Eldorado Artesian Springs (ELDO) 10-Q 2009 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 000-18235

ELDORADO ARTESIAN SPRINGS, INC.

(Exact name of registrant as specified in its charter)

Colorado	84-0907853
(State or Other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)
1783 Dogwood Street
Louisville, Colorado	80027
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code: (303) 499-1316

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On November 13, 2008, there were 6,699,481 shares of the registrant’s common stock, $.001 par value, outstanding.

ELDORADO ARTESIAN SPRINGS, INC.
FORM 10-Q

INDEX

	Page
Part I — Financial Information
Item 1 — Financial Statements
Balance Sheets as of September 30, 2008 (Unaudited) and March 31, 2008		2
Unaudited Statements of Operations for the Three and Six Months Ended September 30, 2008 and September 30, 2007		3
Unaudited Statement of Changes in Stockholders’ Equity for the Six Months Ended September 30, 2008		4
Unaudited Statements of Cash Flows for the Six Months Ended September 30, 2008 and September 30, 2007		5
Notes to Unaudited Financial Statements		6
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3 — Quantitative and Qualitative Disclosures About Market Risk		16
Item 4(T) — Controls and Procedures		16
Part II — Other Information
Item 1 — Legal Proceedings		18
Item 1A — Risk Factors		18
Item 2 — Unregistered Sales of Equity Securities and Use and Proceeds		18
Item 3 — Defaults Upon Senior Securities		18
Item 4 — Submission of Matters to a Vote of Security Holders		18
Item 5 — Other Information		19
Item 6 — Exhibits		19
Signatures		20
Exhibit Index		21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

ITEM 1. FINANCIAL STATEMENTS

ELDORADO ARTESIAN SPRINGS, INC.

Balance Sheets

	September 30,			March 31,
	2008			2008
	(Unaudited)
Assets
Current assets
Cash	$	241,949		$	389,440
Accounts receivable
Trade, net of allowance of $80,000		1,202,837			893,660
Inventories		507,910			437,171
Prepaid expenses and other		49,102			107,144
Deferred tax asset		29,648			29,648
Total current assets		2,031,446			1,857,063
Non-current assets
Property, plant and equipment — net		4,437,420			4,177,350
Notes receivable — related party		330,208			318,138
Water rights		432,871			432,871
Deposits		140,447			135,785
Long-term deferred tax asset — net		163,646			35,944
Other — net		63,361			72,878
Total non-current assets		5,567,953			5,172,966
Total	$	7,599,399		$	7,030,029
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	791,358		$	417,929
Accrued expenses		235,943			318,352
Customer deposits		87,310			80,530
Line of credit		215,000			—
Current portion of capital lease obligations		79,228			—
Current portion of long-term debt		82,938			56,748
Total current liabilities		1,491,777			873,559
Non-current liabilities
Capital lease obligations, less current portion		228,441			—
Long-term debt, less current portion		4,347,675			4,403,789
Deferred gain on the sale of real estate		178,822			178,822
Total non-current liabilities		4,754,938			4,582,611
Total liabilities		6,246,715			5,456,170
Commitments and contingencies
Stockholders’ equity
Preferred stock, par value $.001 per share; 10,000,000 shares authorized; 0 issued and outstanding		—			—
Common stock, par value $.001 per share; 50,000,000 shares authorized; 6,699,481 (2008) and 6,426,464 (2007) issued and outstanding		6,699			6,426
Additional paid-in capital		1,652,786			1,634,159
Accumulated deficit		(306,801	)		(66,726	)
		1,352,684			1,573,859
Total	$	7,599,399		$	7,030,029

See notes to financial statements.

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ELDORADO ARTESIAN SPRINGS, INC.

Unaudited Statements of Operations

	For the Three Months Ended						For the Six Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenue
Water and related	$	2,734,821		$	2,311,041		$	4,909,871		$	4,429,864
Resort operations		83,552			92,395			125,840			138,598
Net revenue		2,818,373			2,403,436			5,035,711			4,568,462
Cost of goods sold		817,616			585,836			1,339,312			1,032,083
Gross profit		2,000,757			1,817,600			3,696,399			3,536,379
Operating expenses
Salaries and related		1,034,506			946,127			2,005,828			1,845,908
Administrative and general		470,193			466,802			976,589			896,743
Delivery		262,771			213,765			501,336			413,736
Advertising and promotions		84,906			90,838			181,524			160,927
Depreciation and amortization		122,353			107,665			238,921			211,986
		1,974,729			1,825,197			3,904,198			3,529,300
Operating income (loss)		26,028			(7,597	)		(207,799	)		7,079
Other income (expense)
Interest income		15,166			15,519			21,909			30,746
Interest expense		(92,429	)		(87,944	)		(181,885	)		(172,863	)
		(77,263	)		(72,425	)		(159,976	)		(142,117	)
Net loss before provision for income taxes		(51,235	)		(80,022	)		(367,775	)		(135,038	)
Income tax benefit		17,700			19,000			127,700			25,000
Net loss	$	(33,535	)	$	(61,022	)	$	(240,075	)	$	(110,038	)
Basic loss per common share	$	(0.01	)	$	(0.01	)	$	(0.04	)	$	(0.02	)
Diluted loss per common share	$	(0.01	)	$	(0.01	)	$	(0.04	)	$	(0.02	)
Weighted average number of common shares outstanding — basic and dilutive		6,696,914			6,109,207			6,638,468			6,070,936

See notes to financial statements.

