**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-QSB**

 

**ý****QUARTERLY REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the period ending June 30, 2005.**

 

**o****TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE EXCHANGE ACT**

 

**Commission File Number: 000-254888**

 

**RG GLOBAL LIFESTYLES, INC.**

(Name of small business issuer in its charter)

 
| **California**                           | ** ** | **33-0230641**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)           |       |                                 |
|                                     |       |                                 |
| **17751 Mitchell Avenue, Irvine, CA**    |       | **92614**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

Issuer’s telephone number: **(949) 486-6666**

 

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

 

Securities registered under Section 12(g) of the Act:  Common Stock, $0.001 par value (Title of Class)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý          No o

 

APPLICABLE ONLY TO ISSUERS INVOLVED INBANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS

 

Check whetherthe registrant filed all documents and reports required to be filed by Sectionl2, 13 or 15(d) of the Exchange Act after the distribution of securities undera plan confirmed by a court. Yes ý          No o

 

The number of shares outstanding of the issuer’s Common Stock as of August 11, 2005 was 25,150,000.

 

TransitionalSmall Business Disclosure Format (Check One): Yes o         No ý

 

 

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**DOCUMENTS INCORPORATED BY REFERENCE**

 

The following documents are incorporated byreference herein: (i) L.L. Knickerbocker Co., Inc. Form SB-2 RegistrationStatement No. 33-85230-LA as filed on October 13, 1994; (ii) L.L. KnickerbockerCo. Inc. Form 10-KSB as filed on March 29, 1995; (iii)  L.L. Knickerbocker Co., Inc. Form 10-K asfiled on April 14, 2000; and (iv) RG Global Lifestyles, Inc. Form 10-KSB asfiled on June 29, 2005.

 

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## **INDEX**

 
|       | **PART I - FINANCIAL INFORMATION**                                                           |   |
|------------|----------------------------------------------------------------------------------------------|--------|
|       |                                                                                         |   |
| Item 1.    | Financial Statements (Unaudited)                                                             |   |
|       |                                                                                         |   |
|       | Independent Accountants’ Review Report                                                  | 1      |
|       |                                                                                         |   |
|       | Consolidated Balance Sheet –June 30, 2005                                               | 2      |
|       |                                                                                         |   |
|       | Consolidated Statements of Operations –                                                 |   |
|       | For the three months ended June 30, 2005 and 2004                                            | 3      |
|       |                                                                                         |   |
|       | Consolidated Statements of Cash Flows –                                                 |   |
|       | For the three months ended June 30, 2005 and 2004                                            | 4      |
|       |                                                                                         |   |
|       | Notes to Financial Statements                                                                | 5      |
|       |                                                                                         |   |
| Item 2.    | Management’s Discussion and Analysis of  Financial Conditions and Results of Operations | 7      |
|       |                                                                                         |   |
|       |                                                                                         |   |
| Item 3.    | Internal Controls                                                                            | 11     |
|       |                                                                                         |   |
|       | **PART II - OTHER  INFORMATION**                                                             |   |
|       |                                                                                         |   |
| Item 1.    | Legal Proceedings                                                                            | 12     |
|       |                                                                                         |   |
| Item 2.    | Unregistered Sales of Equity Securities and  Use of Proceeds                                 | 12     |
|       |                                                                                         |   |
| Item 3.    | Defaults Upon Senior Securities                                                              | 12     |
|       |                                                                                         |   |
| Item 4.    | Submission of Matters to a Vote of Security  Holders                                         | 12     |
|       |                                                                                         |   |
| Item 5.    | Other Information                                                                            | 12     |
|       |                                                                                         |   |
| Item 6.    | Exhibits                                                                                     | 13     |
|       |                                                                                         |   |
| SIGNATURES | 14                                                                                           |

 

----

 

**Part I - Financial Information**

** **

**Item 1. Financial Statements**

**(unaudited)**

 

**Beckstead and Watts, LLP**

***Certified Public Accountants***

2425 W Horizon Ridge Pkwy

Henderson, NV 89052

702.257.1984 tel

702.362.0540 fax

 

 

**INDEPENDENT ACCOUNTANTS’ REVIEW REPORT**

 

Board of Directors

RG Global Lifestyles, Inc. and Subsidiaries

(formerly L.L. Knickerbocker, Inc.)

 

We have reviewed the accompanying balance sheet of RG Global Lifestyles,Inc. (formerly L.L. Knickerbocker, Inc.) and Subsidiaries as of June 30, 2005and the related statements of operations and cash flows for the three monthsended June 30, 2005 and 2004. These financial statements are the responsibilityof the Company’s management.

 

We conducted our reviews in accordance with standards established bythe Public Company Accounting Oversight Board (United States).  A review of interim financial informationconsists principally of applying analytical procedures to financial data, andmaking inquiries of persons responsible for financial and accountingmatters.  It is substantially less inscope than an audit conducted in accordance with generally accepted auditingstandards, which will be performed for the full year with the objective ofexpressing an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such anopinion.

