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, 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 (IRS Employer identification
incorporation or organization) Number)
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 is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
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 this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Section 12b-2 of the Exchange Act).[ ]YES [X]NO
Registrant's revenues for its most recent fiscal year: $143,341.
The aggregate market value of the common stock held by non-affiliates of
the registrant on April 12, 2007 is $3,661,054.
On April 12,2007, the registrant had outstanding 26,685,673 shares of
Common Stock, at $0.0001 par value per share and 8000 preferred shares of
common stock outstanding at $.0001 per share.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this annual report, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects," and other words of similar import, are "forward-looking statements."
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 forward-looking statements. Given these uncertainties,
readers are cautioned not to place undue reliance on forward-looking statements.
In addition to the forward-looking statements contained in this annual report,
the following forward-looking factors could cause our future results to differ
materially from our forward-looking statements: market acceptance of our
products and our functional water technology, competition, ability to obtain
further funding and government compliance.
PART I
Item 1. Descripton of Business
INTRODUCTION
Proton Laboratories, Inc. ("Proton" or the "company") is a company
specializing in the process of electrolysis of water and in the marketing of
"functional water systems." The company utilizes this ionic separation and
enhancement process as a method to alter the properties of water and other
liquids. These advantages are found in the areas of improved efficacies, cost
efficiencies, environmental safety, worker safety, enhanced products and
performance and generally as a simple-yet-advanced method in addressing a wide
array of today's industrial and humanity-related concerns.
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.
Proton Laboratories, Inc. was originally founded as Proton Laboratories,
LLC by our Chief Executive Officer Ed Alexander in 2000. This predecessor
company specialized in the marketing of residential water systems and in
research and development of water electrolysis systems. In 2002 we merged into a
public company trading on the NASDAQ Over the Counter Bulletin Board("OTCBB")
market.
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 stock is traded on the OTCBB. Our trading symbol is "PLBI."
OUR BUSINESS--THE BACKGROUND OF FUNCTIONAL WATER
Our business is the marketing of "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 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 have been marketing functional water systems to the residential market
since 2000, and intend to expand into 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.
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 United States; and educators of
academia, government and industry on the benefits of functional water.
In 2006, we expended approximately $275,000 to configure our operations so
we can become a manufacturer of our own private labeled products. During 2006,
we have designed, engineered and started assembly of our own, "Proton Labs"
branded water electrolysis systems. In this process we have designed 5
different systems of which 3 systems are designed for a wide use of
antimicrobial applications, 1 system as a hand disinfectant system and 1 system
as a commercial grade alkaline
drinking water unit. Additionally, an advanced residential drinking water system
was designed. By making a substantial change in designs and manufacturing, the
company has transitioned itself from a reseller of other manufacturers systems
to that of a proprietary branding owned by the company. The company used
substantial expertise developed through itself and its consultants through the
years in the design and assembly of these units to ensure user friendliness,
durability, lowest manufacturing cost available with a guaranteed level of
quality control coupled to an advanced design to conduct an effective
electrolysis process.
We also have had an agreement as an exclusive importer and master
distributor of functional water systems that are manufactured by Matsushita
Electric Corporation of America. We also 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 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.
Electrolyzed water may also be used in the formulation of nutraceutical
-type dietary supplement products in the health-food and dietary supplement
industries, and we intend to target this market.
OUR BUSINESS --RECENT EVENTS AND NEW PRODUCTS
In 2006, we raised $1,065,052 from investors. We used some of those proceeds for
the following purposes:
A. Design and preparation for assembly and sales of a proprietary residential
counter-top unit which produces an enhanced drinking water through electrolysis.
Our device will have a filtration system coupled to an electrolysis process
which effectively filters the tap water while restructuring the properties of
water to make it: (i) have
greater mineral effectiveness; (ii) be tastier than tap water; and, (iii) be
more hydrating than tap water. We anticipate that this product line will be
ready for marketing in 2007.
B. Design and preparation for assembly, validation and sales of a proprietary
anti-microbial spray. We have identified a form of electrolyzed water that may
be an effective anti-microbial agent. One of our proprietary aspects of this
product may be the stabilization of the electrolyzed water thereby allowing for
an extended shelf life compared to other forms of electrolyzed water. This
product is being readied for testing by a third party testing lab to establish
the efficacies of its anti-microbial effect on MRSA, HBV, HIV and Avian Flu. The
objective of our anti-microbial spray is to be able to control and eliminate
these four microbial strains on a hard surface or on a topical surface. We
anticipate introducing this product to ambulance services as a non-chemical
based, user friendly product for which these microbes do not have an immunity.