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ELDORADO ARTESIAN SPRINGS, INC.

Unaudited Statement of Changes in Stockholders’ Equity

For the Six Months Ended September 30, 2008

					Additional						Total
	Common Stock				Paid-in			Accumulated			Stockholders’
	Shares		Amount		Capital			Deficit			Equity
Balance — March 31, 2008		6,426,464	$	6,426	$	1,634,159		$	(66,726	)	$	1,573,859
Net issuance of shares due to the exercise of options		270,017		270		(270	)		—			—
Stock options exercised		3,000		3		2,622			—			2,625
Stock options issued to employees		—		—		16,275			—			16,275
Net loss		—		—		—			(240,075	)		(240,075	)
Balance — September 30, 2008		6,699,481	$	6,699	$	1,652,786		$	(306,801	)	$	1,352,684

See notes to financial statements.

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ELDORADO ARTESIAN SPRINGS, INC.

Unaudited Statements of Cash Flows

	Six Months Ended
	September 30,
	2008			2007
Cash flows from operating activities
Net loss	$	(240,075	)	$	(110,038	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Depreciation and amortization		238,921			211,986
Deferred income tax benefit		(127,700	)		(25,000	)
Stock based compensation		16,275			64,811
Accrued interest on related party note receivable		(12,070	)		(22,486	)
Income tax payable		—			(99,750	)
Changes in certain assets and liabilities
Accounts receivable		(309,177	)		(128,681	)
Inventories		(70,739	)		(83,579	)
Prepaid expenses and other		67,557			(13,959	)
Deposits		(4,662	)		(35,396	)
Accounts payable		373,429			274,864
Accrued expenses		(82,409	)		(49,152	)
Customer deposits		6,780			19,224
Net cash (used in) provided by operating activities		(143,870	)		2,844
Cash flows from investing activities
Purchase of water rights		—			(87,500	)
Purchases of property and equipment		(147,114	)		(167,251	)
Net cash flows used in investing activities		(147,114	)		(254,751	)
Cash flows from financing activities
Payments on long-term obligations		(74,132	)		(34,778	)
Proceeds on line of credit		215,000			—
Proceeds from exercise of stock options		2,625			7,250
Net cash flows provided by (used in) financing activities		143,493			(27,528	)
Net decrease increase in cash		(147,491	)		(279,435	)
Cash — beginning of period		389,440			607,759
Cash — end of period	$	241,949		$	328,324

Supplemental disclosures of cash flow information:

Cash paid for interest for the six months ended September 30, 2008 and September 30, 2007 was $181,885 and $172,863, respectively.

Cash paid for income taxes for the six months ended September 30, 2008 and September 30, 2007 was $0 and $99,750, respectively.

During the six months ended September 30, 2008, $351,877 in equipment was acquired through capital leases.

See notes to the financial statements.

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ELDORADO ARTESIAN SPRINGS, INC.

Notes to Unaudited Financial Statements

Note 1 — Summary of Significant Accounting Policies

Interim Unaudited Financial Statements

The interim financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The results of operations for the six months ended September 30, 2008 and 2007 are not necessarily indicative of the results of the entire year. The financial statements included herein are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally made in the registrant’s annual report on Form 10-KSB. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Form 10-KSB for the year ended March 31, 2008.

Note 2 — Stockholders’ Equity

Stock Option Expenses

The Company accounts for employee stock-based compensation under the provisions of the Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123(R)”) which requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their consolidated financial statements. SFAS 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R) to its valuation methods. The Company estimates the fair value of stock option awards on the date of grant using the Black-Scholes options pricing model. Stock-based compensation expense recognized under SFAS 123(R) for the six months ended September 30, 2008 was $16,275, which consisted of compensation expense related to employee stock options based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.

Valuation and Expense Information under SFAS 123(R)

The fair value of each share option award is estimated on the date of grant using the Black-Scholes pricing model based on assumptions noted in the following table. The Company’s employee stock options have various restrictions including vesting provision and restrictions on transfers and hedging, among others, and are often exercised prior to their contractual maturity. Expected volatilities used in the fair value estimate are based on historical volatility of the Company’s stock. The Company uses historical data to estimate share option exercises, expected term and employee departure behavior used in the Black-Scholes pricing model. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.

