ITEM 1. BUSINESS
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, smart electric tankless water heater that is more energy efficient than conventional products.
On August 13, 2015, the Company formed a wholly-owned subsidiary, Bollente International, Inc. (“Bollente International”) to begin international manufacturing and sales expansion for our trutankless® line of water heaters.
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 Company’s common stock and warrants after three years from the original issue date of the Preferred Stock. The Certificate of Designation became effective upon filing, and a copy is filed as Exhibit 3.1 hereto, and is incorporated herein by reference.
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. 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 we’ve 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 fiscal year ended December 31, 2017, we generated $695,857 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®.
In April 2017, we announced that our trutankless® line of smart electric tankless water heaters is the exclusive water heating solution for luxury communities built by the award-winning Arizona home builder Cullum Homes.
In June 2017, we announced that we have signed a manufacturing agreement with SINBON Electronics, a leading solution provider of electronic component integration design and manufacturing with a global presence in the U.S., Taiwan, China, Japan, the U.K., Germany, Hungary and the Czech Republic.
In September 2017, we announced that our trutankless® line of electric water heaters has launched a nationwide distribution program with Ferguson, the largest distributor of commercial and residential plumbing supplies, and pipe, valves, and fittings (PVF) in the United States.
In March 2018, we announced our sales and installation expansion into the Florida water heating market, which is over 90% electric, with our trutankless® line of electric water heaters.
Industry Recognition and Awards
Bollente’s trutankless® received the Best of IBS 2014 Award for Best Home Technology Product from the National Association of Home Builders (NAHB) at this year’s 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.
Bollente’s 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.
Bollente’s trutankless® received Kitchen and Bath Business Magazine’s 2014 K*BB Product Innovator’s 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 home’s 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 it’s desired. truCirc’s 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 don’t 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).
Customers and Markets
We sell our products to plumbing wholesale distributors and dealers.
Wholesalers. Approximately 90% of our sales in 2017, 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.
Intellectual Property & Proprietary Rights
Upon completion of our brand development, we will regard substantial elements of our brands and underlying intellectual property as proprietary and attempt to protect them by relying on trademark, service mark and trade secret laws, restrictions on disclosure and transferring title and other methods.
Our plans are to actively pursue patent and trademark protection for all of newly developed products, both domestically and abroad. We have novel and proprietary technologies related to our product line and the central focus of our patent counsel has been to work with our engineers to build a defensible patent portfolio.
To date, we have filed and received a United States federal trademark registration for trutankless® and our logo design with the help of our outside marketing and branding experts and have acquired several unique domain registrations reflective of our online marketing strategy (www.bollente.com). During the year ended December 31, 2013, our patent agent filed ta provisional patent with the US Patent and Trademark Office with the US Patent and Trademark Office with 37 claims based on our prototype design. Upon completion of our engineered prototype, we expect to file additional patents with additional claims. There is no guarantee that we will be able to obtain a formal patent for our tankless water heater. We will continue to protect our intellectual property through confidentiality agreements with vendors and consultants and trade secret protocols employed by employees, consultants, and contractors.
Growth Strategy
Bollente’s product launched in Q1 2014 and is sold through the wholesale plumbing distribution channel. Gas tankless manufacturers’ support of this sales channel was critical in their ability to quickly capture appreciable market share in the $3.6 billion replacement market. No electric tankless has been available solely through wholesale distribution which has welcomed the arrival of trutankless. Bollente’s sales and service training programs geared towards plumbers and contractors are the primary focal point of the Company’s sales strategy. Bollente is employing several outside manufacturers rep agencies to quickly scale sales and educate distributors, plumbers, builders, and contractors.
The Company is also leveraging online marketing strategies and social media. By continually building an immersive and educational web experience at www.trutankless.com. Bollente is efficiently building brand awareness among consumers. Launch efforts are focused in Arizona, Texas, and the Southeast which accounts for over 1,000,000 electric water heater shipments annually. Licensing and co-branding opportunities are being assessed, since strategic partnerships would eliminate the channel conflicts that have historically obstructed previous electric tankless entries in the marketplace. Electric tankless has traditionally not been able to warrant such partnerships because of generally poor quality and product support, but co-branding open up sales of Bollente’s products through big box retailers.
In addition, we have determined that as part of our growth strategy, we will seek to partner with or acquire entities operating in various fields, with a bias towards green and "clean-tech" sectors. Our management has experience in marketing, product launches, business development strategies, and certain other areas specific to the success of growth companies. We will operate with a view towards identifying acquisition candidates as we seek the rights to provide the market with products and services geared toward environmental responsibility.
We have identified several agents who are well suited to provide consulting to high-growth technology and consumer products companies. We are currently negotiating with several agents possessing technical expertise related to planning, structuring, and capitalizing growth companies in the green and "clean-tech" sectors who will be tasked with creating additional revenues and assist the Company with our own planning, structure, and capitalization.
We have identified several entities that fit our criteria. We are focused on adding value to these companies and acquiring either the entity or its business, maintaining and growing that business, and hiring and utilizing existing management where appropriate. We have begun the design of a website which we believe will help us attract relationships with possible acquisition targets.
Margin Expansion
Cost reduction measures, including outsourcing of key components and certain quality control testing protocols, are currently being undertaken on an expedited basis to rapidly reduce costs and improve manufacturing scalability. Such reductions are expected to take place in stages over the next three quarters and are likely to result in gross sales margins approaching 50-60% which is far higher than other companies in the sector.
Market Outlook
Bollente is entering the market in front of the largest water heater replacement cycle ever at a time when homeowners are seeking ways to reduce their carbon footprint without sacrificing comfort. Shares of companies like Whirlpool (WHR) and AO Smith (AOS) have soared - fueled by the unprecedented Consumer Durables replacement cycle - which is an echo of last decade’s building boom. It is estimated that some 57 Million water heaters will need replacement in the next 3 years. Florida, Texas, and Arizona, where electric water heaters dominate the market, were the epicenters of the boom. In the new construction market, builders are increasingly marketing “green” features and trutankless fit well along with other energy saving innovations. In commercial markets, projects with a green designation like LEED or EnergyStar recently became the majority.
Additionally, the Federal Government mandated that standard electric water heaters over 55 gallons may not be sold (started in April 2015), effectively forcing the market to use alternative technologies like tankless water heaters.
Investment Analysis
Bollente has entered the market with a disruptive product that has enjoyed significant tail winds thus far. As a result, we believe BOLC is poised to produce exceptional results. Management expects to announce several key partnerships outside of the wholesale channel for current products and launch several additional lines next year. Management has plans to significantly reduce the cost of goods sold and develop other innovations to supplement existing offerings which will be sold through the existing sales channels and reps which to help ensure sustainable growth over the next 3-5 years.
Tankless Industry Overview
The U.S. gas tankless, whole-house, water heater market is dominated by five brands; Noritz, Rinnai, Takagi, Aqua Star by Bosch and Rheem by Paloma. The U.S. electric tankless, whole-house, water heater market is dominated by four brands; Seisco by Microtherm, Inc., Stiebel Eltron, Eemax and Power Star by Bosch. Until just a few years ago, there were only a few tankless water heater manufacturers with a presence in the United States, but that is changing. Now, several Japanese and European manufacturers have begun marketing products in the United States, and since 2003, gas tankless products have experienced dramatic growth. Electric tankless systems have not experienced comparable growth due to several factors, primarily product performance, capacity, product quality and electrical power supply and installation issues.
