AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 2007
REGISTRATION NO. 333-145322
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
(Amendment No. 1)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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RG GLOBAL LIFESTYLES, INC.
(Name of small business issuer in its charter)
California 5090 33-0230641
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
30021 Tomas, Suite 200
Rancho Santa Margarita, CA 92688
(949) 888-9500 - telephone / (949) 888-9525 - fax
(Address and telephone number of principal executive office)
William C. Hitchcock
4029 Westerly Place, Suite 200
Newport Beach, CA 92660
(949) 651-6344 - telephone / (949) 651-1609 - fax
(Name, address and telephone number of agent for service)
COPIES TO:
Scott D. Olson, Esq.
8 Via Barcaza
Coto de Caza, CA 92679
(310) 985-1034 - telephone / (501) 634-2648 - fax
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
CALCULATION OF REGISTRATION FEE
PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT BEING PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
- --------------------------- ------------ --------- --------- ------------
Shares of Common Stock
underlying Warrants (2) 1,613,940 $ 0.53 $ 855,388 $
Shares of Common Stock
underlying Warrants (3) 2,000,000 $ 0.53 $ 1,060,000 $
Totals 3,613,940 $ 1,915,388 $ 59
(1) The proposed maximum offering price is estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c) and 457(g) of the
Securities Act of 1933, as amended. The price per share is based on the price of
the common stock on the Over-The-Counter Bulletin Board on October 1, 2007.
(2) Represents the shares of our Common Stock underlying warrants issued to six
investors pursuant to the Company's Note and Warrant private offering as
disclosed on Form 8-K filed on November 16, 2005 (Form of Note and Warrant
Offering agreement with form of warrant as exhibit thereto is filed herewith as
Exhibit 4.5) with an exercise price of $0.20 being registered for resale upon
exercise of the outstanding Warrants.
(3) Represents the shares of our Common Stock underlying warrants (form of CFS
warrant is filed herewith as Exhibit 4.4) issued to three individuals pursuant
to a Technology Transfer Agreement, as amended (incorporated by reference as
Exhibit 10.14), between the Company and Catalyx Fluid Solutions, Inc., a
California corporation ("CFS Inc."), as disclosed on Form 8-K filed on January
30, 2007, with an exercise price of $0.21 being registered for resale upon
exercise of the outstanding Warrants.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT TO COMPLETION, DATED OCTOBER 3, 2007
PROSPECTUS
RG GLOBAL LIFESTYLES, INC.
3,613,940 shares of Common Stock, $.001 par value
We are registering up to 3,613,940 shares of Common Stock for sale on behalf of
the existing warrant holders comprised of (i) six investors pursuant to the
Company's Note and Warrant private offering and (ii) three individuals pursuant
to a Technology Transfer Agreement between the Company and Catalyx Fluid
Solutions, Inc. (collectively "Selling Stockholders"), upon exercise of the
Warrants (defined herein). We will not receive any proceeds from this offering;
however, we may receive proceeds from the exercise of the Warrants. We will bear
all costs associated with this registration other than any Selling Stockholder's
legal or accounting costs or commissions.
Our Common Stock is registered under Section 12(g) of the Securities Exchange
Act of 1934, as amended, and is quoted on the over-the-counter market and prices
are reported on the OTC Bulletin Board under the symbol RGBL. On October 1,
2007, the closing price as reported was $0.53.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
THIS ENTIRE PROSPECTUS CAREFULLY. RISK FACTORS ASSOCIATED WITH THESE SECURITIES
CAN BE FOUND ON PAGE 4 IN THE SECTION TITLED "RISK FACTORS." THESE SECURITIES
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The information in this prospectus is not complete and may be changed. The
Selling Stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these Securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
The date of this prospectus is August __, 2007
TABLE OF CONTENTS
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of Common Stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as to
the date of this prospectus, regardless of the time of delivery of the
prospectus or of any sale of the Common Stock.
Item Page
Part I - Information Required In Prospectus
3 Prospectus Summary and Risk Factors 1
4 Use Of Proceeds 5
5 Determination Of Offering Price 5
6 Dilution 6
7 Selling Stockholders 6
8 Plan Of Distribution 7
9 Legal Proceedings 8
10 Directors, Executive Officers, Promoters And Control Persons 9
11 Security Ownership Of Certain Beneficial Owners And Management 10
12 Description Of Securities 11
13 Interest Of Named Experts And Counsel 11
14 Disclosure Of Commission Position Of Indemnification For
Securities Act Liabilities 12
15 Organization Within Last Five Years 12
16 Description Of Business 13
17 Management's Discussion And Analysis Or Plan Of Operation 19
18 Description Of Property 25
19 Certain Relationships And Related Transactions 25
20 Market For Common Equity And Related Stockholder Matters 26
21 Executive Compensation 28
22 Financial Statements F-1
23 Changes In And Disagreements With Accountants On Accounting
And Financial Disclosure
Part II - Information Not Required In Prospectus
24 Indemnification Of Directors and Officers II-1
25 Other Expenses Of Issuance And Distribution II-1
26 Recent Sales Of Unregistered Securities II-1
27 Exhibits II-2
28 Undertakings II-3
PROSPECTUS SUMMARY
This Prospectus is a part of a registration statement that we have filed with
the Securities and Exchange Commission using a "Shelf Registration" process You
should read this Prospectus and any accompanying Prospectus supplement, as well
as any post effective amendments to the registration statement of which this
Prospectus is a part, together with the additional information described under
"Additional Information" before you make any investment decision. This summary
highlights selected information in this prospectus. To better understand this
offering, and for a more complete description of the offering, you should read
this entire prospectus carefully, including the "Risk Factors" section beginning
on page 4 and the financial statements and the notes to those statements, which
are included elsewhere in this prospectus.
In this prospectus, the terms "RGBL" "RGGL" "RG Global" "we," "us," "Company"
and "our" refer to RG Global Lifestyles, Inc., a California corporation, and,
unless the context otherwise requires, "Common Stock" refers to the Common
Stock, par value $0.001, of RG Global Lifestyles, Inc.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause our or our industry's actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by these forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as "may," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential,"
"continue" or the negative of these terms by other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform these
statements to actual results.
THE COMPANY
The Company is headquartered in Rancho Santa Margarita, California. The Company
has operations in (i) its subsidiaries Aquair, Inc., a California corporation
("Aquair") and OC Energy Drink, Inc., a California corporation ("OC Energy"),
and (ii) Catalyx Fluid Solutions, a division of the Company ("CFS"). The
Company's primary focus is on the distribution of bottled energy drinks and
oxygenated water through OC Energy, the sale and/or lease, and professional
support of a proprietary wastewater treatment technology usable in coal bed
methane applications through CFS, and the sale of licensed atmospheric water
generators and other water technologies through Aquair.
THE OFFERING
Shares Offered by the
Selling Stockholders A total of 3,613,940 shares of our Common Stock
may be sold in this offering by the Selling
Stockholders upon exercise of the Warrants.
Common Stock Outstanding 27,333,892 (1)
Warrant Terms Of the total 3,613,940 shares of our Common Stock
that may be issued upon exercise of Warrants held
by the Selling Stockholders, up to 1,613,940
shares may be issued for payment of a Warrant
exercise price of $0.20 per share and up to
2,000,000 shares may be issued for payment of a
Warrant exercise price of $0.21 per share. The
Warrants carry standard anti-dilution protective
provisions.
Use of Proceeds The Selling Stockholders will receive all of the
proceeds from the sale of the shares offered for
sale by them under this prospectus. We will not
receive any proceeds from the resale of shares by
the Selling Stockholders covered by this
prospectus. We will receive proceeds from the
exercise of Warrants outstanding if such warrants
are exercised. In that case, we could receive a
maximum of $742,788, which would be used for
working capital and general corporate purposes.
1
Risk Factors An investment in our common shares involves a high
degree of risk and our common shares should not be
purchased by anyone who cannot afford the loss of
their entire investment. Prospective purchasers of
the shares of our Common Stock should carefully
review and consider the factors set forth under
"RISK FACTORS" beginning on page 4 as well as
other information in this document, before
purchasing any of the shares of our Common Stock.
OTC Bulletin Board Trading
Symbol RGBL
There can be no assurance that an active trading
market will be sustained. As a result, an investor
may find it difficult to dispose of, or to obtain
adequate quotations as to the price of the shares
of our Common Stock.
(1) As of August 15, 2007. This amount does not include an aggregate of shares
of our Common Stock to be issued pursuant to convertible notes or outstanding
warrants or issuable pursuant to exercise of stock options, including stock
options granted pursuant to the Company's 2006 and 2007 Incentive and
Non-Statutory Stock Option Plans.
ABOUT THIS OFFERING
This Prospectus relates to the sale by Selling Stockholders of up to (i)
2,000,000 shares of our Common Stock issuable upon the exercise of Warrants by
certain Selling Stockholders at an exercise price of $0.21 per share, issued to
three individuals in conjunction with the Technology Transfer Agreement entered
into between the Company and CFS dated December 24, 2006, as amended ("CFS
Warrants"), and (ii) 1,613,940 shares of our Common Stock issuable upon exercise
of Warrants by six Selling Stockholders at an exercise price of $0.20 issued
in conjunction with a Note and Warrant Purchase Agreements executed by the
parties in fourth quarter 2005 and first quarter 2006 ("Note Warrants",
collectively the "Warrants"). We will not receive any proceeds from this
offering. However, upon exercise of the Warrants, we may receive the proceeds of
up to $742,788. We will bear all costs associated with this registration.
The shares of our Common Stock being offered by the Selling Stockholders have
not been registered for sale under the securities laws of any state as of the
date of prospectus.
Unless otherwise indicated, all information contained in this prospectus is as
of the date hereof.
PLAN OF DISTRIBUTION
The Selling Stockholders will receive all of the proceeds from the sale of the
shares offered for sale by them under this Prospectus. We will not receive any
proceeds from the resale of shares by the Selling Stockholders covered by this
prospectus. Sales of our Common Stock may be made by the Selling Stockholders in
the open market or in privately negotiated transactions and at fixed or
negotiated prices. We will receive proceeds from the exercise of Warrants
outstanding to the extent such Warrants are exercised by cash exercise. In that
case, we could receive up to a maximum of $742,788, which would be used for
working capital and general corporate purposes.
SELECTED FINANCIAL DATA
The following table sets forth our summary condensed financial data. This
information should be read in conjunction with the financial statements and the
notes to those financial statements appearing elsewhere in this prospectus.
FOR THE QUARTER FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
JUNE 30, MARCH 31, MARCH 31,
2007 2007 2006
------------------------------------------------------------------------
(UNAUDITED) (AUDITED) (AUDITED)
------------------------------------------------------------------------
------------------------------------------------------------------------
INCOME STATEMENT DATA
------------------------------------------------------------------------
Revenue from operations $ 287,207 $ 89,326 $ 69,340
------------------------------------------------------------------------
Gross profit (loss) $ 26,471 $ (57,025) $ 27,313
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Loss from operations $ (1,352,285) $ (6,752,003) $ (848,858)
------------------------------------------------------------------------
Net loss $ (1,841,970) $(23,970,031) $ (2,036,561)
------------------------------------------------------------------------
Net loss per common share $ (0.07) $ (1.21) $ (0.12)
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2
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BALANCE SHEET DATA
------------------------------------------------------------------------
Total Assets $ 5,404,962 $ 5,489,626 $ 685,118
------------------------------------------------------------------------
Total Liabilities $ 14,139,397 $ 14,657,142 $ 1,045,590
------------------------------------------------------------------------
Stockholders' Equity (deficit) $ (8,734,435) $ (9,167,516) $ (360,472)
------------------------------------------------------------------------
RISK FACTORS
This offering and an investment in our Common Stock involve a high degree of
risk. You should consider carefully the risks described below, which are the
most significant risks we face based on our business and the industry in which
we operate, before you decide to buy our Common Stock. If any of the following
risks were to occur, our business, financial condition or results of operations
would likely suffer. In that event, the trading price of our Common Stock could
decline, and you could lose all or part of your investment.
RISKS RELATING WITH OUR BUSINESS AND MARKETPLACE
Our business, financial condition and operating results can be impacted by a
number of factors, any of which could cause our actual results to vary
materially from recent results or from our anticipated future results. You
should carefully consider the following risk factors that may affect the
Company. The risks and uncertainties described below are those that we currently
deem to be material and that we believe are specific to our Company. If any of
these or other risks actually occur, our business, financial condition and
results of operations could be materially and adversely affected, which in turn
could materially and adversely affect the trading price of our Common Stock.
THE COMPANY IS A RELATIVELY YOUNG COMPANY WITH A MINIMAL OPERATING HISTORY SINCE
BEING REORGANIZED IN 2003.
Since the Company's reorganization in 2003 we have generated revenue from
operations. However, our future operating results will depend on many factors,
including the ability to generate sustained and increased demand and acceptance
of our products, the level of our competition, and our ability to attract and
maintain key management and employees. While management believes its estimates
of projected occurrences and events are within the timetable of its business
plan, there can be no guarantees or assurances that the results anticipated will
occur.
THE COMPANY HAS REDIRECTED ITS BUSINESS PLAN AND IS FOCUSING ON OC ENERGY DRINKS
AND CFS TECHNOLOGY.
The Company has redirected its primary focus on its OC Energy drinks and CFS
Technology, and maintains a reduced focus on the sale of atmospheric water
generators through Aquair. While management believes the potential for revenue
growth remains better in its current business plan, there can be no guarantees
that the anticipated results will occur.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING, OUR BUSINESS PLAN MAY BE SLOWED
AND IF WE DO OBTAIN ADDITIONAL FINANCING OUR THEN EXISTING SHAREHOLDERS MAY
SUFFER DILUTION.
We will require additional funds to expand our sales and marketing activities,
to support operations, implement our business strategy. There can be no
assurance that financing will be available in amounts or on terms acceptable to
us, if at all. The inability to obtain additional capital will restrict our
ability to grow and may reduce our ability to conduct business operations. If we
are unable to obtain additional financing, we will likely be required to curtail
our business plan. Any additional equity financing may involve dilution to our
then existing shareholders.
IF WE ACQUIRE ADDITIONAL COMPANIES OR PRODUCTS IN THE FUTURE, THEY COULD PROVE
DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE STOCKHOLDER VALUE OR
ADVERSELY AFFECT OUR OPERATING RESULTS.
We anticipate that we will make other investments in complementary companies,
technologies or products. We may not realize the anticipated benefits of any
such acquisition or investment. The success of our acquisition program will
depend on our ability to overcome substantial obstacles, such as the
availability of acquisition candidates, our ability to compete successfully with
other acquirers seeking similar acquisition candidates, the availability of
funds to finance acquisitions and the availability of management resources to
oversee the operation of acquired businesses. Furthermore, we may have to incur
debt or issue equity securities to pay for future acquisitions or investments,
the issuance of which could be dilutive to us or our existing shareholders. In
addition, our profitability may suffer because of acquisition-related costs or
future impairment costs for acquired goodwill and other intangible assets.
3
WE MAY BE UNABLE TO RETAIN THE SERVICES OF KEY PERSONNEL, AND WE MAY BE UNABLE
TO SUCCESSFULLY RECRUIT QUALIFIED PERSONNEL.
Our success depends to an extent upon the continued service of key personnel;
loss of the services of such personnel could have an adverse effect on our
growth, revenues, and prospective business. In addition, in order to
successfully implement and manage our business plan, we will be dependent upon,
among other things, successfully recruiting qualified managerial and sales
personnel having experience in business. Competition for qualified individuals
is intense. There can be no assurance that we will be able to find, attract and
retain existing employees or that we will be able to find, attract and retain
qualified personnel on acceptable terms.
IF WE CANNOT EFFECTIVELY MANAGE OUR GROWTH, WE MAY INCUR LOSSES.
Any dramatic growth in our business could place a substantial burden on our
production capacity and administrative resources. Businesses, which grow
rapidly, often have difficulty managing their growth. Our management may not be
able to manage our growth effectively or successfully. Rapid growth can often
put a strain on management, financial, and operational resources of a company.
In addition, we would likely need to enhance our operational systems and
personnel procedures. Our failure to meet these challenges could cause our
efforts to expand operations to prove unsuccessful and cause us to incur
operating losses.
OUR INDEPENDENT AUDITORS HAVE ISSUED A REPORT IN WHICH THEY EXPRESSED DOUBT
ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
The report of our independent auditors on our financial statements for the
fiscal year ended March 31, 2007 contains an explanatory paragraph which
indicates that we have an accumulated deficit and loss from operations in that
year. This report states that, because of these issues, there may be a
substantial doubt about our ability to continue as a going concern. This report
and the existence of this accumulated deficit and loss from operations may make
it more difficult for us to raise additional debt or equity financing needed to
run our business and is not viewed favorably by investors. We urge potential
investors to review this report before making a decision to invest in us.
RISKS FACTORS RELATING TO OUR COMMON STOCK
IF THE SELLING STOCKHOLDERS ALL ELECT TO SELL THEIR SHARES OF OUR COMMON STOCK
AT THE SAME TIME, THE MARKET PRICE OF OUR SHARES MAY DECREASE.
It is possible that the Selling Stockholders will offer all of the shares for
sale. Further because it is possible that a significant number of shares of our
Common Stock could be sold at the same time hereunder, the sales, or the
possibility thereof, may have a depressive effect on the market price for our
Common Stock. The closing price of our Common Stock on October 1, 2007 was
$0.53. Significant downward pressure on our stock price caused by the sale of
stock registered in this offering could encourage short sales by third parties
that would place further downward pressure on our stock price.
OUR COMMON STOCK IS SUBJECT TO SEC "PENNY STOCK" RULES.
Since our Common Stock is a penny stock, as defined in Rule 3a51-1 under the
Securities Exchange Act, it will be more difficult for investors to liquidate
their investment of our Common Stock. Until the trading price of the Common
Stock rises above $5.00 per share, if ever, trading in the Common Stock is
subject to the penny stock rules of the Securities Exchange Act specified in
rules 15g-1 through 15g-10. Those rules require broker-dealers, before effecting
transactions in any penny stock, to:
o Deliver to the customer, and obtain a written receipt for, a
disclosure document;
o Disclose certain price information about the stock;
o Disclose the amount of compensation received by the broker-dealer or
any associated person of the broker-dealer;
o Send monthly statements to customers with market and price information
about the penny stock; and
o In some circumstances, approve the purchaser's account under certain
standards and deliver written statements to the customer with
information specified in the rules.
Consequently, the penny stock rules may restrict the ability or willingness of
broker-dealers to sell the Common Stock and may affect the ability of holders to
sell their Common Stock in the secondary market and the price at which such
holders can sell any such securities. These additional procedures could also
limit our ability to raise additional capital in the future.
4
SINCE OUR SHARES ARE TRADING ON THE OTC BULLETIN BOARD, TRADING VOLUMES AND
PRICES MAY BE SPORADIC BECAUSE IT IS NOT AN EXCHANGE.
Our common shares are currently listed for public trading on the
Over-the-Counter Bulletin Board. The trading price of our common shares has been
subject to wide fluctuations. Trading prices of our common shares may fluctuate
in response to a number of factors, many of which will be beyond our control.
The stock market has generally experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of companies with limited business operations. There can be no assurance that
trading prices and price earnings ratios previously experienced by our common
shares will be matched or maintained. Broad market and industry factors may
adversely affect the market price of our common shares, regardless of our
operating performance.
In the past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted. Such
litigation, if instituted, could result in substantial costs for us and a
diversion of management's attention and resources.
WE ARE SUBJECT TO SEC REGULATIONS AND CHANGING LAWS, REGULATIONS AND STANDARDS
RELATING TO CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE, INCLUDING THE
SARBANES-OXLEY ACT OF 2002, NEW SEC REGULATIONS AND OTHER TRADING MARKET RULES,
ARE CREATING UNCERTAINTY FOR PUBLIC COMPANIES.
We are committed to maintaining high standards of corporate governance and
public disclosure. As a result, we intend to invest appropriate resources to
comply with evolving standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities.
WE DO NOT EXPECT TO PAY DIVIDENDS AND INVESTORS SHOULD NOT BUY OUR COMMON STOCK
EXPECTING TO RECEIVE DIVIDENDS.
We have never declared or paid any cash dividends on our Common Stock. We intend
to retain our earnings, if any, to finance the growth and development of our
business and therefore do not anticipate paying any cash dividends on our Common
Stock in the foreseeable future. Although dividends are not limited currently by
any agreements, it is anticipated that future agreements, if any, with
institutional lenders or others may limit our ability to pay dividends on our
Common Stock. Any future determination to pay cash dividends will be at the
discretion of our Board of Directors and will be dependent upon our financial
condition, results of operations, capital and legal requirements and such other
factors as our Board of Directors deems relevant.
SHARES OF OUR TOTAL OUTSTANDING COMMON STOCK THAT ARE RESTRICTED FROM IMMEDIATE
RESALE BUT MAY BE SOLD INTO THE MARKET IN THE FUTURE COULD CAUSE THE MARKET
PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING
WELL.
As of August 15, 2007, we had 27,333,892 shares of Common Stock issued and
outstanding of which approximately 14,026,302 shares are restricted shares. Rule
144 provides, in essence, that a person holding "restricted securities" for a
period of one year may sell only an amount every three months equal to the
greater of (a) one percent of a company's issued and outstanding shares, or (b)
the average weekly volume of sales during the four calendar weeks preceding the
sale.
The amount of "restricted securities" which a person who is not an affiliate of
our company may sell is not so limited, since non-affiliates may sell without
volume limitation their shares held for two years if there is adequate current
public information available concerning our company. In such an event,
"restricted securities" would be eligible for sale to the public at an earlier
date. The sale in the public market of such shares of Common Stock may adversely
affect prevailing market prices of our Common Stock.
USE OF PROCEEDS
The Selling Stockholders will receive all of the proceeds from the sale of the
shares offered for sale by them under this prospectus. We will not receive any
proceeds from the resale of shares by the Selling Stockholders covered by this
prospectus. We will receive proceeds from the exercise of Warrants outstanding
if such warrants are exercised by cash exercise. In that case, we could receive
up to a maximum of $742,788, which would be used for working capital and general
corporate purposes.
DETERMINATON OF OFFERING PRICE
While this registration statement is not for an offering of shares, for the
resale of the 1,613,940 shares of Common Stock underlying the Note Warrants, the
exercise price of $0.20 is pursuant to the terms of the Note Warrant and
represents the lowest closing price of the Common Stock on the OTC for the
twelve months following the date of investment, which was determined by the
Board at the time of the Note and Warrant financing to be in the best interests
of the Company's Stockholders in order to raise necessary funds for required
Company working capital.
5
For the resale of the 2,000,000 shares of Common Stock underlying the CFS
Warrants, the exercise price of $0.21 is pursuant to the terms of the CFS
Warrant and was determined by the Board at the time of entering in to the
Technology Transfer Agreement to be in the best interests of the Company's
Stockholders in order to acquire the CFS Technology.
DILUTION
Not applicable.
SELLING STOCKHOLDERS
The Selling Stockholders are offering a total of up to 3,613,940 shares of our
stock Common Stock. Certain of the Selling Stockholders are deemed
"underwriters" within the meaning of the Securities Act of 1933 in connection
with the sale of their Common Stock under this prospectus. None of the Selling
Stockholders are broker-dealers or affiliates of broker-dealers.
The column "Shares Owned After the Offering" gives effect to the sale of all the
shares of Common Stock being offered by this prospectus. We agreed to register
for resale shares of Common Stock by the Selling Stockholders listed below. The
Selling Stockholders may from time to time offer and sell any or all of their
shares that are registered under this prospectus. All expenses incurred with
respect to the registration of the Common Stock will be borne by us, but we will
not be obligated to pay any underwriting fees, discounts, commissions or other
expenses incurred by the Selling Stockholders in connection with the sale of
such shares.
The following table sets forth information with respect to the maximum number of
shares of Common Stock beneficially owned by the Selling Stockholders named
below and as adjusted to give effect to the sale of the shares offered hereby.
