffee and vitamin water. We are also utilizing advertising and promotional budgets for promoting the products. We will continue to pursue additional business in new areas including the sale of coffee and coffee equipment from our existing route vehicles and filtration equipment rental. In addition, we continue to look for ways to decrease operating costs in order to continue to be profitable.

Three and Nine Months Ended December 31, 2013 Compared to Three and Nine Months Ended December 31, 2012 Revenues Revenues for the nine months ended December 31, 2013 were $8,603,716 compared to $7,565,626 for the same period ended December 31, 2012, an increase of 13.7%.

Sales for the three months ended December 31, 2013 were $2,582,034 compared to $2,279,781 for the same period ended December 31, 2012, an increase of 13.3%.

Revenues derived from products delivered to homes and offices which include 5 and 3 gallons bottles as well as the dispenser units were 54.7% of revenues and increased from $4,270,593 for the nine months ended December 31, 2012 to $4,703,553 for the nine months ended December 31, 2013, an increase of $432,960 or 10.1%. Total unit sales of 5 and 3 gallon products increased by 8.5% while the average selling price increased approximately 1%. Revenues from the rental of equipment used for home and office accounts increased from $337,786 for the nine months ended December 31, 2012 to $408,161 for the nine months ended December 31, 2013, an increase of $70,375 or 20.8%. The Company has increased its customer base and continues to attract new business through a variety of sales events and outside sales staff. As of December 31, 2013, the Company had approximately 15,500 home and office delivery accounts compared to approximately 14,000 as of December 31, 2012.

The Company increased filter rental and sales revenues from $178,142 for the nine months ended December 31, 2012 to $205,582 for the nine months ended December 31, 2013, an increase of $27,440 or 15.4%. Revenues from sales of coffee, coffee equipment and accessories increased from $177,587 for the nine months ended December 31, 2012 to $226,141 for the nine months ended December 31, 2013, an increase of 27.3%. The Company continues to add more varieties of coffee to compete with other distributors.

Revenues from sales of the Company's PET products (.5 liter to 1.5 liter sizes), including private label products, represented 18.1% of revenues for the nine months ended December 31, 2013 and 18.3% of revenues for the nine months ended December 31, 2012 or $1,554,327 and $1,382,302, respectively. This represented a year-over-year increase of 12.4%. Sales of the Company's gallon size products accounted for 17.5% of revenues or $1,502,005 for the nine months ended December 31, 2013 compared to 15.2% of revenues or $1,149,020 for the nine months ended December 31, 2012, an increase of 30.7%. In September 2013, demand for the Company's products increased due to the flooding that severely impacted our delivery area.

10 --------------------------------------------------------------------------------Revenues from sales of the Company's organic vitamin charged spring water were $126,313 for the nine months ended December 31, 2013 compared to $114,524 for the nine months ended December 31, 2012, an increase of 10.3%. The increase in sales was due to the timing of promotional deal periods for our distributors resulting in various buying patterns throughout the year. Quarterly fluctuations such as this are typical and will likely continue.

Gross Profit/Cost of Goods Sold Cost of goods sold for the nine months ended December 31, 2013 were $2,210,477, or 25.7% of revenues, compared to $1,827,026 or 24.1% of revenues for the nine months ended December 31, 2012. Gross profit was $5,738,600, or 75.9% of revenues for the nine months ended December 31, 2012 and $6,393,239 or 74.3% of revenues for the nine months ended December 31, 2013. Overall, gross profit increased 11.4% for the nine months ended December 31, 2013.

Cost of goods sold related to 5 and 3 gallon sales were $309,273, or 6.6% of revenues for such products for the nine months ended December 31, 2013, compared to $285,002, or 6.7% of revenues for such products for the nine months ended December 31, 2012. Cost of goods for the Eldorado brand one gallon products were $756,651, or 50.4% of one gallon revenues for the nine months ended December 31, 2013, compared to $555,531, or 48.3% of 1 gallon revenues for the nine months ended December 31, 2012. Cost of goods sold for the PET products were $757,624, or 48.7% of revenues for the nine months ended December 31, 2013, compared to $679,677, or 49.2% of PET revenues for the nine months ended December 31, 2012.

Operating Expenses Total operating expenses increased to $5,628,531 for the nine months ended December 31, 2013 compared to $5,142,062 for the nine months ended December 31, 2012, an increase of $486,469 or 9.5%. Of the total operating expenses, salaries and related expenses increased to $2,791,733 for the nine months ended December 31, 2013, or 32.4% of revenues, from $2,596,791 for the nine months ended December 31, 2012, or 34.3% of revenues.

Administrative and general expenses increased by 16.7% to $1,527,095 as compared to $1,308,600 for the nine months ended December 31, 2012 due in large part to additional costs associated with the changes to our Augmentation Plan described in note 3 of our financial statements. The Company does not expect these additional costs to be ongoing.

Delivery expenses increased from $669,051 for the nine months ended December 31, 2012 to $727,705 for the nine months ended December 31, 2013, an increase of 8.8%.

