Royal Spring Water (RSPG) 10QSB/A 2007 Q1 Quarterly report (small business) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(AMENDMENT NO. 1)

(Mark One)

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

For the quarter ended: November 30, 2006

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: 000-31329

ROYAL SPRING WATER INC.

(Name of small business issuer in its charter)

Nevada	N/A
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

14553 Delano Street Suite 217, Van-Nuys CA, 91411

(Address of principal executive offices)

Issuer’s telephone number: (818) 902-3690

Securities registered under Section 12(b) of the Exchange Act:   None

Securities registered under Section 12(g) of the Exchange Act:   Common Shares, $0.001 par value

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

State issuer’s revenues for its most recent fiscal year: $0

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days: $73,074,960, assuming a price per share of $2.43 as of March 23, 2007. For the purpose of this disclosure, shares of common stock held by directors, officers and stockholders whose ownership exceeds five percent of the common stock outstanding were excluded. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the issuer, or that such person is controlled by or under common control of the issuer.

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 30,072,000 as of March 23, 2007.

ROYAL SPRING WATER INC.

(A DEVELOPMENT STAGE COMPANY)

Form 10-QSB

For the Quarter Ended November 30, 2006

___________________

TABLE OF CONTENTS

___________________

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets	3
	Statements of Operations	4
	Statements of Cash Flows	5
	Notes to Financial Statements	6
Item 2.	Management’s Discussion & Analysis or Plan of Operation	9
Item 3.	Controls and Procedures	13
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	14
Item 2.	Unregistered Sales of Equity securities and Use of Proceeds	14
Item 3.	Defaults Upon Senior Securities	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 5	Other Information	14
Item 6.	Exhibits	14

2

ROYAL SPRING WATER INC.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

	November 30, 2006			August 31, 2006
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	16,861		$	252,197
Inventory		112,257			65,912
Prepaid expenses and deposits		105,722			32,722
Total Current Assets		234,840			350,831
Property, plant and equipment, net		3,725,397			3,768,892
TOTAL ASSETS	$	3,960,237		$	4,119,723
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	82,382		$	64,398
Advances from shareholders		1,905,974			1,649,609
Obligation under capital lease - current portion		176,267			171,083
Total Current Liabilities		2,164,623			1,885,090
Obligation under capital lease		3,761,326			3,690,442
TOTAL LIABILITIES		5,925,949			5,575,532
STOCKHOLDERS’ DEFICIT
Preferred stock - $.001 par value; 5,000,000 shares authorized, none issued or outstanding		-			-
Common stock - $.001 par value; 50,000,000 shares authorized, 30,072,000 shares outstanding		30,072			30,072
Additional paid-in capital		165,633			135,633
Deficit accumulated during the development stage		(2,161,417	)		(1,621,514	)
TOTAL STOCKHOLDERS’ DEFICIT		(1,965,712	)		(1,455,809	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	3,960,237		$	4,119,723

_______________

See accompanying notes to these financial statements.

3

ROYAL SPRING WATER INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2006 AND 2005

AND FROM INCEPTION TO NOVEMBER 30, 2006

	Three Months Ended November 30, 2006 (Unaudited)			Three Months Ended November 30, 2005 (Unaudited)			For the Period From April 20, 2005 (Date of Inception) to November 30, 2006 (Unaudited)
EXPENSES
General and administrative	$	94,352		$	36,257		$	382,317
Interest and bank charges		46,080			556			48,755
Salaries and wages		45,959			-			76,737
Advertising and promotion		38,076			758			60,839
Consulting fees		17,049			-			29,549
Professional fees		15,912			23,200			256,269
Vehicle		15,433			4,437			56,306
Travel and entertainment		12,257			4,871			43,841
Occupancy costs		9,444			-			51,806
Insurance		6,959			-			20,063
Telecommunications		6,620			2,339			29,672
Depreciation		80,695			43,097			278,234
TOTAL EXPENSES		388,836			115,515			1,334,388
LOSS FROM OPERATIONS		(388,836	)		(115,515	)		(1,334,388	)
OTHER EXPENSES
Interest on capital lease obligation		151,068			158,368			827,029
NET LOSS	$	(539,904	)	$	(273,883	)	$	(2,161,417	)
Loss per common share, basic and diluted	$	(0.02	)	$	(0.01	)	$
Weighted average shares outstanding, basic and diluted		30,072,000			30,072,000

 

_______________

See accompanying notes to these financial statements.