The shares beneficially owned have been determined in accordance with rules
promulgated by the SEC, and the information is not necessarily indicative of
beneficial ownership for any other purpose. The information in the table below
is current as of the date of this Prospectus. All information contained in the
table below is based upon information provided to us by the Selling Stockholders
and we have not independently verified this information. The Selling
Stockholders are not making any representation that any shares covered by the
prospectus will be offered for sale. The Selling Stockholders may from time to
time offer and sell pursuant to this prospectus any or all of the Common Stock
being registered.
Except as indicated below, no Selling Stockholder is the beneficial owner of any
additional shares of Common Stock or other equity securities issued by us or any
securities convertible into, or exercisable or exchangeable for, our equity
securities.
The Selling Stockholders may, from time to time, offer and sell any or all of
their shares listed in this table. Because the selling stockholders are not
obligated to sell their shares, or they may also acquire publicly traded shares
of our common stock, or they may not exercise Warrants relating to certain
shares offered under this prospectus, we are unable to estimate how many shares
they may beneficially own after this offering. For presentation of this table,
however, we have estimated the percentage of our common shares beneficially
owned after the offering based on assumptions that the selling stockholders
exercise all Warrants for shares included in this offering and sell all of the
shares being offered by this Prospectus.
As explained below under "Plan of Distribution," we have agreed with the Selling
Stockholders to bear certain expenses (other than broker discounts and
commissions, if any) in connection with the registration statement, which
includes this Prospectus.
SHARES OWNED PRIOR SHARES OWNED AFTER
NO. OF TO THE OFFERING (1) THE OFFERING (2)
SHARES ------------------------- ------------------------
INCLUDED IN
SELLING STOCKHOLDER (3) PROSPECTUS NUMBER PERCENTAGE NUMBER PERCENTAGE
- ----------------------------- ----------- ----------- ------------ ---------- ------------
CFS Warrant-holders
Noor Mohammed Ebrahim 800,000 800,000 2.9% 0 0
Ken Ravon 600,000 600,000 2.2% 0 0
Moran Shani 600,000 600,000 2.2% 0 0
Note and Warrant Private Offering Warrant-holders
Joseph Murray 508,132 3,909,500(3) 13.9% 3,401,370 12.3%
John Murray 355,808 2,421,030(4) 8.9% 2,065,222 7.6%
Hobo Rentals, Inc. 300,000 300,000 1.1% 0 0
Estate of Louis Knickerbocker 200,000 7,667,995(5) 26.4% 7,467,995 25.7%
Jan Mansfield 150,000 150,000 * 0 0
Henri Schkud 100,000 640,651 2.3% 540,651 2.0%
(1) For purposes of this table, beneficial ownership is determined in accordance
with SEC rules, and includes voting power and investment power with respect to
shares owned, the Common Stock owned underlying the Warrants, and those shares
of Common Stock exercisable under warrants or options within sixty (60) days of
October 1, 2007.
6
(2) The figures in the "Number" and "Percentage" columns under the "Shares Owned
After the Offering" column assumes the sale of all Common Stock underlying the
respective Warrants.
(3) The Company's Director and former VP Operations; he resigned his position of
VP Operations on April 30, 2007. This figure includes 246,000 shares issuable to
Mr. Murray pursuant to options to purchase shares of our common stock.
(4) John Murray is the brother of the Company's Director and former VP
Operations.
(5) The Company's former Director and Chief Executive Officer, he passed away on
April 24, 2007. This figure includes 1,969,079 shares issuable to the estate of
Mr. Knickerbocker pursuant to options to purchase shares of our common stock.
* less than 1%
PLAN OF DISTRIBUTION
This prospectus relates to the resale of up to 3,613,940 shares to be issued
upon the conversion of the Warrants issued to the Selling Stockholders.
The Selling Stockholders and any of their respective pledges, donees, assignees
and other successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on any stock exchange, market or trading facility
on which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The Selling Stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent, but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales after this registration statement becomes effective;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus. The
Selling Stockholders will have the sole and absolute discretion not to accept
any purchase offer or make any sale of shares if they deem the purchase price to
be unsatisfactory at any particular time.
To the extent permitted by law, the Selling Stockholders may also engage in
short sales against the box after this registration statement becomes effective,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The Selling Stockholders or their respective pledgees, donees, transferees or
other successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a Selling Stockholder will attempt to sell
shares of Common Stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
Selling Stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the Selling Stockholders. The Selling
Stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a Selling Stockholder. The
Selling Stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act of 1933.
7
The Selling Stockholders may from time to time pledge or grant a security
interest in some or all of the shares of Common Stock owned by them and, if they
default in the performance of their secured obligations, the pledgee or secured
parties may offer and sell the shares of Common Stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or any other applicable provision of the Securities Act of 1933
amending the list of Selling Stockholders to include the pledgee, transferee or
other successors in interest as Selling Stockholders under this prospectus.
The Selling Stockholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of Common Stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 amending the list of
Selling Stockholders to include the pledgee, transferee or other successors in
interest as Selling Stockholders under this prospectus.
We are required to pay all fees and expenses incident to the registration of the
shares of Common Stock. Otherwise, all discounts, commissions or fees incurred
in connection with the sale of our common stock offered hereby will be paid by
the selling stockholders. We have agreed to indemnify the Selling Stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act of 1933.
Each of the Selling Stockholders acquired the securities offered hereby in the
ordinary course of business and have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of Common Stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of Common Stock by any Selling Stockholder. We will file a supplement
to this prospectus if a Selling Stockholder enters into a material arrangement
with a broker-dealer for sale of Common Stock being registered. If the Selling
Stockholders use this prospectus for any sale of the shares of Common Stock,
they will be subject to the prospectus delivery requirements of the Securities
Act of 1933.
The anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934, as amended, may apply to sales of our Common Stock and activities of the
Selling Stockholders. The shares covered by this prospectus may be offered and
sold from time to time by the Selling Stockholders, including officers and
directors exercising options which have been included in this prospectus. The
Selling Stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale.
LEGAL PROCEEDINGS
The Company's ongoing litigation with it previous investors the NIR Group has
been remanded back to the New York Supreme Court, from the federal district
court, and is now titled AJW Partners LLC, AJW Offshore Ltd, AJW Qualified
Partners LLC, and New Millenium Capital Partners II LLC v. RG Global Lifestyles,
Inc. and Louis Knickerbocker, and is Case No. 600323/07. Recently, however,
plaintiffs agreed to voluntarily dismiss Louis Knickerbocker without prejudice
(therefore the caption will change upon the next round of pleadings).
Additionally, the case has been ordered to non-binding mediation on November 9,
2007.
Other than the foregoing lawsuits, the Company is not aware of any litigation,
either pending or threatened.
8
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
Our officers and directors shall serve until the Company's next Annual
Shareholder's Meeting. Our directors and officers as of the date of this
Prospectus are as follows:
NAME AGE POSITION
------------------------------------------------------------------------
Grant King 55 Chief Executive Officer, Director,
President Aquair Asia
William C. Hitchcock 56 Chief Financial Officer
Joseph Murray 35 Director
Juzer Jangbarwala 47 Director, Chief Technology Officer
Steve Ritchie 63 Director
David Koontz 54 Director
GRANT KING - Chief Executive Officer, Director and President of Aquair Asia Mr.
King has been CEO since April 24, 2007, Director since July 2004, and President
Aquair Asia since November 2006. Mr. King previously served as the Company's
Chief Operations Officer up until November 30, 2006. Prior to joining the
Company, Mr. King has served as General Manager and Managing Director of two
major manufacturing and export companies in Bangkok, Thailand since 1990. From
September 1996 to September 2000 Mr. King served as President of various wholly
owned subsidiaries of the Company's predecessor, L.L. Knickerbocker Co., Inc.
From 1997 to July 2003, he served for six years as president and CEO of L.L.
Knickerbocker (Thai) Co. Ltd. in Thailand. Mr. King has had contact with many
internationally based public companies and is well known within the business
community of several South East Asian countries.
WILLIAM C. HITCHCOCK - Chief Financial Officer since July 2004. Mr. Hitchcock
holds an LL.M in taxation and international studies from New York University,
and a J.D. degree from the University of California at Davis. Prior to joining
the Company, Mr. Hitchcock served as a director of Amerikal International
Holdings from February 2004 to July 2004, when it merged with the Company's
predecessor. From July 1999 to the present he has owned and operated a full
service tax preparation and tax representation business under the name Bottom
Line Financial, LLC. In addition, he has served as a director of Al Barker
Insurance since September 1999.
GEN. STEVE RITCHIE - Director since October 2005. Prior to becoming a Director,
Gen. Ritchie was an advisory board member to the Company from August 2005. Prior
to joining the Company in these positions, Mr. Ritchie had a career in the US
Air Force, culminating with the rank of Brigadier General.
JOSEPH MURRAY - Director since November 2005. Mr. Murray is currently owner and
COO of a Nationwide Asset Management Company which buys and distributes
foreclosed assets at wholesale prices. Mr. Murray has a B.A in Physics and a
B.A. in Business Administration from Wesleyan University, Bloomington, IL. Prior
to joining the Company, Mr. Murray worked for Northrop Grumman from January 2002
to May 2005 as a mobile technical director; and for Iway, from June 2001 to
December 2002 as Vice President of Technology; and Volt from January 2000 to
July 2001 as a technical lead and project manager.
JUZER JANGBARWALA - Director and Chief Technology Officer since January 2007.
Prior to joining the Company, Mr. Jangbarwala in 1989 was founder and CEO of
Hydromatix, Inc., a company that was acquired by BOC Edwards in 2002. In 2002,
Mr. Jangbarwala founded and became CEO of Catalyx Inc. as a technology
incubator. In 2004, he became CEO of Energix Research, Inc., a subsidiary of
Catalyx, Inc., as a developer of low cost hydrogen generators. In 2006, Catalyx
spun off CFS, and Mr. Jangbarwala served as its CTO to develop innovative water
treatment technologies from the Catalyx portfolio of patents. Mr. Jangbarwala
has a B.S. in Chemical Engineering from Lehigh University.
DAVID KOONTZ - Director since May 2007. Mr. Koontz has been Chief Financial
Officer for Wako Logistics Group, Inc. since August, 2005. From July 15, 2003 to
August 6, 2005, he was the Chief Financial Officer and Secretary of the
O2Diesel, Corp, a publicly traded company on the American Stock Exchange. Mr.
Koontz has served as a Director of O2Diesel Corp. since July 15, 2003. From the
period January 2000 to September 2002 to Mr. Koontz worked as an independent
business consultant, mostly for businesses located in Asia. Mr. Koontz began his
business career as a CPA and became a partner with Arthur Andersen & Co. He
practiced in the firm's offices in Los Angeles, Hong Kong, Singapore and Tokyo.
9
FAMILY RELATIONSHIPS
There are no family relationships among our directors, executive officers, or
persons nominated or chosen by the Company to become directors or executive
officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
For the past five years, no director or officer of the Company has been involved
in any of the following: (1) Any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) Any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) Being
subject to any order, judgment, or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his or her involvement in
any type of business, securities or banking activities; and (4) Being found by a
court of competent jurisdiction (in a civil action), the Commission or the
Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
ADVERSE PROCEEDINGS
There exists no material proceeding to which any director or officer is a party
adverse to the Company small business issuer or has a material interest adverse
to the Company.
CODE OF ETHICS
The Company has adopted a code of ethics that is applicable to our directors and
officers. Our code of ethics is posted on our website and can be accessed at
WWW.RGGLIFE.COM.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company's Board of Directors currently has one member - independent Director
David Koontz - serving on its Audit Committee. The Board has determined that Mr.
Koontz qualifies as its audit committee financial expert for purposes of the SEC
rules.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the current common stock ownership of (i) each
person known by the Company to be the beneficial owner of five percent or more
of the Company's common stock based upon approximately 27,333,892 shares
outstanding as of August 15, 2007, (ii) each officer and director of the Company
individually, and (iii) all officers and directors of the Company as a group. In
computing the number of shares beneficially owned by a person and the percentage
of ownership of that person, shares of common stock subject to options and/or
warrants held by that person that are currently exercisable, as appropriate, or
will become exercisable within sixty (60) days of the reporting date are deemed
outstanding, even if they have not actually been exercised. Those shares,
however, are not deemed outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise indicated, each person has sole
voting and investment power with respect to the shares of common stock shown,
and all ownership is of record and beneficial. The address of each owner who is
an officer or director is in care of the Company at 30021 Tomas, Rancho Santa
Margarita California 92688.
- ------------------------------------------------------------------------------------------------------
TITLE OF NUMBER OF PERCENT OF
CLASS NAME OF BENEFICIAL OWNER SHARES CLASS
- ------------------------------------------------------------------------------------------------------
Common Estate of Louis Knickerbocker, former CEO and Chairman 7,667,995(1) 26.0%
- ------------------------------------------------------------------------------------------------------
Common Joseph Murray, Director, former VP Operations 3,909,502(2) 13.9%
- ------------------------------------------------------------------------------------------------------
Common Budy Hartono 2,887,466 10.6%
- ------------------------------------------------------------------------------------------------------
Common Grant King, CEO and Director 1,203,605(3) 4.2%
- ------------------------------------------------------------------------------------------------------
Common William Hitchcock, CFO 1,110,118(4) 3.9%
- ------------------------------------------------------------------------------------------------------
Common Juzer Jangbarwala, CTO and Chairman 666,666(5) 2.4%
- ------------------------------------------------------------------------------------------------------
Common Steve Ritchie, Director 133,000(6) *
- ------------------------------------------------------------------------------------------------------
Common David Koontz, Director 0 0
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
All officers and directors as a group (6 persons) 7,022,891 25.7%
- ------------------------------------------------------------------------------------------------------
10
(1) Mr. Knickerbocker passed away on April 24, 2007 and therefore vesting of his
stock options ceased on that date. This figure includes 2,169,079 shares
issuable to the estate of Mr. Knickerbocker pursuant to options and warrants to
purchase shares of our common stock.
(2) Mr. Murray resigned from his position as VP Operations on April 30, 2007 and
therefore vesting of his stock options ceased on that date. This figure includes
754,130 shares issuable to Mr. Murray pursuant to options and warrants to
purchase shares of our common stock.
(3) Includes 1,120,500 shares issuable to Mr. King pursuant to options to
purchase shares of our common stock within 60 days of October 1, 2007.
(4) Includes 626,118 shares issuable to Mr. Hitchcock pursuant to options to
purchase shares of our common stock within 60 days of October 1, 2007.
(5) Includes 354,166 shares issuable to Mr. Jangbarwala pursuant to options to
purchase shares of our common stock within 60 days of October 1, 2007.
(6) Includes 133,000 shares issuable to Mr. Ritchie pursuant to options to
purchase shares of our common stock within 60 days of October 1, 2007.
*Less than 1%.
DESCRIPTION OF SECURITIES
We are authorized to issue 100,000,000 shares of Common Stock, $.001 par value
per share and 10,000,000 shares of $.001 par value preferred stock. The
following is a summary of certain provisions of our capital stock underlying the
Warrants registered for resale in this Prospectus.
COMMON STOCK
As of August 15, 2007, there are 27,333,892 shares of Common Stock outstanding,
which are held of record by approximately 3200 stockholders. In addition, as of
August 15, 2007, there were options and warrants to purchase 29,255,170 shares
of Common Stock outstanding, including the Warrants held by the Selling
Stockholders.
The holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Subject to preferences that may be applicable
to any outstanding preferred stock, the holders of Common Stock are entitled to
receive ratably dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available for that purpose. In the event
of our liquidation, dissolution, or winding up, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of preferred stock, if any, then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock.
INTEREST OF NAMED EXPERT OR COUNSEL
Our annual financial statements for the year ended March 31, 2006, have been
included herein in reliance on the report of Beckstead & Watts LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of that firm as experts in accounting and auditing.
Our annual financial statements as of and for the year ended March 31, 2007,
have been included herein in reliance on the report of McKennon, Wilson & Morgan
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of that firm as experts in accounting and auditing.
We have not hired any expert or counsel on a contingent basis. No expert or
counsel will receive a direct or indirect interest in the Company specifically
for the preparation of this registration statement, and no such person was a
promoter, underwriter, voting trustee, director, officer or employee of the
Company.
11
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by our directors, officers or controlling persons in
the successful defense of any action, suit or proceedings) is asserted by such
director, officer, or controlling person in connection with any securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issues.
ORGANIZATION WITHIN LAST FIVE YEARS
Rental Agreement
- ----------------
The Company had entered into a month-to-month rental agreement with Pinnacle
International, Inc., a California corporation which was wholly owned by Louis
Knickerbocker, former Company CEO and Director. The agreement was for 3,000
square feet of office space located at 30021 Tomas, Suite 200, Rancho Santa
Margarita, California 92688 and office support services. During the fiscal years
ended March 31, 2007 and 2006, the Company spent $208,715 and $ 72,177,
respectively, for rent and services to the related party under this agreement.
The Company terminated this agreement in June 2007.
Distribution of Amerikal
- ------------------------
On October 1, 2005 the Company distributed its wholly owned subsidiary Amerikal
to a group of founding AIH shareholders in exchange for approximately 7,500,000
million shares of Common Stock of the Company. The distribution reduced the
outstanding shares of the Company at that time from approximately 25 million to
approximately 17 million at that time, and allowed management to concentrate its
efforts on implementing and executing its current business plan focusing on
Aquair, OC Energy and CFS.
Note and Warrant Financing
- --------------------------
In November 2005, Louis Knickerbocker, former CEO and Director, participated in
the Company's Note and Warrant financing as an investor. Pursuant to the terms
of the offering, Mr. Knickerbocker lent the Company $100,000 and received
warrants to purchase 100,000 shares of Company common stock - such warrant
shares are being registered for resale herein.
In December 2005, Joe Murray, Director and former VP Operations, participated in
the Company's Note and Warrant financing as an investor. Pursuant to the terms
of the offering, Joe Murray lent the Company $508,131 and received warrants to
purchase 508,131 shares of Company common stock - such warrant shares are being
registered for resale herein.
In December 2005, John Murray, brother to the Director Joe Murray, participated
in the Company's Note and Warrant financing as an investor. Pursuant to the
terms of the offering, John Murray lent the Company $355,808 and received
warrants to purchase 355,808 shares of Company common stock - such warrant
shares are being registered for resale herein.
Private Stock Offering - Conversion of Notes to Stock
- -----------------------------------------------------
In November 2006, in consideration for the noteholders (all note-holders were
offered an opportunity to participate in the Private Stock Offering - including
non-related party noteholders) agreeing to cancel the outstanding principal and
interest due under their promissory notes discussed above in the Note and
Warrant Financing, the Company offered the noteholders restricted common stock
at $0.20 per share in a private offering.
Pursuant to the terms of this Private Stock Offering and the cancellation of the
notes, the Company issued related parties Louis Knickerbocker 1,018,042 shares
of common stock, Joe Murray 2,783,196 shares of common stock, and John Murray
2,065,222 shares of common stock.
12
CFS Agreement
- -------------
On January 26, 2007, the Technology Transfer Agreement between the Company and
CFS Inc. became effective. CFS Inc. is an entity 50% owned by Juzer Jangbarwala,
the Company's CTO and Director beginning on the date of effectiveness - January
26, 2007. Pursuant to the terms of this agreement, CFS Inc. was prepaid $200,000
against future royalty payments by the Company for revenues earned by license of
the purchased CFS Technology, and will be paid $0.01 per barrel royalty on
revenue received from lease or sublicense transactions in Wyoming, and a 5%
royalty on the sale price of the equipment based on the technology in Wyoming.
Director Independence
- ---------------------
Steve Ritchie and David Koontz are the Company's independent Directors under the
independence standards applicable to the Company under paragraph (a)(1) of Item
407 to Regulation S-B.
DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
BUSINESS DEVELOPMENT
RG Global Lifestyles, Inc. (the "Company"), was originally incorporated in
California on July 12, 1985 as International Beauty Supply Ltd. The name of the
corporation was changed on May 28, 1993 to L.L. Knickerbocker Co., Inc., and
thereafter on January 9, 2003 to the present name, RG Global Lifestyles, Inc.
Bankruptcy
- ----------
Since its inception, the Company, under prior management teams, was involved in
several businesses and engaged in various consumer, retail and commercial
ventures, which ultimately proved unsuccessful. On August 15, 2002, the
Company's Chapter 11 Debtor in Possession reorganization plan with the US
Bankruptcy Court, Central District of California was approved after an
involuntary petition was filed by certain of the Company's creditors. The
Company liquidated its assets in full satisfaction of its creditors' claims and
was discharged from the bankruptcy on September 6, 2002. The Company ceased
filing reports with the Securities and Exchange Commission in 2001 and became
delinquent in its filing obligations after its September 30, 2001 quarterly
financial report.
Reverse Merger
- --------------
Subsequent to the bankruptcy reorganization, the Company sought alternative
business opportunities and worked to develop the Company's new business plan
through merger and consolidation with other entities. In furtherance of this
plan, in July of 2004, the Company entered into an Agreement and Plan of
Reorganization, (the "Plan of Reorganization"), among Amerikal International
Holding, Inc. ("AIH"), the Company, Horst Geicke, and the shareholders of
Amerikal International Holding, Inc. (the "AIH Shareholders"). Pursuant to the
Plan of Reorganization, the Company acquired all of the outstanding shares of
AIH from the AIH Shareholders in exchange for the issuance by the Company to the
AIH Shareholders of an aggregate of 1,934,880 shares of the Company's Common
Stock ("Common Stock"). The Plan of Reorganization also provided for the
transfer by an entity controlled by Horst Geicke to the AIH Shareholders of an
aggregate of 16,630,607 shares of the Company's Common Stock held by the entity
in exchange for nominal consideration. Prior to the consummation of the
transactions contemplated by the Plan of Reorganization, Horst Geicke
beneficially held 90% of the outstanding Common Stock of the Company.
Immediately following the transactions, the Company had an aggregate of
21,462,000 shares of Common Stock issued and outstanding, and the AIH
Shareholders held an aggregate of 18,530,607 shares, or 86.34%, of the Company's
Common Stock issued and outstanding. Thus, at the close of the transactions, the
former shareholders of AIH controlled the voting power of a majority of the
Company's Common Stock. As a result of the reverse merger, the Company caused
AIH to be acquired by the Company pursuant to a Certificate of Ownership filed
with the California Secretary of State on August 12, 2004 and Articles of Merger
filed with the Nevada Secretary of State on August 17, 2004. The Company
continued as the surviving entity in the reverse merger, and held AIH as a
wholly owned subsidiary ("Amerikal").
Aquair
- ------
In October 2004, the Company formed Aquair as a wholly-owned subsidiary and
California corporation. Aquair was formed to fulfill the Company's early mission
to distribute environmentally friendly water generating equipment that creates
purified drinking water from air for residential and commercial uses, distribute
anti-microbial and anti-scaling technology worldwide, and to pursue other
water-related technologies and opportunities.
13
Reinstatement on OTC Bulletin Board
- -----------------------------------
In January 2005, the Company received clearance for quotation of its Common
Stock on the over-the counter Bulletin Board ("OTC Bulletin Board"), under the
symbol "RGBL."
Distribution of Amerikal
- ------------------------
On October 1, 2005, the Company distributed its wholly owned subsidiary Amerikal
to a group of founding AIH shareholders in exchange for approximately 7,500,000
million shares of Common Stock of the Company. The distribution reduced the
outstanding shares of the Company at that time from approximately 25 million to
approximately 17 million, and allowed management to concentrate its efforts on
implementing and executing its Aquair business plan. As part of the
distribution, the purchasing shareholders set aside 315,561 shares of Company
Common Stock into an escrow account as a reserve against any unforeseen
liabilities arising from the distribution. The Company does not anticipate
recognition of gain or loss as a result of the distribution.
Purchase and Sale of Assets of On Line Surgery, Inc.
- ----------------------------------------------------
In January 2005, the Company issued 200,000 shares of its restricted Common
Stock to acquire rights to an Internet portal known as On Line Surgery.
Subsequently, in the quarter ended December 31, 2005, the Company formed On Line
Surgery, Inc. as a wholly-owned subsidiary and California corporation ("On Line
Surgery"), to develop the advertising potential of this web portal for the
Company's then existing nutraceutical product line, as well as to generate
advertising revenue from physicians and other potential customers. During the
quarter ending December 31, 2005, the Company sold its rights to the url
"www.onlinesurgery.com", the sole asset related to On Line Surgery, for $20,000.
