UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 2006
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from --- to ---
Commission file number: 000-31883
PROTON LABORATORIES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Washington 91-2022700
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1135 Atlantic Avenue, Suite 101
Alameda, CA 94501
(Address of principal executive offices)
(510) 865-6412
Issuer's telephone number
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] [ ] No
Indicate by check whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] [X] No
On November 7, 2006 the registrant had outstanding 21,658,020 shares of
Common Stock, $0.0001 par value per share. This includes approximately 182,010
shares that were subscribed for by investors but not paid for yet, which such
stock certificates we retain.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PROTON LABORATORIES, INC.
TABLE OF CONTENTS
PAGE
Condensed Consolidated Balance Sheets - September 30, 2006 and
December 31, 2005 (Unaudited) F-1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2006 and 2005 (Unaudited) F-2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005 (Unaudited) F-3
Notes to Condensed Consolidated Financial Statements (Unaudited) F-4
PROTON LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2006 2005
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ASSETS
CURRENT ASSETS
Cash $ 48,891 $ 1,384
Accounts receivable, less allowance for doubtful accounts of
16,522 and $16,522, respectively 14,756 21,927
Stock subscription receivable 16,533 -
Prepaid expenses 389,693 -
Inventory 240,935 32,861
Product development 136,335 -
----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 847,143 56,172
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PROPERTY AND EQUIPMENT
Furniture and fixtures 20,461 19,709
Equipment and machinery 161,833 161,833
Leasehold improvements 11,323 11,323
Accumulated depreciation (69,175) (45,820)
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NET PROPERTY AND EQUIPMENT 124,442 147,045
----------------------------------------------------------------------------------------------------
DEPOSITS 6,131 6,131
----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 977,716 $ 209,348
----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 73,425 $ 168,378
Accrued expenses 306,106 252,769
Deferred revenue 52,506 52,506
Preferred dividends payable 14,400 9,600
Stockholder loans, current portion 290,642 444,642
----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 737,079 927,895
----------------------------------------------------------------------------------------------------
STOCKHOLDER LOANS, NET OF CURRENT PORTION - 40,000
----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 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; 21,308,020 and 14,270,100 shares issued and
outstanding, respectively 2,133 1,429
Additional paid in capital 3,887,906 1,856,601
Stock subscription receivable (20,000) -
Accumulated deficit (3,709,402) (2,696,577)
----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 240,637 (758,547)
----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 977,716 $ 209,348
----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-1
PROTON LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER30, SEPTEMBER 30,
-------------------------- --------------------------
2006 2005 2006 2005
--------------------------------------------------------------------- --------------------------
SALES $ 10,433 $ 116,791 $ 94,994 $ 274,501
COST OF GOODS SOLD 10,900 113,787 81,379 214,649
-------------------------------------------------------------------------------------------------
GROSS PROFIT (LOSS) (467) 3,004 13,615 59,852
-------------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (including equity-based
expenses of $674,238, $0, $633,712 and
$459,040, respectively) 724,615 114,219 976,656 793,599
-------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (725,082) (111,215) (963,041) (733,747)
-------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Interest income 963 61 1,163 161
Interest expense (13,366) (17,826) (46,147) (90,645)
-------------------------------------------------------------------------------------------------
NET OTHER EXPENSE (12,403) (17,765) (44,984) (90,484)
-------------------------------------------------------------------------------------------------
NET LOSS (737,485) (128,980) (1,008,025) (824,231)
PREFERRED STOCK DIVIDEND 1,600 1,600 4,800 4,800
-------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON
SHAREHOLDERS $ (739,085) $ (130,580) $(1,012,825) $ (829,031)
-------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.04) $ (0.01) $ (0.06) $ (0.06)
-------------------------------------------------------------------------------------------------
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 19,983,251 14,234,230 16,631,410 13,543,217
-------------------------------------------------------------------------------------------------
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 NINE MONTHS ENDED SEPTEMBER 30, 2006 2005
