As filed with the Securities and Exchange Commission on December 29, 2005
Registration No. 333-130460
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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form SB-2
Amendment Number 1
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.
1135 Atlantic Avenue, Suite 101
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
1135 Atlantic Avenue, Suite 101
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)
With a Copy to:
Joel Seidner, Esq.
1240 Blalock, Suite 250
Houston, Texas 77055
voice: (713) 461-2627 ext. 210
fax: (713) 461-2633
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 Proposed
Class Of Maximum Maximum
Securities Amount Offering Aggregate Amount of
To Be To Be Price Offering Registration
Registered Registered (2) Per Unit Price Fee
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Common Stock 50,000,000 shares $0.24 per share 12,000,000.00 $ 1,300.00 (1)
1
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(1) Previously Paid. 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 December 12, 2005.
(2) In accordance with Rule 416 promulgated under the Securities Act of 1933,
this Registration Statement also covers an indeterminate number of additional
shares of common stock as may be issuable upon pursuant to terms which provide
for a change in the amount of securities being offered or issued to prevent
dilution resulting from stock splits, stock dividends, or similar transactions
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 8
Information Regarding Forward-Looking Statements 10
Use of Proceeds 10
Dilution 11
Description of Business 12
Description of Property 17
Financial Statements 17 and F-1
Management's Discussion and Analysis 17
Market for Common Equity and Related Stockholder Matters 20
Directors, Executive Officers, Promoters and Control Persons 21
Executive Compensation 22
Security Ownership of Certain Beneficial Owners and Management 23
Certain Relationships and Related Transactions 24
Description of Securities 25
Selling Stockholders 26
Plan of Distribution 26
Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 27
Legal Proceedings 28
Interest of Named Experts and Counsel 28
Disclosure of Commission Position on Indemnification
for Securities Act Liabilities 28
3
PART I
INFORMATION REQUIRED IN A PROSPECTUS
4
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.
SUBJECT TO COMPLETION DECEMBER 29, 2005
PROSPECTUS
PROTON LABORATORIES, INC.
1135 Atlantic Avenue, Suite 101
Alameda, CA 94501
voice: (510) 865-6412
fax: (510) 865-9385
50,000,000 Shares of Common Stock
This prospectus relates to the sale of up to 50,000,000 shares of our
common stock by Selling Stockholders. We will not receive proceeds from the sale
of our shares by the Selling Stockholders. However, we will receive proceeds
from our sale of the common stock to the Selling Stockholder (also called the
"Investor"). The Investor will purchase the common stock from us at a purchase
price of 95% of the lowest closing best bid price of the common stock during
each pricing period.
Our common stock is traded on the OTCBB under the trading symbol "PLBI."
We have engaged the services of US EURO Securities, Inc. to be our
placement agent in connection with the equity line of credit. US EURO
Securities, Inc. is a member of the NASD.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 8 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 , 2006
--------------- ----
5
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 accountants 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., 1135 Atlantic Avenue, Suite 101,
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
Effective November 28, 2005, we entered into an Investment Agreement, as
amended on December 19, 2005, which is an equity line of credit ("ELOC"), with
Dutchess Private Equities Fund, LP ("Dutchess"). The ELOC terminates 36 months
after the registration statement is effective. The maximum amount of money that
the ELOC may provide to us over the 36 month period of time is $10,000,000.
During this 36 months, commencing at such time as the registration statement is
effective, we may periodically deliver new issue registered shares of our common
stock to Dutchess who then delivers cash to us based on a fluctuating price per
share of our common stock. We are not obligated to request the entire
$10,000,000. The actual aggregate number of shares that we may issue pursuant to
the Investment Agreement is not determinable as it is based on the market price
of our common stock from time to time and how much funding we desire from time
to time. We have reserved 50 million shares for the ELOC which we are
registering in the registration statement pursuant to the Investment Agreement's
Registration Rights Agreement. The 50 million shares of stock represents the
number of shares at a price of $0.20 per share needed to fund the entire $10
million of the ELOC.
