Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q contains forward-looking statements. Any statements contained herein that are not historical fact may deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). The words believes, anticipates, plans, expects, intends, and similar expressions identify some of the forward-looking statements. Forward-looking statements are not guarantees of performance or future results and involve risks, uncertainties and assumptions. These statements include, among other things, statements regarding:
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our ability to diversify our operations;
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inability to raise additional financing for working capital;
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the fact that our accounting policies and methods are fundamental to how we report our financial condition and results of operations, and they may require our management to make estimates about matters that are inherently uncertain;
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our ability to attract key personnel;
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our ability to operate profitably;
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deterioration in general or regional economic conditions;
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adverse state or federal legislation or regulation that increases the costs of compliance, or adverse findings by a regulator with respect to existing operations;
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changes in U.S. GAAP or in the legal, regulatory and legislative environments in the markets in which we operate;
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the inability of management to effectively implement our strategies and business plan;
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inability to achieve future sales levels or other operating results;
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the unavailability of funds for capital expenditures;
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other risks and uncertainties detailed in this report;
as well as other statements regarding our future operations, financial condition and prospects, and business strategies. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, and in particular, the risks discussed under the heading Risk Factors in Part II, Item 1A and those discussed in other documents we file with the Securities and Exchange Commission. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
References in the following discussion and throughout this Quarterly Report to we, our, us, BOLC, Bollente, the Company, and similar terms refer to Bollente Companies Inc. unless otherwise expressly stated or the context otherwise requires.
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AVAILABLE INFORMATION
We file annual, quarterly and other reports and other information with the SEC. You can read these SEC filings and reports over the Internet at the SEC's website at www.sec.gov or on our website at www.bollentecompanies.com. You can also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549 on official business days between the hours of 10:00 am and 3:00 pm. Please call the SEC at (800) SEC-0330 for further information on the operations of the public reference facilities. We will provide a copy of our annual report to security holders, including audited financial statements, at no charge upon receipt to of a written request to us at Bollente Companies, Inc., 8800 N. Gainey Dr., Suite 270, Scottsdale, Arizona 85258.
General
Bollente Companies Inc. was incorporated in the state of Nevada on March 7, 2008. The Company is headquartered in Scottsdale, Arizona and currently operates through its wholly-owned subsidiary, Bollente, Inc., a Nevada corporation incorporated on December 3, 2009.
Bollente manufactures and sells a high quality, whole-house, electric tankless water heater that is more energy efficient than conventional products.
On August 13, 2015, we formed a wholly-owned subsidiary, Bollente International, Inc. (Bollente International), to begin international manufacturing and sales expansion for our trutankless® line of water hearters.
Bollente International has partnered with international manufacturing firm to increase production and efficiently handle distribution to customers in the United Kingdom and throughout Europe, Asia, Dubai, Australia and New Zealand. We have begun the testing and certification process for several international standards, demonstrating that the product complies with the essential requirements of European health, safety and environmental protection legislation and opening the gate for future sales to more than 30 European countries.
On September 1, 2016, the Company filed a Certificate of Designation (the Certificate of Designation) with the Secretary of State of the State of Nevada to establish the preferences, limitations and relative rights of its 6% Series A Convertible Preferred Stock, convertible, at any time, at the option of the holder, into five shares of our common stock and one warrant to purchase one share of our common stock at $1.00 per share. All Preferred Stock will be automatically converted into shares of the Companys common stock and warrants after three years from the original issue date of the Preferred Stock. The Certificate of Designation became effective upon filing.
Products
Trutankless®
We manufacture and distribute trutankless® water heaters, a line of new, high-quality, highly efficient electric tankless water heaters. Our trutankless® water heaters are engineered to outperform and outlast both its tank and tankless predecessors in energy efficiency, output, and durability. It provides endless hot water on demand for a whole household and it also integrates with home automation systems. We have several features and design innovations which are new to the electric tankless water heater market that we believe will give our products a sustainable competitive advantage over our rivals in the market.