On Line Surgery never commenced operations.
OC Energy Drinks
- ----------------
In late 2006, the Company commenced operations in the bottled energy drink and
oxygenated water industry as OC Energy Drinks, as a division of the Company ("OC
Energy").
The Company is in the process of transferring the appropriate intellectual
property into it and operating the OC Energy business as a subsidiary.
Catalyx Fluid Solutions, a division of RGBL ("CFS")
- ---------------------------------------------------
In February 2007, with the technology it purchased from Catalyx Fluid Solutions,
Inc., the Company commenced operations in the water reclamation industry
specifically associated with coal-bed mining as Catalyx Fluid Solutions, a
division of RGBL.
Aquair Asia
- -----------
In 2006, the Company formed two subsidiaries in Asia in anticipation of Asian
operations and sales of its Aquair products. Specifically, it organized Aquair
Hong Kong Ltd, a company organized under the laws of Hong Kong, and Aquair Asia
Company Limited, a company organized under the laws of Thailand.
BUSINESS OF ISSUER
OC ENERGY DRINKS
- ----------------
On October 7, 2006, the Company launched it line of "OC ENERGY" caffeinated
energy drinks and oxygenated water fashioned for the Orange County lifestyle. OC
Energy began development of its products in early 2005. Presently there are
three Energy Drinks and one Highly Oxygenated Water. The Energy Drinks consist
of a 2-oz high-powered "shot" energy drink ("Insane"), a 10-oz energy drink
("KIK-IT") and a 10-oz diet energy drink ("KIK-IT Diet") in addition to a 17-oz
("O2") bottle of 100% pure oxygenated structured water. Befitting the OC
lifestyle, the energy drinks are low in natural sugar and high in vitamins and
minerals. The bottles are custom-designed. Sales of the products have commenced
in the first quarter of fiscal 2008.
14
CFS TECHNOLOGY
- --------------
CFS sells and/or leases, and provides professional support of its proprietary
wastewater treatment technology ("CFS Technology") for the reclamation of
wastewater associated with the production of methane in coal bed applications.
The technology removes sodium and other pollutants from such wastewater allowing
it to be returned to the environment within compliance regulations. The
successful removal of the treated wastewater in turn allows energy companies to
harvest and sell methane associated with coal beds.
In March 2007, the Company entered into an agreement for the construction, sale
and support of a plant utilizing its CFS Technology with Black Diamond Energy.
On June 22, 2007, the Company entered into an agreement with Yates Petroleum
Corporation on a "build, own, operate" model whereby CFS will construct, own and
operate a plant using the CFS Technology and charge a royalty on a per barrel
basis of reclaimed water.
CFS is currently pursuing additional energy companies in Wyoming, and other
locations, for the lease or sale, construction, use and/or support of the CFS
Technology and anticipates executing definitive agreements.
ATMOSPHERIC PURE WATER GENERATORS
- ---------------------------------
Aquair plans to distribute licensed environmentally-friendly water generating
equipment that creates purified drinking water from air for residential and
commercial uses, and converts brackish, polluted, or grey water to purified
water.
Aquair has acquired the rights to market and distribute water generators that
precipitate drinking water from air. The various water generating machines have
been tested in various locations. As of April 2007, the Company has sold limited
amounts of units to customers in the U.S. and Asia, and anticipates further
sales to those regions and Australia, however the Company is currently
dedicating less resources towards the sales of atmospheric water generators as
in the past, as it is focusing on sales and marketing OC Energy Drinks and CFS
Technology sales.
Aquair is currently exploring other environmentally friendly clean water
opportunities, such as desalinization technologies, in various locations.
PRINCIPAL PRODUCTS AND SERVICES, AND DISTRIBUTION METHODS
Atmospheric Water Generation
- ----------------------------
Aquair markets and distributes atmospheric water generators that precipitate
drinking water from air for commercial, residential and/or small office uses.
Aquair currently uses Munters Corp as its supplier in this sector, and continues
to search for new manufacturers of similar and/or improved atmospheric water
generators and may add different suppliers or switch suppliers altogether in the
future as opportunities arise. Aquair has distributed its atmospheric water
generation products directly to customers, but plans to utilize strategic
partners, and redistribution and/or reseller channels to increase sales volume.
OC Energy
- ---------
OC Energy plans to distribute its three Energy Drinks and Highly Oxygenated
Water directly to retail stores and through a network of regional and national
distributors domestically, and to international distributors. OC Energy designed
the packaging, but does not manufacture the OC Energy products, rather it has
its products bottled and packed by a third party.
Our bottler purchases concentrates, juices, flavors, vitamins, minerals,
nutrients, herbs, supplements, caps, labels, trays, boxes and other ingredients
for our beverage products. Depending on the product, our bottler add water
and/or high fructose corn syrup, or sucrose, or cane sugar or an artificial
sweetener, and/or citric acid or other ingredients and supplements for the
manufacture and packaging of the finished products into approved containers.
The Company has utilized Fusion Solutions LLC to coordinate all aspects of the
production of OC Energy products.
CFS
- ---
CFS currently offers its CFS Technology for sale or on a "build, own, operate"
model to the methane energy industry primarily in Wyoming, although the CFS
Technology has applications and utility worldwide.
For sales, CFS designs and maintains the plants, but intends to have them
constructed by a third party firm. For "build, own, operate" CFS designs,
operates and maintains the plant, while they are still constructed by a third
party firm.
15
STATUS OF PUBLICLY ANNOUNCED NEW PRODUCTS AND SERVICES
The Company previously announced its entry into the anti-microbial market with a
sublicense to distribute the licensed product Hydrosil from Apcan Distribution
LLC, with the Company engaging Intercontinental Management of Nevada as a
consultant to head up sales and marketing, and to provide product support,
training and maintenance services to the customers of Hydrosil. The Company has
terminated both of these agreements and has withdrawn from sales efforts in this
sector.
COMPETITION
Atmospheric Water Generation
- ----------------------------
The international market for water generation is substantial. Our key
competitors in the residential and small office water generation sector are
Nestle and DS Waters.
OC Energy Drinks
- ----------------
The beverage industry is highly competitive. The principal areas of competition
are pricing, packaging, development of new products and flavors and marketing
campaigns. Our products compete with a wide range of drinks produced by a
relatively large number of manufacturers, most of which have substantially
greater financial, marketing and distribution resources than we do.
Important factors affecting our ability to compete successfully include taste
and flavor of products, trade and consumer promotions, rapid and effective
development of new, unique cutting edge products, attractive and different
packaging, branded product advertising and pricing. We also compete for
distributors who will concentrate on marketing our products over those of our
competitors, provide stable and reliable distribution and secure adequate shelf
space in retail outlets. Competitive pressures in the energy and bottled water
could cause our products to be unable to gain market share which could have a
material adverse affect on our business and results.
Our energy drinks compete directly with Red Bull, Monster, Adrenaline Rush, Amp,
180, KMX, Venom, Extreme Energy Shot, Rockstar, No Fear, US energy, Red Devil,
Lipovitan, MET-Rx, Hype, XTC, and many other brands.
Our oxygenated bottled water competes directly with E2O Energy Water, Vitamin
Water, Reebok, Propel, Dasani, Aquafina, Evian, Crystal Geyser, Naya, Palomar
Mountain, Sahara, Arrowhead, Dannon and other brands of still water, especially
store brands.
CFS
- ---
The CFS Technology currently has direct competition from AMF Cuno, Ionics, GE
Water, and Water Factory.
Many of these competitors have established histories of operation and greater
financial resources than the Company, enabling them to finance acquisitions and
development opportunities, to pay higher prices for the same opportunities, and
to develop and support their own operations. In addition, many of these
companies have greater name recognition. These companies might be willing to
sacrifice profitability to capture a greater portion of the market for products
similar to those manufactured or distributed by the Company or pay higher prices
than the Company would for the same expansion and development opportunities.
Consequently, the Company may encounter significant competition in its efforts
to achieve its growth objectives.
PRINCIPAL SUPPLIERS
Atmospheric Water Generators
- ----------------------------
The Company intends to have Munters Corporation to be the principal supplier of
the Company's commercial and large residential atmospheric water generation
products. For smaller residential and small business products, the Company has
not chosen a principal supplier.
OC Energy
- ---------
OC Energy utilizes third party bottlers to supply it with its products, and
utilizes Fusion Solutions LLC to coordinate all aspects of such production.
CFS
- ---
CFS intends to utilize a third-party firm to construct the plants using the CFS
Technology.
16
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
For the fiscal year ended March 31, 2007, the Company did not have a dependence
on any major customers. In March 2007, the Company entered into its first
agreement for utilization of the CFS Technology with Black Diamond Energy,
however it did not depend upon such entity for its fiscal year as a major
customer.
INTELLECTUAL PROPERTY
We own numerous trademarks that are very important to our business. Depending
upon the jurisdiction, trademarks are valid as long as they are in use and/or
their registrations are properly maintained and they have not been found to have
become generic. Registrations of trademarks can generally be renewed as long as
the trademarks are in use. We also own the copyright in and to numerous
statements made and content appearing on the packaging of our products.
The Company owns, or has been assigned, has the following trademarks: Aquair, OC
Energy, KIK-IT, KIK-IT Diet, Insane, and 02.
CFS Patents. As part of the Technology Transfer Agreement effective January 2007
between the Company and Catalyx Fluid Solutions, Inc., the Company purchased US
patent 6776913 and proprietary know how which will form the basis for further
patents based on the fundamentals in the issued patent. The Company intends to
file multiple patents for the CFS Technology utilized to treat coal bed methane
gas wastewater. The Company also intends to file patents in Australia for a
unique technology to condense water from humidity in the air.
GOVERNMENT APPROVAL
OC Energy
- ---------
The production, distribution and sale in the United States of many of our
products is subject to the Federal Food, Drug and Cosmetic Act; the Dietary
Supplement Health and Education Act of 1994; the Occupational Safety and Health
Act; various environmental statutes; and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products. California law
requires that a specific warning appear on any product that contains a component
listed by the State as having been found to cause cancer or birth defects. The
law exposes all food and beverage producers to the possibility of having to
provide warnings on their products because the law recognizes no generally
applicable quantitative thresholds below which a warning is not required.
Consequently, even trace amounts of listed components can expose affected
products to the prospect of warning labels. Products containing listed
substances that occur naturally in the product or that are contributed to the
product solely by a municipal water supply are generally exempt from the warning
requirement. While none of our beverage products are required to display
warnings under this law, we cannot predict whether an important component of any
of our products might be added to the California list in the future. We also are
unable to predict whether or to what extent a warning under this law would have
an impact on costs or sales of our products.
Measures have been enacted in various localities and states that require that a
deposit be charged for certain non-refillable beverage containers. The precise
requirements imposed by these measures vary. Other deposit, recycling or product
stewardship proposals have been introduced in certain states and localities and
in Congress, and we anticipate that similar legislation or regulations may be
proposed in the future at the local, state and federal levels, both in the
United States and elsewhere.
Our facilities in the United States are subject to federal, state and local
environmental laws and regulations. Compliance with these provisions has not
had, and we do not expect such compliance to have, any material adverse effect
upon our capital expenditures, net income or competitive position.
17
CFS
- ---
The CFS Technology for plants in Wyoming (currently the only location contracted
for) requires permits issued by the Wyoming Department of Environment Services
that regulate and allow the clean water discharge into the
environment.
EFFECT OF ANY EXISTING OR PROPOSED GOVERNMENT REGULATIONS
CFS
- ---
Proposed government regulations in Wyoming for coal bed methane mining would
require lower wastewater pollutant discharge limits and prohibition/limitation
on use of evaporative ponds, and are being opposed by the methane operators, but
seem to be destined to pass. This regulation would necessitate additional
treatment, making it a positive trend for CFS.
COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS
OC Energy
- ---------
In California, we are required to collect redemption values from our customers
and to remit such redemption values to the State of California Department of
Conservation based upon the number of cans and bottles of certain carbonated and
non-carbonated products sold. In certain other states and Canada where OC Energy
products are sold, we are also required to collect deposits from our customers
and to remit such deposits to the respective state agencies based upon the
number of cans and bottles of certain carbonated and non-carbonated products
sold in such states.
CFS
- ---
The CFS Technology for plants in Wyoming (currently the only location contracted
for) requires building (Chapter 3) permits issued by the Wyoming Department of
Environment Services which are site specific. The effect of this compliance is
that Wyoming issues only four permits until a technology has one year operating
data accumulated, which will limit our initial sales to four projects until
October 2008. Additionally, if Wyoming increases its thresholds for effluent
limits, the CFS Technology may become more expensive, and therefore, less cost
effective for methane production. However, such a consequence would linearly
affect the costs of all competing technologies.
EMPLOYEES
As of October 1, 2007, the Company employed two full time employees comprised of
the Company's Chief Financial Officer and Chief Technology Officer and no part
time employees. The Company's Asian Subsidiaries employs one employee, their
President, who also has been acting as the Company's Chief Executive Officer
subsequent to the passing away of the Company's prior Chief Executive Officer on
April 24, 2007. The Company retains consultants on an as needed basis.
18
MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion and analysis of our financial condition
and results of operations together with "Selected Financial Data" and our
financial statements and related notes appearing elsewhere in this prospectus.
This discussion and analysis contains forward-looking statements that involve
risks, uncertainties, and assumptions. The actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those presented under "Risk
Factors" on page 4 and elsewhere in this prospectus.
OVERVIEW
OC ENERGY DRINKS
- ----------------
The Company has launched it line of "OC ENERGY" caffeinated energy drinks and
oxygenated water fashioned for the Orange County lifestyle. Presently there are
three Energy Drinks and one Highly Oxygenated Water. The Energy Drinks consist
of a 2-oz high-powered "shot" energy drink ("Insane"), a 10-oz energy drink
("KIK-IT") and a 10-oz diet energy drink ("KIK-IT Diet") in addition to a 17-oz
("O2") bottle of 100% pure oxygenated structured water. Befitting the OC
lifestyle, the energy drinks are low in natural sugar and high in vitamins and
minerals. The bottles are custom-designed. Sales of the products have commenced
in the first fiscal quarter of 2008.
CFS TECHNOLOGY
- --------------
CFS sells and/or leases, and provides professional support of its proprietary
wastewater treatment technology ("CFS Technology") for the reclamation of
wastewater associated with the production of methane in coal bed applications.
The technology removes sodium and other pollutants from such wastewater allowing
it to be returned to the environment within compliance regulations. The
successful removal of the treated wastewater in turn allows energy companies to
harvest and sell methane associated with coal beds.
In March 2007, the Company entered into an agreement for the construction, sale
and support of a plant utilizing its CFS Technology with Black Diamond Energy.
On June 22, 2007, the Company entered into an agreement with Yates Petroleum
Corporation on a "build, own, operate" model whereby CFS will construct, own and
operate a plant using the CFS Technology and charge a royalty on a per barrel
basis of reclaimed water.
CFS is currently pursuing additional energy companies in Wyoming, and other
locations, for the lease or sale, construction, use and/or support of the CFS
Technology and anticipates executing definitive agreements.
ATMOSPHERIC PURE WATER GENERATORS
- ---------------------------------
Aquair plans to distribute licensed environmentally-friendly water generating
equipment that creates purified drinking water from air for residential and
commercial uses, and converts brackish, polluted, or grey water to purified
water.
Aquair has acquired the rights to market and distribute water generators that
precipitate drinking water from air. The various water generating machines have
been tested in various locations. As of April 2007, the Company has sold limited
amounts of units to customers in the U.S. and Asia, and anticipates further
sales to those regions and Australia, however the Company is currently
dedicating less resources towards the sales of atmospheric water generators as
in the past, as it is focusing on sales and marketing OC Energy Drinks and CFS
Technology projects.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2007, FISCAL YEAR ENDED
MARCH 31, 2007 AND MARCH 31, 2006.
The following discussion compares results of continuing operations of the
Company only during the periods described.
Year Year
Ended Ended
March 31 March 31
2007 2006
------------ ------------
INCOME STATEMENT DATA
- ---------------------
Revenue $ 89,326 $ 69,340
Gross profit (loss) $ (57,025) 27,313
Loss from operations $ (6,752,003) (848,858)
Net loss $ (23,970,031) $ (2,036,561)
Net loss per weighted average
common shares $ (1.21) $ (0.12)
BALANCE SHEET DATA
- ------------------
Total assets $ 5,489,626 $ 685,118
Total liabilities $ 14,657,142 $ 1,045,590
Stockholders' deficit $ (9,167,516) $ (360,472)
Three Months Ended June 30
2007 2006
------------ ------------
INCOME STATEMENT DATA
- ---------------------
Revenue $ 287,207 $ 425
Gross profit (loss) $ 26,471 $ (5,503)
Loss from operations $(1,352,285) $(1,210,134)
Net loss $(1,841,970) $(5,839,857)
Net loss per weighted average common share $ (0.07) $ (0.33)
BALANCE SHEET DATA
- ------------------
Total assets $ 5,404,962 $ 935,273
Total liabilities $ 14,139,397 $ 6,305,965
Stockholders' deficit $ (8,734,435) $(5,370,692)
REVENUES
For the fiscal year ended March 31 Increase/(decrease)
2007 2006 $ %
- ---------------------------------- ---------- --------- ---------- --------
Revenues $ 89,326 $ 69,340 $ 19,986 28.8%
During fiscal 2007, the Company's primary source of revenues was the Black
Diamond contract which accounted for $84,037 of total revenues. During fiscal
2006, the Company's primary source of revenues was sales of Aquair's atmospheric
water generators which accounted for 100% of total revenues. The decrease in
revenues related to Aquair's atmospheric water generators was directly
attributed to the greater emphasis during fiscal 2007 by the Company to
establish sales and distribution channels for its CFS Technology projects and OC
Energy drinks.
For the quarter ended June 30 Increase/(decrease)
2007 2006 $ %
- ---------------------------------- ---------- --------- ---------- --------
Revenues $ 287,207 $425 $286,782 67,478.1%
During the quarter ended June 30, 2007, the Company's primary source of revenues
was sales of its water treatment technology which accounted for $209,159 of
total revenues. During the quarter ended June 30, 2006, the Company's primary
source of revenues was sales of air to water generating equipment, which
accounted for $425 or 100% of revenues. The increase in revenues related to the
commencement of sales of water treatment technology and the commencement of
sales of the Company's energy drink products.
GROSS PROFIT (LOSS)
For the fiscal year ended March 31 Increase/(decrease)
2007 2006 $ %
- ---------------------------------- ---------- --------- ---------- --------
Gross profit (loss) $ (57,025) $ 27,313 $ (84,338) (308.7%)
During fiscal 2007, a significant portion of the cost of revenues related to
costs incurred under the Black Diamond contract of $80,391. In addition, during
fiscal 2007 the Company incurred costs of $58,600 related to a sale in which no
revenues were recorded. The recording of this item contributed to the gross loss
for fiscal 2007. During fiscal 2006, the Company's cost revenues consisted only
of costs related to Aquair's atmospheric water generators.
For the quarter ended June 30 Increase/(decrease)
2007 2006 $ %
- ---------------------------------- ---------- --------- ---------- --------
Gross profit (loss) $26,471 $(5,503) $31,974 581.0%
20
During the quarter ended June 30 2007, a significant portion of the cost of
revenues related to sales of water treatment technology and production costs
related to the manufacture of energy drink products. During the quarter ended
June 30, 2006, the Company's cost revenues consisted of costs related to freight
costs for shipments of air to water generating equipment.
TOTAL OPERATING EXPENSES
For the fiscal year ended March 31 Increase/(decrease)
2007 2006 $ %
- ---------------------------------- ---------- --------- ---------- --------
Total Operating Expenses $6,694,978 $ 876,171 $5,818,807 664.1%
Our total operating expenses include personnel costs, product marketing and
sales costs, the costs of corporate functions, accounting, transaction costs,
legal, public company, information systems and non-cash stock-based
compensation.
The primary reasons for the increase in operating expense were the stock-based
compensation expense of $4,651,581 recorded by the Company, incurred mainly as a
result of the issuance and modification of stock options to employees and
consultants under the 2006 and 2007 Incentive and Non-statutory Stock Option
Plan. For both periods, we incurred expenses for general management, and legal
and accounting fees related to continuing operations. For the fiscal year ended
March 31, 2007, the Company expended $208,715 in rent paid to a then-related
party, and paid $318,546 in legal and accounting fees, compared to $72,177 and
$304,835 respectively for these expenses in the fiscal year ended March 31,
2006.
For the quarter ended June 30 Increase/(decrease)
2007 2006 $ %
- ---------------------------------- ---------- --------- ---------- --------
Total Operating Expenses $1,378,756 $1,204,631 $174,125 14.5%
Our total operating expenses include personnel costs, product marketing and
sales costs, the costs of corporate functions, accounting, transaction costs,
legal, public company, information systems and non-cash stock-based
compensation.
For both periods, we incurred expenses for general management, and legal and
accounting fees related to continuing operations. For the quarter ended June 30,
2007, the Company expended $18,046 in rent paid to a then-related party, and
paid $172,806 in legal and accounting fees, compared to $41,800 and $80,330
respectively for these expenses in the quarter ended June 30, 2006.
OTHER INCOME (EXPENSE)
For the fiscal year ended March 31 Increase/(decrease)
2007 2006 $ %
- ------------------------------ ------------ ------------ ------------ ----------
Other Income (Expense) $(17,274,884) $ (349,621) $ 16,925,263 4,841.0%
The increase in other income (expense) during fiscal 2007 was directly
attributed to certain non-cash transactions in fiscal 2007 which had a
significant financial statement impact. Of these transactions $10,766,106 were
charges relating to the marking to market of the Company's derivative financial
instruments. In addition, during fiscal 2007 and 2006 the Company issued various
forms of notes with warrants and/or beneficial conversion features, resulting in
significant discounts to the notes. During fiscal 2007 and 2006, amortization
expense related to these discounts was $2,792,691 and $306,902, respectively.
Additionally in fiscal 2007, the Company issued common stock in settlement of
notes payable. The fair value of these shares was determined to be $2,701,323 in
excess of the notes payable settled, thus, resulting in an additional charge.
For the quarter ended June 30 Increase/(decrease)
2007 2006 $ %
- ----------------------------- ---------- ------------ ------------ ---------
Other Income (Expense) $(489,685) $(4,629,723) $(4,140,038) (89.4%)
The change in other income (expense) during the quarter ended June 30, 2007, was
directly attributed to a change in the fair value of derivative liability
related to convertible notes. In the quarter ended June 30, 2006, other income
(expense) included a one-time charge for interest and financing charges related
to convertible notes in the amount of $4,040,569.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and
satisfaction of liabilities and other commitments in the normal course of
business. The report of our independent auditors contains an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern as a result of recurring losses and negative cash flows. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that may be necessary if we are unable to continue as a going
concern.
21
Our principal sources of liquidity consist of cash and cash equivalents, cash
generated from product sales and construction contracts, and the issuance of
equity and/or debt securities. In addition to funding operations, our principal
short-term and long-term liquidity needs have been, and are expected to be, the
debt service requirements of our notes payable, capital expenditures and general
corporate purposes. In addition, as our sales and operations ramp up, we
anticipate significant purchases of equipment for the construction of plants
utilizing the CFS Technology and possibly for purchase of OC Energy drinks from
our bottler for wholesale to the distribution and retail channels. As of March
31, 2007, we had cash and cash equivalents of $502,278 and notes payable
outstanding of $2,770,434.
We believe that our existing sources of liquidity, along with cash expected to
be generated from product sales and construction contracts, will be sufficient
to fund our operations, anticipated capital expenditures, working capital and
other financing requirements through July 2008. We will need to continue a
focused program of capital expenditures to affect our CFS Technology project
constructions and OC Energy drink production capacity expansion. In order to
fund capital expenditures or increase our working capital above our current
plan, or complete any acquisitions, we may seek to obtain additional debt or
equity financing. We may also need to seek to obtain additional debt or equity
financing if we experience downturns or cyclical fluctuations in our business
that are more severe or longer than anticipated, or if we fail to achieve
anticipated revenue, experience significant increases in the costs associated
with products sales, or if we engage in additional strategic transactions.