 

Based on our reviews, we are not aware of any material modificationsthat should be made to the accompanying financial statements referred to abovefor them to be in conformity with generally accepted accounting principles inthe United States of America.

 

Beckstead and Watts, LLP has previously audited, in accordance withgenerally accepted auditing standards established by the Public CompanyAccounting Oversight Board (United States), the balance sheet of RG GlobalLifestyles, Inc. and Subsidiaries as of March 31, 2005, and the relatedstatements of operations, stockholders’ equity, and cash flows for the yearthen ended (not presented herein).  Inour report dated June 24, 2005, we expressed an unqualified opinion on thosefinancial statements.

August 10, 2005

 

1

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**R.G. Global Lifestyles, Inc.**

**(formerly L.L. Knickerbocker Company, Inc.)**

**Consolidated Balance Sheet**

**(unaudited)**

 

| ** **                                                                                               | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                                                                               | ** ** | **2005**     | ** ** |
| **Assets**                                                                                               |       |         |       |
|                                                                                                     |       |         |       |
| Current  assets:                                                                                         |       |         |       |
| Cash and cash equivalents                                                                                |       | $            | 28,434     |   |
| Accounts receivable                                                                                      |       | 459,516      |       |
| Inventory                                                                                                |       | 176,489      |       |
| Prepaid expenses                                                                                         |       | 11,624       |       |
| Total current assets                                                                                     |       | 676,063      |       |
|                                                                                                     |       |         |       |
| Fixed assets, net                                                                                        |       | 18,240       |       |
|                                                                                                     |       |         |       |
| Intangible assets, net                                                                                   |       | 210,000      |       |
| Deposits held                                                                                            |       | 127,100      |       |
| Total other assets                                                                                       |       | 337,100      |       |
|                                                                                                     |       |         |       |
|                                                                                                     |       | $            | 1,031,403  |   |
|                                                                                                     |       |         |       |
| **Liabilities  and Stockholders' Equity**                                                                |       |         |       |
|                                                                                                     |       |         |       |
| Current  liabilities:                                                                                    |       |         |       |
| Accounts payable                                                                                         |       | $            | 269,550    |   |
| Due to related party                                                                                     |       | 50,000       |       |
| Accrued liabilities                                                                                      |       | 6,347        |       |
| Income taxes payable                                                                                     |       | 143,582      |       |
| Total current liabilities                                                                                |       | 469,479      |       |
|                                                                                                     |       |         |       |
| Total liabilities                                                                                        |       | 469,479      |       |
|                                                                                                     |       |         |       |
| Stockholders'  equity:                                                                                   |       |         |       |
|                                                                                                     |       |         |       |
| Preferred stock, no par value, 10,000,000  shares authorized, no shares issued and outstanding           |       | —       |       |
| Common stock, $0.001 par value, 100,000,000  shares authorized, 25,150,000 shares issued and outstanding |       | 25,150       |       |
| Additional paid-in capital                                                                               |       | 269,156      |       |
| Accumulated earnings                                                                                     |       | 267,618      |       |
|                                                                                                     |       | 561,924      |       |
|                                                                                                     |       |         |       |
|                                                                                                     |       | $            | 1,031,403  |   |

 

The accompanying notes are an integral partof these financial statements.

 

2

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**R.G. Global Lifestyles, Inc.**

**(formerly L.L. Knickerbocker Company, Inc.)**

**Consolidated Statements of Operations**

**(unaudited)**

 
| ** **                                                                      | ** ** | **For the Three Months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                      | ** ** | **June 30,**                   | ** ** |
| ** **                                                                      | ** ** | **2005**                       | ** ** | **2004** | ** ** |
|                                                                            |       |                           |       |   |   |
| Revenue                                                                         |       |                           |       |   |   |
| Product sales                                                                   |       | $                              | 827,736    |   | $ | 1,732,038 |   |
| Cost of sales                                                                   |       | 400,533                        |       | 817,662 |   |
|                                                                            |       |                           |       |   |   |
| Gross profit                                                                    |       | 427,203                        |       | 914,376 |   |
|                                                                            |       |                           |       |   |   |
| Expenses:                                                                       |       |                           |       |   |   |
| Advertising and marketing                                                       |       | 176,778                        |       | 84,699 |   |
| Commissions                                                                     |       | 14,698                         |       | 1,754 |   |
| Consulting services                                                             |       | 53,557                         |       | 45,584 |   |
| Depreciation and amortization                                                   |       | 26,202                         |       | — |   |
| General and administrative expenses                                             |       | 71,984                         |       | 125,365 |   |
| Professional fees                                                               |       | 70,546                         |       | 22,810 |   |
| Rent - related party                                                            |       | 18,000                         |       | — |   |
| Salaries and wages                                                              |       | 68,082                         |       | 48,604 |   |
| Total expenses                                                                  |       | 499,847                        |       | 328,816 |   |
|                                                                            |       |                           |       |   |   |
| Net income  (loss) from operations                                              |       | (72,644                        | )          | 585,560 |   |
|                                                                            |       |                           |       |   |   |
| Other income                                                                    |       |                           |       |   |   |
| Interest income                                                                 |       | 184                            |       | 232 |   |
| Tax refund                                                                      |       | 510                            |       | — |   |
| Total other income                                                              |       | 694                            |       | 232 |   |
|                                                                            |       |                           |       |   |   |
| Net income  (loss) before income tax                                            |       | (71,950                        | )          | 585,792 |   |
|                                                                            |       |                           |       |   |   |
| Income tax  expense                                                             |       |                           |       |   |   |
| Current federal                                                                 |       | —                         |       | 126,079 |   |
| Current state                                                                   |       | 3,200                          |       | 43,870 |   |
|                                                                            |       | 3,200                          |       | 169,949 |   |
|                                                                            |       |                           |       |   |   |
| Net income  (loss)                                                              |       | $                              | (75,150    | ) | $ | 415,843 |   |
|                                                                            |       |                           |       |   |   |
| Weighted  average number of common shares outstanding - basic and fully diluted |       | 25,150,000                     |       | 19,965,120 |   |
|                                                                            |       |                           |       |   |   |
| Net income  (loss) per share - basic & fully diluted                        |       | $                              | (0.00      | ) | $ | 0.02 |   |