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Our trutankless® water heaters are available through wholesale plumbing distributors, including Ferguson, Hajoca, Hughes Supply, WinSupply locations, Morrison Supply, and several regional distributors. A partial listing of wholesalers may be found on our website (www.trutankless.com).
Our trutankless® water heaters are designed to provide an endless hot water supply because they are designed to heat water as it flows through the system. We believe that our products are capable of higher temperature rise than competitive units at given flow rates because of its improved design and greater efficiency. Our trutankless® water heaters can save energy and reduce operating costs compared to tank systems because unlike tanks, if there is no hot water demand, no energy is being used. In addition, we intend to improve life-cycle costs with an improved design conceived not only to increase efficiency, but also the longevity of our products versus competitive units. Generally, a typical tank water heater lasts about 11 years, whereas gas tankless systems may last longer, but requires more routine maintenance. Our product line is designed to last longer than tank water heaters without any routine maintenance required under most conditions.
We created a custom heat exchanger for our trutankless® product line that utilizes our patent pending Velix technology to heat water as it flows through the system, which means customers need not worry about running out of hot water. We believe weve selected the best materials available and a collection of exclusive design elements and features to maximize capacity, minimize energy use, and provide a truly maintenance free experience.
Our trutankless® water heaters were officially launched in the first quarter of 2014 and is sold throughout the wholesale plumbing distribution channel. We began generating revenue in the first quarter of 2014. As of the fiscal year ended December 31, 2014, we generated $238,912 in revenue. As of the fiscal year ended December 31, 2015, we generated $265,504 in revenue. As of the fiscal year ended December 31, 2016, we generated $429,582 in revenue. As of the three months ended March 31, 2017, we generated $115,308 in revenue.
In July of 2014, we launched MYtankless.com, a customizable online control panel for our trutankless® line of smart electric water heaters. From the dashboard, residential and commercial users can obtain real-time status reports, adjust unit temperature settings, view up to three years of water usage data, and change notification settings from anywhere in the world, using a computer or web-enabled smart device at www.mytankless.com.
Additionally, service professionals can also use the dashboard to monitor system status on every unit they install, allowing them to proactively contact their customers if a service or warranty appointment is needed.
Our primary markets, Florida, Texas, Arizona, and the rest of the Sunbelt region are centers of growth in the U.S. construction industry with green building at an all-time high, and an unprecedented appliance replacement cycle. We intend to take advantage of these powerful macro-economic trends.
MYTankless.com is available as a service to consumers of trutankless® water heaters. We have applications available for download from the Google Play and Apple iOS stores, which like the online control panels, allows monitoring and control of the tankless systems.
On March 21, 2017, we announced our exclusive partnership with Mr. Rooter®.
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Industry Recognition and Awards
Bollentes trutankless® received the Best of IBS 2014 Award for Best Home Technology Product from the National Association of Home Builders (NAHB) at this years International Builders Show (IBS) in Las Vegas. The IBS is produced by NAHB and is the largest annual light construction show in the world - featuring more than 1,100 exhibitors and attracting 75,000 attendees including high level decision makers from some of the largest home builders in the world as well as plumbing and HVAC professionals from top outfits in major markets.
Bollentes trutankless® received the Governor's Award of Merit for Energy and Technology Innovation for the trutankless line of electric tankless heaters at Arizona Forward's 2014 Environmental Excellence Awards.
Bollentes trutankless® received Kitchen and Bath Business Magazines 2014 K*BB Product Innovators Award Judges Choice Product.
truCirc
truCirc is a high-tech, smart-home water circulation pump. The energy reducing, water-saving truCirc can be used as a standalone product or with our multi-award winning trutankless® electric tankless water heater. truCirc represents the next step in our mission to pioneer forward-thinking technology that changes the way people think about hot water.
