As filed with the Securities and Exchange Commission on October 4, 2007
Registration No. __________________
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form SB-2
Registration Statement
Under The Securities Act of 1933
PROTON LABORATORIES, INC.
(Exact name of small business issuer in its charter)
Washington 3590 91-2022700
(State or other jurisdiction of (Primary standard (I.R.S. Employer
incorporation or organization) industrial code) Identification Number)
PROTON LABORATORIES, INC.
980 Atlantic Avenue, Suite 110
Alameda, CA 94501
voice: (510) 865-6412
fax: (510) 865-9385
(Address and telephone number of principal executive offices and principal place
of business)
Edward Alexander, Chief Executive Officer
980 Atlantic Avenue, Suite 110
Alameda, CA 94501
voice: (510) 865-6412
fax: (510) 865-9385
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration Statement number of the earlier effective
Registration Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title Of Each Proposed
Class Of Maximum
Securities Amount Offering Aggregate Amount of
To Be To Be Price Offering Registration
Registered Registered Per Unit Price Fee
---------------------------------------------------------------------------------
Common Stock 7,750,000 shares $0.07 per share $542,500 $16.65 (1)
---------------------------------------------------------------------------------
(1) The Proposed Maximum Offering Price Per Share was computed pursuant to Rule
457. This fee is calculated based on the closing price of our common stock under
the trading symbol PLBI on the OTCBB on September 27, 2007.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT.
THE SECURITIES COVERED BY THIS PROSPECTUS CANNOT BE SOLD UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE.
THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH AN OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF THAT STATE.
2
TABLE OF CONTENTS
Page
Available Information 6
Prospectus Summary 6
Risk Factors 7
Information Regarding Forward-Looking Statements 9
Use of Proceeds 9
Description of Business 9
Description of Property 15
Financial Statements 15 and F-1
Management's Discussion and Analysis 15
Market for Common Equity and Related Stockholder Matters 18
Directors, Executive Officers, Promoters and Control Persons 20
Executive Compensation 22
Security Ownership of Certain Beneficial Owners and Management 23
Certain Relationships and Related Transactions 23
Description of Securities 24
Selling Stockholders 25
Plan of Distribution 25
Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 26
Legal Proceedings 27
Interest of Named Experts and Counsel 27
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities 27
3
PART I
INFORMATION REQUIRED IN A PROSPECTUS
WE HAVE FILED A REGISTRATION STATEMENT RELATING TO THESE SECURITIES WITH
THE SECURITIES AND EXCHANGE COMMISSION. WE WILL AMEND AND COMPLETE THE
INFORMATION IN THIS PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
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SUBJECT TO COMPLETION September __ 2007
PROSPECTUS
PROTON LABORATORIES, INC.
980 Atlantic Avenue, Suite 110
Alameda, CA 94501
voice: (510) 865-6412
fax: (510) 865-9385
7,750,000 Shares of Common Stock
This prospectus relates to the sale of up to 7,750,000 shares of our
common stock by Selling Stockholders. We will not receive proceeds from the sale
of our shares by the Selling Stockholders.
Our common stock is traded on the OTCBB under the trading symbol "PLBI."
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 6 OF THIS PROSPECTUS
BEFORE MAKING A DECISION TO PURCHASE OUR STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is October __, 2007
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AVAILABLE INFORMATION
We are currently subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). We file periodic reports,
proxy materials and other information with the Securities and Exchange
Commission (the "Commission"). In addition, we will furnish stockholders with
annual reports containing audited financial statements certified by our
independent registered public accounting firm and interim reports containing
unaudited financial information as it may be necessary or desirable. We will
provide without charge to each person who receives a copy of this prospectus,
upon written or oral request, a copy of any information that is incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the exhibits are themselves specifically
incorporated by reference). Such request should be directed to: Edward
Alexander, Chief Executive Officer, Proton Laboratories, Inc., 980 Atlantic
Avenue, Suite 110, Alameda, CA 94501, voice: (510) 865-6412, fax: (510)
865-9385. Our Web site is www.protonlabs.com.
We have filed with the Securities and Exchange Commission a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the securities offered by this prospectus. This prospectus does
not contain all of the information set forth in the Registration Statement,
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to us and this offering,
reference is made to the Registration Statement, including the exhibits filed
therewith, that may be inspected without charge at the public reference room
maintained by the Commission at 100 F Street N.E., Washington , D.C. 20549, tel.
1-800-SEC-0330, or through SEC's e-mail address: publicinfo@sec.gov. Copies of
such material may also be obtained from the Public Reference Section of the
Commission at 100 F Street N.E., Washington, D.C. 20549, at prescribed rates.
The Web site of the Commission is www.sec.gov which contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission. Visitors to the Commission's Web site may
access such information by searching the EDGAR database.
PROSPECTUS SUMMARY
THE OFFERING
Outstanding 29,470,523 shares of common stock as of
Common Stock September 27, 2007.
Before This
Offering
Common Stock Up to 4,250,000 shares of common stock all of which are
Offered by currently outstanding.(1)
Selling
Stockholders
Outstanding 29,470,523 shares if all offered shares are sold.(1)
Common Stock
After This
Offering
Offering Price Determined at the time of sale by the Selling
Stockholders.
Proceeds We will not receive proceeds from the sale of our shares
by the Selling Stockholders.
Risk Factors The securities offered hereby involve a high degree of
risk. See "Risk Factors."
(1) Does not include 3,500,000 shares registered hereunder which may be
converted by a selling shareholder which holds a convertible note. See pages 11
and 16
6
RISK FACTORS
You should carefully consider the following risk factors before purchasing
our common stock. The risks and uncertainties described below are not the only
ones we face. There may be additional risks and uncertainties that are not known
to us or that we do not consider to be material at this time. If the events
described in these risks occur, our business, financial condition and results of
operations would likely suffer. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
OUR STOCK PRICE IS HIGHLY VOLATILE AND YOU MAY LOSE SOME OR ALL OF YOUR
INVESTMENT.
The trading prices of our common stock have fluctuated in the past and may
fluctuate in response to a number of events and factors, such as:
- quarterly variations in our operating results;
- new products, services, innovations, and strategic developments by our
competitors, or business combinations and investments by our
competitors;
- changes in our capital structure, including issuance of additional
debt or equity to the public;
- certain analyst reports, news and speculation.
OUR PAST LOSSES RAISE DOUBTS ABOUT OUR ABILITY TO OPERATE PROFITABLY OR CONTINUE
AS A GOING CONCERN.
We have experienced substantial operating losses. For the year ended
December 31, 2005, we had a net loss of $981,674. For the year ended December
31, 2006, we had a net loss of $1,716,680. For the six month period ending June
30,2007, we had a net loss of $1,701,660. Our stockholders deficit as of
December 31, 2005 was $758,547 and as of December 31,2006 was $312,118. We
expect to incur significant operating losses until product sales increase. We
will also need to raise sufficient funds to finance our operations and
activities. We may not be able to achieve or sustain profitability. Our
independent registered public accounting firm 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. These factors raise substantial doubt
about our ability to continue as a going concern.
WE MUST RAISE CAPITAL TO BE SUCCESSFUL.
We will require additional funds to conduct our operations. We may not be
able to raise such funds. To raise additional capital, we may sell additional
equity securities, or accept debt financing or obtaining financing through a
bank or other entity. There is no limit as to the amount of debt we may incur.
Additional financing may not be available to us or may not be available on terms
that we can afford. If we issue additional stock to raise capital, there may be
a significant dilution in the value of our outstanding common stock.
LACK OF INDUSTRIAL AND CONSUMER ACCEPTANCE OF FUNCTIONAL WATER WOULD IMPAIR OUR
BUSINESS.
We manufacture and sell equipment that makes "functional water".
"Functional water" is undergoing testing in various environm increase market
acceptance of functional water in order to be successful. We do not know if the
products we sell will receive market scientific acceptance at a level that would
allow us to operate profitably.