 

The accompanying notes are an integral partof these financial statements.

 

3

----

 

**R.G. Global Lifestyles, Inc.**

**(formerly L.L. Knickerbocker Company, Inc.)**

**Consolidated Statements of Cash Flows**

**(unaudited)**

 
| ** **                                                                                        | ** ** | **For the Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                        | ** ** | **June 30,**                   | ** ** |
| ** **                                                                                        | ** ** | **2005**                       | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities**                                                         |       |                           |       |   |   |
| Net income  (loss)                                                                                |       | $                              | (75,150    | ) | $ | 415,843 |   |
|                                                                                              |       |                           |       |   |   |
| Adjustments  to reconcile net income (loss) to net cash provided (used) by operating  activities: |       |                           |       |   |   |
| Depreciation and amortization                                                                     |       | 26,203                         |       | — |   |
| Changes in operating assets and  liabilities:                                                     |       |                           |       |   |   |
| (Increase) decrease in account receivable                                                         |       | 47,297                         |       | (294,178 | ) |
| (Increase) in inventory                                                                           |       | (21,624                        | )          | — |   |
| (Increase) in prepaid expenses                                                                    |       | (3,657                         | )          | — |   |
| (Increase) in deposits held                                                                       |       | (60,000                        | )          | — |   |
| Increase (decrease) in accounts payable                                                           |       | 20,088                         |       | (44,233 | ) |
| Increase in accrued liabilities                                                                   |       | 15,914                         |       | 13 |   |
| Increase (decrease) in income tax payable                                                         |       | (129,551                       | )          | 168,280 |   |
| Net cash  provided (used) by operating activities                                                 |       | (180,480                       | )          | 245,725 |   |
|                                                                                              |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                                        |       |                           |       |   |   |
| Purchase of fixed assets                                                                          |       | (747                           | )          | (406 | ) |
| Net cash  (used) from investing activities                                                        |       | (747                           | )          | (406 | ) |
|                                                                                              |       |                           |       |   |   |
| **Cash  flows from financing activities**                                                         |       |                           |       |   |   |
| Proceeds from note payable                                                                        |       | 50,000                         |       | — |   |
| Donated capital                                                                                   |       | —                         |       | 6,993 |   |
| Net cash  provided by financing activities                                                        |       | 50,000                         |       | 6,993 |   |
|                                                                                              |       |                           |       |   |   |
| Net increase  (decrease) in cash                                                                  |       | (131,227                       | )          | 252,312 |   |
| Cash -  beginning                                                                                 |       | 159,661                        |       | 181,845 |   |
| Cash -  ending                                                                                    |       | $                              | 28,434     |   | $ | 434,157 |   |

 

The accompanying notes are an integral partof these financial statements.

 

4

----

 

**R.G. Global Lifestyles, Inc.**

(Formerly L.L. Knickerbocker Company, Inc.)

Notes to consolidated financial statements

(Unaudited)

 

**Note 1 – Basis of presentation**

 

The financial statements included herein, presented in accordance withUnited States generally accepted accounting principles and stated in USdollars, have been prepared by the Company, without audit, pursuant to therules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations, although the Company believes that the disclosures areadequate to make the information presented not misleading.

 

These statements reflect all adjustments, consisting of normalrecurring adjustments, which, in the opinion of management, are necessary forfair presentation of the information contained therein.  It is suggested that these consolidatedinterim financial statements be read in conjunction with the financialstatements of the Company for the year ended March 31, 2005 and notes theretoincluded in the Company’s 10-KSB annual report. The Company follows the same accounting policies in the preparation ofinterim reports.

 

**Note 2 – Organization**

 

During the quarter ended June 30, 2005, the Company formed anotherwholly owned subsidiary, On Line Surgery, Inc. for the purpose of developingadvertising and internet marketing of the Company’s products. The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries after elimination of all material intercompany accounts,transactions and profits.