However, we cannot assure you that such financing will be available to us on
favorable terms, or at all. If, after utilizing the existing sources of capital
available to the Company, further capital needs are identified and the Company
is not successful in obtaining the financing, it may be forced to curtail its
existing or planned future operations.
During fiscal 2007, we funded operations through the issuance of $2,600,000 in
notes payable under various terms.
OPERATING ACTIVITIES
Operating cash flows used during fiscal 2007, reflect our net loss of
$23,970,031 and increased working capital requirements, partially offset by
non-cash charges (depreciation, amortization of intangible assets, stock-based
compensation, non-cash interest expense including the amortization of debt
discounts, and the change in the fair value of derivative instruments) of
approximately $21,831,828.
Operating cash flows used during fiscal 2006, reflect our net loss of $2,036,561
and increased working capital requirements, partially offset by non-cash charges
related to the amortization of debt discounts of approximately $306,902. In
addition, at the time due to the emphases in the sale of Aquair's atmospheric
water generators, a significant portion of the Company's operating cash was used
in the purchase of those units of approximately $290,000.
INVESTING ACTIVITIES
Investing cash flows using during fiscal 2007, reflect the payment of $200,000
to Catalyx Fluid Solutions, Inc. to be offset against future royalties due to
them. In addition, the Company purchased $18,137 in property and equipment
related to expanding their operations. Investing cash flows used during fiscal
2006 were not significant.
FINANCING ACTIVITIES
Financing cash flows provided during fiscal 2007, reflect the Company borrowing
$2,600,000 to fund operations during the year. In addition, $208,300 of the
proceeds were used to satisfy previous borrowings from fiscal 2006. In fiscal
2006, financing cash flows provided are the result of loans received of
$1,613,940 to fund operations.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the use of estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Our
management periodically evaluates the estimates and judgments made. Management
bases its estimates and judgments on historical experience and on various
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
The methods, estimates, and judgment we use in applying our most critical
accounting policies have a significant impact on the results we report in our
financial statements. The SEC has defined "critical accounting policies" as
those accounting policies that are most important to the portrayal of our
financial condition and results, and require us to make our most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based upon this definition, our most critical
estimates are described below under the heading "Revenue Recognition." We also
have other key accounting estimates and policies, but we believe that these
other policies either do not generally require us to make estimates and
judgments that are as difficult or as subjective, or it is less likely that they
would have a material impact on our reported results of operations for a given
period. For additional information see Note 1, "Summary of Organization and
Significant Accounting Policies" in the notes to our audited financial
statements appearing elsewhere in this report. Although we believe that our
estimates and assumptions are reasonable, they are based upon information
presently available, and actual results may differ significantly from these
estimates.
22
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
144 ("SFAS 144"). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Events relating to recoverability may include
significant unfavorable changes in business conditions, recurring losses, or a
forecasted inability to achieve break-even operating results over an extended
period. The Company evaluates the recoverability of long-lived assets based upon
forecasted undercounted cash flows. Should impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates of
future discounted cash flows resulting from the use and ultimate disposition of
the asset. SFAS No. 144 also requires assets to be disposed of be reported at
the lower of the carrying amount or the fair value less costs to sell.
REVENUE RECOGNITION
Product sales - For revenue from product sales, the Company recognizes revenue
in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition
("SAB104"), which superseded Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB101"). SAB 101 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred; (3) the selling price is
fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's judgments
regarding the fixed nature of the selling prices of the products delivered and
the collectibility of those amounts. Provisions for discounts and rebates to
customers, estimated returns and allowances, and other adjustments are provided
for in the same period the related sales are recorded.
Construction contracts - In accordance with Statement of Position 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts", the Company uses the percentage completion method for the
recognition of revenue received in connection with it's engineering, equipment
sale and installation contracts. In making the estimate of the percentage of
revenue to recognize, the Company compares costs to the total projected cost of
the contract. Accordingly, the Company recognizes that portion of the revenue
and record the balance of the cash received as deferred revenues, which is
included within accrued liabilities on the accompanying balance sheet.
STOCK-BASED COMPENSATION
On December 16, 2004, the FASB published Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
requires that compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment transactions within
the scope of SFAS 123R include stock options, restricted stock plans,
performance-based awards, stock appreciation rights, and employee share purchase
plans. The provisions of SFAS 123R were effective as of the first interim period
that begins after December 15, 2005.
The Company has adopted SFAS 123R, which requires disclosure of the fair value
and other characteristics of stock options, and SFAS 148 "Accounting for
Stock-Based Compensation -- Transition and Disclosure," which requires more
prominent disclosure about the effects of an entity's accounting policy
decisions with respect to stock-based compensation on reported net loss. The
Company has reflected the expense of such stock based compensation based on the
fair value at the grant date for awards consistent with the provisions of SFAS
No. 123R. There were no options issued to employees as of March 31, 2006, all
other options and warrants had been accounted for at fair value using the Black
Scholes valuation model. Thus, the impact of adopting SFAS 123R was immaterial
to the Company's financial statements.
23
In connection with the adoption of SFAS 123R, we estimate the fair value of our
share-based compensation utilizing the Black-Scholes pricing model. The fair
value of the options granted is amortized as compensation expense on a straight
line basis over the requisite service period of the award, which is generally
the vesting period. The fair value calculations involve significant judgments,
assumptions, estimates and complexities that impact the amount of compensation
expense to be recorded in current and future periods. The factors include: (1)
The time period our stock-based compensation awards are expected to remain
outstanding based upon the average of the original award period and the
remaining vesting period in accordance with SEC Staff Accounting Bulletin 107
simplified method. Our Company's stock trading history has been relatively short
(since January 2005). Our expected term assumption for awards issued during the
year ended March 31, 2007 was five years. As additional evidence develops from
our stock's trading history, the expected term assumption will be refined to
capture the relevant trends. (2) The future volatility of our stock has been
estimated based upon our entire trading history from inception to the reporting
date. (3) A dividend yield of zero has been assumed for awards issued during the
year ended March 31, 2007 based upon our actual past experience and the fact
that we do not anticipate paying a dividend on our shares in the near future.
(4) We have based our risk-free interest rate assumption for awards issued
during the year ended March 31, 2007 based upon the weighted-average yield of
5.25% available on US Treasury debt instruments with an equivalent expected
term. (5) Forfeiture rates for awards issued during these periods have not yet
been estimated as the Company has only recently issued share based awards and no
forfeiture data has been available to the Company as a result.
The Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of Emerging
Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services". The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor's performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109" ("FIN 48"). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 is effective for fiscal years beginning in years
beginning after December 15, 2006. We are currently assessing the impact of FIN
48 on our consolidated financial statements and plan to adopt the provisions of
FIN 48 as of April 1, 2007.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 provides accounting guidance on the definition of fair
value and establishes a framework for measuring fair value and requires expanded
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. We plan to
adopt the provisions of SFAS 157 on April 1, 2008 and we are currently assessing
the impact of the adoption of SFAS 157 on our results of operations and
financial condition.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued for fiscal
year beginning after November 15, 2007. We are currently assessing the impact of
adopting SFAS 159 on our results of operations and financial condition.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements, that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that are
material to investors.
24
DESCRIPTION OF PROPERTY
Because the Company's prior lease of corporate office space was with an entity
owned by its late CEO and Chairman that was dissolved, on June 30, 2007, the
Company's sublease for its previous corporate office space was terminated.
However, for now the Company rents an office in its previous space at (from a
new lessor) for $1,500 per month and is in the process of securing a lease for
corporate office space in Anaheim, CA.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Rental Agreement
- ----------------
The Company had entered into a month-to-month rental agreement with Pinnacle
International, Inc., a California corporation which was wholly owned by Louis
Knickerbocker, former Company CEO and Director. The agreement was for 3,000
square feet of office space located at 30021 Tomas, Suite 200, Rancho Santa
Margarita, California 92688 and office support services. During the fiscal years
ended March 31, 2007 and 2006, the Company spent $208,715 and $ 72,177,
respectively, for rent and services to the related party under this agreement.
The Company terminated this agreement in June 2007.
Distribution of Amerikal
- ------------------------
On October 1, 2005 the Company distributed its wholly owned subsidiary Amerikal
to a group of founding AIH shareholders in exchange for approximately 7,500,000
million shares of Common Stock of the Company. The distribution reduced the
outstanding shares of the Company at that time from approximately 25 million to
approximately 17 million at that time, and allowed management to concentrate its
efforts on implementing and executing its current business plan focusing on
Aquair, OC Energy and CFS.
Note and Warrant Financing
- --------------------------
In November 2005, Louis Knickerbocker, Company CEO and Director, participated in
the Company's Note and Warrant financing as an investor. Pursuant to the terms
of the offering, Mr. Knickerbocker lent the Company $100,000 and received
warrants to purchase 100,000 shares of Company common stock - such warrant
shares are being registered for resale herein.
In December 2005, Joe Murray, Company VP Operations and Director, participated
in the Company's Note and Warrant financing as an investor. Pursuant to the
terms of the offering, Joe Murray lent the Company $508,131 and received
warrants to purchase 508,131 shares of Company common stock - such warrant
shares are being registered for resale herein.
In December 2005, John Murray, brother to the Company VP Operations and Director
Joe Murray, participated in the Company's Note and Warrant financing as an
investor. Pursuant to the terms of the offering, John Murray lent the Company
$355,808 and received warrants to purchase 355,808 shares of Company common
stock - such warrant shares are being registered for resale herein.
Private Stock Offering - Conversion of Notes to Stock
- -----------------------------------------------------
In November 2006, in consideration for the noteholders (all note-holders were
offered an opportunity to participate in the Private Stock Offering - including
non-related party noteholders) agreeing to cancel the outstanding principal and
interest due under their promissory notes discussed above in the Note and
Warrant Financing, the Company offered the noteholders restricted common stock
at $0.20 per share in a private offering.
Pursuant to the terms of this Private Stock Offering and the cancellation of the
notes, the Company issued related parties Louis Knickerbocker 1,018,042 shares
of common stock, Joe Murray 2,783,196 shares of common stock, and John Murray
2,065,222 shares of common stock.
CFS Inc. Agreement
- ------------------
On January 26, 2007, a Technology Transfer Agreement between the Company and CFS
Inc. became effective. CFS Inc. is an entity 50% owned by Juzer Jangbarwala, the
Company's CTO and Director beginning on the date of effectiveness - January 26,
2007. Pursuant to the terms of this agreement, CFS Inc. was prepaid $200,000
against future royalty payments by the Company for revenues earned by license of
the purchased CFS Technology, and will be paid $0.01 per barrel royalty on
revenue received from lease or sublicense transactions in Wyoming, and a 5%
royalty on the sale price of the equipment based on the technology in Wyoming.
25
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the OTC Bulletin Board under the symbol
"RGBL." The following tables set forth the high and low bid information for the
Common Stock for each quarter within the last two fiscal years and the
subsequent interim period:
QUARTERLY COMMON STOCK PRICE RANGES
Quarter Ended High Low
- ------------- ---- ---
June 30, 2005 $5.45 $1.25
September 30, 2005 $4.52 $1.70
December 31, 2005 $2.40 $1.05
March 31, 2006 $1.45 $0.56
June 30, 2006 $1.59 $0.65
September 30, 2006 $1.01 $0.33
December 31, 2006 $1.02 $0.17
March 31, 2007 $2.55 $0.57
June 30, 2007 $1.68 $0.60
September 30, 2007 $1.32 $0.39
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions.
HOLDERS
There were approximately 3200 holders of record of the Company's Common Stock as
of August 15, 2007.
DIVIDENDS
The Company has not paid any dividends on its Common Stock since emerging from
the Chapter 11 bankruptcy proceeding in September 2002 and does not anticipate
paying dividends in the foreseeable future. There are no restrictions on the
Company's present ability to pay dividends to shareholders of its Common Stock,
other than those prescribed by California law.
STOCK OPTIONS
In order to compensate our officers, directors, employees and/or consultants,
our Board and stockholders adopted the 2006 Incentive and Non-Statutory Stock
Option Plan (the "2006 Plan"). On December 26, 2006, our Board adopted the 2007
Incentive and Non-Statutory Stock Option Plan (the "2007 Plan", collectively the
"Plans"). The 2007 Plan has not been adopted by the Company's stockholders as of
the date of this prospectus (summary of material terms of 2007 Plan below).
The 2006 Plan has a total of 10,000,000 shares reserved for issuance, and the
2007 Plan has a total of 6,000,000 shares reserved for issuance.
As of the end of the fiscal year ended March 31, 2007, we have issued the
following stock options under the Plans:
EQUITY COMPENSATION PLAN INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance
warrants and rights warrants and rights
- ----------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by 9,957,600 $0.32 42,400
security holders: 2006 Plan
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved 5,254,800 $0.40 745,200
by security holders: 2007 Plan
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation not pursuant to a 100,000 $2.00 N/A
plan
- ----------------------------------------------------------------------------------------------------------------------
Total 15,312,400 $0.35 787,600
- ----------------------------------------------------------------------------------------------------------------------
26
SUMMARY OF 2007 PLAN
Administration
The 2007 Plan shall be administered by the Board of Directors of the Company;
provided however, that the Board may delegate such administration to a committee
of not fewer than three (3) members (the "Committee"), at least two (2) of whom
are members of the Board and all of whom are disinterested administrators, as
contemplated by Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended ("Rule 16b-3"); and provided further, that the foregoing
requirement for disinterested administrators shall not apply prior to the date
of the first registration of any of the securities of the Company under the
Securities Act of 1933, as amended.
Eligibility
The persons who shall be eligible to receive Options shall be employees,
directors, or consultants of the Company or any of its Affiliates ("Optionees").
The term consultant shall mean any person who is engaged by the Company to
render services and is compensated for such services, and any director of the
Company whether or not compensated for such services; provided that, if the
Company registers any of its securities pursuant to the Securities Act of 1933,
as amended (the "Act"), the term consultant shall thereafter not include
directors who are not compensated for their services or are paid only a director
fee by the Company.
The 2007 Plan authorizes the granting of both incentive stock options, as
defined under Section 422 of the Internal Revenue Code of 1986 ("ISO"), and
non-statutory stock options ("NQO") to purchase Common Stock. All employees of
the Company and its affiliates are eligible to participate in the 2007 Plan The
2007 Plan also authorizes the granting of NQO's to non-employee Directors and
others performing services to the Company.
Any ISO granted to a person who at the time the ISO is granted owns stock
possessing more than ten percent (10%) of the total combined voting power of
value of all classes of stock of the Company, or of any Affiliate, ("Ten Percent
Holder") shall have an Option Price of no less than one hundred ten percent
(110%) of the fair market value of the common stock as of the date of grant.
ISOs granted to a person who at the time the ISO is granted is not a Ten Percent
Holder shall have an Option Price of no less than one hundred percent (100%) of
the fair market value of the common stock as of the date of grant. NQOs shall
have an Option Price determined by the Board as of the date of grant.
No option granted pursuant to the 2007 Plan is transferable otherwise than by
will or the laws of descent and distribution. If there is a stock split, stock
dividend, or other relevant change affecting the Company's shares, appropriate
adjustments would be made in the number of shares that could be issued in the
future and in the number of shares and price under all outstanding grants made
before the event. Future options may also cover such shares as may cease to be
under option by reason of total or partial expiration, termination or voluntary
surrender of an option.
The aggregate fair market value (determined at the time an option is granted) of
the Common Stock with respect to which ISO's are exercisable for the first time
by any person during any calendar year under the 2007 Plan shall not exceed
$100,000.
Any Option granted to an Employee of the Company shall become exercisable over a
period of no longer than five (5) years, and no less than twenty percent (20%)
of the shares covered thereby shall become exercisable annually. No Option shall
be exercisable, in whole or in part, prior to one (1) year from the date it is
granted unless the Board shall specifically determine otherwise, as provided
herein. In no event shall any Option be exercisable after the expiration of five
(5) years from the date it is granted. Unless otherwise specified by the Board
or the Committee in the resolution authorizing such option, the date of grant of
an Option shall be deemed to be the date upon which the Board or the Committee
authorizes the granting of such Option.
FEDERAL INCOME TAX CONSEQUENCES
The holder of an ISO does not realize taxable income upon the grant or upon the
exercise of the option (although the option spread is an item of tax preference
income potentially subject to the alternative minimum tax). If the stock
acquired upon exercise of the options sold or otherwise disposed of within two
(2) years from the option grant date or within one year from the exercise date
then, in general, gain realized on the sale is treated as ordinary income to the
extent of the option spread at the exercise date, and the Company receives a
corresponding deduction. Any remaining gain is treated as capital gain. If the
stock is held for at least two (2) years from the grant date and one year from
the exercise date, then gain or loss realized upon the sale will be capital gain
or loss and the Company will not be entitled to a deduction. A special basis
adjustment applies to reduce the gain for alternative minimum tax purposes.
An optionee does not realize taxable income upon the grant of an NQO. In
general, the holder of a NQO realizes ordinary income in an amount equal to the
difference between the exercise price and the market value on the date of
exercise. The Company is entitled to an expense deduction at the same time and
in a corresponding amount.
27
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Change in
Pension
Non-Equity Value and
Incentive Nonqualified
Stock Option Plan Deferred All Other
Salary Bonus Awards Awards Compensation Compensation Compensation
Name and Principal Position Year ($) ($) ($) ($) ($) Earnings ($) ($) Total ($)
- --------------------------- ------- --------- ----- ------ ---------- ------------ ------------ ------------ ----------
Louis Knickerbocker 2006/07 $ 160,000 $4,610,768 $4,770,768
CEO and Chairman 2005/06 $ -- 0 0
Grant King 2006/07 $ 67,500 0 0 $2,296,875 $2,364,375
President Aquair Asia 2005/06 $ -- 0 0
and Director
Joseph Murray 2006/07 $ 87,500 $1,297,730 $1,385,230
VP Operations and Director 2005/06 $ 40,000 0 $40,000
William Hitchcock 2006/07 $ 85,500 0 0 $1,162,274 $1,247,774
Chief Financial Officer 2005/06 $ 36,000 0 $36,000
Juzer Jangbarwala 2006/07 $ 24,000 0 0 $1,255,548 $1,279,548
Chief Technology Officer
and Director
- ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
Option Awards
----------------------------------------------------------------
Equity
Incentive
Number of Number of Plan Awards:
Securities Securities Number of
Underlying Underlying Securities
Unexercised Unexercised Underlying Option
Options Options Unexercised Exercise Option
(#) (#) Unearned Price Expiration
Name Exercisable Unexercisable Options (#) ($) Date
- ------------------------- ----------- ------------- ----------- --------- -----------
Louis Knickerbocker 1,570,000 2,338,000 0.28 5/3/2011
250,500 1,753,500 0.69 12/26/2011
Grant King 166,000 1,162,000 0.2 5/3/2011
124,500 871,500 0.4 12/26/2011
Joseph Murray 84,000 588,000 0.2 5/3/2011
90,000 630,000 0.4 12/26/2011
William Hitchcock 170,000 588,000 0.2 5/3/2011
63,000 441,000 0.4 12/26/2011
Juzer Jangbarwala 187,500 1,312,500 0.2 1/26/2012
62,500 437,500 0.4 1/26/2012
- ------------------------------------------------------------------------------------------
Market
Number of Value of Equity Incentive Equity Incentive Plan
Shares Shares Plan Awards: Awards: Market or
or Units or Units Number of Unearned Payout Value of
of Stock of Stock Shares, Units or Unearned Shares, Units
That Have That Have Other Rights That or Other Rights That
Not Vested Not Vested Have Not Vested Have Not Vested
Name (#) ($) (#) ($)
- ------------------------- ---------- ---------- ------------------ ----------------------
Louis Knickerbocker
Grant King
Joseph Murray
William Hitchcock
Juzer Jangbarwala
- ---------------------------------------------------------------------------------------------
28
DIRECTOR COMPENSATION
- ----------------------------------------------------------------------------------------------------------------
Change in
Pension
Value and
Nonqualified
Fees Earned Non-Equity Deferred
or Stock Option Incentive Plan Compensation All Other
Paid in Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
- ----------------------- --------------- ------ ------- --------------- ------------ ------------- -------
Louis Knickerbocker 0
Grant King 0
Juzer Jangbarwala 0
Steve Ritchie $62,710 $62,710
Joseph Murray 0
- ----------------------------------------------------------------------------------------------------------------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
None of our directors will have personal liability to us or any of our
stockholders for monetary damages for breach of fiduciary duty as a director
involving any act or omission of any such director since provisions have been
made in the Articles of Incorporation limiting such liability. The foregoing
provisions shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to us or our stockholders, (ii) for
acts or omissions not in good faith or, which involve intentional misconduct or
a knowing violation of law, (iii) under applicable Sections of the California
Corporations Code, (iv) the payment of dividends in violation of Section 78300
of the Nevada Revised Statutes or, (v) for any transaction from which the
director derived an improper personal benefit.
The Bylaws provide for indemnification of the directors, officers, and employees
of RG Global Lifestyles, Inc. in most cases for any liability suffered by them
or arising out of their activities as directors, officers, and employees of RG
Global Lifestyles, Inc. if they were not engaged in willful misfeasance or
malfeasance in the performance of his or her duties; provided that in the event
of a settlement the indemnification will apply only when the Board of Directors
approves such settlement and reimbursement as being for the best interests of
the Corporation. The Bylaws, therefore, limit the liability of directors to the
maximum extent permitted by California law.
Our officers and directors are accountable to us as fiduciaries, which means
they are required to exercise good faith and fairness in all dealings affecting
us. In the event that a stockholder believes the officers and/or directors have
violated their fiduciary duties to us, the stockholder may, subject to
applicable rules of civil procedure, be able to bring a class action or
derivative suit to enforce the stockholder's rights, including rights under
certain federal and state securities laws and regulations to recover damages
from and require an accounting by management. Stockholders who have suffered
losses in connection with the purchase or sale of their interest in RG Global
Lifestyles, Inc. in connection with such sale or purchase, including the
misapplication by any such officer or director of the proceeds from the sale of
these securities, may be able to recover such losses from us. RG Global
Lifestyles, Inc. has been advised that in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
LEGAL MATTERS
The validity of the Common Stock offered by this prospectus has been passed upon
for us by Scott D. Olson, Esq., Coto de Caza, California.
EXPERTS
Our financial statements included in this prospectus to the extent and for the
fiscal year ended March 31, 2007 and 2006 (as indicated in their reports) have
been audited by McKennon, Wilson & Morgan LLP, Irvine, CA, and Beckstead and
Watts, LLP, Henderson, Nevada, independent registered public accounting firms,
respectively, and are included herein in reliance upon the authority of said
firms as experts in giving said reports.
29
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration statement on
Form SB-2 under the Securities Act for the shares of Common Stock in this
offering. This Prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to our Common Stock
and us, we refer you to the registration statement and the exhibits and schedule
that were filed with the registration statement. Statements contained in this
prospectus about the contents of any contract or any other document that is
filed as an exhibit to the registration statement are not necessarily complete,
and we refer you to the full text of the contract or other document filed as an
exhibit to the registration statement. A copy of the registration statement and
the exhibits and schedules that were filed with the registration statement may
be inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission 100 F Street N.E., Washington, D.C. 20549,
and copies of all or any part of the registration statement may be obtained from
the SEC upon payment of the prescribed fee or for free at the Commission's
website, www.sec.gov. Information regarding the operation of the Public
Reference Room may be obtained by calling the Commission at 1(800) SEC-0330 The
Securities and Exchange Commission maintains a Web site that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the site is http://www.sec.gov. We are subject to the information and
periodic reporting requirements of the Securities Exchange Act and, in
accordance with the requirements of the Securities Exchange Act, file periodic
reports, proxy statements, and other information with the Securities and
Exchange Commission. These periodic reports, proxy statements, and other
information are available for inspection and copying at the regional offices,
public reference facilities and Web site of the Securities and Exchange
Commission referred to above.
30
RG GLOBAL LIFESTYLES, INC.