A traditional water circulation pump circulates hot water through a homes pipes, enabling homeowners to have instant, on-demand hot water as soon as they turn on the faucet and saving countless gallons of water that would have been wasted. truCirc takes the traditional pump to the next level with multiple hot water delivery strategies including a self-aware learning mode that tracks water usage in a household and predicts when hot water will be needed-- thereby using energy to keep water hot only when its desired. truCircs simple, modern, high-tech interface allows homeowners to quickly and easily change delivery modes or choose a zone or fixture to send hot water. Thermostatic shut-off valves can be installed at showerhead points of use throughout a home to further eliminate wasted water.
Our new product, truCirc, was unveiled on January 20, 2015 at the 2015 International Builders Show in Las Vegas and is still in the development phase. While not yet commercially available, trutankless products are expected to be compatible. Alternatively, truCirc is expected to be a stand alone product for customers who dont utilize trutankless.
Vero
On April 16, 2015, we announced the release of Vero, our new line of electric tankless water heaters geared towards budget-driven customers. Vero boasts the same water heating performance, durability and space savings of our flagship tankless water heater. Our trutankless® water heaters are available through wholesale plumbing distributors, including Ferguson, Hajoca, Hughes Supply, WinSupply locations, Morrison Supply, and several regional distributors. A partial listing of wholesalers may be found on our website (www.trutankless.com).
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Customers and Markets
We sell our products to plumbing wholesale distributors and dealers.
Wholesalers
. Approximately 96.1% of our sales in 2016, 98.3% of our sales in 2015 and 93.5% of our sales in 2014 were to wholesale distributors for commercial and residential applications. We rely on commissioned manufacturers representatives to market our product lines. Additionally, our products are sold to independent dealers throughout the United States.
Manufacturing and Distribution
Our principal supplier is Sinbon Electronics, a contract manufacturer and engineering company based in Taiwan with manufacturing facilities in China. Sinbon handles procurement and supply chain management. We have an engineering agreement which is ongoing and our manufacturing agreement is currently being negotiated.
Finished products are generally shipped Free on Board (FOB) Shanghai via ocean freight and are warehoused at Associated Global Systems located in Phoenix, Arizona. Merchandise is typically shipped using common carriers or freight companies are selected at the time of shipment based on order volume and the best available rates.
RESULTS OF OPERATIONS
Results of Operations for the three months ended March 31, 2017 compared with the three months ended March 31, 2016.
Revenues
In the three months ended March 31, 2017, we generated $115,308 in revenues, as compared to $115,527 in revenues in the prior year. Cost of goods sold was $63,945, as compared to $99,143 in the three months ended March 31, 2016. This decrease in cost of goods sold was primarily attributable to a decrease in cost of inventory.
To the knowledge of management, the Company is unaware of any trends or uncertainties in the sales or costs of our products and services for the periods discussed.
Gross Profit
Our gross profit increased $67,744, or approximately 414%, to $51,363 for the three months ended March 31, 2017 from ($16,381) for the three months ended March 31, 2016. This increase in gross profit was primarily attributable to a decrease in cost of products sold.
Expenses
Operating expenses totaled $392,709 during the three months ended March 31, 2017 as compared to $1,061,141 in the prior year. In the three month period ended March 31, 2017, our expenses primarily consisted of General and Administrative of $86,943, Salaries and wages of $87,009, Research and Development of $52,149, and Professional fees of $166,608.
General and administrative fees decreased $358,411, or approximately 80% to $86,943 for the three months ended March 31, 2017 from $445,354 for the three months ended March 31, 2016. This decrease was primarily due to a decrease in wages and marketing.
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Salaries and wages increased $38,529, or approximately 78% to $87,009 for the three months ended March 31, 2017 from $48,750 for the three months ended March 31, 2016. Salaries and wages decreased due to a increase in cash and stock based compensation to the President of the Company.
Research and development increased $51,218, or approximately 550% to $52,149 for the three months ended March 31, 2017 from $931 for the three months ended March 31, 2016. This increase is attributed primarily to the Company spending more towards developing its technology.
Professional fees decreased $399,498, or approximately 71% to $166,608 for the three months ended March 31, 2017 from $566,106 for the three months ended March 31, 2016. Professional fees decreased due to a decrease in consulting fee associated with business development.