Manufacturers of tank heaters have a competitive advantage due largely to their product category’s long established use, name recognition, established distribution and brand position in the marketplace. Many plumbers and other building industry professionals were opposed to changing brands or to tankless systems because many tankless water heaters have been poorly designed in the past. As a result there is a perception among some contractors that these water heaters are more complicated and generally less dependable than traditional tank heaters. This perception is often passed along to consumers when making buying decisions or inquiring about switching to a tankless water heater. In recent years however, the industry has experienced a contraction in sales of products and services for new building projects. Consequently, higher ticket, higher margin products, such as tankless and solar water heating systems have become a primary growth driver for many plumbers and companies who had traditionally avoided emerging technologies.
While we believe that our products will have superior performance, such as endless hot water, superior longevity, greater efficiency and lower “life-cycle” costs than traditional tank water heaters, the Company’s success will depend to a large degree on the successful conversion of traditional water heater buyers to tankless water heater buyers. The acquisition price of tankless water heaters (both gas and electric) is greater than traditional tank water heaters, but the overall cost of ownership will be less than that of traditional tank technologies under typical circumstances. Although the public’s awareness of tankless systems has not been strong historically, sales growth in the sector is suggestive of increasing awareness.
Our marketing and promotion plans have been developed to increase the awareness of the Company’s brand as the preferred option to traditional tank systems. Bollente intends to position itself and its brand to capitalize on the paradigm shift to green-conscious living and development.
Overview of Potential Markets and Summary of Marketing Plan
Management intends to focus on the United States residential market initially. For decades Americans have used only tank type water heaters. For most homes, the units hold an average of 40 to 80 gallons of water in a storage tank, are gas or electric fueled and consume excessive energy to keep water hot continuously. In fact, water heaters expend up to 25% of the total energy used by a typical household representing the second largest use of energy in most homes. Depending on household usage, approximately 25 - 50% of the heat created is lost through the walls of the tank and connecting pipes.
There are other problems inherent with traditional tank water heaters:
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Due to the high temperatures and corrosive aspects of water, a typical water heater has a life span of 10.7 years.
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Unless replaced beforehand, more than two thirds of water heaters eventually corrode and leak or burst, often resulting in extensive and costly water and mold related damage.
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Due to the large size and other installation requirements often result in the units being installed in garages and utility rooms on the opposite side of the home from the bathroom fixtures. Because of this, an estimated 10,000 gallons of water per household goes down the drain while users wait on the water to get hot at the faucet.
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Traditional tank water heaters take up to 6 to 9 square feet of floor space, which can be especially valuable in multi-family or commercial applications.
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To reduce operating costs, many people adjust the temperature on their water heaters down. Unfortunately, lower temperatures increase the possibility of unhealthy, water born bacteria growth.
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To increase water heating capacity, many people will adjust the temperature of their water heaters up. In addition to using more energy, this practice can be dangerous by posing a greater risk of scalding.
Tankless water heaters are becoming increasingly popular in America because they:
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Produce a continuous, unlimited supply of hot water
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Expend only the energy needed to heat the water used with no “standby” energy loss
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Can last more than twice as long as tank heaters
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Are small and require very little space.
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Are not conducive to bacterial growth
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Are considered very “green” by green conscious builders and consumers.
Electric tankless water heaters have additional benefits over gas powered models because they can be installed almost anywhere in a home (closets, attics, utility rooms, etc.) where hot water is needed which improves flexibility of floor plan design for builders, architects, and remodelers. In addition, gas tankless water heaters may not be suitable for many applications due to challenges with adequate fuel supply, the need for exhaust vents with specific requirements, and other code-related requirements. In spite of these issues, gas tankless water heaters have enjoyed significant growth in North America because of the efficiency and performance they provide.
Distribution Plan
Initially, we will be distributing our first product line throughout the southern and western U.S. using an existing network of plumbing and electrical wholesalers (distributors), manufacturers’ representatives and dealers. We believe that once the product has been launched, we will be able to partner with major companies in the building and plumbing industries to rapidly expand awareness of Bollente and our products in the water heater market in the U.S and Canada.
Sales will be pursued through the following channels:
1.
Regional and national plumbing and electrical wholesalers (also called “distributors”);
2.
Plumbers and electricians on a direct basis, in those areas where wholesalers have not yet been set up; and,
3.
Builders on a direct basis, in those areas where wholesalers & mechanical contractors have not yet been set up.
We will expand sales of the product further by marketing the product directly to consumers over the internet with a series of aggressive and ongoing marketing initiatives. We intend to market to industry professionals and end-users through more traditional marketing efforts as well, including print advertising, attendance of select national trade shows, and attendance of select regional consumer shows. We also expect Bollente will be successful in providing education, training, and support to our sales and installer networks as part of our distribution and marketing efforts.
We believe our products will be a differentiating factor for industry professionals and builders as they market to their customers. Additionally, our electric tankless products are expected to provide these professionals and their companies with a mechanism to increase revenue and improve gross margin as compared to more traditional water heating products.
Employees
We currently have nine full-time employees, including our two officers, and two part-time employees. We expect to increase the number of employees to expand our sales and technical staff. We are using and will continue to use independent consultants and contractors to perform various professional services. We believe that this use of third-party service providers may enhance our ability to contain operating and general expenses, and capital costs.
Available Information
Our periodic reports filed with the SEC, which include Form 10-K, Form 10-Q, Form 8-K and amendments thereto, may be accessed by the public free of charge from the SEC. Electronic copies of these reports can be accessed at the SEC’s website (http://www.sec.gov). Copies of these reports may also be obtained, free of charge, upon written request to: Bollente Companies Inc., 15720 N. Greenway Hayden Loop, Suite 2, Scottsdale, Arizona 85260, Attn: Corporate Secretary. The public may read or obtain copies of these reports from the SEC at the SEC’s Public Reference Room at 450 Fifth N.W., Washington, D.C. 20549 (1-800-SEC-0330).
ITEM 1A.
ITEM 1A. RISK FACTORS
If we are unable to attract and retain key personnel, our business could be harmed.
If any of our key employees were to leave, we could face substantial difficulty in hiring qualified successors and could experience a loss in productivity while any successor obtains the necessary training and experience. Our employment relationships are generally at-will. We cannot assure that one or more key employees will not leave in the future. We intend to continue to hire additional highly qualified personnel, but may not be able to attract, assimilate or retain qualified personnel in the future. Any failure to attract, integrate, motivate and retain these employees could harm our business.
We are subject to significant competition from large, well-funded companies.
The industry we compete in is characterized by intense competition and rapid and significant technological advancements. Many companies are working in a number of areas similar to our primary field of interest to develop new products; some of which may be similar and/or competitive to our products.
Most of the companies with which we compete have substantially greater financial, technical, manufacturing, marketing, sales and distribution and other resources than us. If a competitor enters the tankless water heater industry and establishes a greater market share in the direct-selling channel, our business and operating results will be adversely affected.