We anticipate that this product line will be ready for marketing in 2007. As of
the date of this 10K, the Company has received successful test results from an
independent 3rd party testing laboratory, indicating the high efficacy of the
anti-microbial spray with MRSA.
C. Design and preparation for assembly of 3 proprietary commercial-grade
electrolysis systems based on a standard platform. There are many industrial
uses for water electrolysis systems. Our 3 system designs based on a standard
platform which minimizes the need for different components for different
applications. The standard platform will provide ease of assembly, ease of use,
durability and cost effectiveness. We anticipate that this product line will be
ready for marketing in 2007.
D. The use of the wine enhancement through the use of our equipment being
integrated into an existing wine production line to achieve:
1. A jumpstart to the wine aging process.
2. The control of the wine aging process.
3. The termination of the wine aging process.
4. The ability to circumvent the use of a particular wine process
ingredient.
5. The ability to bring a specific component of wine to the forefront of
taste.
6. The ability to tone down a specific component of wine so to reduce its
taste.
7. The ability to control the classification (rating) of a wine product
based on a desired combination of several features of the wine.
Our ability to successfully market these products will depend upon our
continued ability to raise capital.
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 effective in the prevention of
cross-contamination of processing environments.
OUR BUSINESS--FUNCTIONAL WATER SYSTEMS PROCESSES
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.
OUR BUSINESS--MARKETING
Our objectives are:
- 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.
- 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 our own engineers 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 listing for the hand disinfectant, we
then would 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, wine aging control, and the formulation
of functional water based aquaceuticals.
Hand Disinfection. After we obtain FDA listing 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.
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.
During 2006, the company had 12 product distributors. During December,
2006, the company entered into a discussions with a private company, AquaThirst,
Inc. ("Aquathirst"), to explore an exclusive manufacturing, marketing and sales
arrangement. AquaThirst's marketing group has specialized experiences in product
distribution in the dietary supplement, functional foods, functional beverages,
Cosmetics (hair and skin), over the counter drugs, specialty foods and pet care
markets, as well as in distributing products requiring clinical diagnostic
laboratory testing, both physician and consumer.
These exclusive manufacturing and marketing agreements were ratified by
Proton's Board of Directors in March 2007, and effectively provide that the
Company will have access to Aquathirst's product distribution channels in
domestic and international markets. These distribution channels will cover
residential, cosmetic, medical, agricultural, food processing and consumer
product areas.
OUR BUSINESS--COMPETITION
Our direct 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 United
States during the past nine-year period through various companies and
organizations. These consultants are the leaders in the U.S. 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 United States, 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 eleven-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.
Although the majority of competitors of water systems are limited
resellers, the one significant competitor that we have is named Hoshizaki
U.S.A., which is an established U.S. 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 expand their business models.
In our new products areas, we will compete with United Kingdom based
Sterilox regarding our antimicrobial spray, as well as traditional suppliers of
chemical disinfectants such as Johnson and Johnson. With respect to nutritional
and enhanced consumable water products, our nearest competitor would be
Essentia, which manufactures bottled water products.
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. Sufficiently
adding to this requirement are the discussions that are currently underway
involving the alliance of the company with an established product manufacturing,
marketing and sales infrastructure.
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
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
We have completed a 3-year 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 through routine application removes mildew.
We have done preliminary field testing in the potato growing industry with
respect to potato maintenance during storage. Our preliminary review of this use
of functional water indicates better potato maintenance during storage. 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 are identifying suppliers who can provide components and tools for the
manufacture of our proprietary residential water-enhancing small appliance. The
residential system utilizes an advanced form of electrolysis to enhance the
beneficial properties of electrolytes found in tap water. This small appliance
will allow for the consumer to create an enhanced drink, similar to bottled
water, using our contemporary, kitchen counter-top, small appliance. We expect
these consumer appliances to be ready for retail sales in 2008.
Utilizing the sublicense from Edward Alexander at no cost to us, which are
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, the
company has begun advancing the terms of this sublicense. During the latter
part of 2006, the company ordered a commercial-grade system to produce this
advanced antioxidant beverage. During the first quarter of 2007, the company
will take delivery of this unit with production of this product anticipated to
begin during the second quarter of 2007.
In conjunction with our Japanese engineering group, we have completed the
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 resulting in a wine product with a smooth texture to the
wine along with an enhancement to the various active properties of the wine. In
August, 2006, the company and its lead engineer, Mr. Hiroshi Tanaka, were
invited to address the 40th Anniversary Mondavi Wine Conference, held in Napa
California, with this newly-developed technique for wine enhancement. The
presentation was well understood by the specialized audience and several
articles had been written about it in various media. The company has been
invited to attend the Taste3 Conference held in Napa, California during the
month of May, 2007. With what the company has achieved through the wine
enhancing process, the company and its engineer has extended the use of this
application to the enhancement of Tequila, Japanese Sake, Japanese Sho-chu and
through a business alliance, a Cello product. During 2007, the company will
introduce this enhancement method to a targeted audience specializing in wine,
tequila and other alcohol-based products.
