ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
When
used
in this Form 10-QSB and in our future filings with the Securities and Exchange
Commission, the words or phrases "will likely result", "management expects",
"we
expect", "will continue", "is anticipated", "estimated" or similar expressions
are intended to identify forward-looking statements. Readers are cautioned
not
to place undue reliance on any such forward-looking statements, each of
which
speaks only as of the date made. These statements are subject to risks
and
uncertainties, some of which are described below. We have no obligation
to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect anticipated events or circumstances
occurring after the date of such statements.
The
forward-looking statements in the discussion that follows are subject to
significant risks and uncertainties about us, our current and planned products,
our current and proposed marketing and sales, and our projected results
of
operations. There are several important factors that could cause actual
results
to differ materially from historical results and percentages and results
anticipated by the forward-looking statements. We have sought to identify
the
most significant risks to our business, but cannot predict whether or to
what
extent any of such risks may be realized nor can there be any assurance
that we
have identified all possible risks that might arise. Investors should carefully
consider all of such risks before making an investment decision with respect
to
our stock. The following discussion and analysis should be read in conjunction
with our financial statements and notes thereto. This discussion should
not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily
be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment from our management.
Plan
of Operation
In
2003,
we purchased property containing a spring located in Mt. Sidney, Virginia
in the
Shenandoah Valley with the intention of developing a spring water distribution
business. The spring has a flow in excess of 1,000,000 gallons of water
daily.
We
have
chosen to develop and acquire packaging for selling our water under the
brand
names Seawright Springs and Quibell. We have developed two proprietary
Polyethylene Terephthalate, or PET, bottles in a 16.9 ounce size and a
33.8
ounce size. In addition, in June 2005 we acquired from Quibell, glass bottle
designs for various sized bottles (including 237 ml, 385 ml, 750 ml and
1 liter
sizes) as well as labels for various sized sparkling water bottles, spring
water
bottles and tea bottles (including 237 ml, 385 ml, 750 ml, 1 liter, 1.5
liter
and 16.9 ounce bottles).
We
are
positioning our water in an effort to compete in the luxury brand category
of
the water market. We will also continue to seek opportunities to sell our
daily
supply of water to other bottlers.
In
May of
2005 and April of 2006, respectively, we closed on the purchase of two
parcels
of land located approximately 10 miles south of the Mt. Sidney property.
Both of
these properties are currently zoned for agricultural use. Although no
assurances can be given, both sites are expected to be re-zoned to commercial
use according to the master zoning plan of the city of Staunton, Virginia.
If
these properties are rezoned for commercial use, we may lease these properties
for commercial purposes.
The
further development of our business will require, among other things, further
capital expenditures on plant and equipment, developing marketing materials,
renting additional office space, and interviewing and hiring administrative,
marketing and maintenance personnel. While we have raised the capital necessary
to meet our working capital and financing needs in the past, additional
financing is required in order to meet our current and projected cash flow
deficits from operations and development. We believe that it will be necessary
to raise further capital to implement our business plan over the course
of the
next twelve months.
For
the
period from our inception through September 30, 2007, we have:
·
|
formed
our company and established our initial
structure;
|
·
|
sought
and pursued investment
opportunities;
|
·
|
reviewed
and analyzed the potential market for natural spring
water;
|
·
|
purchased
the Mt. Sidney property and procured the necessary financing
to cover the
initial purchase costs from an offering of preferred
stock;
|
·
|
purchased
two properties near the Mt. Sidney property, which we are considering
leasing for commercial purposes;
|
·
|
purchased
trademarks and other intellectual property relating to the creation
and
bottling of flavored and non-flavored bottled
water;
|
·
|
performed
required testing of water quality at spring
site;
|
·
|
began
developing a new web site as part of our marketing strategy;
and
|
·
|
made
improvements to the spring site and water collection
facilities.
|
Product
Research and Development
We
do not
anticipate performing research and development for any products during
the next
twelve months.
Acquisition
or Disposition of Plant and Equipment
We
do not
anticipate the sale of any significant property, plant or equipment during
the
next twelve months. We have made improvements to plant and equipment at
the
spring site, and we have spent approximately $250,000 to complete the renovation
of our spring catchment, which protects the water spring from outside
elements.