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On February 2, 2007, the Company granted 100,000 options to one of its directors at fair value. These options vest over 4 years and expire in 5 years. These options were determined to have a value of $78,297 based on the Black-Scholes option-pricing model and an estimated forfeiture rate of 23%. The value of the option will be expensed over the term of the vesting schedule. For the six months ended September 30, 2008, $9,786 was recorded as compensation expense. $48,939 remains to be expensed over the remaining vesting period. The following is a summary of the assumptions used and the weighted average grant-date fair value of these stock option grants.

	Six Months Ended
	September 30, 2008
Risk Free Interest Rate	4.65%
Expected life (years)	5
Expected dividend yield	0%
Annualized volatility	88.5%
Estimated fair value of options granted	$1.01 per share

On April 17, 2008, the Company granted 50,000 options to a certain employee at fair value. These options will vest over 5 years and will expire in 10 years. These options were determined to have a value of $62,965 based upon the Black-Scholes option-pricing model and an estimated forfeiture rate of 23%. The value of the option will be expensed over the term of the vesting schedule. For the six months ended September 30, 2008, $3,147 was recorded as compensation expense. $59,818 remains to be expensed over the remaining vesting period. The following is a summary of the assumptions used and the weighted average grant-date fair value of these stock option grants.

	Six Months Ended
	September 30, 2008
Risk Free Interest Rate	3.75%
Expected life (years)	7.5
Expected dividend yield	0%
Annualized volatility	118.27%
Estimated fair value of options granted	$1.26 per share

Warrants

On January 24, 2008, the Company retained Pfeiffer High Investor Relations, Inc. (“PHIR”) to develop and implement a comprehensive investor relations program. For providing services, PHIR will be paid a monthly retainer fee of $5,000. In addition, the Company granted to PHIR principals, John Pfeiffer and Geoff High, a total of 20,000 warrants to purchase 20,000 shares of the Company’s common stock at an exercise price of $1.80. The warrants vest one-third on the date of the agreement, one-third at the six-month anniversary and one-third at 12-month anniversary. In the event of termination of the agreement, warrants will vest on a pro-rata basis for the period in which the agreement was in effect. All warrants have a four-year term, have cashless exercise provisions and piggyback registration rights. The warrants were determined to have a value of $26,750 based upon the Black-Scholes option-pricing model, which will be expensed in full by March, 31, 2009. As of September 30, 2008, $3,342 was recorded as compensation expense. As of September 30, 2008, 13,333 of the warrants are fully vested and the remaining 6,667 warrants will vest by January 2009. The warrants have a remaining life of 3.25 years.

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Note 3 — Related Party Transactions

During the year ended March 31, 2002, the Company entered into an agreement to sell certain parcels of real estate to two senior executives of the Company, Messrs. Larson and Sipple, for a total of $900,000. The Company received cash from the sale of $500,000. The Company also provided 60 month carry back financing of $400,000 with interest at 7.5% that has been recorded as notes receivable related party and includes $130,208 of accrued interest at September 30, 2008. The Company recognized a gain on the real estate sales of $519,937 and deferred an additional $357,544 of gain as required by the terms of the carry back note. The collateral on the notes receivable included a junior deed of trust on the properties and shares of the Company’s common stock. During the year ended March 31, 2003, the Board of Directors determined that 250,000 shares of common stock of the Company was sufficient collateral and released the junior deed of trust on the properties. The accumulated interest and outstanding principal were due upon maturity in August 2007. As of September 30, 2008, the note due from Mr. Larson has not yet been paid and the outstanding principal and interest due is $330,208 as reflected in the Company’s financial statements as “Notes receivable — related party.”

On December 7, 2007, Mr. Sipple paid the entire balance due to the Company in the amount of $310,311. In the third quarter of fiscal year 2008, $178,722 of the deferred gain was recognized as the $200,000 note receivable plus interest from Mr. Sipple was paid.

Note 4 — Contingencies

Water Rights Contingency

When the Company purchased mountain property in 1983, included in the purchase price were certain water rights for Eldorado Springs. These water rights are relatively junior to other water rights in the South Boulder Creek and South Platte Basins. The Company has the right to beneficially use all of the water that emanates from the springs in accordance with its water rights unless a more senior rights holder makes a call on the water. A senior call might occur in the winter or when runoff is low and insufficient to meet the water needs of more senior water users below Eldorado Springs. Because of Colorado’s drought conditions, the possibility of a senior call has increased. For many years, the Company had enrolled its water rights in a substitute supply plan approved by the Colorado State Engineer, which serves to protect the Company’s water supply in the event of a senior call.

