10QSB 1 rgglobal_10qsb-063007.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2007. |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT Commission File Number: 000-254888 RG GLOBAL LIFESTYLES, INC. -------------------------- (Exact Name of small business issuer as specified in its charter) California 33-0230641 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 30021 Tomas, Ste 200, Rancho Santa Margarita, CA 92688 ------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number: (949) 888-9500 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares outstanding of the issuer's Common Stock as of August 14, 2007 was 27,317,092 Transitional Small Business Disclosure Format (Check One): Yes |_| No |X| INDEX ----- PAGE PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Consolidated Balance Sheet - June 30, 2007 3 Consolidated Statements of Operations - For the Three Months ended June 30, 2007 and 2006 4 Consolidated Statements of Cash Flows For the Three Months ended June 30, 2007 and 2006 5 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 3. Controls and Procedures 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 26 Item 6. Exhibits 26 SIGNATURES 26 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RG GLOBAL LIFESTYLES, INC. Consolidated Balance Sheet June 30, 2007 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 473,536 Inventory - finished goods 253,854 Federal income tax refund receivable 155,000 Prepaids and other current assets 26,040 ----------------- Total current assets 908,430 ----------------- Property and equipment, net 18,643 Intangible assets, net 4,221,643 Other assets 256,246 ----------------- TOTAL ASSETS $ 5,404,962 ================= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 215,445 Accrued liabilities 185,666 Deferred revenues 381,804 State income taxes payable 96,681 Secured convertible notes payable 1,870,433 Warrant liability 5,276,831 Conversion feature liability 5,685,122 Notes payable (net of discount of $310,548) 427,415 ----------------- Total liabilities 14,139,397 Stockholders' deficit: Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued and outstanding - Common stock, $0.001 par value, 100,000,000 shares authorized, 27,317,092 shares issued and outstanding 27,317 Additional paid-in capital 18,792,798 Subscription receivable (48,755) Accumulated deficit (27,505,795) ----------------- Total stockholders' deficit (8,734,435) ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,404,962 ================= The accompanying notes are an integral part of these financial statements. 3 RG GLOBAL LIFESTYLES, INC. Consolidated Statements of Operations (unaudited) For the Three Months Ended June 30, ------------------------------- 2007 2006 ------------ ------------ Revenues: Product sales $ 78,048 $ 425 Water treatment related 209,159 -- ------------ ------------ Total revenues 287,207 425 Cost of revenues: Product sales 65,356 5,928 Water treatment related 195,380 -- ------------ ------------ Total cost of revenues 260,736 5,928 Gross profit (loss) 26,471 (5,503) Expenses: General and administrative (including stock-based compensation of $822,406 and $830,466 respectively) 1,318,017 1,201,286 Selling and marketing 60,739 3,345 ------------ ------------ Total expenses 1,378,756 1,204,631 ------------ ------------ Operating loss (1,352,285) (1,210,134) ------------ ------------ Other income (expense): Interest income 3,018 -- Interest expense - related party (2,752) (128,145) Interest expense (189,536) (143,077) Fair value of common stock issued in excess of notes payable satisfied (1,242,500) -- Change in fair value of derivative liabilities 942,085 (199,319) Interest and financing related to convertible notes -- (4,159,182) ------------ ------------ Total other income (expense) (489,685) (4,629,723) Net loss before provision for income taxes (1,841,970) (5,839,857) ------------ ------------ Provision for income taxes -- 800 ------------ ------------ Net loss $ (1,841,970) $ (5,840,657) ============ ============ Weighted average number of common shares outstanding - basic and fully diluted 26,557,323 17,650,000 ============ ============ Net loss per share - basic and fully diluted $ (0.07) $ (0.33) ============ ============ The accompanying notes are an integral part of these financial statements. 4 RG GLOBAL LIFESTYLES, INC. Consolidated Statements of Cash Flows (unaudited) For the Three Months Ended June 30 ------------------------------ 2007 2006 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(1,841,970) $(5,840,657) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of debt discounts related to beneficial conversion features and warrants 149,589 239,276 Fair value of common stock issued in excess of notes payable forgiven 1,242,500 -- Change in fair value of derivative liabilities (942,085) 4,259,048 Depreciation and amortization 79,024 30 Stock-based compensation 822,406 830,466 Changes in operating assets and liabilities: Prepaid and other current assets -- (76,200) Accounts payable 122,011 19,662 Accrued liabilities 68,617 42,360 Deferred revenues 265,841 -- Income taxes payable 1,681 -- ----------- ----------- Net cash used in operating activities (32,386) (526,015) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets (2,871) (1,800) Other assets (20,230) 519 ----------- ----------- Net cash used in investing activities (23,101) (1,281) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable -- 700,000 Proceeds from exercise of stock options 26,745 -- ----------- ----------- Net cash provided by financing activities 26,745 700,000 Net increase (decrease) in cash (28,742) 172,704 Cash - beginning of period 502,278 346,661 ----------- ----------- Cash - ending of period $ 473,536 $ 519,365 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ -- $ -- =========== =========== Income taxes $ -- $ -- =========== =========== Non-cash investing and financing activities: Issuance of common stock in settlement of notes payable and accrued interest $ 175,000 $ -- =========== =========== The accompanying notes are an integral part of these financial statements.
5 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements included herein, presented in accordance with United States generally accepted accounting principles and stated in US dollars, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These statements reflect all adjustments, consisting of normal recurring adjustments, which, in the opinion of management, are necessary for fair presentation of the information contained therein. It is suggested that these consolidated interim financial statements be read in conjunction with the consolidated financial statements and notes thereto of the Company for the year ended March 31, 2007 included in the Company's 10-KSB annual report. The Company follows the same accounting policies in the preparation of interim reports. Revenue Recognition ------------------- Product sales - For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB104"), which superseded Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. Construction contracts - In accordance with Statement of Position 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts", the Company uses the percentage completion method for the recognition of revenue received in connection with it's engineering, equipment sale and installation contracts. In making the estimate of the percentage of revenue to recognize, the Company compares costs to the total projected cost of the contract. Accordingly, the Company recognizes that portion of the revenue and