UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB AMENDMENT NUMBER 2
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Fiscal Year Ended December 31, 2004.
[ ] 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) (Zip Code)
(510) 865-6412
Issuer's telephone number
Securities registered under Section 12(b) of the Act:
Title of Each Class: Name of exchange on which registered:
None. None.
Securities registered under Section 12(g) of the Act:
Common Stock, $0.0001 par value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] [ ] No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Registrant's revenues for its most recent fiscal year: $379,989
The aggregate market value of the common stock held by non-affiliates of
the registrant on March 30, 2005, based on the last price which was $0.40 per
share on March 30, 2005, was $1,900,400. On March 30, 2005, the closing bid
price on our common stock on the OTCBB was $0.38.
On March 30, 2005, the registrant had outstanding 12,975,000 shares of
Common Stock, $0.0001 par value per share. However, 376,500 of those shares have
not been certificated as of April 12, 2005.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Explanatory Paragraph:
Only those portions of our Form 10-KSB being amended are contained in this
FORM 10-KSB AMENDMENT NUMBER 2. This FORM 10-KSB AMENDMENT NUMBER 2 does not
contain all of the information related to Form 10-KSB, but, rather, only the
information that has been amended. This FORM 10-KSB AMENDMENT NUMBER 2 should be
read in conjunction with our original submission of FORM 10-KSB.
This FORM 10-KSB AMENDMENT NUMBER 2 contains changes to the following sections:
A. The ITEM 1. DESCRIPTION OF BUSINESS--SUBSEQUENT EVENTS at its paragraph 2
has been amended to reflect the abandonment of an agreement with J.P.
Turner & Company, L.L.C.
B. The CONSOLIDATED STATEMENT OF CASH FLOW had been amended to reflect the
addition of $27,377 as additional cash paid for inventory in operating cash
flows and the exclusion of the same amount for property and equipment in
investing cash flows in 2004.
C. The CONSOLIDATED STATEMENT OF CASH FLOW had been amended to reflect the use
of equipment as a long term asset as well as reflecting the cash payment as
an investing activity. We originally were going to sell, as an inventory
item, the equipment related to the $64,500 deposit. Subsequently, we
decided that rather than selling the equipment, we would use this equipment
for internal use and, as available, allow others to rent this piece of
equipment.
D. The NOTES TO THE FINANCIAL STATEMENTS, NOTE 8--SUBSEQUENT EVENTS has been
amended to reflect that it is an "unaudited" footnote as well as the
abandonment of the agreement with J.P. Turner. The independent auditor has
advised us that the independent auditor did not change its procedures and
therefore it is not necessary for the independent auditor to update its
report.
E. Where necessary, the ITEM 6--MANAGEMENT DISCUSS AND ANALYSIS has been
amended to reflect the above changes.
ITEM 1. DESCRIPTION OF BUSINESS.
SUBSEQUENT EVENTS
In February 2005, MIZ Company, 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.
In March 2005, we proposed to engaged the services of J. P. Turner &
Company, L.L.C. for its best efforts to raise funds for us. We proposed to issue
550,000 shares of our restricted common stock to J. P. Turner & Company, L.L.C.
as a non-refundable fee and we proposed to pay J. P. Turner & Company, L.L.C. a
sales commission of 10% on any funds raised and grant a warrant to J. P. Turner
& Company, L.L.C. to acquire our common stock in the amount of 10% of the
equivalent of the funds that are raised. Upon a successful money raise, we
proposed that J. P. Turner & Company, L.L.C. would act as our investment banker
for a fee of 4.5% of our restricted common stock as calculated immediately after
the funds are raised. These share have not been issued and this agreement has
since been abandoned.
In March 2005, we issued a note payable in the amount of $164,000 for the
purchase of inventory. The inventory will be held by the lender as collateral
until the note is repaid in May 2005. We also agreed to pay $28,500, or
approximately 17%, in interest. In addition, we will issue to the lender 47,500
shares of common stock, which will be recorded as a $27,075 discount valued on
the date of issuance and amortized over the term of the note. These shares are
to be issued prior to the note's due date.
In January 2005, a shareholder advanced $40,000 to us. This advance bears
interest at 7% with principal and accrued interest due January 2007.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.