 

**Note 3 – Fixed assets**

 

Fixed assets as of June 30, 2005 consisted of the following:

 

| ** **                | ** ** | **2005** | ** ** |
|---------------------------|------------|----------|------------|
| Office  Equipment         |       | $        | 20,873     |   |
| Accumulated  depreciation |       | (2,633   | )          |
|                      |       | $        | 18,240     |   |

 

During the periods ended June 30, 2005 and 2004, the Company recordeddepreciation expense of $1,203 and $0, respectively.

 

**Note 4 – Distribution agreements**

 

During the period ending December 31, 2004, the Company entered into anagreement to distribute its products in Indonesia. The purchase price paid forthe distribution rights was $300,000 in cash, which represents its fair value.The amount was recorded as an intangible asset and is being amortized over theperiod of its estimated benefit period of three years. The Company recordedamortization expense $25,000 and $0 for the periods ended June 30, 2005 and2004, respectively.

 

5

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**Note 5 – Deposits**

 

During the quarter ended June 30, 2005, the Company entered into anexclusive distributorship agreement with Munters Corporation.  At June 30, 2005, the Company has depositswith various vendors totaling $127,100 comprised of the following:

 

| ** **                       | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|--------------|------------|
| ** **                       | ** ** | **2005**     | ** ** |
| Future  advertising              |       | $            | 34,600     |   |
| Marketing  services agreement    |       | 7,500        |       |
| Equipment  purchase              |       | 25,000       |       |
| Distributor  agreement           |       | 50,000       |       |
| Deposit with  fulfillment center |       | 10,000       |       |
| Total                            |       | $            | 127,100    |   |

 

**Note 6 – Related party transactions**

 

During the fiscal year ended March 31, 2005, the Company entered intoan agreement with a company wholly owned by an officer and director of theCompany. The agreement provides for office space as well as administrativeservices at a fair market rate of $6,000 per month. The agreement is notbinding and may be cancelled by either party at any time.  During the quarter ended June 30, 2005, theCompany expensed $18,000 under this agreement.

 

During the quarter ended June 30, 2005, a related party advanced$50,000 to the company, by way of a zero-interest, due upon demand loan.  The company recorded this advance as aliability due to the related party.

 

**Note 7 – Segment reporting**

 

The Company operates in a single business segment that includes themanufacture and sale of natural supplements, health and beauty aid products forthe nutraceutical industry. The following table summarizes the Company’srevenues and long-lived assets in different geographic locations:

 

| ** **                | ** ** | **For the three months ended** | ** ** |
|---------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **June 30, 2005**              | ** ** | **June 30, 2004** | ** ** |
|                      |       |                           |       |   |   |
| Revenues:                 |       |                           |       |   |   |
| United  States            |       | $                              | 42,701     |   | $ | — |   |
| Singapore                 |       | 628,056                        |       | 1,451,101 |   |
| Other  Foreign Countries  |       | 156,979                        |       | 280,937 |   |
| Total                     |       | $                              | 827,736    |   | $ | 1,732,038 |   |
|                      |       |                           |       |   |   |
| Long-Lived  Assets (net): |       |                           |       |   |   |
| United  States            |       | $                              | 218,240    |   | $ | — |   |
| Singapore                 |       | —                         |       | — |   |
| Other  Foreign Countries  |       | —                         |       | — |   |
| Total                     |       | $                              | 218,240    |   | $ | — |   |

 

Geographic area data is based upon product shipment destination.  Export sales as a percentage of revenues were94.85% and 100.0% for the quarters ended June 30, 2005 and 2004, respectively.

 

The geographic summary of long-lived assets is based in part uponphysical location, as to the net physical assets ($18,240) and in part upon thelocation of the holder of the intangible rights (in the instance of theintangible Distribution Rights Agreement for the country of Indonesia, net ofamortization, in the amount of $200,000.

 

The Company manufactures its products in the United States but derivesmost of its revenues from shipments of its products to Singapore, Indonesia,Thailand, and other countries in South East Asia.  These areas have, in the past, experiencedvarying degrees of illiquidity, volatile currency exchange rates, reducedeconomic activity, and in some instances, war, revolution or insurrection.  The Company may be adversely affected for theforeseeable future by economic conditions in these regions, although it is notpossible to determine the extent of the effects.

 

6

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**Note 8 – Subsequent events**

 

The company granted stock options pursuant to a consulting agreementdated July 7, 2005 to an individual.  As compensation for servicesincluding sales and marketing for the Company’s products, 100,000 options topurchase common stock were granted under a three year incremental vestingschedule.  The value of the options on the grant date is $313,480 and willbe recognized ratably over the exercise period.  The value was calculatedusing the Black-Scholes option pricing model with the following assumptions:

 

| ** **                       | ** ** | **July 7, 2005** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| Exercise Price                   |       | $                     | 3.30       |   |
| Average risk-free interest rates |       | %                     | 3          |   |
| Volatility                       |       | %                     | 224        |   |
| Time to Expiration (in years)    |       | 3                     |       |

 

During the quarters ended June 30, 2005 and 2004, sales to a singlecustomer were 75.88 and 83.78% of total sales, respectively.

