UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
|X| Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Fiscal Year Ended December 31, 2004.
| | Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from --- to ---
Commission file number: 000-31883
PROTON LABORATORIES, INC.
(Name of small business issuer in its charter)
Washington 91-2022700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1135 Atlantic Avenue, Suite 101
Alameda, CA 94501
(Address of principal executive offices) (Zip Code)
(510) 865-6412
Issuer's telephone number
Securities registered under Section 12(b) of the Act:
Title of Each Class: Name of exchange on which registered:
None. None.
Securities registered under Section 12(g) of the Act:
Common Stock, $0.0001 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 Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes |X| | | No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
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this Form 10-KSB or any amendment to this Form 10-KSB. |X|
Registrant's revenues for its most recent fiscal year: $379,989
The aggregate market value of the common stock held by non-affiliates of
the registrant on March 30, 2005, based on the last price which was $0.40 per
share on March 30, 2005, was $1,900,400. On March 30, 2005, the closing bid
price on our common stock on the OTCBB was $0.38.
On March 30, 2005, the registrant had outstanding 12,975,000 shares of
Common Stock, $0.0001 par value per share. However, 376,500 of those shares
have not been certificated as of April 12, 2005.
Transitional Small Business Disclosure Format: Yes | | No |X|
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TABLE OF CONTENTS
PART I PAGE
Item 1 Description of Business 4
Item 2. Description of Property 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters and Small Business Issuer Purchases of Equity
Securities 13
Item 6. Management's Discussion &Analysis 16
Item 7. Financial Statements 19 and F-1
Item 8. Changes In and Disagreements with Accountants
On Accounting and Financial Disclosure 19
Item 8A. Controls and Procedures 19
Item 8B. Other Information 20
PART III
Item 9. Directors and Executive Officers of the Registrant 20
Item 10. Executive Compensation 22
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 24
Item 12. Certain Relationships and Related Transactions 25
Item 13. Exhibits 26
Item 14. Principal Accountant Fees and Services 26
SIGNATURES 28
FINANCIAL STATEMENTS F-1 and 19
EXHIBITS 28
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
Our business is marketing functional water systems. In March 2004 we filed
an amendment to our Articles of Incorporation to change our name to Proton
Laboratories, Inc. Our former name was BentleyCapitalCorp.com, Inc. In this
Form 10-KSB, we refer to ourselves as "Proton", "We", Us" and "Our." References
to us in this Form 10-KSB include our wholly-owned subsidiary which also changed
its name in April 2004. The new name of our subsidiary is Water Science, Inc.
The former name of our subsidiary was Proton Laboratorie-s, Inc.
Our executive offices are located at: Proton Laboratories, Inc., 1135
Atlantic Avenue, Suite 101, Alameda, CA 94501, tel. (510) 865-6412, fax: (510)
865-9385. Our Web site is www.protonlabs.com.
Our growth is dependent on attaining profit from our operations and our
raising capital through the sale of stock or debt. There is no assurance that
we will be able to raise any equity
financing or sell any of our products at a profit.
Our functional currency is the U.S. dollar. Our independent auditors made
a going concern qualification in their report dated March 7, 2005, which raises
substantial doubt about our ability to continue as a going concern.
Our stock is traded on the OTCBB. Our trading symbol is "PLBI."
CORPORATE HISTORY
In November 2002, we entered into an Agreement and Plan of Reorganization
whereby Proton Laboratories, LLC, a California limited liability company merged
with and into VWO I Inc., our wholly owned subsidiary (the "Merger"). As a
result of the Merger, Proton Laboratories, LLC's sole owner, Edward Alexander,
exchanged 100% of his ownership of Proton Laboratories, LLC for 8,750,000 shares
of our common stock, and we cancelled the similar amount of 8,750,000 shares of
our common stock that Mr. Alexander had purchased from Michael Kirsh and Brian
Gruson in June 2002.
VWO I Inc. changed its name to Proton Laboratorie-s, Inc. as part of the
Merger, and we subsequently changed its name again to Water Science, Inc. in
April 2004. Proton Laboratories, LLC itself was incorporated in February 2000
in the State of California. Proton Laboratories, LLC did not begin operations
until January 2001 when Mr. Alexander contributed inventory and property and
equipment to Proton Laboratories, LLC.
The consideration exchanged pursuant to the Merger was the result of
negotiations between us and Proton Laboratories, LLC. However, no appraisal was
done. In evaluating Proton Laboratories, LLC as a candidate for the proposed
Merger, we used criteria such as the
4
value of the assets of Proton Laboratories, LLC, Proton Laboratories, LLC's then
current business operations and anticipated operations, and Proton Laboratories,
LLC's business name and reputation. We determined that the consideration for
the Merger was reasonable.
OUR BUSINESS--THE BACKGROUND OF FUNCTIONAL WATER
Our business is the marketing of residential and commercial "functional
water systems." "Functional water" is water that has been processed through an
electrolytic ion separation process or electrolysis process and has a wide array
of functional properties due to its unique characteristics. Our functional
water systems restructure tap water into one type of water that is alkaline in
concentration and one type of water that is acidic in concentration. We believe
that the functional water systems that we market will have applications in a
large variety of industries, such as corporate agriculture, organic agriculture,
food processing, medicine and dentistry, dermatology, heavy industry, mining,
environmental clean-up, product formulations and beverages.
We are an exclusive importer and master distributor of functional water
systems that are manufactured by Matsushita Electric Corporation of America. We
utilize functional water intellectual property under licensing agreements. We
supply consumer products related to functional water. We consult on projects
utilizing functional water. We facilitate knowledge about functional water
between the manufacturer and industry, and we act as educators about the
benefits of functional water. We are a provider of systems that produce
functional water, also called "electrolyzed water" or "functional electrolyzed
water." Functional water is water that has been restructured through the
process of electrolysis. Electrolysis forces a separation to occur in the
electrolytes that are present in the water molecules. Through the process of
creating functional water, regular tap water can be restructured into two
separate types of water. For instance, tap water can be restructured into one
type of water that is alkaline in concentration and one type of water that is
acidic in concentration.
We believe that water with these unique functional properties is desirable
for a number of reasons. Water with smaller clusters of molecules has a lower
surface tension. With a lower surface tension, water may have improved
hydrating, permeating and solubility properties. These properties may enhance
the overall functional effectiveness of water. The separation of the alkaline
and acidic properties found in water provides the water with functional
abilities. For example, functional acidic water has disinfecting abilities to
meet a wide array of disinfecting requirements in food processing procedures.
Functional alkaline water makes an excellent drinking water due to improved
hydration.
OUR BUSINESS--SYSTEMS AND MARKETS
We market functional water systems to the residential and commercial
markets. For the residential market, we market functional water systems that
are used to produce a health-beneficial, alkaline-concentrated drinking water.
For the commercial market, we market commercial-grade functional water systems
that are used in applications ranging from food preparation to hospital
disinfection. Our goal is to take our functional water technology and market it
throughout North America.
5
Our business model envisions us as: a supplier of technology for functional
water applications; a supplier of hardware for functional water systems; a
provider of intellectual property for functional water systems under licensing
agreements; a supplier of consumer functional water products; consultants to
industries requiring functional water; facilitators between Japanese functional
water manufacturers and industrial users in the U.S.A.; and educators of
academia, government and industry on the benefits of functional water.
OUR BUSINESS--SCIENCE
"Functional water" is a term that has been assigned to a new category of
water. Functional water has a wide array of functional properties due to its
unique characteristics. We believe the uses for this type of water are far
reaching, since we are identifying new applications and uses for functional
water on an ongoing basis. Functional water systems are capable of producing
the following types of functional water:
Ionic-Structured Water. Ionic-structured water is electrolyzed drinking
----------------------
water that is alkaline-concentrated and utilizes smaller molecular clusters than
regular water for improved hydration and solubility. Ionic structured water is
smooth to the palate.
Electro-Structured Water. Electro-structured water is water that is
------------------------
anti-microbial in nature and may be effective against virus, bacteria, fungus,
mildew and spores. This water may have a wide array of disinfectant uses.
Derma-Structured Water. Derma-structured water is electrolyzed low pH
----------------------
water that has astringent and disinfecting properties and may have a wide array
of cosmetic, dermatological and post-plastic surgery applications that may
minimize infections and scarring and expedite healing.
FUNCTIONAL WATER RESEARCH IN ACADEMIA
The process to produce functional water was developed by Scottish inventor
Michael Faraday in Boston, Massachusetts in 1834. In 1929, the value of
electrolytic water separation to produce water with functional properties was
realized in Japan. Japanese researchers have since taken this process, created
a wide array of functional waters and have introduced this technology to food
processing, hospital disinfection, wound care, agriculture, organic agriculture
and food safety in Japan. During recent years, functional water applications
have been studied by universities in the U.S.A. and Canada. For example, in a
University of Georgia study published in the Journal of Food Protection in 1999
entitled "Inactivation of Escherichia coli O157:H7 and Listeria monocytogenes on
Plastic Kitchen Cutting Boards by Electrolyzed Oxidizing Water," the immersion
of plastic kitchen cutting boards in electrolyzed oxidizing water was found to
be an effective method for inactivating food-borne pathogens such as E. coli.
Other studies at the University of Georgia have looked at the efficacy of
electrolyzed oxidizing water for inactivating E. coli, Salmonella and Listeria
and have determined that such water may be a useful disinfectant. A University
of Georgia study entitled "Antimicrobial effect of electrolyzed water for
inactivating Campylobacter jejuni during poultry washing" demonstrated that
electrolyzed water is not only effective in reducing the populations of C.
jejuni on chicken, but also may be
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effective in the prevention of cross-contamination of processing environments.
OUR BUSINESS--FUNCTIONAL WATER SYSTEMS
Residential Systems. The residential countertop, functional water systems
-------------------
produce water that scientists believe contains more wellness and
health-beneficial properties than regular tap water (see, "Electrolyzed-Reduced
Water Scavenges Active Oxygen Species and Protects DNA from Oxidative Damage,"
Biochemical and Biophysical Research Communications, Vol. 234, No. 1, pp.
269-274 (1997); and, Hanaoka, K., "Antioxidant Effects Of Reduced Water Produced
By Electrolysis Of Sodium Chloride Solutions," 31 Journal of Applied
Electrochemistry 1307-1313 (2001)). Generally, the residential countertop system
sits next to the kitchen faucet, and through the use of a diverter, allows tap
water to be routed through the system. The water is then processed through a
charcoal filter where chlorine and sediments are removed. The filtered water
then proceeds to the electrolysis chamber that is made up of electrodes and
membranes. A positive and negative electrical charge is passed through the
electrodes. The minerals that are found in the filtered water are attracted to
opposite electrodes. For example, the alkaline minerals (minerals with
positive(+) properties that include calcium, magnesium, sodium, manganese, iron
and potassium) are attracted to the negatively charged (-) electrode. The acidic
minerals (minerals with negative (-) properties include nitric acid, sulfuric
acid and chlorine) are attracted to the positively-charged (+) electrode.
Through this mineral separation process, two separate types of water are formed,
which are water with alkaline-concentrated minerals, and water with
acidic-concentrated minerals. Each type of water is held in a separate chamber
in the residential countertop system. The alkaline-concentrated water may be
consumed for drinking and cooking purposes, while the acidic-concentrated water
may be used in a topical, astringent medium.
Commercial Systems. We are in preparation to market commercial functional
------------------
water systems to the food processing, medical and agricultural industries. The
system for the food processing industry includes: (1) a hand disinfectant system
for proper hand washing, and (2) an anti-microbial water production system for
general sterilization and disinfectant needs. We also intend to market similar
systems to the medical industry. For the agricultural industry, we intend to
sell functional water systems to organic food growers who desire to use
functional water to replace the use of pesticides, fungicides, herbicides and
chemical fertilizers. Our commercial functional water systems produce
approximately one gallon per minute of electrolyzed alkaline and acidic waters.
For the food processing industry, the alkaline water may be used as an effective
medium for removing pesticides from agricultural products, while the acidic
water may be used as anti-microbial water. For the hospital industry, the
alkaline water may be used as an effective medium in removing protein buildup
from surfaces, while the acidic water may be used as anti-microbial water. For
the organic agricultural industry, the alkaline water may be used for plant
growth and as a solid nutrient, while the acidic water may be used as a
substitute for fungicides, pesticides, herbicides and sporicides.
OUR BUSINESS--MARKETING STRATEGY
Our objectives are:
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- To create a revenue stream through our marketing of residential
systems. These sales may be made through independent distributors,
network marketing, infomercials, mail order, retail sales and direct
sales generated through word-of-mouth referrals.
- To create a revenue stream through the sale of disinfectant
systems to the food processing industry.
- To create a revenue stream through licensing agreements based
upon a wide array of applications for functional water that will be
targeted to specific industries. For example, electrolyzed water may
be used in the beverage industry to extract flavors from their natural
sources, such as extracting tea from tea leaves for use in bottled
iced tea. Electrolyzed water may also be used in the formulation of
nutraceutical-type dietary supplement products in the health-food and
dietary supplement industries.
To continue the development of functional water applications for industries
that are currently dependent upon chemicals as a processing medium. In addition
to the food processing, medical and agricultural markets, we intend to develop
market-driven applications for functional water, provide the science to these
applications, publish the developments in scientific and industrial circulars
and perform consulting functions to industries that can benefit from functional
water. We intend to hire engineers from Japan to design, engineer and assemble
prototypes of functional water systems that are built for specific industrial
needs. We believe that by performing these functions ourselves, we will have
all of the necessary tools to become a leading provider of functional water
technology.
OUR BUSINESS--GOVERNMENT REGULATIONS
Our functional water systems are, or may be, subject to regulation by a
variety of federal, state and local agencies, including the Consumer Product
Safety Commission (CPSC") and the Food and Drug Administration ("FDA").
Our hand disinfectant functional water system may be subject to pre-market
approval by the FDA under Title 21 of the Code of Federal Regulations. We would
expect such an approval process to take approximately 90 days after filing with
the FDA, although there is no assurance that we will be able to obtain
pre-market approval from the FDA. We have not made any applications to the FDA
yet. We have engaged the consulting services of Environ Health Associates Inc.
to assist us with our FDA application for the hand disinfectant. We anticipate
filing the FDA application in the near future. Environ Health Associates Inc. is
familiar with a modern food safety procedure known as Hazard Analysis and
Critical Control Point ("HACCP"). HACCP is a food safety procedure that focuses
on identifying and preventing hazards that could cause food-borne illnesses. We
believe that complying with the HACCP procedure may assist us in getting FDA
approval, since the FDA generally encourages retailers to apply HACCP-based food
safety principles, along with other recommended practices.
At such time as we may obtain FDA approval for the hand disinfectant, we
then would
8
request that the system be tested by Underwriter's Laboratories and the National
Sanitation Foundation.
OUR BUSINESS--MARKETING AND DISTRIBUTION
We intend to develop systems for the following markets:
- Hand disinfection for the food processing, fast food, medical,
dental, personal care and general health care industries.
- Residential, countertop drinking water electrolysis systems.
- Commercial functional water systems, such as metal mining and
refining, wine grape mildew treatment, and the formulation of dietary
supplement products.
Hand Disinfection. After we obtain FDA approvals for the hand disinfection
-----------------
system, we plan to introduce the device and what we believe to be its
operational simplicity, user-friendliness, high efficacy and affordability,
through industrial circulars where hand disinfection is of a primary concern.
We also intend to arrange with a leasing company to lease the hand disinfectant
system to the fast food industry. A large part of our marketing efforts will be
directed to educating our target markets about functional water. We plan to
write and publish articles through industrial media, disinfection forums, trade
shows and documentary-type films that may be aired through CNN, PBS and Voice of
America introducing a new and novel method for hand disinfection. We intend to
handle all inquiries through a toll-free number.
We plan to hire a public relations company that provides the news media
with documentary videos for the purpose of educating the public on the
technology, processes and applications that we market. The videos will cover
the following subjects:
- The use of functional electrolyzed water for food safety.
- The use of functional electrolyzed water for effective
disinfection in hospitals and clinical settings.
- The use of functional electrolyzed water for agriculture and organic
agriculture.
- The use of functional electrolyzed water as a wellness medium.
Residential Countertop Units. The first step towards the marketing and
----------------------------
distribution of residential countertop units is to develop a national product
distribution program through network marketing, mail order catalogs sales,
infomercials, independent distributor channels and word of mouth sales. Since
we understand that the demographics in these sales channels is predominately
composed of females in the age groups of 35-60, we intend to concentrate on this
market segment. The second step in the marketing and distribution of
residential countertop units is to introduce a simplified, lower price-point
system that will be introduced through retail outlets under a series of private
labels.
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Commercial Functional Water Systems. In addition to marketing the
-----------------------------------
residential countertop systems, we plan to develop marketing plans for
commercial systems. We may enter into agreements with companies to act as
distributors of our functional water systems. We may also grant exclusive rights
to companies to use our systems in specific industries for specific applications
in exchange for royalties.
We presently have 12 product distributors. We are presently seeking 108
additional product distributors. In 2004 we had a radio advertising campaign to
advertise our residential consumer products.
OUR BUSINESS--COMPETITION
Our competitors include several entry-level importers of systems from Japan
and Korea. We believe that we have several distinctive advantages over
entry-level distributors:
We and our consultants, who are scientists, business people and advisers,
are individuals who have helped pioneer the understanding, documentation,
representation and structuring of the technology and its relevance to the U.S.A.
during the past nine-year period through various companies and organizations.
These consultants are the leaders in the U.S.A. in the knowledge and
representation of functional water.
We have been able to create a strong platform of specialists to advance
functional water technology in the U.S.A., which would be difficult for others
to replicate due to our high level of focused commitment and dedication.
We have close working relationships with our Japanese counterparts which
have been developed and nurtured over the past ten-year period. These members
are highly respected within the Japanese electrolysis community and attend
annual conferences as invited speakers.
We have excellent working relationships with the Japanese manufacturers and
we are often relied upon to provide international perspectives to be used in the
refinement of their scientific, design and engineering thought processes to
create products that will be accepted on a global basis.
With our knowledge, experience and foresight into the electrolyzed water
industry, we are well-positioned to branch out on our own without reliance on
Japanese manufacturing, if necessary.
We have strategically positioned ourselves as the "go to" organization for
technology, hardware and informational support for the public.
Although the majority of competitors are small resellers, the one
significant competitor that we have is named Hoshizaki U.S.A., which is an
established U.S.A.-based Japanese company that has a substantial market presence
in refrigeration and icemakers. We expect that we may face additional
competition from new market entrants and current competitors as they
10
expand their business models, but we do not believe that any real strong
competitors are imminent for the foreseeable 3 to 4 year period, other than
Hoshizaki U.S.A.
To be competitive, we must assemble a strategic marketing and sales
infrastructure. Our success will be dependent on our ability to become a
formidable marketing and sales entity based upon the technology we have and our
ability to aggressively introduce this technology and its far-reaching benefits
through documentary videos and other methods of public relations.
OUR BUSINESS--CUSTOMERS AND VENDORS
MAJOR CUSTOMERS. During the year ended December 31, 2004, our sales to
----------------
three customers accounted for 37% of our total sales. As of December 31, 2004,
there were no amounts due from these customers. During the year ended December
31, 2003, sales to one customer accounted for 11% of total sales. As of
December 31, 2003, there were no amounts due from this customer.
MAJOR VENDOR. During the year ended December 31, 2004, our purchases from
-------------
three vendors accounted for 96% of total inventory purchases. As of December
31, 2004, amounts due to these vendors accounted for 54% of accounts payable.
During the year ended December 31, 2003, purchases from two vendors accounted
for 87% of total inventory purchases. As of December 31, 2003, amounts due to
these vendors accounted for 65% of accounts payable.
INTELLECTUAL PROPERTY
We plan to file patent applications for various functional water
applications. We may also obtain licenses from others. There can be no assurance
that our intellectual property rights, if any, will not be challenged,
invalidated or circumvented, or that any rights granted under our intellectual
property will provide competitive advantages to us. There can be no assurance
that our patent claims allowed on any future patents would be sufficiently broad
to protect our products.
EMPLOYEES
We currently have 3 full-time employees all of whom are in management
positions. None of our employees is subject to a collective bargaining
agreement. We believe that our employee relations are good.
OTHER DEVELOPMENTS IN 2004
We have done preliminary testing in the wine industry with respect to the
control of mildew on wine grapes in vineyards. Mildew on wine grapes is a
serious grapevine fungal disease. The tendency for mildew to grow on wine
grapes occurs, for example, in areas of Napa Valley where foggy conditions
prevail. If mildew is found on the wine grapes, then spraying with dusty sulfur
is done. Spraying with dusty sulfur will generally eliminate and control the
mildew on grapes. If this fungus is ignored, the wine grapes may spoil.
However, the long-term effects of sulfur exposure is unknown. The use of low pH
functional water may remove mildew
11
on wine grapes in a safe and efficacious, large scale manner. Our preliminary
review of this use of functional water indicates a complete elimination of
mildew on wine grapes in vineyards and the continued growth of healthy grapes.
We plan to continue this preliminary test using an automated functional water
sprayer.
We have done preliminary testing in the mining and refining industry with
respect to the effect of the use of functional water on heap leaching and
refining of precious metals.
We obtained, through a sublicense from Edward Alexander at no cost to us,
the North American rights to manufacture and distribute an electrolyzed
water-based antioxidant dietary supplement developed by MIZ Corporation, a
Japanese company specializing in advanced uses of electrolyzed water. We plan
to sell this product to the fitness, sports and wellness markets.
We have been developing a proprietary process allowing for electrolysis to
be applied to wine. The primary objective for this application is to allow for
a wine maker to have direct control over the aging process of wine such that it
allows a wine maker to shorten, complement or, if desired, bypass the wine aging
process. The test results that were achieved showed promise in creating the
"optimal" wine through a controlled process which provides a smooth texture to
the wine along with an enhancement to the various active properties of the wine.
We plan to file an FDA application for our hand disinfectant system and our
surface disinfectant system.
SUBSEQUENT EVENTS
In February 2005, MIZ Company, a Japanese company that owns four U.S.
patents whose subject matter is the electrolysis of water, assigned a 50%
ownership interest in those four patents to Mr. Alexander in consideration of
consulting services provided to MIZ Company by Mr. Alexander. Mr. Alexander has
agreed to allow us to exploit the four patents on a royalty-free basis. Since
MIZ Company and Mr. Alexander each has an ownership interest in the four
patents, either Mr. Alexander or the Japanese company could grant licenses to
others to use the four patents, and the Japanese company could exploit the four
patents by itself.
In March 2005, we proposed to engaged the services of J. P. Turner &
Company, L.L.C. for its best efforts to raise funds for us. We proposed to
issue 550,000 shares of our restricted common stock to J. P. Turner & Company,
L.L.C. as a non-refundable fee and we proposed to pay J. P. Turner & Company,
L.L.C. a sales commission of 10% on any funds raised and grant a warrant to J.
P. Turner & Company, L.L.C. to acquire our common stock in the amount of 10% of
the equivalent of the funds that are raised. Upon a successful money raise, we
proposed that J. P. Turner & Company, L.L.C. would act as our investment banker
for a fee of 4.5% of our restricted common stock as calculated immediately after
the funds are raised. This transaction is being finalized at this time. These
share have not been issued yet.
In March 2005, we issued a note payable in the amount of $164,000 for the
purchase of inventory. The inventory will be held by the lender as collateral
until the note is repaid in May 2005. We also agreed to pay $28,500, or
approximately 17%, in interest. In addition, we will issue to the lender 47,500
shares of common stock, which will be recorded as a $27,075 discount
12
valued on the date of issuance and amortized over the term of the note. These
shares are to be issued prior to the note's due date.
In January 2005, a shareholder advanced $40,000 to us. This advance bears
interest at 7% with principal and accrued interest due January 2007.
AVAILABLE INFORMATION ABOUT US
Our filings with the SEC may be obtained in person or by writing to the
SEC's Public Reference Branch at 450 Fifth Street, N.W., Washington, D.C. 20549,
tel. 1-800-SEC-0330, or through SEC's e-mail address: publicinfo@sec.gov. In
most cases, this information is also available on the SEC's Web site:
www.sec.gov.
ITEM 2. DESCRIPTION OF PROPERTY.
We lease approximately 4,000 square feet of office and storage space
located at 1135 Atlantic Avenue, Suite 101, Alameda, CA 94501, for a lease
payment of approximately $3,066 per month. Under this lease, we are required to
pay a percentage of the property taxes, insurance and maintenance. The lease
expires in June 2005 and we anticipate renewing the lease at that time. We
believe this space is adequate for our current needs, and that additional space
is available to us at a reasonable cost, if needed.
ITEM 3. LEGAL PROCEEDINGS.
We are not a plaintiff or defendant in any litigation, nor is any
litigation threatened against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.
Our stock is traded on the OTCBB. Our trading symbol is "PLBI." Our stock
was added to the OTCBB in late December 2003. The first reported trade in our
stock on the OTCBB occurred in January 2004. We are not aware of any trading
market for our stock prior to January 2004. The following table sets forth the
quarterly high and low bid price per share for our common stock. These bid and
asked price quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual prices. There were no
trades in our common stock until January 2004. Our fiscal year ends December
31.
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COMMON STOCK PRICE RANGE
YEAR AND QUARTER HIGH LOW
----------------------------------------
2003:
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First Quarter (*) (*)
Second Quarter (*) (*)
Third Quarter (*) (*)
Fourth Quarter (*) (*)
2004:
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First Quarter $ 2.45 $ 0.60
Second Quarter $ 2.30 $ 0.90
Third Quarter $ 1.15 $ 0.30
Fourth Quarter $ 2.90 $ 0.35
---------------------------------
(*) There was no trading market for our stock until January 2004.
On March 30, 2005, the closing price of our stock was $0.40.
On March 30, 2005, we had outstanding 12,975,000 shares of common stock.
On March 30, 2005, we had approximately 80 shareholders of record which
includes shares held directly by shareholders and shares beneficially owned by
shareholders who have deposited their shares into an account at a broker-dealer.
Such deposited shares into a brokerage account are accumulated in a nominee
account in the name of Cede, Inc. Cede, Inc. is the nominee account that most
broker-dealers use to deposit shares held in the name of the broker-dealer.
Cede, Inc. is counted as one record shareholder, even though it could represent
many beneficial shareholders who have deposited their shares into an account at
a broker-dealer.
We have not paid any cash dividends on our common stock and we do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future. Payment of any cash dividends will depend upon our future
earnings, if any, our financial condition, and other factors as deemed relevant
by the Board of Directors.
We have outstanding 8,000 shares of Series A Preferred Stock. We have no
outstanding options, warrants, convertible debt. Our Series A Preferred Stock
pays dividends.
On December 3, 2004, we sold 280,000 shares of common stock to World
Munsell for consideration of $196,000 in cash. World Munsell is a Japanese
company that is a division of ItoX Group, also a Japanese company. World
Munsell has interests in the functional water industry. We will be working with
World Munsell on various functional water applications for industry and consumer
use. We issued these securities in reliance on Section 4(2) of the Act.
14
This transaction occurred outside of the United States and the purchaser is not
a U.S. company. This was a transaction by us as issuer that did not involve
public offering. We believe that the purchaser was knowledgeable about our
operations and financial condition. We believe that the purchaser had the
knowledge and experience in financial and business matters which allowed the
purchaser to evaluate the merits and risk of receipt of our securities.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS
Number of
securities to Number of securities
be issued remaining available
upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding outstanding compensation
options, options, plans (excluding
warrants and warrants and securities reflected
rights rights in column (a))
(a) (b) (c)
PLAN CATEGORY:
Equity compensation
plans approved by
security holders -0- n/a -0- (1)
Equity compensation
plans not approved by
security holders (2) -0- n/a -0-
Total -0- n/a -0-
-----------------------------
(1) All of the 500,000 shares under our 2004 Stock and Stock Option Plan
(the "Plan") have been approved for issuance. However, 376,500 of those
shares have not been certificated yet. This Plan was approved by our
shareholders.
2) In November 2004, our Board of Directors approved the 2004 Marketing
Consultants Stock Plan which covered 945,000 shares which were all
subsequently issued during 2004 pursuant to this Plan. This Plan was not
approved by our shareholders as of the date of this Form 10-KSB.
15
ITEM 6. MANAGEMENT'S DISCUSSION & ANALYSIS.
FORWARD-LOOKING STATEMENT
Certain statements contained in this report, including, without limitation,
statements containing the words, "believes," "anticipates," "expects," and other
words of similar meaning, constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements, of to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. We disclaim any obligation to update any such
factors or to announce publicly the results of any revision of the
forward-looking statements contained or incorporated by reference herein to
reflect future events or developments. In addition to the forward-looking
statements contained in this Form 10-KSB, the following forward-looking factors
could cause our future results to differ materially our forward-looking
statements: competition, funding, government compliance and market acceptance of
our products.
INTRODUCTION
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the audited financial
statements and accompanying notes and the other financial information appearing
elsewhere in this Form 10-KSB. The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the U.S.A., which contemplate our continuation as a going concern.
Our independent auditors made a going concern qualification in their report
dated March 7, 2005, which raises substantial doubt about our ability to
continue as a going concern. Our 2004 revenue increased by 59% compared to our
2003 revenue. Capital contributions were required from our President to fund
operations. These conditions raise a substantial doubt about our ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should we be unable to continue in existence. Our ability to continue as a
going concern is dependent upon our ability to generate sufficient cash flows to
meet our obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain profitable operations. However, there is no
assurance that profitable operations or sufficient cash flows will occur in the
future.
We have incurred net losses of $965,840 in 2004 and $217,333 in 2003. We
had a working capital deficit of $203,900 at December 31, 2004 and $156,505 at
December 31, 2003.
Our operations are located in Alameda, California. Our business consists
of the sales and marketing of the industrial, environmental and residential
systems throughout the U.S.A. which alter the properties of water to produce
functional water. We act as an exclusive importer and
16
master distributor of these products to various companies in which uses for the
product range from food processing to retail water sales. We: formulate
intellectual properties under licensing agreements; supply consumer products;
consult on projects utilizing functional water; facilitate usage, uses and users
of functional water between manufacturer and industry; and act as educators on
the benefits of functional water.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. These estimates and assumptions provide a basis for us
to make judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Our actual results may differ from
these estimates under different assumptions or conditions, and these differences
may be material.
We recognize revenue when all four of the following criteria are met: (i)
persuasive evidence that an arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable. Our revenues are
derived from sales of our industrial, environmental and residential systems
which alter the properties of water to produce functional water. We believe
that this critical accounting policy affects our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
During the period from March 14, 2000 through November 15, 2002, prior to
our acquisition of Proton Laboratories, LLC in November 2002, we did not engage
in significant operations. No revenues were received by us during that period.
In November 2002, we acquired Proton Laboratories, LLC, which is active in
the functional water business. This acquisition was reported in detail on our
Form 8-K for the event dated November 15, 2002 as filed with the Commission on
November 25, 2002. Proton Laboratories, LLC is now our wholly-owned subsidiary
and in April 2004 was renamed Water Science Corporation. Since our acquisition
of Proton Laboratories, LLC in November 2002, our business has been focused on
marketing functional water equipment and systems. Alkaline-concentrated
functional water may have health-beneficial properties and may be used for
drinking and cooking purposes. Acidic-concentrated functional water may be used
as a topical, astringent medium
Our fiscal year end is December 31.
RESULTS OF OPERATIONS-YEARS ENDED DECEMBER 31, 2004 AND 2003.
17
We had revenue of $379,989 for the year ended December 31, 2004 compared to
revenue of $238,805 for the year ended December 31, 2003. This increase is a 59%
increase in revenue. This increase in revenue was due primarily to our hiring a
sales manager in 2004.
We had a net loss $965,840 for the year ended December 31, 2004 compared to
a net loss of $217,333 for the year ended December 31, 2003. This increase in
net loss was due primarily to our increase in equity-based compensation for
sales, general and administrative expenses.
Cash used by operating activities was $365,845 for the year ended December
31, 2004 compared to cash used by operating activities of $80,587 for the year
ended December 31, 2003. This increase in cash used by operating activities was
due primarily to the issuance of common stock used as in-kind compensation to
pay for legal services and consulting services.
LIQUIDITY
As of December 31, 2004, we had cash on hand of $14,412. Our growth is
dependent on attaining profit from our operations, or our raising additional
capital either through the sale of stock or borrowing. There is no assurance
that we will be able to raise any equity financing or sell any our products at a
profit.
During the year ended December 31, 2004, our President, Edward Alexander,
advanced to us the amount of $178,000 in cash. This advance accrues interest at
the rate of 7% per annum and is due on dates ranging from March through
September 2006. At December 31, 2004, the aggregate balance we owe on loans from
shareholders is $262,000 which includes $84,000 in loans from prior periods. All
of these loans accrues interest at the rate of 7% per annum and are due on dates
ranging from November 2005 through September 2006. At December 31, 2004, the
aggregate accrued interest on these loans was $16,681.
During the year ended December 31, 2004, we accrued $60,000 as salary
payable to Mr. Alexander resulting in an aggregate of $105,000 of salary payable
to Mr. Alexander at December 31, 2004.
During 2004, we raised $276,000 in cash through the sale of our securities.
FUTURE CAPITAL REQUIREMENTS
Our growth is dependent on attaining profit from our operations, or our
raising additional capital either through the sale of stock or borrowing. There
is no assurance that we will be able to raise any equity financing or sell any
of our products at a profit.
Our future capital requirements will depend upon many factors, including:
18
- The cost to acquire equipment to resell.
- The cost of sales and marketing our products.
- The rate at which we expand our operations.
- The results of our consulting business.
- The response of competitors.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this item are set forth beginning on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures.
Based on their evaluation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")), our principal executive officer and principal financial
officer have concluded that as of the end of the period
covered by this annual report on Form 10-KSB such disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting.
During the year under report, there was no change in our internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
The evaluation of our disclosure controls included a review of whether
there were any significant deficiencies in the design or operation of such
controls and procedures, material weaknesses in such controls and procedures,
any corrective actions taken with regard to such deficiencies and weaknesses and
any fraud involving management or other employees with a significant role in
such controls and procedures.
There have been no changes in our internal control over financial
reporting.
19
ITEM 8B. OTHER INFORMATION.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION
-------------------------------------------------------------------------------
Edward Alexander 53 Director, Chief Executive Officer,
Chief Financial Officer, President and Secretary
Michael Fintan Ledwith 62 Director, Member of the Audit Committee
Edward Alexander has been our Chairman, a Director, Chief Executive
Officer, Chief Financial Officer, President and Secretary since 2002. He had
been the owner and president of Proton Laboratories, LLC from January, 2001
until its merger with us. Proton Laboratories, LLC introduced an electrolytic
water separation technology that has many uses in industry, product formulations
and consumer products. From January 1997 to July 1998, Mr. Alexander served as
owner and president of Advanced H2O, LLC. In July 1998, Mr. Alexander formed
Advanced H2O, Inc. to specialize in bottled water production. Mr. Alexander
continues to serve as a consultant to Advanced H2O, Inc. Prior to 1997, Mr.
Alexander served as General Manager for Tomoe Incorporated and held various
positions with various divisions of the U.S. Navy Resale System. In February
2002, the Securities and Exchange Commission accepted a settlement offer from
Mr. Alexander and imposed a cease and desist order against Mr. Alexander from
committing or causing any violation or future violation of Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder. This order was imposed in connection
with a press release that Mr. Alexander was persuaded to release about Proton
Laboratories, LLC by a business associate whom Mr. Alexander trusted at the
time.
Michael Ledwith has been our Director since 2002. He has been a member of
the Audit Committee since June 2004. He has been semi-retired from daily
business activities since 1998. He was Professor of Systematic Theology at the
Pontifical University of Maynooth in Ireland from 1976 to 1994. He was later
Dean of the Faculty, Head of Department and Editor of "The Irish Theological
Quarterly." He was later appointed as a Consulting Editor of the renowned
international review "Communio" and still serves in that capacity. He was
appointed Vice-President of the University in 1980, re-appointed in 1983, and
was appointed President in 1985. He served as Chairman of the Committee of
Heads of the Irish Universities and was a Member of the Governing Bureau of the
European University Presidents' Federation (CRE). He retired from his
Professorship on September 30, 1996 and has since continued to pursue his
interest in research, writing, and lecturing in the field of actualizing human
potential. Since November
20
2001 he has been a partner in World of Star Stuff, which markets whole food
products.
COMMITTEES OF THE BOARD OF DIRECTORS
We do not have any nominating, or compensation committees of the Board, or
committees performing similar functions.
In December 2003, our Board adopted our Audit Committee Charter (the
"Charter") which established our Audit Committee. The Board of Directors has
selected Michael Ledwith, our only independent Director, to be on the Audit
Committee. Mr. Ledwith is not a financial expert. We have determined Mr.
Ledwith's independence using the definition of independence set forth in NASD
Rule 4200-(14). We have not yet been able to recruit an independent director
who is also a financial expert.
The primary purpose of the Audit Committee is to oversee our financial
reporting process on behalf of the Board of Directors. The Audit Committee will
meet privately with our Chief Accounting Officer and with our independent public
accountants and evaluate the responses by the Chief Accounting Officer both to
the facts presented and to the judgments made by our independent accountants.
The Charter establishes the independence of our Audit Committee and sets forth
the scope of the Audit Committee's duties. The Purpose of the Audit Committee
is to conduct continuing oversight of our financial affairs. The Audit
Committee conducts an ongoing review of our financial reports and other
financial information prior to filing them with the Securities and Exchange
Commission, or otherwise providing them to the public. The Audit Committee also
reviews our systems, methods and procedures of internal controls in the areas
of: financial reporting, audits, treasury operations, corporate finance,
managerial, financial and SEC accounting, compliance with law, and ethical
conduct. A majority of the members of the Audit Committee will be independent
directors. The Audit Committee is objective, and reviews and assesses the work
of our independent accountants and our internal audit department. The Audit
Committee will review and discuss the matters required by SAS 61 and our audited
financial statements for the year ended December 31, 2004 with our management
and our independent auditors. The Audit Committee will receive the written
disclosures and the letter from our independent accountants required by
Independence Standards Board No. 1, and the Audit Committee will discuss with
the independent accountant the independent accountant's independence.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors did not hold meetings during the year ended December
31, 2004, but did act by consent on four occasions. There is no family
relationship between or among any of our directors and executive officers.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers, directors and
persons who beneficially own more than 10% of our common stock to file reports
of ownership and changes in ownership with the SEC. These reporting persons
also are required to furnish us with copies
21
of all Section 16(a) forms they file. To the best of our knowledge, all persons
required to file reports under Section 16(a) of the Exchange Act have done so in
a timely manner.
CODE OF ETHICS
We have a Code of Ethics that applies to our principal executive officer
and our principal financial officer. We undertake to provide to any person,
without charge, upon request, a copy of our Code of Ethics. You may request a
copy of our Code of Ethics by mailing your written request to us. Your written
request must contain the phrase "Request for a Copy of the Code of Ethics of
Proton Laboratories, Inc." Our address is: Proton Laboratories, Inc., 1135
Atlantic Avenue, Suite 101, Alameda, CA 94501.
SHAREHOLDER NOMINEES FOR DIRECTOR AND SHAREHOLDER COMMUNICATIONS WITH DIRECTORS
The deadline for stockholders to submit proposals to be considered for
inclusion in the Proxy Statement for the 2005 Annual Meeting of Stockholders is
October 31, 2004. If you have any proposals that you would like to be included
in the Proxy Statement for the 2005 Annual Meeting of Stockholders, including
nominees for Director, kindly mail them to us. We encourage our shareholders to
communicate with our Directors by mail addressed to any Director or to all
Directors. Our address is: Proton Laboratories, Inc., 1135 Atlantic Avenue,
Suite 101, Alameda, CA, 94501. We will not screen such communications.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain information as to our highest paid
officers and directors for our fiscal year ended December 31, 2004. No other
compensation was paid to any such officers or directors other than the
compensation set forth below.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Pay-
Awards Outs
Securities
Other Under-
Name and Restricted lying All
Principal Annual Stock Options/ LTIP Other
Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
$ $ $ $ # $
2004 (1) 62,400 -0- -0- -0- -0- -0- -0-
Edward 2003 (2) 62,400 -0- -0- -0- -0- -0- -0-
Alexander 2002 (3) 60,000 -0- -0- -0- -0- -0- -0-
CEO, CFO
--------------------------------
(1) Mr. Alexander received $2,400 as cash compensation. We determined that
the value of his services was $62,400, of which $60,000 was recorded as
accrued wages.
(2) Mr. Alexander received $2,400 as cash compensation. We determined that
the value of
22
his services was $62,400, of which $45,000 was recorded as additional
paid-in capital and $15,000 was recorded as accrued wages.
(3) Mr. Alexander did not receive any cash compensation. This amount was
determined to be the value of his services and was recorded as additional
paid in capital.
OUTSTANDING STOCK OPTIONS
We have not granted any options to purchase common stock and we do not have
any outstanding options to purchase common stock.
COMPENSATION OF DIRECTORS
Our directors do not receive cash compensation for their services as
directors or members of committees of the Board of Directors.
EMPLOYEE STOCK OPTION PLANS
We believe that our future success will depend in part on our continued
ability to attract and retain highly qualified personnel. We pay wages and
salaries that we believe are competitive. We also believe that equity ownership
is an important factor in our ability to attract and retain skilled personnel.
Our Board of Directors has adopted the 2004 Stock and Stock Option Plan (the
"Plan") which was approved by our shareholders in February 2004. The purpose
of the Plan is to further our interests, our subsidiaries and our stockholders
by providing incentives in the form of stock and stock options to our officers,
directors, employees, vendors, consultants, attorneys and subcontractors. There
are a total of 500,000 shares of our common stock that may be granted or
optioned under the Plan, of which all 500,000 shares have been approved for
issuance. However, 376,500 of those shares have not been certificated yet.
This Plan was approved by our shareholders.
NO EMPLOYMENT AGREEMENT
We do not have any employment agreements with any employees.
23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
As a result of the Merger, Mr. Alexander became the majority owner of our
common stock. The following table sets forth certain information concerning the
number of shares of common stock owned beneficially as of March 30, 2005, by:
(i) each person (including any group) known by us to own more than five percent
(5%) of any class of our voting securities, (ii) each of our directors and
executive officers, and (iii) and our officers and directors as a group. Unless
otherwise indicated, the shareholders listed possess sole voting and investment
power with respect to the shares shown.
Name Amount of Shares Class of Percentage
and Address Beneficially Owned Securities of Class
-------------------------------------------------------------------------------
Edward Alexander
1135 Atlantic Avenue, Suite 101
Alameda, CA 94501 8,224,000 Common Stock 63.43%
Michael Fintan Ledwith
6610 Churchill Rd. SE
Tenino, WA 98589 -0- Common Stock -0-%
Executive Officers
As A Group(2 Persons) 8,224,000 Common Stock 63.4%
We are not aware of any arrangements that could result in a change of
control.
24
SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS
Number of
securities to Number of securities
be issued remaining available
upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding outstanding compensation
options, options, plans (excluding
warrants and warrants and securities reflected
rights rights in column (a))
(a) (b) (c)
PLAN CATEGORY:
Equity compensation
plans approved by
security holders -0- n/a -0- (1)
Equity compensation
plans not approved by
security holders -0- n/a -0-
Total -0- n/a -0- (1)
-------------------------------------
(1) All of the 500,000 shares under our 2004 Stock and Stock Option Plan
(the "Plan") have been approved for issuance. However, 376,500 of those
shares have not been certificated yet. This Plan was approved by our
shareholders.
2) In November 2004, our Board of Directors approved the 2004 Marketing
Consultants Stock Plan which covered 945,000 shares which were all
subsequently issued pursuant to this Plan. This Plan was not approved by
our shareholders as of the date of this Form 10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
We have a policy that our business affairs will be conducted in all
respects by standards applicable to publicly held corporations and that we will
not enter into any future transactions and/or loans between us and our officers,
directors and 5% shareholders unless the terms are: (a) no less favorable than
could be obtained from independent third parties, and (b) will be approved by a
majority of our independent and disinterested directors. In our view, all of
the transactions described below meet this standard.
25
During the year ended December 31, 2004, our President, Edward Alexander,
advanced to us the amount of $178,000 in cash. This advance accrues interest at
the rate of 7% per annum and is due on dates ranging from March through
September 2006. At December 31, 2004, the aggregate balance we owe on loans from
shareholders is $262,000 which includes $84,000 in loans from prior periods.
All of these loans accrues interest at the rate of 7% per annum and are due on
dates ranging from November 2005 through September 2006.At December 31, 2004,
the aggregate accrued interest on these loans was $16,681.
During 2004, we obtained, through a sublicense from Edward Alexander, at no
cost to us, the North American rights to manufacture and distribute an
electrolyzed water-based antioxidant dietary supplement developed by MIZ
Corporation, a Japanese company specializing in advanced uses of electrolyzed
water. We plan to sell this product to the fitness, sports and wellness
markets.
ITEM 13. EXHIBITS.
Exhibit Number Exhibit Description
----------------------------------------------------------------
31.1 Certification pursuant to Section 13a-14 of CEO
31.2 Certification pursuant to Section 13a-14 of CFO
32.1 Certification pursuant to Section 1350 of CEO
32.2 Certification pursuant to Section 1350 of CFO
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
OUR INDEPENDENT ACCOUNTANT
In 2004, our Board of Directors selected as our independent accountant the
CPA firm of Hansen, Barnett & Maxwell, a Professional Corporation ("HBM") of
Salt Lake City, Utah. HBM audited our financial statements for the years ended
December 31, 2004 and 2003. Our Audit Committee approved 100% of the work of
HBM.
1. AUDIT FEES
For the two years ended December 31, 2004 and 2003, HBM billed us the
aggregate amount of $ 14,458 and $24,813, respectively, for
professional services rendered for their
26
audits of our annual financial statements for those years and their
reviews of our quarterly financial statements for those years. We were
not billed for professional services from any other accounting firm
for audits or reviews done in 2004 and 2003.
2. AUDIT-RELATED FEES
For the two years ended December 31, 2004 and 2003, we were billed
$1,073 and $0, respectively, by HBM for audit-related fees.
3. TAX FEES
For the two years ended December 31, 2004 and 2003, we were not billed
by HBM for any tax fees.
4. ALL OTHER FEES
For the two years ended December 31, 2004 and 2003, we were not billed
by HBM for any other professional services.
5(I). PRE-APPROVAL POLICIES
Our Audit Committee does not pre-approve any work of our independent
auditor, but rather approves independent auditor engagements before
each engagement.
5(II). PERCENTAGE OF SERVICES APPROVED BY OUR AUDIT COMMITTEE
There were no services performed by our independent auditor of the
type described in Items 9(e)(2) through 9(e)(4) of Schedule 14A. Our
Audit Committee considers that the work done for us by HBM is
compatible with maintaining HBM's independence.
6. AUDITOR'S TIME ON TASK
At least 50% of the work expended by HBM on our 2004 audit was
attributed to work performed by HBM's full-time, permanent employees.
27
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 in Alameda, California.
PROTON LABORATORIES, INC.
April 12, 2005 By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer, President and
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
April 12, 2005 By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer, President and
Chief Financial Officer
April 12, 2005 By: /s/ Michael Fintan Ledwith
Michael Fintan Ledwith
Director
28
PROTON LABORATORIES, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
PROTON LABORATORIES, INC.
TABLE OF CONTENTS
PAGE
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2004 and 2003 F-3
Consolidated Statements of Operations for the years ended December 31, 2004 and 2003 F-4
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2003
and 2004 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 F-6
Notes to Consolidated Financial Statements F-7
F-1
HANSEN, BARNETT & MAXWELL
A Professional Corporation REGISTERED WITH THE PUBLIC COMPANY
CERTIFIED PUBLIC ACCOUNTANTS ACCOUNTING OVERSIGHT BOARD
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128 [GRAPHIC OMITTED]
Phone: (801) 532-2200 in independent member of
Fax: (801) 532-7944 BAKER TILLY
www.hbmcpas.com INTERNATIONAL
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and the Stockholders
Proton Laboratories, Inc. and subsidiaries
We have audited the consolidated balance sheets of Proton Laboratories, Inc. as
of December 31, 2004 and 2003, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 2004 and 2003. 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 audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
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
audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Proton
Laboratories as of December 31, 2004 and 2003, and the results of their
consolidated operations and their cash flows for the years ended December 31,
2004 and 2003, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has an accumulated deficit, has
suffered reoccurring losses from operations, has negative working capital, and
has required loans from the Company's majority shareholder to fund operations.
These factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 7, 2005
F-2
PROTON LABORATORIES, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
===========================================================================================
ASSETS
CURRENT ASSETS
Cash $ 14,412 $ 4,423
Accounts receivable, less allowance for doubtful accounts of
$16,522 and $10,092, respectively 10,633 24,583
Inventory 34,097 27,800
Deposit 69,500 -
-------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 128,642 56,806
-------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 18,438 4,670
Equipment and machinery 95,039 43,724
Leasehold improvements 10,995 1,886
Less: accumulated depreciation (19,160) (11,672)
-------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 105,312 38,608
-------------------------------------------------------------------------------------------
TOTAL ASSETS $ 233,954 $ 95,414
===========================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 134,780 $ 197,576
Accrued expenses 110,562 15,735
Preferred dividends payable 3,200 -
Stockholder loan, current portion 84,000 -
-------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 332,542 213,311
-------------------------------------------------------------------------------------------
STOCKHOLDER LOAN, NET OF CURRENT PORTION 178,000 84,000
-------------------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock, 400,000 shares authorized
with a par value of $0.0001; 8,000 and no shares issued and
outstanding, respectively; liquidation preference of $80,000
and $0, respectively 80,000 -
Undesignated preferred stock, 19,600,000 shares authorized with a
par value of $0.0001; no shares issued or outstanding - -
Common stock, 100,000,000 common shares authorized with a par
value of $0.0001; 12,975,000 and 11,250,000 shares issued and
outstanding, respectively 1,299 1,126
Additional paid in capital 1,350,616 536,440
Accumulated deficit (1,708,503) (739,463)
-------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (276,588) (201,897)
-------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 233,954 $ 95,414
===========================================================================================
The accompanying notes are an itnegral part of these consolidated financial
statements.
F-3
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
==========================================================================================
SALES $ 379,989 $ 238,805
COST OF GOODS SOLD 263,395 175,505
------------------------------------------------------------------------------------------
GROSS PROFIT 116,594 63,300
------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including
equity-based expenses of $663,349 and $45,000, respectively) 1,065,595 270,420
------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (949,001) (207,120)
------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Loss on disposal of property and equipment (1,648) (9,483)
Interest income 20 5
Interest expense (15,211) (735)
------------------------------------------------------------------------------------------
NET OTHER EXPENSE (16,839) (10,213)
------------------------------------------------------------------------------------------
NET LOSS (965,840) (217,333)
PREFERRED STOCK DIVIDEND (3,200) -
------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (969,040) $ (217,333)
==========================================================================================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.08) $ (0.02)
==========================================================================================
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 11,525,510 11,250,000
==========================================================================================
The accompanying notes are an itnegral part of these consolidated financial
statements.
F-4
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2004
PREFERRED STOCK COMMON STOCK ADDITIONAL
============================== ======================== PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
================================================================================================================================
BALANCE - DECEMBER 31, 2002 - $ - 11,250,000 1,126 491,440 (522,130) (29,564)
Fair value of officer services,
no additional shares issued - - - - 45,000 - 45,000
Net loss for the period - - - - - (217,333) (217,333)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2003 - - 11,250,000 1,126 536,440 (739,463) (201,897)
Sale of preferred stock 8,000 80,000 - - - - 80,000
Issuance of shares - - 100,000 10 39,990 - 40,000
for legal services
Issuance of shares for - - 1,345,000 135 578,214 - 578,349
consulting services
Issuance of common stock - - 280,000 28 195,972 - 196,000
for cash
Dividends accrued - - - - - (3,200) (3,200)
Net loss for the period - - - - - (965,840) (965,840)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2004 8,000 $ 80,000 12,975,000 $ 1,299 $1,350,616 $(1,708,503) $ (276,588)
================================================================================================================================
The accompanying notes are an itnegral part of these consolidated financial
statements.
F-5
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
========================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(965,840) $(217,333)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 9,814 7,480
Bad debt expense 6,430 -
Loss on disposal of property and equipment 1,648 9,483
Fair value of officer services - 45,000
Common stock issued for legal services and consulting services 618,349 -
Changes in operating assets and liabilities
Accounts receivable 7,520 8,172
Inventory (6,297) (18,879)
Deposits (69,500) -
Accounts payable (62,796) 69,938
Accrued expenses 94,827 15,552
----------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (365,845) (80,587)
----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (78,166) (375)
----------------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (78,166) (375)
----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stockholder loans 178,000 84,000
Proceeds from sale of preferred stock 80,000 -
Proceeds from sale of common stock 196,000 -
----------------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 454,000 84,000
----------------------------------------------------------------------------------------
NET INCREASE IN CASH 9,989 3,038
CASH AT BEGINNING OF PERIOD 4,423 1,385
----------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 14,412 $ 4,423
========================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of inventory to equipment $ 27,377 $ 11,740
----------------------------------------------------------------------------------------
The accompanying notes are an itnegral part of these consolidated financial
statements.
F-6
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATIONS
ORGANIZATION- Proton Laboratorie-s, LLC. (Proton) was incorporated on February
16, 2000 in the State of California. Proton did not begin its operations until
January 1, 2001. On January 1, 2001, Proton's sole owner contributed inventory
and property and equipment to the Company.
BentleyCapitalCorp.com Inc. (Bentley) was incorporated in the State of
Washington, U.S.A. on March 14, 2000. On November 15, 2002, Proton entered into
an Agreement and Plan of Reorganization with Bentley whereby the Company merged
with and into VWO I Inc. (VWO), a wholly owned subsidiary of Bentley (the
"Merger"). In April 2004 the subsidiary changed its name to Water Science, Inc.
For financial statement purposes Proton is considered the parent corporation and
originally elected to maintain BentleyCapitalCorp.com, Inc as its business name.
In December 2003 the Company's board elected to change its name to Proton
Laboratories, Inc., and hereafter collectively referred to as the "Company".
CONSOLIDATION POLICY - The accompanying consolidated financial statements
reflect the financial position of and operations for Proton as of and for the
years ended December 31, 2004 and 2003. All significant intercompany
transactions have been eliminated in consolidation.
NATURE OF OPERATIONS - The Company's operations are located in Alameda,
California. The core business of the Company consists of the sales and
marketing of the Company's industrial, environmental and residential systems
throughout the United States of America which alter the properties of water to
produce functional water. The Company acts as an exclusive importer and master
distributor of these products to various companies in which uses for the product
range from food processing to retail water sales. Additionally, the Company
formulates intellectual properties under licensing agreements, supplies consumer
products, consults on projects utilizing functional water, facilitates between
manufacturer and industry and acts as educators on the benefits of functional
water.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS -The Company is subject to concentration of credit risk
with respect to sales primarily in the functional water industry and sales to a
significant customer and purchases from a significant vendor. Accounts
receivable are generally unsecured. The Company normally obtains payments from
customers prior to delivery of the related products. Otherwise, the Company does
not require collateral for accounts receivable.
The carrying value of the note payable approximates fair value based on it
bearing interest at a rate which approximates market rates. The amount reported
as inventory is considered to be a reasonable
F-7
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximation of its fair value. The fair value estimates presented herein were
based on market information available to management at the time of the
preparation of the financial statements.
BUSINESS CONDITION - The accompanying consolidated financial statements have
been prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. The Company has incurred net losses of $965,840 and $217,333 for
the years ended December 31, 2004 and 2003, respectively. The Company had a
working capital deficit of $203,900 and $156,505 at December 31, 2004 and 2003,
respectively. Loans from the Company's president were required to fund
operations. These conditions raise a substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
The Company is working towards raising public funds to expand its marketing and
revenues. The Company has spent considerable time in contracting with several
major overseas corporations for the co-development of enhanced antioxidant
beverages for distribution into the overseas markets. In addition, the Company
is working with its Canadian business associates to identify institutional
businesses to market various disinfection applications based upon functional
water, pending government approval.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flows to meet its obligations on a timely
basis, to obtain additional financing as may be required, and ultimately to
attain profitable operations. However, there is no assurance that profitable
operations or sufficient cash flows will occur in the future.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents.
ACCOUNTS RECEIVABLE - Accounts receivable are recorded at the invoiced amount
and do not bear interest. The allowance for doubtful accounts is the Company's
best estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on historical
write-off experience. Past due balances over 90 days and a specified amount are
reviewed individually for collectibility. Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. The Company does not have any
off-balance sheet credit exposure related to its customers.
INVENTORY - Inventory consists of purchased finished goods and is stated at the
lower of cost (using the first-in, first-out method) or market value.
PROPERTY AND EQUIPMENT - Equipment, and furniture and fixtures are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives range from 3 to 7 years.
Depreciation expense for the years ended December 31, 2004 and 2003, was $9,814
and $7,480, respectively. Expenditures for maintenance, repairs, and renewals
are charged to expense as incurred. Expenditures for major renewals and
betterments that extend the useful lives of existing equipment are capitalized
and depreciated. On retirement or disposition of property and equipment, the
cost and accumulated depreciation are removed and any resulting gain or loss is
recognized in the statement of operations.
F-8
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived assets are reviewed for impairment yearly. Recoverability of assets
to be held and used is measured by comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount that the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Based on the evaluation, no impairment
was considered necessary during the years ended December 31, 2004 or 2003.
INCOME TAXES - The Company recognizes an asset or liability for the deferred tax
consequences of all temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. That will
result in taxable or deductible amounts in future years when the reported
amounts of the assets or liabilities are recovered. These deferred tax assets
and or liabilities are measured using the enacted tax rates that will be in
effect when the differences are expected to reverse. Deferred tax assets are
reviewed periodically for recoverability and valuation allowances and
adjustments are provided as necessary.
ADVERTISING - The Company follows the policy of charging the cost of advertising
to expense as incurred. Advertising expense for the year ended December 31,
2004 and 2003 was $10,776 and $3,952, respectively.
CONCENTRATIONS OF RISK - Sales to major customers are defined as sales to any
one customer which exceeded 10% of total sales. The risk of loss of a major
customer subjects the Company to the possibility of decreased sales. Purchases
from major vendors are defined as inventory purchases from any one vendor which
exceeded 10% of total inventory purchases. The risk of loss of a major vendor
subjects the Company to the possibility of increased costs and not being able to
fulfill customer orders. See Note 7.
REVENUE RECOGNITION - The Company recognizes revenue when all four of the
following criteria are met: (i) persuasive evidence that arrangement exists;
(ii) delivery of the products and/or services has occurred; (iii) the selling
price is both fixed and determinable and; (iv) collectibility is reasonably
probable. The Company's revenues are derived from sales of their industrial,
environmental and residential systems which alter the properties of water to
produce functional water.
BASIC AND DILUTED LOSS PER COMMON SHARE - Basic loss per common share is
calculated by dividing net loss by the weighted-average number of common shares
outstanding. Diluted loss per common share is calculated by dividing net loss
by the weighted-average number of Series A convertible preferred shares and
common shares outstanding to give effect to potentially issuable common shares
except during loss periods when those potentially issuable shares are
anti-dilutive. Potential common shares from convertible preferred stock have
not been included as they are anti-dilutive.
NEW ACCOUNTING STANDARDS - In December 2004, the FASB issued SFAS No. 123
(revised 2004), "Share-Based Payment," which is an amendment to SFAS No. 123,
"Accounting for Stock-Based Compensation." This new standard eliminates the
ability to account for share-based compensation transactions using Accounting
Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees" (APB
25) and requires such transactions to be accounted for using a fair-value-based
method and the resulting cost recognized in the Company's financial statements.
This new standard is effective for interim and annual periods beginning after
June 15, 2005. The Company is currently evaluating SFAS No. 123 as revised and
intends to implement it in the third quarter of 2005 and will not presently have
an effect on the Company's financial statements.
F-9
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets-an amendment of APB Opinion No. 29." This Statement amends
APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Statement will
be effective in January 2006. The Company does not expect that the adoption of
SFAS No. 153 will have a material impact on its Consolidated Financial
Statements.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003, the Company's president and
majority shareholder advanced the Company $178,000 and $84,000, respectively.
These advances bear interest at 7% with principal and accrued interest due
between November 2005 and September 2006. At December 31, 2004 and 2003, the
accrued interest was $15,946 and $735, respectively.
NOTE 4 - INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the net deferred tax asset at December 31, 2004 and 2003 are as
follows:
2004 2003
======================================================
Net operating loss carryforward $ 416,124 $ 71,395
Bad debt reserve 6,381 3,898
Accrued salaries 29,000 5,793
Less: valuation allowance (451,505) (81,086)
------------------------------------------------------
NET DEFERRED TAX ASSET $ - $ -
======================================================
For tax reporting purposes, the Company has net operating loss carry forwards in
the amount of $1,077,482 which will begin expiring in 2023.
The following is a reconciliation of the amount of tax benefit that would result
from applying the federal statutory rate to pretax loss with the benefit from
income taxes for the years ended December 31, 2004 and 2003:
2004 2003
====================================================================
Benefit as statutory rate (34%) $(328,386) $(73,893)
Non-deductible expenses 2,589 17,567
Change in valuation allowance 370,419 66,367
State tax benefit, net of federal tax effect (44,622) (10,041)
--------------------------------------------------------------------
NET BENEFIT FROM INCOME TAXES $ - $ -
====================================================================
NOTE 5 - PREFERRED STOCK
During May 2004, the Company designated 400,000 shares of the preferred stock as
Series A convertible preferred stock.
The holders of Series A convertible preferred stock are entitled to a cumulative
dividend of 8% per year in cash payable in arrears.
The holders of Series A convertible preferred stock may convert any or all of
their shares plus all accrued dividends on the preferred stock into common stock
at any time. Each share of preferred stock may be
F-10
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
converted into 5 shares of common stock. The holder will receive one share of
common stock for $2 of accrued dividends.
Upon the liquidation, dissolution or winding up of the Company, holders of
Series A convertible preferred stock, are entitled to receive, out of legally
available assets, a liquidation preference of $10 per share, plus an amount
equal to any unpaid dividends through the payment date, before any payment or
distribution was made to holders of common stock. The holders of Series A
convertible preferred stock are not entitled to vote.
During the July 2004, the Company issued 8,000 shares of preferred stock for
$80,000. At December 31, 2004, dividends payable was $3,200, or 40 cents per
share.
NOTE 6 - COMMON STOCK
During September 2004, the Company issued 100,000 shares of common stock for
$40,000 of legal services. These shares were valued using the per share fair
value of the Company's common stock on the date of issuance.
In December 2003, the Company's shareholders approved the 2004 Stock and Stock
Option Plan effective January 1, 2004 whereby up to 500,000 shares may be
granted, optioned or sold. The plan is for its key employees and directors who
contribute materially to the success and profitability of the Company as well as
attracting other key employees and directors. In November 2004, 400,000 common
shares were issued pursuant to this plan, resulting in $172,000 in consulting
expense. These shares were valued using the per share fair value of the
Company's common stock on the date of issuance.
In November 2004, the Company's board of directors approved the 2004 Marketing
Consultant Stock Plan whereby up to 945,000 common shares may be granted,
optioned or sold. The plan is for its consultants, key employees, and directors
who contribute materially to the success and profitability of the Company as
well as attracting other key employees and directors. In November 2004,
945,000 shares were issued under this plan resulting in $406,349 of consulting
and employee expense valued using the per share fair value of the Company's
common stock on the date of issuance.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company currently leases office and storage space from a
third party. On August 1, 2004, the Company entered into a lease agreement to
pay a monthly lease payment of $3,066 until June 2005.
Future minimum lease payments under operating lease obligations as of December
31, 2004, were as follows:
Year Ending December 31,
---------------------------------
2005 $21,462
---------------------------------
Rent expense for the years ended December 31, 2004 and 2003 was $33,678 and
$27,097, respectively.
F-11
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAJOR CUSTOMER - During the year ended December 31, 2004, sales to three
customers accounted for 37% of total sales. As of December 31, 2004, there were
no amounts due from these customers. During the year ended December 31, 2003,
sales to one customer accounted for 11% of total sales. As of December 31,
2003, there were no amounts due from this customer.
MAJOR VENDOR - During the year ended December 31, 2004, purchases from three
vendors accounted for 96% of total inventory purchases. As of December 31,
2004, amounts due to these vendors accounted for 54% of accounts payable.
During the year ended December 31, 2003, purchases from two vendors accounted
for 87% of total inventory purchases. As of December 31, 2003, amounts due to
these vendors accounted for 65% of accounts payable.
NOTE 8 - SUBSEQUENT EVENTS
COMMON STOCK - During March 2005, the Company entered into an agreement with a
consultant related to promoting the Company and the possibility of a future
offering of the Company's common stock. Under this agreement, the Company
agreed to immediately issue the consultant 550,000 shares of the Company's
common stock, resulting in $269,500 consulting expense valued using the per
share fair value of the Company's common stock on the date of the agreement. In
addition, the Company agreed to pay a cash fee equal to 10% of the gross
proceeds of any future common stock offering. The Company also agreed to issue
the investment bank company a warrant to purchase a number of the Company's
common shares equal to 10% of the gross proceeds of the offering. As part of
the agreement, the consultant is to provide advisory services for 12 months from
the close of the offering. In consideration for these services, the Company
will issue the consultant common shares equal to 4.5% of the total number of
common shares outstanding following the close of the offering.
NOTES PAYABLE - In March 2005 the Company also issued a note payable in the
amount of $164,000 for the purchase of inventory. The inventory will be held by
the lender as collateral until the note is repaid in May 2005. The Company has
also agreed to pay $28,500, or approximately 17%, in interest. In addition, the
Company is to issue the lender 47,500 shares of common stock, which will be
recorded as a $27,075 discount valued on the date of issuance and amortized over
the term of the note. These shares are to be issued prior to the note's due
date.
During January 2005, a shareholder advanced the Company $40,000. This advance
bears interest at 7% with principal and accrued interest due January 2007.
F-12
EXHIBIT INDEX
Exhibit Number Exhibit Description
----------------------------------------------------------------
31.1 Certification pursuant to Section 13a-14 of CEO
31.2 Certification pursuant to Section 13a-14 of CFO
32.1 Certification pursuant to Section 1350 of CEO
32.2 Certification pursuant to Section 1350 of CFO
29