Our auditors have substantial doubt about our ability to continue as a going concern. Additionally, our auditor’s report reflects that the ability of the Company to continue as a going concern is dependent upon our ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues.
Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Our auditor’s report reflects that the ability of the Company to continue as a going concern is dependent upon our ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. If we are unable to continue as a going concern, stockholders will lose their investment. We will be required to seek additional capital to fund future growth and expansion. No assurance can be given that such financing will be available or, if available, that it will be on commercially favorable terms. Moreover, favorable financing may be dilutive to investors.
We will require additional financing in order to implement our business plan. In the event we are unable to acquire additional financing, we may not be able to implement our business plan resulting in a loss of revenues and ultimately the loss of your investment.
Due to our very recent start-up nature, we will have to incur the costs of product development, import expenses, advertising, in addition to hiring new employees and commencing additional marketing activities for product sales and distribution. To fully implement our business plan we will require substantial additional funding.
We will need to raise additional funds to expand our operations. We plan to raise additional funds through private placements, registered offerings, debt financing or other sources to maintain and expand our operations. Adequate funds for this purpose on terms favorable to us may not be available, and if available, on terms significantly more adverse to us than are manageable. Without new funding, we may be only partially successful or completely unsuccessful in implementing our business plan, and our stockholders may lose part or all of their investment.
Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, 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 and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
We have two individuals performing the functions of all officers and directors. Mr. Orr, our CEO, and Mr. Stebbins, our president, have developed our internal control procedures and are responsible for monitoring and ensuring compliance with those procedures. As a result, our internal controls may be inadequate or ineffective, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.
We depend on certain key employees, and believe the loss of any of them would have a material adverse effect on our business.
We will be dependent on the continued services of our management team, as well as our outside consultants. While we have no assurance that our current management will produce successful operations, the loss of such personnel could have an adverse effect on meeting our production and financial performance objectives. We have no assurance that we will not lose the services of these or other key personnel and may not be able to timely replace any personnel if we do lose their services.
Our ability to attract qualified sales and marketing personnel is critical to our future success, and any inability to attract such personnel could harm our business.
Our future success may also depend on our ability to attract and retain additional qualified design and sales and marketing personnel. We face competition for these individuals and may not be able to attract or retain these employees, which could have a material adverse effect on our results of operations and financial condition.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY AND TECHNOLOGY
If we fail to secure or protect our intellectual property rights, our products and competitors may be able to use our designs, each of which could harm our reputation, reduce our revenues and increase our costs.
We will rely on intellectual property laws to protect our proprietary rights with respect to our trademarks and pending patent. We are susceptible to injury from patent infringement, which may harm our reputation for producing high-quality products or force us to incur additional expense in enforcing our rights. It is difficult and expensive to detect and prevent patent infringement. Despite our efforts to protect our intellectual property, some may attempt to violate our intellectual property rights by using our trademarks and imitating our products, which could potentially harm our brand, reputation and financial condition.
We may face significant expenses and liability in connection with the protection of our intellectual property rights. Infringement claims and lawsuits likely would be expensive to resolve and would require substantial management time and resources. Any adverse determination in litigation could subject us to the loss of our rights to a particular trademark, which could prevent us from manufacturing, selling or using certain aspects of our products or could subject us to substantial liability, any of which would harm our results of operations. Aside from infringement claims against us, if we fail to secure or protect our intellectual property rights, our competitors may be able to use our designs. If we are unable to successfully protect our intellectual property rights or resolve any conflicts, our results of operations may be harmed.
Our reliance on intellectual property and other proprietary information subjects us to the risk that these key ingredients of our business could be copied by competitors.
Our success depends, in significant part, on the proprietary nature of our technology. If a competitor is able to reproduce or otherwise capitalize on our technology, despite the safeguards we have in place, it may be difficult, expensive or impossible for us to obtain necessary legal protection. In addition to patent protection of intellectual property rights, we consider elements of our product designs and processes to be proprietary and confidential. We rely upon employee, consultant and vendor non-disclosure agreements and contractual provisions and a system of internal safeguards to protect our proprietary information. However, any of our registered or unregistered intellectual property rights may be challenged or exploited by others in the industry, which might harm our operating results.
RISKS RELATING TO OUR COMMON STOCK
Because our common stock could remain under $5.00 per share, it could continue to be deemed a low-priced “Penny” stock, an investment in our common stock should be considered high risk and subject to marketability restrictions.
Since our common stock is currently under $5.00 per share, it is considered a penny stock, as defined in Rule 3a51-1 under the Securities Exchange Act, it will be more difficult for investors to liquidate their investment even if and when a market develops for the common stock. If the trading price of the common stock stays below $5.00 per share, trading in the common stock is subject to the penny stock rules of the Securities Exchange Act specified in rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting transactions in any penny stock, to:
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Deliver to the customer, and obtain a written receipt for, a disclosure document;
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Disclose certain price information about the stock;
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Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer;
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Send monthly statements to customers with market and price information about the penny stock; and
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In some circumstances, approve the purchaser’s account under certain standards and deliver written statements to the customer with information specified in the rules.
Consequently, the penny stock rules may restrict the ability or willingness of broker-dealers to accept the common stock for deposit into an account or, if accepted for deposit, to sell the common stock and these restrictions may affect the ability of holders to sell their common stock in the secondary market and the price at which such holders can sell any such securities. These additional procedures could also limit our ability to raise additional capital in the future.
FINRA sales practice requirements may also limit a stockholder's ability to buy and sell our stock.
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (FINRA) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
We currently maintain an executive office 15720 N. Greenway Hayden Loop, Suite 2, Scottsdale Arizona 85260, which consists of approximately 1,924 square feet. Our monthly rent for this office is $2,800.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
Market Information
Our common stock is traded in the OTCQB under the symbol “BOLC”. Our common stock has traded sporadically on the OTCQB, which limits our ability to locate accurate high and low bid prices for each quarter within the last two fiscal years. Therefore, the following table lists the available quotations for the high and low bid prices for the fiscal years ended December 31, 2017 and 2016.
The following table sets forth, the average high and low bid prices of our common stock as reported by Yahoo Finance. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions
Holders of Common Stock
As of April 5, 2018, there were approximately 307 stockholders of record of our common stock. This number does not include shares held by brokerage clearing houses, depositories or others in unregistered form.
Dividends
The payment of dividends is subject to the discretion of our Board of Directors and will depend, among other things, upon our earnings, our capital requirements, our financial condition, and other relevant factors. We have not paid or declared any dividends upon our common stock since our inception and, by reason of our present financial status and our contemplated financial requirements, do not anticipate paying any dividends upon our common stock in the foreseeable future.
We have never declared or paid any cash dividends. We currently do not intend to pay cash dividends in the foreseeable future on the shares of common stock. We intend to reinvest any earnings in the development and expansion of our business. Any cash dividends in the future to common stockholders will be payable when, as and if declared by our Board of Directors, based upon the Board’s assessment of:
·
our financial condition;
·
earnings;
·
need for funds;
·
capital requirements;
·
prior claims of preferred stock to the extent issued and outstanding; and
·
other factors, including any applicable laws.
Therefore, there can be no assurance that any dividends on the common stock will ever be paid.