 

7

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**Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations**

 

THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTSOF MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE HAPPENING OFFUTURE EVENTS ARE NOT BASED UPON HISTORICAL FACT.  FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIEDBY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS “MAY”, “SHALL”, “COULD”, “EXPECT”,“ESTIMATE”, “ANTICIPATE”, “PREDICT”, “PROBABLE”, “POSSIBLE”, “SHOULD”, “CONTINUE”,OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSETERMS.  THE FORWARD-LOOKING STATEMENTSSPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN COMPILED BY OUR MANAGEMENT ONTHE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BEREASONABLE.  OUR FUTURE OPERATINGRESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, ORWARRANTY IS TO BE INFERRD FROM THESE FORWARD-LOOKING STATEMENTS.

 

THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTSSPECIFIED IN THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS ANDARE SUBJECT TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE,INDUSTRY, AND OTHER CIRCUMSTANCES.  AS ARESULT, THE IDENTIFICATION NAD INTERPRETATION OF DATA AND OTHER INFORMATION ANDTHEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS AND AMONG OTHER REASONABLEALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE ETENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARYSUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS, AND ACCORDINGLY, NOOPINION IS EXPRESSED ON THE ABILITY TO ACHIEVE THE RESULTS OF THESE FORWARD —LOOKINGSTATEMENTS. NO ASSURANCE CAN BE GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TOTHE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION AREACCURATE, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKINGSTATEMENTS.

 

The following discussion should be read in conjunction with the historical financial statements of R.G. Global Lifestyles, Inc., including Form 10-KSB as of March 31, 2005, and those of its predecessor, the L.L. Knickerbocker Company, Inc., and notes thereto.

 

**Overview**

 

R.G. Global Lifestyles, Inc. (the “Company”) was originallyincorporated in California on July 12, 1985 as International Beauty SupplyLtd.  The name of the corporation waschanged on May 28, 1993 to L.L. Knickerbocker Co., Inc., and thereafter, onJanuary 9, 2003, to R.G. Global Lifestyles, Inc.  On July 28, 2004 the Company entered into anagreement with Amerikal International Holding, Inc. (“AIH”) whereby the Companyacquired all of the issued and outstanding common stock of AIH in exchange for1,900,000 voting common shares of the Company’s common $0.001 par value commonstock.  The acquisition closed and theshares were exchanged on July 28, 2004. At the close of the transaction, the former shareholders of AIHcontrolled the Company’s common stock. The common stock issued in the course of the reverse merger transactionwas recorded at the net book value of the Company’s assets on the acquisitiondate. As allowed under SFAS 141, “Business Combinations,” we treated thisacquisition as a recapitalization for accounting purposes, in a manner similarto reverse acquisition accounting.

 

As a result of the merger, the Company now owns and operates AmerikalNutraceutical Corporation, a California corporation, (“ANC”) as a wholly-ownedsubsidiary.  ANC’s business is tomanufacture, sell and distribute dietary supplements and health and beauty aidproducts.  The primary geographic markets

 

8

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for our products are in South East Asia and Asia, including Singapore,Indonesia, Malaysia, Thailand, Taiwan, Hong Kong and Japan.  During 2005, in order to diversify its marketand customer base, ANC launched a program of Internet marketing for itsLifeDerma TM brand of products.  The focusof the Internet marketing program was to generate new customers in the UnitedStates (the “U.S.”).

 

In October, 2004 we formed Aquair, Inc., a California corporation, todiversify the Company’s product-lines. Through Aquair, Inc., the Company has acquired the rights to market anddistribute a patented water generator that precipitates drinking water from theair. The water generating machine has been tested in various locations.  During the quarter ended June 30, 2005, theCompany has made minimal sales of units to customers in the U.S. and Asia.

 

During the fiscal quarter ending December 31, 2004, we entered into adistribution agreement to distribute the Company’s products in Indonesia.  The purchase price paid for the distributionrights was $300,000 in cash, which represents the fair value of thedistribution rights.  We recorded thispurchase price as an asset and will amortize the asset over the period of itsestimated benefit period of three years.

 

In addition to the foregoing, in January 2005 the Company issued200,000 of restricted common stock to acquire rights to an Internet portalknown as On Line Surgery.  Subsequently,in the quarter ended June 30, 2005 the Company formed On Line Surgery, Inc., aCalifornia Corporation, to develop the advertising potential of this web portalfor the Company’s existing and future nutraceutical products, as well as togenerate advertising revenue from physicians and other potential customers.  On Line Surgery, Inc. had not begunoperations during the quarter ended June 30, 2005.

 

Also during June 2005, Aquair, Inc. entered into an agreement withMunters, Inc., a Swedish manufacturer of water generating equipment.  Pursuant to this Agreement, Aquair, Inc. hasthe right to distribute and sell Munters water generating equipment products tothe commercial residential building industry, government agencies, shippingindustry and oil and gas industry.  Thisagreement also grants Aquair, Inc. the right to bottle water generated by Muntersnew patented technology. This agreement is effective worldwide, with theexclusion of Thailand, Indonesia, Singapore and Malaysia.  In connection with this agreement, Louis L.Knickerbocker, Chairman of the Board and Chief Executive Officer of theCompany,   advanced the good faith deposit of $50,000toward the required purchase of equipment under the agreement.  The Company reflected this deposit as anasset and recorded the note payable to the related party as a liability of thesame amount.