REGULATORY COMPLIANCE; CHANGING REGULATORY ENVIRONMENT
Our industry is subject to extensive regulation and compliance issues. We
are subject to certification and testing procedures regarding the manufacture of
products with EPA, FDA and various other federal and state agencies. Our
transition to a developer and manufacturer of systems in 2006 has brought more
regulatory compliance requirements upon us. While we believe we are in
compliance with all current regulations, and while we expect to receive any
necessary certifications for our products, there is always a risk that the
regulatory environment will change and that certifications may not be granted.
In such an instance, we would diligently strive to comply with any new
requirements to achieve certification.
IF WE DO NOT KEEP PACE WITH OUR COMPETITORS AND WITH TECHNOLOGICAL AND MARKET
CHANGES, OUR PRODUCTS MAY BECOME OBSOLETE AND OUR BUSINESS MAY SUFFER.
7
The market for our products is competitive and could be subject to rapid
technological changes. We believe that there are potentially many competitive
approaches being pursued, including some by private companies for which
information is difficult to obtain. Many of our competitors have significantly
greater resources, more product candidates and have developed product candidates
and processes that directly compete with our products. Our competitors may have
developed, or could in the future develop, new technologies that compete with
our products or even render our products obsolete. To the extent that others
develop new technologies that address the applications for functional water, our
business will suffer.
THE SHARES AVAILABLE FOR SALE BY THE SELLING STOCKHOLDERS COULD SIGNIFICANTLY
REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
A total of 7,750,000 shares of our common stock are being registered for
Resale. The market price of our common stock could drop if a substantial amount
of these shares are sold in the public market. A drop in the market price will
reduce the value of your investment.
SELLING STOCKHOLDERS MAY SELL SECURITIES AT ANY PRICE OR TIME WHICH COULD REDUCE
THE MARKET PRICE OF OUR COMMON STOCK.
After effectiveness of this prospectus, the Selling Stockholders may offer
and sell their shares at a price and time determined by them. The timing of
sales and the price at which the shares are sold by the Selling Stockholders
could have an adverse effect upon the public for our common stock.
SINCE WE HAVE NOT PAID ANY DIVIDENDS ON OUR COMMON STOCK AND DO NOT INTEND TO DO
SO IN THE FUTURE, A PURCHASER OF OUR STOCK WILL ONLY REALIZE A GAIN ON HIS
INVESTMENT IF THE MARKET PRICE OF OUR COMMON STOCK INCREASES.
We have never paid, and do not intend, to pay any cash dividends on our
common stock. Therefore an investor in this offering, in all likelihood, will
only realize a profit on his investment if the market price of our common stock
increases in value.
BECAUSE SHARES OF OUR COMMON STOCK WILL MOST LIKELY CONTINUE TO TRADE UNDER
5.00 PER SHARE, THE APPLICATION OF THE PENNY STOCK REGULATION COULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK AND MAY AFFECT THE ABILITY OF
HOLDERS OF OUR COMMON STOCK TO SELL THEIR SHARES.
Our securities may be considered a penny stock. Penny stocks generally are
securities with a price of less than $5.00 per share other than securities
registered on national securities exchanges or quoted on the Nasdaq stock
market, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system. Our
securities may be subject to penny stock rules that impose additional sales
practice requirements on broker-dealers who sell penny stock securities to
persons other than established customers and accredited investors. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of penny stock securities and have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the penny stock rules require the delivery, prior to the transaction, of
a disclosure schedule prescribed by the Commission relating to the penny stock
market. The broker-dealer also must disclose the sales commissions payable to
both the broker-dealer and the registered representative and current quotations
for the securities. Monthly statements must be sent by the broker-dealer
disclosing recent price information on the limited market in penny stocks. The
penny stock rules may restrict the ability of broker-dealers to sell our
securities and may have the effect of reducing the level of trading activity of
our common stock in the public market, if any.
CONTROL OF OUR COMMON STOCK IS IN A SMALL GROUP OF SHAREHOLDERS.
Under Washington state law, matters involving our company and our common
stock may be decided by written shareholder consent among a small group of
shareholders, including the election and removal of directors and any merger,
consolidation, takeover or other business combination involving us, reverse or
forward splits of stock, and to control our management and affairs. This may
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control in an acquisition or takeover.
Futhermore, one of our debtholders holds debt convertible into our common
stock at any time at a conversion ratio equal to half of our common stock's
trading price on the date of conversion. Accordingly, if our common stock price
falls significantly, we may be required to issue control of our company to this
debtholder if it choosed to convert at that time. See pages 11 and 16.
OUR OFFICERS AND DIRECTORS HAVE LIMITED LIABILITY AND HAVE INDEMNITY RIGHTS.
The State of Washington law, our Article of Incorporation and our By-Laws
provide that we may indemnify our officers and directors against losses or
liabilities which arise in their corporate capacity. The effect of these
provisions could be to dissuade lawsuits against our officers and directors. The
cost of indemnification could be high.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, we have been advised that in the opinion of the
8
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
EQUITY LINE OF CREDIT
We are currently negotiating a new equity line of credit ("ELOC") with a
private equity fund. At such time, if and when, we may draw down on such ELOC
the private fund will sell shares of our common stock into the market. Such
selling could cause the price of our stock to go down. We terminated a
previously negotiated ELOC without a draw down of such line by us and without
purchase of stock by any outside private investor.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus, 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 prospectus, 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, funding and
government compliance.
USE OF PROCEEDS
We will pay for the cost of registering the shares of common stock in this
offering. We will not receive any proceeds from the sale of the common stock by
the Selling Stockholders.
DESCRIPTION OF BUSINESS
INTRODUCTION
Proton Laboratories, Inc. ("Proton" or the "company") is a company
specializing in the process of electrolysis of water and i Our executive offices
are located at: Proton Laboratories, Inc., 980 Atlantic Avenue, Suite 110, tel.
(510) 865-6412, fax: (51 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 manufacturing and 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 and manufacture 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.
9
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.
In 2006, we made the decision to design and manufacture our own systems and
products, as well as continue to import and distribute certain systems and
products. As a result of this transition and our work over the past several
years we have three priority products that we anticipate to manufacture and sell
within three to nine months as follows:
- Commercial food and water safety units designed to eliminate or
reduce pathogens in food or water products and/or container systems,
marketable to produce fields, grocery stores and industrial water
container applications;
- Antimicrobial spray designed to eliminate or reduce pathogens,
particularly targeted to medical, hospital and sports facility
applications;
- Residential counter top water enhancement units, designed to
eliminate impurities, enhance water properties, and eliminate
continual glass and plastic water packaging.
We also are anticipating a release this quarter of an enhanced consumer
bottled water product which will be sold to specialty health and food stores. We
are under contract with a specialty manufacturer in Encino, California for the
manufacture and bottling of this water in October 2007.
We still intend to import and distribute products that we do not
manufacture. We still act as an exclusive importer and master distributor of
certain products to various companies in which uses for the product range from
food processing to retail water sales.
In February 2007, we entered into a strategic alliance with Aquathirst,
Inc., a privately held company whose principals have substantial marketing,
manufacturing and distribution experience with health care, dietary supplements,
cosmetics, specialty and functional food and beverages, and over the counter
drug products. Two of Aquathirst's principals serve on our Board of Directors.
OUR BUSINESS--SYSTEMS AND MARKETS
We have been marketing functional water systems to the residential market
since 2000. We began a transition in third quarter 2006 to design, manufacture
and private label our products for both commercial and residential systems. For
the residential market, we have been marketing functional water systems that are
used to produce a health-beneficial, alkaline-concentrated drinking water. For
the commercial market, we have begun marketing 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
manufacture market it throughout the world.
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 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 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.
10
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 $1,065,062 from investors. We used some of those proceeds for
the following purposes:
A. 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 have completed and taken delivery of the
first 11 commercial, food safety antimicrobial systems during July, 2007. We
will be forwarding these units to the Underwriter's Laboratory for UL listings.