records the balance of the cash received as deferred revenues. Loss Per Share -------------- Net loss per share is provided in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share" ("SFAS 128"). Basic loss per share is computed by dividing losses available to common stockholders by the weighted average number of common shares outstanding during the period, after giving effect to dilutive common stock equivalents, such as stock options, warrants and convertible debt. The following is a summary of outstanding 6 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) securities which have been excluded from the calculation of diluted net loss per share because the effect would have been anti-dilutive for the three months ended June 30, 2007 and 2006: 2007 2006 ------------------ ------------------ Common stock options 8,311,230 8,317,600 Common stock warrants 15,403,940 6,253,940 Secured convertible notes 4,412,232 1,481,053 ------------------ ------------------ Totals 28,127,402 16,052,593 ================== ================== Recent Accounting Pronouncements -------------------------------- In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning in years beginning after December 15, 2006. The adoption of FIN 48 at April 1, 2007 did not have a significant impact on our consolidated financial statements. NOTE 2 - GOING CONCERN The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has incurred an operating loss (loss before income taxes and other expenses) of $1,352,285 for the period ended June 30, 2007, loss, and current liabilities in excess of current assets of $13,230,967 at June 30, 2007. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The future of the Company is dependent partly upon its ability to perform on contracts for wastewater treatment systems not yet completed, and upon its ability to realize profit on sales of its energy drinks, as well as upon its ability to obtain equity and/or debt financing. There can be no assurance that the Company will be able to achieve profitability in its operations, and it is possible that additional equity or debt financing may be required to continue as a going concern. Without such additional capital, there is substantial doubt as to whether the Company will continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities, which might be necessary in the event the Company cannot continue in existence. 7 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) NOTE 3 - NOTES PAYABLE As of June 30, 2007, the Company had the following notes payable and accrued interest: Notes Accrued Payable Interest ------------- ----------- 2006 Note Payable, interest at 8%, due on demand and currently in default $ 137,963 $ 13,789 2007 Notes Payable, interest at 8%, due on December 26, 2007 and January 17, 2008, face value of $600,000 289,452 23,189 Secured Convertible Notes, interest at 6%, see discussion below regarding current status 1,870,433 48,887 ------------- ----------- Totals $ 2,297,848 $ 85,865 ============= ===========
2006 NOTES PAYABLE ------------------ In April 2007, the Company entered into a series of conversion agreements with a group of individuals who had received an assignment of a $300,000 note and accrued interest of $24,000 which was due on March 31, 2007. On April 19, 2007, certain holders agreed to receive share of the Company's common stock at $0.20 per share. The Company issued 875,000 shares of common stock valued at $1,417,500 to three of the assignors in settlement of $162,037 in principal and $12,963 in accrued interest. At the time of issuance, the Company recorded the excess in fair value of the common stock over the liabilities satisfied of $1,242,500 as additional interest expense. 2007 NOTES PAYABLE ------------------ During the quarter ended June 30, 2007, the Company amortized $149,589 of the discount resulting from the warrants and beneficial conversion feature to interest expense. At June 30, 2007, the remaining discount relating to these notes was $310,548. $2,000,000 SECURED CONVERTIBLE NOTES ------------------------------------ On June 6, 2006, the Company entered into a definitive securities purchase agreement and ancillary agreements with accredited investors for a private placement of $2,000,000 of 6% callable secured convertible notes due June 6, 2009 (the "Secured Notes") and stock purchase warrants to purchase 4,000,000 shares of the Company's common stock, vesting immediately and exercisable before June 6, 2013, with an exercise price of $1.10 subject to adjustment upon certain events. In the event of default, the Secured Notes incur interest at fifteen percent (15%) per annum, until such default has been cured. The Company received the proceeds under these Secured Notes in three tranches; June 2006 - $700,000; July 2006 - $600,000; and October, 2006 - $700,000. The Secured Notes are convertible at the option of the holder at any time prior to maturity into shares of the Company's common stock at a conversion price based upon the average of the three lowest trading prices of the Company's common stock for the previous 20 trading days discounted by 50%. The Secured Notes are secured by a security interest in substantially all of the assets of the Company. 8 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) In connection with the issuance of the Secured Notes, the Company evaluated the terms and features of the conversion feature and the warrants and determined that the instruments embodied certain derivative features that were not clearly and closely related to the debt instrument. Thus, the conversion feature and warrants did not meet the established criteria for equity classification under Emerging Issues Task Force ("EITF") 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". On the dates of issuance, the Company allocated the proceeds between the Secured Notes, warrants and conversion feature. Since the fair value of the warrants and conversion feature exceeded the carrying value of the Secured Notes, the Company recorded $4,040,569 of additional expense during the period ended June 30, 2007. The Company up until March 31, 2007, see discussion below, was amortizing the discount of the Secured Notes of $2,000,000 over the term of the Secured Notes. The conversion feature and warrants are being carried at their respective fair values with changes in their values recorded in the statement of operations. Upon issuance in June 2006, the Company valued the conversion feature liability of the Secured Notes at $1,252,520 using the Black Scholes valuation method based upon the following weighted average variables; a risk free interest rate of 5.25%, an exercise price of $0.45, a volatility of 160%, and a remaining term of 3.0 years. Upon issuance in June 2006, the Company valued the 4,000,000 detached warrants to purchase shares of the Company's common stock at $3,488,049 based upon the Black Scholes method of valuation using the following weighted average variables; risk free interest rate of 5.25%, an exercise price of $1.10, a volatility of 150%, and an estimated remaining life of 7 years. As of June 30, 2007, the fair value of the conversion feature liability related to Secured Notes was $5,685,122. The Company valued the beneficial conversion feature at June 30, 2007, using the Black Scholes method of valuation with the following variables; a risk free interest rate of 5.25%, an exercise price of $0.44, a volatility of 277%, and a remaining life of 2.09 years. The change in the fair value of the derivative liability for the quarter ended June 30, 2007 was an increase of $377,184. At June 30, 2007, the Company valued the warrants at $5,276,831 based upon the Black Scholes method of valuation using the following variables; risk free interest rate of 5.25%, an exercise price of $1.10, a volatility of 277%, and an estimated remaining life of 5.9 years. The change in the fair value of the warrant liability for the quarter ended June 30, 2007 was a decrease of $1,319,269. In January 2007, a dispute arose between the Company and the holders of the Secured Notes, see Note 6 for additional information. The Company carries the Secured Notes at their face value due to the dispute. In addition, the Company has not recorded any potential penalty provision under the Secured Notes attributable to the allegations of default based upon the Company's belief that the holders of the Secured Notes violated the terms of the agreement and in reliance upon the analysis of legal counsel to the Company regarding its obligations under the Secured Notes. 