 

In January 2005, we received clearance from the NASD for quotation ofour common stock on the Over the Counter Bulletin Board (the “OTCBB”) under thesymbol “RGBL.”

 

**Going Concern**

 

The accompanying consolidated financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the U.S., which contemplate that the Company willcontinue in business as a going concern. During the three (3) months ending June 30, 2005 we experienced a lossfrom consolidated operations in the amount of ($75,150).  Through our wholly owned subsidiary, AmerikalNutraceutical Corporation, we have developed a source of revenue from the saleof American-made dietary supplements and health and beauty-aid products inSouth East Asian and Asian countries, as well as having introduced our productsto the U.S. market through the use of a test marketing program on the Internet.  Through our wholly owned subsidiary, Aquair,Inc., we anticipate future sales and revenues from a patented water generatorand the distribution of water-generating equipment under the recently-concludedAgreement with Munters Corporation; however, to date only minimal sales havebeen generated from these product-lines, as selling activity has just begun inthis fiscal quarter. We also anticipate revenues to be generated in the futurefrom advertising sales under our recently formed subsidiary On Line Surgery,Inc., which is in the process of development and has not yet commencedoperations.  The consolidated financialstatements do not include any adjustments that might result from 

 

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the outcome of any uncertainty as to theCompany’s ability to continue as a going concern.  These consolidated financial statements alsodo not include any adjustments relating to the recoverability andclassification of recorded asset amounts, or amounts and classifications ofliabilities that might be necessary should we be unable to continue as a goingconcern.

 

In July 1, 2005 the Company executed apromissory note (the “Note”) for $600,000 in favor of Karim Joseph Murray andLarbi John Murphy, shareholders of the Company, who loaned the Company saidfunds to be used as working capital. The note accrues interest at a rate of 8%per annum and matures 270 days from the date of the note.

 

**Critical Accounting Policy and Estimates**

 

Our Management’s Discussion and Analysis of Financial Condition andResults of Operations section discusses our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the U.S.  The preparation ofthese consolidated financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the consolidated financial statements, and the reported amounts ofrevenues and expenses during the reporting period.  On an ongoing basis, management evaluates itsestimates and judgments, including those related to revenue recognition,accrued expenses, financing operations, and contingencies.  Management bases its estimates and judgmentson historical experience and on various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.  The mostsignificant accounting estimates inherent in the preparation of ourconsolidated financial statements include estimates as to the appropriatecarrying value of certain assets and liabilities which are not readily apparentfrom other sources, primarily stock-based compensation.  The methods, estimates and judgments we usein applying these most critical accounting policies have a significant impacton the results we report in our consolidated financial statements.

 

**Equity-Based Compensation**

 

We record stock-based compensation to our officers, directors, andoutside consultants at the fair market value of the services in general andadministrative expense.  In 2004, priorto being approved for quotation of our Company stock on the OTCBB, we recordedthe expenses of stock based compensation issued to related parties (officersand directors), as well as stock based compensation issued to consultants, at$0.05 per share of common stock based upon a valuation study conducted at therequest of the Board of Directors. Subsequent to the listing of the Company commonstock on the OTCBB, we issued shares of our restricted common stock to twoattorneys in exchange for legal services.  As of the date of this share issuance in March2005, the Company’s common stock was trading at approximately $1.51 per share,and we therefore recorded the stock issuance as of that date as an expense atthe fair market value of the stock issued.

 

The Company most recently granted stock options pursuant to aconsulting agreement dated July 7, 2005 among the Company,  Aquair, Inc. and Hon. Brig. Gen. SteveRitchie.  In exchange for sales andmarketing services to be rendered for Aquair, Inc. and as partial compensationfor services, General Ritchie was granted an option to purchase 100,000 sharesof the Company’s common stock, vesting incrementally over three years.  The exercise price of said options is $3.30,the fair market value as of the date of grant.

 

We have not yet adopted a plan for issuance of stock options toemployees or others.  Although managementbelieves its estimate regarding the fair value of the services to bereasonable, there can be no assurance that all of the subjective assumptionswill remain constant, and therefore the valuation of the services may not be areliable measure of the fair value of stock compensation or stock basedpayments for consulting services.

 

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**Liquidity and Capital Resources**

 

We had cash and cash equivalents of $28,434 at June 30, 2005.  We also had $459,516 of accounts receivable,prepaid expenses of $11,624, and $176,489 in inventory, making our totalcurrent assets at June 30, 2005 equal to $676,063.  We also had the following long-term assets:$18,240 in fixed assets net of depreciation, $210,000 of intangibledistribution rights and Web portal rights net of amortization, and $127,100 ofcash deposits held by others. Our total assets at June 30, 2005 were$1,031,403.