-------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,008,025) $(824,231)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 23,355 16,370
Loss on disposal of property and equipment - -
Common stock issued for services 674,238 459,040
Amortization of loan costs - 27,075
Changes in operating assets and liabilities
Accounts receivable 7,171 (7,153)
Inventory and product development (344,409) (29,701)
Deposits - (1,131)
Deferred revenue - 52,506
Accounts payable (54,427) (32,579)
Accrued expenses 53,337 108,708
-------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (648,760) (231,096)
-------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (752) (3,562)
-------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (752) (3,562)
-------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 891,019 20,000
Proceeds from stockholder loans 73,852 48,642
Proceeds form notes payable - 164,000
Payment on note payable (267,852) -
-------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 697,019 232,642
-------------------------------------------------------------------------
NET INCREASE IN CASH 47,507 (2,016)
CASH AT BEGINNING OF PERIOD 1,384 14,412
-------------------------------------------------------------------------
CASH AT END OF PERIOD $ 48,891 $ 12,396
-------------------------------------------------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued for accrued legal services $ 40,526 $ -
Stock issued for future services $ 389,693 $ -
Stock issued under subscription agreement $ 36,533 $ -
Accrual of preferred stock dividends $ 4,800 $ 4,800
Transfer of inventory to equipment $ - $ 64,500
Issuance of common stock for loan costs $ - $ 27,075
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, 2005 Annual Report on Form 10-KSB. In particular, the Company's
significant accounting principles were presented as Note 1 to the consolidated
financial statements in that report. In the opinion of management, all
adjustments necessary for a fair presentation have been included in the
accompanying condensed consolidated financial statements and consist of only
normal recurring adjustments. The results of operations presented in the
accompanying condensed consolidated financial statements for the nine months
ended September 30, 2006 are not necessarily indicative of the results that may
be expected for the full year ending December 31, 2006.
NATURE OF OPERATIONS - The Company's operations are located in Alameda,
California. The core business of the Company consists of the sales and
marketing of the Company's industrial, environmental and residential systems
throughout the United States of America which alter the properties of water to
produce functional water. The Company acts as an exclusive importer and master
distributor of these products to various companies. Additionally, the Company
formulates intellectual properties under licensing agreements, supplies consumer
products, consults on projects utilizing functional water, facilitates between
manufacturer and industry and acts as educators on the benefits of functional
water.
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORY - Inventory consists of purchased finished goods and is stated at the
lower of cost (using the first-in, first-out method) or market value.
BASIC AND DILUTED LOSS PER COMMON SHARE - Basic loss per common share is
calculated by dividing net loss by the weighted-average number of common shares
outstanding. Diluted loss per common share is calculated by dividing net loss
by the weighted-average number of Series A convertible preferred shares and
common shares outstanding to give effect to potentially issuable common shares
except during loss periods when those potentially issuable shares are
anti-dilutive. Potential common shares from convertible preferred stock have
not been included as they are anti-dilutive.
F-4
NOTE 2 - BUSINESS CONDITION
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern. The
company has incurred losses applicable to common shareholders of $1,012,825 for
the nine months ended September 30, 2006. The Company had working capital of
$110,064 at September 30, 2006, and a working capital deficit of $871,723 at
December 31, 2005. Loans and equity funding were required to fund operations.
The Company is working towards raising additional public funds to expand its
marketing and revenues. The Company has spent considerable time in contracting
with several major overseas corporations for the co-development of enhanced
antioxidant beverages for distribution into the overseas markets. In addition,
the Company is working with its Canadian business associates to identify
institutional businesses to market various disinfection applications based upon
functional water, pending government approval.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flows to meet its obligations on a timely
basis, to obtain additional financing as may be required, and ultimately to
attain profitable operations. However, there is no assurance that profitable
operations or sufficient cash flows will occur in the future.