4

ROYAL SPRING WATER INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED NOVEMBER 30, 2006 AND 2005

AND FROM INCEPTION TO NOVEMBER 30, 2006

	Three Months Ended November 30, 2006 (Unaudited)			Three Months Ended November 30, 2005 (Unaudited)			For the Period From April 20, 2005 (Date of Inception) to November 30, 2006 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(539,904	)	$	(273,883	)	$	(2,161,417	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		80,695			43,097			278,234
Interest accrued on obligation under capital lease		151,068			158,368			827,029
Acquisition of the net liabilities of Easy.com Inc.		-			-			(4,295	)
Services contributed by shareholders		30,000			30,000			200,000
Changes in Assets and Liabilities:
Prepaid expenses and deposits		(73,000	)		(15,000	)		(105,722	)
Inventory		(46,345	)		-			(112,257	)
Accounts payable and accrued liabilities		17,985			-			82,382
NET CASH USED IN OPERATING ACTIVITIES		(379,501	)		(57,418	)		(996,046	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment		(37,200	)		(1,700	)		(653,067	)
NET CASH PROVIDED BY INVESTING ACTIVITIES		(37,200	)		(1,700	)		(653,067	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from shareholders		256,365			102,509			1,905,974
Repayment of obligation under capital lease		(75,000	)		-			(240,000	)
NET CASH PROVIDED BY FINANCING ACTIVITES		181,365			102,509			1,665,974
NET CHANGE IN CASH & CASH EQUIVALENTS		(235,336	)		43,391			16,861
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		252,197			12			-
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	16,861		$	43,403		$	16,861

_______________

See accompanying notes to these financial statements.

5

ROYAL SPRING WATER INC.

(A DEVELOPMENT STAGE COMPANY)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS

ORGANIZATION

Easy.com, Inc. (“Easy”) was incorporated under the laws of the State of Nevada on May 9, 2000. Easy was a non-operating shell corporation with nominal net assets prior to June 2005, when Easy acquired one hundred percent (100%) of the assets of Royal Spring Water Inc., a Nevada company (“RSW” or the “Company”).

In April 2006, the Company filed Articles of Merger in Nevada and legally combined the entities of Easy.com and Royal Spring Water Inc. They concurrently changed the name of the surviving entity to Royal Spring Water Inc.

The Company was established with a clear mission, namely to extract, process, and bottle artesian well water of supreme quality.

BASIS OF PRESENTATION

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-QSB and item 310 under subpart A of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended November 30, 2006 is not necessarily indicative of the results that may be expected for the year ending August 31, 2007. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended August 31, 2006.

The Company has not earned any revenues from limited principal operations and accordingly, the Company's activities have been accounted for as those of a "Development Stage Enterprise" as set forth in Statement of Financial Accounting Standards (“SFAS”) No. 7, Accounting and Reporting by Development Stage Enterprises (“SFAS No. 7 “). Among the disclosures required by SFAS No. 7 are that the Company's financial statements be identified as those of a development stage company, and that the statements of operations, stockholders' deficit and cash flows disclose activity since the date of the Company's inception.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective in fiscal years beginning after November 15, 2007. Management is currently evaluating the impact that the adoption of this statement may have on the Company’s consolidated financial position and results of operations.

6

ROYAL SPRING WATER INC.

(A DEVELOPMENT STAGE COMPANY)

NOTE 2. PROPERTY, PLANT & EQUIPMENT

At November 30, 2006 property, plant and equipment consists of the following:

Land and water rights under capital lease	$	1,287,853
Equipment under capital lease		506,555
Locomotive under capital lease		53,661
Computer		70,410
Software		3,275
Water treatment system		461,068
Building under capital lease		1,502,495
Furniture and equipment		81,120
Leasehold improvements		37,194
		4,003,631
Less: accumulated depreciation		(278,234	)
Net property, plant and equipment	$	3,725,397

Depreciation expense was $80,695 for the three months ended November 30, 2006 ($43,097 - 2005).