On August 31, 2006, the Company entered into a Water Lease Agreement with Denver Wells, LLC, a Colorado limited liability company. Under the terms of the agreement, Eldorado is leasing 100 acre feet annually of nontributary ground water from Denver Wells, LLC for an initial term of two (2) years that commenced on August 31, 2006. The cost of the lease was $60,000 in year one and $65,000 in year two. Denver Wells, LLC also agreed to lease to the Company up to 200 additional acre feet of water per year, if needed, for an additional $600 per acre foot in year one and $650 per acre foot in year two. The Company also has the option to purchase 300 acre feet per year of water from the existing and operating well or wells under the terms of the agreement. If the Company exercises its purchase option, the purchase price will be $10,000 per acre foot if purchased before December 31, 2006. The purchase price increases by .5% in each month thereafter. With the execution of the lease, the Company paid a $90,000 earnest money deposit. The deposit is nonrefundable unless Denver Wells, LLC is unable to obtain a change in the use of the water adjudicated to include augmentation. In the event that the Company executes the option to purchase the water, the deposit will be applied to the purchase price. The first lease payment was made on September 29, 2006 and the second lease payment was made on September 26, 2007.

8

On July 28, 2008, the Company entered into a First Amendment dated July 15, 2008 to the Water Lease Agreement with Denver Wells, LLC, to extend the original agreement for an additional two (2) years, commencing October 1, 2008 and continuing through September 20, 2010. The cost of the lease is $70,000 in year three and $75,000 in year four. Pursuant to the First Amendment, Denver Wells, LLC also agreed to lease to the Company up to 200 additional acre feet of water per year, if needed, for an additional $700 per acre foot in year three and $750 per acre foot in year four. The third lease payment was made on October 1, 2008 and the fourth lease payment will be made on or about September 30, 2009.

The Company is also pursuing other possible supply sources for use in augmenting the stream flows as a result of the Company’s withdrawals of water. There is no assurance that any of the renewal applications, Colorado Water Court applications for permanent augmentation, or any other alternative arrangements being sought by the Company will be approved. Denial of the Company’s applications for substitute or for a permanent augmentation plan coupled with a senior call on the Company’s water will likely result in a significant financial impact on the Company. The Company will also incur significant expenses in connection with its efforts to obtain approval of these plans. In the event of the approval of a permanent augmentation plan, the Company will also incur additional expenses associated with its required purchase of additional water rights.

Note 5 — Commitments

Line of Credit

The Company has a bank line of credit that provides for borrowings of up to $300,000 subject to certain borrowing base requirements and requires monthly interest payments calculated at the Prime Rate plus 0.5% (5.5% at September 30, 2008) with all unpaid principal and interest due February 28, 2009. The line requires the Company to comply with reporting and financial covenants and is cross-collateralized by accounts receivable, inventory and defined real property and guaranteed by three stockholders and officers of the Company. The balance on the line of credit was $215,000 as of September 30, 2008.

Note Payable

On October 11, 2007, the Company entered into a commercial loan agreement with American National Bank. Under the loan agreement, the Company received proceeds of $3,000,000 from the bank pursuant to a promissory note. The terms of the note include a fixed interest rate of 7.5% for five years with monthly payments of approximately $22,300. A single “balloon payment” of the entire unpaid balance of principal and interest will be due on October 11, 2012. Under the loan agreement, the Company granted the bank security interests in the leases and rents on the property in Louisville, Colorado as well as a deed of trust for the same property in Louisville, Colorado.

The Company used the proceeds to pay off an existing real estate loan of approximately $2,500,000 for the corporate headquarters and bottling facility located in Louisville, Colorado. In addition, the Company will use the additional proceeds of approximately $500,000 to purchase additional water rights and purchase additional equipment.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This filing contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include the plans and objectives of management for future operations, including plans and objectives relating to services offered by and future economic performance of the Company.

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

Overview

Eldorado Artesian Springs, Inc. is a Colorado based company that is primarily involved in the bottling and marketing of natural artesian spring water. Currently, Eldorado’s operations consist of its home/commercial delivery business (five and three gallon bottles) and the PET (polyethylene terephtalate, a premium clear plastic container) consumer business. Over the years, the Company has added additional products to its service and delivery operation in order to handle competition from other companies. The Company began offering filtration products in July 2003 and coffee products and coffee equipment in October 2005.

The Company’s growing product portfolio also includes the nation’s onlyOrganic Vitamin Charged Spring Water, which was recently introduced and has generated strong market acceptance. All of the products that the Company provides have been easily integrated into the current service and delivery operations. During the summer months, the Company also owns and operates an outdoor swimming pool in Eldorado Springs, Colorado.

Results of Operations

Performance Overview — Recent Trends

Revenues for the three months ended September 30, 2008 increased 17.3% to $2,818,373 from $2,403,436 for the same period ended September 30, 2007. Revenues for the six months ended September 30, 2008 increased 10.2% to $5,035,711 compared to $4,568,462 during the same period ended September 30, 2007. TheOrganic Vitamin Charged Spring Wateras well as a new purified drinking water have been the leading factors in the growth of the revenues for the three and six months ended September 30, 2008.