Recent Sales of Unregistered Securities
During the year ended December 31, 2017, we issued 2,190,000 shares of common stock for cash received of $876,758, of which $120,000 of the funds were received during the year ended December 31, 2016 and recorded as stock payable.
During the year ended December 31, 2017, we received $110,780 cash for the purchase of common stock. As of December 31, 2017, no shares have been issued and the amount is recorded as stock payable.
During the year ended December 31, 2017, we issued 25,000 units consisting of shares of preferred stock and one warrant for $62,500 cash. During the year ended December 31, 2017, a shareholder converted 10,000 shares of preferred stock into 50,000 shares of the Company’s common stock and 10,000 warrants.
During the year ended December 31, 2017, we repurchased and retired 300,000 shares of common stock for $84,000.
During the year ended December 31, 2017, we issued 1,362,500 shares of common stock with a fair value of $473,181 for services, of which $2,000 of the services were received during the year ended December 31, 2016 and recorded as stock payable.
We believe that the issuance and sale of the securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Registrant that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.
Subsequent Sales & issuances of Unregistered Securities
Subsequent to year end, we issued 1,482,560 shares of common stock for cash.
Subsequent to year end, we issued 13,560 shares of common stock for services.
Subsequent to year end, we issued 610,000 shares of common stock for the termination of certain Royalty Agreements.
We believe that the issuance and sale of the securities was exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 by virtue of Section 4(2) and Regulation D Rule. The securities were sold directly by us and did not involve a public offering or general solicitation. The recipients of the securities were afforded an opportunity for effective access to files and records of the Registrant that contained the relevant information needed to make their investment decision, including the financial statements and 34 Act reports. We reasonably believed that the recipients, immediately prior to the sale of the securities, were accredited investors and had such knowledge and experience in our financial and business matters that they were capable of evaluating the merits and risks of their investment. The management of the recipients had the opportunity to speak with our management on several occasions prior to their investment decision. There were no commissions paid on the issuance and sale of the securities.
Issuer Purchases of Equity Securities
The Company did not repurchase any of its equity securities during the fourth quarter ended December 31, 2017.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
This item is not applicable, as we are considered a smaller reporting company.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Background
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. On August 13, 2015, the Company formed a wholly-owned subsidiary, Bollente International, Inc.
Bollente manufactures and sells a high quality, whole-house, electric tankless water heater that is more energy efficient than conventional products. See “Item 1. Business.”
RESULTS OF OPERATIONS
Revenues
In the year ended December 31, 2017 we generated $695,857 in revenues, as compared to $429,582 in revenues in the prior year. The increase in sales was attributable mostly to sales of our trutankless® products and also the sale of Vero products. Cost of goods sold was $530,593, as compared to $490,276 in the prior year.
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.
Expenses
Operating expenses totaled $2,570,071 during the year ended December 31, 2017 as compared to $2,828,692 in the prior year. In the year ended December 31, 2017, our expenses primarily consisted of General and Administrative of $1,710,117, Research and Development of $165,218 and Professional fees of $694,736.
General and administrative fees increased $678,473, from the year ended December 31, 2016 to the year ended December 31, 2017. This increase was primarily due to an increase in wages and marketing in 2017.
Research and Development increased $165,218 from the year ended December 31, 2016 to the year ended December 31, 2017. Research and Development fees increased due to there being no research and development in 2016.
Professional fees decreased $1,102,312 from the year ended December 31, 2016 to the year ended December 31, 2017. Professional fees decreased due to a decrease in consulting fees associated with business development.
Other Expenses
Interest expense increased $83,523 to $467,164 in the year ended December 31, 2017 from $383,641 for the year ended December 31, 2016. The increase was the result of an increase in notes payable with interest accruals.
Net Loss
In the year ended December 31, 2017, we generated a net loss of $2,871,971, a decrease of $400,863 from $3,272,834 for the year ended December 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 December 31, 2017, we had an accumulated deficit of $23,997,135. Primarily because of our history of operating losses and our recording of note payables, we have a working capital deficiency of $1,301,079 at December 31, 2017. Losses have been funded primarily through issuance of common stock and borrowings from our stockholders and third-party debt. As of December 31, 2017, we had $78,599 in cash, $129,246 in accounts receivable, $157,487 in inventory, and $318,207 in prepaid expenses.
Debt Financing
The Company has agreed to allow accredited investors the ability to receive a royalty on products sold in an effort to fund its distribution and marketing advances internationally by purchasing units. Each unit represents 0.625% royalty interest in the Gross Margin of product sold by Bollente International, Inc., costing $25,000 per unit.
During the year ended December 31, 2017, we paid $11,400 in dividends related to royalty agreements.
On October 18, 2017, the Company entered into royalty termination agreements whereas the Company converted all royalties interest into a total of 1,400,000 shares of common stock valued at $700,000. As of December 31, 2017, the Company has issued 600,000 shares of common stock and has recorded the balance of the common stock due to stock payable.
Cash Flows from Operating, Investing and Financing Activities
The following table provides detailed information about our net cash flow for all financial statement periods presented in this Annual 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 years ended December 31, 2017 and 2016:
Operating activities
Net cash used in operating activities was $1,521,944 for the year ended December 31, 2017, as compared to $1,409,096 used in operating activities for the same period in 2016. The increase in net cash used in operating activities was primarily due to higher volume of units sold and increase in research and development cost.
Investing activities
Net cash used in investing activities was $0 for the year ended December 31, 2017, as compared to $3,828 used in investing activities for the same period in 2016. The decrease in net cash used in investing activities was primarily due to a decrease in software, trademarks, and fixed asset purchases.
Financing activities
Net cash provided by financing activities for the year ended December 31, 2017 was $1,597,109, as compared to $1,496,440 for the same period of 2016. The increase of net cash provided by financing activities was mainly attributable to more equity financing.
Ongoing Funding Requirements
As of December 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.
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item in not applicable as we are currently considered a smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules appearing on page 36 of this Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no disagreements with our independent auditors on accounting or financial disclosures.
ITEM 9A
ITEM 9A (T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer, Robertson James Orr, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on his evaluation, Mr. Orr concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control, as is defined in the Securities Exchange Act of 1934. These internal controls are designed to provide reasonable assurance that the reported financial information is presented fairly, that disclosures are adequate and that the judgments inherent in the preparation of financial statements are reasonable. There are inherent limitations in the effectiveness of any system of internal controls, including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.
Our internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with generally accepted accounting principles and the receipts and expenditures of company assets are made and in accordance with our management and directors authorization; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.
Management has undertaken an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based upon this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2017.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The members of our board of directors serve for one year terms and are elected at the next annual meeting of stockholders, or until their successors have been elected. The officers serve at the pleasure of the board of directors.
