UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2007
[ ] 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 (IRS Employer Identification No.)
of incorporation or organization)
Alameda, CA 94501
(Address of principal executive offices)
(510) 865-6412
Issuer's telephone number
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
On November 8, 2007, the registrant had outstanding 29,470,523 Common
Stock, $0.0001 par value per share.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. FINANCIAL STATEMENTS.. . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets
September 30, 2007 and December 31, 2006 (Unaudited) . . . . . . . . 3
Consolidated Statements of Operations
For the Three and Nine Months ended September 30, 2007 and
2006 (Unaudited), and the Period from Inception Through September 30,
2007 (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2007 and 2006 (Unaudited) . 5
Notes to Condensed Consolidated Financial Statements (Unaudited). . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION. . . 10
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 10
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . 12
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 3. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 2. CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . . . 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . . . . 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . . 14
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 15
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTON LABORATORIES, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2007 2006
-----------------------------------------------------------------------------------------------------
ASSETS (UNAUDITED)
CURRENT ASSETS
Cash $ 8,461 $ 9,768
Accounts receivable, less allowance for doubtful accounts of
24,586 and $30,419, respectively 2,403 794
Inventory 113,652 143,865
-----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 124,516 154,427
-----------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 23,316 23,316
Equipment and machinery 241,680 238,776
Leasehold improvements 15,823 11,323
Accumulated depreciation (99,270) (69,550)
-----------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 181,549 203,865
-----------------------------------------------------------------------------------------------------
DEPOSITS 6,131 6,131
=====================================================================================================
TOTAL ASSETS $ 312,196 $ 364,423
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 126,789 $ 71,314
Accrued expenses 331,801 266,079
Deferred revenue 52,506 52,506
Preferred dividends payable 20,800 16,000
Convertible debenture, net discount of $141,507 108,493 -
Fair value of derivative liabilities 361,148 -
TOTAL CURRENT LIABILITIES 1,001,537 405,899
-----------------------------------------------------------------------------------------------------
STOCKHOLDER LOANS 307,642 270,642
TOTAL LIABILITIES 1,309,179 676,541
=====================================================================================================
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock, 400,000 shares authorized
with a par value of $0.0001; 8,000 shares issued and outstanding;
liquidation preference of $80,000 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; 29,270,523 and 21,658,223 shares issued and
outstanding, respectively 2,929 2,168
Additional paid in capital 5,892,162 4,045,371
Stock subscription receivable (20,000) (20,000)
Accumulated deficit (6,952,074) (4,419,657)
-----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (996,983) (312,118)
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 312,196 $ 364,423
=====================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
PROTON LABORATORIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2007 2006 2007 2006
----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
SALES $ 40,241 $ 10,433 $ 119,280 $ 94,994
COST OF GOODS SOLD 36,007 10,900 84,262 81,379
----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 4,234 (467) 35,018 13,615
----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative expenses (including
equity-based expenses of $377,001, $0, $377,001 and $40,526, respectively) 601,502 724,615 852,741 976,656
Product development costs (including equity-based
expenses of $0, $0, $1,470,551 and $0, respectively) - - 1,470,551 -
----------------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (597,268) (725,082) (2,288,274) (963,041)
----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Interest income 200 963 312 1,163
Interest expense (117,741) (13,366) (128,507) (46,147)
Change in fair value of derivative liabilities (111,148) - (111,148) -
----------------------------------------------------------------------------------------------------------------------------------
NET OTHER EXPENSE (228,689) (12,403) (239,343) (44,984)
----------------------------------------------------------------------------------------------------------------------------------
NET LOSS (825,957) (737,485) (2,527,617) (1,008,025)
PREFERRED STOCK DIVIDEND (1,600) (1,600) (4,800) (4,800)
----------------------------------------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (827,557) $ (739,085) $(2,532,417) $(1,012,825)
==================================================================================================================================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.03) $ (0.04) $ (0.10) $ (0.06)
==================================================================================================================================