In 2007, we plan to file an EPA/FDA application for our hand disinfectant
system and our surface disinfectant system. We are currently working on the
submission of our antimicrobial waters to be used for produce misting and for
vegetable washes to the EPA.
In February 2005, MIZ, 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.
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 $6,300 per month. Under this lease, we are required to
pay a percentage of the property taxes, insurance and maintenance. The lease
expires in July 2007 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.
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." 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. Our fiscal year ends on December 31.
COMMON STOCK PRICE RANGE
YEAR AND QUARTER HIGH LOW
------------------------------------
2006:
-----
First Quarter $0.40 $0.20
Second Quarter $0.61 $0.29
Third Quarter $1.21 $0.55
Fourth Quarter $0.69 $0.17
2005:
-----
First Quarter $1.55 $0.37
Second Quarter $0.48 $0.32
Third Quarter $0.40 $0.20
Fourth Quarter $0.34 $0.14
-------------------------
On April 12, 2007, the closing price of our stock was $0.20.
On April 12, 2007, we had outstanding 26,685,673 shares of common stock and
we had approximately 254 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.
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, or convertible debt. Our Series A Preferred Stock
pays dividends.
Sales of Securities
Sales of Unregistered Securities in 2006:
During the twelve months ended December 31, 2006, we sold 6,575,723
restricted common shares to foreign residents, for a total value of $1,882,314
cash and services. These securities were issued in private transactions, in
reliance on the exemption from registration under the federal securities laws
provided by Regulation S. We also sold to United States residents 812,400 shares
of restricted common shares for a total value of $307,195 in cash and services
in reliance on the exemption available under Section 4(2) of the 1933 Securities
Act.
The total amount of cash we received in 2006 for sale of restricted
securities, both from foreign and United States residents was $1,065,052.
Proceeds of Sale from Registration of Our Common Stock
We filed an SB-2 registration statement for 5,846,250 shares of our selling
shareholders' common stock on September 11, 2006. This registration statement
became effective on September 29, 2006. We do not receive proceeds from the sale
of these shares by our selling shareholders. The selling shareholders may offer
and sell their shares at a price and time determined by them. The market price
of our common stock could drop if a substantial amount of these shares are sold
in the public market.
Item 6. Management's Discussion and Analysis
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 herein. The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
U.S., which contemplate our continuation as a going concern.
We have incurred net losses of $1,716,680 in 2006 and $981,674 in 2005.
Loans from our CEO were required to fund operations.
Our independent auditors made a going concern qualification in their report
dated April 13, 2007, which raises 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 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 have our primary office located in Alameda, California. During 2006 we
created a presence in Quincy, Washington and Portland, Oregon by aligning
ourselves with office spaces that were made available to us. These offices are
used primarily for marketing and sales generation.
Our business consists of the development, marketing and sales of the
industrial, environmental, and residential systems through the United States
which alter the properties of water to produce functional water. During 2006,
we continued to import and resell systems manufactured by various Japanese
companies; however, during the same time period the company started design,
engineering, parts sourcing and assembly identification for developing its own
brand labeled products. In Management's view, the company has successfully
designed, engineered and developed five commercial systems and one residential
unit. If the company can raise sufficient capital, of which there is no
assurance, management believes these units will be ready for market introduction
during the second quarter of 2007.
We continue to raise funds to bring inventory to market. The company in
late 2006 started a dialogue with a funding sourcing entity to raise $10,000,000
to advance its market-ready products to production and revenue. These
negotiations have been finalized in the first quarter of 2007.
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.
RESULTS OF OPERATIONS-YEARS ENDED DECEMBER 31, 2006 AND 2005.
We had revenue of $143,341 for the year ended December 31, 2006, compared
to revenue of $328,200 for the year ended December 31, 2005. This was a decrease
of 56%. We had a working capital deficit of $251,472 and $871,723 at December
31, 2006 and 2005, respectively.
We had a net loss $1,716,680 for the year ended December 31, 2006 compared
to a net loss of $981,674 for the year ended December 31, 2005. This increase in
net loss was directly attributed to the following circumstances. (a) Expenses
incurred in various consulting services that the company needed for marketing
and public relations. (b) Expenses incurred in the development of its
proprietary brand products consisting of 4 different antimicrobial systems, 1
commercial grade drinking water system, 1 hand disinfectant system, a disposable
antimicrobial spray, and a produce misting/vegetable washing system. (c)
Expenses incurred in various 3rd party testings to validate the efficacy of the
company's waters. (d) Reduction to 2006 revenues due to a delayed product
substitution process brought about by funding delays (e) Interest expenses and
principal paid in retiring a note that was carried by the company to its current
President.