Information as to our current directors and executive officers is as follows:
Duties, Responsibilities and Experience
Robertson James Orr, has been our Chief Executive Officer, Treasurer, Secretary and a Director since May 12, 2010. Mr. Orr attended Arizona State University and graduated with a BA in Business Management. In 1998, Mr. Orr assisted in the founding of bluemedia, Inc., a successful large format digital printing company based in Tempe, Arizona. Mr. Orr led bluemedia to profitability 9 years ago while overseeing the company's sales department and business development, and since then the company has continued to grow by more than 28% annually. In 2005, Mr. Orr and his Partners in bluemedia started a non-traditional ad agency called Blind Society, which is responsible for the direct to consumer marketing efforts of companies like AT&T, K-Swiss, and Activision. In addition to his entrepreneurial successes, Mr. Orr has been involved with supporting numerous local charitable causes through his work with the Boys & Girls Clubs of Phoenix, St. Joseph the Worker, the MDA and the ADA. He is also on the Board of Directors for the Tempe Chamber of Commerce and is active in the Phoenix 40.
Michael Stebbins, has been our President since February 2, 2017 and a Director since June 23, 2016. Mr. Stebbins is also the president and a director of Bollente, Inc., a Nevada corporation and wholly owned subsidiary of the Company. In 2009, Mr. Stebbins assisted in the founding of Bollente, Inc. Mr. Stebbins helped lead the design team that created our trutankless water heater. He oversaw virtually every aspect of launching our trutankless line of water heaters. Working directly with engineering and development teams, he developed several innovations and was instrumental in working on Bollente Inc.’s intellectual property and patents consisting of 29 proprietary claims related to our products. Since substantially completing R/D efforts in 2013, Mr. Stebbins has worked with the rest of management to lead branding, marketing, and sales initiatives, which has resulted in substantial sales growth and business development opportunities. Mr. Stebbins’ experience in the water heater industry dates back to 2003. Prior to co-founding Bollente, Inc., Mr. Stebbins spent time consulting on several product development projects. Mr. Stebbins was named Top 35 Entrepreneurs under 35 by the Arizona Republic.
Indemnification of Directors and Officers
Our Articles of Incorporation and Bylaws both provide for the indemnification of our officers and directors to the fullest extent permitted by Nevada law.
Limitation of Liability of Directors
Pursuant to the Nevada General Corporation Law, our Articles of Incorporation exclude personal liability for our Directors for monetary damages based upon any violation of their fiduciary duties as Directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or any transaction from which a Director receives an improper personal benefit. This exclusion of liability does not limit any right which a Director may have to be indemnified and does not affect any Director’s liability under federal or applicable state securities laws. We have agreed to indemnify our directors against expenses, judgments, and amounts paid in settlement in connection with any claim against a Director if he acted in good faith and in a manner he believed to be in our best interests.
Election of Directors and Officers
Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and qualified. Officers are appointed to serve until the meeting of the Board of Directors following the next annual meeting of stockholders and until their successors have been elected and qualified.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater-than-ten-percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based upon a review of the copies of such forms furnished to us and written representations from our executive officers and directors, we believe that as of the date of this filing they were current in their filings.
Code of Ethics
A code of ethics relates to written standards that are reasonably designed to deter wrongdoing and to promote:
1.
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
2.
Full, fair, accurate, timely and understandable disclosure in reports and documents that are filed with, or submitted to, the Commission and in other public communications made by an issuer;
3.
Compliance with applicable governmental laws, rules and regulations;
4.
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
5.
Accountability for adherence to the code.
We have not adopted a corporate code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Our decision to not adopt such a code of ethics results from our having a small management for the Company. We believe that the limited interaction which occurs having such a small management structure for the Company eliminates the current need for such a code, in that violations of such a code would be reported to the party generating the violation.
Corporate Governance
We currently do not have standing audit, nominating and compensation committees of the board of directors, or committees performing similar functions. Until formal committees are established, our entire board of directors, perform the same functions as an audit, nominating and compensation committee.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past five years:
·
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
·
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
·
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity;
·
been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
·
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
·
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Overview of Compensation Program
We currently have not appointed members to serve on the Compensation Committee of the Board of Directors. Until a formal committee is established, our entire Board of Directors has responsibility for establishing, implementing and continually monitoring adherence with the Company’s compensation philosophy. The Board of Directors ensures that the total compensation paid to the executives is fair, reasonable and competitive.
Compensation Philosophy and Objectives
The Board of Directors believes that the most effective executive compensation program is one that is designed to reward the achievement of specific annual, long-term and strategic goals by the Company and that aligns executives’ interests with those of the stockholders by rewarding performance above established goals, with the ultimate objective of improving stockholder value. As a result of the size of the Company and only having two officers, the Board evaluates both performance and compensation on an informal basis. Upon hiring additional executives, the Board intends to establish a Compensation Committee to evaluate both performance and compensation to ensure that the Company maintains its ability to attract and retain superior employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly-situated executives of peer companies. To that end, the Board believes executive compensation packages provided by the Company to its executives, including the named executive officers, should include both cash and stock-based compensation that reward performance as measured against established goals.
Role of Executive Officers in Compensation Decisions
The Board of Directors makes all compensation decisions for, and approves recommendations regarding equity awards to, the executive officers and Directors of the Company. Decisions regarding the non-equity compensation of other employees of the Company are made by management.
Summary Compensation Table
The table below summarizes the total compensation paid to or earned by our current Executive Officers for the fiscal years ended December 31, 2017, 2016 and 2015.
(1)
Mr. Orr was appointed President, CEO, Secretary, Treasurer, and Director of the Company on May 12, 2010. Subsequent to the year ended, on February 2, 2017, Mr. Orr resigned as president.
(2)
Amount represents the fair market value of 120,000 shares of common stock issued for services as an employee.
(3)
Amount represents the fair market value of 90,000 shares of common stock issued for services as an employee.
(4)
Amount represents the fair market value of 190,000 shares of common stock issued for services as an employee.
(5)
Mr. Stebbins was appointed President of the Company on February 2, 2017.
(6)
Amount represents the fair market value of 150,000 shares of common stock issued for services as an employee.
Termination of Employment
There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person’s employment with the Company or its subsidiaries, or any change in control of the Company, or a change in the person’s responsibilities following a change in control of the Company, except with respect to a breach of contract on the part of the Company.
Option Grants in Last Fiscal Year
During the years ended December 31, 2017 and 2016, we did not grant any options to our officers and directors.
Employment Agreements
The Company has an employment agreement with the CEO/President to perform duties and responsibilities as may be assigned. The base salary is in the amount of $75,000 per annum plus an annual bonus of 120,000 shares of common stock commencing on March 31, 2016 and ending February 28, 2017 with an option renewal on (March 1) thereafter.
The Company has an employment agreement with the President to perform duties and responsibilities as may be assigned. The base salary is in the amount of $125,000 per annum plus an one-time bonus of 250,000 shares of common stock commencing on October 1, 2016 and ending September 30, 2017 with an option renewal on September 15, 2017.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information, to the best of our knowledge, about the beneficial ownership of our common stock on April 5, 2018 relating to the beneficial ownership of our common stock by those persons known to beneficially own more than 5% of our capital stock and by our directors and executive officers. The percentage of beneficial ownership for the following table is based on 28,779,906 shares of common stock outstanding.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes shares of common stock that the stockholder has a right to acquire within 60 days after April 5, 2018 pursuant to options, warrants, conversion privileges or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options or warrants into shares of our common stock.
Security Ownership of Management, Directors and Certain Beneficial Owners
1.
As used in this table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to Common Stock (i.e., the power to dispose of, or to direct the disposition of, a security).