Recently, we recognized the opportunity to introduce a new product line to the current natural spring water line. Enhanced and flavored waters have experienced a significant growth over the recent years and now maintain an 18% market share of the premium water category. In order to compete in this market, the Company introduced itsOrganic Vitamin Charged Spring Waterin September 2007. The Company developed six flavors for introduction which included Pink Passion Guava, Sicilian Orange, Strawberry Blueberry, Black Raspberry, Dragonfruit and Peach Mango and began delivery to new and existing customers utilizing our current delivery system. The products have also been introduced on a regional level to Albertson’s, Vitamin Cottage, Kroger’s and a major natural foods supermarket. Additionally, the Company began shipments to a regional distributor on the west coast which now makes the product available in over 2,000 locations in that area.

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Also contributing to the growth in revenues, the Company began packaging a purified drinking water for the largest retailer in the country in July 2008. Shipments to this retailer has increased revenues for the Company while also opening up the opportunity to offer the same product to other customers by utilizing filtration equipment that was recently installed.

General economic trends have increased the costs associated with raw materials and the fuel costs associated with the operation of the route vehicles. Additionally, costs associated with the maintenance of the facility, insurance, property taxes and advertising and promotional expenses have increased the total operating expenses compared to the previous year.

The Company will continue to look for additional ways to increase the sales of our core products while also introducing the newOrganic Vitamin Charged Spring Waterline to our existing distribution channels and expanding into new territories.

Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30, 2007

Revenues

Sales for the three months ended September 30, 2008 were $2,818,373 compared to $2,403,436 for the same period ended September 30, 2007, an increase of 17.3%. Sales for the six months ended September 30, 2008 were $5,035,711 compared to $4,568,462 for the same period ended September 30, 2007, an increase of 10.2%.

Sales of the products used in the delivery to homes and offices, which include 5 and 3 gallons bottles as well as the dispenser units, were 57.1% of sales and increased slightly from $2,867,730 for the six months ended September 30, 2007 to $2,872,824 for the six months ended September 30, 2008, an increase of $5,097 or less than 1%. Total units of 5 and 3 gallon products decreased less than 1% from the six months ended September 30, 2007 to the six months ended September 30, 2008, while the average selling price increased approximately 2.1%. The Company increased the price of the 5 and 3 gallon bottles in March 2008 which resulted in an increase of the average selling price by approximately 2.8%.

In July 2008, the Company began shipments of a private label purified drinking water to the largest retailer in the country. The Company is one of the suppliers for their distribution center in Colorado that services approximately 90 locations. Revenues for the purified drinking water were approximately $220,000 for the three months ended September 30, 2008. The Company expects to continue to provide private label purified drinking water for this retailer.

In September 2007, the Company introduced anOrganic Vitamin Charged Spring Waterfor distribution off of existing route vehicles as well as through major distributors. The product is now available throughout Colorado and in portions of surrounding states and through distributors along the west coast. The line ofOrganic Vitamin Charged Spring Wateris available in Albertson’s, Vitamin Cottage, K&G (Jenny’s Markets), Kroger’s (King Soopers and City Markets) and one of the nation’s premier health food supermarkets. Additionally, the product is available to more than 2,000 other retail outlets, convenience stores and on-premise locations serviced by UNFI and US Food Service distributors. Gross revenues for theOrganic Vitamin Charged Spring Waterincreased over 280% to $256,457 for the three months ended September 30, 2008 compared to the prior period ended June 30, 2008.

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Net revenues, after discounts to retailers, for theOrganic Vitamin Charged Spring Waterwere $197,620 for the three months ended September 30, 2008 compared to $49,092 for the three months ended June 30, 2008, an increase of over 300%. The Company is offering purchasing incentives to the retail buyers including discounts and buy one get one offers, as well as supporting in store sampling. In the stores in which the Company has been able to utilize sampling, sales figures show increased market acceptance by the increased ordering schedule for additional products. Total unit sales for theOrganic Vitamin Charged Spring Waterincreased over 200% for the three months ended September 30, 2008 compared to the previous three months ended June 30, 2008. The Company has been able to add additional distributors and the result has been an increase in shipments quarter over quarter.

Sales of the Company’s branded PET products (.5 liter to 1.5 liter sizes) decreased from $968,324 for the six months ended September 30, 2007 to $911,587 for the six months ended September 30, 2008, a decrease of 5.8%. Sales of the Company’s branded PET products represented 16.9% of sales for the six months ended September 30, 2008 and 21.3% of sales for the six months ended September 30, 2007. The Company offers a private label PET product which has contributed in the decreased of branded PET products while still contributing to the revenues for the private label PET products.