F-5
NOTE 3 - RELATED PARTY TRANSACTIONS
Stockholder loans as of September 30, 2006 and December 31, 2005 consist of
the following: 2006 2005
-----------------------------------------------------------------------------------------------------
Note payable to President; principal and interest settled at September 30, 2006 $ - $168,500
Note payable to President; principal and interest due June 2008;
interest is accrued at 7% per annum; unsecured 20,000 -
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 84,000 84,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 125,000 125,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 40,000 40,000
Note payable to CEO and majority shareholder; principal and
interest due September 2006; interest is accrued at 7% per annum;
unsecured. 13,000 13,000
Note payable to CEO and majority shareholder; principal and
interest due September 2007; interest is accrued at 7% per annum;
unsecured. 8,642 14,142
Note payable to shareholder; principal and interest settled at September 30, 2006 - 40,000
-----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS 290,642 484,642
Less: Current Portion 290,642 444,642
-----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS - LONG TERM $ - $ 40,000
-----------------------------------------------------------------------------------------------------
During the nine months ended September 30, 2006, two shareholders advanced the
Company $73,852. The Company made payments on all shareholder notes totaling
$267,852 during the nine months ended September 30, 2006.
At September 30, 2006, the Company had accrued interest relating to shareholder
loans of $98,018.
During the nine months ended September 30, 2006, the Company accrued $45,000 as
salaries payable to the company's CEO, resulting in $202,827 of salaries payable
at September 30, 2006.
F-6
NOTE 4 - COMMON STOCK
In March 2006 the Company issued 352,400 shares of common stock for payment of
legal fees. The value of the shares issued was $81,052, based on a market price
on date of issuance of $0.23. $40,526 of this amount is related to services
rendered during the year ended December 31, 2005.
In July and August 2006 the Company issued 1,410,000 shares of common stock for
marketing and sales expense through December 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 date of issuance.
Through September 30, 2006, $633,712 of expense related to the shares had been
recognized with the remaining $389,693 to be recognized through December 31,
2006.
During May through September the Company issued 5,275,520 shares of common stock
for cash proceeds of $891,019 and a stock subscription of $36,533 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. Subsequent to September 30, 2006, $16,533 of subscription receivables had
been collected and is classified as a current asset in the accompanying
financial statements.
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 September 30, 2006, Mitachi had paid 6,000,000
Yen, or $52,506, for the above mentioned distribution rights. Since the project
is not yet completed and no units have been sold, this amount is classified as
deferred revenue.
EQUITY LINE - In November 2005, the Company entered into an equity line
agreement with a private investor (the "Equity Line Investor"). Under the
equity line, the Company had the right to draw up to $10,000,000 from the Equity
Line Investor. The Company was entitled to draw funds and to "put" to the
Equity Line Investor shares of the Company's Class A common stock in lieu of
repayment of the draw. As of September 30, 2006, the Company had not drawn
funds under the equity line.
NOTE 6 - SUBSEQUENT EVENT
Subsequent to September 30, 2006 the Company issued 350,000 shares of common
stock for cash proceeds of $157,500, or $0.45 per share from one investor.
F-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
FORWARD-LOOKING STATEMENT
Certain statements contained herein, including, without limitation,
statements containing the words, "believes," "anticipates," "expects," and other
words of similar meaning, constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Given these
uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements. In addition to the forward-looking statements
contained herein, the following forward-looking factors could cause our future
results to differ materially our forward-looking statements: competition,
funding, government compliance and market acceptance of our products.
INTRODUCTION
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our audited financial
statements and the accompanying notes thereto for the year ended December 31,
2005 which appear in our Form 10-KSB for the year then ended, and our unaudited
financial statements for the quarter ended September 30, 2006 and the
accompanying notes thereto and the other financial information appearing
elsewhere herein. The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the USA,
which contemplate our continuation as a going concern. We have incurred losses
applicable to common shareholders of $1,012,825 for the nine months ended
September 30, 2006. We had working capital of $110,064 at September 30, 2006,
and a working capital deficit of $871,723 at December 31, 2005. Loans and equity
funding were required to fund operations.
We had a stockholder equity of $240,637 at September 30, 2006, and a
stockholders deficit of $758,547at September 30, 2005.