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 27,510,740 19,983,251 25,595,631 16,631,410
==================================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 2006
---------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,527,617) $(1,008,025)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 29,720 23,355
Bad debt expense (5,833) -
Common stock issued for services 1,847,552 674,238
Change in fair value of derivative liabilities 111,148 -
Accretion of debt discounts 108,493 -
Changes in operating assets and liabilities
Accounts receivable 4,224 7,171
Inventory 30,213 (344,409)
Accounts payable 55,475 (54,427)
Accrued expenses 155,722 53,337
---------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (190,903) (648,760)
---------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (7,404) (752)
---------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (7,404) (752)
---------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net - 891,019
Proceeds from stockholder loans 37,000 73,852
Proceeds from convertible debentures 160,000 -
Payment on note payable - (267,852)
---------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 197,000 697,019
---------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,307) 47,507
CASH AT BEGINNING OF PERIOD 9,768 1,384
---------------------------------------------------------------------------
CASH AT END OF PERIOD $ 8,461 $ 48,891
===========================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrual of preferred stock dividends $ 4,800 $ 4,800
Stock issued for accrued legal services $ - $ 40,526
Stock issued for future services $ - $ 389,693
Stock issued under subscription agreement $ - $ 36,533
Payment for services with convertible debenture $ 90,000 $ -
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
PROTON LABORATORIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION - The condensed consolidated financial statements include
the accounts of Proton Laboratories, Inc., and its wholly owned subsidiary
("Proton" or the "Company"). All significant inter-company transactions and
balances have been eliminated in consolidation.
In April 2004, the Company changed its name from BentleyCapitalCorp.com, Inc. to
Proton Laboratories, Inc. The Company's subsidiary also changed its name from
Proton Laboratories, Inc. to Water Science, Inc.
CONDENSED FINANCIAL STATEMENTS - The accompanying unaudited condensed
consolidated financial statements are condensed and, therefore, do not include
all disclosures normally required by accounting principles generally accepted in
the United States of America. These statements should be read in conjunction
with the Company's annual financial statements included in the Company's
December 31, 2006 Annual Report on Form 10-KSB. In particular, the Company's
significant accounting principles were presented as Note 1 to the consolidated
financial statements in that report. In the opinion of management, all
adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the nine months
ended September 30, 2007 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2007.
NATURE OF OPERATIONS - The Company's operations are located in Alameda,
California. The core business of the Company consists of the sales and
marketing of the Company's industrial, environmental and residential systems
throughout the United States of America which alter the properties of water to
produce functional water. The Company acts as an exclusive importer and master
distributor of these products to various companies. Additionally, the Company
formulates intellectual properties under licensing agreements, supplies consumer
products, consults on projects utilizing functional water, facilitates between
manufacturer and industry and acts as educators on the benefits of functional
water.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, 8%
convertible debenture and common shares outstanding to give effect to
potentially issuable common shares except during loss periods when those
potentially issuable shares are anti-dilutive. Potential common shares from
convertible preferred stock and the 8% convertible debenture have not been
included as they are anti-dilutive.
CONVERTIBLE DEBENTURES - The Company accounts for conversion options embedded in
convertible debentures in accordance with SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") and Emerging Issues
Task Force ("EITF") 00-19, "Accounting for Derivative Financial Instruments
Indexed to, and potentially settled in, a Company's Own Stock" ("EITF 00-19").
SFAS 133 generally requires companies to bifurcate conversion options embedded
in convertible notes from their host instruments and to account for them as free
standing derivative financial instruments in accordance with EITF 00-19. SFAS
133
6
PROTON LABORATORIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - BUSINESS CONDITION
provides for an exception to this rule when convertible notes, as host
instruments, are deemed to be conventional as that term is described in the
implementation guidance under Appendix A to SFAS 133 and further clarified in
EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue
No. 00-19.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
Company has incurred losses applicable to common shareholders of $2,532,417 for
the nine months ended September 30, 2007. For September 30, 2007 and December
31, 2006 the Company had working capital deficits of $887,021 and $251,472,
respectively. The Company has relied upon borrowings from related parties,
proceeds from convertible debentures and capital raised through the sales of
common stock to fund operations.