Once this process is complete, and the proper EPA filing of these systems
complete, the Company will start marketing these units to food processing
industries specifically handling fruits and vegetables. The Company is already
in negotiations with certain major produce and grain producers for the
demonstration and test runs of the commercial systems, including Crunch-Pak
Group, an affiliate of Earth Bound Farms. The Company has discussed its
technology with National Produce Association, and is in discussion with several
national grocery chains and food distributors. It is anticipated that we will
intensify our marketing efforts during the fourth quarter of 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 Fluand with an intial emphasis on MRSA. 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. 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.
We have completed the third party testing of this product during the first
quarter of 2007 and also completed the components sourcing to assemble this
product. Currently, a production line is being installed in a contracted
laboratory located in Encino, California for product assembly. Once the
production line is able to produce product, a maiden run of 1,000 sprays will be
assembled to begin test marketing of this product. It is anticipated that we
will begin production of this item in the fourth quarter of 2007.
C. 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 are
currently in discussion with the plastic mold makers and will determine the date
when the mold making process can begin. Once the molds are made, the company
will be able to assemble test units for a 30-60 day evaluation of its
performance, durability and user friendliness.
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.
Legacy Media, LLC has been granted 2.6 million shares of the Company's
restricted common stock in connection with an agreement to provide investor
relations on behalf of the Company. Legacy Media, LLC has also been issued a
convertible note by the Company in the amount of $250,000 repayable at 8%
interest by January 2007. Legacy Media, LLC has the option to convert this note
into restricted voting common stock of the Company, at the lesser of (i) 50% of
the lowest closing bid price during the fifteen (15) days of full trading,
defined as standard market hours from 9:30 AM to 4:00 PM EST, partial trading
days will not be counted for calculation purposes only ("Trading Days") 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. All of Legacy Media, LLC's shares may be registered in
an SB-2 filing at its request.
We have interest created with several wine makers who are experiencing
unique problems with their products. We will start working with them in the
next 60 days.
Our ability to successfully market these products will depend upon our
continued ability to raise capital.
11
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, 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
12
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 late 2007. 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.
OUR BUSINESS--MARKETING AND DISTRIBUTION
We are developing and producing systems for the following markets:
- Commercial functional water systems for produce and grocery store
disinfection, medical and hospital facility disinfection, sports facility
sanitation refining, wine grape mildew treatment, wine aging control, and the
formulation of functional water based aquaceuticals.
- Hand disinfection for the food processing, fast food, medical, dental,
personal care and general health care industries.
- Residential, countertop drinking water electrolysis systems.
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.
In third quarter 2006, the Company began an active transition into
developing and manufacturing its own proprietary functional water systems, as
well as distributing systems. This transition followed from the research and
study conducted by Ed Alexander, as well as the Company's more than five year
experience in distributing functional water systems. In December 2006, the
Company began negotiation for manufacturing and marketing agreements with
Aquathirst, Inc., a a privately held company whose principals have substantial
marketing, manufacturing and distribution experience with health care, dietary
supplements, cosmetics, specialty and functional food and beverages, and over
the counter drug products.
These exclusive and or strategic 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. Two of Aquathirst's principals serve on our Board of Directors.
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.
13
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.A.-based Japanese company that has a
substantial market presence in refrigeration and icemakers. We expect that we
may face additional competition from new market entrants and current competitors
as they expand their business models.
In our new products areas, we will compete with United Kingdom based
Sterilox regarding our antimicrobial spray and commercial units, 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. Though
a competitor, the founder of Proton Labs had provided the bottled water
manufacturing device to Essentia.
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. The alliance
of the company with Aquathirst, Inc., we believe brings a significant component
to establishing our 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 are 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 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.
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 with Weber Farms 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 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.
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.
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 took
delivery of this unit with production of this product anticipated to begin
during the third 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 attended the
Taste3 Conference held in Napa, California during the month of May, 2007. We
believe our attendance at the Taste3 Conference was a success for us. All of the
enhanced beverages developed from our technology, comprising of a tequila
product, a cello liqueur and Proton's eWine were well received by the taste
testers and attendees. We have been invited back to the 2008 Taste3 Conference,
With what the company has achieved through the wine
14
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 late 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.
DESCRIPTION OF PROPERTY
We lease approximately 2800 square feet of office and storage space located
at 980 Atlantic Avenue, Suite 110 Alameda, CA 94501, for a lease payment of
approximately $6,000 per month. Under this lease, we are required to pay a
percentage of the property taxes, insurance and maintenance. The lease commenced
for a two year period on July 1, 2007 and is renewable. We believe this space is
adequate for our current needs, and that additional space is available to us at
a reasonable cost, if needed.
FINANCIAL INFORMATION
Our financial statements begin on page F-1.
Management's Discussion and Analysis
FORWARD-LOOKING STATEMENT
Certain statements contained herein, including, without limitation,
statements containing the words, "believes," "anticipates," "expects," and other
words of similar meaning, constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. In addition to the forward-looking statements
contained herein, the following forward-looking factors could cause our future
results to differ materially from 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, and our unaudited financial statements for the three and six months ended
June 30,2006 and 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 contemplate our continuation as a going
concern.
We have incurred net losses of $1,716,680 at December 31, 2006 and of
$981,674 in December 31,2005. We had a working capital deficit of $251,472
December 31, 2006 and $871,723 at December 31, 2005 . Loans from our president
were required to fund operations.
We incurred a net loss for the six months ended June 30, 2007 of $1,701,660
and $270,540 for the six months ended June 30, 2006. We had a working capital
deficit of $431,318 at June 30, 2007, and a working capital deficit of $251,472
at December 31,2006.
We had a stockholders deficit of $312,118 at December 31, 2006 and a
stockholders deficit of $546,426 June 30, 2007. Loans from our CEO and our
president have been necessary to fund our operations.
Stockholder loans as of June 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 LOANS 307,642 270,642
Less: Current Portion - -
--------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS - LONG TERM $307,642 $270,642
======================================================================================
15
During the six months ended June 30, 2007 two shareholders advanced the
Company $37,000. The Company did not make any payments on notes during the six
months ended June 30, 2007.
At June 30, 2007, the Company had accrued interest relating to shareholder
loans of $62,321.
During the six months ended June 30, 2007, the Company accrued $30,000 as
salaries payable to the company's CEO, resulting in $225,091 of salaries payable
June 30, 2007.
Legacy Media, LLC has been granted 2.6 million shares of the Company's
restricted common stock in connection with an agreement to provide investor
relations on behalf of the Company. Legacy Media, LLC has also been issued a
convertible note by the Company in the amount of $250,000 repayable at 8%
interest by January 2007. Legacy Media, LLC has the option to convert this note
into restricted voting common stock of the Company, at the lesser of (i) 50% of
the lowest closing bid price during the fifteen (15) days of full trading,
defined as standard market hours from 9:30 AM to 4:00 PM EST, partial trading
days will not be counted for calculation purposes only ("Trading Days") 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. All of Legacy Media, LLC's shares may be registered in
an SB-2 filing at its request.
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 herein do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
Our ability to continue as a going concern is dependent upon our ability to
generate sufficient cash flows to meet our obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitable operations. However, there is no assurance that profitable operations
or sufficient cash flows will occur in the future.
In 2006, we made the decision to design and manufacture our own systems and
products, as well as continue to import and distribute certain systems and
products. As a result of this transition and our work over the past several
years we have three priority products that we anticipate to manufacture and sell
within three to nine months as follows:
- Commercial food and water safety unit designed to eliminate or
reduce pathogens in food or water products and/or container systems,
marketable to produce fields, grocery stores and industrial water
container applications;
- Antimicrobial spray designed to eliminate or reduce pathogens,
particularly targeted to medical, hospital and sports facility
applications;
- Residential counter top water enhancement units, designed to
eliminate impurities, enhance water properties, and eliminate
continual glass and plastic water packaging.
We also are anticipating a release this quarter of an enhanced consumer
bottled water product named "Super Red" which will be sold to specialty health
and food stores. We are under contract with a specialty manufacturer for the
manufacture and bottling of this water in October 2007. We are under worldwide
license from MIZ Corporation for this product.