NOTE 3. RELATED PARTY TRANSACTIONS

The advances from shareholders of the Company, to facilitate the payment of debts, are non-interest bearing, unsecured and have no specific terms of repayment. The carrying value of the advances approximates the market value due to the short-term maturity of the financial instruments.

For the three months ended November 30, 2006 and 2005, the Company's directors and shareholders devoted time to the development of the Company. Compensation expense totaling $30,000 has been recorded for the three months ended November 30, 2006 and 2005 and has been included in general and administrative. These directors and shareholders have waived reimbursement and have considered these services as a contribution to capital. Accordingly, the contributions have been recorded as additional paid-in capital.

NOTE 4. OBLIGATION UNDER CAPITAL LEASE

The Company leases land, building and equipment under a capital lease which contains a bargain purchase option which the Company intends to exercise on or before its expiration on August 1, 2009. The asset and liability under the capital lease are recorded at the present value of the minimum lease payments and purchase option price.

Future minimum lease payments under capital lease as of November 30, 2006 are:

2007 (9 months)	$	225,000
2008		307,000
2009 (11 months), including bargain purchase option		4,881,929
Total minimum lease payments		5,413,929
Less: amount representing interest at 19%		(1,476,336	)
Total obligations under capital lease		3,937,593
Less: current installments of obligations under capital lease		(176,267	)
Long-term obligation under capital lease	$	3,761,326

7

ROYAL SPRING WATER INC.

(A DEVELOPMENT STAGE COMPANY)

NOTE 5. SUBSEQUENT EVENTS

In December 2006, the Company signed a two year non-interest bearing convertible note for $1,250,000.  The note is collateralized by a general security agreement over the assets of the Company.  The note matures in December 2008 and the Company may at its option repay, in whole or in part, the note for a pre-payment price of 110%.  Any remaining unpaid balance of the note will be paid on the maturity date.  The holder of the note shall have the right, at its option, at any time, to convert the outstanding principal to common stock at a price equal to 85% of the weighted market value for the twenty days immediately prior to the conversion date.  The Company has also issued to the purchaser of the convertible note 500,000 warrants with strike prices ranging from $2.00 to $5.00. These warrants are exercisable for a period of five years (the “exercise period”) and can be exercised at any time within the exercise period; and payment will be made by a net cash settlement by the holder and the holder will receive unregistered common shares of the Company.

In accounting for the Debentures and the warrants described above the Company considered the guidance contained in EITF 00-19, Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company's Own Common Stock, and SFAS 133 Accounting for Derivative Instruments and Hedging Activities. In accordance with the guidance provided in EITF 00-19, the Company determined that the conversion feature of the convertible debentures represents an embedded derivative since the debenture is convertible into a variable number of shares based upon the conversion formula which could require the Company to issue shares in excess of its authorized amount. The convertible debentures are not considered to be “conventional” convertible debt under EITF 00-19 and thus the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability.

The Company is required to measure the fair value of the warrants and the embedded conversion feature to be calculated using the Black-Scholes valuation model on the date of each reporting period until the debt is extinguished. The Company allocated the proceeds from the sale of the Debentures between the relative fair values at the date of origination of the sale for the warrants, embedded derivative and the debenture. The fair value of the warrants was calculated by using the Black-Scholes valuation model and the relative fair value of the warrants was recorded as a reduction to the Debenture liability and will be amortized over the loan period and charged to interest expense.

The fair value of the embedded conversion feature allocated to the Debentures liability was based on the Black-Scholes valuation model and the relative fair value of the embedded conversion feature was recorded as a reduction to the Debenture liability and will be amortized over the loan period and charged to interest expense.

Subsequent to the year end, the Company has emerged from the development stage as described in note 1. The Company has begun principal operations and has earned revenue from the delivery of their product to their customers.