INDEX TO FINANCIAL STATEMENTS
F-2 Report of Independent Registered Public Accounting Firm;
F-3 Report of Independent Registered Public Accounting Firm;
F-4 Consolidated Balance Sheet as of March 31, 2007;
F-5 Consolidated Statements of Operations For Years Ended March 31, 2007
and 2006;
F-6 Consolidated Statement of Stockholders' Deficit for the Years Ended
March 31, 2006 and 2007;
F-7 Consolidated Statements of Cash Flows for the Years Ended March 31,
2007 and 2006;
F-8 Notes to Consolidated Financial Statements;
F-27 Consolidated Balance Sheet - June 30, 2007
F-28 Consolidated Statements of Operations -
For the Three Months ended June 30, 2007 and 2006
F-29 Consolidated Statements of Cash Flows
For the Three Months ended June 30, 2007 and 2006
F-30 Notes to Financial Statements
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
RG Global Lifestyles, Inc.
We have audited the accompanying consolidated balance sheet of RG Global
Lifestyles, Inc. and its subsidiaries (the "Company") as of March 31, 2007, and
the related statement of operations, stockholders' deficit and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RG Global
Lifestyles, Inc. and subsidiaries as of March 31, 2007, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 of the
consolidated financial statements, the Company has incurred losses, has used
cash in operating activities and has a significant stockholders' deficit. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters are also
discussed in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ McKennon Wilson & Morgan LLP
- --------------------------------
Irvine, California
July 13, 2007
F-2
BECKSTEAD AND WATTS, LLP
- ------------------------
CERTIFIED PUBLIC ACCOUNTANTS
2425 W Horizon Ridge Parkway
Henderson, NV 89052
702.257.1984 (tel)
702.362.0540 (fax)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors
RG Global Lifestyles, Inc.
We have audited the consolidated statement of operations, stockholders' deficit,
and cash flows of RG Global Lifestyles, Inc. and subsidiaries (the "Company"),
for the year ended March 31, 2006. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RG Global
Lifestyles, Inc. and subsidiaries results of operations and cash flows for the
year ended March 31, 2006, in conformity with U.S. generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 of the
consolidated financial statements, the Company has incurred losses, has used
cash in operating activities and has a significant stockholders' deficit. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with respect to these matters are also
discussed in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Beckstead and Watts, LLP
- ------------------------------------------
June 23, 2006
F-3
RG GLOBAL LIFESTYLES, INC.
Consolidated Balance Sheet
March 31, 2007
ASSETS
Current assets:
Cash and cash equivalents $ 502,278
Accounts receivable 63
Inventory 253,854
Federal income taxes refund receivable 155,000
Prepaids and other current assets 25,976
------------
Total current assets 937,171
------------
Property and equipment, net 16,775
Intangible assets, net 4,299,664
Other assets 236,016
------------
TOTAL ASSETS $ 5,489,626
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 93,434
Accrued liabilities 138,410
Deferred revenues 115,963
State income taxes payable 95,000
Secured convertible notes payable 1,870,434
Notes payable (net of discounts of $460,137) 439,863
Warrant liability 6,596,100
Conversion feature liability 5,307,938
------------
Total current liabilities 14,657,142
Stockholders' deficit:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 26,022,592 shares issued and outstanding 26,023
Additional paid-in capital 16,470,286
Accumulated deficit (25,663,825)
------------
(9,167,516)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,489,626
============
The accompanying notes are an integral part of these financial statements.
F-4
RG GLOBAL LIFESTYLES, INC.
Consolidated Statements of Operations
For the years ended
March 31,
----------------------------
2007 2006
------------ ------------
Revenues $ 89,326 $ 69,340
Cost of revenues 146,351 42,027
------------ ------------
Gross profit (loss) (57,025) 27,313
General and administrative expenses (including
stock based compensation of $4,651,581
and zero, respectively) 6,565,505 839,174
Selling and marketing expenses 129,473 36,997
------------ ------------
Total expenses 6,694,978 876,171
------------ ------------
Operating loss (6,752,003) (848,858)
------------ ------------
Other income (expense):
Interest income 468 283
Interest expense - related party (14,279) (53,002)
Interest expense (3,793,644) (306,902)
Fair value of common stock issued in
excess of notes payable satisfied (2,701,323) --
Gain on sale of asset -- 10,000
Change in fair value of derivative liabilities (10,766,106) --
------------ ------------
Total other (expense) (17,274,884) (349,621)
Net loss before income tax and discontinued operations (24,026,887) (1,198,479)
------------ ------------
(Provision) benefit for income taxes 56,856 (314)
Net loss from continuing operations (23,970,031) (1,198,793)
------------ ------------
Discontinued Operations:
Income from discontinued operations, net of tax -- 371,868
Loss on distribution of discontinued operations, net of tax -- (1,209,636)
Net loss from discontinued operations -- (837,768)
------------ ------------
Net loss $(23,970,031) $ (2,036,561)
============ ============
Weighted average number of
common shares outstanding - basic and fully diluted 19,771,710 17,650,000
============ ============
Net loss per share - basic and fully diluted
Continuing operations $ (1.21) $ (0.07)
============ ============
Discontinued operations $ -- $ (0.05)
============ ============
The accompanying notes are an integral part of these financial statements.
F-5
RG GLOBAL LIFESTYLES, INC.
Statement of Changes in Stockholders' Equity (Deficit)
For the years ended March 31, 2007 and 2006
Total
Common Stock Additional Prepaid Share Retained Stockholders'
---------------------------- Paid-in Based Earnings Equity
Shares Amount Capital Compensation (Deficit) (Deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance March 31, 2005 25,150,000 $ 25,150 $ 269,156 $ -- $ 342,767 $ 637,073
Common shares received for
distribution of subsidiary (7,500,000) (7,500) 7,500 -- -- --
Options granted to related
party for services -- -- 81,855 (81,855) -- --
Warrants issued for services -- -- 107,555 (107,555) -- --
Warrants granted in
connection with notes payable -- -- 972,041 -- -- 972,041
Forgiveness of debt on
distribution -- -- 66,975 -- -- 66,975
Net loss -- -- -- -- (2,036,561) (2,036,561)
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2006 17,650,000 17,650 1,505,082 (189,410) (1,693,794) (360,472)
Conversions of secured notes
payable into common stock 778,053 778 115,897 -- -- 116,675
Reclass of conversion feature
liability upon conversion
of secured notes payable in
common stock -- -- 844,828 -- -- 844,828
Fair value of warrants
issued in connection with
secured notes payable -- -- 611,036 -- -- 611,036
Common stock issued in
settlement of 2006 notes
payable 6,282,150 6,282 3,951,472 -- -- 3,957,754
Fair value of beneficial
conversion feature and
warrants issued in
connection with 2007 notes
payable -- -- 600,000 -- -- 600,000
Fair value of 8,000,000
warrants issued to acquire
Catalytx's Technology -- -- 4,381,113 -- -- 4,381,113
Cashless exercises of stock
options 1,312,389 1,313 (1,313) -- -- --
Fair value of warrants issued
to consultants for services -- -- 612,271 -- -- 612,271
Stock based compensation -- -- 4,039,310 -- -- 4,039,310
Removal of prepaid compensation -- -- (189,410) 189,410 -- --
Net loss -- -- -- -- (23,970,031) (23,970,031)
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2007 26,022,592 $ 26,023 $ 16,470,286 $ -- $(25,663,825) $ (9,167,516)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
RG GLOBAL LIFESTYLES, INC.
Consolidated Statements of Cash Flows
For the years ended
March 31,
----------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
CONTINUING OPERATIONS
Net loss $(23,970,031) $ (2,036,561)
Income from discontinued operations -- (371,868)
Loss on distribution of discontinued operations -- 1,209,636
------------ ------------
Net loss from continuing operations (23,970,031) (1,198,793)
Adjustments to reconcile net loss to
net cash used by continuing operations:
Amortization of debt discounts related
to beneficial conversion features and warrants 2,792,691 306,901
Amortization of debt issuance costs 837,316 --
Depreciation and amortization of intangibles 82,811 --
Fair value of common stock issued in excess
of notes payable forgiven 2,701,323 --
Change in fair value of derivative liabilities 10,766,106 --
Stock based compensation and warrant expense 4,651,581 --
Changes in operating assets and liabilities:
Accounts receivable 837 (900)
Inventory (253,854) 25,875
Federal income taxes refund receivable (155,000) --
Prepaids and other current assets 150,046 (176,021)
Accounts payable 55,036 39,272
Accrued liabilities 330,334 37,993
Due to affiliate -- (172,337)
Income taxes payable 93,619 (300)
------------ ------------
Net cash used in continuing operations (1,917,185) (1,138,310)
Net cash used in discontinued operations -- (116,062)
------------ ------------
Net cash used in operating activities (1,917,185) (1,254,372)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (18,137) --
Proceeds from sale of intangible assets -- 10,000
Other assets (74,481) (136,535)
------------ ------------
Net cash used in continuing operations (92,618) (126,535)
Net cash used in discontinued operations -- (46,033)
------------ ------------
Net cash used by investing activities (92,618) (172,568)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,373,720 1,613,940
Payments on notes payable (208,300) --
------------ ------------
Net cash provided by continuing operations 2,165,420 1,613,940
Net cash provided by discontinued operations -- --
------------ ------------
Net cash provided by financing activities 2,165,420 1,613,940
------------ ------------
Net increase in cash provided by continuing operations 155,617 187,000
Cash - beginning of year 346,661 159,661
------------ ------------
Cash - ending of year $ 502,278 $ 346,661
============ ============
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid during the year for:
Income taxes $ 3,200 $ --
============ ============
Interest $ 28,479 $ --
============ ============
Non-cash investing and financing activities:
Issuance of warrants for Catalytx's technology $ 4,381,113 $ --
============ ============
Issuance of common stock for settlement of notes payable $ 1,179,315 $ --
============ ============
Conversion of secured notes payable into common stock $ 71,267 $ --
============ ============
The accompanying notes are an integral part of these financial statements.
F-7
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION, HISTORY AND SIGNIFICANT ACCOUNTING POLICIES AND
PROCEDURES
ORGANIZATION AND HISTORY
- ------------------------
R.G. Global Lifestyles, Inc. (the "Company"), was originally incorporated in
California on July 12, 1985 as International Beauty Supply Ltd. The name of the
corporation was changed on May 28, 1993 to L.L. Knickerbocker Co., Inc., and
thereafter on January 9, 2003 to the present name, R.G. Global Lifestyles, Inc.
CONTINUING OPERATIONS
The Company operates in three (3) segments, through various subsidiaries.
Its wholly-owned subsidiary, Aquair, Inc., ("Aquair") distributes, markets and
resells atmospheric water generators, a business which the Company entered into
in fiscal 2007. On July 26, 2006, the Company formed two wholly-owned
subsidiaries in Hong Kong and Taiwan Limited. The purpose of the subsidiary is
to develop markets in Asian and South Pacific countries. The foreign
subsidiaries commenced limited operations during the year ended March 31, 2007.
In September 2006, the Company developed and introduced a line of energy drinks
and oxygenated bottled water products under the name of OC Energy Drinks (TM),
through its wholly-owned subsidiary On Line Surgery, Inc. The Company is
currently in the process of the changing the name of the entity to OC Energy
Drinks, Inc. ("OC Energy").
On December 24, 2006, the Company entered into a series of agreements to acquire
technology for the use in removing excessive sodium from the water associated
with wet-bed methane mining from Catalyx Fluid Solutions, Inc. ("Catalyx") in
exchange for issuance of warrants to purchase eight (8) million shares of the
Company' s common stock. See Note 5 for additional information. The Company
entered into a long-term contract using this technology in the fourth quarter of
fiscal 2007.
DISCONTINUED OPERATIONS
During the fiscal year commencing April 1, 2005, for a period of six (6) months,
the Company through its subsidiary, Amerikal Nutraceutical Corporation
("Amerikal"), manufactured, sold and distributed dietary supplements, health and
beauty aid products. The primary markets for Amerikal during this period were
Southeast Asia and Asia. Amerikal also manufactured, sold and distributed
dietary supplements, health and beauty-aid products in the United States of
America during this period, through its division named Magna-1 USA.
In September 2005, the Company entered into an agreement with a group of its
shareholders to distribute Amerikal, in exchange for 7,500,000 shares of the
Company's common stock. The transaction closed on October 1, 2005. The
distribution of Amerikal qualified for treatment as discontinued operations in
accordance with FASB Statement No. 144 ("SFAS 144"), Accounting for the
Impairment or Disposal of Long-Lived Assets. The Company has reflected the
operations of the distributed subsidiary as discontinued operations in its
consolidated financial statements for the fiscal year ended March 31, 2006.
On May 2, 2005, the Company formed On Line Surgery, Inc, a wholly-owed
subsidiary, for purpose of diversifying its market, and to develop internet
marketing for the companies products. In October 2005, the Company sold its
rights to www.onlinesurgery.com. The website was the sole asset related to On
Line Surgery, Inc., which never commenced operations. Subsequent to March 31,
2007, the entity's name was changed to OC Energy Drinks, Inc.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, Aquair, OC Energy and Catalyx, after elimination
of all material inter-company accounts, transactions and profits.
F-8
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH EQUIVALENTS
- ----------------
Management considers all highly-liquid investments with an original maturity of
three (3) months or less to be cash equivalents.
INVENTORY
- ---------
At March 31, 2007, the Company had inventory consisting of three (3) finished
mobile air-to-water units manufactured by a contract manufacturer valued at cost
in the amount of $253,854. Inventory is recorded at the lower of cost (first-in,
first-out) or net realizable market value.
PROPERTY AND EQUIPMENT
- ----------------------
Property and equipment are recorded at cost and depreciation is provided over
the estimated useful lives of the related assets using the straight-line method
for financial statement purposes. The estimated lives of property and equipment
are as follows:
Office equipment five (5) years
Computer software three (3) years
Furniture and fixtures seven (7) years
IMPAIRMENT OF LONG-LIVED AND INTANGIBLE ASSETS
- ----------------------------------------------
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
144 ("SFAS 144"). The Statement requires that long-lived assets and certain
identifiable intangibles with definite lives, which are held and used by the
Company, be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Events
relating to recoverability may include significant unfavorable changes in
business conditions, recurring losses, or a forecasted inability to achieve
break-even operating results over an extended period. The Company evaluates the
recoverability of long-lived assets based upon forecasted undercounted cash
flows. Should impairment in value be indicated, the carrying value of intangible
assets will be adjusted, based on estimates of future discounted cash flows
resulting from the use and ultimate disposition of the asset. SFAS No. 144 also
requires assets to be disposed of be reported at the lower of the carrying
amount or the fair value less costs to sell.
CONVERSION FEATURES AND WARRANTS ISSUED WITH CONVERTIBLE DEBT
- -------------------------------------------------------------
The Company's derivative financial instruments consist of embedded derivatives
related to the senior convertible secured notes. These embedded derivatives
include the conversion feature and the detachable warrants. As of the inception
date of the agreement as the debt was not considered conventional as defined in
EITF 05-2, The Meaning of "Conventional Convertible Debt Instruments" in issue
No. 00-19). The accounting treatment of derivative financial instruments
requires that the Company record the conversion feature and related warrants at
their fair values and record them at fair value as of each subsequent balance
sheet date. Any change in fair value is to be recorded as non-operating,
non-cash income or expense at each reporting date. If the fair value of the
derivatives is higher at the subsequent balance sheet date, the Company will
record a non-operating, non-cash charge. If the fair value of the derivatives is
lower at the subsequent balance sheet date, the Company will record
non-operating, non-cash income.
EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios," and EITF 00-27,
"Application of Issue 98-5 to Certain Convertible Instruments" governs the
calculation of an embedded beneficial conversion, which is treated as an
additional discount to the to the instruments where derivative accounting
(explained above) does not apply. The amount of the value of warrants and
beneficial conversion feature may reduce the carrying value of the instrument to
zero, but no further. The discounts relating to the initial recording of the
derivatives or beneficial conversion features are accreted over the term of the
debt.
F-9
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVE FINANCIAL INSTRUMENTS
- --------------------------------
Derivative financial instruments, as defined in Financial Accounting Standard
No. 133, Accounting for Derivative Financial Instruments and Hedging Activities
("FAS 133"), consist of financial instruments or other contracts that contain a
notional amount and one or more underlying (e.g. interest rate, security price
or other variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.
The Company does not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, The Company has issued
financial instruments including senior convertible notes payable and
freestanding stock purchase warrants with features that are either (i) not
afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by FAS 133, in certain instances, these instruments are required to
be carried as derivative liabilities, at fair value, in our financial
statements.
The Company estimates the fair values of derivative financial instruments using
various techniques (and combinations thereof) that are considered to be
consistent with the objectively measuring fair values. In selecting the
appropriate technique, consideration is give to, among other factors, the nature
of the instrument, the market risks that it embodies and the expected means of
settlement. For less complex derivative instruments, such as free-standing
warrants, the Company generally uses the Black-Scholes option valuation
technique because it embodies all of the requisite assumptions (including
trading volatility, estimated terms and risk free rates) necessary to fair value
these instruments. Estimating fair values of derivative financial instruments
requires the development of significant and subjective estimates that may, and
are likely to, change over the duration of the instrument with related changes
in internal and external market factors. In addition, option-based techniques
are highly volatile and sensitive to changes in the trading market price of our
common stock, which has a high-historical volatility. Since derivative financial
instruments are initially and subsequently carried at fair values, the Company's
operating results will reflect the volatility in these estimate and assumption
changes.
CONCENTRATION OF CREDIT RISK
- ----------------------------
At times, the Company maintains cash balances at a financial institution in
excess of the FDIC insurance limit.
We extend credit to customers in the normal course of business, after we
evaluate the credit worthiness. We do not expect to take any unnecessary credit
risks causing significant causing write-offs of potentially uncollectible
accounts.
REVENUE RECOGNITION
- -------------------
PRODUCT SALES - For revenue from product sales, the Company recognizes revenue
in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition
("SAB104"), which superseded Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements ("SAB101"). SAB 101 requires that four basic
criteria must be met before revenue can be recognized: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred; (3) the selling price is
fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's judgments
regarding the fixed nature of the selling prices of the products delivered and
the collectibility of those amounts. Provisions for discounts and rebates to
customers, estimated returns and allowances, and other adjustments are provided
for in the same period the related sales are recorded.
CONSTRUCTION CONTRACTS - In accordance with Statement of Position 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts", the Company uses the percentage completion method for the
recognition of revenue received in connection with it's engineering, equipment
sale and installation contracts. In making the estimate of the percentage of
revenue to recognize, the Company compares costs to the total projected cost of
the contract. Accordingly, the Company recognizes that portion of the revenue,
and records the unearned portion of the cash received as deferred revenues,
which is included within accrued liabilities on the accompanying consolidated
balance sheet.
F-10
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOSS PER SHARE
- --------------
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"). Basic loss per
share is computed by dividing losses available to common stockholders by the
weighted average number of common shares outstanding during the period, after
giving effect to dilutive common stock equivalents, such as stock options,
warrants and convertible debt. The following is a summary of outstanding
securities which have been excluded from the calculation of diluted net loss per
share because the effect would have been anti-dilutive for the years ended March
31, 2007 and 2006:
2007 2006
---------- ----------
Common stock options 13,851,230 100,000
Common stock warrants 15,403,940 1,733,940
Secured convertible notes 3,308,040 --
---------- ----------
Total 32,563,210 1,833,940
---------- ----------
STOCK-BASED COMPENSATION
- ------------------------
On December 16, 2004, the FASB published Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
requires that compensation cost related to share-based payment transactions be
recognized in the financial statements. Share-based payment transactions within
the scope of SFAS 123R include stock options, restricted stock plans,
performance-based awards, stock appreciation rights, and employee share purchase
plans. The provisions of SFAS 123R were effective as of the first interim period
that begins after December 15, 2005.
The Company has adopted SFAS 123R, using the modified prospective method, which
requires use of the fair value method. The Company has reflected the expense of
such stock-based compensation based on the fair value at the grant date for
awards consistent with the provisions of SFAS No. 123R. There were no options
issued to employees as of March 31, 2006, all other options and warrants had
been accounted for at fair value using the Black-Scholes valuation model. Thus,
the impact of adopting SFAS 123R was immaterial to the Company's financial
statements.
The Company's accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of Emerging
Issues Task Force ("EITF") 96-18, "Accounting for Equity Instruments That are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services". The measurement date for the fair value of the equity
instruments issued is determined at the earlier of (i) the date at which a
commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor's performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.
ESTIMATES
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Significant estimates include the valuation of derivatives, equity instruments
such as options and warrants, potential litigation exposures and the percentage
of completion related to construction contracts. Actual results could differ
from those estimates.
F-11
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATION
- ----------------
Certain reclassifications have been made to the prior year's statement of
operations to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
Fair-value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of March 31, 2007. The
respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash,
prepaids, accounts payable, accrued liabilities, notes payable and derivative
liabilities. Fair values were assumed to approximate carrying values for cash
and payables because they are short term in nature and their carrying amounts
approximate fair values or they are payable on demand.
SEGMENT REPORTING
- -----------------
The Company reports its segments under SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to be
presented in interim financial reports issued to stockholders. SFAS 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker, or decision making group, in
making decisions on how to allocate resources and assess performance.
INCOME TAXES
- ------------
The Company follows SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109") for
recording the provision for income taxes. Deferred tax assets and liabilities
are computed based upon the difference between the financial statement and
income tax basis of assets and liabilities using the enacted marginal tax rate
applicable when the related asset or liability is expected to be realized or
settled. Deferred income tax expenses or benefits are based on the changes in
the asset or liability each period. If available evidence suggests that it is
more likely than not that some portion or all of the deferred tax assets will
not be realized, a valuation allowance is required to reduce the deferred tax
assets to the amount that is more likely than not to be realized. Future changes
in such valuation allowance are included in the provision for deferred income
taxes in the period of change.
Deferred income taxes may arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. Deferred taxes are classified as current or non-current,
depending on the classification of assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not related to an
asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109" ("FIN 48"). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 is effective for fiscal years beginning in years
beginning after December 15, 2006. We are currently assessing the impact of FIN
48 on our consolidated financial statements and plan to adopt the provisions of
FIN 48 as of April 1, 2007.
F-12
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 provides accounting guidance on the definition of fair
value and establishes a framework for measuring fair value and requires expanded
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. We plan to
adopt the provisions of SFAS 157 on April 1, 2008 and we are currently assessing
the impact of the adoption of SFAS 157 on our results of operations and
financial condition.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued for fiscal
year beginning after November 15, 2007. We are currently assessing the impact of
adopting SFAS 159 on our results of operations and financial condition.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the accompanying financial
statements, the Company during the year ended March 31, 2007 incurred an
operating loss before income taxes of $24,026,887, used $1,917,185 cash from
operations, and generated only $89,326 in revenues. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The future of the Company is dependent upon its ability to obtain equity and/or
debt financing and ultimately achieving profitable operations from the
development of its new business opportunities. Currently, the Company does not
have any commitments or assurances for additional capital. However, the Company
recently announced the execution of a contract with a customer for licensing of
its water treatment technology in the oil and gas industry, and is currently in
the process of performing its engineering, equipment sale and installation
contract for similar technology with another customer. There can be no assurance
that the revenue from these contracts will be sufficient for the Company to
achieve profitability in its operations, and it is possible that additional
equity or debt financing may be required to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts of and classification of liabilities, which might be
necessary in the event the Company cannot continue as a going concern.
NOTE 3 - PREPAIDS
At March 31, 2007, the Company had prepaid assets with various vendors comprised
of the following:
Deposit with vendors $ 12,724
Other 13,252
--------
Total $ 25,976
========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2007, consisted of the following:
Office equipment, furniture and fixtures $ 18,137
Accumulated depreciation (1,362)
--------
Total $ 16,775
========
During the years ended March 31, 2007 and 2006, the Company recorded
depreciation expense of $1,362 and $0, respectively.
F-13
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INTANGIBLE ASSETS
On July 12, 2006, the Company executed a letter of intent with Catalyx to
license their patented technology for use in removing excessive sodium from the
water associated with wet bed methane mining.