 

Our total current liabilities were $469,479 as of June 30, 2005. Thistotal consisted of $269,550 of accounts payable, $50,000 of advance payable toa related party, and $149,929 of income taxes payable and accruedexpenses.  The total of currentliabilities also represented the total liabilities of the Company as of June30, 2005.

 

The Company has financed its operations through cash generated fromsales of product through its wholly owned subsidiary Amerikal NutraceuticalCorporation.  During the three monthsended June 30, 2005 we generated $827,736 of cash from operating activities, ofwhich we used $400,533 to pay direct costs of operations and other expenses of$499,847, resulting in a net loss from operations of ($72,644), of which$26,202 was attributable to depreciation and amortization expenses.  During the quarter ended June 30, 2005, weincurred a new liability of $50,000 in a non-cash transaction when a relatedparty advanced funds on behalf of the Company. We used $747 of net cash to acquire fixed assets, and increased ourdeposits held by others by $60,000. We also made payments on income taxespayable in the amount of $129,551.  Ourtotal cash used by operating activities was $180,480.

 

For the same period ending June 30, 2004, the Company had experienced anet income from operations of $415,843, based upon total revenues of$1,732,038.  The primary reason for thereduced revenues in the current quarter is that the Company made the decisionto implement a strategy to diversify its customer and market base, whichdiverted personnel and attention away from traditional markets and customers.Also in the period ending June 30, 2004, the Company had $84,699 of advertisingand marketing expenses, as compared to $176,778 of similar expenses in thecurrent fiscal quarter.

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDING JUNE 30, 2005 ASCOMPARED TO THE THREE MONTHS ENDING JUNE 30, 2004.**

 

**Revenues and Cost of Sales**.

 

During the three months ending June 30, 2005 the Company generatedgross profit of $427,203 on net product sales of $827,736 and cost of salestotaling $400,533, compared to $914,376 of gross profit on net product sales of$1,732,038 and costs of sales of $817,662 in the three months ending June 30,2004.

 

**Operating Expenses.**

 

Our operating expenses for the three months ended June 30, 2005 were$499,847 compared to $328,816 for the three months ended June 30, 2004.  For both periods, we incurred expenses forgeneral management and legal fees related to continuing operations.  For the three months ended June 30, 2005, theCompany expended $18,000 in rent paid to a related party, and approximately$15,500 in general and administrative expenses related to the acquisition ofintangible rights to the web portal known as On Line Surgery, Inc, and theformation of its new subsidiary of the same name, as well as legal costsincurred in connection with the negotiation and execution of the ExclusiveReseller Agreement with Munters Corporation. During the same period, the Company’s wholly owned subsidiary, Aquair,Inc., expended $22,346 in general and administrative expenses related tooperations and the acquisition of rights to distribute the patented watergenerator. The Company’s principal operating subsidiary Amerikal NutraceuticalCorporation incurred an additional $34,138 in General and Administrativeexpenses during the quarter ended June 30, 2005. The Company also incurred$70,546 of professional fees during the three months ending June 30, 2005,primarily related to the expense of conducting the 

 

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annual audit and preparation of the filing of the Company’s Form 10-KSBfor the fiscal year ended March 31, 2005. During the three months ended June30, 2004, the Company incurred general and administrative expenses of $125,365,of which $22,810 was attributed to professional fees.

 

**PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.**

 

Over the next twelve months, we will continue to operate ANC as a wholly-owned subsidiary, to continue to market and distribute high quality, American-made dietary supplements and health and beauty-aid products in Asian countries, and we plan to continue to diversify our market and customer base by promoting the sale of similar products in the U.S.  In addition to producing and selling products directly, the Company has previously used contract manufacturers, and has also acquired certain rights to distribute products manufactured by others.  The Company intends to expand its sales by use of Internet marketing and the continued use of an infomercial marketing plan. Through our wholly owned subsidiary Aquair, Inc., we plan to distribute water generating equipment in the U.S and Asia that creates drinking water from the air.

 

As of June 30, 2005 we had cash and cash equivalents of $28,434, and accounts receivable in the amount of $459,516.  To fully execute our business plan for the next twelve months we may need to raise additional funds to meet increased demand for the manufacture and distribution of our products.  The Company has not yet decided upon the specific method of raising additional working capital that may be required to meet its objectives.  Additional working capital funds may be obtained through various means, including the future sale of the Company’s equity securities in private or public offerings, debt financing, hybrid financing, trade financing, receivables financing, factoring or any combination of credit, equity and/or debt which the Company can obtain on terms deemed favorable to the Company by the Board of Directors. In furtherance of the anticipated need to raise additional working capital, the Board of Directors has filed a Certificate of Determination of the rights and preferences concerning the Company’s authorized but unissued preferred stock.  The Company has not yet embarked upon a plan for the raising of additional working capital.

 

The Company’s principal operating subsidiary, ANC, is engaged in continuing product research and development relating to the production, distribution and marketing of its natural health and beauty aid products.  In addition, the Company has concluded its Internet based test marketing program for the Company’s LifeDerma products, but continues its research and testing related to our new operating subsidiary, Aquair, Inc.  As a result of our planned growth, we anticipate that the Company will need to purchase additional plant and equipment over the next twelve months, but that such purchases and the amounts are contingent upon our business success and overall market conditions.  Similarly, we may need to significantly increase our workforce to respond to growing business needs, but the amounts and timing cannot be ascertained with certainty at this time.

 

**Off-Balance Sheet Arrangements.**

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect upon our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

 

**Item 3. Controls and Procedures**

 

As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures at the end of the period covered by this report.  The evaluation was carried out by our Audit Committee under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (the “Certifying Officers”).   Based upon this evaluation, the Certifying Officers have concluded that the design and 

 

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operation of our disclosure controls and procedures are effective.  Such disclosure controls and procedures are designed to ensure that material information is made known to the Certifying Officers, particularly during the period in which this report was prepared.  The Certifying Officers have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report and believe that our disclosure controls and procedures are effective based on the required evaluation.  During the period covered by this report, there were no changes in internal controls that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

**PART II —OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Presently, theCompany is not a party to any litigation. However, the Company is in receipt of a formal demand letter fromUniversal Communications Systems, Inc. and Air Water alleging defamation, fraud,interference with prospective business arrangement, attempted restraint oftrade, and theft of proprietary property, and seeking $180,000 in damages andattorney’s fees. The Board of Directors has consulted with legal counsel whohas indicated that they believe the claims presented to be without merit andtherefore has determined to strongly contest these claims.  Other than the foregoing, the Company is notaware of any litigation, either pending or threatened, and has not been thedefendant or plaintiff in any litigation since the discharge from bankruptcyattributable to its predecessor L.L. Knickerbocker Company, Inc.

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

Other than the grant to General Steve Ritchieof 100,000 stock options, as discussed herein in Part I, Item 2, there havebeen no grants or unregistered sales of equity securities during this reportingperiod.

 

**Item 3.  Defaults Upon Senior Securities**

 

None.

 

**Item 4. Submission of Mattersto a Vote of Security Holders**

 

None.

 

**Item 5. Other Information**

 

None.

 

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# **Item 6. Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                             |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **         | ** ** | ** **                                                                                                                                                                                                  |
| 3.1                |       | Articles of Incorporation of International Beauty Supply Ltd. (“IBS”) filed July 12, 1985.(1)                                                                                                     |
| 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.(3)                                                                                                              |
| 3.6                |       | Certificate of Amendment of the Articles of Incorporation of LLK,  filed June 19, 1996.(3)                                                                                                                  |
| 3.7                |       | Certificate of Amendment to the Articles of Incorporation of LLK  filed April 22, 1999.(2)                                                                                                                  |
| 3.8                |       | Certificate of Amendment to the Articles of Incorporation of the L.L. Knickerbocker Company Inc. filed January 9, 2003.(3)                                                                                  |
| 3.9                |       | Bylaws of the L.L. Knickerbocker Company Inc.(4)                                                                                                                                                            |
| 10.1               |       | Consulting  Agreement among the Company, Aquair, Inc. and Hon. Brig.                                                                                                                                        |
|               |       | General  Steve Ritchie, dated July 18, 2005, filed herewith.                                                                                                                                                |
| 10.2               |       | Promissory  Note for $600,000 executed by the Company in favor of Karim Joseph Murray and  Larbi John Murray, dated July 1, 2005, filed herewith.                                                           |
| 31.1               |       | Certification  of Chief Executive Officer Pursuant to the Securities Exchange Act of 1934,  Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, filed herewith. |
| 31.2               |       | Certification  of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934,  Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, filed herewith. |
| 32                 |       | Certification pursuant to 18  U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley  Act of 2002, filed herewith.                                                                    |

 

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(1) Incorporated byreference to the L.L. Knickerbocker Co., Inc. Form SB-2 RegistrationStatement No. 33-85230-LA as filed on October 13, 1994.

(2) Incorporated byreference to L.L. Knickerbocker Co., Inc. Form 10-K as filed onApril 14, 2000.

(3) Incorporated byreference to the Company’s Form 10-KSB, as filed on June 29, 2005.

(4) Incorporated byreference to the L.L. Knickerbocker Co., Inc. Annual Report onForm 10-KSB as filed on March 29, 1995.

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
| R G Global Lifestyles, Inc. |       |                     |       |             |
|-----------------------------|------------|--------------------------|------------|------------------|
|                        |       |                     |       |             |
| **Signature**               | ** ** | **Title**                | ** ** | **Date**         |
|                        |       |                     |       |             |
| /s/ Louis L. Knickerbocker  |       |                     |       |             |
| Louis L. Knickerbocker      |       | Chairman of the Board,   |       | August 11, 2005  |
|                        |       | Chief Executive Officer  |       |             |
|                        |       |                     |       |             |
| /s/ William  C. Hitchcock   |       |                     |       |             |
| William C.  Hitchcock       |       | Chief  Financial Officer |       | August 11,  2005 |

 

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