NOTE 6. COMMITMENT AND CONTINGENCY

The Company has made payments toward equipment in the amount of $70,000. The Company has a commitment to pay an additional $80,000 towards this equipment subsequent to the year end.

In February of 2006, our former Chief Operating Officer filed a complaint against the Company, for, among other things, breach of employment agreement. The complaint was filed in the Los Angeles Superior Court, Santa Monica Division and seeks unspecified damages. The Company filed a cross complaint against this individual for fraud, misrepresentation and breach of fiduciary duty. We recently made an offer of settlement to plaintiff, to which a response has not been received. The Company is in the process of conducting discovery. We do not believe that this litigation will be material to our financial position, operations, or cash flows. There are no proceedings in which any of our directors, officers or affiliates is an adverse party or has a material interest adverse to the interest of the Company.

8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

PLAN OF OPERATION

Overview

The following discussion and analysis should be read in conjunction with our Financial Statements and notes appearing elsewhere in this report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to; those discussed below and elsewhere in this report.

Our financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.

On August 1, 2005 the Company entered into a lease for operating a production facility at 3500 Holly Sugar Rd. in Hereford, Texas with the intention of producing and selling artesian water. This property includes 1,000 square feet of office space, a 70,000 square foot warehouse and production facility, six 25,000 gallon liquid holding tanks and related equipment and the water rights from two artesian wells. The lease calls for an initial rent of $15,000 per month for six months commencing November 1, 2005 to April 2006 payable in advance for six months on November 1, 2005. Thereafter for the next 24 years, the annual rent is $25,000 per month, adjusted annually based on the consumer price index. In the first four years, the Company has an option to purchase the facility at an amount calculated as set forth in the terms of the lease which is estimated to be $4,590,964.

Of the 70,000 square foot space, 40,000 square feet will be allocated to water processing and packaging space made accessible by loading bays and a 5.5 mile railroad spur leading directly from the main railroad station in Hereford to our loading dock. The railroad extension is made available to the Company as a term of the lease and, as a term of the option to purchase the property, will continue to be made available for use as an easement when the Company purchases the property. Also included in the property lease and option to purchase is the train engine needed to pull and push the train cars for our shipping needs which will enable us to keep our shipping cost very low. Approximately 30,000 square feet has been allocated for storage of raw materials and finished goods.

Under our lease agreement, we are allowed to pump 400,000 gallons of water per day, which equates to approximately 2,909,000bottles of water (16.9 oz) per day. We believe this will be sufficient to meet the demands of any large orders in the foreseeable future.

During the next twelve months, we intend to concentrate on one product; plain, non-carbonated bottled water.

Our primary business strategy is focused in two main areas. The first is to offer existing bottled water distribution companies, major retail stores and service oriented businesses the ability to change their current bottled water to a private label in their business name. Additionally, for companies already selling under a private label, we intend to sell our water for a more competitive price and to help increase their bottle water capacity by providing them with an additional source for their water supply. Our research has shown that some manufacturing and distribution companies are at their production capacity and cannot meet their customers’ demands and that it may be more cost effective for them to have us provide them with water rather than to develop or expand existing water bottling facilities. In these circumstances, we intend to have the customers provide us with their labels or logo, and we will fill the bottles, apply the label and ship the products to the customer. The second part of our marketing and sales strategy is to develop the “Royal Spring Water” brand of bottled water and commence sales of that product in the US and around the world. We will be targeting our product (single serve plastic bottles of 355ml, 500ml, 1liter, 1.5liters, 1gallon) directly to the smaller end user - convenience stores, fast food establishments, gas stations, major clubs and popular restaurants, among others.

9

A sales team comprised of Company representatives will be put in charge to first work on securing contracts with stores, restaurants and clubs using various promotional tools such as pamphlets, price lists, and samples of our bottled water. Sponsorship is another marketing tool that we will utilize in order to acquire exposure and gain recognition. We expect to be sponsoring concerts, golf tournaments, and dance clubs, etc. We believe that by providing free samples of our bottled water to various groups and venues, we will be able to effectively spread our name and popularity and obtain market penetration. We will also be targeting all major hotel and casino gaming companies in order to provide them with their private labeled bottled water and customized labels (specific hotel-casino names, logos and images). We have contacts in some of the major hotel-casinos in Las Vegas who have already expressed an interest in purchasing water from our company when it becomes available. The hotels and major casinos out-source 100% of their consumable bottled water.