Stockholder loans as of September 30, 2006 and December 31, 2005 consist of the
following:
2006 2005
-----------------------------------------------------------------------------------------------------
Note payable to President; principal and interest settled at September 30, 2006 $ - $168,500
Note payable to President; principal and interest due June 2008;
interest is accrued at 7% per annum; unsecured 20,000 -
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 84,000 84,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 125,000 125,000
Note payable to CEO and majority shareholder; principal and
interest currently due; interest is accrued at 7% per annum;
unsecured. 40,000 40,000
Note payable to CEO and majority shareholder; principal and
interest due September 2006; interest is accrued at 7% per annum;
unsecured. 13,000 13,000
Note payable to CEO and majority shareholder; principal and
interest due September 2007; interest is accrued at 7% per annum;
unsecured. 8,642 14,142
Note payable to shareholder; principal and interest settled at September 30, 2006 - 40,000
-----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS 290,642 484,642
Less: Current Portion 290,642 444,642
-----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER LOANS - LONG TERM $ - $ 40,000
-----------------------------------------------------------------------------------------------------
During the nine months ended September 30, 2006, two shareholders advanced
us $73,852. We made payments on all shareholder notes totaling $267,852 during
the nine months ended September 30, 2006.
At September 30, 2006, we had accrued interest relating to shareholder
loans of $98,018.
During the nine months ended September 30, 2006, we accrued $45,000 as
salaries payable to our CEO, resulting in $202,827 of salaries payable at
September 30, 2006.
Our independent auditors made a going concern qualification in their report
dated March 29, 2006, which raises substantial doubt about our ability to
continue as a going concern. The financial statements herein do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should we be unable to continue in existence.
Our ability to continue as a going concern is dependent upon our ability to
generate sufficient cash flows to meet our obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitable operations. However, there is no assurance that profitable operations
or sufficient cash flows will occur in the future.
We are located in Alameda, California. We are a biotechnology company that
develops new, practical applications for electrolyzed water and the electrolysis
process. Our processes and equipment alters the properties of water through
electrolysis with electrolytic ion separation and through the conversion of
existing properties found in water to achieve functional results. Our business
consists of the sales and marketing of the industrial, environmental and
residential systems throughout the U.S.A. which alter the properties of water to
produce functional water. We act as an exclusive importer and master distributor
of these products to various companies in which uses for the product range from
food processing to retail water sales. We are working towards raising funds to
expand our marketing and revenues. We have spent considerable time negotiating
with several overseas corporations for the co-development of enhanced
antioxidant beverages for distribution into the overseas markets. In addition,
we are working with Canadian businesses to identify markets for various
disinfection applications of functional water, pending government approval. We
are working on agricultural applications of functional water. We are working on
packaging for a spray-on application of function water for pathogen
counter-measures.
We formulate intellectual properties under licensing agreements, supply
consumer products, consult on projects utilizing functional water, facilitate
usage, uses and users of functional water between manufacturer and industry and
act as educators on the benefits of functional water. Our business has been
focused on marketing functional water equipment and systems.
Alkaline-concentrated functional water may have health-beneficial properties and
may be used for drinking and cooking purposes. Acidic-concentrated functional
water may be used as a topical, astringent medium.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. These estimates and assumptions provide a basis for us
to make judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Our actual results may differ from
these estimates under different assumptions or conditions, and these differences
may be material.
We recognize revenue when all four of the following criteria are met:
(i)persuasive evidence that an arrangement exists; (ii) delivery of the product
sand/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable. Our revenues are
derived from sales of our industrial, environmental and residential systems
which alter the properties of water to produce functional water. We believe that
this critical accounting policy affects our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Our fiscal year end is December 31.
We have a joint research and development program with Weber Farms locate
din Washington State. Weber Farms is family-owned with a long history of raising
and marketing quality potatoes, wheat and corn. In 1979, Weber Farms built
afresh pack potato warehouse to ensure better quality and more oversight of the
marketing of open potatoes both to domestic and foreign markets. In 1997, a
state-of- the-art potato storage facility capable of storing 50,000 tons was
built. End uses of Weber Farm potatoes are generally in the areas of boxed and
bagged potatoes for retail stores, hash browns, French fries and other
retail-type products. We will work together in various areas where Proton's
electrolyzed water, with its unique efficacies, can be integrated into potato
production and post-harvesting processes. Understanding that Proton's water
brings about certain potato maintenance efficacies, environmental and worker
safety, on-site production abilities and cost efficiencies, both parties are
looking forward to a mutually rewarding relationship.