9 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) NOTE 4 - STOCKHOLDERS' EQUITY See Notes 3 and 5 for discussion of shares of common stock issued during the period ended June 30, 2007. There were no issuances of common stock by the Company during the period ended June 30, 2006. NOTE 5 - OPTIONS AND WARRANTS OPTIONS ------- STOCK OPTION PLANS On May 3, 2006, the Company's Board of Directors adopted the 2006 Incentive and Non-statutory Stock Option Plan ("2006 Plan") for issuance of stock options to employees and others. Under the 2006 Plan, the Company reserved 10,000,000 shares for issuance. As of June 30, 2007, there were 42,400 options available for issuance under the 2006 Plan. On December 26, 2006, the Board of Directors authorized the issuance of up to 6,000,000 options under its 2007 Incentive and Non-statutory Stock Option Plan ("2007 Plan"). The 2007 Plan has not yet been approved by a vote of the shareholders of the Company. As of June 30, 2007, there were 745,200 options available for issuance under the 2007 Plan. Compensation expense recorded during the quarter ended June 30, 2007 was $776,030 under the above plans, of which $618,806 was stock-based compensation to employees and $157,224 was stock-based compensation to consultants. The Company accounts for options issued to consultants under EITF 96-18 and revalues these options at each quarter end. At June 30, 2007, the options were valued based upon the Black Scholes method of valuation using the following estimates: 5.25 % risk free rate, 277% volatility, and an expected life of approximately five years. The following is a summary of activity of outstanding stock options: Number of Shares --------------- Balance, March 31, 2007 13,851,230 Options granted - Options exercised (419,500) Options cancelled or forfeited (5,120,500) --------------- Balance, June 30, 2007 8,311,230 =============== 10 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) EXERCISES AND SIGNIFICANT CANCELLATIONS OF STOCK OPTIONS During the quarter ended June 30, 2007, two consultants exercised a total of 107,000 options vested under the 2006 Plan. In addition, an officer exercised 312,500 options vested under the 2006 Plan. One consultant paid for the exercise of his options by foregoing payment of an outstanding invoice for legal services in the amount of $8,400. The other consultant has yet to remit the $13,000 due under the exercise. The officer paid for a portion of the exercise of his 312,500 options by reducing net accrued salary payable by $26,745, leaving $35,755 payable to the Company. As of June 30, 2007, the Company recorded a subscription receivable in the amount of $48,755 attributable to the remaining amounts due in connection with exercise of the options. On August 13, 2007, this subscription receivable was reduced by $35,755 through a payment received from the officer. On April 24, 2007, the Company's Chief Executive Officer passed away. In accordance with the 2006 and 2007 Plans, the unvested options of 3,924,500 expired during the period. Vested options under the 2006 and 2007 Plan will expire under their initial term of five years. During the three months ended June 30, 2007, a consultant terminated his employment. As of June 30, 2007, the Company has not cancelled the vested portion of his options for approximately 247,000 shares of common stock. Although management believes its estimate regarding the fair value of the services to be reasonable, there can be no assurance that all of the subjective assumptions will remain constant, and therefore the valuation of the services may not be a reliable measure of the fair value of stock compensation or stock based payments for consulting services. WARRANTS On October 11, 2006, the Company issued 300,000 warrants at an exercise price of $0.47 to a consultant for services. One third of the warrants were vested upon issuance, the remaining 200,000 warrants vest over the period of two years. During the quarter ended June 30, 2007, the Company recorded total compensation expense of $17,700. The Company accounts for this agreement under EITF 96-18 and revalues these warrants at each quarter end. At June 30, 2007, the warrants were valued based upon the Black Scholes method of valuation using the following estimates: 5.25 % risk free rate, 277 % volatility, and an expected life of five years. The following is a summary of activity of outstanding common stock warrants: Number Of Shares ----------------- Balance, March 31, 2007 15,403,940 Warrants granted - Warrants exercised - ----------------- Balance, June 30, 2007 15,403,940 ================= 11 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) NOTE 6 - COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS On July 3, 2007, the Company and its subsidiary Aquair entered into a settlement agreement with plaintiff Atmospheric Water Technologies, Inc. in the Orange County Superior Court Case No. 05CC09548. Under the terms of the settlement, (i) all parties will be released from liability, (ii) the Company and Aquair, as well as the Company's late Chairman and CEO Louis Knickerbocker, will be dismissed with prejudice from the lawsuit, (iii) plaintiff will issue a press release announcing the dismissal of the case, and (iv) the Company, through its insurer, will pay $15,000 to plaintiff. The Company's ongoing litigation with it previous investors the NIR Group has been remanded back to the New York Supreme Court, from the federal district court, and is now titled AJW Partners LLC, AJW Offshore Ltd, AJW Qualified Partners LLC, and New Millenium Capital Partners II LLC v. RG Global Lifestyles, Inc. and Louis Knickerbocker, and is Case No. 600323/07. Recently, however, plaintiffs agreed to voluntarily dismiss Louis Knickerbocker without prejudice (therefore the caption will change upon the next round of pleadings). Additionally, the parties have agreed to informally stay the proceeding for thirty (30) days pending resolution of the Company's claim for $3 million in insurance proceeds from its "key man" life insurance policy with AIG American General it owned and is the beneficiary of. Other than the foregoing lawsuits, the Company is not aware of any litigation, either pending or threatened. WATER TREATMENT CONTRACTS On May 29, 2007, the Company received its second progress payment of $450,000 from a customer in connection with its pending engineering, equipment sale and installation contract with the customer. In accordance with the Company's revenue recognition policy, the Company has recorded the revenue on the basis of a percentage completion of the pending contract. As