Sales for the private label PET products decreased slightly from $199,043 for the six months ended September 30, 2007 to $192,827 for the six months ended September 30, 2008, a decrease of 3.1% compared to the same period ended September 30, 2007. The Company is able to offer the private label products at a premium to customers wishing to utilize the product in their marketing campaigns. The Company stopped supplying private label PET products for Wild Oats Markets as a result of the purchase of that retail chain by Whole Foods Market who already had a supplier for their private label products. The average selling price for the private label PET products is about 24.8% higher than the Company’s branded PET products.

The Company’s branded gallon size products were 8.6% of sales or $430,721 for the six months ended September 30, 2008 compared to $423,477 for the six months ended September 30, 2007, an increase of 1.7%.While the total unit volume for the one gallon products has increased 3.3% for the six months ended September 30, 2008 compared to the same period ended September 30, 2007, the average selling price per unit has increased by less than 1%.

Sales generated from the filter division increased from $42,228 for the six months ended September 30, 2007 to $53,529 for the six months ended September 30, 2008, an increase of 26.8%. Coffee and coffee equipment for service from our existing route vehicle decreased slightly from $82,175 for the six months ended September 30, 2007 to $79,728 for the six months ended September 30, 2008. The Company has experienced competition from other water companies that have now begun offering similar services.

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Gross Profit/Cost of Goods Sold

Cost of goods sold for the six months ended September 30, 2008 were $1,339,312, or 26.6% of sales, compared to $1,032,083 or 22.6% of sales for the same period ended September 30, 2007. Gross profit increased from $3,536,379 or 77.4% of sales for the six months ended September 30, 2007 to $3,696,399 or 73.4% of sales for the six months ended September 30, 2008. Overall, gross profit increased 4.5% for the six months ended September 30, 2008. Cost of goods sold for the three months ended September 30, 2008 were $817,616, or 29.0% of sales, compared to $585,836 or 24.4% of sales for the same period ended September 30, 2007. Gross profit increased from $1,817,600 or 75.6% of sales for the three months ended September 30, 2007 to $2,000,757 or 71.0% of sales for the three months ended September 30, 2008. Gross profit increased 10.1% for the three months ended September 30, 2008 compared to the same period ended September 30, 2007. The introduction of the organic vitamin charged spring water has resulted in an increase in overall cost of goods sold as a percentage of revenue due to the overall higher cost of goods sold for the product. Additionally, recent economic conditions have increased the cost of bottles and packaging for products and this has resulted in a decrease in gross profit as a percent of sales.

Operating Expenses

Total operating expenses increased to $3,904,198 for the six months ended September 30, 2008 from $3,529,300 for the same period ended September 30, 2007, an increase of $374,898 or 10.6%. Total operating expenses increased to $1,974,729 for the three months ended September 30, 2008 from $1,825,197 for the three months ended September 30, 2007, an increase of $149,532 or 8.2%.

Salaries and related expenses increased to $2,005,828 for the six months ended September 30, 2008, or 39.8% of sales, from $1,845,908 for the six months ended September 30, 2007, or 40.4% of sales. Salaries and related expenses increased to $1,034,506 for the three months ended September 30, 2008, or 36.7% of sales, from $946,127 for the three months ended September 30, 2007, or 39.4% of sales. The Company recognized the largest increase in the wages for the production of the smaller packaged products as well as for the water hauling wages in order to augment overall water usage. The Company has maintained a stable workforce and continues to compensate accordingly, resulting in increased wages in order to attract and retain stable employees.

Administrative and general expenses increased from $896,743 for the six months ended September 30, 2007 to $976,589 for the six months ended September 30, 2008, an increase of 8.9%. Administrative and general expenses increased from $466,802 for the three months ended September 30, 2007 to $470,193 for the three months ended September 30, 2008, an increase of less than 1%. The Company experienced increased expenses related to insurance, utilities and professional fees for an investor relations firm to implement a comprehensive investor relations program.

Delivery expenses increased from $413,736 for the six months ended September 30, 2007 to $501,336 for the six months ended September 30, 2008, an increase of 21.2%. Delivery expenses increased from $213,765 for the three months ended September 30, 2007 to $262,771 for the three months ended September 30, 2008, an increase of 22.9%. The rising costs of fuel resulted in an increase of 37.9% of fuel costs as compared to the previous six months. There has also been an increase in vehicle leased equipment costs compared to the previous quarter as older leased vehicles are replaced. The Company instituted a delivery surcharge to help offset some of these increased costs.