Our production and bottling facility at the wells is a highly automated plant with an operationally flexible system with high production capacity. The processing and bottling of the water to be captured at the artesian well water facility is divided into various main steps:

Initial capture at the artesian well water where the water is pumped from a depth of approximately 300 to 400 feet then transferred to the storage location by a system of pipes.

1. From the point of capture, a network of underground pipes transfers the water to our treatment plant where the water is first filtered through sand traps and stored in indoor holding tanks (one of six 25,000 gallon tanks) subsequent to the filtration and treatment process to prepare water for the bottling process.

2. After the primary storage, water is pumped to a Multi-Media Filter to an Activated Carbon Pre-Filter, to a 5-Micron Sediment Filter to Reverse Osmosis to Ozone Disinfection treated water pumped in two 6,000 gallon Stainless Steel Production Water Storage Tanks. The water is then transferred to the bottling zone via stainless steel pipes and Post Activated Carbon Filter and a Ultra-Violet Sterilization system.

3. The water is then moved to the bottling room which is pressurized and air conditioned (filtered air) to avoid all possible contamination during the bottle filling process. These operations consist of rinsing of the bottle prior to filling, filling of the bottle with the purified water, capping it, labeling it, assigning it with a batch number, year and time of bottling and expiration date.

4. The bottles are then moved to the packing and shipping area where a bundling machine groups the various forms into packs of 6, 12, 24 and 32 bottles, wrapping them in printed film. The packs are then transferred to the robotic pallet- forming area where they are palletized for shipment.

5. Our in house laboratory staff maintains a constant control on the quality of the water. Weekly water samples are sent out to a certified lab in order to maintain our certification by the EPA, TCEQ and Texas Department of Health authorities. To further guarantee a superior quality product, the laboratory has to process daily chemical and bacteriological analyses on the entire production chain. We are using polyethylene Terephthalate (known as PET) bottles in various sizes - 12oz, 16.9oz 1L and 1.5L. Our current system can also manufacture flavored water and carbonated water. Our capping machines can handle both a regular flat cap as well as a sportscap. We have a Krup stretch blow molder which we will use to blow our PET bottles. The PET bottles are blown from what is called a preform. This is supplied to us by the Ball Corporation, one of the leading PET manufacturers. We have made a decision to buy all of our raw materials from US based companies instead of China made products. (see details of our current existing production capacity and potential capacity in the paragraph below entitled “Acquisition or Disposition of Plant and Equipment”)

10

Results of Operations for the Three Months Ended November 30, 2006

We have no revenue from operations from inception to Novemebr 30, 2006. From commencement in 2005 to the first quarter of fiscal year 2007, our financing came from loans from shareholders in the amount of $1,905,974. Commencing October 1, 2006, the Company and the shareholders have agreed to an annual interest rate of 10% which the Company believes approximates a fair market rate of interest for similar debt financing.

Our general and administrative expenses have increased $58,095 since the first quarter in 2006. This is mainly because the plant was not operational until December 2006, therefore there were minimal operational costs incurred in the first quarter of 2006, whereas in the current quarter we have incurred costs related to testing the water facilities, maintenance and repairs, engineering fees, equipment rentals, etc. We have also hired new employees at the plant and incurred salaries and wages expense of $38,076. We did not have any salaries and wages expenses in the first quarter of 2006. Advertising and promotion increased $35,369 since the first quarter of 2006. This is because we incurred expenses related to creating and airing a television commercial for our product. Other general expense categories have increased as well, which include consulting, vehicle, travel and entertainment, occupancy costs, insurance and telecommunications. These expenses either did not exist or were minimal in the first quarter of 2006 mainly because we had only recently begun operations. Our interest and bank charges have increased $45,524 since the first quarter in 2006 because of the interest recorded on our shareholder loans.