2.
The address of each Officer and Director is c/o Bollente Companies, Inc., 15720 N. Greenway Hayden Loop, Suite 2, Scottsdale, AZ 85260.
3.
Of the total shares of Common Stock owned or controlled by Mr. Stebbins, 350,000 shares are held by White Isle Holdings, Inc. and 15,000 shares are held by Core Financial Companies LLC.
Changes in Control
There are no arrangements, known to the Company, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
As of December 31, 2017, and 2016, the Company had two notes payable due to an officer and director of the Company in amount of $34,150 and $34,150, respectively. The notes have interest rate that range from 0%-8% with due dates ranging from on demand through April 2017.
As of December 31, 2017, and 2016, the Company had line of credit due to a Company controlled by an officer and director of the Company in an amount of $4,791 and $0, respectively. During the year ended December 31, 2017 and 2016 the Company received advances $22,500 and $36,000 and made payments of $17,709 and $52,000, respectively.
Promoters and Certain Control Persons
We did not have any promoters at any time since our inception in March 2008.
Director Independence
We currently do not have any independent directors, as the term “independent” is defined in Section 803A of the NYSE Amex LLC Company Guide. Since the OTCQB does not have rules regarding director independence, the Board makes its determination as to director independence based on the definition of “independence” as defined under the rules of the New York Stock Exchange (“NYSE”) and American Stock Exchange (“Amex”).
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
(1) AUDIT FEES
Audit and Non-Audit Fees
The aggregate fees billed for professional services rendered by Seale and Beers, CPAs, for the audit of our annual financial statements and review of the financial statements included in our Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal year 2016 was $19,100.
In October 2016, Seale and Beers, CPAs was dismissed as our Independent Registered Public Accountants and we engaged AMC Auditing to serve as the Registrant’s independent registered public accountants. The aggregate fees billed for professional services rendered by AMC Auditing for the audit of our annual financial statements and review of the financial statements included in our Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal year 2017 was $29,209.
(2) AUDIT-RELATED FEES
None.
(3) TAX FEES
See table above.
(4) ALL OTHER FEES
None.
(5) AUDIT COMMITTEE POLICIES AND PROCEDURES
We do not have an audit committee.
(6) If greater than 50 percent, disclose the percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees.
Not applicable.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
We have filed the following documents as part of this Annual Report on Form 10-K:
1.
The financial statements listed in the "Index to Consolidated Financial Statements" on page 34 are filed as part of this report.
2.
Financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.
Exhibits included or incorporated herein: See index to Exhibits.
Exhibit Index
(1)
Incorporated by reference from the Company’s Registration Statement on Form SB-2 filed on March 19, 2008.
(2)
Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed on November 24, 2010.
(3)
Incorporated by reference from the Company’s Current Report on Form 8-K filed on March 10, 2011.
(4)
Incorporated by reference from the Company’s Current Report on Form 8-K filed on May 6, 2011.
(5)
Incorporated by reference from the Company’s Annual Report on Form 10-K/A filed on November 2, 2016.
(6)
Incorporated by reference from the company’s Quarterly Report on Form 10-Q/A filed on November 3, 2016.
*Filed herewith.
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.
BOLLENTE COMPANIES INC.
By: /s/ Robertson J. Orr
Robertson James Orr, Chief Executive Officer
Date: April 16, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Robertson J. Orr
Chairman of the Board of Directors,
April 16, 2018
Robertson James Orr
Chief Executive Officer (Principal Executive Officer)
and Principal Financial Officer
/s/ Michael Stebbins
Director
April 16, 2018
Michael Stebbins
BOLLENTE COMPANIES INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bollente Companies Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Bollente Companies Inc. (the “Company”) as of December 31, 2017 and December 31, 2016 and the related statements of operations, stockholders’ (deficit), and cash flows for each of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has negative working capital at December 31, 2017, has incurred recurring losses and recurring negative cash flow from operating activities, and has an accumulated deficit which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ AMC Auditing
AMC Auditing
We have served as the Company’s auditor since 2015
Las Vegas, Nevada
April 13, 2018
BOLLENTE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(AUDITED)
See accompanying notes to consolidated financial statements.
BOLLENTE COMPANIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(AUDITED)
See accompanying notes to consolidated financial statements.
BOLLENTE COMPANIES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AUDITED)
See accompanying notes to consolidated financial statements.
BOLLENTE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AUDITED)
See accompanying notes to consolidated financial statements.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated on March 7, 2008 under the laws of the State of Nevada, as Alcantara Brands Corporation. On October 5, 2010, the Company amended its articles of incorporation and changed its name to Bollente Companies, Inc.
Nature of operations
The Company is involved in research and development of a new high quality, whole-house, electric tankless water heater that is more energy efficient than conventional products.
Principles of consolidation
The consolidated financial statements include the accounts of Bollente Companies, Inc. and its wholly owned subsidiaries. On May 16, 2010, the Company acquired 100% of the outstanding stock of Bollente, Inc. On the date of acquisition, Bollente, Inc. was 2.78% owned and controlled 100% by Robertson J. Orr, a majority shareholder and officer and director of Bollente Companies, Inc. and the acquisition was accounted for by means of a pooling of the entities from the date of inception of Bollente Companies, Inc. on March 7, 2008 because the entities were under common control. On November 21, 2013, the Company formed a wholly owned subsidiary, Nuvola, Inc. On August 13, 2015, the Company formed a wholly owned subsidiary, Bollente International, Inc. All significant inter-company transactions and balances have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ significantly from those estimates.
Cash and cash equivalents
For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. The carrying value of these investments approximates fair value.
Website
The Company capitalizes the costs associated with the development of the Company’s website pursuant to ASC Topic 350. Other costs related to the maintenance of the website are expensed as incurred. Amortization is provided over the estimated useful lives of 3 years using the straight-line method for financial statement purposes. The Company plans to commence amortization upon completion and release of the Company’s fully operational website.
Stock-based compensation
The Company records stock based compensation in accordance with the guidance in ASC Topic 505 and 718 which requires the Company to recognize expenses related to the fair value of its employee stock option awards. This eliminates accounting for share-based compensation transactions using intrinsic value and requires instead that such transactions be accounted for using a fair-value-based method. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from other than employees in accordance with FASB ASC 718-10 and the conclusions reached by the FASB ASC 505-50. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the provider of goods or services as defined by FASB ASC 505-50.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
Earnings per share
The Company follows ASC Topic 260 to account for the 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.
Inventory
Inventories are stated at the lower of cost (average cost) or market (net realizable value).
Revenue recognition
The Company records revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is probable. The Company records revenue from the sale of product upon shipment or delivery of the products to the customer. The Company also records the shipping income when the products are sent to the customer.
Recent Accounting Pronouncements
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations and includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. ASU 2016-08 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. ASU 2016-10 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts from Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments in this update affect the guidance in ASU 2014-09, which is not yet effective. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU 2016-12 do not change the core principle of the guidance in Topic 606, but instead affect only the narrow aspects noted in Topic 606. ASU 2016-12 is effective January 1, 2018 to be in alignment with the effective date of ASU 2014-09. Management evaluated ASU 2016-08, ASU2016-09, ASU 2016-10, and ASU 2016-12 and determined the adoption will not have a material impact on the Company’s consolidated financial statements.