Cash used by operating activities was $762,118 for the year ended December
31, 2006 compared to cash used by operating activities of $250,646 for the year
ended December 31, 2005. This increase in cash used by operating activities was
due primarily to expenditures incurred in the development of the Company's
own systems, third party testing and applications development expenditures.
LIQUIDITY
As of December 31, 2006, we had cash on hand of $9,768. The Company had a
working capital deficit of $251,472 and $871,723 at December 31, 2006 and 2005,
respectively. Our growth is dependent on 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 December 31, 2006 and 2005, the outstanding principal on all stockholder
loans was $270,642 and $484,642 respectively, and accrued interest was $51,554
and $37,154 annually. During 2006, we paid in full stockholder loans of a
principal amount of $287,852.
As of December 31,2006, one stockholder agreed to consolidate all
outstanding notes due to him and to extend the time for repayment of interest
and principal to December 31, 2009. Total amount due to this stockholder under
the consolidated note is $270,642 in principal and $51,554 in interest.
Interest will continue to accrue at 7% per annum.
The company raised $1,065,052 from the sale of common stock in 2006,
compared to $20,000 from the sale of common stock in 2005.
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 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.
As of the end of the period covered by this report, the Company conducted
an evaluation, under the supervision and with the participation of the Chief
Executive Officer and Chief Financial Officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
1934 Act. The evaluation was prompted by the following communication from the
Company's registered public accounting firm.
In connection with its review of the Company's consolidated financial
statements for ended December 31, 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 December 31, 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.
We considered these matters in connection with the annual closing process
and the preparation of the December 31, 2006 consolidated financial
statements included in this Form 10-KSB and determined that no prior period
financial statements were materially affected by such matters. In response
to the observations made by HB&M, we are in the process of implementing
enhancements to our internal controls, accounting staff and procedures, which we
believe address the matters raised by HB&M, including the retaining of
additional outside consultants and employees who will have the skills, training
and familiarity with certain complex technical accounting pronouncements
appropriate to preparing our financial statements and disclosures.
Item 8B. Other Information
None.
Item 9. Directors and Executive Officers of the Registrant, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act
EXECUTIVE OFFICERS AND DIRECTORS
Name Age Position
--------------------------------------------------------------------
Edward Alexander 55 Director, Chief Executive Officer,
Chief Financial Officer, and Secretary
Michael Fintan Ledwith 64 Director, Member of the Audit Committee
Gary Taylor 57 Director and President
Edward Alexander has been our Chairman, a Director, Chief Executive
Officer, Chief Financial Officer, 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. 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 during the 22
years prior to 1993. 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 authorize and 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 "Communion" 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 2001 he has been a partner in World of Star Stuff,
which markets whole food products.
On June 3, 2005, Gary Taylor was appointed as a Director and President. We
granted 131,600 shares of common stock to Mr. Taylor in connection with this
appointment. Since 1998, Mr. Taylor has been the
CEO of The Moore Company which provides consulting for product distribution and
third party logistical services.
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, 2007 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.
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 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.
Item 10. Executive Compensation
Executive Compensation
The following table sets forth certain information as to our highest paid
officers and directors. No other compensation was paid to any such officers or
directors other than the compensation set forth below.
Annual Compensation Long-Term Compensation
Awards Pay-Outs
Securities
Name and Other Under-
All Restricted lying
Principal Annual Stock Options LTIP Other
Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
---------------------------------------------------------------------------------------------------------
Edward
Alexander
CEO, CFO
$ $ $ $ # $
2006(1) 68,400 -0- -0- -0- -0- -0-
2005(2) 62,400 -0- -0- -0- -0- -0-
Gary Taylor
President
2006 -0- -0- -0- -0- -0-
2005 -0- -0- -0- -0- -0-
--------------------------------
(1) Mr. Alexander's services were valued at $60,000 which was recorded as
accrued wages. Mr. Alexander also received $8,400 as cash compensation.
(2) Mr. Alexander's services were valued at $60,000, which was recorded as
accrued wages Mr. Alexander also received $2,400 as cash compensation.
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
No compensation was paid to outside directors in either 2005 or 2006. Ed
Alexander, CEO and Chairman, did not receive compensation in addition to his
salary for serving as a director in 2005 and 2006.
EMPLOYEE STOCK OPTION PLANS
In June, 2005, the Board of Directors approved the "June 2, 2005 Stock and
Stock Option Plan" which made available 1,500,000 shares of the company's common
stock as incentive grants for consultants, directors and key employees. As of
December 31, 2006, all shares available under the plan were granted to
consultants to the company, and no shares were granted to officers and
directors.