of June 30, 2007, payments received in excess of revenues recorded (deferred revenue) under this contract was $356,804. In June 2007, the Company entered into contract with Yates Petroleum Corporation ("YPC") to engineer, design, and install a water treatment system ("System") of Coal Bed Methane ("CBM") produced water provided by YPC. The Company will own and operate the System and regeneration waste pond. The term of the contract is for 60 months from the start of the first billing cycle. The Company received an initial deposit of $25,000 from YPC and has recorded such as deferred revenue. YPC is responsible for constructing the inflow pond and will receive a credit from the Company of $50,000 each month for the first three months. In addition, YPC will receive credits on current billings for future repairs and maintenance to the inflow pond. The base rate under the contract is $0.125 per barrel (42 US gallons) of water discharged by the System up to the maximum load. 12 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) OC ENERGY DISTRIBUTIONS CONTRACTS The Company has entered into various agreements with distributors for the distribution of is OC Energy Drink products. Some of these agreements include clauses where by the distributor has the exclusive right to distribute the Company's products to for a particular area. NOTE 7 - SEGMENT REPORTING AND CONCENTRATIONS Currently the Company generates all of its revenues, and incurred all of its expenses from the sale of OC Energy products and from construction projects related to water treatment technology. A summary of revenues generated by segment for the quarter ended June 30, 2007, is as follows: 2007 ------------------ Water treatment segment $ 209,159 OC energy drink segment 78,048 ------------------ Total $ 287,207 ================== A summary of operating loss by segment for the quarter ended June 30, 2007, is as follows: 2007 ----------------- Water treatment segment $ (161,119) OC energy drink segment (92,067) Corporate segment (1,099,099) ----------------- Total $ (1,352,285) ================= The assets related to the OC Energy segment are insignificant and thus have not been presented. During the quarter ended June 30, 2007, sales to a single customer were 100% of total sales for both the OC Energy Drink sales and revenues related to water-treatment technology. NOTE 8 - RELATED PARTY TRANSACTIONS Effective April 1, 2006, the Company entered into an agreement with a company wholly owned by the former Chief Executive Officer of the Company for the subleasing of office space and administrative support services. During the quarters ended June 30, 2007 and 2006, payments to this related party for these services were $18,046 and $41,800, respectively. The agreement was cancelled effective June 1, 2007. During the quarter ended June 30, 2007, the Company accrued interest payable of $2,752 to a director of the Company on the unpaid portion of a note payable, see Note 4. 13 RG GLOBAL LIFESTYLES, INC. Notes to consolidated financial statements (unaudited) During the quarter ended June 30, 2007, an officer, who is also a director of the Company, exercised 312,500 of vested options granted to him under the Company's 2006 Plan, see Note 5 for additional information. NOTE 9 - SUBSEQUENT EVENT On August 13, 2007, an officer and director of the Company paid the balance of his subscription receivable to the Company for exercise of 312,500 options. 14 FORWARD-LOOKING STATEMENTS This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objections of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "could," "estimate," "intend," "continue," "believe," "optimistic," "plan," "aim," "will," "likely," "expect" or "anticipate" or other similar words. These forward-looking statements present our estimates and assumptions only as of the date of this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Except for our ongoing securities laws, we do not intend, and undertake no obligation, to update any forward-looking statement. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The factors impacting these risks and uncertainties include, but are not limited to: o Increased competitive pressures from existing competitors and new entrants; o Deterioration in general or regional economic conditions; Adverse state or federal legislation or regulation that increases the costs of compliance, or o adverse findings by a regulator with respect to existing operations; Ability to grow business in its relatively new OC Energy Drink product lines and CFS products and services and meet or exceed its return on shareholders' equity target, which will depend on o the Company's ability to manage its capital needs and the effect of business and/or acquisitions; o If acquisitions are made, the costs and successful integration of acquisitions; Barriers in trade with foreign countries or tariff regulations and other United States and o foreign laws; o Loss of customers or sales weakness; o Inability to achieve future sales levels or other operating results; Ability to locate suitable new products for distribution within our business sector, and retain o licensing rights to such new products on acceptable terms; o The continuation of favorable trends, including the drop in affordable potable water globally; o Outcomes and costs associated with litigation and potential compliance matters; Inadequacies in the Company's internal control over financial reporting, which could result in o inaccurate or incomplete financial reporting; o Dilution to Shareholders from convertible debt or equity financings; o Loss of key management or other unanticipated personnel changes; o The unavailability of funds for capital expenditures; and o Operational inefficiencies in distribution or other systems. The following discussion should be read in conjunction with the historical financial statements of R.G. Global Lifestyles, Inc., including Form 10-KSB as of March 31, 2007, and those of its predecessor, the L.L. Knickerbocker Company, Inc., and notes thereto. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with "Selected Financial Data" and our financial statements and related notes appearing elsewhere in this quarterly report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under "Risk Factors" on page 21 and elsewhere in this quarterly report. OVERVIEW OC ENERGY DRINKS ---------------- The Company has launched it line of "OC ENERGY" caffeinated energy drinks and oxygenated water fashioned for the Orange County lifestyle. Presently there are three Energy Drinks and one Highly Oxygenated Water. The Energy Drinks consist of a 2-oz high-powered "shot" energy drink ("Insane"), a 10-oz energy drink ("KIK-IT") and a 10-oz diet energy drink ("KIK-IT Diet") in addition to a 17-oz ("O2") bottle of 100% pure oxygenated structured water. Befitting the OC lifestyle, the energy drinks are low in natural sugar and high in vitamins and minerals. The bottles are custom-designed. Sales of the products have commenced in the first fiscal quarter of 2008. CFS TECHNOLOGY -------------- CFS sells and/or leases, and provides professional support of its proprietary wastewater treatment technology ("CFS Technology") for the reclamation of wastewater associated with the production of methane in coal bed applications. The technology removes sodium and other pollutants from such wastewater allowing it to be returned to the environment within compliance regulations. The successful removal of the treated wastewater in turn allows energy companies to harvest and sell methane associated with