` We still intend to import and distribute products that we do not
manufacture. We still act as an exclusive importer and master distributor of
certain products to various companies in which uses for the product range from
food processing to retail water sales.
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 accounting principles generally accepted in the
United States. 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
16
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 $328,200 revenue for the year ended December 31,2005, this was a decrease of
%56.
We had a net loss of $1,716,680 for the year ended December 31, 2006 as
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, as compared to $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.
RESULTS OF OPERATIONS-SIX MONTHS ENDED JUNE 30, 2007 AND 2006.
We had revenues of $79,039 for the six months ended June 30, 2007 compared
to revenue of $84,561 for the six months ended June 30, 2006. During the period
that the company is developing its new line of products, the revenue base will
remain fairly consistent.
We incurred a net loss of $1,701,660 for the six months ended June 30, 2007
and a net loss of $270,540 for the six months ended June 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.
Cash used in operating activities was $41,504 for the six months ended
June 30, 2007 compared to cash used by operating activities of $180,073 for the
six months ended June 30, 2006.
We had total assets at June 30, 2007 of $295,368, compared to $364,423 at
December 31, 2006. The decrease in assets is attributable to the Company's
transition from a distributor of product to a manufacturer of product, causing a
reduction in inventory and a greater expenditure of cash.
LIQUIDITY
At June 30, 2007, we had cash on hand of $1,710. 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.
At June 30, 2007, we owed stockholder loans in principal amount of
$307,642.
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.
17
- The response of competitors.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Our principal
executive and financial officer evaluated our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended) as of the end of the period covered by this quarterly
report. Based on this evaluation, our principal executive officer and principal
financial officer concluded that these disclosure controls and procedures are
effective and designed to ensure that the information required to be disclosed
in our reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the requisite time periods.
In connection with its audit of the Company's consolidated financial
statements for the year ended December 31,2006, 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 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, the Company is in the process of
implementing certain enhancements to its internal controls, accounting staff and
procedures, which it believes address the matters raised by Hansen, Barnett &
Maxwell.
(b) Changes in Internal Control Over Financial Reporting. There was no
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
identified in connection with the evaluation of our internal control performed
during the quarter ended June 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES.
Our stock is traded on the OTCBB under the trading symbol "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 December 31.
COMMON STOCK PRICE RANGE
YEAR AND QUARTER HIGH LOW
---------------- ----- -----
2005:
First Quarter $1.55 $0.38
Second Quarter $0.48 $0.32
Third Quarter $0.40 $0.20
Fourth Quarter $0.34 $0.14
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
2007:
First Quarter $0.42 $0.19
Second Quarter $0.25 $0.15
18
On September 27, 2007, the closing price of our stock was $0.07.
On September 27, 2007 we had outstanding 29,470,523 shares of common stock.
On September 27, 2007 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. Cede, Inc. is the nominee account that most
broker-dealers use to deposit shares held in the name of the broker-dealer.
Cede, Inc. is counted as one record shareholder, even though it could represent
many beneficial shareholders who have deposited their shares into an account at
a broker-dealer.
Our transfer agent is Holladay Stock Transfer, Inc., 2939 North 67th Place,
Scottsdale, Arizona 85251, tel. (480) 481 3940.
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 or convertible debt. Our Series A Preferred Stock pays no
dividends.
19
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We currently have no shares available for issuance under any equity
compensation plan. In 2007, we authorized and issued 4,200,000 shares for
issuance to employees and consultants under our 2007 Employee Stock and Stock
Option Plan.
Directors, Executive Officers, Promoters and Control Persons
EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION
---------------- --- --------------------------------------
Edward Alexander 54 Director, Chief Executive Officer,
Chief Financial Officer, and Secretary
Gary Taylor 56 Director and President
Don Gallego 56 Director
Steven Perry 57 Director
Gregory Darragh 49 Director
Jed Astin 61 Director
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. Mr. Alexander continues to
serve as a consultant to Advanced H2O, Inc. Prior to 1997, Mr. Alexander served
as General Manager for Tomoe Incorporated and held various positions with
various divisions of the U.S. Navy Resale System. In February 2002, the
Securities and Exchange Commission accepted a settlement offer from Mr.
Alexander and imposed a cease and desist order against Mr. Alexander from
committing or causing any violation or future violation of Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder. This order was imposed in connection
with a press release that Mr. Alexander was persuaded to release about Proton
Laboratories, LLC by a business associate whom Mr. Alexander trusted at the
time.
In June 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
Steven Perry is a highly accomplished scientist and entrepreneur. He is the
founder and CEO of Conseal International, Inc. a contract formulator and
manufacturer for health care, beauty care, and industrial products that have
substantial international and domestic retail sales per year. He is also the
Chief Operating Officer and a director of Aquathirst, Inc., a new manufacturer
and marketer of functional water beverages.
Don Gallego has over thirty years of broad and extensive high-level
corporate management, company start up, funding and consulting experience. Mr.
Gallego is also chairman and director of Aquathirst, Inc.
Jed A. Astin has been educated in the United Kingdom Canada, and the United
States. He holds undergraduate and postgraduate degrees in education and
administration. He has been a land developer, builder and social housing
provider for over thirty years. He has received a Canadian government award for
the provision of social housing. He is a successful facilitator and manager,
encouraging others to chose the path of personal wealth and freedom based on
information, knowledge and respect, as well as service and productivity. Gregory
Darragh started his sales career with "Combined Insurance Company of America" in
March of 1983. At the time Combined Insurance had in excess of 14,000 agents, in
over 14 countries world wide. He was International Salesman of the Year in his
first 10 months and was promoted into management after just four months. As an
executive his organization continued to achieve some of the highest sales
figures in North America. In 1995 Mr. Darragh started a new marketing team for
Commercial Union Life, where he was Provincial Manager (Disability Product Line)
for British Columbia, Canada. Mr. Darragh's very extensive marketing and sales
experience convinced Harland Stonecipher (founder of Pre-Paid Legal
Services-PPD-NYSE) to expand into the Canadian market in 1999, where Mr. Darragh
was appointed, Regional Vice President for several years.
Messrs. Gallego, Astin, Darragh and Perry were appointed as directors via a
stockholder consent effective as of June 6, 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
20
Meeting 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 29,070,523.
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 Jed Astin, an independent Director, to be on the Audit Committee. Mr.
Astin is not a financial expert. We have determined Mr. Astin'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
with our management and our independent auditors. The Audit Committee will
receive the written disclosures and the letter from our independent accountants
required by Independence Standards Board No. 1, and the Audit Committee will
discuss with the independent accountant the independent accountant's
independence.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors held no meetings during the year ended December 31,
2006 and acted by consent on five occasions. There is no family relationship
between or among any of our directors and executive officers.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers, directors and
persons who beneficially own more than 10% of our common stock to file reports
of ownership and changes in ownership with the SEC. These reporting persons also
are required to furnish us with copies 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., 980110,
Alameda, CA 94501.
21
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 LTIP Other
Principal Annual Stock Options Payouts
Position Year Salary Bonus Compensation Award(s) SARs 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
Our directors do not receive cash compensation for their services as
directors or members of committees of the Board of Directors.
EMPLOYEE STOCK OPTION PLANS
Our Board of Directors approved the Company's 2005 Employee Stock and Stock
Option Plan and the Company's 2007 Employee Stock and Stock Option Plans.
22
NO EMPLOYMENT AGREEMENT
We do not have any employment agreements with any employees.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We currently have no shares available for issuance pursuant to any equity
compensation plans.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We currently have no shares available for issuance pursuant to any equity
compensation plan.
BENEFICIAL OWNERSHIP
The following table sets forth certain information concerning the number of
shares of common stock owned beneficially as of September 27,2007, 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 September 27, 2007, we had 29, 470,523 shares
of common stock outstanding.