In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments including requirements to measure most equity investments at fair value with changes in fair value recognized in net income, to perform a qualitative assessment of equity investments without readily determinable fair values, and to separately present financial assets and liabilities by measurement category and by type of financial asset on the balance sheet or the accompanying notes to the financial statements. ASU 2016-01 will be effective for the Company beginning on January 1, 2018 and will be applied by means of a cumulative effect adjustment to the balance sheet, except for effects related to equity securities without readily determinable values, which will be applied prospectively. Management has reviewed this pronouncement and have determined that it would not have a material impact to the financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires an entity to recognize long-term lease arrangements as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all long-term leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The amendments also require certain new quantitative and qualitative disclosures regarding leasing arrangements. ASU 2016-02 will be effective for the Company beginning on January 1, 2019. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. Management does not believe the adoption of ASU 2016-02 will have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument would not, in and of itself, be considered a termination of the derivative instrument, provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for the Company beginning on January 1, 2017. Early adoption is permitted, including in an interim period. Management evaluated ASU 2016-05 and determined the adoption of this new accounting standard will not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, which aims to reduce the diversity of practice in identifying embedded derivatives in debt instruments. ASU 2016-06 clarifies that the nature of an exercise contingency is not subject to the “clearly and closely” criteria for purposes of assessing whether the call or put option must be separated from the debt instrument and accounted for separately as a derivative. ASU 2016-06 will be effective for the Company beginning on January 1, 2017. Management evaluated ASU 2016-06 and determined the adoption of this this new accounting standard will not have a material impact on the Company’s consolidated financial statements effective January 1, 2017.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting and presentation of share-based payment transactions, including the accounting for related income taxes consequences and certain classifications within the statement of cash flows. ASU 2016-09 is effective for the Company beginning on January 1, 2017. Management evaluated the impact of adopting ASU 2016-09 and determined the new accounting standard will not have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. Management has reviewed this pronouncement and have determined that it would not have a material impact to the financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. Management has reviewed this pronouncement and have determined that it would not have a material impact to the financial statements.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt-Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
Fair value of financial instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of December 31, 2016. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values were assumed to approximate carrying values for cash and payables because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
Level 1: The preferred inputs to valuation efforts are “quoted prices in active markets for identical assets or liabilities,” with the caveat that the reporting entity must have access to that market. Information at this level is based on direct observations of transactions involving the same assets and liabilities, not assumptions, and thus offers superior reliability. However, relatively few items, especially physical assets, actually trade in active markets.
Level 2: FASB acknowledged that active markets for identical assets and liabilities are relatively uncommon and, even when they do exist, they may be too thin to provide reliable information. To deal with this shortage of direct data, the board provided a second level of inputs that can be applied in three situations.
Level 3: If inputs from levels 1 and 2 are not available, FASB acknowledges that fair value measures of many assets and liabilities are less precise. The board describes Level 3 inputs as “unobservable,” and limits their use by saying they “shall be used to measure fair value to the extent that observable inputs are not available.” This category allows “for situations in which there is little, if any, market activity for the asset or liability at the measurement date”. Earlier in the standard, FASB explains that “observable inputs” are gathered from sources other than the reporting company and that they are expected to reflect assumptions made by market participants.
NOTE 2 - 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. As a result, the Company incurred accumulated net losses for the year ended December 31, 2017 of ($23,997,135).
The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital from the sale of common stock and, ultimately, the achievement of significant operating revenues. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
NOTE 3 - INVENTORY
Inventories consist of the following at:
NOTE 4 - WEBSITE
Website consists of the following at:
Amortization expense from continuing operations for the years ended December 31, 2017 and 2016 was $1,628 and $19,533, respectively.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
NOTE 5 - RELATED PARTY
As of December 31, 2017, and 2016, the Company had two notes payable due to an officer and director of the Company in amount of $34,150 and $34,150, respectively. The notes have interest rate that range from 0%-8% with due dates ranging from on demand through April 2017.
As of December 31, 2017, and 2016, the Company had line of credit due to a Company controlled by a officer and director of the Company in amount of $4,791 and $0, respectively. During the year ended December 31, 2017 and 2016 the Company received advances $22,500 and $36,000 and made payments of $17,709 and $52,000, respectively.
NOTE 6 - NOTES PAYABLE
Notes payable consist of the following at:
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
Convertible notes payable, net of debt discount consist of the following:
As of September 30, 2016, the Company issued $110,000 of principal amount of 12% secured convertible promissory notes and warrants to purchase our common stock. The notes are due between May and August 2018 and bear interest of percent (12%). The notes are secured by all of the Company’s assets. The outstanding principal amounts and accrued but unpaid interest of the notes are convertible at any time at the option of the holder into common stock at a conversion price of $1.00 per share. The notes the were issued with warrants to purchase up to 110,000 shares of the Company’s common stock at an exercise price of $1.50 per share. The warrants are exercisable at any time. The warrants are exercisable until five (5) years after the closing date.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
On August 2, 2016, the above-mentioned note holders entered into a subordination agreement, wherein the note holders agreed that the security interest granted to the note holders is now subordinated and made subsequent to the security interest granted to Built-Right Holdings, LLC, as mentioned below. In order to induce the note holders to permit and allow their security interest to be subordinated, the Company reduced the note holders’ warrant exercise price of the note holders’ warrants from $1.50 to $1.00 as evidenced in the executed addendums to warrant agreements.
On August 2, 2016, the Company entered into a Loan Agreement and Security Agreement (“Loan Agreement”) with Built-Right Holdings, LLC, an Arizona limited liability company (“Lender”). The Manager of Built-Right Holdings, LLC is 4C Management, Inc., whose Vice President is Rod Cullum, a consultant and shareholder of the Company. Pursuant to the Loan Agreement, Lender agreed to lend the Company $1 Million (the “Loan”). The Loan, which is evidenced by the Company’s Convertible Promissory Note dated August 2, 2016 (the “Note”), bears interest at the rate of twelve percent (12%) per annum and is due August 1, 2018. The Note is secured by a first priority security interest on all of the Company’s assets. The outstanding principal amount and accrued but unpaid interest of the Loan is convertible at any time at the option of the Lender into common stock at a conversion price of $0.25 per share. As of the date of this filing $900,000 has been received.
As an inducement to Lender to provide the Loan, the Company issued to Lender warrants (the “Warrants”) to purchase 1,000,000 shares of the Company’s common stock (the “Shares”) at an exercise price of $1.00 per share. The Warrants are exercisable in whole or in part at any time or from time to time on or after August 2, 2016 and until August 1, 2021.
On May 2, 2017, the Company issued $100,000 of principal amount of 10% secured convertible promissory notes and 20,000 warrants to purchase common stock. The note is due on May 2, 2020 and are secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes are convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes the were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants are exercisable at any time. The warrants are exercisable until four (4) years after the closing date.
On May 2, 2017, the Company issued $50,000 of principal amount of 10% secured convertible promissory notes and 10,000 warrants to purchase common stock. The note is due on May 2, 2020 and are secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes are convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes the were issued with warrants to purchase up to 10,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants are exercisable at any time. The warrants are exercisable until four (4) years after the closing date.
