Royal Spring Water (RSPG) 10QSB/A 2007 Q3 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: May 31, 2007

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: $34,565,005, assuming a price per share of $1.35 as of July 19, 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 July 19, 2007.

ROYAL SPRING WATER INC.

Form 10-QSB

For the Quarter Ended May 31, 2007

__________________

TABLE OF CONTENTS

____________________

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets	3
	Statements of Operations	4
	Statements of Cash Flows	6
	Notes to Financial Statements	7
Item 2.	Management’s Discussion & Analysis or Plan of  Operation	12
Item 3.	Controls and Procedures	18
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 2.	Unregistered Sales of Equity securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5	Other Information	19
Item 6.	Exhibits	19

2

ROYAL SPRING WATER INC.

BALANCE SHEETS

	May 31, 2007			August 31, 2006
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	10,810		$	252,197
Accounts receivable		23,650			-
Inventory		224,789			65,912
Prepaid expenses and deposits		181,197			32,722
Total Current Assets		440,446			350,831
Property, plant and equipment, net		3,716,145			3,768,892
Debt issue costs		81,146			-
TOTAL ASSETS	$	4,237,737		$	4,119,723
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	301,393		$	64,398
Advances from shareholders		1,893,147			1,649,609
Accrued warrant liability		430,028			-
Obligation under capital lease - current portion		187,111			171,083
Total Current Liabilities		2,811,679			1,885,090
Convertible debt, net of discount		876,566			-
Obligation under capital lease		3,894,786			3,690,442
Total Long Term Liabilities		4,771,352			3,690,442
TOTAL LIABILITIES		7,583,031			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		369,863			135,633
Accumulated deficit		(3,745,229	)		(1,621,514	)
TOTAL STOCKHOLDERS’ DEFICIT		(3,345,294	)		(1,455,809	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	4,237,737		$	4,119,723

See accompanying notes to these financial statements.

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ROYAL SPRING WATER INC.

STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MAY 31, 2007 AND 2006

	Three Months Ended May 31, 2007 (Unaudited)		Three Months Ended May 31, 2006 (Unaudited)
Sales	$	24,517	$	-
Cost of goods sold		56,624		-
Gross loss		(32,107		-
EXPENSES
General and administrative		136,274		85,164
Product testing and development		95,482		-
Salaries and wages		62,490		-
Professional fees		57,488		61,014
Travel and entertainment		18,416		5,413
Advertising and promotion		16,335		1,182
Vehicle		14,500		11,565
Commissions		9,500		-
Telecommunications		5,917		6,584
Occupancy costs		4,864		-
Insurance		4,136		7,607
Depreciation		98,429		43,636
TOTAL EXPENSES		523,831		222,165
LOSS FROM OPERATIONS		(555,938		(222,165
OTHER EXPENSES
Unrealized loss on warrants		40,580		-
Interest and bank charges		57,793		166
Interest on capital lease obligation and convertible debenture		192,502		154,826
NET LOSS	$	(846,813	$	(377,157
Loss per common share, basic and diluted	$	(0.03	$	(0.01
Weighted average shares outstanding, basic and diluted		30,072,000		30,072,000

See accompanying notes to these financial statements.

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ROYAL SPRING WATER INC.

STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED MAY 31, 2007 AND 2006

	Nine Months Ended May 31, 2007 (Unaudited)			Nine Months Ended May 31, 2006 (Unaudited)
Sales	$	89,909		$	-
Cost of goods sold		84,215			-
Gross Loss		5,694			-
EXPENSES
General and administrative		396,022			189,855
Professional fees		147,183			126,849
Salaries and wages		125,400			-
Product testing and development		95,482
Advertising and promotion		69,293			1,940
Travel and entertainment		51,049			16,980
Vehicle		48,797			26,164
Telecommunications		22,633			14,009
Occupancy costs		19,593			-
Insurance		18,954			7,607
Consulting fees		17,049			-
Commissions		9,500			-
Depreciation		242,085			130,145
TOTAL EXPENSES		1,263,040			513,549
LOSS FROM OPERATIONS		(1,257,346	)		(513,549	)
OTHER EXPENSES
Unrealized loss on warrants		40,580			-
Interest and bank charges		155,798			1,057
Interest on capital lease obligation and convertible debenture		669,991			469,818
NET LOSS	$	(2,123,715	)	$	(984,424	)
Loss per common share, basic and diluted	$	(0.07	)	$	(0.03	)
Weighted average shares outstanding, basic and diluted		30,072,000			30,072,000

See accompanying notes to these financial statements.

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ROYAL SPRING WATER INC.

STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MAY 31, 2007 AND 2006

	Nine Months Ended May 31, 2007 (Unaudited)			Nine Months Ended May 31, 2006 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(2,123,715	)	$	(984,424	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		242,085			130,145
Interest accrued on obligation under capital lease and convertible debt		669,991			469,818
Services contributed by shareholders		90,000			90,000
Amortization of debt issuance costs		21,354			-
Unrealized loss on warrants		40,580			-
Changes in Assets and Liabilities:
Accounts receivable		(23,650	)		-
Prepaid expenses and deposits		(13,500	)		(22,722	)
Inventory		(158,877	)		-
Accounts payable and accrued liabilities		236,994			36,649
NET CASH USED IN OPERATING ACTIVITIES		(1,018,738	)		(280,534	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment		(324,312	)		(352,887	)
NET CASH USED IN INVESTING ACTIVITIES		(324,312	)		(352,887	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debt		1,085,000			-
Advances from shareholders		243,538			804,593
Repayment of obligation under capital lease		(226,875	)		(90,000	)
NET CASH PROVIDED BY FINANCING ACTIVITES		1,101,663			714,593
NET CHANGE IN CASH & CASH EQUIVALENTS		(241,387	)		81,172
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		252,197			12
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	10,810		$	81,184

See accompanying notes to these financial statements.

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ROYAL SPRING WATER INC.

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 and nine month periods ended May 31, 2007 are 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's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses from operations since inception, and as of May 31, 2007 has a working capital and total capital deficiency, which raise substantial doubt as to its ability to continue as a going concern.

REVENUE RECOGNITION

The Company recognizes revenue from product sales when title transfers, the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable, which is generally at the time of shipment.  In the event a situation occurs to create a post-shipment obligation, we would defer revenue recognition until the specific obligation was satisfied.  We defer recognition of sales to distributors when we are unable to make a reasonable estimate of product returns due to insufficient historical product return information.  The revenue recorded is dependent upon estimates of expected customer returns and sales discounts.

INCOME TAXES

The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recorded for differences between the financial statements and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period. As of May 31, 2007, a deferred tax asset of approximately $1.4 million (which arises solely as a result of net operating losses), has been entirely offset by a valuation reserve due the uncertainty that this asset will be realized in the future.

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ROYAL SPRING WATER INC.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes, which is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109 and 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 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 may have on its financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently in the process of assessing the impact the adoption of SFAS 157 will have on its financial statements.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires that public companies utilize a "dual-approach" to assessing the quantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to annual financial statements for fiscal years ending after November 15, 2006. Management believes the adoption of this pronouncement will not have a material impact on the Company's consolidated financial statements.

In December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration Payment Arrangements which addresses accounting for registration payment arrangements. FSP 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. FSP 00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement.  Adoption of FSP 00-19-02 is required for fiscal years beginning after December 15, 2006.  The Company has adopted FSP 00-19-2 and the effect on the financial statements is disclosed in note 5.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments, and certain other items, at fair value. SFAS 159 applies to reporting periods beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on the Company’s financial condition or results of operations.

8

ROYAL SPRING WATER INC.

NOTE 2. PROPERTY, PLANT & EQUIPMENT

At May 31, 2007 property, plant and equipment consists of the following:

	May 31, 2007		August 31, 2006
	(Unaudited)
Land and water rights under capital lease	$	1,287,853	$	1,287,853
Equipment under capital lease		506,555		506,555
Locomotive under capital lease		53,661		53,661
Computer		73,531		67,524
Software		3,275		3,275
Water treatment system		563,731		469,218
Building under capital lease		1,502,495		1,502,495
Furniture and equipment		96,318		75,850
Leasehold improvements		68,350		-
		4,155,769		3,966,431
Less: accumulated depreciation		(439,624		(197,539
Net property, plant and equipment	$	3,716,145	$	3,768,892

Depreciation expense was $98,429 and $242,085 for the three and nine months ended May 31, 2007, respectively ($43,636 and $130,145 - 2006).

NOTE 3. RELATED PARTY TRANSACTIONS

The advances from shareholders of the Company to facilitate the payment of debts bear interest at 10% per annum, are 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 and nine months ended May 31, 2007, the Company's directors and shareholders devoted time to the development of the Company. Compensation expense totaling $30,000 and $90,000 has been recorded for the three and nine months ended May 31, 2007, respectively. 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 May 31, 2007 are:

2007 (3 months)	$	76,875
2008		310,575
2009 (11 months), including bargain purchase option		4,874,603
Total minimum lease payments		5,262,053
Less: amount representing interest at 19%		(1,180,156
Total obligations under capital lease		4,081,897
Less: current installments of obligations under capital lease		(187,111
Long-term obligation under capital lease	$	3,894,786

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ROYAL SPRING WATER INC.