NO EMPLOYMENT AGREEMENT
We do not have any employment agreements with any employees.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
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-
Equity compensation
plans not approved by
security holders (2) -0- n/a --
Total -0- n/a -0-
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth certain information concerning the number of
shares of common stock owned beneficially as of April 12, 2007, 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. As of April 12, 2007, we had 26,685,673 shares of
common stock outstanding.
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 30.7%
Gary Taylor
333 S.E. 2ND AVE.
PORTLAND OR 97214 156,400 Common Stock 0.6%
Michael Fintan Ledwith
6610 Churchill Rd. SE
Tenino, WA 98589 40,000 Common Stock 0.1%
Executive Officers
As A Group(3 Persons) 8,380,400 Common Stock 31.4%
We are not aware of any arrangements that could result in a change of
control.
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.
During 2006, notes of total principal amount of $168,000 that were due to
our President and current director, Gary Taylor, and the principal and interest
that was due on each of these notes have been paid in full.
Our CEO, Ed Alexander, held a series of notes from the Company during
fiscal years 2005 and 2006 which at fiscal year end of 2006 had total
outstanding principal due of $270,642 and total accrued interest due of $51,554.
As of December 31, 2006, our CEO agreed to consolidate all of these outstanding
notes and to extend the term of repayment to December 31, 2009. Interest will
continue to accrue on these notes at an interest rate of 7% per annum.
Item 13. Exhibits
Exhibit Number Exhibit Description
-----------------------------------------------------------------------
31 Certification pursuant to Section 13a-14 of CEO
32 Certification pursuant to Section 1350 of CEO
Item 14. Principal Accountant Fees and Services
OUR INDEPENDENT ACCOUNTANT
In 2005, 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, 2006 and 2005. Our Audit Committee approved 100% of the work of
HBM.
1. AUDIT FEES
For the two years ended December 31, 2006 and 2005, HBM billed us the
aggregate amount of $35,357 and $24,096, respectively, for
professional services rendered for their 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 2006 and 2005.
2. AUDIT-RELATED FEES
For the two years ended December 31, 2006 and 2005, we were billed $3,040
and $5,029, respectively, by HBM for audit-related fees.
3. TAX FEES
For the two years ended December 31, 2006 and 2005, we were not billed by
HBM for any tax fees.
4. ALL OTHER FEES
For the two years ended December 31, 2006 and 2005, 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 2006 audit was attributed
to work performed by HBM's full-time, permanent employees.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this FORM 10-KSB to be signed on its behalf by the undersigned, thereunto
duly authorized in Alameda, California.
PROTON LABORATORIES, INC.
April 16, 2007 By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer,
Chief Financial Officer
In accordance with the Exchange Act, this FORM 10-KSB has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
April 16, 2007 By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer and
Chief Financial Officer
April 16, 2007 By: /s/ Michael Fintan Ledwith
Michael Fintan Ledwith
Director
April 16, 2007 By: /s/ Gary Taylor
Gary Taylor
Director and President
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
PROTON LABORATORIES, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
HANSEN, BARNETT & MAXWELL, P.C.
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, 2006 and 2005 F-3
Consolidated Statements of Operations for the years ended December 31, 2006 and 2005 F-4
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2005
and 2006 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005 F-6
Notes to Consolidated Financial Statements F-7
HANSEN, BARNETT & MAXWELL, P.C.
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 an independent member of
Phone: (801) 532-2200 BAKER TILLY
Fax: (801) 532-7944 INTERNATIONAL
www.hbmcpas.com
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, 2006 and 2005, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 2006 and 2005. 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, 2006 and 2005, and the results of their
consolidated operations and their consolidated cash flows for the years ended
December 31, 2006 and 2005, 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 and has negative working capital.
These factors raise substantial doubt about the Company's 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, P.C.