coal beds. In March 2007, the Company entered into an agreement for the construction, sale and support of a plant utilizing its CFS Technology with Black Diamond Energy. On June 22, 2007, the Company entered into an agreement with Yates Petroleum Corporation on a "build, own, operate" model whereby the Company will construct, own and operate a plant using the CFS Technology and charge a royalty on a per barrel basis of reclaimed water. The Company is currently pursuing additional energy companies in Wyoming, and other locations, for the lease or sale, construction, use and/or support of the CFS Technology and anticipates executing definitive agreements. ATMOSPHERIC PURE WATER GENERATORS --------------------------------- Aquair plans to distribute licensed environmentally-friendly water generating equipment that creates purified drinking water from air for residential and commercial uses, and converts brackish, polluted, or grey water to purified water. Aquair has acquired the rights to market and distribute water generators that precipitate drinking water from air. The various water generating machines have been tested in various locations. As of April 2007, the Company has sold limited amounts of units to customers in the U.S. and Asia, and anticipates further sales to those regions and Australia, however the Company is currently dedicating less resources towards the sales of atmospheric water generators as in the past, as it is focusing on sales and marketing OC Energy Drinks and CFS Technology projects. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2007 AND 2006. The following discussion compares results of continuing operations of the Company only during the periods described. 16 Three Months Ended June 30 2007 2006 ------------ ------------ INCOME STATEMENT DATA --------------------- Revenue $ 287,207 $ 425 Gross profit (loss) $ 26,471 $ (5,503) Loss from operations $(1,352,285) $(1,210,134) Net loss $(1,841,970) $(5,839,857) Net loss per weighted average common share $ (0.07) $ (0.33) BALANCE SHEET DATA ------------------ Total assets $ 5,404,962 $ 935,273 Total liabilities $ 14,139,397 $ 6,305,965 Stockholders' deficit $ (8,734,435) $(5,370,692) REVENUES For the quarter ended June 30 Increase/(decrease) 2007 2006 $ % ---------------------------------- ---------- --------- ---------- -------- Revenues $ 287,207 $425 $286,782 67,478.1% During the quarter ended June 30, 2007, the Company's primary source of revenues was sales of its water treatment technology which accounted for $209,159 of total revenues. During the quarter ended June 30, 2006, the Company's primary source of revenues was sales of air to water generating equipment, which accounted for $425 or 100% of revenues. The increase in revenues related to the commencement of sales of water treatment technology and the commencement of sales of the Company's energy drink products. GROSS PROFIT (LOSS) For the quarter ended June 30 Increase/(decrease) 2007 2006 $ % ---------------------------------- ---------- --------- ---------- -------- Gross profit (loss) $26,471 $(5,503) $31,974 581.0% During the quarter ended June 30 2007, a significant portion of the cost of revenues related to sales of water treatment technology and production costs related to the manufacture of energy drink products. During the quarter ended June 30, 2006, the Company's cost revenues consisted of costs related to freight costs for shipments of air to water generating equipment. TOTAL OPERATING EXPENSES For the quarter ended June 30 Increase/(decrease) 2007 2006 $ % ---------------------------------- ---------- --------- ---------- -------- Total Operating Expenses $1,378,756 $1,204,631 $174,125 14.5% Our total operating expenses include personnel costs, product marketing and sales costs, the costs of corporate functions, accounting, transaction costs, legal, public company, information systems and non-cash stock-based compensation. For both periods, we incurred expenses for general management, and legal and accounting fees related to continuing operations. For the quarter ended June 30, 2007, the Company expended $18,046 in rent paid to a then-related party, and paid $172,806 in legal and accounting fees, compared to $41,800 and $80,330 respectively for these expenses in the quarter ended June 30, 2006. 17 OTHER INCOME (EXPENSE) For the quarter ended June 30 Increase/(decrease) 2007 2006 $ % ---------------------------------- ------------ ------------ ------------ ---------- Other Income (Expense) $(489,685) $(4,629,723) $(4,140,038) (89.4%)
The change in other income (expense) during the quarter ended June 30, 2007, was directly attributed to a change in the fair value of derivative liability related to convertible notes. In the quarter ended June 30, 2006, other income (expense) included a one-time charge for interest and financing charges related to convertible notes in the amount of $4,040,569. LIQUIDITY AND CAPITAL RESOURCES The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and satisfaction of liabilities and other commitments in the normal course of business. The report of our independent auditors contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern as a result of recurring losses and negative cash flows. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that may be necessary if we are unable to continue as a going concern. Our principal sources of liquidity consist of cash and cash equivalents, cash generated from product sales and construction contracts, and the issuance of equity and/or debt securities. In addition to funding operations, our principal short-term and long-term liquidity needs have been, and are expected to be, the debt service requirements of our notes payable, capital expenditures and general corporate expenses. In addition, as our sales and operations ramp up, we anticipate significant purchases of equipment for the construction of plants utilizing the CFS Technology and possibly for purchase of OC Energy drinks from our bottler for wholesale to the distribution and retail channels. As of June 30, 2007, we had cash and cash equivalents of $473,536 and notes payable outstanding of $2,297,848. We believe that our existing sources of liquidity, along with cash expected to be generated from product sales and construction contracts, will be sufficient to fund our operations, anticipated capital expenditures, working capital and other financing requirements through December 2007. However, we will need to continue a focused program of capital expenditures to effectuate our CFS Technology project constructions and OC Energy drink production capacity expansion. In order to fund capital expenditures or increase our working capital above our current plan, or complete any acquisitions, we may seek to obtain additional debt or equity financing. We may also need to seek to obtain additional debt or equity financing if we experience downturns or cyclical fluctuations in our business that are more severe or longer than anticipated, or if we fail to achieve anticipated revenue, experience significant increases in the costs associated with products sales, or if we engage in additional strategic transactions. However, we cannot assure you that such financing will be available to us on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. During the quarter ended June 30, 2007, we funded operations through existing cash on hand, cash receipts related to sales of our water treatment technology, sales of our energy drink products and through reduction of various expenditures including the deferral of payroll to certain members of management. OPERATING ACTIVITIES Operating cash flows used during the quarter ended June 30, 2007, reflect our net loss of ($1,841,970) and increased working capital requirements, partially offset by non-cash charges (depreciation, amortization of intangible assets, stock-based compensation, non-cash interest expense including the amortization of debt discounts, changes in operating assets and liabilities, and the change in the fair value of derivative instruments) of approximately $1,351,434. 