Advertising and promotion expenses increased 12.8% for the six months ended September 30, 2008 compared to the same period ended September 30, 2007. Advertising and promotion expenses decreased 6.5% for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. Advertising and promotion expenses were 3.6% of sales for the six months ended September 30, 2008 compared to 3.5% for the same period ended September 30, 2007. Advertising and promotion expenses were 3.0% of sales for the three months ended September 30, 2008 compared to 3.8% of sales for the three months ended September 30, 2007. The increase of advertising and promotion expenses for the six months ended September 30, 2008 is due to the launch of the new organic vitamin charged spring water. The Company will incur additional costs as we promote the product at events and through major retail chains. The Company recognizes certain advertising and promotional expenses for products or services that could have been purchased at a fair market value regardless of whether or not the vendor had purchased the product.

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Depreciation and amortization increased 12.7% for the six months ended September 30, 2008, as compared to the six months ended September 30, 2007. Depreciation and amortization increased 13.6% for the three months ended September 30, 2008, as compared to the three months ended September 30, 2007. Depreciation and amortization for the six months ended September 30, 2008 was 4.7% of sales compared to 4.6% of sales for the same period ended September 30, 2007. Depreciation and amortization for the three months ended September 30, 2008 was 4.3% of sales compared to 4.5% of sales for the three months ended September 30, 2007. The Company’s need for additional equipment has increased with the introduction of the new organic vitamin charged spring water. Additionally, the Company has added additional equipment in order to produce purified water which was introduced in July 2008.

Interest, Taxes, Other Income and Other Expenses

For the six months ended September 30, 2008, interest income decreased 28.7% to $21,909 as compared to $30,746 for the same period ended September 30, 2007. For the three months ended September 30, 2008, interest income decreased 2.3% to $15,166 as compared to $15,519 for the same period ended September 30, 2007. During the fiscal year ended March 31, 2008, the Company began utilizing funds that had been placed in an interest bearing account to purchase additional equipment and to help fund the launch of the organic vitamin charged spring water resulting in a decrease of earned interest income.

Interest expense for the six months ended September 30, 2008 increased 5.2% to $181,885 as compared to $172,863 for the same period ended September 30, 2007. Interest expense for the three months ended September 30, 2008 increased 5.1% to $92,429 as compared to $87,944 for the same period ended September 30, 2007. The increase in net interest expense resulted from the refinance of the notes on the property in Eldorado Springs, Colorado and the property in Louisville, Colorado. We refinanced the notes to receive net proceeds to be used in the operations of the Company and we extended the payment terms, which resulted in more of the payment allocated towards interest.

For the six months ended September 30, 2008, the Company recorded income tax benefit of $127,700 against our pretax book loss of $367,775, a 34.7% effective tax rate compared to a tax benefit of $25,000 against our pretax book loss of $135,038 for the six months ended September 30, 2007. For the three months ended September 30, 2008, the Company recorded income tax benefit of $17,700 against our pretax book loss of $51,235, a 34.5% effective tax rate compared to a tax benefit of $19,000 against our pretax book loss of $80,022 for the three months ended September 30, 2007.

The Company had a net loss after taxes of $240,075 for the six months ended September 30, 2008 compared to a net loss after taxes of $110,038 for the same period ended September 30, 2007. The Company had a net loss after taxes of $33,535 for the three months ended September 30, 2008 compared to a net loss after taxes of $61,022 for the three months ended September 30, 2007.

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Liquidity and Capital Resources

Trade accounts receivable for the six months ended September 30, 2008 were 34.3% more than compared to the six months ended September 30, 2007. This resulted from the increase in revenues for the six months ended September 30, 2008. Day’s sales outstanding was approximately 43 days for September 30, 2008 and 38 days for September 30, 2007. The increase in the day’s sales outstanding can be attributed to the timing of certain larger orders that were recognized at the end of September 2008. While this is an increase over the same period ended September 30, 2007, the Company continues to manage accounts receivable and the day sales outstanding is still within the range of forecasted balances.

Cash flows from operating activities had a net outflow of $143,870 for the six months ended September 30, 2008. The cash used in operating activities represents an increase of $146,714 from the six months ended September 30, 2007. The change in operating activities resulted from the change in inventories, accounts receivable and income taxes. The Company anticipates that cash flow from operations will be available to fund existing obligations for expected cash requirements over the next year and thereafter.

Cash flows from investing activities resulted in a net outflow of $147,114 for the six months ended September 30, 2008. This total represents expenditures on equipment for electric water coolers, filtration equipment and coffee dispensing equipment that are rented to existing delivery customers.

Cash flows from financing activities resulted in a net inflow of $143,493 for the six months ended September 30, 2008. The Company received proceeds from the line of credit in the amount of $215,000. The Company made payments on long-term debt obligations of $67,682.

The Company’s cash balance at September 30, 2008 decreased to $241,949 by a net amount of $147,491 from $389,440 at March 31, 2008.

The Company has a line of credit with American National Bank for $300,000. As of September 30, 2008, the Company had a balance due on the line of credit for $215,000. The line of credit is due for renewal on February 28, 2009. The Company believes that the line of credit will be renewed when due. The Company has no other material commitments for capital expenditures.