NOTE 5. CONVERTIBLE DEBT

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 of 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; 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.  Since the convertible debenture is convertible into an indeterminate number of shares of common stock, it is assumed that the Company could never have enough authorized and unissued shares to settle the conversion of the outstanding warrants into common stock that are held by non-employees.  In addition, as the warrants are detachable from the convertible debt, they are freestanding derivative financial instruments.  Therefore, in accordance with EITF 00-19, the fair value of the warrants outstanding when the debentures were issued was determined and removed from equity and shown as a liability.  The fair value of the warrants at the inception of the debentures of $389,448 was calculated using the Black-Scholes model using the following assumptions: Discount rate of 4.8%, volatility of 70%; dividend rate of 0% and expected term of 5 years.

In connection with the convertible debt, the Company paid $102,500 in fees and commissions. These debt issue costs are being amortized over the term of the debentures in accordance with SAB 5. For the three and nine months ended May 31, 2007, the Company amortized $12,821 and $21,354 of the debt issue costs as a charge to financing costs.

The Company is required to measure the fair value of the warrants 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 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 valued periodically with any increase or decrease charged to earnings. Upon full payment of the debenture (through repayment or conversion to equity) the fair value of the warrants on that date will be reclassified to equity.   As of May 31, 2007, the estimated value of the warrants is $430,028.

In accordance with EITF 98-5, the Company evaluated the conversion feature embedded in the debt instrument and concluded that a beneficial conversion feature exists since the effective conversion price of the shares was less than the stock price at the date of issuance.  The beneficial conversion feature of $144,230 has been recorded as additional paid in capital and has been charged as interest expense in the statement of operations for the nine month period ended May 31, 2007.

The convertible debenture agreement requires the Company to prepare and file a registration statement on or before the 30th day following the closing date on December 27, 2006.  If the Company fails to file the registration statement by the filing date, the Company must pay to the Purchaser an amount equal to 1% of the outstanding principal amount of the Convertible Note, prorated, for each 30 day period until the Registration Statement is filed with the Commission.  The Company has not as this date filed a registration statement and accordingly has accrued payments of $13,750 in the statement of operations for the nine months ended May 31, 2007.  The agreement also requires the Company to pay to purchaser, as liquidated damages, an amount equal to 2% of the outstanding principal amount of the Convertible Note, prorated, for each 30 day period the Registration Statement is not declared effective by the Commission, based on certain definitions of the “best efforts” of the Company to do so.  The agreement goes on to require the Company to pay liquidated damages if, following the declaration of effectiveness of the Registration Statement, such registration statement ceases to be effective.  The Company must pay to the purchaser an amount equal to 1% of the outstanding principal amount of the convertible note, prorated, for each 30 day period the registration default remains uncured.  

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ROYAL SPRING WATER INC.

NOTE 6. COMMITMENT AND CONTINGENCY

The Company has made payments toward equipment in the amount of $134,975, which is recorded in prepaid expenses and deposits.  The Company has a commitment to pay an additional $94,975 towards this equipment subsequent to the period end.

In February of 2006, our former Chief Operating Officer (“COO”) 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. The Company recently reached a settlement agreement which involved a cash payment of $1,700 to the former COO.  The COO shall return 250,000 shares that was part of the contract between the Company and the COO and will retain 35,000 shares.  The contract is now terminated.  The COO and the Company have released each other of any past, present or future claims. 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.

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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 was  estimated at the inception of the lease 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 2,909,000 bottles 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) directly to the smaller end user - convenience stores, fast food establishments, gas stations, major clubs and popular restaurants, among others.

12

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).   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 via sealed pipes 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  machine  packs the bottles, wrapping them in   film.  The packs are then transferred to the pallet- forming area where they are palletized for shipment.

5.   Our in house  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 16.9oz size.    Our capping machines can handle  a regular flat cap  We  will use a blow molder 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”)

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Results of Operations for the Three and Nine Months Ended May 31, 2007

The plant is now operational and during the three and nine months ended May 31, 2007 we began shipping bottled water to our customers and realized sales of $24,517 and $89,909 for the three and nine months ended May 31, 2007 respectively.  These sales were made to distributors and national chain stores.  The sales were of both our RSW bottled water and private labeled bottled water.  The revenues from the contracts we have negotiated are on a net 30 basis after the products are received by the customer. We now have an account receivable line of credit for $1,000,000 with American Business Finance LLC out of Oklahoma which will help to speed up cash flow into our account against the payments that are pending on outstanding vendor invoices.

Cost of sales represents the allocation of raw materials, direct labor, freight in and water testing related to our sales of our finished goods inventory.  For the three months and nine months ended May 31, 2007, we incurred a gross (loss) profit of ($32,107) and 5,694 respectively.  We experienced a gross loss this quarter because we sold a portion of our finished goods at amounts below cost in order to promote our product.  In addition, we began to capitalize less direct labor to our inventory than in the previous quarter, based on more accurate estimates from new information on our production process.  We expect in the next quarter that our cost per product will decrease and we will be increasing our sale prices, resulting in gross profits.