Salt Lake City, Utah
April 13, 2007
F-2
PROTON LABORATORIES, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
2006 2005
---------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 9,768 $ 1,384
Accounts receivable, less allowance for doubtful accounts of
$30,419 and $16,522, respectively 794 21,927
Inventory 143,865 32,861
---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 154,427 56,172
---------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 23,316 19,709
Equipment and machinery 238,776 161,833
Leasehold improvements 11,323 11,323
Accumulated depreciation (69,550) (45,820)
---------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 203,865 147,045
---------------------------------------------------------------------------------------------
DEPOSITS 6,131 6,131
=============================================================================================
TOTAL ASSETS $ 364,423 $ 209,348
=============================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 71,314 $ 168,378
Accrued expenses 266,079 252,769
Deferred revenue 52,506 52,506
Preferred dividends payable 16,000 9,600
Stockholder loans, current portion - 444,642
---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 405,899 927,895
---------------------------------------------------------------------------------------------
STOCKHOLDER LOANS, NET OF CURRENT PORTION 270,642 40,000
=============================================================================================
TOTAL LIABILITIES $ 676,541 $ 967,895
=============================================================================================
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock, 400,000 shares authorized
with a par value of $0.0001; 8,000 shares issued and
outstanding, respectively; liquidation preference of $80,000
and $0, respectively 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; 21,658,223 and 14,270,100 shares issued and
outstanding, respectively 2,168 1,429
Additional paid in capital 4,045,371 1,856,601
Subscription receivable (20,000) -
Accumulated deficit (4,419,657) (2,696,577)
---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (312,118) (758,547)
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 364,423 $ 209,348
=============================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
---------------------------------------------------------------------------------------------
SALES $ 143,341 $ 328,200
COST OF GOODS SOLD 113,288 246,630
---------------------------------------------------------------------------------------------
GROSS PROFIT 30,053 81,570
---------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including
equity-based expenses of $1,063,931 and $459,040, respectively) 1,702,134 954,834
---------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (1,672,081) (873,264)
---------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Interest income 1,615 186
Interest expense (46,214) (108,596)
---------------------------------------------------------------------------------------------
NET OTHER EXPENSE (44,599) (108,410)
---------------------------------------------------------------------------------------------
NET LOSS (1,716,680) (981,674)
PREFERRED STOCK DIVIDEND (6,400) (6,400)
---------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $(1,723,080) $ (988,074)
---------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.10) $ (0.07)
---------------------------------------------------------------------------------------------
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 17,813,461 13,720,209
---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2006
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------- PAID IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2004 8,000 $80,000 12,975,000 $ 1,299 $ 1,350,616 $ - $ (1,708,503) $ (276,588)
Issuance of shares for
interest expense - - 47,500 5 27,070 - - 27,075
Issuance of directors
shares - - 131,600 13 52,627 - - 52,640
Issuance of shares for
consulting services - - 1,016,000 102 406,298 - - 406,400
Issuance of shares for
cash - - 100,000 10 19,990 - - 20,000
Dividends declared - - - - - - (6,400) (6,400)
Net loss for the period - - - - - - (981,674) (981,674)
------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2005 8,000 80,000 14,270,100 1,429 1,856,601 - (2,696,577) (758,547)
Issuance of shares for
legal services - - 352,400 35 81,017 - - 81,052
Issuance of shares for
consulting services - - 1,410,000 141 1,023,264 - - 1,023,405
Issuance of shares for
cash - - 5,625,723 563 1,084,489 (20,000) - 1,065,052
Dividends declared - - - - - - (6,400) (6,400)
Net loss for the period - - - - - - (1,716,680) (1,716,680)
------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2006 8,000 $80,000 21,658,223 $ 2,168 $ 4,045,371 $ (20,000) $ (4,419,657) $ (312,118)
==============================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,716,680) $(981,674)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 23,730 26,660
Common stock issued for services 1,063,931 459,040
Amortization of loan costs - 27,075
Changes in operating assets and liabilities
Accounts receivable 21,133 (11,294)
Inventory (111,004) 1,236
Deferred revenue - 52,506
Accounts payable (56,538) 33,598
Accrued expenses 13,310 142,207
----------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (762,118) (250,646)
----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Refund of deposit - 5,000
Cash paid for deposit - (6,131)
Purchases of property and equipment (80,550) (3,893)
----------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (80,550) (5,024)
----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 1,065,052 20,000
Proceeds from stockholder loans 73,852 222,642
Payment on stockholder loans (287,852) -
----------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 851,052 242,642
----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 8,384 (13,028)
CASH AT BEGINNING OF PERIOD 1,384 14,412
----------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 9,768 $ 1,384
----------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest $ 46,214 $ 108,596
No taxes were paid
NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Issuance of common stock for prior period legal services $ 40,526 $ 27,075
Accrual of preferred stock dividends $ 6,400 $ 6,400
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATIONS
ORGANIZATION- Proton Laboratories, 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 Proton 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 and its subsidiaries
as of and for the years ended December 31, 2006 and 2005. 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 design,
manufacturing, marketing, sales and integration 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. During 2006,
the company switched from an exclusive importer and master distributor of these
products to becoming a design, engineering, manufacturing, marketing and seller
of these products to 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
electrolyzed 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. 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 stockholder loans approximates fair value based on it
bearing interest at a rate which approximates market rates.