Name Amount of Shares Class of Percentage
and Address Beneficially Owned Securities of Class
----------------------------------------------------------------------------------------------
Edward Alexander
980 Atlantic Ave. Suite 110
Alameda, CA 94501 8,224,000 Common Stock 28.1%
Gary Taylor
333 S.E. 2ND AVE.
PORTLAND OR 97214 131,600 Common Stock 0.44%
Don Gallego
8726 South Sepulveda Boulevard Suite D-266
Los Angeles, CA 90045 0 Common Stock 0.0%
Steven Perry
8726 South Sepulveda Boulevard Suite D-266
Los Angeles, CA 90045 0 Common Stock 0.0%
Gregory Darragh
8726 South Sepulveda Boulevard Suite D-266
Los Angeles, CA 90045 1,410,750* Common Stock 4.8%%
Jed Astin
8726 South Sepulveda Boulevard Suite D-266 1,097,500 Common Stock 3.7%%
Los Angeles, CA 90045
Executive Officers and Directors
As A Group(5 Persons) 10,863,850 Common Stock 37.1%
Legacy Media, LLC
634 State Street
Santa Barbara, CA 93101 3,200,000 Common Stock 10.8%**
* Includes 100,000 shares held in the name of Shannon Darragh. Ms. Darragh is
the wife of Mr. Darragh.
** Does not include shares underlying Legacy Media LLC's right to convert a
$250,000 note at a conversion ratio equal to half of the price of our common
stock at any time. See Risk Factors and pages 11 and 16.
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.
23
During 2006, notes of total principal amount of $168,000 that were due to
our former 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.
DESCRIPTION OF SECURITIES
CAPITAL STOCK
The following description of our capital stock is a summary of the material
terms of our capital stock. Our authorized capital stock consists of 120,000,000
shares of which there are 100,000,000 shares of common stock having a par value
of $0.0001 per share and 20,000,000 shares of preferred stock having a par value
of $0.0001 per share. As of September 27, 2007, there were 29, 470,523 shares of
common stock outstanding. and 8,000 shares of Series A Preferred Stock
outstanding. The outstanding shares of common stock are validly issued, fully
paid and non-assessable.
Of our 29,470,523 outstanding of common stock outstanding, 8,381,000 shares
are free trading shares.
Our Articles of Incorporation do not permit cumulative voting for the
election of directors, nor do stockholders have any preemptive rights,
subscription or conversion rights to purchase shares in any future issuance of
our common stock.
The holders of common stock have the sole right to vote, except as
otherwise provided by law or by the Articles, including provisions governing any
preferred stock. Election of directors and other general stockholder action
requires the affirmative vote of a majority of shares represented at a meeting
in which a quorum is represented. The holders of more than 50% of such
outstanding shares common stock, voting for the election of directors, can elect
all of the directors to be elected, if they so choose, and, in such event, the
holders of the remaining shares will not be able to elect any other directors.
Subject to the rights, if any, of any outstanding shares of preferred
stock, if any, the holders of shares of common stock are entitled to dividends,
out of funds legally available therefore, when, if and as declared by the Board
of Directors. The Board of Directors has never declared a dividend and does not
anticipate declaring a dividend in the future. Each outstanding share of common
stock entitles the holder thereof to one vote per share on all matters required
by law to be submitted to a vote of stockholders.
In the event of liquidation, dissolution or winding up of our affairs,
holders of common stock are entitled to receive, ratably, our net assets of
available after payment of all creditors and any preferential liquidation
rights, if any, of any preferred stock, if any, then outstanding.
All of the issued and outstanding shares of common stock are duly
authorized, validly issued, fully paid, and non-assessable. To the extent that
additional shares of our common stock are issued, the relative interests of
existing stockholders may be diluted.
THE PENNY STOCK RULES
Our securities may be considered a penny stock. Penny stocks are securities
with a price of less than $5.00 per share other than securities registered on
national securities exchanges or quoted on the Nasdaq stock market, provided
that current price and volume information with respect to transactions in such
securities is provided by the exchange or system. Our securities may be subject
to "penny stock rules" that impose additional sales practice requirements on
broker-dealers who sell penny stock securities to persons other than established
customers and accredited investors. For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase of
penny stock securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving a
penny stock, unless exempt, the "penny stock rules" require the delivery, prior
to the transaction, of a disclosure schedule prescribed by the Commission
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Monthly statements must be sent
disclosing recent price information on the limited market in
24
penny stocks. The "penny stock rules" may restrict the ability of broker-dealers
to sell our securities and may have the effect of reducing the level of trading
activity of our common stock in the secondary market. The penny stock
restrictions will not apply to our securities when our market price is $5.00 or
greater. The price of our securities may not reach or maintain a $5.00 price
level.
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder, the
number of shares of common stock offered by each Selling Stockholder, the number
of shares of common stock to be owned by each Selling Stockholder if all shares
were to be sold in this offering and the percentage of our common stock that
will be owned by each Selling Stockholder if all shares are sold in this the
offering. The shares of common stock being offered hereby are being registered
to permit public secondary trading and the Selling Stockholders may offer all,
none or a portion of the shares for resale from time to time.
----------------------------------------------------------------------------------
Name Shares Shares Shares Percentage
Of Owned Offered Owned After
Selling Before For After Offering If All
Stockholder Offering Sale Offering Shares Are Sold
Sold If All Shares
Are Sold
(1) (2) (2)
----------------------------------------------------------------------------------
Legacy Media, LLC 7,100,000 (3) 7,100,000 (3) -0- -0-
Paula Argento 400,000 (4) 200,000 200,000 .09%
Stuart Young 450,000 450,000 -0- -0-
-------------------
(1) To the best of our knowledge, no Selling Stockholder has a short position
in our common stock. To the best of our knowledge, no Selling Stockholder
that is a beneficial owner of any of these shares is a broker-dealer or an
affiliate of a broker-dealer (a broker-dealer may be a record holder).
Except as otherwise disclosed in this filing, no Selling Stockholder has
held any position or office, or has had any material relationship with us
or any of our affiliates within the past three years.
(2) Assumes no sales or purchases are transacted by the Selling Stockholder
during the offering period other than in this offering.
(3) Includes 3.2 million shares of voting common stock issued for services and
3.5 million unissued shares of voting common stock underlying the right to
convert of a $250,000 note described earlier in this Prospectus on pages 11
and 16.
For purposes of this table and per agreement with Legacy Media, LLC, the
Company used a conversion price of approximately $0.07 per share for the
convertible debt which was determined as if the the debt were converted in
its entirety on August 30, 2007. The actual number of shares of common
stock issuable upon the conversion of the convertible debt is subject to
adjustment depending on amount, other factors and the future market price
of the common stock and could be materially less or more than the number
estimated in the table.
(4) Includes 200,000 shares which were authorized in April 2007 and were
issued in September 2007. Includes an additional 200,000 shares which will
be issued concurrent with the filing of this SB-2. All shares have been
issued for services rendered.
PLAN OF DISTRIBUTION
The Selling Stockholders (of record ownership and of beneficial ownership)
and any of their pledgees, assignees, and successors-in-interest may, from time
to time, sell any or all of their shares of common stock on any stock exchange,
market, or trading facility on which the shares are traded or in private
transactions. These sales may be at fixed or negotiated prices. There is no
assurance that the Selling Stockholders will sell any or all of the common stock
in this offering. The Selling Stockholders may use any one or more of the
following methods when selling shares:
- Ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers.
- Block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction.
- Purchases by a broker-dealer as principal and resale by the broker-dealer
for its own account.
- An exchange distribution following the rules of the applicable exchange.
- Privately negotiated transactions.
- Short sales or sales of shares not previously owned by the seller.
- An agreement between a broker-dealer and a Selling Stockholder to sell a
specified number of such shares at a stipulated price per share.
- A combination of any such methods of sale.
25
- Any other lawful method.
The Selling Stockholder may also engage in:
- Short selling against the box, which is making a short sale when the seller
already owns the shares.
- Buying puts, which is a contract whereby the person buying the contract may
sell shares at a specified price by a specified date.
- Selling calls, which is a contract giving the person buying the contract
the right to buy shares at a specified price by a specified date.