Due to the initial reception of the technology, the Company decided to acquire
the technology. On December 24, 2006, the Company entered into a series of
agreements with Catalyx pursuant to which the Company acquired certain
technology, know-how, and patent rights related to water treatment for use in
the oil and gas industry. This patent has a remaining legal life of 14 years.
The Company acquired the technology to expand their water purification
operations to the oil and gas industry. In accordance with the agreements, the
Company issued warrants to purchase eight million shares of the Company's common
stock at various exercise prices ranging from $0.21 to $0.40. The Company valued
these warrants using the Black Scholes option valuation model using a term of
five years for the warrants, a risk free interest rate of 5.25% and a volatility
of the Company's stock as of the date of issuance of 243%, and determined that
the value of the warrants issued was $4,381,113. This amount was recorded as an
intangible asset on the consolidated balance sheet, and is being amortized over
the period of its estimated benefit period of 14 years. In addition, per the
terms of the acquisition agreement the initial $200,000 paid will be offset
against future royalties due to Catalyx under the agreement.
During the year ended March 31, 2007, the Company recorded amortization expense
of $81,449. Estimated aggregate amortization expense for each of the five
succeeding years is as follows: 2008: $312,937; 2009: $312,937; 2010: $312,937;
2011: $312,937; and 2012: 312,937; thereafter $2,734,979.
NOTE 6 - DEPOSITS
At March 31, 2007, the Company had deposits with various vendors comprised of
the following:
Future royalties under technology
transfer agreement $200,000
Legal retainers 10,808
Other 25,208
--------
Totals: $236,016
========
NOTE 7 - NOTES PAYABLE
2006 NOTES PAYABLE
- ------------------
On November 15, 2005, the Company began a private placement of notes ("2006
Notes") and warrants (collectively the "2006 Unit"). The 2006 Notes incurred
interest per annum at 8%, with a maturity date of one year after the loan date.
For each dollar of 2006 Notes issued, the investor received a warrant to
purchase one share of the Company's common stock at an exercise price equal to
the lowest closing price of the Company's common stock for the period of one
year from to the loan date. The warrants expire in five (5) years.
>From November 15, 2005 to December 22, 2005, the Company entered into seven
separate 2006 Unit agreements totaling $1,313,940, of which $613,940 was
previously loaned to the Company and then exchanged for the 2006 Units. Included
in the 2006 Notes was $708,132 of amounts due to three (3) related parties,
consisting of the Chief Executive Officer, a Company director, and a
shareholder.
In connection with the 2006 Units, the Company issued 1,313,940 warrants;
however, the exercise price was unknown on the date of grant. Management used a
look back, low price of $0.60 per share in the preceding year from the date of
the 2006 Notes, while the closing prices per share on the various dates of the
2006 Notes, ranged from $1.60 to $2.20. The aggregate value of the warrants was
$2,534,317. The Company determined the fair value of the warrants on the date of
issuance utilizing the Black Scholes method with the following: a risk free
interest rate of 5.25%, an estimated life of five years, a volatility of 126%
F-14
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and no dividends. The Company allocated $837,119 attributed to the warrants,
using the relative fair value of the 2006 Notes and warrants, as a discount to
the 2006 Notes. The discount was amortized over the term of the 2006 Notes.
During the years ended March 31, 2007 and 2006, the Company amortized $530,217
and $306,902 to interest expense, respectively. All warrants were assigned an
exercise price of $0.20 per share one year after the dates of the 2006 Notes in
accordance with the agreements.
During the year ended March 31, 2007, the Company repaid one 2006 Note in full
in cash, together with accrued interest, in the amount of $162,479, and paid
accrued interest payable on note in the amount of $16,000. On December 26, 2006,
the Company issued 6,282,150 shares of its common stock at $0.20 per share in
full payment of the balance due on six other 2006 Notes totaling $1,256,431 The
fair value of the Company's common stock on the date of the transaction was
$0.63 per share which exceeded the settlement amount of $0.20. Thus, the Company
recorded additional interest expense of $2,701,323 related to the difference
between the fair value of the common stock issued and the liabilities satisfied.
Of the common shares issued, 3,801,278 shares were issued to related parties in
payment of three outstanding 2006 Notes and accrued interest in the total amount
of $760,257. The remaining 2,480,872 common shares were issued to un-related
parties in satisfaction of three notes and accrued interest in the total amount
of $496,174.
On March 31, 2006, the Company issued another 2006 Unit in the amount of
$300,000 to an unrelated party. Management used a look back, low price of $0.60
per share in the preceding year, while the closing price per share on the date
of this 2006 Note, was $0.76. The Company calculated the fair value of the
warrants at $207,360, utilizing the Black Scholes method with the following
estimates: a risk free interest rate of 5.25%; an estimated life of five years,
volatility of 140% and no dividends. The Company allocated the relative fair
value of $122,611 attributed to the warrants as a discount to the note. The
discount was amortized over the one-year term of the 2006 Note. During the year
ended March 31, 2007, the Company amortized $122,611 to interest expense. As of
March 31, 2007, this 2006 Note was due and had not been repaid. This note is
technically in default; however, no demand for payment has been made by the
holder. Subsequent to March 31, 2007, a portion of this 2006 Note was satisfied
through the issuance of common stock, see Note 14. All warrants were assigned an
exercise price of $0.20 per share one year after the dates of the 2006 Notes in
accordance with the agreements.
2007 NOTES PAYABLE
- ------------------
On December 26, 2006 and January 12, 2007, the Company entered into three new
note agreements (the "2007 Notes") with accredited investors for total proceeds
of $600,000. The 2007 Notes have a term of one year and bear interest at 8% per
annum. For each dollar loaned, the holders were granted a warrant to purchase
one share of the Company's common stock at $0.20 per share (a total of 600,000
warrants). The warrants vest at maturity and expire in five years from the date
of issuance. The 2007 Notes and accrued interest are convertible into shares of
the Company's common stock upon maturity, at the lowest price traded of the
Company's common stock for the prior year, but not less than $0.10 per share.
The Company determined the value of these warrants to be $778,953 using the
Black Scholes method with the following weighted average estimates: 5.25% risk
free interest rate, 248% volatility, and a five-year life. The Company allocated
$320,346 to the warrants based on their relative fair value to the 2007 Notes,
resulting in a discount.
In addition, since the lowest conversion price of $0.10 per share was lower than
the fair market value of the Company's common stock on the dates of issuance of
$0.63 and $1.75, respectively, management used $0.10 per share in its
computation of the value of the beneficial conversion feature. The Company
valued the beneficial conversion feature as of the date of issuance in the
amount of $279,654, and recorded a discount against the 2007 Notes. The total
discount between the warrants and the conversion feature applicable to the notes
was $600,000. The discount is being amortized over the one year term of the
notes. During the year ended March 31, 2007, the Company amortized $139,863 of
the discount to interest expense. At March 31, 2007, the remaining discount
relating to these notes was $460,137.
F-15
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$2,000,000 SECURED CONVERTIBLE NOTES
- ------------------------------------
On June 6, 2006, the Company entered into a definitive securities purchase
agreement and ancillary agreements with accredited investors for a private
placement of $2,000,000 of 6% callable secured convertible notes due June 6,
2009 (the "Secured Notes") and stock purchase warrants to purchase 4,000,000
shares of the Company's common stock, vesting immediately, exercisable before
June 6, 2013, with an exercise price of $1.10 subject to adjustment upon certain
events. In the event of default, the Secured Notes incur interest at 15% per
annum, until such default has been cured. The Company received the proceeds
under these Secured Notes in three tranches; June 2006 - $700,000; July 2006 -
$600,000; and October, 2006 - $700,000. The Secured Notes are convertible at the
option of the holder at any time prior to maturity into shares of the Company's
common stock at a conversion price based upon the average of the three (3)
lowest trading prices of the Company's common stock for the previous 20 trading
days discounted by 50%. In addition, the Company was obligated to file a
registration statement registering the shares of the Company's common stock
covering the Secured Notes and the related warrants. In July 2006, Company filed
a shelf registration with the SEC for the underlying common stock upon
conversion of the Secured Notes. The Secured Notes are secured by a security
interest in substantially all of the assets of the Company.
In connection with the issuance of the Secured Notes, the Company evaluated the
terms and features of the conversion feature and the warrants and determined
that the instruments embodied certain derivative features that were not clearly
and closely related to the debt instrument. Thus, the conversion feature and
warrants did not meet the established criteria for equity classification under
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". On the dates of issuance, the
Company allocated the proceeds between the Secured Notes, warrants and
conversion feature. Accordingly, the Company accounts for the embedded
conversion feature and warrants as derivatives under SFAS No. 133 "Accounting
for Derivative Instruments".
Upon issuance, the Company valued the bifurcated embedded conversion feature of
the Secured Notes at $4,286,729 using the Black Scholes valuation method based
upon the following weighted average variables; a risk free interest rate of
5.25%, a conversion price of $0.27, a volatility of 216%, and a remaining term
of 3.0 years.
Upon issuance, the Company valued the 4,000,000 detached warrants to purchase
shares of the Company's common stock at $3,443,336 based upon the Black Scholes
method of valuation using the following weighted average variables; risk free
interest rate of 5.25%, an exercise price of $1.10, a volatility of 150%, and an
estimated remaining life of seven years.
The warrants and embedded conversion feature exceeded the carrying value of the
Secured Notes, and accordingly, the Company recorded $5,730,065 of additional
expense. The Company is amortizing the discount of the Secured Notes of
$2,000,000 over the term of the Secured Notes. The conversion feature and
warrants are being carried at their respective fair values with changes in their
values recorded in the statement of operations.
The Company valued the embedded conversion feature at March 31, 2007 at
$5,307,938, using the Black Scholes method of valuation with the following
variables; a risk free interest rate of 5.25%, a conversion price of $0.57, a
volatility of 265%, and a remaining term of 2.17 years. The change in the fair
value of the bifurcated embedded conversion feature liability for the year ended
March 31, 2007 was $1,021,209.
At March 31, 2007, the Company valued the warrants at $6,596,100 based upon the
Black Scholes method of valuation using the following variables; risk free
interest rate of 5.25%, an exercise price of $1.10, a volatility of 265%, and an
estimated remaining life of 6.11 years. The change in the fair value of the
warrant liability for the year ended March 31, 2007 was $3,152,764.
F-16
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2006, the Company made a payment of $66,000 toward the Secured
Notes, which reduced accrued interest by $7,700 and reduced the principal
balance by $58,300. During the year ended March 31, 2007, the Secured Note
holders converted principal of $71,267 and accrued interest of $45,408 into
778,053 shares of the Company's common stock. At the time of conversion, the
Company increased additional paid-in capital by $844,828 based on the
proportionate share of the fair value of the conversion feature converted. As of
March 31, 2007, there was accrued interest payable included in accrued
liabilities on the Secured Notes in the amount of $20,908.
The $2,000,000 discount on the Secured Notes was being amortized over the
three-year term of the notes. During the year ended March 31, 2007, the Company
amortized $685,052 to interest expense. In January 2007, a dispute arose between
the Company and the holders of the Secured Notes, see Note 11 for additional
information. At March 31, 2007, the Company expensed the remaining discount of
$1,314,948 on the Secured Notes and currently carry the notes at their face
value due to the dispute. In addition, the Company has not recorded any
potential penalty provision under the Secured Notes attributable to the
allegations of default based upon the Company's belief that the holders of the
Secured Notes violated the terms of the agreement and in reliance upon the
analysis of legal counsel to the Company regarding its obligations under the
Secured Notes.
Pursuant to an engagement agreement for financial advisory services and as
compensation for the Secured Notes financing, the Company issued 640,000
warrants to purchase shares of the Company's common stock and made cash payments
of $226,280 to a placement agent and for legal fees. These warrants bear an
exercise price of $0.80 per share, and are exercisable for a term of seven years
from the date of issuance. The Company determined the value of the warrants to
be $611,036 based upon the Black Scholes method of valuation, using the
following estimates: 5.25% risk free interest rate, 150% volatility, and an
expected life of seven years. Due to a dispute with the Secured Notes holder,
all amounts were expensed during the year ended March 31, 2007. See Note 11 for
additional information.
NOTE 8 - INCOME TAXES
The provision (benefit) for income taxes consisted of the following for the
years ended March 31, 2007 and 2006:
2007 2006
----------- -----------
CURRENT
Federal (refund) $ (60,000) $ --
State 3,144 800
----------- -----------
(56,856) 800
DEFERRED
Federal (1,882,791) (157,236)
State (460,224) --
Increase in valuation allowance 2,515,775 157,236
Change in beginning of year
valuation allowance (172,760) --
----------- -----------
PROVISION (BENEFIT) $ (56,856) $ 800
=========== ===========
F-17
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliations of the U.S. federal statutory rate to the actual tax rate
follows for the years ended March 31, 2007 and 2006 are as follows:
2007 2006
------- -------
U.S. federal statutory income tax rate 34.0% 34.0%
State tax - net of federal benefit 5.8% 5.8%
------- -------
39.8% 39.8%
Permanent differences (29.9%) 0.0%
Others (0.1%) 0.0%
Increase in valuation allowance (11.2%) (39.8%)
------- -------
Effective tax rate (1.4%) 0.0%
======= =======
The major components of the deferred taxes are as follows at March 31, 2007:
2007
---------------
Asset (Liability)
Current:
Accrued Expenses $ 35,774
Other (11,128)
---------------
$ 24,646
---------------
Noncurrent:
State taxes $ (172,697)
Stock based compensation 2,216,842
Net operating losses 604,220
---------------
2,648,365
Valuation allowance (2,673,011)
---------------
Net deferred tax assets $ --
===============
For financial reporting purposes based upon continuing operations, the Company
has incurred a net loss during the past two fiscal years. Based on the available
objective evidence, including the Company's history of losses, management
believes it is more likely than not that the net deferred tax assets at March
31, 2007 will not be fully realizable and thus a full valuation allowance has
been recorded.
As of March 31, 2007, the Company has not filed its fiscal year ended 2006 and
2005 Federal and California tax returns. Based upon the current and previous
years net operating loss being available to carry back to the fiscal year ended
March 31, 2005 for Federal income tax purposes, the federal tax liability for
the years ended March 31, 2005 will be eliminated and the Company expects to
have a refund receivable of approximately $155,000 related to previous taxes
paid. Currently, under the state of California tax law, the Company's net
operating loss from the current year will not be allowed to be carried back to
reduce or eliminate the state income tax liability, with penalties, for the year
ended March 31, 2005. Accordingly, the state tax liability, with penalties, of
approximately $95,000 is still subject to payment and has been recorded as a
current liability on the accompanying consolidated financial statements.
F-18
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2007, the Company has federal net operating carry forwards of
approximately $1,880,000 and $460,000 of state net operating loss carry forwards
for tax purposes, which will be available to offset future taxable income. The
net operating loss carry forward, if not utilized, will begin to expire in 2025.
The net operating loss has been computed without regard to the financial loss
reported on distribution of discontinued operations, as the Company has been
advised that the transaction in which the Amerikal subsidiary was distributed
did not give rise to taxable income or loss.
NOTE 9 - STOCKHOLDERS' DEFICIT
The Company is authorized to issue 100,000,000 shares of $0.001 par value common
stock and 10,000,000 shares of $0.001 par value preferred stock. See Notes 7 and
10 for discussion of common stock issued during the year ended March 31, 2007.
NOTE 10 - OPTIONS AND WARRANTS
In fiscal 2007, we estimated the fair value of our share-based compensation
utilizing the Black-Scholes pricing model. The fair value of the options granted
is amortized as compensation expense on a straight-line basis over the requisite
service period of the award, which is generally the vesting period. The fair
value calculations involve significant judgments, assumptions, estimates and
complexities that impact the amount of compensation expense to be recorded in
current and future periods. The factors include: (1) The time period our
stock-based compensation awards are expected to remain outstanding based upon
the average of the original award period and the remaining vesting period in
accordance with SEC Staff Accounting Bulletin 107 simplified method. Our
Company's stock trading history has been relatively short (since January 2005).
Our expected term assumption for awards issued during the year ended March 31,
2007 was five years. As additional evidence develops from our stock's trading
history, the expected term assumption will be refined to capture the relevant
trends. (2) The future volatility of our stock has been estimated based upon our
entire trading history from inception to the reporting date. (3) A dividend
yield of zero has been assumed for awards issued during the year ended March 31,
2007 based upon our actual past experience and the fact that we do not
anticipate paying a dividend on our shares in the near future. (4) We have based
our risk-free interest rate assumption for awards issued during the year ended
March 31, 2007 based upon the weighted-average yield of 5.25% available on US
Treasury debt instruments with an equivalent expected term. (5) Forfeiture rates
for awards issued during these periods have not yet been estimated as the
Company has only recently issued share based awards and no forfeiture data has
been available to the Company as a result.
The following variables show the weighted average of variables used in the Black
Scholes model for all issuances valued during the fiscal year ended March 31,
2007:
- --------------- ---------- --------------- -------------- ------------ ---------
Stock Price at Dividend Range of Risk Free Volatility Average
Grant Date Yield Exercise Price Interest Rate Life
- --------------- ---------- --------------- -------------- ------------ ---------
$0.75 0% $0.20-$0.69 5.25% 216% 5.0
- --------------- ---------- --------------- -------------- ------------ ---------
OPTIONS
- -------
In July 2005, the Company entered into a three-year agreement with a consultant,
who later became a related party (Director of the Company). As a portion of the
compensation due to consultant under the agreement, the Company issued options
to purchase 100,000 shares of the Company's common stock vesting at the rate of
one-third at the end of each 12 months under the agreement. The Company
determined the fair market value of the options as of the date of the grant at
$346,379, using the Black Scholes valuation method with the following estimates:
4.0% risk free rate and 100% volatility of the Company's common stock.
Compensation expense recorded during the year ended March 31, 2007 was
approximately $138,350.
F-19
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 3, 2006, the Company's Board of Directors adopted the 2006 Incentive and
Non-statutory Stock Option Plan ("2006 Plan") authorizing the issuance of
10,000,000 stock options to employees and others. Under the 2006 Plan, the
Company reserved ten million shares for issuance. During the year ended March
31, 2007, the Company granted 9,957,600 stock options to certain employees and
consultants with a vesting period of two years under the 2006 Plan. On October
20, 2006, the Company re-priced 8,217,600 of these options and recorded
additional stock based compensation of $1,392,000. As of March 31, 2007, 42,400
options were still available for issuance under the 2006 Plan.
On December 26, 2006 the Board of Directors authorized the issuance of 6,000,000
options under its 2007 Incentive and Non-statutory Stock Option Plan ("2007
Plan"). The 2007 Plan provides for a vesting of the following option grants over
a five year term, with the options vesting ratably over the first two years from
the date of issuance. During the year ended March 31, 2007, the Company granted
5,254,800 stock options to certain employees and consultants with a vesting
period of two years under the 2007 Plan. As of March 31, 2007, there were
745,200 options were available for issuance under the 2007 Plan. The 2007 Plan
is still subject to shareholder approval.
Although management believes its estimate regarding the fair value of the
services to be reasonable, there can be no assurance that all of the subjective
assumptions will remain constant, and therefore the valuation of the services
may not be a reliable measure of the fair value of stock compensation or stock
based payments for consulting services.
The following is a summary of activity of outstanding stock options:
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term (Years) Value
----------- -------- ---------- -----------
Outstanding at March 31, 2005 -- $ --
Options granted 100,000 2.00
-----------
Outstanding at March 31, 2006 100,000 2.00
Options granted 15,212,400 0.33
Options exercised (1,461,170) 0.21
-----------
Outstanding at March 31, 2007 13,851,230 $ 0.35 4.47 $17,981,087
=========== ======== ========== ===========
Exercisable at March 31, 2007 3,009,132 $ 0.33 4.47 $ 3,973,357
=========== ======== ========== ===========
Exercisable Unexercisable Total
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Stock Options Number of Exercise Number of Exercise Number of Exercise
exercise price Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Less than $1.65 2,956,073 $ 0.29 10,795,157 $ 0.35 13,751,230 $ 0.34
Above $1.65 53,059 2.00 46,941 2.00 100,000 $ 2.00
---------- ---------- ---------- ---------- ---------- ----------
Total Outstanding 3,009,132 $ 0.33 10,842,098 $ 0.36 13,851,230 $ 0.35
========== ========== ========== ========== ========== ==========
Total compensation cost for stock based payment arrangement recognized during
the years ended March 31, 2007 and 2006 were $4,154,770 and $0, respectively.
During the year ended March 31, 2007, 1,461,170 options were exercised under the
cash less option resulting in the issuance of 1,312,389 shares of common stock.
Total compensation cost related to non-vested awards not yet recognized as of
March 31, 2007 is $9,124,970. The weighted-average period over which it is
expected to be recognized is approximately 1.5 years. The aggregate intrinsic
value of the options exercised during the year ended March 31, 2007 was
approximately $1.5 million. The total fair value of options that vested during
the year ended March 31, 2007 was approximately $4 million.
F-20
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WARRANTS
- --------
In September 2005, the Company entered into a legal retainer agreement with
legal counsel providing for the issuance of cashless warrants to purchase 25,000
shares of the Company's common stock at $2.00 per share, in prepayment of legal
services to be rendered by the law firm on behalf of the Company. The warrants
vest over ten months from the inception of the agreement in September 2005, and
expire five years after the vesting date in July 2006. The warrants have been
attributed a value of $77,388 using the Black Scholes method of valuation with
the following estimates: 4.0% risk free rate and 105% volatility, and an
expected life of five years. During the years ended March 31, 2007 and 2006, the
Company recorded compensation expense of $65,025 and $12,364, respectively.
On March 16, 2006, the Company entered into an agreement with a consultant to
issue cashless warrants to purchase 120,000 shares of the Company's common stock
at an exercise price of $0.60, as compensation for services to be rendered over
the period of one year. The warrants vested over the service period of one year.
Upon vesting, the Company valued the warrants at $197,686 and recorded
compensation expense of the same amount during the year ended March 31, 2007.
The Company accounted for this agreement under EITF 96-18, thus previously, the
Company estimated the fair value of the warrants and was expensing over the
service period. In March 2007, the warrants were valued based upon the Black
Scholes method of valuation using the following estimates: 5.25% risk free rate,
265% volatility, and an expected life of five years.
On July 1, 2006, the Company issued 100,000 and 5,000 warrants at an exercise
price of $0.60, to two consultants for past services provided. The Company
valued these warrants at $90,519 and $4,526, respectively, using the Black
Scholes method of valuation using the following estimates: 5.25% risk free
interest rate, 163% volatility and an expected life of five years. Since the
warrants were vested immediately and the services had been provided, the Company
expensed the value immediately.
On October 11, 2006, the Company issued 300,000 warrants at an exercise price of
$0.47 to a consultant for services. One third of the warrants were vested upon
issuance, the remaining 200,000 warrants vest over the period of two years.
During the year ended March 31, 2007, the Company recorded total compensation
expense of $116,164. The Company accounts for this agreement under EITF 96-18
and revalues these warrants at each quarter end. At March 31, 2007, the warrants
were valued based upon the Black Scholes method of valuation using the following
estimates: 5.25 % risk free rate, 265 % volatility, and an expected life of five
years.
The following is a summary of activity of outstanding stock warrants:
Weighted
Average
Number Exercise
Of Shares Price
---------- --------
Balance, March 31, 2005 -- --
Warrants granted 1,733,940 $ 0.25
----------
Balance, March 31, 2006 1,733,940 0.25
Warrants granted 13,670,000 0.50
----------
Balance, March 31, 2007 15,403,940 $ 0.53
========== ========
Exercisable, March 31, 2007 14,603,940 $ 0.54
========== ========
At March 31, 2007, the range of warrant prices for shares under warrants and the
weighted average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable
------------------------------------- ----------------------
Weighted-
Range of Weighted- Average Weighted-
Warrant Number Average Remaining Number Average
Exercise Of Exercise Contractual Of Exercise
Prices Warrants Price Life Warrants Price
- ----------- ---------- --------- ----------- ---------- ---------
$ 0.20-2.00 15,403,940 $ 0.53 5.88 yrs 14,603,940 $0.54
F-21
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On August 30, 2005, the Company was served with a lawsuit filed as Case No.