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 $1,716,680 and $981,674
for the years ended December 31, 2006 and 2005, respectively. The Company had a
working capital deficit of $251,472 and $871,723 at December 31, 2006 and 2005,
respectively. Loans from the Company's shareholders have been required to fund
operations. These conditions raise a
F-7
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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, and has been, working towards raising public funds to expand its
marketing and revenues. During the fourth quarter of 2006, the Company has
spent considerable time in advancing discussions with U.S. product manufacturing
and U.S. marketing and sales groups for manufacturing and distribution into
domestic and overseas markets. The Company has also spent considerable time and
financial resources in the development of its proprietary brand and electrolysis
systems utilizing Japanese engineering and assembly. During 2007, the Company is
planning to begin its marketing and sales efforts with a completely new line of
products and applications.
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, 2006 and 2005, was $23,730
and $26,660, 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.
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, 2006 or 2005.
INCOME TAXES - The Company recognizes an asset or liability for the deferred tax
consequences of all temporary differences between the tax basis 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
F-8
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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,
2006 and 2005 was $8,137 and $2,055, 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. 2,008,000 potential common shares from convertible preferred
stock have not been included as they are anti-dilutive.
NEW ACCOUNTING STANDARDS - In July 2006, the FASB issued Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes" (FIN 48), which attempts to set out
a consistent framework for preparers to use to determine the appropriate level
of tax reserves to maintain for uncertain tax positions. This interpretation of
FASB Statement No. 109 uses a two-step approach wherein a tax benefit is
recognized if a position is more-likely-than-not to be sustained. The amount of
the benefit is then measured to be the highest tax benefit which is greater than
fifty percent likely to be realized. FIN 48 also sets out disclosure
requirements to enhance transparency of an entity's tax reserves. The Company
will be required to adopt this Interpretation as of January 1, 2007. The
Company is still evaluating the impact of the adoption of FIN 48.
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" (SFAS 157), which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and requires additional disclosures about fair value
measurements. SFAS 157 aims to improve the consistency and comparability of
fair value measurements by creating a single definition of fair value. The
Statement emphasizes that fair value is not entity-specific, but instead is a
market-based measurement of an asset or liability. SFAS 157 upholds the
requirements of previously issued pronouncements concerning fair value
measurements and expands the required disclosures. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007, however earlier application is permitted provided the reporting entity has
not yet issued financial statements for that fiscal year. The Company does not
believe that the adoption of SFAS 157 will have a material effect on its
consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 (SAB 108). SAB 108 was issued to provide
interpretive guidance on how the effects of the carryover
F-9
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The provisions of SAB 108 are effective for the
Company for its December 31, 2006 year-end. The adoption of SAB 108 had no
impact on the Company's consolidated financial statements.
NOTE 3 - RELATED PARTY TRANSACTIONS
Stockholder loans as of December 31, 2006 and 2005 consisted of the following:
2006 2005
======================================================================================
Note payable to President; settled during the year ended
December 31, 2006 $ - $168,500
Note payable to CEO and majority shareholder; principal and
interest due December 2009; interest is accrued at 7% per annum;
unsecured. 270,642 276,142
Note payable to shareholder; settled during the year end 12-31-06 - 40,000
------------------
TOTAL STOCKHOLDER LOAN 270,642 484,642
Less: Current Portion - 444,642
--------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOAN - LONG TERM $270,642 $ 40,000
======================================================================================
The following table shows the schedule of principal payments under shareholder
loans as of December 31, 2006:
YEAR ENDING DECEMBER 31, PAYMENTS
------------------------ ---------
2007 $ -
2008 -
2009 270,642
---------
$ 270,642
=========
The note payable to the president was issued in March 2005 in the amount of
$164,000 and was originally due in May 2005. During 2005, the due date was
extended to May 2006. The original terms of the loan provided for an interest
payment of $28,500 or 106% per annum. The interest rate for the extension period
is 30% on the original principal balance. In October 2005, the Company obtained
an additional $4,500 from the same lender under the same terms. In addition,
the Company issued the lender 47,500 shares of common stock, which was recorded
as a $27,075 loan cost and was amortized over the original term of the note.
During 2006, the note payable and accrued interest were paid to the President in
full.
At December 31, 2006 and 2005, the accrued interest relating to stockholder
loans was $51,554 and $97,575, respectively.
During the years ended December 31, 2006 and 2005, the Company accrued $60,000
as salaries payable to the Company's CEO, resulting in $195,091 and $135,091 of
salaries payable at December 31, 2006 and 2005, 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, 2006 and 2005 are as
follows:
F-10
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
2006 2005
=======================================================================
Net operating loss carryforward $ 1,289,066 $ 654,778
Bad debt reserve 11,748 6,381
Accrued salaries 75,344 52,172
Less: valuation allowance (1,376,158) (713,331)
-----------------------------------------------------------------------
NET DEFERRED TAX ASSET $ - $ -
=======================================================================
For tax reporting purposes, the Company has net operating loss carry forwards in
the amount of $3,374,643 which will begin expiring in 2022.