FORWARD-LOOKING STATEMENT
Certain statements contained in this report, 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, of 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. We disclaim any obligation to update any such
factors or to announce publicly the results of any revision of the
forward-looking statements contained or incorporated by reference herein to
reflect future events or developments. In addition to the forward-looking
statements contained in this Form 10-KSB, 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 the audited financial
statements and accompanying notes and the other financial information appearing
elsewhere in this Form 10-KSB. The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the U.S.A., which contemplate our continuation as a going concern.
Our independent auditors made a going concern qualification in their report
dated March 7, 2005, which raises substantial doubt about our ability to
continue as a going concern. Our 2004 revenue increased by 59% compared to our
2003 revenue. Capital contributions were required from our President to fund
operations. These conditions raise a substantial doubt about our ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be necessary
should 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 have incurred net losses of $965,840 in 2004 and $217,333 in 2003. We
had a working capital deficit of $273,400 at December 31, 2004 and $156,505 at
December 31, 2003.
Our operations are located in Alameda, California. 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: 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. These estimates and assumptions provide a basis for us
to make judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Our actual results may differ from
these estimates under different assumptions or conditions, and these differences
may be material.
We recognize revenue when all four of the following criteria are met: (i)
persuasive evidence that an arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable. Our revenues are
derived from sales of our industrial, environmental and residential systems
which alter the properties of water to produce functional water. We believe that
this critical accounting policy affects our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
During the period from March 14, 2000 through November 15, 2002, prior to
our acquisition of Proton Laboratories, LLC in November 2002, we did not engage
in significant operations. No revenues were received by us during that period.
In November 2002, we acquired Proton Laboratories, LLC, which is active in
the functional water business. This acquisition was reported in detail on our
Form 8-K for the event dated November 15, 2002 as filed with the Commission on
November 25, 2002. Proton Laboratories, LLC is now our wholly-owned subsidiary
and in April 2004 was renamed Water Science Corporation. Since our acquisition
of Proton Laboratories, LLC in November 2002, 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
Our fiscal year end is December 31.
RESULTS OF OPERATIONS-YEARS ENDED DECEMBER 31, 2004 AND 2003.
We had revenue of $379,989 for the year ended December 31, 2004 compared to
revenue of $238,805 for the year ended December 31, 2003. This increase is a 59%
increase in revenue. This increase in revenue was due primarily to our hiring a
sales manager in 2004.
We had a net loss $965,840 for the year ended December 31, 2004 compared to
a net loss of $217,333 for the year ended December 31, 2003. This increase in
net loss was due primarily to our increase in equity-based compensation for
sales, general and administrative expenses.
Cash used by operating activities was $323,722 for the year ended December
31, 2004 compared to cash used by operating activities of $80,587 for the year
ended December 31, 2003. This increase in cash used by operating activities was
due primarily to the issuance of common stock used as in-kind compensation to
pay for legal services and consulting services.
LIQUIDITY
As of December 31, 2004, we had cash on hand of $14,412. 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 our products at a
profit.
During the year ended December 31, 2004, our President, Edward Alexander,
advanced to us the amount of $178,000 in cash. This advance accrues interest at
the rate of 7% per annum and is due on dates ranging from March through
September 2006. At December 31, 2004, the aggregate balance we owe on loans from
shareholders is $262,000 which includes $84,000 in loans from prior periods. All
of these loans accrues interest at the rate of 7% per annum and are due on dates
ranging from November 2005 through September 2006. At December 31, 2004, the
aggregate accrued interest on these loans was $16,681.
During the year ended December 31, 2004, we accrued $60,000 as salary
payable to Mr. Alexander resulting in an aggregate of $105,000 of salary payable
to Mr. Alexander at December 31, 2004.
During 2004, we raised $276,000 in cash through the sale of our securities.
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 to resell.
- The cost of sales and marketing our products.
- The rate at which we expand our operations.
- The results of our consulting business.
- The response of competitors.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this item are set forth beginning on
page F-1.
ITEM 13. EXHIBITS.
Exhibit Number Exhibit Description
----------------------------------------------------------------
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 Section 13 or 15(d) of the Exchange Act, the registrant
caused this FORM 10-KSB AMENDMENT NUMBER 2 to be signed on its behalf by the
undersigned, thereunto duly authorized in Alameda, California.
PROTON LABORATORIES, INC.
August 15, 2005 By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer, President and
Chief Financial Officer
In accordance with the Exchange Act, this FORM 10-KSB AMENDMENT NUMBER 2
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
August 15, 2005 By: /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer and
Chief Financial Officer
August 15 2005 By: /s/ Michael Fintan Ledwith
Michael Fintan Ledwith
Director
August 15, 2005 By: /s/ Gary Taylor
Gary Taylor
Director and President
PROTON LABORATORIES, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
PROTON LABORATORIES, INC.