05CC09548 in Orange County, California Superior Court. In the complaint,
Universal Communications Systems, Inc. and its subsidiary Atmospheric Water
Technologies, Inc. alleged defamation, interference with prospective economic
advantage, and false advertising, and sought compensatory and punitive damages,
and costs against the Company. As of June 21, 2007, the parties to this
litigation entered into an agreement that provides for dismissal of the case and
exchange of mutual releases. No amounts were accrued in the accompanying
financial statements related to this settlement.
On July 7, 2006, the Company was served with a lawsuit for "injunctive and
declaratory relief and damages" filed by plaintiffs H2O Liquid Air, LLC and H2O
Liquid Air of Florida, LLC on June 10, 2006 in the United States district Court,
Southern district of Florida, Miami Division, against the Company and eight
other defendants. The complaint alleged ten "counts" although only three of
these counts were directed against the Company: unfair competition under common
law, statutory infringement under Section 32 of the Lanham Act, and interference
with a distribution agreement. The Company was defended by legal counsel engaged
by co-defendant Munters Corporation. This lawsuit has been dismissed and thus no
amounts have been accrued in the accompanying financial statements.
In January 2007, the Company was served with a complaint by holders of the
Secured Notes alleging, among other things, that the Company has failed and
refused to allow the Secured Notes holders to convert into shares of common
stock of the Company. The Company believes that the holders of the Secured Notes
are in violation of the agreement between the Company and the Secured Notes
holders, and that any liability it may incur in connection with this dispute
will not have a material adverse effect upon its financial condition or its
results of operations. The Company has engaged legal counsel to file the
necessary pleadings in response to the complaint. As a consequence of the
existence of the dispute, the Company has elected to expense the discount
attributable to the warrants and beneficial conversion feature of the Secured
Notes as of March 31, 2007, and has reflected the principal amount and all
accrued interest payable on the Secured Notes in full on the consolidated
financial statements of the Company at March 31, 2007. No additional amounts
have been accrued in the accompanying financial statements.
NOTE 12 - SEGMENT REPORTING AND CONCENTRATIONS
Up until September 30, 2005, the Company operated in a business segment that
included the manufacture and sale of natural supplements, health and beauty aid
products for the nutraceutical industry in the United States and in foreign
countries. Effective as of October 1, 2005, the Company completed the
distribution of its subsidiary Amerikal, and subsequently has generated all of
its revenue activity, and incurred all of its expenses and net loss from
operations in the sale of energy drinks and from licensing water treatment
technology in the United States. The results of the energy drink operations are
insignificant to the financial statements and thus have not been presented as a
separate segment. As operations increase the Company will disclose if necessary.
Currently, the Company operates in a single geographical segment.
F-22
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of revenues generated by geographical location is as follows:
For the year ended March 31,
2007 2006
---------- ----------
Revenues of continuing operations:
Water treatment revenues:
United States $ 84,037 $ --
Sales of air-water units:
Vietnam -- 69,340
Sales of air-water units:
United States 5,289 --
---------- ----------
Total $ 89,326 $ 69,340
========== ==========
Revenues of discontinued operations:
United States $ -- $ 90,846
Singapore -- 1,124,810
Other foreign countries -- 708,221
---------- ----------
Total $ -- $1,923,877
========== ==========
Geographic data is based upon product shipment destination. For continuing
operations, export sales as a percentage of revenues were 0% and 100% for the
year ended March 31, 2007 and 2006, respectively. For discontinued operations,
export sales as a percentage of revenues were 95.3% for the year ended March 31,
2006. During the year ended March 31, 2007 and 2006, for continuing operations,
sales to a single customer were 96.1% and 84.4% of total sales, respectively.
For discontinued operations, during the year ended March 31, 2006, sales to a
single customer were $1,125,486 consisting of 58.5% of the total sales.
NOTE 13 - RELATED PARTY TRANSACTIONS
During the fiscal year ended March 31, 2005, the Company entered into an
agreement with a company wholly owned by the Chief Executive Officer of the
Company for the subleasing of office space and administrative support services.
Effective April 1, 2006, the Company amended the previous agreement, to increase
the amount of rental space and support services provided. The amended agreement
provides for 1,667 square feet of office space at a fair market rate of $3.00
per square foot, including maintenance, utilities and base telephone, for a
total rent payment of $7,000 per month, and expanded support services including
administrative and secretarial support staff at a rate of $12,700 per month The
agreement is month to month and may be cancelled by either party at any time.
During the years ended March 31, 2007 and 2006, payments to this related party
for these services were $208,715 and $72,177, respectively.
As described in detail in Note 7, during the year ended March 31, 2006, the
Company entered into three transactions with related parties whereby the Company
issued notes and warrants to officers and directors of the Company.
NOTE 14 - DISCONTINUED OPERATIONS
During the third fiscal quarter, the Company entered into an agreement with a
group of its shareholders to distribute its wholly-owned subsidiary Amerikal, in
exchange for 7,500,000 shares of the Company's common stock. The transaction
closed on October 1, 2005. The distribution of Amerikal qualified for treatment
as discontinued operations in accordance with FASB Statement No. 144 ("SFAS No.
144"), Accounting for the Impairment or Disposal of Long-Lived Assets.
Therefore, the operating results of Amerikal were not included in results from
continuing operations. In addition, all operating results of Amerikal previously
reported in the consolidated financial statements were reflected as
"Discontinued Operations" for all periods prior to the effective date of the
distribution. The following is a summary of the net assets distributed as of the
end of the period immediately prior to the effective date of the Distribution
Agreement:
F-23
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of March 31,
2006
-------------
Assets Distributed:
Cash and cash equivalents $ 45,287
Accounts receivable 1,039,683
Inventory 131,120
Property and equipment, net 17,037
Other assets 315,780
-------------
Total assets of discontinued operations 1,548,907
-------------
Liabilities distributed:
Accounts payable 106,657
Accrued liabilities 240,420
-------------
Total liabilities of discontinued operations 347,077
-------------
Net assets of discontinued operations distributed $ 1,201,830
=============
Net loss from discontinued operations as reported on the consolidated statements
of operations, including the loss on the distribution of discontinued
operations, consists of the following:
As of March 31,
2006
-------------
Summary of income loss
Revenues $ 1,923,877
Cost of revenues 786,964
-------------
Gross profit 1,136,913
-------------
Total operating expenses 670,655
Total other (income) expenses (441)
Provision for income tax 94,831
-------------
Income from operations of Amerikal, net of tax $ 371,868
=============
Summary of loss on distribution
Net assets distributed 1,201,830
Costs and expenses of distribution:
Transfer agent fees 632
Legal and accounting costs 7,174
-------------
Total costs and expenses of sale 7,806
-------------
(Loss) on distribution of Amerikal, net of tax $ (1,209,636)
=============
-------------
Net loss from discontinued operations $ (837,768)
=============
As a result of the foregoing distribution of Amerikal, the Company recognized a
loss from discontinued operations during the year ended March 31, 2007 of
$837,768. There were no sales from the Amerikal subsidiary included in the
periods from October 1, 2005 to March 31, 2006.
F-24
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of providing comparative disclosure of continuing operations for
the year ending March 31, 2006, the following pro forma summary of financial
statements is set forth:
As of March 31,
2006
-------------
Summary of income loss from continuing operation
Revenues $ 69,340
Cost of revenues 42,027
-------------
Gross profit 27,313
-------------
Total operating expenses 876,171
Total other (income) expenses (349,621)
Provision for income tax (314)
-------------
Income from operations of continuing entities, net of tax $ (1,198,793)
=============
NOTE 15 - SUBSEQUENT EVENTS
CONTRACTS
On May 29, 2007, the Company received its second progress payment of $450,000
from a customer in connection with its pending engineering, equipment sale and
installation contract with the customer. In accordance with the Company's
revenue recognition policy, the Company has recorded the revenue along with
previously deferred revenue on the basis of a percentage completion of the
pending contract.
On June 25, 2007, the Company entered into contract with Yates Petroleum
Corporation ("YPC") to engineer, design, and install a water treatment system
("System")of Coal Bed Methane ("CBM") produced water provided by YPC. The
Company will own and operate the System and Regeneration Waste Pond. YPC will
build the Inflow Pond. Engineering can be initiated immediately after the
contract is signed and the term of each Phase of the contract is 60 months from
the start of the first billing cycle. Initial deposit of $25,000 was paid by
YPC. For Inflow Pond construction costs, YPC will receive a credit from CFS of
$50,000 each month for the first three months payments of Phase I ($150,000
total). Base Rate for all Phases is established at a flat year round price of
$.0125 (12.50 cents) per barrel (42 US gallons) of water discharged by the CFS
System up to the max load.
CONVERSION OF NOTES PAYABLE
In April 2007, the Company entered into a series of conversion agreements with a
group of individuals who had received an assignment of a $300,000 note and
accrued interest of $24,000 which was due on March 31, 2007. On April 19, 2007,
certain holders agreed to receive share of the Company's common stock at $020
per share. The Company issued 875,000 shares of common stock to three of the
assignors in settlement of $162,037 in principal and $12,963 in accrued
interest. At the time of issuance, the Company recorded the excess in fair value
of the common stock over the liabilities satisfied of $1,242,500 as additional
interest expense.
F-25
RG GLOBAL LIFESTYLES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXERCISES OF STOCK OPTIONS
On June 18, 2007, a consultant exercised 42,000 of his options vested under the
Company's 2006 Plan by foregoing payment of $8,400 on a pending legal invoice.
In addition, on June 18, 2007 an employee exercised 312,500 of his vested
options under the Company's 2006 Plan. The employee is offsetting a portion of
the payable with accrued compensation.
LEGAL SETTLEMENT
See Note 11 for the settlement of pending litigation.
F-26
RG GLOBAL LIFESTYLES, INC.
Consolidated Balance Sheet
June 30, 2007
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 473,536
Inventory - finished goods 253,854
Federal income tax refund receivable 155,000
Prepaids and other current assets 26,040
-----------------
Total current assets 908,430
-----------------
Property and equipment, net 18,643
Intangible assets, net 4,221,643
Other assets 256,246
-----------------
TOTAL ASSETS $ 5,404,962
=================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 215,445
Accrued liabilities 185,666
Deferred revenues 381,804
State income taxes payable 96,681
Secured convertible notes payable 1,870,433
Warrant liability 5,276,831
Conversion feature liability 5,685,122
Notes payable (net of discount of $310,548) 427,415
-----------------
Total liabilities 14,139,397
Stockholders' deficit:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding -
Common stock, $0.001 par value, 100,000,000 shares
authorized, 27,317,092 shares issued and outstanding 27,317
Additional paid-in capital 18,792,798
Subscription receivable (48,755)
Accumulated deficit (27,505,795)
-----------------
Total stockholders' deficit (8,734,435)
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,404,962
=================
The accompanying notes are an integral part of these financial statements.
F-27
RG GLOBAL LIFESTYLES, INC.
Consolidated Statements of Operations
(unaudited)
For the Three Months Ended
June 30,
-------------------------------
2007 2006
------------ ------------
Revenues:
Product sales $ 78,048 $ 425
Water treatment related 209,159 --
------------ ------------
Total revenues 287,207 425
Cost of revenues:
Product sales 65,356 5,928
Water treatment related 195,380 --
------------ ------------
Total cost of revenues 260,736 5,928
Gross profit (loss) 26,471 (5,503)
Expenses:
General and administrative (including
stock-based compensation of $822,406
and $830,466 respectively) 1,318,017 1,201,286
Selling and marketing 60,739 3,345
------------ ------------
Total expenses 1,378,756 1,204,631
------------ ------------
Operating loss (1,352,285) (1,210,134)
------------ ------------
Other income (expense):
Interest income 3,018 --
Interest expense - related party (2,752) (128,145)
Interest expense (189,536) (143,077)
Fair value of common stock issued in
excess of notes payable satisfied (1,242,500) --
Change in fair value of derivative liabilities 942,085 (199,319)
Interest and financing related to convertible notes -- (4,159,182)
------------ ------------
Total other income (expense) (489,685) (4,629,723)
Net loss before provision for income taxes (1,841,970) (5,839,857)
------------ ------------
Provision for income taxes -- 800
------------ ------------
Net loss $ (1,841,970) $ (5,840,657)
============ ============
Weighted average number of
common shares outstanding - basic and fully diluted 26,557,323 17,650,000
============ ============
Net loss per share - basic and fully diluted $ (0.07) $ (0.33)
============ ============
The accompanying notes are an integral part of these financial statements.
F-28
RG GLOBAL LIFESTYLES, INC.
Consolidated Statements of Cash Flows
(unaudited)
For the Three Months Ended
June 30
------------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,841,970) $(5,840,657)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of debt discounts related to beneficial
conversion features and warrants 149,589 239,276
Fair value of common stock issued in excess
of notes payable forgiven 1,242,500 --
Change in fair value of derivative liabilities (942,085) 4,259,048
Depreciation and amortization 79,024 30
Stock-based compensation 822,406 830,466
Changes in operating assets and liabilities:
Prepaid and other current assets -- (76,200)
Accounts payable 122,011 19,662
Accrued liabilities 68,617 42,360
Deferred revenues 265,841 --
Income taxes payable 1,681 --
----------- -----------
Net cash used in operating activities (32,386) (526,015)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,871) (1,800)
Other assets (20,230) 519
----------- -----------
Net cash used in investing activities (23,101) (1,281)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 700,000
Proceeds from exercise of stock options 26,745 --
----------- -----------
Net cash provided by financing activities 26,745 700,000
Net increase (decrease) in cash (28,742) 172,704
Cash - beginning of period 502,278 346,661
----------- -----------
Cash - ending of period $ 473,536 $ 519,365
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ -- $ --
=========== ===========
Income taxes $ -- $ --
=========== ===========
Non-cash investing and financing activities:
Issuance of common stock in settlement of notes payable
and accrued interest $ 175,000 $ --
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-29
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein, presented in accordance
with United States generally accepted accounting principles and stated in US
dollars, have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.
These statements reflect all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for fair
presentation of the information contained therein. It is suggested that these
consolidated interim financial statements be read in conjunction with the
consolidated financial statements and notes thereto of the Company for the year
ended March 31, 2007 included in the Company's 10-KSB annual report. The Company
follows the same accounting policies in the preparation of interim reports.
Revenue Recognition
- -------------------
Product sales - For revenue from product sales, the Company recognizes revenue
in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition"
("SAB104"), which superseded Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" ("SAB101"). SAB 101 requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management's judgments
regarding the fixed nature of the selling prices of the products delivered and
the collectibility of those amounts. Provisions for discounts and rebates to
customers, estimated returns and allowances, and other adjustments are provided
for in the same period the related sales are recorded.
Construction contracts - In accordance with Statement of Position 81-1
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts", the Company uses the percentage completion method for the
recognition of revenue received in connection with it's engineering, equipment
sale and installation contracts. In making the estimate of the percentage of
revenue to recognize, the Company compares costs to the total projected cost of
the contract. Accordingly, the Company recognizes that portion of the revenue
and records the balance of the cash received as deferred revenues.
Loss Per Share
- --------------
Net loss per share is provided in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share" ("SFAS 128"). Basic
loss per share is computed by dividing losses available to common stockholders
by the weighted average number of common shares outstanding during the period,
after giving effect to dilutive common stock equivalents, such as stock options,
warrants and convertible debt. The following is a summary of outstanding
F-30
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
securities which have been excluded from the calculation of diluted net loss per
share because the effect would have been anti-dilutive for the three months
ended June 30, 2007 and 2006:
2007 2006
------------------ ------------------
Common stock options 8,311,230 8,317,600
Common stock warrants 15,403,940 6,253,940
Secured convertible notes 4,412,232 1,481,053
------------------ ------------------
Totals 28,127,402 16,052,593
================== ==================
Recent Accounting Pronouncements
- --------------------------------
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109" ("FIN 48"). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for fiscal years beginning in years beginning
after December 15, 2006. The adoption of FIN 48 at April 1, 2007 did not have a
significant impact on our consolidated financial statements.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the accompanying consolidated
financial statements, the Company has incurred an operating loss (loss before
income taxes and other expenses) of $1,352,285 for the period ended June 30,
2007, loss, and current liabilities in excess of current assets of $13,230,967
at June 30, 2007. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
The future of the Company is dependent partly upon its ability to perform on
contracts for wastewater treatment systems not yet completed, and upon its
ability to realize profit on sales of its energy drinks, as well as upon its
ability to obtain equity and/or debt financing. There can be no assurance that
the Company will be able to achieve profitability in its operations, and it is
possible that additional equity or debt financing may be required to continue as
a going concern. Without such additional capital, there is substantial doubt as
to whether the Company will continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts of and
classification of liabilities, which might be necessary in the event the Company
cannot continue in existence.
F-31
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
NOTE 3 - NOTES PAYABLE
As of June 30, 2007, the Company had the following notes payable and accrued
interest:
Notes Accrued
Payable Interest
------------- -----------
2006 Note Payable, interest at 8%, due on demand
and currently in default $ 137,963 $ 13,789
2007 Notes Payable, interest at 8%, due on December
26, 2007 and January 17, 2008, face value of $600,000 289,452 23,189
Secured Convertible Notes, interest at 6%, see
discussion below regarding current status 1,870,433 48,887
------------- -----------
Totals $ 2,297,848 $ 85,865
============= ===========
2006 NOTES PAYABLE
- ------------------
In April 2007, the Company entered into a series of conversion agreements with a
group of individuals who had received an assignment of a $300,000 note and
accrued interest of $24,000 which was due on March 31, 2007. On April 19, 2007,
certain holders agreed to receive share of the Company's common stock at $0.20
per share. The Company issued 875,000 shares of common stock valued at
$1,417,500 to three of the assignors in settlement of $162,037 in principal and
$12,963 in accrued interest. At the time of issuance, the Company recorded the
excess in fair value of the common stock over the liabilities satisfied of
$1,242,500 as additional interest expense.
2007 NOTES PAYABLE
- ------------------
During the quarter ended June 30, 2007, the Company amortized $149,589 of the
discount resulting from the warrants and beneficial conversion feature to
interest expense. At June 30, 2007, the remaining discount relating to these
notes was $310,548.
$2,000,000 SECURED CONVERTIBLE NOTES
- ------------------------------------
On June 6, 2006, the Company entered into a definitive securities purchase
agreement and ancillary agreements with accredited investors for a private
placement of $2,000,000 of 6% callable secured convertible notes due June 6,
2009 (the "Secured Notes") and stock purchase warrants to purchase 4,000,000
shares of the Company's common stock, vesting immediately and exercisable before
June 6, 2013, with an exercise price of $1.10 subject to adjustment upon certain
events. In the event of default, the Secured Notes incur interest at fifteen
percent (15%) per annum, until such default has been cured. The Company received
the proceeds under these Secured Notes in three tranches; June 2006 - $700,000;
July 2006 - $600,000; and October, 2006 - $700,000. The Secured Notes are
convertible at the option of the holder at any time prior to maturity into
shares of the Company's common stock at a conversion price based upon the
average of the three lowest trading prices of the Company's common stock for the
previous 20 trading days discounted by 50%. The Secured Notes are secured by a
security interest in substantially all of the assets of the Company.
F-32
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
In connection with the issuance of the Secured Notes, the Company evaluated the
terms and features of the conversion feature and the warrants and determined
that the instruments embodied certain derivative features that were not clearly
and closely related to the debt instrument. Thus, the conversion feature and
warrants did not meet the established criteria for equity classification under
Emerging Issues Task Force ("EITF") 00-19 "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". On
the dates of issuance, the Company allocated the proceeds between the Secured
Notes, warrants and conversion feature. Since the fair value of the warrants and
conversion feature exceeded the carrying value of the Secured Notes, the Company
recorded $4,040,569 of additional expense during the period ended June 30, 2007.
The Company up until March 31, 2007, see discussion below, was amortizing the
discount of the Secured Notes of $2,000,000 over the term of the Secured Notes.
The conversion feature and warrants are being carried at their respective fair
values with changes in their values recorded in the statement of operations.
Upon issuance in June 2006, the Company valued the conversion feature liability
of the Secured Notes at $1,252,520 using the Black Scholes valuation method
based upon the following weighted average variables; a risk free interest rate
of 5.25%, an exercise price of $0.45, a volatility of 160%, and a remaining term
of 3.0 years.
Upon issuance in June 2006, the Company valued the 4,000,000 detached warrants
to purchase shares of the Company's common stock at $3,488,049 based upon the
Black Scholes method of valuation using the following weighted average
variables; risk free interest rate of 5.25%, an exercise price of $1.10, a
volatility of 150%, and an estimated remaining life of 7 years.
As of June 30, 2007, the fair value of the conversion feature liability related
to Secured Notes was $5,685,122. The Company valued the beneficial conversion
feature at June 30, 2007, using the Black Scholes method of valuation with the
following variables; a risk free interest rate of 5.25%, an exercise price of
$0.44, a volatility of 277%, and a remaining life of 2.09 years. The change in
the fair value of the derivative liability for the quarter ended June 30, 2007
was an increase of $377,184.
At June 30, 2007, the Company valued the warrants at $5,276,831 based upon the
Black Scholes method of valuation using the following variables; risk free
interest rate of 5.25%, an exercise price of $1.10, a volatility of 277%, and an
estimated remaining life of 5.9 years. The change in the fair value of the
warrant liability for the quarter ended June 30, 2007 was a decrease of
$1,319,269.
In January 2007, a dispute arose between the Company and the holders of the
Secured Notes, see Note 6 for additional information. The Company carries the
Secured Notes at their face value due to the dispute. In addition, the Company
has not recorded any potential penalty provision under the Secured Notes
attributable to the allegations of default based upon the Company's belief that
the holders of the Secured Notes violated the terms of the agreement and in
reliance upon the analysis of legal counsel to the Company regarding its
obligations under the Secured Notes.
F-33
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
NOTE 4 - STOCKHOLDERS' EQUITY
See Notes 3 and 5 for discussion of shares of common stock issued during the
period ended June 30, 2007. There were no issuances of common stock by the
Company during the period ended June 30, 2006.
NOTE 5 - OPTIONS AND WARRANTS
OPTIONS
- -------
STOCK OPTION PLANS
On May 3, 2006, the Company's Board of Directors adopted the 2006 Incentive and
Non-statutory Stock Option Plan ("2006 Plan") for issuance of stock options to
employees and others. Under the 2006 Plan, the Company reserved 10,000,000
shares for issuance. As of June 30, 2007, there were 42,400 options available
for issuance under the 2006 Plan.
On December 26, 2006, the Board of Directors authorized the issuance of up to
6,000,000 options under its 2007 Incentive and Non-statutory Stock Option Plan
("2007 Plan"). The 2007 Plan has not yet been approved by a vote of the
shareholders of the Company. As of June 30, 2007, there were 745,200 options
available for issuance under the 2007 Plan.
Compensation expense recorded during the quarter ended June 30, 2007 was
$776,030 under the above plans, of which $618,806 was stock-based compensation
to employees and $157,224 was stock-based compensation to consultants. The
Company accounts for options issued to consultants under EITF 96-18 and revalues
these options at each quarter end. At June 30, 2007, the options were valued
based upon the Black Scholes method of valuation using the following estimates:
5.25 % risk free rate, 277% volatility, and an expected life of approximately
five years.
The following is a summary of activity of outstanding stock options:
Number
of Shares
---------------
Balance, March 31, 2007 13,851,230
Options granted -
Options exercised (419,500)
Options cancelled or forfeited (5,120,500)
---------------
Balance, June 30, 2007 8,311,230
===============
F-34
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
EXERCISES AND SIGNIFICANT CANCELLATIONS OF STOCK OPTIONS
During the quarter ended June 30, 2007, two consultants exercised a total of
107,000 options vested under the 2006 Plan. In addition, an officer exercised
312,500 options vested under the 2006 Plan. One consultant paid for the exercise
of his options by foregoing payment of an outstanding invoice for legal services
in the amount of $8,400. The other consultant has yet to remit the $13,000 due
under the exercise. The officer paid for a portion of the exercise of his
312,500 options by reducing net accrued salary payable by $26,745, leaving
$35,755 payable to the Company. As of June 30, 2007, the Company recorded a
subscription receivable in the amount of $48,755 attributable to the remaining
amounts due in connection with exercise of the options. On August 13, 2007, this
subscription receivable was reduced by $35,755 through a payment received from
the officer.