On May 22, 2017, the Company issued $5,000 of principal amount of 10% secured convertible promissory notes and 1,000 warrants to purchase common stock. The note is due on May 22, 2020 and are secured by the Company’s accounts receivable and inventory. The outstanding principal amounts and accrued but unpaid interest of the notes are convertible at any time at the option of the holder into common stock at a conversion price of $0.50 per share. The notes the were issued with warrants to purchase up to 1,000 shares of the Company’s common stock at an exercise price of $1.00 per share. The warrants are exercisable at any time. The warrants are exercisable until four (4) years after the closing date.
Interest expense including amortization of the associated debt discount for the ended December 31, 2017 and 2016 was $467,164 and $383,641, respectively.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
NOTE 7 - ROYALTY PAYMENTS
The Company has agreed to allow accredited investors the ability to receive a royalty on products sold in an effort to fund its distribution and marketing advances internationally by purchasing units. Each unit represents 0.625% royalty interest in the Gross Margin of product sold by Bollente International, Inc., costing $25,000 per unit.
During the year ended December 31, 2017, the Company paid $11,400 in dividends related to royalty agreements.
On October 18, 2017, the Company entered into royalty termination agreements whereas the Company converted all royalties interest into a total of 1,400,000 shares of common stock valued at $700,000. As of December 31, 2017, the Company has issued 600,000 shares of common stock and has recorded the balance of the common stock due to stock payable.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Office Lease
In January 2015, the Company executed a sublease agreement with Perigon Companies, LLC, a related party. The lease term is one year at a rate of $4,000 per month with an option to continue on a month to month basis. The Company paid a refundable security deposit of $1,500.
In January 2015, the Company executed a sublease agreement with Templar Asset Group, LLC, a related party. The lease term is one year at a rate of $2,800 per month with an option to continue on a month to month basis. The Company was not required to pay a security deposit.
Rent expense for the year ended December 31, 2017 and 2016 was $84,000 and $62,000, respectively.
Executive Employment Agreements
The Company has an employment agreement with the CEO/President to perform duties and responsibilities as may be assigned. The base salary is in the amount of $75,000 per annum plus an annual bonus of 120,000 shares of common stock commencing on March 31, 2016 and ending February 28, 2017 with an option renewal on (March 1) thereafter.
The Company has an employment agreement with the President to perform duties and responsibilities as may be assigned. The base salary is in the amount of $125,000 per annum plus a one-time bonus of 250,000 shares of common stock commencing on October 1, 2016 and ending September 30, 2017 with an option renewal on September 15, 2017.
NOTE 9 - STOCK WARRANTS
As of December 31, 2016, the Company issued warrants to purchase 160,000 shares of the Company’s common stock at an exercise price of $1.50 per share to three accredited investors in connection with 12% secured convertible promissory note financing. The warrants are exercisable at any time until five (5) years after the closing date. On August 2, 2016, the Company reduced the warrant exercise price of the warrant holders’ warrants from $1.50 to $1.00 per share.
On August 2, 2016, The Company issued warrants to purchase 1,000,000 shares of the Company’s common stock at an exercise price of $1.00 per share to one accredited investor in connection with loan agreement and security agreement dated August 2, 2016. The warrants are exercisable in whole or in part at any time or from time to time on or after August 2, 2016 and until August 1, 2021.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
As of December 31, 2016, we issued 77,312 warrants to purchase 77,312 shares of the Company’s common stock at an exercise price of $1.00 per share associated with conversion of the Company’s 6% Series A Convertible Preferred Stock (“Preferred Stock”). The warrants are exercisable at any time until three (3) years after the closing date.
As of December 31, 2017, we issued 236,000 warrants for cash to purchase 236,000 shares of the Company’s common stock at an exercise price of $1.00 per share associated with. The warrants are exercisable at any time until three (3) years after the closing date.
Summary of warrant activity for the two years ended December 31, 2017 and 2016 is presented below:
As of December 31, 2017, there are warrants exercisable to purchase 1,473,312 shares of common stock in the Company.
NOTE 10 - INCOME TAXES
For the year ended December 31, 2017, the cumulative net operating loss carry-forward from continuing operations is approximately $23,997,135 at December 31, 2017 and will expire beginning in the year 2031.
The cumulative tax effect at the expected rate of 34% of significant items comprising our net deferred tax amount is as follows as of December 31, 2017 and 2016:
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carry forwards of approximately $23,997,135 for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carry forwards may be limited as to use in future years.
BOLLENTE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
(AUDITED)
NOTE 11 - STOCKHOLDERS’ EQUITY
The Company is authorized to issue 10,000,000 shares of it $0.001 par value preferred stock and 100,000,000 shares of its $0.001 par value common stock.
Each share of Preferred Stock is convertible, at any time, at the option of the holder, is convertible 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 Company’s common stock and warrants after three years from the original issue date of the Preferred Stock.
During the year ended December 31, 2016, the Company issued 1,111,100 shares of common stock for cash received of $625,070, of which $120,000 of the funds were received during the year ended December 31, 2015 and recorded as stock payable.
During the year ended December 31, 2016, the Company issued 77,312 units consisting of shares of preferred stock and one warrant. During the year shareholder converted 16,312 shares of preferred stock into 81,560 shares of common stock.
During the year ended December 31, 2016, the Company issued 2,974,500 shares of common stock for services totaling $1,392,101. Of which $590,000 of the services were received during the year ended December 31, 2015 and recorded as stock payable.
During the year ended December 31, 2016, 2016, the Company issued 45,000 shares of common stock as part of a loan. The fair value of the shares was $45,000.
During the year ended December 31, 2016 the Company agreed to issue 110,000 shares to three lenders to agree to subordinate their debt. The shares were valued at $110,000.
During the year ended December 31, 2016, the Company issued 50,000 shares of common stock as part of a loan. The fair value of the shares was $50,000.
During the year ended December 31, 2017, the Company issued 2,190,000 shares of common stock for cash received of $876,758, of which $120,000 of the funds were received during the year ended December 31, 2016 and recorded as stock payable.
During the year ended December 31, 2017, the Company received $110,780 cash for the purchase of common stock. As of December 31, 2017, no shares have been issued and the amount is recorded as stock payable.
During the year ended December 31, 2017, the Company issued 25,000 units consisting of shares of preferred stock and one warrant for $62,500 cash. During the year ended December 31, 2017, the Company a shareholder converted 10,000 shares of preferred stock into 50,000 shares of the Company’s common stock and 10,000 warrants.
During the year ended December 31, 2017, the Company repurchased and retired 300,000 shares of common stock for $84,000.
During the year ended December 31, 2017, the Company issued 1,362,500 shares of common stock with a fair value of $473,181 for services, of which $2,000 of the services were received during the year ended December 31, 2016 and recorded as stock payable.
NOTE 12 - SUBSEQUENT EVENT
Subsequent to year end, the Company issued 1,482,560 shares of common stock for cash.
Subsequent to year end, the Company issued 73,500 shares of common stock for services.
Subsequent to year end, the Company issued 550,000 shares of common stock for the termination of certain Royalty Agreements.