TABLE OF CONTENTS
PAGE
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets - December 31, 2004 and 2003. . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended December 31, 2004 and 2003. . . . F-4
Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2003
and 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003. . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . F-7
F-1
HANSEN, BARNETT & MAXWELL
A Professional Corporation REGISTERED WITH THE PUBLIC COMPANY
CERTIFIED PUBLIC ACCOUNTANTS ACCOUNTING OVERSIGHT BOARD
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128 [GRAPHIC OMITTED]
Phone: (801) 532-2200 in independent member of
Fax: (801) 532-7944 BAKER TILLY
www.hbmcpas.com INTERNATIONAL
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, 2004 and 2003, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years ended December
31, 2004 and 2003. 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, 2004 and 2003, and the results of their
consolidated operations and their cash flows for the years ended December 31,
2004 and 2003, 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, has negative working capital, and
has required loans from the Company's majority shareholder to fund operations.
These factors raise substantial doubt about its 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
Salt Lake City, Utah
March 7, 2005
F-2
PROTON LABORATORIES, INC
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
2004 2003
=============================================================================================
ASSETS
CURRENT ASSETS
Cash $ 14,412 $ 4,423
Accounts receivable, less allowance for doubtful accounts of
$16,522 and $10,092, respectively 10,633 24,583
Inventory 34,097 27,800
---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 59,142 56,806
---------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 18,438 4,670
Equipment and machinery 95,039 43,724
Leasehold improvements 10,995 1,886
Deposit on equipment 69,500 -
Less: accumulated depreciation (19,160) (11,672)
---------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 174,812 38,608
---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 233,954 $ 95,414
=============================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 134,780 $ 197,576
Accrued expenses 110,562 15,735
Preferred dividends payable 3,200 -
Stockholder loan, current portion 84,000 -
---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 332,542 213,311
---------------------------------------------------------------------------------------------
STOCKHOLDER LOAN, NET OF CURRENT PORTION 178,000 84,000
---------------------------------------------------------------------------------------------
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock, 400,000 shares authorized
with a par value of $0.0001; 8,000 and no shares issued and
outstanding, respectively; liquidation preference of $80,000
and $0, respectively 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; 12,975,000 and 11,250,000 shares issued and
outstanding, respectively 1,299 1,126
Additional paid in capital 1,350,616 536,440
Accumulated deficit (1,708,503) (739,463)
---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (276,588) (201,897)
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 233,954 $ 95,414
=============================================================================================
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, 2004 AND 2003
2004 2003
==========================================================================================
SALES $ 379,989 $ 238,805
COST OF GOODS SOLD 263,395 175,505
------------------------------------------------------------------------------------------
GROSS PROFIT 116,594 63,300
------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (including
equity-based expenses of $663,349 and $45,000, respectively) 1,065,595 270,420
------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (949,001) (207,120)
OTHER INCOME AND (EXPENSE)
Loss on disposal of property and equipment (1,648) (9,483)
Interest income 20 5
Interest expense (15,211) (735)
------------------------------------------------------------------------------------------
NET OTHER EXPENSE (16,839) (10,213)
------------------------------------------------------------------------------------------
NET LOSS (965,840) (217,333)
PREFERRED STOCK DIVIDEND (3,200) -
------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (969,040) $ (217,333)
==========================================================================================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.08) $ (0.02)
==========================================================================================
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 11,525,510 11,250,000
==========================================================================================
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, 2003 AND 2004
PREFERRED STOCK COMMON STOCK ADDITIONAL
============================== ======================== PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
================================================================================================================================
BALANCE - DECEMBER 31, 2002 - $ - 11,250,000 1,126 491,440 (522,130) (29,564)
Fair value of officer services,
no additional shares issued - - - - 45,000 - 45,000
Net loss for the period - - - - - (217,333) (217,333)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2003 - - 11,250,000 1,126 536,440 (739,463) (201,897)
Sale of preferred stock 8,000 80,000 - - - - 80,000
Issuance of shares - - 100,000 10 39,990 - 40,000
for legal services
Issuance of shares for - - 1,345,000 135 578,214 - 578,349
consulting services
Issuance of common stock - - 280,000 28 195,972 - 196,000
for cash
Dividends accrued - - - - - (3,200) (3,200)
Net loss for the period - - - - - (965,840) (965,840)
--------------------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 31, 2004 8,000 $ 80,000 12,975,000 $ 1,299 $1,350,616 $ (1,708,503) $(276,588)