The Company is working towards raising additional public funds to expand its
marketing and revenues. In addition, the Company is working with its Canadian
business associates to identify institutional businesses to market various
disinfection applications based upon functional water, pending government
approval.
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 what is
views as key components necessary to strengthen its infrastructure for the
manufacturing, marketing and sales of its 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.
NOTE 3 - CONVERTIBLE DEBTURE
On June 29, 2007, the Company entered into a financing arrangement with Legacy
Media, LLC ("Legacy") that provided the issuance of a $250,000, 8.0% convertible
debenture, due December 29, 2007. Proceeds from the arrangement were received in
two installments of $125,000, net of $90,000 held as payment for services by
Legacy, on July 6 and August 6, 2007 and has been used for operations. Upon
issuance, the convertible debenture is convertible into shares of the Company'
common stock, at the lesser of (i) 50% of the lowest closing bid price during
the fifteen (15) days of full trading prior to the conversion date or (ii) 100%
of the average of the five lowest closing bid prices for the thirty (30) trading
days immediately following the first reverse split in the stock price. Legacy
also received an additional 3,200,000 shares for additional services rendered.
All of Legacy's shares may be registered in an SB-2 filing at their request,
subject to SEC approval. On October 4, 2007, the Company filed an inital
registration statement for certain of Legacy's shares on form SB-2. Please refer
to note 5.
7
PROTON LABORATORIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In connection with the issuance of the convertible debenture, the Company
evaluated the terms and features and determined that under EITF 05-2 "The
Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19" the
convertible debt was deemed non-conventional due to the variable number of
common shares the convertible debenture was convertible into. Accordingly, the
conversion feature embedded within the convertible debentures did not meet the
established criteria for equity classification under Emerging Issues Task Force
EITF 00-19 "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
Upon issuances, the Company valued the embedded conversion feature liability of
the convertible debenture at $166,390 and $149,780 using the Black-Scholes
valuation method based on the following variables; a risk free rate of 5.10% and
4.52%; an exercise price of $0.09 and $0.075; a volatility of 151.4% and 147.5%;
and a remaining term of 0.50 and 0.45 years, respectively. Since the fair value
of the conversion feature exceeded the carrying value of the convertible
debenture on the date of issuance, the Company recorded $66,170 of additional
expense during the period ending September 30, 2007. The Company is amortizing
the discount over the term of the convertible debenture. The embedded
conversion feature is being carried at its respective fair value with changes in
its value recorded in the statement of operations.
At September 30, 2007, the Company revalued the embedded conversion feature
liability of the convertible debenture at $361,148 resulting in an entry to loss
on derivative liability of $44,978 during the three and nine month periods ended
September 30, 2007. The Company used the Black-Scholes valuation method with the
following variables; risk free rate of 4.23%; exercise price of $0.03;
volatility of 159.9%; and a remaining life of 0.25 years.
During the three and nine months ended September 30, 2007, the Company amortized
$108,493 of the discount on the convertible debentures to interest expense. To
date there have been no conversions.
NOTE 4 - RELATED PARTY TRANSACTIONS
Stockholder loans as of September 30, 2007 and December 31, 2006 consist of the
following:
2007 2006
--------------------------------------------------------------------------------------
Note payable to CEO and majority shareholder; principal and
interest due December 2009; interest is accrued at 7% per annum;
unsecured. $287,642 $270,642
Note payable to shareholder; principal and interest due
December 2009; interest is accrued at 7% per annum; unsecured. 20,000 -
--------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOAN 307,642 270,642
Less: Current Portion - -
--------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOAN - LONG TERM $307,642 $270,642
======================================================================================
8
PROTON LABORATORIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the nine months ended September 30, 2007, two shareholders advanced the
Company $37,000 at an interest rate of 7%. The $37,000 is included as a part of
the stockholder loans shown above. The Company did not make any payments on the
notes during the nine months ended September 30, 2007.
During the three and nine months ended September 30, 2007, the Company accrued
$5,348 and $16,151, respectively, in interest expense on stockholder loans. , At
September 30, 2007, the Company had accrued interest relating to stockholder
loans of $67,705 recorded in accrued liabilities on the accompanying balance
sheet.