- Selling under Rule 144 under the Securities Act, if available, rather than
under this prospectus.
- Other transactions in our securities or in derivatives of our securities
and the subsequent sale or delivery of shares by the stock holder.
- Pledging shares to their brokers under the margin provisions of customer
agreements. If a Selling Stockholder defaults on a margin loan, the broker
may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholder in amounts to be negotiated. If any
broker-dealer acts as agent for the purchaser of shares, the broker-dealer may
receive commission from the purchaser in amounts to be negotiated. We do not
expect these commissions and discounts to exceed what is customary in the types
of transactions involved.
We are required to pay all fees and expenses incident to the registration
of the shares in this offering. However, we will not pay any commissions or any
other fees in connection with the resale of the common stock in this offering.
If we are notified by a Selling Stockholder that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the Registration Statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the Selling Stockholder and the broker-dealer.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
26
LEGAL PROCEEDINGS
We are not a plaintiff or defendant in any litigation, nor is any
litigation threatened against us.
INTEREST OF NAMED EXPERTS AND COUNSEL
Paula Argento, Esq., of Argento & Associates Law Firm, 1120 20th St., NW
Box 18726 Washington, DC 20036, Tel. 202-538-2473, has acted as our legal
counsel for this offering. The validity of the shares offered by this prospectus
has been passed upon for Proton Laboratories, Inc. by Argento & Associates Law
Firm. As of the date of this prospectus, Ms. Argento has been authorized 400,000
shares of our voting common stock.
Our consolidated balance sheets as of December 31, 2006 and 2005, and the
consolidated statements of operations, stockholders' deficit, and cash flows,
for the years then ended, have been included in the registration statement on
Form SB-2 of which this prospectus forms a part, in reliance on the report of
Hansen, Barnett & Maxwell, an independent registered public accounting firm,
given on the authority of that firm as experts in auditing and accounting.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Washington Business Corporation Act at Title 23 RCW provides that we
shall indemnify our officers and directors and hold harmless each person who
was, is or is threatened to be made a party to or is otherwise involved in any
threatened proceedings by reason of the fact that he or she is or was our
director or officer, against losses, claims, damages, liabilities and expenses
actually and reasonably incurred or suffered in connection with such proceeding.
However, the statutory indemnity does not apply to: (a) acts or omissions
of the director finally adjudged to be intentional misconduct or a knowing
violation of law; (b) unlawful distributions; or (c) any transaction with
respect to which it was finally adjudged that such director personally received
a benefit in money, property, or services to which the director was not legally
entitled.
Our Articles of Incorporation and By-Laws also state that we indemnify our
officers and directors and hold harmless each person who was, is or is
threatened to be made a party to or is otherwise involved in any threatened
proceedings by reason of the fact that he or she is or was our director or
officer, against losses, claims, damages, liabilities and expenses actually and
reasonably incurred or suffered in connection with such proceeding.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the forgoing provisions or otherwise, we have been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in that Act and is, therefore, unenforceable.
27
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
28
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
F-1
HANSEN, BARNETT & MAXWELL, P.C.
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS REGISTERED WITH THE PUBLIC COMPANY
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
PROTON LABORATORIES, INC.
TABLE OF CONTENTS
PAGE
Condensed Consolidated Balance Sheets - June 30, 2007 and
December 31, 2006 (Unaudited) F-1
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2007 and 2006 (Unaudited) F-2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2007 and 2006 (Unaudited) F-3
Notes to Condensed Consolidated Financial Statements (Unaudited) F-4
PROTON LABORATORIES, INC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2007 2006
-------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 1,710 $ 9,768
Accounts receivable, less allowance for doubtful accounts of
$24,586 and $30,419, respectively 360 794
Inventory 100,764 143,865
-------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 102,834 154,427
-------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 23,316 23,316
Equipment and machinery 242,330 238,776
Leasehold improvements 11,323 11,323
Accumulated depreciation (90,566) (69,550)
-------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 186,403 203,865
-------------------------------------------------------------------------------------------------
DEPOSITS 6,131 6,131
=================================================================================================
TOTAL ASSETS $ 295,368 $ 364,423
=================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 154,892 $ 71,314
Accrued expenses 307,554 266,079
Deferred revenue 52,506 52,506
Preferred dividends payable 19,200 16,000
-------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 534,152 405,899
-------------------------------------------------------------------------------------------------
STOCKHOLDER LOANS, NET OF CURRENT PORTION 307,642 270,642
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ 841,794 $ 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; 26,470,523 and 21,658,223 shares issued and
outstanding, respectively 2,649 2,168
Additional paid in capital 5,515,442 4,045,371
Stock subscription receivable (20,000) (20,000)
Accumulated deficit (6,124,517) (4,419,657)
-------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (546,426) (312,118)
-------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 295,368 $ 364,423
=================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-1
PROTON LABORATORIES, INC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -----------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------------------------------------------------------------
SALES $ 27,298 $ 33,639 $ 79,039 $ 84,561
COST OF GOODS SOLD 18,455 26,187 48,255 70,479
--------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 8,843 7,452 30,784 14,082
--------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Selling, general and administrative expenses (including
equity-based expenses of $0, $0, $0 and $40,526, respectively) 163,701 124,011 251,239 252,041
Product development costs (including equity-based
expenses of $0, $0, $1,470,551 and $0, respectively) - - 1,470,551 -
--------------------------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (154,858) (116,559) (1,691,006) (237,959)
--------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Interest income 59 175 112 200
Interest expense (5,382) (15,044) (10,766) (32,781)
--------------------------------------------------------------------------------------------------------------------------------
NET OTHER EXPENSE (5,323) (14,869) (10,654) (32,581)
--------------------------------------------------------------------------------------------------------------------------------
NET LOSS (160,181) (131,428) (1,701,660) (270,540)
PREFERRED STOCK DIVIDEND (1,600) (1,600) (3,200) (3,200)
--------------------------------------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (161,781) $ (136,228) $ (1,704,860) $ (273,740)
================================================================================================================================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.01) $ (0.01) $ (0.07) $ (0.02)
================================================================================================================================
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 26,470,523 15,483,316 24,616,797 14,914,666
================================================================================================================================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
PROTON LABORATORIES, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2007 2006
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,701,660) $(270,540)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 21,016 15,603
Common stock issued for services 1,470,551 40,526
Changes in operating assets and liabilities
Accounts receivable 434 6,906
Inventory 43,102 (3,688)
Accounts payable 83,578 (33,151)
Accrued expenses 41,475 64,271
------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (41,504) (180,073)
------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,554) -
------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (3,554) -
------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net - 401,959
Proceeds from stockholder loans 37,000 73,852
Payment on note payable - (267,852)
------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 37,000 207,959
------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (8,058) 27,886
CASH AT BEGINNING OF PERIOD 9,768 1,384
------------------------------------------------------------------------
CASH AT END OF PERIOD $ 1,710 $ 29,270
========================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for accrued legal services $ - $ 40,526
Accrual of preferred stock dividends $ 3,200 $ 3,200
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
PROTON LABORATORIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND NATURE OF OPERATIONS
BASIS OF PRESENTATION - The condensed consolidated financial statements include
the accounts of Proton Laboratories, Inc., and its wholly owned subsidiary
("Proton" or the "Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
In April 2004, the Company changed its name from BentleyCapitalCorp.com, Inc. to
Proton Laboratories, Inc. The Company's subsidiary also changed its name from
Proton Laboratories, Inc. to Water Science, Inc.
CONDENSED FINANCIAL STATEMENTS - The accompanying unaudited condensed
consolidated financial statements are condensed and, therefore, do not include
all disclosures normally required by accounting principles generally accepted in
the United States of America. These statements should be read in conjunction
with the Company's annual financial statements included in the Company's
December 31, 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 six months
ended June 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 and
common shares outstanding to give effect to potentially issuable common shares
except during loss periods when those potentially issuable shares are
anti-dilutive. Potential common shares from convertible preferred stock have
not been included as they are anti-dilutive.