================================================================================================================================
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, 2004 AND 2003
2004 2003
========================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(965,840) $(217,333)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 9,814 7,480
Bad debt expense 6,430 -
Loss on disposal of property and equipment 1,648 9,483
Fair value of officer services - 45,000
Common stock issued for legal services and consulting services 618,349 -
Changes in operating assets and liabilities
Accounts receivable 7,520 8,172
Inventory (33,674) (18,879)
Accounts payable (62,796) 69,938
Accrued expenses 94,827 15,552
----------------------------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (323,722) (80,587)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (120,289) (375)
----------------------------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (120,289) (375)
----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stockholder loans 178,000 84,000
Proceeds from sale of preferred stock 80,000 -
Proceeds from sale of common stock 196,000 -
----------------------------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 454,000 84,000
----------------------------------------------------------------------------------------
NET INCREASE IN CASH 9,989 3,038
CASH AT BEGINNING OF PERIOD 4,423 1,385
----------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 14,412 $ 4,423
========================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of inventory to equipment $ 27,377 $ 11,740
----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED 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 the Company 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 as of and for the
years ended December 31, 2004 and 2003. 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 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 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
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 and sales to a
significant customer and purchases from a significant vendor. 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 note payable approximates fair value based on it
bearing interest at a rate which approximates market rates. The amount reported
as inventory is considered to be a reasonable
F-7
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximation of its fair value. The fair value estimates presented herein were
based on market information available to management at the time of the
preparation of the financial statements.
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 $965,840 and $217,333 for
the years ended December 31, 2004 and 2003, respectively. The Company had a
working capital deficit of $273,400 and $156,505 at December 31, 2004 and 2003,
respectively. Loans from the Company's president were required to fund
operations. These conditions raise a 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 working towards raising 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.
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, 2004 and 2003, was $9,814
and $7,480, 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.
F-8
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004 or 2003.
INCOME TAXES - The Company recognizes an asset or liability for the deferred tax
consequences of all temporary differences between the tax bases 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
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, 2004
and 2003 was $10,776 and $3,952, 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.
Potential common shares from convertible preferred stock have not been included
as they are anti-dilutive.
NEW ACCOUNTING STANDARDS - In December 2004, the FASB issued SFAS No. 123
(revised 2004), "Share-Based Payment," which is an amendment to SFAS No. 123,
"Accounting for Stock-Based Compensation." This new standard eliminates the
ability to account for share-based compensation transactions using Accounting
Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees" (APB
25) and requires such transactions to be accounted for using a fair-value-based
method and the resulting cost recognized in the Company's financial statements.
This new standard is effective for interim and annual periods beginning after
June 15, 2005. The Company is currently evaluating SFAS No. 123 as revised and
intends to implement it in the third quarter of 2005 and will not presently have
an effect on the Company's financial statements.
F-9
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2004, the FASB issued SFAS Statement No. 153, "Exchanges of
Non-monetary Assets-an amendment of APB Opinion No. 29." This Statement amends
APB Opinion 29 to eliminate the exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. The Statement will
be effective in January 2006. The Company does not expect that the adoption of
SFAS No. 153 will have a material impact on its Consolidated Financial
Statements.
NOTE 3 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2004 and 2003, the Company's president and
majority shareholder advanced the Company $178,000 and $84,000, respectively.
These advances bear interest at 7% with principal and accrued interest due
between November 2005 and September 2006. At December 31, 2004 and 2003, the
accrued interest was $15,946 and $735, 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, 2004 and 2003 are as
follows:
2004 2003
======================================================
Net operating loss carryforward $ 416,124 $ 71,395
Bad debt reserve 6,381 3,898
Accrued salaries 29,000 5,793
Less: valuation allowance (451,505) (81,086)
------------------------------------------------------
NET DEFERRED TAX ASSET $ - $ -
======================================================
For tax reporting purposes, the Company has net operating loss carry forwards in
the amount of $1,077,482 which will begin expiring in 2023.