Advertising and promotion expenses increased from $183,856 for the nine months ended December 31, 2012 to $198,583 for the nine months ended December 31, 2013, an increase of 8%. Advertising and promotion expenses were 2.3% and 2.4% of revenues, respectively for the nine months ended December 31, 2013 and 2012.

11 --------------------------------------------------------------------------------Depreciation and amortization decreased from $383,764 for the nine months ended December 31, 2012 to $383,415 for the nine months ended December 31, 2013, a decrease of less than 1%. Depreciation and amortization was 4.5% of revenues for the nine months ended December 31, 2013 compared to 5.1% of revenues for the nine months ended December 31, 2012.

Interest, Taxes, Other Income and Other Expenses Other income and expense for the nine months ended December 31, 2013, decreased 7.7% to $180,677 as compared to $195,844 for the nine months ended December 31, 2012 due to lower interest rates under the SBA Loan Agreement.

For the nine months ended December 31, 2013, the Company recorded income tax expense of $222,000 against our pretax income of $584,031.

The Company had a net income after taxes of $362,031 for the nine months ended December 31, 2013 compared to a net income after taxes of $400,694 for the nine months ended December 31, 2012.

Liquidity and Capital Resources Trade accounts receivable for the nine months ended December 31, 2013 were 13.8% more than at year ended March 31, 2013. This resulted from the increase in revenues for the nine months ended December 31, 2013. Days outstanding were approximately 37 days for both December 31, 2013 and March 31, 2013.

Cash flows from operating activities had a net inflow of $638,729 for the nine months ended December 31, 2013. The cash provided by operating activities represents a decrease of $128,266 from the nine months ended December 31, 2012.

The largest reconciling items between net income and net cash flow from operations were the $139,474 of accounts receivable and $384,085 of depreciation and amortization.

Cash flows from investing activities resulted in a net outflow of $369,208 for the nine months ended December 31, 2013. This total represents expenditures on equipment for electric water coolers, filtration equipment and coffee dispensing equipment that are rented to delivery customers.

Cash flows from financing activities resulted in a net outflow of $157,012 for the nine months ended December 31, 2013 for payments made on long-term obligations.

The Company's cash balance at December 31, 2013 increased to $593,055 by a net amount of $112,509 from $480,546 at March 31, 2013.

On December 27, 2012, the Company entered into an agreement with ANB Bank for a line of credit in the amount of $750,000. The line of credit is subject to certain borrowing base requirements, requires monthly interest payments calculated at prime plus 1% with a minimum rate of 5.5%. The borrowing base was $750,000 as of December 31, 2013. The line includes certain reporting and financial covenants, is cross-collateralized by accounts receivable and inventory and is guaranteed by three company executives. The line has a maturity date of December 27, 2014.

On February 2, 2012, the Company refinanced debt that was due within the next 12 months and had previously been classified as current debt. The Company entered into a Commercial Loan Agreement with ANB Bank under which it received proceeds of $2,815,892, which were used to pay off a prior note secured by the Company's property in Louisville, Colorado. On December 11, 2013, the Company and ANB Bank amended the Commercial Loan Agreement to reduce the fixed interest rate from 5.5% to 5.0%. The loan is now payable at a rate of approximately $17,700 per month, which includes principal and interest. A single "balloon payment" of the entire unpaid balance of principal and interest will be due on February 2, 2022.

12 --------------------------------------------------------------------------------Also on February 2, 2012, the Company entered into a second Commercial Loan Agreement (the "Second ANB Loan Agreement") with ANB Bank, which was intended to be in place for a short period while we obtained the loan from the Small Business Administration ("SBA") described below. Under the Second ANB Loan Agreement, the Company received proceeds of $1,415,216, which were used to pay off a prior note on the Company's property in Eldorado Springs, Colorado. On April 11, 2012, the Company received proceeds of $1,457,000 from the SBA and used such proceeds to pay off the loan made under the Second ANB Loan Agreement.

The SBA loan bears interest at a fixed rate of 4.951% for its full 20 year term and is payable at a rate of $10,089 per month until maturity on April 1, 2032.

The above loans are secured by substantially all of the assets of the Company, including the real estate in Eldorado Springs and Louisville, Colorado. The loan agreements specify events of default customary to facilities of their type, including any non-payment of principal, interest or other amounts, misrepresentation of representations and warranties, violation of covenants, certain events of bankruptcy or insolvency, certain material judgments, seizure of assets, or other material adverse changes. Upon the occurrence of an event of default, the payments by the Company of all of its outstanding obligations may be accelerated, and the commitments under the loan agreements may be terminated by the respective lender. The loans are guaranteed by three Company executives.

The loan agreements also include certain performance and reporting covenants.

Income Taxes The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the differences between the financial statement and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that are not expected to be realized based on available evidence. During the nine months ended December 31, 2013, the Company recognized the utilization of the remainder of its Federal net operating loss carryforward, resulting in deferred expense of approximately $54,000.

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