Number
of Employees
As
of
September 30, 2007, we had one employee, our Chief Executive Officer and
President, Joel Sens. We anticipate that the number of employees will
increase in the future. However, given our ability to contract out much
of our
required services, it is not anticipated, based on the current business
plan,
that new employees will be hired in the next twelve months. No formal contract
for the compensation of Mr. Sens exists as of September 30, 2007, but we
may
enter into an employment contract with him within the next twelve
months.
Comparison
of Financial Results
Three
and
Nine Months Ended September 30, 2007 and September 30, 2006
Revenues
During
the three and nine-month periods ended September 30, 2007, $4,183 and $6,267
of
revenue, respectively, was generated from the Mt. Sidney spring from on-site
sales as compared to $522 and $2,122 of revenue for the three and nine-month
periods ended September 30, 2006, respectively. We expect to increase our
sales
in future quarters and will remain a development stage company until revenues
increase significantly.
Costs
and Expenses
During
the three and nine-month periods ended September 30, 2007, operating expenses
were $169,001 and $1,556,938, respectively. These expenses were related
to the
establishment of our spring water business, which includes expenses for
consulting and engineering services, testing and spring maintenance, and
to the
administration and overhead of our business, which includes accounting,
legal
and office expenses. This compared with operating expenses for the three
and
nine-month periods ended September 30, 2006 of $344,763 and $906,457,
respectively. The increase in expenses is due to the increased expenditures
on
the spring site operations principally related to consulting and
marketing.
We
have
incurred interest expenses of $94,841 and $536,056 for the three and nine-month
periods ended September 30, 2007, respectively, and $125,580 and $295,710
for
the three and nine-month periods ended September 30, 2006,
respectively.
During
the three and nine-month periods ended September 30, 2007 on trading securities,
we recorded a net loss of $6 and $255, respectively. This compared with
net loss
on trading securities for the three and nine-month periods ended September
30,
2006 of $737 and $1,268, respectively.
As
of
September 30, 2007, the President of our company advanced capital of $216,358
for general working capital.
Liquidity
and Capital Resources
As
of
September 30, 2007, we had a working capital deficit of $1,519,213, an
available
cash balance of $475, a marketable securities balance of $24,878 and cash
in
excess of available funds, accounts payable and accrued liabilities balance,
including accrued interest on the convertible notes, of $273,185.
In
August
2004 we issued a private placement memorandum to offer up to 1,000 units
of
equity/notes payable instruments. Each unit consisted of 2,500 shares of
our
common stock, $1,500 of convertible promissory notes, and a warrant to
purchase
300 shares of our common stock at $0.85 per share. The convertible promissory
notes accrue interest at 11% per annum, and are payable and due in September
2009. The note holders have the option to convert any unpaid note principal
and
accrued interest to our common stock at a rate of $0.85 per share anytime
after
six months from the issuance date of the note. During the second quarter
of
2007, most of the convertible notes payable were converted into shares
of the
Company’s common stock, except for the remaining balance of
$33,166. The note holders agreed to a conversion rate of one share of
common stock for each $0.60 of principal and unpaid interest accrued through
the
closing date plus an additional six months of interest at the rate of 11%
per
annum. The private placement was closed in February of 2005. Over the
course of our private placement, we received total proceeds of $2,665,116,
net
of placement costs and fees, and issued to investors $1,498,500 of convertible
promissory notes, 2,497,500 shares of common stock and 999 warrants, of
which
451,351, have been converted to common stock. Part of the proceeds of the
private placement was used to pay off the remaining debt on the Mt. Sidney
property.
The
purchase of one of the two Staunton, Virginia properties mentioned above
was
closed on May 24, 2005. The purchase price for that parcel was $725,000,
of
which $225,000 was paid in cash. The remaining $500,000 of the purchase
price
has been financed through a bank loan. We also completed the purchase of
the
second Staunton, Virginia property on April 10, 2006. The purchase price
for the
second property was $240,000, less a previously made $10,000 refundable
deposit.
We paid $90,000 of the remaining purchase price at settlement and have
financed
the remaining $140,000.
Our
accounts payable and accrued liabilities of $268,837 is composed predominantly
of liabilities to our consultants and vendors associated with the Mt. Sidney
spring, our accountants and lawyers as well as accrued interest on our
outstanding debt.
In
order
to provide funding for operations and capital expenditures, on September
12,
2005, we entered into an investment agreement with Dutchess Private Equities
Fund, LP. The investment agreement establishes what is sometimes referred
to as
an “equity line of credit.” Under the investment agreement, Dutchess has agreed
to provide us with up to $5,000,000 during the 36-month period following
the
date a registration statement of our common stock is declared effective
by the
Securities and Exchange Commission. During this 36-month period, we may
request
a draw down under the equity line of credit by which we would sell shares
of our
common stock to Dutchess, which is obligated to purchase the shares under
the
investment agreement, subject to certain conditions set forth therein.