In 2006, we raised funds for the following purposes:
A. Design, assembly and sales of a proprietary residential counter-top
unitwhich produces an enhanced drinking water through electrolysis. We will
be the exclusive licensee of the patent. This device will have a filtration
system coupled to an electrolysis process whicheffectively filters the tap
water while restructuring the properties of water to make it: (i) have
greater mineral effectiveness; (ii) be tastier than tap water; and, (iii)
be more hydrating than tap water. We anticipate that this product line will
be ready for marketing in 2007.
We are preparing to file an application for a U.S.A. patent on the design
of the proprietary residential water-enhancing device. The patent application
has been filed in Japan. and will be filed shortly in the U.S., Canada and
China. We are currently evaluating the market positioning of this uniquely
advanced product. We will be the exclusive licensee of the patent.
B. Design, 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 tested by a third party testing lab to establish the
efficacies of its anti-microbial effect on MRSA, HBV, HIV and Avian Flu.
The objective of our anti-microbial spray is to be able to control and
eliminate these four microbial strains on a hard surface or on a topical
surface. We anticipate introducing this product to ambulance services as a
non-chemical based, user friendly product for which these microbes do not
have an immunity. We anticipate that this product line will be ready for
marketing in 2007.
Interim laboratory testing results that have been attained from an
accredited, 3rd party testing laboratory, show the efficacy of the company's
antimicrobial spray to have rapid germicidal activity for an antibacterial and
antiviral agent against Staphylococcus aureus (MRSA), ATCC 6538 and Escherichia
coli (E. coli), ATCC 11229. The test article was tested in duplicate with three
puffs of spray at a distance of 8 inches with exposure periods of 1 minute and 2
minutes. Results showed that a 99.98% (3.71 log10) reduction in numbers of
tested
bacteria was shown after 1 minute exposure to the test article and a > 99.999% (
> 5.06 log10) reduction in numbers of the test bacteria was shown after 2
minutes exposure to the test article." Currently, we have completed product
design of the spray and we await additional testing on the stability of the
product.
C. Design and assembly of 3 proprietary commercial-grade electrolysis systems
based on a standard platform. There are many industrial uses for water
electrolysis systems. Our 3 system designs based on a standard platform
which minimizes the need for different components for different
applications. The standard platform will provide ease of assembly, ease of
use, durability and cost effectiveness. We anticipate that this product
line will be ready for marketing in 2007.
D. Testing of wine enhancement and other alcohol-synergistic products. 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 as 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.
Laboratory testing results indicate that the functional water molecules
attach to the alcohol resulting in conditions similar to conventional aging
methods. During the laboratory testing, a minimum of a 10-year aging
characteristic was applied to whiskey enhanced through this process, and similar
enhancements to taste, texture and beverage body were observed on other
alcohol-synergistic products such as sake and tequila. Further lab testing is
being conducted on a 2006 Chardonnay and a 2006 Petite Syrah. One barrel of each
wine will be processed through the enhancement process in the near future. These
products will be provided as pre-market test products to a focused audience for
feedback and recommended product refinements prior to readying a product for
market. The first lab test objective is to determine the ability of the wine
enhancement process to take a full-bodied Petite Syrah and introduce an aged
mellowness to it. Through this objective, and if success is achieved, we will
able to introduce this technique to wine makers that are interested in expanding
the market presence of an improved Petite Syrah. The second objective is to work
through established distribution channels to introduce the electrolysis-enhanced
Petite Syrah to an overseas market.
RESULTS OF OPERATIONS-Nine Months ended September 30, 2006 and 2005.
We had revenue of $94,994 for the for the nine months ended September 30,
2006 compared to revenue of $274,501 for the for the nine months ended September
30, 2005. This was a revenue decrease attributable to management efforts being
directed at fundraising and product development.