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, 2004 and 2003:
2004 2003
====================================================================
Benefit as statutory rate (34%) $(328,386) $(73,893)
Non-deductible expenses 2,589 17,567
Change in valuation allowance 370,419 66,367
State tax benefit, net of federal tax effect (44,622) (10,041)
--------------------------------------------------------------------
NET BENEFIT FROM INCOME TAXES $ - $ -
====================================================================
NOTE 5 - PREFERRED STOCK
During May 2004, the Company designated 400,000 shares of the preferred stock 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
F-10
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was made to holders of common stock. The holders of Series A
convertible preferred stock are not entitled to vote.
During the July 2004, the Company issued 8,000 shares of preferred stock for
$80,000. At December 31, 2004, dividends payable was $3,200, or 40 cents per
share.
NOTE 6 - COMMON STOCK
During September 2004, the Company issued 100,000 shares of common stock for
$40,000 of legal services. These shares were valued using the per share fair
value of the Company's common stock on the date of issuance.
In December 2003, the Company's shareholders approved the 2004 Stock and Stock
Option Plan effective January 1, 2004 whereby up to 500,000 shares may be
granted, optioned or sold. The plan is for its key employees and directors who
contribute materially to the success and profitability of the Company as well as
attracting other key employees and directors. In November 2004, 400,000 common
shares were issued pursuant to this plan, resulting in $172,000 in consulting
expense. These shares were valued using the per share fair value of the
Company's common stock on the date of issuance.
In November 2004, the Company's board of directors approved the 2004 Marketing
Consultant Stock Plan whereby up to 945,000 common shares may be granted,
optioned or sold. The plan is for its consultants, key employees, and directors
who contribute materially to the success and profitability of the Company as
well as attracting other key employees and directors. In November 2004, 945,000
shares were issued under this plan resulting in $406,349 of consulting and
employee expense valued using the per share fair value of the Company's common
stock on the date of issuance.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company currently leases office and storage space from a
third party. On August 1, 2004, the Company entered into a lease agreement to
pay a monthly lease payment of $3,066 until June 2005.
Future minimum lease payments under operating lease obligations as of December
31, 2004, were as follows:
Year Ending December 31,
---------------------------------
2005 $21,462
---------------------------------
Rent expense for the years ended December 31, 2004 and 2003 was $33,678 and
$27,097, respectively.
F-11
PROTON LABORATORIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAJOR CUSTOMER - During the year ended December 31, 2004, sales to three
customers accounted for 37% of total sales. As of December 31, 2004, there were
no amounts due from these customers. During the year ended December 31, 2003,
sales to one customer accounted for 11% of total sales. As of December 31, 2003,
there were no amounts due from this customer.
MAJOR VENDOR - During the year ended December 31, 2004, purchases from three
vendors accounted for 96% of total inventory purchases. As of December 31, 2004,
amounts due to these vendors accounted for 54% of accounts payable. During the
year ended December 31, 2003, purchases from two vendors accounted for 87% of
total inventory purchases. As of December 31, 2003, amounts due to these vendors
accounted for 65% of accounts payable.
NOTE 8 - SUBSEQUENT EVENTS (Unaudited)
COMMON STOCK - During March 2005, the Company entered into a tentative agreement
with a consultant related to promoting the Company and the possibility of a
future offering of the Company's common stock. Under this agreement, the Company
agreed to immediately issue the consultant 550,000 shares of the Company's
common stock. In addition, the Company agreed to pay a cash fee equal to 10% of
the gross proceeds of any future common stock offering. The Company also agreed
to issue the investment bank company a warrant to purchase a number of the
Company's common shares equal to 10% of the gross proceeds of the offering. As
part of the agreement, the consultant is to provide advisory services for 12
months from the close of the offering. In consideration for these services, the
Company will issue the consultant common shares equal to 4.5% of the total
number of common shares outstanding following the close of the offering. This
agreement was abandoned with no shares or funds being delivered.
NOTES PAYABLE - In March 2005 the Company also issued a note payable in the
amount of $164,000 for the purchase of inventory. The inventory will be held by
the lender as collateral until the note is repaid in May 2005. The Company has
also agreed to pay $28,500, or approximately 17%, in interest. In addition, the
Company is to issue the lender 47,500 shares of common stock, which will be
recorded as a $27,075 discount valued on the date of issuance and amortized over
the term of the note. These shares are to be issued prior to the note's due
date.
During January 2005, a shareholder advanced the Company $40,000. This advance
bears interest at 7% with principal and accrued interest due January 2007.
F-12
EXHIBIT INDEX
Exhibit Number Exhibit Description
----------------------------------------------------------------
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