During the three and nine months ended September 30, 2007, the Company accrued
$15,000 and $45,000, respectively, for salaries payable to the Company's Chief
Executive Officer, resulting in $260,233 of salaries payable recorded in accrued
liabilities on the accompanying balance sheet at September 30, 2007.
NOTE 5 - COMMON STOCK
During January through September 30, 2007 the Company issued 7,612,300 shares of
common stock for various services and agreements. The value of the shares was
$1,847,552 based on market prices ranging from $0.13 to $0.37 per share which
was the market price of the Company's common stock on the date of issuance.
NOTE 6 - 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 September 30, 2007, 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.
EQUITY LINE - In June 2007, the Company terminated an equity line of credit
agreement with a private investment fund. No funds were drawn down on this
equity line, and no shares of stock were sold to the investment fund.
LEASE COMMITMENT - On July 1, 2007, the Company entered into a lease agreement
to pay monthly lease payments of $3,852 until June 30, 2008 and $3,966 from July
1, 2009 through June 30, 2009.
NOTE 7 - SUBSEQUENT EVENT
On October 5, 2007, the Company issued 200,000 shares of common stock for legal
services rendered. The Company valued the shares at the closing price of the
Company's common stock of $0.06 resulting in share based compensation of $12,000
on the date of the transaction.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENT
Certain statements contained herein, including, without imitation,
statements containing the words, "believes," "anticipates," "expects," and other
words of similar meaning, constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. In addition to the forward-looking statements
contained herein, the following forward-looking factors could cause our future
results to differ materially our forward-looking statements: competition,
funding, government compliance and market acceptance of our products.
INTRODUCTION
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited financial statements
and the accompanying notes thereto for the year ended December 31, 2006 which
appear in our Form 10-KSB for the year then ended, and our unaudited financial
statements for the three and nine months ended September 30, 2007 and the
accompanying notes thereto and the other financial information appearing
elsewhere herein.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the USA, which
contemplates our continuation as a going concern. We have incurred losses
applicable to common shareholders of $2,532,417 for the nine months ended
September 30, 2007. We had working capital deficit of $887,021 at September 30,
2007. Loans and equity funding were required to fund operations. We had a
stockholder deficit of $996,983 at September 30, 2007 and a stockholders deficit
of $312,118 at December 31,2006.
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.
10
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. We
need to raise more funds to bring our residential counter top unit to market,
and there is no assurance that such funds can be raised. The Company believes
the food safety commercial unit will be ready for market introduction during the
third quarter of 2007, following certification by an independent underwriters
laboratory. We are prioritizing the marketing and distribution of our food
safety commercial unit, which can also have applications in the medical, dental
and sports facility industries.
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.
In February 2007, the Company entered into an exclusive Marketing, Distribution
and Sales Agreement and a Manufacturing and Packaging Agreement with Aqua
Thirst, Inc. These agreements 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.
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
11
accounting policy affects our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
We had revenue of $40,241 for the three months ended September 30, 2007 compared
to revenue of $10,433 for the three months ended September 30, 2006. During the
current period the Company is developing its new line of products, and thus
expects the revenue base will remain fairly consistent.
We incurred a net loss of $825,957 for the three months ended September 30, 2007
and a net loss of $737,485 for the three months ended September 30, 2006. This
was an increase in net loss attributable to the recording of non-cash interest
expense of $108,493 related to the amortization of the discount on the
convertible debentures and additional expense related to the change in the fair
value of the derivative liabilities of $111,148 during the three months ended
September 30, 2007.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
We had revenue of $119,280 for the nine months ended September 30, 2007 compared
to revenue of $94,994 for the nine months ended September 30, 2006. During the
current period the Company is developing its new line of products, and thus
expects the revenue base will remain fairly consistent.
We incurred a net loss of $2,527,617 for the nine months ended September 30,
2007 and a net loss of $1,008,025 for the nine months ended September 30, 2006.