Our operations since inception have not generated any revenue. We generated a net loss of $539,904 for the three months ended November 30, 2006, for a cumulative loss of $2,161,417 since the inception of the Company.

Licensing and Water Rights:

Although we have a contract which will allow us to extract water from the land, it doesn’t automatically give us the right to distribute it. In order to distribute water worldwide and do business, certain licenses must first be acquired. Besides necessary licenses, one must pass certain specifications and requirements of the Food and Drug Administration (FDA). This includes a clean and immaculate warehouse, and the use of hygienic filtration, refrigeration, bottling and packing operation systems. We will assure that all our operations meet and surpass these government requirements. In June 2006 the Company passed the water test required by the state of Texas Commission on Environmental Quality, in order to commence production at the Royal Spring Water plant in Hereford, Texas. The test was conducted by the City of Amarillo, Environmental Laboratory No. 48103 over a period of three days. This completed all of the testing and licensing requirements of the various government bodies needed to commence production and sales of our products.

Product Research and Development:

In order to obtain high quality products and assure customer satisfaction, we will be using fully automated state of the art machinery. Since our inception, we have spent much of our time, money and efforts into researching the water industry in the U.S. and overseas. As a result, we have acquired broad knowledge about procedures, licenses, machinery, and land. During this time, we have also built strong relationships with key individuals within the government and private sectors related to the water industry. We do not anticipate performing further research and development for any products during the next twelve months.

Acquisition or Disposition of Plant and Equipment:

We have purchased and assembled a fully automated, state of the art water treatment and bottling system that is currently in place and has the capacity to bottle up to 144 million bottles per year, based on a bottle size of 16.9 ounces. The plant facility has the water capacity to grow and supply in excess of one billion bottles per year. Our bottling line can currently handle bottle sizes from 8 ounce bottles to 1.5 liter bottles. This state of the art machinery is fully automated and runs with minimal human intervention. As part of our bottling system we also purchased a bottle stretch blow molder which enables us to blow our own bottles from preforms.

To date, we have spent approximately $653,000 on the purchase of machinery and equipment.

11

Liquidity and Capital Resources and Future Funding Requirements

The Company has received letters of intent from potential customers, which management believes will produce the necessary income to attain positive cash flows in the future. Since inception, the Company’s principal shareholders/officers have provided approximately $1.9 million in short-term working capital advances and these individuals will continue to provide certain funding as and when required on a short-term basis. In addition, the Company has secured a line of credit of up to $1,000,000 with American Business Finance LLC, located in Oklahoma, to be collateralized by accounts receivable. American Business Finance LLP will purchase 80% of the face value of invoices until Royal Spring Water Inc. is paid. Borrowings will bear a base fee of 2% over base index. This will help to improve cash flows needed for working capital until profitable operations are attained.

In December 2006, the Company signed a two year non-interest bearing convertible note for $1,250,000. The note is collateralized by a general security agreement over the assets of the Company. The note matures in December 2008 and the Company may at its option repay, in whole or in part, the note for a pre-payment price of 110%. Any remaining unpaid balance of the note will be paid on the maturity date. The holder of the note shall have the right, at its option, at any time, to convert the outstanding principal to common stock at a price equal to 85% of the weighted market value for the twenty days immediately prior to the conversion date. The Company has also issued, to the purchaser of the convertible note, 500,000 warrants with strike prices ranging from $2.00 to $5.00 expiring in five years.

Although the Company has no other firm commitments from other investors or lenders at this time, the Company believes it has raised sufficient capital to continue production and distribution of its products until profitability is reached. Additionally, the Company believes it will not be required to raise any additional funds in the next twelve months. There can be no assurance that the Company will be able to secure additional financing or that the amount of any additional financing will be sufficient to accomplish its business objectives or to pay ongoing operating expenses.

Our cash used in operating activities increased mainly because of the purchase of new inventory and payments for deposits on new equipment not yet delivered as of the quarter end, as well as payments made for rent deposits on our plant facility. To date we have spent $70,000 towards a new water bottling machine which is included with prepaid expenses and deposits. We have also paid for new machinery in the current quarter in the amount of $37,200. These payments are mainly related to the purchase of new equipment, as discussed above in Acquisition or Disposition of Plant and Equipment.