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, 2006 and 2005:
2006 2005
=======================================================================
Benefit as statutory rate (34%) $ (583,671) $(231,769)
Non-deductible expenses 155 1,436
Change in valuation allowance 662,827 261,826
State tax benefit, net of federal tax effect (79,311) (31,493)
-----------------------------------------------------------------------
NET BENEFIT FROM INCOME TAXES $ - $ -
=======================================================================
NOTE 5 - PREFERRED STOCK
On December 31, 2006 and 2005 the company had 400,000 shares of preferred stock
designated 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 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 is made to holders of common stock. The holders of Series A
convertible preferred stock are not entitled to vote.
At December 31, 2006 and 2005, dividends payable was $16,000 and $9,600,
respectively.
NOTE 6 - COMMON STOCK
During May through September 2006, the Company issued 5,625,723 shares of common
stock for cash proceeds of $1,065,052 and a stock subscription of $20,000 at
prices ranging from $0.11 to $0.34 per share. The proceeds received are net
$41,025 of offering costs paid and include 666,250 shares issued to finders as
offering costs.
In July and August 2006 the Company issued 1,410,000 shares of common stock for
marketing and sales expense through December 31, 2006. The value of the shares
was $1,023,405 based on market prices ranging from $0.62 to $0.74 per share
which was the market price of the Company's common stock on the dates of
issuance.
F-11
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
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 the year ended December 31, 2005, the Company issued 131,600 shares of
its common stock to a director for compensation of services. The shares were
valued at $52,640, based on the market price on date of issuance of $0.40.
In August 2005, the Company sold 100,000 shares of restricted common stock at a
sale price of $0.20 per share for total consideration of $20,000 in cash.
In June 2005, the Company issued 1,016,000 of its common stock to consultants
for services. The shares were valued at $406,400 based on the market value of
the Company's stock on the date of issuance.
NOTE 7 - 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 December 31, 2005, 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.
In August 2006, the Company entered into an agreement with Innovative Design and
Technology to design, engineer and assemble five separate systems under the
Company's proprietary designs and label. As of December 31, 2006 the company
had incurred and expensed $176,466 of product development costs under this
agreement.
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.
For the years ended December 31, 2005 and 2006, the Company had not drawn funds
under the equity line. The Company has paid the Equity Line Investor $10,000 as
a documentation fee for the equity line, which is to be netted against funds
drawn. No funds have been drawn and the Company's intends not to draw on the
equity line, this documentation fee was expensed during the year ended December
31, 2005.
OPERATING LEASES - The Company currently leases office and storage space from a
third party. On July 1, 2005, the Company entered into a lease agreement to pay
monthly lease payments of $6,131 until June 30, 2006 and $6,335 from July 1,
2006 through June 30, 2007.
As of December 31, 2006 the company had six remaining months of future lease
payments under operating lease obligations totaling $38,010.
Rent expense for the years ended December 31, 2006 and 2005 was $87,153 and
$45,649, respectively.
MAJOR CUSTOMER - During the year ended December 31, 2006, sales to five
customers accounted for 45% of total sales. As of December 31, 2006, $11,370
was due from these customers. During the year ended December 31, 2005, sales to
three customers accounted for 39% of total sales. As of December 31, 2005,
$4,573 was due from these customers.
F-12
PROTON LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
MAJOR VENDOR - During the year ended December 31, 2006, purchases from four
vendors accounted for 95% of total inventory purchases. As of December 31,
2006, amounts due to these vendors accounted for 0% of accounts payable. During
the year ended December 31, 2005, purchases from four vendors accounted for 96%
of total inventory purchases. As of December 31, 2005, amounts due to these
vendors accounted for 35% of accounts payable.
NOTE 8 - SUBSEQUENT EVENTS
During January through March 31, 2007 the Company issued 5,412,300 shares of
restricted common stock for various services and agreements. The value of the
shares was $1,930,674 based on market prices ranging from $0.30 to $0.38 per
share which was the market price of the Company's common stock on the dates of
issuance.
On February 20, 2007, the Board of Directors of Proton Laboratories, Inc. (the
"Company") ratified an exclusive Marketing, Distribution and Sales Agreement
("Marketing Agreement") and a Manufacturing and Packaging Agreement
("Manufacturing Agreement"), each made with Aqua Thirst, Inc. Through the
enactment of these agreements, the Company has been able to acquire the two key
components necessary to strengthen its infrastructure for the manufacturing,
marketing and sales of its products and applications.
F-13