This was an increase in net loss attributable to in-kind consultant compensation
expenses incurred in the sourcing of manufacturing, marketing and sales
infrastructure necessary for the Company. In addition, the Company had non-cash
interest expense of $108,493 related to the amortization of the discount on the
convertible debentures and additional expense related to the change in the fair
value of the derivative liabilities of $111,148 during the nine months ended
September 30, 2007.
Cash used by operating activities was $190,903 for the nine months ended
September 30, 2007 compared to cash used by operating activities of $648,760 for
the nine months ended September 30, 2006. The increase is directly related to
the increase in the Company's net loss.
We had total assets at September 30, 2007 of $312,196, compared to $364,423 at
December 31, 2006. During the current period that the Company is developing its
new line of products, and expects that the total asset base will remain fairly
consistent.
LIQUIDITY
At September 30, 2007, we had cash on hand of $8,461. Our growth is dependent on
our attaining profit from our operations and our raising of additional capital
either through the sale of stock or borrowing funds. There is no assurance that
we will be able to raise any equity financing or sell any of our products to
generate a profit.
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At September 30, 2007, we owed stockholder loans of $307,642. In March 2007, we
entered into an equity line of credit with a private investor. As of September
30, 2007 we terminated this equity line without draw down. In addition, during
the nine months ended we received $160,000 in net proceeds from the issuance of
a convertible debenture which is due in December 2007.
FUTURE CAPITAL REQUIREMENTS
Our growth is dependent on attaining profit from our operations, or our raising
additional capital either through the sale of stock or borrowing. There is no
assurance that we will be able to raise any equity financing or sell any of our
products at a profit.
Our future capital requirements will depend upon many factors, including:
- - The cost to acquire equipment that we then would resell.
- - The cost of sales and marketing.
- - The rate at which we expand our operations.
- - The results of our consulting business.
- - The response of competitors.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
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
from the Company's registered public accounting firm.
In connection with its review of the Company's consolidated financial
statements for the quarter ended September 30, 2007, 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 September 30, 2007 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.
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.
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PART II -OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES.
During July 2007, the Company entered into an agreement with Legacy Media, LLC
in connection with the agreement Legacy Media, LLC has been granted 3.2 million
shares of the Company's restricted common stock to provide investor relations
services.
During July 2007, Legacy Media, LLC has also been issued a convertible debenture
by the Company in the amount of $250,000, incurring interest at 8% and due in
December 2007. The convertible debenture is convertible immediately into shares
of the Company's common stock, at the lesser of (i) 50% of the lowest closing
bid price during 15 days prior to conversion or (ii) 100% of the average of the
five lowest closing bid prices for 30 Trading Days immediately following any
reverse split in the common stock. All of Legacy Media, LLC's shares may be
registered in an SB-2 filing at its request, subject to SEC approval.
The Company also issued 200,000 shares of restricted common stock to an
independent consultant for legal and business services rendered.
These securities were issued in private transactions, in reliance on the
exemption available under Section 4(2) of the 1933 Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
September 30, 2007.
Pursuant to Section RCW 23B.07.040(b) of the Revised Code of Washington, a
majority of the shareholders of Proton Laboratories, Inc. acting by a
Shareholder Consent in Lieu of Annual Meeting have appointed a new Board of
Directors as follows: Ed Alexander, Don Gallego, Gregory Darragh, Jed A. Astin,
Gary Taylor and Steven Perry. Mr. Miceal Ledwith has stepped down from the Board
following good service. The majority shareholders also consented to the
amendment of the articles of incorporation to increase the number of Board
Members to nine. They have also consented to the appointment of Dr. Kochiki
Hanoaka to the Board as soon as the amendment has been properly filed with the
state of Washington.
The effective date of the consent is June 6, 2007. Majority shareholder consents
were received as of July 27, 2007. The total number of shareholder votes in
favor of the consent was 16,279,308. Proton's total outstanding number of shares
on the effective date of the consent was 29,185,673. A 14-C Statement will be
filed with the Commission shortly.
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ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROTON LABORATORIES, INC.
(Registrant)
Date: November 14, 2007 By: /s/ Ed Alexander
-------------------------------
Ed Alexander
Its: Chief Executive Officer,
President, CFO
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