During the year ended March 31, 2002, the Company entered into an agreement to sell certain parcels of real estate to two senior executives of the Company, Messrs. Larson and Sipple, for a total of $900,000. The Company received cash from the sale of $500,000. The Company also provided 60 month carry back financing of $400,000 with interest at 7.5% that has been recorded as notes receivable related party and includes $130,208 of accrued interest at September 30, 2008. The Company recognized a gain on the real estate sales of $519,937 and deferred an additional $357,544 of gain as required by the terms of the carry back note. The collateral on the notes receivable included a junior deed of trust on the properties and shares of the Company’s common stock. During the year ended March 31, 2003, the Board of Directors determined that 250,000 shares of common stock of the Company was sufficient collateral and released the junior deed of trust on the properties. The accumulated interest and outstanding principal were due upon maturity in August 2007. As of September 30, 2008, the note due from Mr. Larson has not yet been paid and the outstanding principal and interest due is $330,208 as reflected in the Company’s financial statements as “Notes receivable — related party.”

On December 7, 2007, Mr. Sipple paid the entire balance due to the Company in the amount of $310,311. In the third quarter of fiscal year 2008, $178,722 of the deferred gain was recognized as the $200,000 note receivable plus interest from Mr. Sipple was paid.

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Contractual Obligations and Commitments

The following table sets forth our contractual commitments as of September 30, 2008:

Fiscal Year End	Long-Term Debt		Operating Lease		Total
2009	$	162,166	$	386,836	$	549,002
2010		172,888		338,969		511,857
2011		181,594		195,038		376,632
2012		1,468,901		83,771		1,552,672
2013		2,752,733		78,363		2,831,096
Total	$	4,738,282	$	1,082,977	$	5,821,259

The Company has no other material commitments for capital expenditures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 4(T). CONTROLS AND PROCEDURES

Conclusion Regarding The Effectiveness Of Disclosure Controls And Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

With the participation of management, our principal executive officer and principal financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. In consultation with Ehrhardt Keefe Steiner & Hottman, PC, our independent registered public accounting firm, management has identified a control deficiency that it believes constitutes a material weakness in our internal control over financial reporting. The material weakness relates to our lack of technical expertise regarding complex accounting matters associated with certain equity transactions and the impact of deferred income taxes. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective in ensuring that material information required to be disclosed is included in the reports that we file with the Securities and Exchange Commission.

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Remediation Of Material Weaknesses in Internal Control Over Financial Reporting

In light of the conclusion that our internal control over financial reporting was not effective, our management is in the process of implementing a plan intended to remediate such ineffectiveness and to strengthen our internal controls over financial reporting through the implementation of certain remedial measures, including obtaining the assistance of experienced financial personnel to enhance our financial reporting capabilities and assist our principal financial officer as the need arises.

Changes In Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As described above, in the future we intend to obtain the assistance of experienced financial personnel to enhance our financial reporting capabilities.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

ITEM 1A. RISK FACTORS

As a smaller reporting company, the Company is not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE AND PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Shareholders was held on August 26, 2008 for the principal purpose of (i) electing five directors; (ii) ratifying Ehrhardt Keefe Steiner & Hottman, PC, as our independent registered public accountants for the fiscal year ending March 31, 2009; and (iii) approving the 2008 Incentive Stock Plan.

The following votes were cast by the shareholders with respect to the election of directors named in our proxy statement:

Nominee	Shares Voted For		Shares Withheld
Douglas A. Larson		5,891,257		98,612
Kevin M. Sipple		5,891,257		98,612
Jeremy S. Martin		5,891,257		98,612
George J. Schmitt		5,891,257		98,612
J. Ross Colbert		5,891,257		98,612

The following votes were cast by the shareholders with respect to the ratification of Ehrhardt Keefe Steiner & Hottman, PC, as our independent registered public accountants for the fiscal year ending March 31, 2009:

Proposal	Shares Voted For		Shares Voted Against		Shares Abstained
Ehrhardt Keefe Steiner & Hottman, PC		5,895,318		94,315		236

The following votes were cast by the shareholders with respect to approving the 2008 Incentive Stock Plan:

Proposal	Shares Voted For		Shares Voted Against		Shares Abstained
2008 Incentive Stock Plan		5,139,926		135,496		2,336

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ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

Exhibit No.		Description
	31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with the requirements 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.

	ELDORADO ARTESIAN SPRINGS, INC.
Date: November 14, 2008	By:	/s/ Douglas A. Larson
		Douglas A. Larson
		President (Principal Executive Officer)
Date: November 14, 2008	By:	/s/ Cathleen Shoenfeld
		Cathleen Shoenfeld
		Chief Financial Officer (Principal Financial Officer)

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ELDORADO ARTESIAN SPRINGS, INC.

Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2008

Exhibits Filed Herewith

Exhibit No.		Description
	31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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