Advertising and promotion during the three and nine months ended May 31, 2007 increased $15,153 and $67,353 compared to the three and nine months ended May 31, 2006.  This was because we incurred expenses related to creating and airing a television commercial for our product, and we shipped out free cases of water to potential customers to promote our product.  Other general expense categories have increased as well over these periods, which include salaries and wages, vehicle, travel and entertainment, occupancy costs, insurance and telecommunications.  These expenses either did not exist or were minimal in the three months and nine months ended May 31, 2006 mainly because we had only recently begun operations.  We also had damages and spoilages during initial production runs which we calculated as approximately $95,482.  This was expensed as product testing and development. Our interest and bank charges during the three months and nine months ended May 31, 2007 have increased $57,627 and $155,241 compared to the three months and nine months ended May 31, 2006 because of the interest recorded on our shareholder loans.

Our operations since inception have not generated any significant revenue.  We generated a net loss of $846,813 for the three months ended May 31, 2007 and a net loss of $2,123,715 for the nine months ended May 31, 2007.We have relied on and will continue to rely on significant external financing to fund our operations.

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 and in-depth 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.

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Acquisition or Disposition of Plant and Equipment

We have purchased and assembled an automated, state of the art water treatment and bottling system that is currently in place and has the capacity to bottle up to approximately 113 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 a bottle size of 16.9oz.  This state of the art machinery is automated and runs with minimal human intervention.  As part of our bottling system we also purchased a bottle stretch blow molder which will enable us to blow our own bottles from preforms.

To date, we have spent approximately $1,184,000 on the purchase of machinery and equipment and have acquired land, water rights, facilities, and other operating equipment under a capital lease.

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, with an original issue discount of and debt issue costs of $102,500.  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 and has adequate available credit facilities in place 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.

Operating Cash Flows:

Our cash used in operating activities increased mainly because of our operating loss and the purchase of new inventory.

Investing Cash Flows:

In fiscal 2007 we have spent $134,975 in deposits towards new equipment which is included with prepaid expenses and deposits.  We have also paid for new machinery in the current quarter in the amount of $189,337. These payments are mainly related to the purchase of new equipment, as discussed above in Acquisition or Disposition of Plant and Equipment.

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Financing Cash Flows:

From commencement in 2005 to the third quarter of fiscal year 2007, our financing came from loans from shareholders in the amount of $1,893,147 and a convertible note in the amount of $1,085,000.  These funds have been used to meet working capital requirements, acquire bottling equipment and further develop the plant.  Commencing October 1, 2006, the Company and the shareholders have agreed to an annual interest rate of 10% on the shareholder loans which the Company believes approximates a fair market rate of interest for similar debt financing.

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:

June 1, 2007 – December 31, 2007	$	179,375
January 1, 2008 – December 31, 2008*		312,625
January 1, 2009 – July 31, 2009*		185,579
	$	677,579

*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 $4,584,474. The actual purchase price will depend upon the prevailing lease rate in effect at the time we exercise our purchase option.

Critical Accounting Policies and Estimates

Our most critical accounting policies, which are those that require significant judgment, include: capitalization and recognition of leases; income taxes and revenue recognition. In-depth descriptions of these can be found in our Annual Report on Form 10-KSB for the fiscal year ended August 31, 2006 (the “2006 Form 10-KSB”). There have been no material changes in our existing accounting policies from the disclosures included in our 2006 Form 10-KSB.

Off-Balance Sheet Arrangements

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

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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.

Income taxes

Deferred tax assets and liabilities are recorded for differences between the financial statements and tax basis of the assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is recorded for the amount of income tax payable or refundable for the period increased or decreased by the change in deferred tax assets and liabilities during the period. As of May 31, 2007, a deferred tax asset of approximately $1.4 million (which arises solely as a result of net operating losses), has been entirely offset by a valuation reserve due the uncertainty that this asset will be realized in the future.

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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.

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.

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PART II - OTHER INFORMATION

ITEM 1 LEGAL PROCEEDINGS

In February of 2006, our former Chief Operating Officer (“COO”) filed a complaint against the Company, relating to his employment with the 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.  The Company recently reached a settlement agreement which involved a cash payment of $1,700 to the former COO.  The COO shall return 250,000 shares that was part of the contract between the Company and the COO and will retain 35,000 shares.  The contract is now terminated.  The COO and the Company have released each other of any past, present or future claims.  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.

Date: August 16, 2007	By:	/s/ Alex Hazan
		Name: Alex Hazan Title: Chief Executive Officer

Date: August 16, 2007	By:	/s/ Harel Goldstein
		Name: Harel Goldstein Title: Chief Financial Officer

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