We may,
at our election, require Dutchess to purchase an amount equal to no more
than
either (a) 200% of the average daily volume of our common stock for the
10
trading days prior to the put notice date, multiplied by the average of
the
three daily closing bid prices immediately preceding the put notice date
or (b)
$100,000; provided that we may not request more than $1,000,000 in any
single
put notice. On the trading day following the put notice date, a pricing
period
of five trading days will begin. The purchase price for the common stock
identified in the put notice will be equal to 95% of the lowest closing
best bid
price of our common stock during the pricing period. We are under no obligation
to draw down under the equity line of credit.
On
November 20, 2006, a registration statement on Form SB-2 pertaining to
the
Company’s common stock was declared effective by the Securities and Exchange
Commission. The registration statement related to the sale of shares
of the Company’s common stock by our stockholders. The Securities and
Exchange Commission limited the amount of shares of the Company’s common stock
that the Company could register under the investment agreement to 1,000,000
shares of the Company’s common stock. Accordingly, although the
investment agreement remains a viable agreement, the Company can only require
Dutchess to purchase up to 1,000,000 shares, thereby reducing the amount
of
money available to the Company.
During
December 2006, the Company entered into a promissory note with a face amount
of
$780,000. Under the terms of the note, the Company received $650,000
less closing costs of $50,075, creating a calculated effective interest
rate of
35%. As a further incentive, we agreed to issue 250,000 shares of
common stock to Dutchess. The fair value of the shares, $127,500, was
accounted for as a deferred financing cost and is being amortized over
the life
of the note. As detailed in the agreement, the Company shall make
payments to the holder in the amount of the greater of (a) 100% of each
Put (as
defined in the investment agreement) given to the investor from the Company
or
(b) made in 12 monthly increments of $65,000. The agreement is
collateralized by signed put notices under the investment agreement, as
well as
a lien on the Company’s goods, inventory, general intangibles, and all
associated documents and chattel paper. Moreover, Joel Sens, the
President and Chief Executive Officer of the Company, has pledged certain
personal property. As of September 30, 2007 the promissory note has been
fully
paid and converted into common stock.
Future
Funding Requirements and Going Concern
While
we
have raised the capital necessary to meet our working capital and financing
needs in the past, additional financing is required in order to meet our
current
and projected cash flow deficits from operations and development. Within
the
next year, funds will be needed to meet our obligations related to the
financing
of the purchases of the Staunton, Virginia properties and to fund improvements
to our spring site and our initial operations.
We
intend
to generate these funds primarily from our equity line of credit. We believe
that proceeds from the equity line of credit will allow us to cover our
capital
and operating expenses over the next year. If during that period or thereafter,
we are not successful in generating sufficient liquidity from operations
or in
raising sufficient capital resources on terms acceptable to us, this could
have
a material adverse effect on our business, results of operations, liquidity
and
financial condition.
Our
independent certified public accountants have stated in their report included
in
our December 31, 2006 Form 10-KSB, that we have incurred operating losses
since
our inception, and that we are dependent upon management's ability to develop
profitable operations. These factors among others may raise substantial
doubt
about our ability to continue as a going concern.
Off-Balance
Sheet Arrangements
We
have
not had and, at September 30, 2007, do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues
or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Inflation
We
do not
believe that inflation has had a material effect on our business, financial
condition or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or
failure to do so could adversely affect our business, financial condition
and
results of operations.
Trends,
Risks and Uncertainties
We
have
sought to identify what we believe to be the most significant risks to
our
business as discussed below, but cannot predict whether or to what extent
any of
such risks may be realized nor can there be any assurances that we have
identified all possible risks that might arise. Investors should carefully
consider all of such risk factors before making an investment decision
with
respect to our stock.
Limited
operating history; anticipated losses; uncertainly of future
results
We
have
only a limited operating history upon which to be evaluated. Our prospects
must
be evaluated with a view to the risks encountered by a company in an early
stage
of development. We will be incurring costs to develop, introduce and enhance
our
spring water operations and products, to develop and market an interactive
website, to establish marketing relationships, to acquire and develop products
that will complement each other, and to build an administrative organization.