We incurred a net loss of $1,008,025 for the nine months ended September
30, 2006 and a net loss of $824,231 for the nine months ended September 30,
2005. This was an increase in net loss arrtributable to in-kind consultant
compensation expenses.
Cash used by operating activities was $648,760 for the for the nine months
ended September 30, 2006 compared to cash used by operating activities of
$231,096 for the nine months ended September 30, 2005.
We had total assets at September 30, 2006 of $847,143, compared to $56,172
for the quarter ended September 30, 2005. This increase in assets reflects our
spending on inventory, product development and prepaid expenses
using funds that we raised in the second and third fiscal quarters of 2006. We
anticipate entering the new product sales mode for these new products in late
2006 and early 2007.
LIQUIDITY
At September 30, 2006, we had cash on hand of $48,891. 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 September 30, 2006, we owed stockholder loans of $290,642.
In 2005, we entered into an agreement with Mitachi, a Japanese electronics
component manufacturer, to aid in the production of enhanced drinking water
generators. Pursuant to this agreement, Mitachi agreed to pay us 25,000,000 Yen
for engineering design, molding, tooling and preparation costs, and the
exclusive product distribution rights for China, Taiwan, and Japan. As of
September 30, 2006, Mitachi had paid 6,000,000 Yen, or $52,506, for distribution
rights. Since the project is not yet completed and no units have been sold, this
amount is classified as deferred revenue.
In 2005, we entered into an equity line of credit with a private investor
by which we have the right to draw an aggregate of up to $10,000,000 from time
to time. As of September 30, 2006, we had not drawn funds under the equity line.
FUTURE CAPITAL REQUIREMENTS
Our growth is dependent on attaining profit from our operations, or our
raising additional capital either through the sale of stock or borrowing. There
is no assurance that we will be able to raise any equity financing or sell any
of our products at a profit.
Our future capital requirements will depend upon many factors, including:
- The cost to acquire equipment that we then would resell.
- The cost of sales and marketing.
- The rate at which we expand our operations.
- The results of our consulting business.
- The response of competitors.
ITEM 3. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Our Principal
executive and financial officer evaluated our disclosure controls and
procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
quarterly report. Based on this evaluation, our principal executive officer and
principal financial officer concluded that these disclosure controls and
procedures are effective and designed to ensure that the information required to
be disclosed in our reports filed or submitted under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the requisite
time periods.
In connection with its review of the Company's consolidated financial
statements for the three and nine months ended September 30, 2006, Hansen,
Barnett & Maxwell ("HB&M"), the Company's registered public accounting firm,
advised the Audit Committee and management of internal control matters with
respect to certain financial reporting controls that they considered to be a
material weakness, which is described below. A material weakness is a control
deficiency, or a combination of control deficiencies, that results in there
being more than a remote likelihood that a material misstatement of the annual
or interim financial statements will not be prevented or detected. The material
weakness identified at September 30, 2006 was as follows:
A material weakness existed in our control environment relating to
inadequate staffing of our technical accounting function, including a lack
of sufficient personnel with skills, training and familiarity with certain
complex technical accounting pronouncements that have or may affect our
financial statements and disclosures.
We considered these matters in connection with the quarterly closing process and
the preparation of the September 30, 2006 consolidated financial statements
included in this Form 10-QSB and determined that no prior period financial
statements were materially affected by such matters. In response to the
observations made by HB&M, we will implement enhancements to our internal
controls, accounting staff and procedures, which we believe address the matters
raised by HB&M.
(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 September 30, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
NONE.
ITEM 6. EXHIBITS.
Exhibit
Number Name
--------------------------------------------------------------
31.1 Certification pursuant to Section 13a-14 of CEO.
31.2 Certification pursuant to Section 13a-14 of CFO.
32.1 Certification pursuant to Section 1350 of CEO.
32.2 Certification pursuant to Section 1350 of CFO.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized in Alameda, California.
PROTON LABORATORIES, INC.
November 20, 2006
By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer, and
Chief Financial Officer