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BOREAL WATER COLLECTION INC. - 10-K - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

June 26, 2014

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.

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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:

Net Income $ 849,748 Adjustments to reconcile net income to net cash (725,905 ) Changes in operating assets and liabilities (309,509 ) Net cash used by operating activities (185,666 ) Investing activities (11,939 ) Financing activities 114,652 Net decrease in cash $ (82,953 )



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.

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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.

13 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:

Working capital and building management $ 800,000.00 Upgrading NY plant standards for export 250,000.00 Sparkling water filling line 600,000.00 Glass Bottling line 350,000.00 Sub Total $ 2,000,000.00 14



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.

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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.


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Source: Edgar Glimpses


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