Other Expenses
Interest expense increased $124,180 to $140,449 in the three months ended March 31, 2017 from $16,269 in the three months ended March 31, 2016. The increase was the result of an increase in notes payable with interest accruals.
Net Loss
In the three months ended March 31, 2017, we generated a net loss of $481,795, a decrease of $579,041 from $1,060,836 for the three months ended March 31, 2016. This decrease was attributable to decreased consulting fees associated with business development and the Company spending less towards developing its technology.
Going Concern
The financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern. The Company may not have a sufficient amount of cash required to pay all of the costs associated with operating and marketing of its products. Management intends to use borrowings and security sales to mitigate the effects of cash flow deficits; however, no assurance can be given that debt or equity financing, if and when required, will be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue existence.
Liquidity and Capital Resources
At March 31, 2017, we had an accumulated deficit of $21,554,808. Primarily because of our history of operating losses and our recording of note payables, we have a working capital deficiency of $530,486 at March 31, 2017. Losses have been funded primarily through issuance of common stock and borrowings from our stockholders and third-party debt. As of March 31, 2017, we had $66,664 in cash, $78,515 in accounts receivable, $47,042 in inventory, and $290,615 in prepaid expenses. We used net cash in operating activities of $281,055 for the three months ended March 31, 2017.
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6% Series A Convertible Preferred Securities Purchase Agreement
As of the quarter ended March 31, 2017, we sold 10,000 shares of our 6% Series A Convertible Preferred Stock (Preferred Stock) to one accredited investors. Each share of Preferred Stock is convertible, at any time, at the option of the holder, into five shares of our common stock and one warrant to purchase one share of our common stock at $1.00 per share. All Preferred Stock will be automatically converted into shares of the Companys common stock and warrants after three years from the original issue date of the Preferred Stock. The Preferred Stock was issued pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving any public offering.
Cash Flows from Operating, Investing and Financing Activites
The following table provides detailed information about our net cash flow for all financial statement periods presented in this Quarterly Report. To date, we have financed our operations through the issuance of stock and borrowings.
The following table sets forth a summary of our cash flows for the three months ended March 31, 2017 and 2016:
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Three months ended
March 31,
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2017
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2016
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Net cash used in operating activities
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$
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(281,055)
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$
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(181,148)
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Net cash used in investing activities
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-
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(2,381)
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Net cash provided by financing activities
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260,585
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181,500
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Net increase/(decrease) in Cash
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(20,470)
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(2,029)
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Cash, beginning
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87,134
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3,618
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Cash, ending
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$
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66,664
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$
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1,589
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Operating activities
- Net cash used in operating activities was $281,055 for the three months ended March 31, 2017, as compared to $181,148 used in operating activities for the same period in 2016. The decrease in net cash used in operating activities was primarily due to a higher volume of units sold and decrease in research and development and consulting contract cost.
Investing activities
- Net cash provided by financing activities for the three months ended March 31, 2017 was $0, as compared to $2,381 for the same period of 2016. The decrease of net cash provided by financing activities was mainly attributable to the purchase of trademarks during the prior period.
Financing activities
- Net cash provided by financing activities for the three months ended March 31, 2017 was $260,585, as compared to $181,500 for the same period of 2016. The decrease of net cash provided by financing activities was mainly attributable to less equity financing.
Ongoing Funding Requirements
As of March 31, 2017, we continue to use traditional and/or debt financing to provide the capital we need to run the business. It is possible that we may need additional funding to enable us to fund our operating expenses and capital expenditures requirements.
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Until such time, if ever, as we can generate substantial product revenues, we intend to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances and licensing arrangements. There can be no assurance that any of those sources of funding will be available when needed on acceptable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or relationships with third parties when needed or on acceptable terms, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts; abandon our business strategy of growth through acquisitions; or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Off-Balance Sheet Arrangements
We 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.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. See Note 1 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements.