UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2006
[ ] 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)
(510) 865-6412
Issuer's telephone number
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
Indicate by check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] [X] No
On August 18, 2006 the registrant had outstanding 18,759,261 shares of
Common Stock, $0.0001 par value per share. Some of these shares have not been
certificated yet.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PROTON LABORATORIES, INC.
TABLE OF CONTENTS
PAGE
Condensed Consolidated Balance Sheets - June 30, 2006 and
December 31, 2005 (Unaudited) F-1
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2006 and 2005 (Unaudited) F-2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2006 and 2005 (Unaudited) F-3
Notes to Condensed Consolidated Financial Statements (Unaudited) F-4
PROTON LABORATORIES, INC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
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ASSETS
CURRENT ASSETS
Cash $ 29,270 $ 1,384
Accounts receivable, less allowance for doubtful accounts of $16,522 15,021 21,927
Inventory 36,549 32,861
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TOTAL CURRENT ASSETS 80,840 56,172
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PROPERTY AND EQUIPMENT
Furniture and fixtures 19,709 19,709
Equipment and machinery 161,833 161,833
Leasehold improvements 11,323 11,323
Less: accumulated depreciation (61,423) (45,820)
---------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 131,442 147,045
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DEPOSITS 6,131 6,131
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TOTAL ASSETS $ 218,413 $ 209,348
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 94,701 $ 168,378
Accrued expenses 317,040 252,769
Deferred revenue 52,506 52,506
Preferred dividends payable 12,800 9,600
Stockholder loans, current portion 282,000 444,642
---------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 759,047 927,895
---------------------------------------------------------------------------------------------------
STOCKHOLDER LOANS, NET OF CURRENT PORTION 8,642 40,000
---------------------------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock, 400,000 shares authorized
with a par value of $0.0001; 8,000 shares issued and outstanding;
liquidation preference of $80,000 80,000 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; 16,632,550 and 14,270,100 shares issued and
outstanding, respectively 1,665 1,429
Additional paid in capital 2,339,376 1,856,601
Accumulated deficit (2,970,317) (2,696,577)
---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (549,276) (758,547)
---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 218,413 $ 209,348
---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-1
PROTON LABORATORIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2006 2005 2006 2005
------------------------------------------------------------------------------- -----------------------------
SALES $ 33,639 $ 63,521 $ 84,561 $ 157,710
COST OF GOODS SOLD 26,187 33,499 70,479 100,862
--------------------------------------------------------------------------------------------------------------
GROSS PROFIT 7,452 30,022 14,082 56,848
--------------------------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(INCLUDING EQUITY-BASED EXPENSE OF $0,
459,040, $40,526 AND $459,040) 124,011 563,886 252,041 679,380
--------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (116,559) (533,864) (237,959) (622,532)
--------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Interest income 175 41 200 100
Interest expense (15,044) (49,235) (32,781) (72,819)
--------------------------------------------------------------------------------------------------------------
NET OTHER EXPENSE (14,869) (49,194) (32,581) (72,719)
--------------------------------------------------------------------------------------------------------------
NET LOSS (131,428) (583,058) (270,540) (695,251)
PREFERRED STOCK DIVIDEND 1,600 1,600 3,200 3,200
--------------------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (133,028) $ (584,658) $ (273,740) $ (698,451)
--------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.01) $ (0.04) $ (0.02) $ (0.05)
--------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 15,486,316 13,362,997 14,914,666 13,176,132
--------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED 2006 2005
---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(270,540) $(695,251)
Shares issued for services 40,526 459,040
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 15,603 10,814
Amortization of loan costs - 27,075
Changes in operating assets and liabilities
Accounts receivable 6,906 (1,232)
Inventory (3,688) (66,681)
Deposits - 5,000
Deferred revenue - 52,506
Accounts payable (33,151) (24,187)
Accrued expenses 64,271 75,413
---------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (180,073) (157,503)
---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (146)
---------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES - (146)
---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 401,959 -
Payments on notes payable (267,852) -
Proceeds from stockholder loans 73,852 204,000
---------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 207,959 204,000
---------------------------------------------------------------------------
NET INCREASE IN CASH 27,886 46,351
CASH AT BEGINNING OF PERIOD 1,384 14,412
---------------------------------------------------------------------------
CASH AT END OF PERIOD $ 29,270 $ 60,763
---------------------------------------------------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for accrued legal services $ 40,526 $ -
Issuance of common stock for loan costs $ - $ 27,075
Accrual of preferred stock dividends $ 3,200 $ 3,200
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
PROTON LABORATORIES, INC
1.1.1 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION - The condensed consolidated financial statements include
the accounts of Proton Laboratories, Inc., and its wholly owned subsidiary
("Proton" or the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
In April 2004, the Company changed its name from BentleyCapitalCorp.com, Inc. to
Proton Laboratories, Inc. The Company's subsidiary also changed its name from
Proton Laboratories, Inc. to Water Science, Inc.
CONDENSED FINANCIAL STATEMENTS - The accompanying unaudited condensed
consolidated financial statements are condensed and, therefore, do not include
all disclosures normally required by accounting principles generally accepted in
the United States of America. These statements should be read in conjunction
with the Company's annual financial statements included in the Company's
December 31, 2005 Annual Report on Form 10-KSB. In particular, the Company's
significant accounting principles were presented as Note 1 to the consolidated
financial statements in that report. In the opinion of management, all
adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the six months
ended June 30, 2006 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2006.
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. 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.
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.
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.
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.
F-4
NOTE 2 - 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 losses applicable to common shareholders of $273,740 for
the six months ended June 30, 2006. The Company had a working capital deficit of
$678,207, and $871,723 at June 30, 2006 and December 31, 2005, respectively.
Loans and equity funding were required to fund operations.
The Company is working towards raising additional 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.
NOTE 3 - RELATED PARTY TRANSACTIONS
Stockholder loans as of June 30, 2006 and December 31, 2005 consist of the
following:
2006 2005
-----------------------------------------------------------------------------------------
Note payable to President; principal and interest due May 2006;
interest is accrued at 30% per annum; secured by inventory $ - $168,500
Note payable to President; principal and interest due June 2006;
interest is accrued at 7% per annum; unsecured 20,000 -
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 84,000 84,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 125,000 125,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 40,000 40,000
Note payable to CEO and majority shareholder; principal and
interest due September 2006; interest is accrued at 7% per annum;
unsecured. 13,000 13,000
F-5
Note payable to CEO and majority shareholder; principal and
interest due September 2007; interest is accrued at 7% per annum;
unsecured. 8,642 14,142
Note payable to shareholder; principal and interest due January 2007;
interest is accrued at 7% per annum; unsecured. - 40,000
Notes payable to President and CEO; principal and interest due
March 2008; interest is accrued at 7% per annum; unsecured. - -
-----------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS 290,642 484,642
Less: Current Portion 282,000 444,642
-----------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS - LONG TERM $ 8,642 $ 40,000
-----------------------------------------------------------------------------------------
During the six months ended June 30, 2006, two shareholders advanced the Company
$73,852. The Company made payments on these shareholder notes totaling $267,852
during the six months ended June 30, 2006.
At June 30, 2006, the Company had accrued interest relating to shareholder
loans of $129,913.
During the six months ended June 30, 2006, the Company accrued $30,000 as
salaries payable to the company's CEO, resulting in $185,987 of salaries payable
at June 30, 2006.
NOTE 4 - COMMON STOCK
In March 2006 the Company issued 352,400 shares of common stock for payment of
legal fees. The value of the shares issued was $81,052, based on a market price
on date of issuance of $0.23. $40,526 of this amount is related to services
rendered during the year ended December 31, 2005.
During May and June the Company issued 2,010,050 shares of common stock for cash
proceeds of $401,959 or $0.20 per share.
NOTE 5 - COMMITMENTS
PRODUCTION AGREEMENT - In June 2005, the Company entered into an agreement with
Mitachi, a Japanese electronics component manufacturer, to aid in the production
of enhanced drinking water generators. Pursuant to this agreement, Mitachi
agreed to pay the Company 25,000,000 Yen for engineering design, molding,
tooling and preparation costs, and the exclusive product distribution rights for
China, Taiwan, and Japan. As of June 30, 2006, Mitachi had paid 6,000,000 Yen,
or $52,506, for the above mentioned distribution rights. Since the project is
not yet completed and no units have been sold, this amount is classified as
deferred revenue.
F-6
EQUITY LINE - In November 2005, the Company entered into an equity line
agreement with a private investor (the "Equity Line Investor"). Under the
equity line, the Company had the right to draw up to $10,000,000 from the Equity
Line Investor. The Company was entitled to draw funds and to "put" to the
Equity Line Investor shares of the Company's Class A common stock in lieu of
repayment of the draw. As of June 30, 2006, the Company had not drawn funds
under the equity line.
NOTE 6 - SUBSEQUENT EVENT
Subsequent to June 30, 2006 the Company issued 524,985 shares of common stock
for cash proceeds of $104,985, or $0.20 from various investors.
Previously, the Company entered into an agreement whereby an investor agreed to
purchase, up to $2,000,000 dollars worth of common shares of the Company at a
per share purchase price equal to 40% of the previous day's last trade price.
Subsequent to June 30, 2006, the Company issued 1,026,711 shares of common stock
under this agreement for cash proceeds of $226,599 (net of $30,197 of issuance
costs).
In July 2006, the Company issued 1,851,250 shares of common stock to various
individuals for their services in raising equity funds and marketing upcoming
Company products. The Company is currently evaluating the value of these
shares.
F-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
FORWARD-LOOKING STATEMENT
Certain statements contained herein, 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, 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. In addition to the forward-looking statements
contained herein, 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 our audited financial
statements and the accompanying notes thereto for the year ended December 31,
2005 which appear in our Form 10-KSB for the year then ended, and our unaudited
financial statements for the quarter ended June 30, 2006 and the accompanying
notes thereto and the other financial information appearing elsewhere herein.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the USA, which
contemplate our continuation as a going concern.
We had a stockholders deficit of $549,276 at June 30, 2006, and a
stockholders deficit of $758,547 at June 30, 2005.
Loans from our CEO and our president have been necessary to fund our
operations.
Stockholder loans as of June 30, 2006 and December 31, 2005 consist of the
following:
JUNE 30, DECEMBER
2006 31, 2005
-------------------------------------------------------------------------------------------
Note payable to President; principal and interest due May 2006;
interest is accrued at 30% per annum; secured by inventory $ - $ 168,500
Note payable to President; principal and interest due June 2006;
interest is accrued at 7% per annum; unsecured 20,000 -
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 84,000 84,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 125,000 125,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 40,000 40,000
F-8
Note payable to CEO and majority shareholder; principal and
interest due September 2006; interest is accrued at 7% per annum;
unsecured. 13,000 13,000
Note payable to CEO and majority shareholder; principal and
interest due September 2007; interest is accrued at 7% per annum;
unsecured. 8,642 14,142
Note payable to shareholder; principal and interest due January 2007;
interest is accrued at 7% per annum; unsecured. - 40,000
Notes payable to President and CEO; principal and interest due
March 2008; interest is accrued at 7% per annum; unsecured. - -
-------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS 290,642 484,642
Less: Current Portion 282,000 444,642
-------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS - LONG TERM $ 8,642 $ 40,000
-------------------------------------------------------------------------------------------
During the six months ended June 30, 2006, two shareholders advanced the
Company $73,852. The Company made payments on these shareholder notes totaling
$267,852 during the six months ended June 30, 2006.
At June 30, 2006, the Company had accrued interest relating to shareholder
loans of $129,913.
During the six months ended June 30, 2006, the Company accrued $30,000 as
salaries payable to the company's CEO, resulting in $185,987 of salaries payable
at June 30, 2006.
Our independent auditors made a going concern qualification in their report
dated March 29, 2006, which raises substantial doubt about our ability to
continue as a going concern. The financial statements herein 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.
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 are located in Alameda, California. We are a biotechnology company that
develops new, practical applications for electrolyzed water and the electrolysis
process. Our processes and equipment alters the properties of water through
electrolysis with electrolytic ion separation and through the conversion of
existing properties found in water to achieve functional results. Our business
consists of the salesand marketing of the industrial, environmental and
residential systems throughout the U.S.A. which alter the properties of water to
produce functional
F-9
water. We act 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. We are working towards raising funds to expand our marketing
and revenues. We have spent considerable time negotiating with several overseas
corporations for the co-development of enhanced antioxidant beverages for
distribution into the overseas markets. In addition, we are working with
Canadian businesses to identify markets for various disinfection applications of
functional water, pending government approval. We are working on agricultural
applications of functional water. We are working on packaging for a spray-on
application of function water for pathogen counter-measures.
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. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is 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.
Our fiscal year end is December 31.
We have a joint research and development program with Weber Farms located
in Washington State. Weber Farms is family-owned with a long history of raising
and marketing quality potatoes, wheat and corn. In 1979, Weber Farms built a
fresh pack potato warehouse to ensure better quality and more oversight of the
marketing of open potatoes both to domestic and foreign markets. In 1997, a
state-of- the-art potato storage facility capable of storing 50,000 tons was
built. End uses of Weber Farm potatoes are generally in the areas of boxed and
bagged potatoes for retail stores, hash browns, French fries and other
retail-type products. We will work together in various areas where Proton's
electrolyzed water, with its unique efficacies, can be integrated into potato
production and post-harvesting processes. Understanding that Proton's water
brings about certain potato maintenance efficacies, environmental and worker
safety, on-site production abilities and cost efficiencies, both parties are
looking forward to a mutually rewarding relationship.
We have also been experimenting with the uses of electrolysis to complement
or bypass the conventional wine aging process by applying the process of
electrolysis to young wine that has been fermented but not aged.
We have begun the design and engineering of three market-ready industrial
electrolysis systems based on one standard platform. The strong advantage of
designing these three systems utilizing a standard platform allows for cost
efficiencies in assembly, ease of maintenance and the ability to have systems
that will be able to produce all of
F-10
the required forms of electrolyzed water to meet most of the industrial
applications for which electrolysis is beneficial. Market-ready units for
industrial applications are scheduled delivery to us in late 2006.
We are preparing to submit its anti-microbial sprays for testing at an
independent testing laboratory. The testing will determine the efficacy of our
proprietary anti-microbial water in the elimination of germs. After testing is
completed, we will plan for commercial production of the sprays. Upon the
successful completion of the testing, our goal is to have market-ready sprays
for germ elimination scheduled for delivery to us 90 days thereafter.
We are in the final phase of component sourcing and tool sourcing for our
proprietary residential water-enhancing device. The home system utilizes an
advanced form of electrolysis to enhance the beneficial properties of
electrolytes found in tap water. This unit will allow for an individual to
create an enhanced, drink similar to bottled water through a contemporary
kitchen counter-top appliance which will retail at an attractive and affordable
price. Upon the completion of component sourcing and tool sourcing, we can
begin manufacturing. Our goal is to have market-ready residential units
scheduled for delivery to us in early 207.
We recently hired Hiroshi Tanaka as its VP of Technology. Mr. Tanaka is an
expert in the field of industrial and consumer uses of electrolyzed water.
RESULTS OF OPERATIONS-SIX MONTHS ENDED June 30, 2006 AND 2005.
We had revenue of $84,561 for the for the six months ended June 30, 2006
compared to revenue of $157,710 for the for the six months ended June 30, 2005.
This was a revenue decrease of $73,149 attributable to management efforts being
directed at fundraising and product development.
We incurred a net loss of $270,540 for the six months ended June 30,
2006 and a net loss of $695,251 for the six months ended June 30, 2005.
Cash used by operating activities was $180,073 for the for the six months
ended June 30, 2006 compared to cash used by operating activities of $157,503
for the six months ended June 30, 2005.
LIQUIDITY
At June 30, 2006, we had cash on hand of $29,270. Our growth is dependent
on our attaining profit from our operations and our raising of 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
to generate a profit.
At June 30, 2006, we owed stockholder loans of $290,642.
In June 2005, we entered into an agreement with Mitachi, a Japanese
electronics component manufacturer, to aid in the production of enhanced
drinking water generators. Pursuant to this agreement, Mitachi agreed to pay us
25,000,000 Yen for engineering design, molding, tooling and preparation costs,
and the exclusive product distribution rights for China, Taiwan, and Japan.
Through June 30, 2006, Mitachi had paid to us an aggregate of6,000,000 Yen (US
$52,506in connection with this agreement. Since the project is not yet completed
and no units have been sold, this amount is classified as deferred revenue.
We sometimes issue stock for in-kind payments of compensation to
consultants. Subsequently, in July 2006, we issued an aggregate of 1,851,250
shares of common stock to five consultants as payment in-kind for services
rendered.
F-11
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:
- The cost to acquire equipment that we then would resell.
- The cost of sales and marketing.
- The rate at which we expand our operations.
- The results of our consulting business.
- The response of competitors.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Our principal
executive and financial officer evaluated our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this quarterly
report. Based on this evaluation, our principal executive officer and principal
financial officer concluded that these disclosure controls and procedures are
effective and designed to ensure that the information required to be disclosed
in our reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the requisite time periods.
In connection with its review of the Company's consolidated financial
statements for the three and six months ended June 30, 2006, Hansen, Barnett &
Maxwell ("HB&M"), the Company's registered public accounting firm, advised the
Audit Committee and management of internal control matters with respect to
certain financial reporting controls that they considered to be a material
weakness, which is described below. A material weakness is a control deficiency,
or a combination of control deficiencies, that results in there being more than
a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The material weakness
identified at June 30, 2006 was as follows:
A material weakness existed in our control environment relating
to inadequate staffing of our technical accounting function, including
a lack of sufficient personnel with skills, training and familiarity
with certain complex technical accounting pronouncements that have or
may affect our financial statements and disclosures.
The Company considered these matters in connection with the quarterly closing
process and the preparation of the June 30, 2006 consolidated financial
statements included in this Form 10-QSB and determined that no prior period
financial statements were materially affected by such matters. In response to
the observations made by HB&M, the Company will implement certain enhancements
to its internal controls, accounting staff and procedures, which it believes
address the matters raised by Hansen, Barnett & Maxwell.
(b) Changes in Internal Control Over Financial Reporting. There was no
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
identified in connection with the evaluation of our internal control performed
during the quarter ended June 30, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
In July 2006, Mr. Hiroshi Tanaka was appointed our Vice President of
Technology. Mr. Tanaka resides in and is a citizen of Japan. From 1992 through
2004, Mr. Tanaka was the Chief Engineer at ARV. From 2004 through the present,
Mr. Tanaka has been the president of Solution Technos. From 2005 through the
present, Mr.
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Tanaka has been the president of Innovative Design and Technology, the successor
company to Solution Technos. We granted 100,000 shares of common stock to Mr.
Tanaka as compensation. Innovative Design and Technology is one of our
manufacturing vendors.
Payments to Innovative Design and Technology. In 2006 to date, we have
--------------------------------------------
paid Innovative Design and Technology the sum of $230,000 for product design and
manufacturing services.
Proposed payments to Mt. Tanaka. In connection with wine enhancement
--------------------------------
technology that is the intellectual property and know-how of Mr., Tanaka, we are
presently negotiating to acquire a USA license from Mr., Tanaka.
ITEM 6. EXHIBITS.
Exhibit
Number Name
--------------------------------------------------------------
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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in Alameda, California.
PROTON LABORATORIES, INC.
August 21, 2006 (signed)
-------------------------
By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer, and
Chief Financial Officer
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