On April 24, 2007, the Company's Chief Executive Officer passed away. In
accordance with the 2006 and 2007 Plans, the unvested options of 3,924,500
expired during the period. Vested options under the 2006 and 2007 Plan will
expire under their initial term of five years. During the three months ended
June 30, 2007, a consultant terminated his employment. As of June 30, 2007, the
Company has not cancelled the vested portion of his options for approximately
247,000 shares of common stock.
Although management believes its estimate regarding the fair value of the
services to be reasonable, there can be no assurance that all of the subjective
assumptions will remain constant, and therefore the valuation of the services
may not be a reliable measure of the fair value of stock compensation or stock
based payments for consulting services.
WARRANTS
On October 11, 2006, the Company issued 300,000 warrants at an exercise price of
$0.47 to a consultant for services. One third of the warrants were vested upon
issuance, the remaining 200,000 warrants vest over the period of two years.
During the quarter ended June 30, 2007, the Company recorded total compensation
expense of $17,700. The Company accounts for this agreement under EITF 96-18 and
revalues these warrants at each quarter end. At June 30, 2007, the warrants were
valued based upon the Black Scholes method of valuation using the following
estimates: 5.25 % risk free rate, 277 % volatility, and an expected life of five
years.
The following is a summary of activity of outstanding common stock warrants:
Number
Of Shares
-----------------
Balance, March 31, 2007 15,403,940
Warrants granted -
Warrants exercised -
-----------------
Balance, June 30, 2007 15,403,940
=================
F-35
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
NOTE 6 - COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On July 3, 2007, the Company and its subsidiary Aquair entered into a settlement
agreement with plaintiff Atmospheric Water Technologies, Inc. in the Orange
County Superior Court Case No. 05CC09548. Under the terms of the settlement, (i)
all parties will be released from liability, (ii) the Company and Aquair, as
well as the Company's late Chairman and CEO Louis Knickerbocker, will be
dismissed with prejudice from the lawsuit, (iii) plaintiff will issue a press
release announcing the dismissal of the case, and (iv) the Company, through its
insurer, will pay $15,000 to plaintiff.
The Company's ongoing litigation with it previous investors the NIR Group has
been remanded back to the New York Supreme Court, from the federal district
court, and is now titled AJW Partners LLC, AJW Offshore Ltd, AJW Qualified
Partners LLC, and New Millenium Capital Partners II LLC v. RG Global Lifestyles,
Inc. and Louis Knickerbocker, and is Case No. 600323/07. Recently, however,
plaintiffs agreed to voluntarily dismiss Louis Knickerbocker without prejudice
(therefore the caption will change upon the next round of pleadings).
Additionally, the parties have agreed to informally stay the proceeding for
thirty (30) days pending resolution of the Company's claim for $3 million in
insurance proceeds from its "key man" life insurance policy with AIG American
General it owned and is the beneficiary of.
Other than the foregoing lawsuits, the Company is not aware of any litigation,
either pending or threatened.
WATER TREATMENT CONTRACTS
On May 29, 2007, the Company received its second progress payment of $450,000
from a customer in connection with its pending engineering, equipment sale and
installation contract with the customer. In accordance with the Company's
revenue recognition policy, the Company has recorded the revenue on the basis of
a percentage completion of the pending contract. As of June 30, 2007, payments
received in excess of revenues recorded (deferred revenue) under this contract
was $356,804.
In June 2007, the Company entered into contract with Yates Petroleum Corporation
("YPC") to engineer, design, and install a water treatment system ("System") of
Coal Bed Methane ("CBM") produced water provided by YPC. The Company will own
and operate the System and regeneration waste pond. The term of the contract is
for 60 months from the start of the first billing cycle. The Company received an
initial deposit of $25,000 from YPC and has recorded such as deferred revenue.
YPC is responsible for constructing the inflow pond and will receive a credit
from the Company of $50,000 each month for the first three months. In addition,
YPC will receive credits on current billings for future repairs and maintenance
to the inflow pond. The base rate under the contract is $0.125 per barrel (42 US
gallons) of water discharged by the System up to the maximum load.
F-36
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
OC ENERGY DISTRIBUTIONS CONTRACTS
The Company has entered into various agreements with distributors for the
distribution of is OC Energy Drink products. Some of these agreements include
clauses where by the distributor has the exclusive right to distribute the
Company's products to for a particular area.
NOTE 7 - SEGMENT REPORTING AND CONCENTRATIONS
Currently the Company generates all of its revenues, and incurred all of its
expenses from the sale of OC Energy products and from construction projects
related to water treatment technology. A summary of revenues generated by
segment for the quarter ended June 30, 2007, is as follows:
2007
------------------
Water treatment segment $ 209,159
OC energy drink segment 78,048
------------------
Total $ 287,207
==================
A summary of operating loss by segment for the quarter ended June 30, 2007, is
as follows:
2007
-----------------
Water treatment segment $ (161,119)
OC energy drink segment (92,067)
Corporate segment (1,099,099)
-----------------
Total $ (1,352,285)
=================
The assets related to the OC Energy segment are insignificant and thus have not
been presented. During the quarter ended June 30, 2007, sales to a single
customer were 100% of total sales for both the OC Energy Drink sales and
revenues related to water-treatment technology.
NOTE 8 - RELATED PARTY TRANSACTIONS
Effective April 1, 2006, the Company entered into an agreement with a company
wholly owned by the former Chief Executive Officer of the Company for the
subleasing of office space and administrative support services. During the
quarters ended June 30, 2007 and 2006, payments to this related party for these
services were $18,046 and $41,800, respectively. The agreement was cancelled
effective June 1, 2007.
During the quarter ended June 30, 2007, the Company accrued interest payable of
$2,752 to a director of the Company on the unpaid portion of a note payable, see
Note 4.
F-37
RG GLOBAL LIFESTYLES, INC.
Notes to consolidated financial statements
(unaudited)
During the quarter ended June 30, 2007, an officer, who is also a director of
the Company, exercised 312,500 of vested options granted to him under the
Company's 2006 Plan, see Note 5 for additional information.
NOTE 9 - SUBSEQUENT EVENTS
On August 13, 2007, an officer and director of the Company paid the balance of
his subscription receivable to the Company for exercise of 312,500 options.
On September 4, 2007, in consideration for the final remaining note holder
(accredited investor and Director) from the Note and Warrant Offering agreeing
to cancel the outstanding principal and interest due under his promissory note,
the Company offered the note holder a private offering of restricted common
stock at $0.20 per share, totaling 780,475 shares. The Company is currently
assessing the accounting impact on the financial statements.
On September 1, 2007, the Company and its heretofore wholly owned subsidiary OC
Energy Drink, Inc. entered into a Plan of Organization and Securities Purchase
Agreement with three individuals affiliated with Fusion Solutions Inc. In
connection with the terms of the agreement, the Company issued of 654,925 shares
of its common stock and 24% of the common stock of OC Energy Drink, Inc. to the
individuals in exchange for certain assets and intellectual property relating to
OC Energy Drink products. The Company is currently assessing the accounting
impact on the financial statements.
On September 4, 2007, the Company borrowed $100,000 from a shareholder as a
temporary loan to be used as working capital on terms to be determined.
F-38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our Articles of Incorporation, as well as our By-Laws provide for the
indemnification of directors, officers, employees and agents of the corporation
to the fullest extent provided by the Corporate Law of the State of California,
as well as is described in the Articles of Incorporation and the By-Laws. These
sections generally provide that the Company may indemnify any person who was or
is a party to any threatened, pending or completed action, suit or proceeding
whether civil, criminal, administrative or investigative except for an action by
or in right of the corporation by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation. Generally, no
indemnification may be made where the person has been determined to be negligent
or guilty of misconduct in the performance of his or her duties to the Company.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by us in connection with the registration of the
Shares is as follows:
SEC Registration $ 100
Accounting Fees and Expenses $ 2,500
Legal Fees and Expenses $ 15,000
Printing Costs $ 0
Miscellaneous Expenses $ 500
----------
Total $ 18,100
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On September 4, 2007, in consideration for the final remaining note holder
(accredited investor) from the Note and Warrant Offering (discussed below)
agreeing to cancel the outstanding principal and interest due under his
promissory note, the Company offered the note holder a private offering of
restricted common stock at $0.20 per share. The securities were sold to in
reliance on Section 4(2) under the Securities Act. In this final tranche of this
conversion (see below for the remaining), the Company issued 780,475 shares to
one investor.
On September 1, 2007, the Company and its heretofore wholly owned subsidiary OC
Energy Drink, Inc. entered into a Plan of Organization and Securities Purchase
Agreement with three individuals affiliated with Fusion Solutions Inc., Bob
Glaser, Mariano Fusco, and Albert Guerra. In connection with the terms of the
agreement, the Company issued of 654,925 shares of RGBL.OB common stock to the
individuals in exchange for certain assets and intellectual property relating to
OC Energy Drink to the Company. The issuance of the Registrant's shares of
common stock was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section 4(2) thereof.
Fiscal Year Ended March 31, 2007
- --------------------------------
On December 26, 2006 and January 17, 2007, the Company entered into three note
agreements with accredited investors for total proceeds of $600,000. The notes
have a term of one year and bear interest at 8% per annum. For each dollar
loaned the Company, the holders were granted a warrant to purchase one share of
the Company's common stock at $0.20 per share (a total of 600,000 warrants) and
expire in five years from the date of issuance. In addition, the principal and
accrued interest were convertible into shares of the Company's common stock upon
maturity at the lowest price traded of the Company's common stock for the prior
year, but not less than $0.10 per share. The securities were sold to accredited
investors in reliance on Section 4(2) under the Securities Act of 1933, as
amended (the "Securities Act").
Beginning in November 2006, in consideration for certain of the note holders
(accredited investors) from the Note and Warrant Offering (discussed below)
agreeing to cancel the outstanding principal and interest due under their
promissory notes, the Company offered the note holders a private offering of
restricted common stock at $0.20 per share. The securities were sold to
accredited investors in reliance on Section 4(2) under the Securities Act. In
the aggregate, the Company issued 6,282,150 shares to six (6) investors
(including three note assignees from one of the initial investors).
On June 6, 2006, we entered into a definitive Securities Purchase Agreement and
ancillary agreements with NIR Group (accredited investors) for a private
placement of $2,000,000 of 6.0% Callable Secured Convertible Notes due June 6,
2009 and in conjunction issued Stock Purchase Warrants to purchase 4,000,000
shares of our Common Stock exercisable before June 6, 2013, with an exercise
price of $1.10 (subject to adjustment upon certain events). The notes are
convertible at the option of the holder at any time prior to maturity into
shares of our Common Stock at a conversion price of the market price as defined
in the agreements. The securities were sold to accredited investors in reliance
on Regulation D and Section 4(2) under the Securities Act. On October 12, 2006,
the Company registered 2,000,000 shares for resale underlying conversion of the
notes on Form SB-2 under the Securities Act.
II-1
Fiscal Year Ended March 31, 2006
- --------------------------------
Beginning on November 15, 2005, the Company conducted a private placement
offering to six accredited investors only under the terms and conditions of a
Note and Warrant Agreement. The terms of the Offering are a non-convertible
promissory note with an annual interest rate of 8%, with a maturity date of one
year after loan; and for each dollar loaned the Company via promissory note, the
investor is granted a cashless warrant to purchase one share of the Company's
common stock at an exercise price equal to the lowest closing price of the stock
as reported by the OTC for the year following the date of warrant grant which is
$.20 ("Warrant"). These sales are exempt from registration under the Securities
Act pursuant to Section 4(2) of the Securities Act of 1933, as amended, or
Regulation D of the Securities Act. As of March 31, 2006, under the terms of the
offering the Company raised $1,613,940 in notes and therefore issued an
aggregate of 1,613,940 shares of common stock as Warrants.
During the fiscal year ended March 31, 2006, the Company received 7,500,000
shares of its common stock pursuant to the distribution of Amerikal. On November
15, 2005, the board of directors of the Company resolved to cancel these shares.
The cancellation was completed prior to March 31, 2006.
Fiscal Year Ended March 31, 2005
- --------------------------------
In July of 2004, pursuant to its Plan of Reorganization, the Company acquired
all of the outstanding shares of AIH from the AIH Shareholders in exchange for
the issuance by the Company to the AIH Shareholders of an aggregate of 1,934,880
shares of the Company's Common Stock. These shares were issued without
registration pursuant to available exemptions from registration under both sate
and federal securities laws and are subject to certain restrictions and
limitations on transferability.
ITEM 27. EXHIBITS
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------------------------------------------------------------
2.0 Agreement and Plan of Reorganization dated July 8, 2004.(1)
3.1 Articles of Incorporation of International Beauty Supply Ltd.
("IBS") filed July 12, 1985.(2)
3.2 Amendment to Articles of Incorporation of IBS filed May 28,
1993.(2)
3.3 Certificate of Amendment to Articles of Incorporation of the L.L.
Knickerbocker Company Inc. ("LLK") filed June 27, 1994.(2)
3.4 Certificate of Amendment to Articles of Incorporation of LLK
filed September 29, 1994.(2)
3.5 Certificate of Amendment of the Articles of Incorporation of LLK,
filed September 1, 1995. (5)
3.6 Certificate of Amendment of the Articles of Incorporation of LLK,
filed June 19, 1996. (5)
3.7 Certificate of Amendment to the Articles of Incorporation of LLK
filed April 22, 1999.(3)
3.8 Certificate of Amendment to the Articles of Incorporation of the
L.L. Knickerbocker Company Inc. filed January 9, 2003. (5).
3.9 Bylaws of the L.L. Knickerbocker Company Inc.(4)
4.1 Form of Stock Purchase Warrant. (9)
4.2 Form of Callable Secured Convertible Note. (9)
4.3 Warrant issued to Ascendiant Securities, LLC. (10)
4.4 Form of CFS Warrant. (14).
4.5 Note and Warrant Offering Agreement. (14).
5.1 Opinion on Legality, filed herewith.
10.1 Consulting Agreement between Aquair and Steve Ritchie dated July
18, 2005. (6)
10.2 Master Separation and Distribution Agreement dated November 15,
2005. (7)
10.3 Distribution Agreement entered into between Aquair, Inc. and
Locke Media dated August 30, 2005 filed November 14, 2005. (6)
10.4 Agreement entered into between Aquair and Entech Sales dated
November 2005. (8)
10.5 Securities Purchase Agreement. (9)
10.6 Security Agreement. (10)
10.7 Intellectual Property Security Agreement. (10)
10.8 Rental Agreement between Aquair and Pinnacle International, Inc.
dated October 1, 2004. (5)
10.9 Private Label Agreement between Aquair and Ahoy Network
Association, Ltd, dated November 20, 2004. (5)
II-2
10.10 Exclusive Sales and Marketing Agreement between Aquair and
Munters Corporation dated June 8, 2005. (5)
10.11 Company's 2006 Incentive and Nonstatutory Stock Option Plan. (10)
10.12 Engagement Agreement with Ascendiant Securities, LLC. (11)
10.13 Registration Rights Agreement. (9)
10.14 Technology Transfer Agreement between the Company and Catalyx
Fluid Solutions, Inc., as amended, effective January 2007. (12)
10.15 Company's 2007 incentive and Nonstatutory Stock Option Plan. (13)
10.16 Plan of Organization and Securities Purchase Agreement dated
September 1, 2007, among the Company OC Energy Drink, Inc., Bob
Glaser, Mariano Fusco and Albert Guerra. (15)
14.1 Code of Ethics (5)
21.1 Subsidiaries
23.1 Consent of Scott D. Olson, Esq. (included in opinion set forth in
Exhibit 5.1 hereto).
23.2 Consent of Beckstead & Watts, LLP, Certified Public Accountants,
filed herewith.
23.3 Consent of McKennon, Wilson & Morgan LLP, Certified Public
Accountants, filed herewith.
- -----------------
(1) Incorporated by reference to the Company's report on Form 8-K as filed
August 23, 2004.
(2) Incorporated by reference to the L.L. Knickerbocker Co., Inc. Form SB-2
Registration Statement No. 33-85230-LA as filed on October 13, 1994.
(3) Incorporated by reference to L.L. Knickerbocker Co., Inc. Form 10-K as filed
on April 14, 2000.
(4) Incorporated by reference to the L.L. Knickerbocker Co., Inc. Annual Report
on Form 10-KSB as filed on March 29, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB as
filed on June 24, 2005.
(6) Incorporated by reference to the Company's Form 10-QSB, as filed on November
14, 2005.
(7) Incorporated by reference to the Company's Form 8-K, as filed on November
16, 2005.
(8) Incorporated by reference to the Company's Form 10-QSB, as filed on February
15, 2006.
(9) Incorporated by reference to the Company's Form 8-K, as filed on June 8,
2006.
(10) Incorporated by reference to the Company's Form SB-2 Registration No.
333-135966, as filed July 21, 2006.
(11) Incorporated by reference to the Company's Form SB2/A Registration No.
333-135966, as filed August 29, 2006.
(12) Incorporated by reference to the Company's Form 10-KSB, as filed on July
13, 2007.
(13) Incorporated by reference to the Company's Preliminary Proxy Statement on
Schedule 14A, as filed on July 27, 2007.
(14) Incorporated by reference to the Company's Form SB-2 Registration No.
333-145322 as filed on August 10, 2007.
(15) Incorporated by reference to the Company's Form 8-K as filed on September
7, 2007.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(b) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing,, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) (ss.230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(c) Include any additional or changed material information on the plan of
distribution.
II-3
2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3) To remove from registration by means of post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
4) For determining liability of the undersigned under the Securities Act to any
purchaser in the initial distribution of the securities, the undersigned
undertakes that in a primary offering of securities of the undersigned pursuant
to this registration statement, regardless of the underwriting method used to
sell the securities to the purchaser, if the securities are offered or sold to
such purchaser by means of any of the following communications, the undersigned
will be a seller to the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned relating to the
offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned or used or referred to by the undersigned;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned or its securities provided
by or on behalf of the undersigned; and
(iv) Any other communication that is an offer in the offering made by the
undersigned to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers, and controlling persons pursuant to the
provisions described above in Item 24, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of the expenses incurred or paid by a
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Rancho
Santa Margarita, County of Orange, State of California, on the 3rd day of
October, 2007.
RG Global Lifestyles, Inc.
By: /s/ Grant King
--------------
Grant King, Chief Executive Officer
By: /s/ William C. Hitchcock
------------------------
William C.Hitchcock, Principal Accounting
Officer, CFO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
- --------------------------- ------------------------- -----------------------
/s/ Juzer Jangbarwala Chairman of the Board October 3, 2007
- ---------------------------
Juzer Jangbarwala
/s/ Grant King Director October 3, 2007
- ---------------------------
Grant King
/s/ David Koontz Director October 3, 2007
- ---------------------------
David Koontz
/s/ Steve Ritchie Director October 3, 2007
- ---------------------------
Steve Ritchie
EXHIBIT INDEX
The following Exhibits are filed or incorporated by reference as part of this
Registration Statement on Form SB-2:
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------------------------------------------------------------
2.0 Agreement and Plan of Reorganization dated July 8, 2004.(1)
3.1 Articles of Incorporation of International Beauty Supply Ltd.
("IBS") filed July 12, 1985.(2)
3.2 Amendment to Articles of Incorporation of IBS filed May 28,
1993.(2)
3.3 Certificate of Amendment to Articles of Incorporation of the L.L.
Knickerbocker Company Inc. ("LLK") filed June 27, 1994.(2)
3.4 Certificate of Amendment to Articles of Incorporation of LLK
filed September 29, 1994.(2)
3.5 Certificate of Amendment of the Articles of Incorporation of LLK,
filed September 1, 1995. (5)
3.6 Certificate of Amendment of the Articles of Incorporation of LLK,
filed June 19, 1996. (5)
3.7 Certificate of Amendment to the Articles of Incorporation of LLK
filed April 22, 1999.(3)
3.8 Certificate of Amendment to the Articles of Incorporation of the
L.L. Knickerbocker Company Inc. filed January 9, 2003. (5).
3.9 Bylaws of the L.L. Knickerbocker Company Inc.(4)
4.1 Form of Stock Purchase Warrant. (9)
4.2 Form of Callable Secured Convertible Note. (9)
4.3 Warrant issued to Ascendiant Securities, LLC. (10)
4.4 Form of CFS Warrant (14).
4.5 Note and Warrant Offering Agreement (14)
5.1 Opinion on Legality, filed herewith.
10.1 Consulting Agreement between Aquair and Steve Ritchie dated July
18, 2005. (6)
10.2 Master Separation and Distribution Agreement dated November 15,
2005. (7)
10.3 Distribution Agreement entered into between Aquair, Inc. and
Locke Media dated August 30, 2005 filed November 14, 2005. (6)
10.4 Agreement entered into between Aquair and Entech Sales dated
November 2005. (8)
10.5 Securities Purchase Agreement. (9)
10.6 Security Agreement. (10)
10.7 Intellectual Property Security Agreement. (10)
10.8 Rental Agreement between Aquair and Pinnacle International, Inc.
dated October 1, 2004. (5)
10.9 Private Label Agreement between Aquair and Ahoy Network
Association, Ltd, dated November 20, 2004. (5)
10.10 Exclusive Sales and Marketing Agreement between Aquair and
Munters Corporation dated June 8, 2005. (5)
10.11 Company's 2006 Incentive and Nonstatutory Stock Option Plan. (10)
10.12 Engagement Agreement with Ascendiant Securities, LLC. (11)
10.13 Registration Rights Agreement. (9)
10.14 Technology Transfer Agreement between the Company and Catalyx
Fluid Solutions, Inc., as amended, effective January 2007. (12)
10.15 Company's 2007 incentive and Nonstatutory Stock Option Plan. (13)
10.16 Plan of Organization and Securities Purchase Agreement dated
September 1, 2007, among the Company OC Energy Drink, Inc., Bob
Glaser, Mariano Fusco and Albert Guerra. (15)
14.1 Code of Ethics (5)
21.1 Subsidiaries
23.1 Consent of Scott D. Olson, Esq. (included in opinion set forth in
Exhibit 5.1 hereto).
23.2 Consent of Beckstead & Watts, LLP, Certified Public Accountants,
filed herewith.
23.3 Consent of McKennon, Wilson & Morgan LLP, Certified Public
Accountants, filed herewith.
- -----------------
(1) Incorporated by reference to the Company's report on Form 8-K as filed
August 23, 2004.
(2) Incorporated by reference to the L.L. Knickerbocker Co., Inc. Form SB-2
Registration Statement No. 33-85230-LA as filed on October 13, 1994.
(3) Incorporated by reference to L.L. Knickerbocker Co., Inc. Form 10-K as filed
on April 14, 2000.
(4) Incorporated by reference to the L.L. Knickerbocker Co., Inc. Annual Report
on Form 10-KSB as filed on March 29, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB as
filed on June 24, 2005.
(6) Incorporated by reference to the Company's Form 10-QSB, as filed on November
14, 2005.
(7) Incorporated by reference to the Company's Form 8-K, as filed on November
16, 2005.
(8) Incorporated by reference to the Company's Form 10-QSB, as filed on February
15, 2006.
(9) Incorporated by reference to the Company's Form 8-K, as filed on June 8,
2006.
(10) Incorporated by reference to the Company's Form SB-2 Registration No.
333-135966, as filed July 21, 2006.
(11) Incorporated by reference to the Company's Form SB-2/A Registration No.
333-135966, as filed August 29, 2006.
(12) Incorporated by reference to the Company's Form 10-KSB, as filed on July
13, 2007.
(13) Incorporated by reference to the Company's Preliminary Proxy Statement on
Schedule 14A, as filed on July 27, 2007.
(14) Incorporated by reference to the Company's Form SB-2 Registration No.
333-145322 as filed on August 10, 2007.
(15) Incorporated by reference to the Company's Form 8-K as filed on September
7, 2007.
Exhibit 5.1