18 Operating cash flows used during the quarter ended June 30, 2006, reflect our net loss of ($5,840,647) and increased working capital requirements, partially offset by non-cash charges related to the changes in operating assets and liabilities and amortization of debt discounts of approximately $5,328,820. INVESTING ACTIVITIES Investing cash flows using during the quarter ended June 30, 2007, reflect ($23,101) of cash used for purchase of fixed assets and other assets. FINANCING ACTIVITIES Financing cash flows provided during the quarter ended June 30, 2007, reflect proceeds from exercise of stock options of $26,745. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The methods, estimates, and judgment we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. The SEC has defined "critical accounting policies" as those accounting policies that are most important to the portrayal of our financial condition and results, and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based upon this definition, our most critical estimates are described below under the heading "Revenue Recognition." We also have other key accounting estimates and policies, but we believe that these other policies either do not generally require us to make estimates and judgments that are as difficult or as subjective, or it is less likely that they would have a material impact on our reported results of operations for a given period. For additional information see Note 1, "Summary of Organization and Significant Accounting Policies" in the notes to our audited financial statements appearing elsewhere in this report. Although we believe that our estimates and assumptions are reasonable, they are based upon information presently available, and actual results may differ significantly from these estimates. IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 144 ("SFAS 144"). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undercounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. SFAS No. 144 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell. REVENUE RECOGNITION Product sales - For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB104"), which superseded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. 19 Construction contracts - In accordance with Statement of Position 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts", the Company uses the percentage completion method for the recognition of revenue received in connection with it's engineering, equipment sale and installation contracts. In making the estimate of the percentage of revenue to recognize, the Company compares costs to the total projected cost of the contract. Accordingly, the Company recognizes that portion of the revenue and record the balance of the cash received as deferred revenues, which is included within accrued liabilities on the accompanying balance sheet. STOCK-BASED COMPENSATION On December 16, 2004, the FASB published Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R were effective as of the first interim period that begins after December 15, 2005. The Company has adopted SFAS 123R, which requires disclosure of the fair value and other characteristics of stock options, and SFAS 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure," which requires more prominent disclosure about the effects of an entity's accounting policy decisions with respect to stock-based compensation on reported net loss. The Company has reflected the expense of such stock based compensation based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123R. There were no options issued to employees as of March 31, 2006, all other options and warrants had been accounted for at fair value using the Black Scholes valuation model. Thus, the impact of adopting SFAS 123R was immaterial to the Company's financial statements. In connection with the adoption of SFAS 123R, we estimate the fair value of our share-based compensation utilizing the Black-Scholes pricing model. The fair value of the options granted is amortized as compensation expense on a straight line basis over the requisite service period of the award, which is generally the vesting period. The fair value calculations involve significant judgments, assumptions, estimates and complexities that impact the amount of compensation expense to be recorded in current and future periods. The factors include: (1) The time period our stock-based compensation awards are expected to remain outstanding based upon the average of the original award period and the remaining vesting period in accordance with SEC Staff Accounting Bulletin 107 simplified method. Our Company's stock trading history has been relatively short (since January 2005). Our expected term assumption for awards issued during the year ended March 31, 2007 was five years. As additional evidence develops from our stock's trading history, the expected term assumption will be refined to capture the relevant trends. (2) The future volatility of our stock has been estimated based upon our entire trading history from inception to the reporting date. (3) A dividend yield of zero has been assumed for awards issued during the quarter ended June 30, 2007 based upon our actual past experience and the fact that we do not anticipate paying a dividend on our shares in the near future. (4) We have based our risk-free interest rate assumption for awards issued during the quarter June 30, 2007 based upon the weighted-average yield of 5.25% available on US Treasury debt instruments with an equivalent expected term. (5) Forfeiture rates for awards issued during these periods have not yet been estimated as the Company has only recently issued share based awards and no forfeiture data has been available to the Company as a result. The Company's accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of Emerging Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement. 20 RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109" ("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years beginning in years beginning after December 15, 2006. The adoption of FIN 48 did not have a significant impact on the consolidated financial statements. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 provides accounting guidance on the definition of fair value and establishes a framework for measuring fair value and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We plan to adopt the provisions of SFAS 157 on April 1, 2008 and we are currently assessing the impact of the adoption of SFAS 157 on our results of operations and financial condition. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--Including an amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal year beginning after November 15, 2007. We are currently assessing the impact of adopting SFAS 159 on our results of operations and financial condition. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS RISKS RELATING WITH OUR BUSINESS AND MARKETPLACE Our business, financial condition and operating results can be impacted by a number of factors, any of which could cause our actual results to vary materially from recent results or from our anticipated future results. You should carefully consider the following risk factors that may affect the Company. The risks and uncertainties described below are those that we currently deem to be material and that we believe are specific to our Company. If any of these or other risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, which in turn could materially and adversely affect the trading price of our common stock. THE COMPANY IS A RELATIVELY YOUNG COMPANY WITH A MINIMAL OPERATING HISTORY SINCE BEING REORGANIZED IN 2003. Since the Company's reorganization in 2003 we have generated revenue from operations. However, our future operating results will depend on many factors, including the ability to generate sustained and increased demand and acceptance of our products, the level of our competition, and our ability to attract and maintain key management and employees. While management believes its estimates of projected occurrences and events are within the timetable of its business plan, there can be no guarantees or assurances that the results anticipated will occur. THE COMPANY HAS REDIRECTED ITS BUSINESS PLAN AND IS FOCUSING ON OC ENERGY DRINKS AND CFS TECHNOLOGY. The Company has redirected its focus on its OC Energy drinks and CFS Technology, and maintains a reduced focus on the sale of atmospheric water generators. While management believes the potential for revenue growth remains better in its current business plan, there can be no guarantees that the anticipated results will occur. 21 IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING, OUR BUSINESS PLAN MAY BE SLOWED AND IF WE DO OBTAIN ADDITIONAL FINANCING OUR THEN EXISTING SHAREHOLDERS MAY SUFFER DILUTION. We will require additional funds to expand our sales and marketing activities, to support operations, implement our business strategy. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our business plan. Any additional equity financing may involve dilution to our then existing shareholders. IF WE ACQUIRE ADDITIONAL COMPANIES OR PRODUCTS IN THE FUTURE, THEY COULD PROVE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR ADVERSELY AFFECT OUR OPERATING RESULTS. We anticipate that we will make other investments in complementary companies or products. We may not realize the anticipated benefits of any such acquisition or investment. The success of our acquisition program will depend on our ability to overcome substantial obstacles, such as the availability of acquisition candidates, our ability to compete successfully with other acquirers seeking similar acquisition candidates, the availability of funds to finance acquisitions and the availability of management resources to oversee the operation of acquired businesses. Furthermore, we may have to incur debt or issue equity securities to pay for future acquisitions or investments, the issuance of which could be dilutive to us or our existing shareholders. In addition, our profitability may suffer because of acquisition-related costs or future impairment costs for acquired goodwill and other intangible assets. WE MAY BE UNABLE TO RETAIN THE SERVICES OF KEY PERSONNEL, AND WE MAY BE UNABLE TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL. Our success depends to an extent upon the continued service of key personnel; loss of the services of such personnel could have an adverse effect on our growth, revenues, and prospective business. In addition, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial and sales personnel having experience in business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms. IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, WE MAY INCUR LOSSES. Any dramatic growth in our business could place a substantial burden on our production capacity and administrative resources. Businesses, which grow rapidly, often have difficulty managing their growth. Our management may not be able to manage our growth effectively or successfully. Rapid growth can often put a strain on management, financial, and operational resources of a company. In addition, we would likely need to enhance our operational systems and personnel procedures. Our failure to meet these challenges could cause our efforts to expand operations to prove unsuccessful and cause us to incur operating losses. OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT IN WHICH THEY EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN. The report of our independent auditors on our financial statements for the fiscal year ended March 31, 2007 contains an explanatory paragraph which indicates that we have an accumulated deficit and loss from operations in that year. This report states that, because of these issues, there may be a substantial doubt about our ability to continue as a going concern. This report and the existence of this accumulated deficit and loss from operations may make it more difficult for us to raise additional debt or equity financing needed to run our business and is not viewed favorably by investors. We urge potential investors to review this report before making a decision to invest in us. RISKS FACTORS RELATING TO OUR COMMON STOCK IF THE SELLING STOCKHOLDERS ALL ELECT TO SELL THEIR SHARES OF OUR COMMON STOCK AT THE SAME TIME, THE MARKET PRICE OF OUR SHARES MAY DECREASE. 22 It is possible that the Selling Stockholders will offer all of the shares for sale. Further because it is possible that a significant number of shares of our Common Stock could be sold at the same time hereunder, the sales, or the possibility thereof, may have a depressive effect on the market price for our Common Stock. The closing price of our Common Stock on July 9, 2007 was $1.10. Significant downward pressure on our stock price caused by the sale of stock registered in this offering could encourage short sales by third parties that would place further downward pressure on our stock price. OUR COMMON STOCK IS SUBJECT TO SEC "PENNY STOCK" RULES. Since our Common Stock is 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 of our Common Stock. Until the trading price of the Common Stock rises above $5.00 per share, if ever, 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: o Deliver to the customer, and obtain a written receipt for, a disclosure document; o Disclose certain price information about the stock; o Disclose the amount of compensation received by the broker-dealer or any associated person of the broker-dealer; o Send monthly statements to customers with market and price information about the penny stock; and o 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 sell the Common Stock and 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. SINCE OUR SHARES ARE TRADING ON THE OTC BULLETIN BOARD, TRADING VOLUMES AND PRICES MAY BE SPORADIC BECAUSE IT IS NOT AN EXCHANGE. Our common shares are currently listed for public trading on the Over-the-Counter Bulletin Board. The trading price of our common shares has been subject to wide fluctuations. Trading prices of our common shares may fluctuate in response to a number of factors, many of which will be beyond our control. The stock market has generally experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with limited business operations. There can be no assurance that trading prices and price earnings ratios previously experienced by our common shares will be matched or maintained. Broad market and industry factors may adversely affect the market price of our common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted. Such litigation, if instituted, could result in substantial costs for us and a diversion of management's attention and resources. WE ARE SUBJECT TO SEC REGULATIONS AND CHANGING LAWS, REGULATIONS AND STANDARDS RELATING TO CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE, INCLUDING THE SARBANES-OXLEY ACT OF 2002, NEW SEC REGULATIONS AND OTHER TRADING MARKET RULES, ARE CREATING UNCERTAINTY FOR PUBLIC COMPANIES. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest appropriate resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. WE DO NOT EXPECT TO PAY DIVIDENDS AND INVESTORS SHOULD NOT BUY OUR COMMON STOCK EXPECTING TO RECEIVE DIVIDENDS. We have never declared or paid any cash dividends on our Common Stock. We intend to retain our earnings, if any, to finance the growth and development of our business and therefore do not anticipate paying any cash dividends on our Common Stock in the foreseeable future. Although dividends are not limited currently by any agreements, it is anticipated that future agreements, if any, with institutional lenders or others may limit our ability to pay dividends on our Common Stock. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital and legal requirements and such other factors as our Board of Directors deems relevant. 23 SHARES OF OUR TOTAL OUTSTANDING COMMON STOCK THAT ARE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE FUTURE COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL. As of June 30, 2007, we had 27,317,092 shares of Common Stock issued and outstanding of which approximately 14,389,485 shares are restricted shares. Rule 144 provides, in essence, that a person holding "restricted securities" for a period of one year may sell only an amount every three months equal to the greater of (a) one percent of a company's issued and outstanding shares, or (b) the average weekly volume of sales during the four calendar weeks preceding the sale. The amount of "restricted securities" which a person who is not an affiliate of our company may sell is not so limited, since non-affiliates may sell without volume limitation their shares held for two years if there is adequate current public information available concerning our company. In such an event, "restricted securities" would be eligible for sale to the public at an earlier date. The sale in the public market of such shares of Common Stock may adversely affect prevailing market prices of our Common Stock. Item 3. Controls and Procedures As required by SEC rules, the Company regularly evaluates the effectiveness of disclosure controls and procedures and report its conclusions about the effectiveness of the disclosure controls quarterly on our Forms 10-QSB and annually on our Forms 10-KSB. In the course of the quarter ended June 30, 2007, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective in ensuring that material information relating to the Company required to be disclosed by the Company in reports that it files or submits 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 management, including the chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management has concluded that the consolidated financial statements included in this report on Form 10-QSB for the quarter ended June 30, 2007 fairly state, in all material respects, the Company's financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. The reason for this conclusion is that the Company ascertained the errors associated with the presentation of the financial information in the course of the review of its consolidated financial statements for the quarter ended June 30, 2007. PLAN FOR REMEDIATION OF MATERIAL WEAKNESSES The Company's Audit Committee has met, reviewed the internal controls over financial reporting and has made certain recommendations regarding the use of qualified independent accounting consultants to assist in the review of financial statements and the calculation and presentation of complex financial transactions. CHANGES IN INTERNAL CONTROLS Changes in our internal controls are currently being designed and reviewed and will be implemented on an ongoing basis. LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, and not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. 24 The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events occurring. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Management of the Company is committed to continually review and redesign its internal controls to ensure compliance by the Company with all applicable rules and standards regarding disclosures and financial reporting. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 3, 2007, the Company and its subsidiary Aquair entered into a settlement agreement with plaintiff Atmospheric Water Technologies, Inc. in the Orange County Superior Court Case No. 05CC09548. Under the terms of the settlement, (i) all parties will be released from liability, (ii) the Company and Aquair, as well as the Company's late Chairman and CEO Louis Knickerbocker, will be dismissed with prejudice from the lawsuit, (iii) plaintiff will issue a press release announcing the dismissal of the case, and (iv) the Company, through its insurer, will pay $15,000 to plaintiff. The Company's ongoing litigation with it previous investors the NIR Group has been remanded back to the New York Supreme Court, from the federal district court, and is now titled AJW Partners LLC, AJW Offshore Ltd, AJW Qualified Partners LLC, and New Millenium Capital Partners II LLC v. RG Global Lifestyles, Inc. and Louis Knickerbocker, and is Case No. 600323/07. Recently, however, plaintiffs agreed to voluntarily dismiss Louis Knickerbocker without prejudice (therefore the caption will change upon the next round of pleadings). Additionally, the parties have agreed to informally stay the proceeding for thirty (30) days pending resolution of the Company's claim for $3 million in insurance proceeds from its "key man" life insurance policy with AIG American General it owned and is the beneficiary of. Other than the foregoing lawsuits, the Company is not aware of any litigation, either pending or threatened. 25 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS In April 2007, the Company entered into conversion and subscription agreements with three individuals (accredited investors) who had received an assignment of an aggregate of $175,000 of principal and interest thereon of a $300,000 promissory note which was due to be paid by the Company on March 31, 2007 to a certain noteholder. In furtherance of these agreements, on April 19, 2007, the assignees of the note agreed to cancel their respective assigned notes, and in lieu of repayment, receive an aggregate of 875,000 shares of the Company's restricted common stock, which represents a sale of restricted common stock at $0.20 per share. The securities were sold to the three accredited investors in reliance on Section 4(2) under the Securities Act of 1933, as amended. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS. The following Exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-QSB: EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ---------- --------------------------------------------------------------------- 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act 32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RG Global Lifestyles, Inc. Signature Title Date --------- ----- ---- /s/ Grant King -------------- Grant King Chief Executive Officer August 14, 2007 /s/ William C. Hitchcock ------------------------- William C. Hitchcock Chief Financial Officer August 14, 2007 26