To
the extent that such expenses are not followed by commensurate revenue,
our
business, results of operations and financial condition will be materially
adversely affected. There can be no assurance that we will be able to generate
sufficient revenues from sales of our products. We expect negative cash
flow
from operations to continue for at least the next 12 months, and we must
raise
additional capital to meet our expected expenses. We intend to raise this
capital primarily through the establishment of an equity line of credit
as
described above, but it is possible that we will not be able to establish
the
equity line of credit, or that proceeds from the equity line of credit
will be
insufficient to cover our future expenses.
Potential
fluctuations in quarterly operating results
Our
quarterly operating results may fluctuate significantly in the future as
a
result of a variety of factors, most of which are outside our control,
including: market acceptance of our products, the demand for the spring
water
services and related products; seasonal trends in demand; the amount and
timing
of operating costs and capital expenditures relating to the expansion of
our
business, operations and infrastructure, and the implementation of marketing
programs, key agreements and strategic alliances; our ability to obtain
additional financing in a timely manner and on terms favorable to us; the
introduction of new services and products by us or our competitors; price
competition or pricing changes in the industry; technical difficulties;
and
general economic conditions specific to the beverage market and the spring
water
industry. Our quarterly results may also be significantly affected by the
impact
of the accounting treatment of acquisitions, financing transactions or
other
matters. Particularly at our early stage of development, such accounting
treatment can have a material impact on the results for any quarter. Due
to the
foregoing factors, among others, it is likely that our operating results
will
fall below our expectations or investors’ expectations in some future
quarter.
We
are subject to substantial competition and may not have the ability or
the
capital to compete effectively
The
industry in which we expect our products to be sold is highly competitive.
We
may not have the ability or the capital to compete effectively in this
environment. The significant competition in our industry could harm our
ability
to win business and increase the price pressure on our products. We face
strong
competition from a wide variety of firms, including large, multinational
firms
with far greater resources than we possess. Many of our competitors have
considerably greater financial, marketing and technological resources than
we
do, which may make it difficult to sell our products. Many of our competitors
also have longer operating histories and presence in key markets, greater
name
recognition, larger customer bases and significantly greater financial,
sales
and marketing, manufacturing, distribution, technical and other resources.
As a
result, these competitors may also be able to devote greater resources
to the
promotion and sale of their products.
Management
of growth
Our
future success will also be highly dependent upon our ability to successfully
manage the anticipated expansion of our operations. Our ability to manage
and
support growth effectively will be substantially dependent on our ability
to
implement adequate financial and management controls, reporting systems
and
other procedures, and attract and retain sufficient numbers of qualified
technical, sales, marketing, financial, accounting, administrative and
management personnel.
Our
future success also depends upon our ability to address potential market
opportunities while managing expenses to match our ability to finance our
operations. This need to manage our expenses will place a significant strain
on
our management and operational resources. If we are unable to manage our
expenses effectively, our business, results of operations and financial
condition will be materially and adversely affected.
Risks
associated with acquisitions
Although
we do not presently intend to do so, as part of our business strategy in
the
future, we could acquire assets and businesses relating to or complementary
to
our operations. Any acquisitions by us would involve risks commonly encountered
in acquisitions of assets or companies. These risks would include, among
other
things, the following: we could be exposed to unknown liabilities of the
acquired companies; we could incur acquisition costs and expenses higher
than
anticipated; fluctuations in our quarterly and annual operating results
could
occur due to the costs and expenses of acquiring and integrating new businesses
or technologies; we could experience difficulties and expenses in assimilating
the operations and personnel of any acquired businesses; our ongoing business
could be disrupted and our management’s time and attention diverted; and we
could be unable to integrate with any acquired businesses
successfully.
Other
Risks
We
are
also subject to risks associated with economic conditions generally and
the
economy in those areas where we have or expect to have assets and operations;
competitive and other factors affecting our operations, markets, products
and
services; those risks associated with our ability to successfully negotiate
with
certain customers, risks relating to estimated contract costs, estimated
losses
on uncompleted contracts and estimates regarding the percentage of completion
of
contracts, associated costs arising out of our activities and the matters
discussed in this report; risks relating to changes in interest rates and
in the
availability, cost and terms of financing; risks related to the performance
of
financial markets; risks related to changes in domestic laws, regulations
and
taxes; risks related to changes in business strategy or development plans;
risks
associated with future profitability; and other factors discussed elsewhere
in
this report and in documents filed by us with the Securities and Exchange
Commission. Many of these factors are beyond our control.