F-4
PROTON LABORATORIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 2 - BUSINESS CONDITION
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
company has incurred losses applicable to common shareholders of $1,704,860 for
the six months ended June 30, 2007. For June 30, 2007 and December 31, 2006 the
Company had working capital deficits of $431,318 and $251,472, respectively.
Loans and equity funding were required to fund operations.
The Company is working towards raising additional public funds to expand its
marketing and revenues. The Company has spent considerable time in contracting
with several major overseas corporations for the co-development of enhanced
antioxidant beverages for distribution into the overseas markets. In addition,
the Company is working with its Canadian business associates to identify
institutional businesses to market various disinfection applications based upon
functional water, pending government approval.
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 - RELATED PARTY TRANSACTIONS
Stockholder loans as of June 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
--------------------------------------------------------------------------------------
During the six months ended June 30, 2007, two shareholders advanced the Company
$37,000. The Company did not make any payments on notes during the six months
ended June 30, 2007.
At June 30, 2007, the Company had accrued interest relating to shareholder loans
of $62,321.
F-5
PROTON LABORATORIES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
During the six months ended June 30, 2007, the Company accrued $15,000 as
salaries payable to the company's CEO, resulting in $225,091 of salaries payable
at June 30, 2007.
NOTE 4 - COMMON STOCK
During January through June 30, 2007 the Company issued 4,812,300 shares of
common stock for various services and agreements. The value of the shares was
$1,470,551 based on market prices ranging from $0.30 to $0.37 per share which
was the market price of the Company's common stock on the dates of issuances.
NOTE 5 - COMMITMENTS
PRODUCTION AGREEMENT - In June 2005, the Company entered into an agreement with
Mitachi, a Japanese electronics component manufacturer, to aid in the production
of enhanced drinking water generators. Pursuant to this agreement, Mitachi
agreed to pay the Company 25,000,000 Yen for engineering design, molding,
tooling and preparation costs, and the exclusive product distribution rights for
China, Taiwan, and Japan. As of June 30, 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. """"'
NOTE 6 - SUBSEQUENT EVENTS
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.
Future minimum lease payments under operating lease obligations as of June 30,
2007 were as follows:
Year Ending December 31,
2007 $23,109
2008 46,903
2009 23,794
--------------------------------------
Total $93,807
--------------------------------------
During July 2007, the Company entered into an agreement with Legacy Media, LLC
in connection with the agreement Legacy Media, LLC has been granted 2.6 million
shares of the Company's restricted common stock to provide investor relations
services. Legacy Media, LLC has also been issued a convertible note by the
Company in the amount of $250,000 repayable at 8% interest by January 2007. If
payment is not received by the due date Legacy Media, LLC has the option to
convert this note into restricted voting common stock of the Company, 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 stock price. All
of Legacy Media, LLC's shares may be registered in an SB-2 filing at its
request.
F-6
FORM SB-2
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
THE WASHINGTON BUSINESS CORPORATION ACT
---------------------------------------
The Washington Business Corporation Act at Title 23 RCW provides that we
shall indemnify our officers and directors and hold harmless each person who
was, is or is threatened to be made a party to or is otherwise involved in any
threatened proceedings by reason of the fact that he or she is or was our
director or officer, against losses, claims, damages, liabilities and expenses
actually and reasonably incurred or suffered in connection with such proceeding.
ARTICLES OF INCORPORATION
-------------------------
Our Articles of Incorporation, at Section 11-Indemnification, provide for
the following:
ARTICLES OF INCORPORATION
ARTICLE XI
11.1 Indemnification.
The corporation shall indemnify its directors to the full extent permitted
by the Washington Business Corporation Act now or hereafter in force. However,
such indemnity shall not apply on account of: (a) acts or omissions of the
director finally adjudged to be intentional misconduct or a knowing violation of
law; (b) conduct of the director finally adjudged to be in violation of RCW
23B.08.310; or (c) any transaction with respect to which it was finally adjudged
that such director personally received a benefit in money, property, or services
to which the director was not legally entitled. The corporation shall advance
expenses for such persons pursuant to the terms set forth in the Bylaws, or in a
separate Board resolution or contract.
11.2 Authorization.
The Board of Directors may take such action as is necessary to carry out
these indemnification and expense advancement provisions. It is expressly
empowered to adopt, approve, and amend from time to time such Bylaws,
resolutions, contracts, or further indemnification and expense advancement
arrangements as may be permitted by law, implementing these provisions. Such
Bylaws, resolutions, contracts or further arrangements shall include but not be
limited to implementing the manner in which determinations as to any indemnity
or advancement of expenses shall be made.
11.3 Effect of Amendment.
No amendment or repeal of this Article shall apply to or have any effect on
any right to indemnification provided hereunder with respect to acts or
omissions occurring prior to such amendment or repeal.
BY-LAWS
-------
Our By-laws, at Section 10--Indemnification and Section 11-Limitation of
Liability, provide for the following:
BY-LAWS
SECTION 10--INDEMNIFICATION
10.1 Right to Indemnification
Each person who was, is or is threatened to be made a party to or is
otherwise involved (including, without limitation, as a witness) in any
threatened, pending or completed action, suit, claim or proceeding, whether
civil, criminal, administrative or investigative and whether formal or informal
(hereinafter "proceedings"), by reason of the fact that he or she is or was a
Director or officer of the corporation or, that being or having been such a
Director or officer of the corporation, he or she is or was serving at the
request of the corporation as a Director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise (hereafter an "indemnitee"), whether the basis
of a proceeding is alleged action in an official capacity or in any other
capacity while serving as such a Director, officer, partner, trustee, employee
29
or agent, shall be indemnified and held harmless by the corporation against all
losses, claims, damages (compensatory, exemplary, punitive or otherwise),
liabilities and expenses (including attorneys' fees, costs, judgments, fines,
ERISA excise taxes or penalties, amounts to be paid in settlement
and any other expenses) actually and reasonably incurred or suffered by such
indemnitee in connection therewith and such indemnification shall continue as to
an indemnitee who has ceased to be a Director or officer of the Corporation or a
Director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
shall insure to the benefit of the indemnitee's heirs, executors and
administrators. Except as provided in subsection 10.4 of this Section with
respect to proceedings seeking to enforce rights to indemnification, the
corporation shall indemnify any such indemnitee in connection with a proceeding
(or part thereof) initiated by such indemnitee only if a proceeding (or part
thereof) was authorized or ratified by the Board. The right to indemnification
conferred in this Section shall be a contract right.
10.2 Restrictions on Indemnification
No indemnification shall be provided to any such indemnitee for acts or
omissions of the indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
indemnitee personally received a benefit in money, property or services to which
the indemnitee was not legally entitled or if the corporation is otherwise
prohibited by applicable law from paying such indemnification. Notwithstanding
the foregoing, if Section 23B.08.560 or any successor provision of the
Washington Business Corporation Act is hereafter amended, the restrictions on
indemnification set forth in this subsection 10.2 shall be as set forth in such
amended statutory provision.
10.3 Advancement of Expenses
The right to indemnification conferred in this Section shall include the
right to be paid by the corporation the expenses reasonably incurred in
defending any proceeding in advance of its final disposition (hereinafter an
"advancement of expenses"). An advancement of expenses shall be made upon
delivery to the corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified.
10.4 Right of Indemnitee to Bring Suit
If a claim under subsection 10.1 or 10.3 of this Section is not paid in
full by the corporation within 60 days after a written claim has been received
by the corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim. If successful in whole or in part, in any such suit
or in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of the undertaking, the indemnitee shall be entitled to be
paid also the expense of litigating such suit. The indemnitee shall be presumed
to be entitled to indemnification under this Section upon submission of a
written claim (and, in an action brought to enforce a claim for an advancement
of expenses, when the required undertaking has been tendered to the corporation)
and thereafter the corporation shall have the burden of proof to overcome the
presumption that the indemnitee is so entitled.