From commencement in 2005 to the first quarter of fiscal year 2007, the Company has funded its operations from loans from our officers and directors. The shareholders of the Company have made loans in the amount of $1,905,974. These funds have been used to meet working capital requirements, acquire bottling equipment and further develop the plant.

The majority of the infrastructure necessary for the operation of the plant was already in place upon commencement of the lease. This is the key capital resource that will enable the Company to quickly commence production and obtain revenues to assist in meeting its working capital requirements.

The following assets are currently in use at our plant:

· Building - 20,000 square feet three story building attached to the warehouse

· Warehouse - 15,000 square feet adjacent to the three story building

· Warehouse - additional 36,000 square feet space, added April 2006

· Equipment - six 25,000 gallon liquid holding tanks (4 tanks are inside the building and 2 outside) related water pumps and pipes connecting wells and tanks, motors and agitators

· Land and Water Rights - Well #11 and Well #12 located on the real Property

· Waste water ponds

· Paved parking

· Access to existing rail

The Company’s scheduled lease payments from inception of the lease and leading up the purchase date are as follows:

December 1, 2006 - December 31, 2006	$	175,000
January 1, 2007 - December 31, 2007		300,000
January 1, 2008 - December 31, 2008*		310,500
January 1, 2009 - July 31, 2009*		187,464
	$	972,964

*CPI is estimated at 3.5% as per most recent full year information available as posted in The Wall Street Journal.

At the end of this period, the Company intends to purchase the assets at an estimated price of $4,590,964.The actual purchase price will depend upon the prevailing lease rate in effect at the time we exercise our purchase option.

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Determination of the classification of the lease

The Company has determined that the Lease meets the criteria set forth in paragraph 7 (b) of Statement of Financial Accounting Standards ("SFAS") No. 13, Accounting for leases, requiring it to be classified as a capital lease. To meet this requirement the lease must meet one of four specific criteria, one of which is the existence of a bargain purchase option, defined as a provision in the lease allowing the lessee, at our option, to purchase the leased property for a price which is sufficiently lower than the expected fair value of the property at the date the option becomes exercisable, and that exercise of the option appears, at the inception of the lease, to be reasonably assured.

Off-Balance Sheet Arrangements

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.

Going Concern

Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited financial statements for the period ended August 31, 2006, our independent registered accountants included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.

ITEM 3.  CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, 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. Because of 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, 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. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based upon that evaluation, management concluded that our disclosure controls and procedures are effective to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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There was no change in our internal controls over financial reporting identified in connection with the requisite evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

In February of 2006, our former Chief Operating Officer filed a complaint against the Company, relating to his employment with Company. The complaint was filed in the Los Angeles Superior Court, Santa Monica Division and seeks unspecified damages alleging breach of contract, wrongful discharge, fraud and violation of labor law. The Company filed a cross complaint against this individual for fraud, misrepresentation and breach of fiduciary duty. We recently made an offer of settlement to plaintiff, which provided the plaintiff would retain the $50,000 in salary paid to him, and in return, plaintiff would return 300,720 shares of common stock that were issued to him at the time he entered into the alleged employment contract with the Company. The plaintiff has retained new legal counsel who has reiterated the previous settlement proposal to which the Company is waiting for a response. We do not believe that this litigation will be material to our financial position, operations, or cash flow. There are no proceedings in which any of our directors, officers or affiliates is an adverse party or has a material interest adverse to the interest of the Company

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

This item is not applicable.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

This item is not applicable.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

This item is not applicable.

ITEM 5 OTHER INFORMATION

This item is not applicable.

ITEM 6 EXHIBITS

The following exhibits are being filed as part of this quarterly report:

Exhibit No.	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer and Chief 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 Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ROYAL SPRING WATER INC.
By:	/s/ Alex Hazan
	Name: Alex Hazan
	Title: Chief Executive Officer
Date: March 27, 2007
By:	/s/ Harel Goldstein
	Name: Harel Goldstein
	Title: Chief Financial Officer
Date: March 27, 2007

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