10.5 Procedures Exclusive
Pursuant to Section 23B.08.560(2) or any successor provision of the
Washington Business Corporation Act, the procedures for indemnification and the
advancement of expenses set forth in this Section are in lieu of the procedures
required by Section 23B.08.550 or any successor provision of the Washington
Business Corporation Act.
10.6 Nonexclusivity of Rights
Except as set forth in subsection 10.5, the right to indemnification and
the advancement of expenses conferred in this Section shall not be exclusive of
any other right that any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation or By-laws of the corporation,
general or specific action of the Board or shareholders, contract or otherwise.
10.7 Insurance, Contracts and Funding
30
The corporation may maintain insurance, at its expense, to protect itself
and any Director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any expense, liability or loss, whether
or not the corporation would have the authority or right to indemnify such
person against such expense, liability or loss under the Washington Business
Corporation Act or other law. The corporation may enter into contracts with any
Director, officer, partner, trustee, employee or agent of the corporation in
furtherance of the provisions of this section and may create a trust fund, grant
a security interest, or use other means (including, without limitation, a letter
of credit) to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Section.
10.8 Identification of Employees and Agents of the Corporation
In addition to the rights of indemnification set forth in subsection 10.1,
the corporation may, by action of the Board, grant rights to indemnification and
advancement of expenses to employees and agents or any class or group of
employees and agents of the corporation (a) with the same scope and effect as
the provisions of this Section with respect to indemnification and the
advancement of expenses of Directors and officers of the corporation; (b)
pursuant to rights granted or provided by the Washington Business Corporation
Act; or (c) as are otherwise consistent with law.
10.9 Persons Serving Other Entities
Any person who, while a Director or officer of the corporation, is or was
serving (a) as a Director, officer, employee or agent of another corporation of
which a majority of the shares entitled to vote in the election of its directors
is held by the corporation or (b) as a partner, trustee or otherwise in an
executive or management capacity in a partnership, joint venture, trust,
employee benefit plan or other enterprise of which the corporation or a majority
owned subsidiary of the corporation is a general partner or has a majority
ownership shall conclusively be deemed to be so serving at the request of the
corporation and entitled to indemnification and the advancement of expenses
under subsections 10.1 and 10.3 of this Section.
BY-LAWS
SECTION 11--LIMITATION OF LIABILITY
To the full extent that the Washington Business Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of any person who would be considered an indemnitee
under subsection 10.1 of Section 10, an indemnitee of the Corporation shall not
be liable to the Corporation or its shareholders for monetary damages for
conduct in the capacity based upon which such person is considered an
indemnitee. Any amendments to or repeal of this Section 11 shall not adversely
affect any right or protection of any indemnitee of the Corporation for or with
respect to any acts or omissions of such indemnitee occurring prior to such
amendment or repeal.
The effect of these provisions of the Washington Business Corporation Act
at Title 23 RCW, our Articles of Incorporation and our By-laws is to indemnify
our directors and officers from the costs and expenses of liability incurred by
them in connection with any action, suit or proceeding in which they are
involved by reason of their affiliation with us. Pursuant to Washington law, a
corporation may indemnify a director, provided that such indemnity shall not
apply on account of: (a) acts or omissions of the director finally adjudged to
be intentional misconduct or a knowing violation of law; (b) unlawful
distributions; or (c) any transaction with respect to which it was finally
adjudged that such director personally received a benefit in money, property, or
services to which the director was not legally entitled.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, we have been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
31
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The amounts set forth are all estimates:
Amount Paid or
be Paid (*)
SEC registration fee $ $ 413.00
Printing and engraving expenses 1,000.00
Attorneys' fees and expenses 30,000.00
Accountants' fees and expenses 5,000.00
Transfer agent's and registrar's fees and expenses 1,000.00
Edgar service provider fee 2,000.00
Miscellaneous 1,000.00
----------------
Total $ 41,413.00
================
_________________
(*) Estimated
32
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the three year period ended September 27, 2007, unregistered
securities in transactions summarized below.
The following transactions were effected on reliance upon exemptions from
registration under Section 4(2) of the Securities Act. Each certificate issued
for unregistered securities contained a legend stating that the securities have
not been registered under the Securities Act and setting forth the restrictions
on the transferability and the sale of the securities. No underwriter
participated in, nor did we pay any commissions or fees to any underwriter in
connection with any of these transactions.
During July through September 2007, the Company issued 3,000,000 shares of
common stock for various services and agreements. The value of the shares was
$391,000 based on market prices ranging from $0.07 to $0.15 per share which was
the market price of the common stock on the dates of issuances.
During January through June 30, 2007 the Company issued 4,812,300 shares of
common stock for various services and agreements. The value of the shares was
$1,470,551 based on market prices ranging from $0.30 to $0.37 per share which
was the market price of the Company's common stock on the dates of issuances.
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.
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.
These transactions did not involve a public offering. The investors were
knowledgeable about our operations and financial condition. These transactions
were made in reliance upon exemptions from registration under Section 4(2) of
the Securities Act.
33
ITEM 27. EXHIBITS
Exhibit
Number Description
3.1.1 Articles of Incorporation----Incorporated by reference to our Form SB-2 filed
on March 31, 2000, as amended.
3.1.2 Amendment to Articles of Incorporation (name change)----Incorporated by reference to our Form SB-2
filed December 19, 2005.
Amendment to Articles of Incorporation (Series A Preferred Stock)---- Incorporated by reference to our
3.1.3 Form SB-2 filed December 19, 2005.
3.2 By-laws----Incorporated by reference to our Form SB-2 filed
on March 31, 2000, as amended.
4.1 Specimen Stock Certificate---- Incorporated by reference to our Form SB-2
filed December 19, 2005.
5.1 Opinion re: legality----Provided herewith.
10.1 Investment Agreement----Incorporated by reference to our Form 8-K
filed on December 1, 2005.
10.4 Amendment to Investment Agreement---- Incorporated by reference to our Form SB-2
filed December 19, 2005.
14.1 Code Of Ethics---- Incorporated by reference to our Form 10-KSB
for the year ended December 31. 2003.
21.1 Subsidiaries----Incorporated by reference to our Form 8-K filed
on August 25, 2003.
23.1 Consent of Independent Auditors----Provided herewith.
23.2 Consent of Counsel (see Exhibit 5.1)----Provided herewith.
99.1 Audit Committee Charter----Incorporated by reference to our Definitive Form 14A
filed on February 2, 2004.
34
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes that it will:
a.
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the Registration
Statement; and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new Registration Statement of the securities
offered, and the Offering of the securities at that time to be the initial bona
fide Offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
(4) For determining liability of the undersigned small business issuer under
the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned small business issuer undertakes that in a primary
offering of securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned small
business issuer relating to the offering required to be filed
pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering prepared by
or on behalf of the undersigned small business issuer or used or
referred to by the undersigned small business issuer;
iii. The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
small business issuer or its securities provided by or on behalf
of the undersigned small business issuer; and
iv. Any other communication that is an offer in the offering made by
the undersigned small business issuer to the purchaser.
g.
That, for the purpose of determining liability under the Securities
Act to any purchaser:
1. If the small business issuer is relying on Rule 430B:
i. Each prospectus filed by the undersigned small business issuer
pursuant to Rule 424(b)(3) shall be deemed to be part of the
registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
ii. Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance
on Rule 430B relating to an offering made pursuant to Rule
415(a)(1)(i), (vii), or (x) for the purpose of providing the
information required by section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration
statement as of the earlier of the date such form of prospectus
is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of
the issuer and any person that is at that date an underwriter,
such date shall be deemed to be a new effective date of the
registration statement relating to the securities in the
registration statement to which that prospectus relates, and the
offering of such securities at that time shall be deemed to be
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the initial bona fide offering thereof. Provided, however, that
no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or made
in any such document immediately prior to such effective date; or
2. If the small business issuer is subject to Rule 430C, include the
following:
Each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be
part of and included in the registration statement as of the date it
is first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of first use.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorize s this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Alameda, California on September 27, 2007.
PROTON LABORATORIES, INC.
(signed) ______________________
Oct. 4, 2007 /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer and
Chief Financial Officer
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