We can commence drawing down on the ELOC at such time as the registration
statement is effective. Since only the Commission can order a registration
statement effective, we do not know when or if the registration statement will
become effective. For an equal amount of dollars of funding from time to time
pursuant to the ELOC, the number of shares we would issue to Dutchess would be
greater during times of our stock price being low, and conversely so during
times when our stock price is high. Pursuant to the ELOC, we are subject to
penalties if we fail to deliver stock to Dutchess after we request a draw down
from the ELOC.
Upon the effectiveness of the registration statement, and pursuant to the
ELOC, we may issue and sell to the Investor, and the Investor will purchase from
us, up to that number of shares pf common stock having an aggregate value of
$10,000,000. From time to time, we may, in our sole discretion, deliver a put
notice to the Investor which states the dollar amount which we intend to sell to
the Investor which will be, at our choice, either: (A) 200% of the average daily
volume (U.S. market only) of our common stock for the 20 trading days prior to
the applicable put notice date, multiplied by the average of the 3 daily closing
bid prices immediately preceding the put date, or, (B) $100,000. The purchase
price for the common stock identified in the put notice will be equal to 95% of
the lowest closing bid price of the common stock during the pricing period. The
pricing period is the period beginning on a put notice date and ending on and
including the date that is 5 trading days after the put notice date. The
Investor is required to purchase from us during the related pricing period that
number of shares having an aggregate purchase price equal to the Put Amount set
forth in the Put Notice.
Pursuant to the ELOC, we are subject to a penalty if we fail to deliver
stock to Dutchess after requesting a draw down from the ELOC. The penalty varies
based on the number of undelivered shares, if any. The penalty is as follows:
6
NO. OF DAYS LATE Per $10,000 OF COMMON STOCK
1 $ 100
2 $ 200
3 $ 300
4 $ 400
5 $ 500
6 $ 600
7 $ 700
8 $ 800
9 $ 900
10 $1,000
Over 10 $1,000 + $200 for each Business Day late beyond 10 days.
As we draw down on the equity line of credit, more shares will be sold into
the market by Dutchess. This new supply of shares may cause our stock price to
drop. In turn, as the stock price drops and as we make more draw downs on the
ELOC, even more stock will come into the market which may cause yet a further
drop in stock price. You should be aware that there is an inverse relationship
between our stock price and the number of shares to be issued pursuant to the
ELOC. If our stock price declines, we will be required to issue a greater number
of shares under the ELOC. We are not required to draw down or use the full
amount available of the ELOC.
Examples of share issuances under the equity line of credit if the full $10
million of the ELOC is funded:
Purchase Price: (1) $0.30 $0.20 $0.15 $0.10
Shares Purchased: (2) 33,333,333 50,000,000 66,666,666 (3) 100,000,000 (3)
----------------------------------
(1) Represents recent market prices or lower than recent market prices that may
apply to the equity line of credit.
(2) Represents the number of shares of common stock to be issued at the prices
set forth in the table to generate $10 million in gross proceeds from the
equity line of credit.
(3) Would require that we register additional shares.
We have engaged the services of US EURO Securities, Inc. to be our
placement agent in connection with the equity line of credit. US EURO
Securities, Inc. is a member of the NASD. Pursuant to the terms of the Placement
Agent Agreement, US EURO will render consulting services to us with respect to
the Investment Agreement and will be available for consultation in connection
with ELOC funding.
THE OFFERING
Outstanding
Common Stock 14,270,100 shares outstanding as of December 12, 2005
Before This (includes 47,500 shares that have not been certificated yet).
Offering
Common Stock Up to 50,000,000 shares of common stock underlying the equity line credit.
Offered
Outstanding 64,270,100 shares if all offered shares are sold.
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.
However, we will receive proceeds from our sale of the common stock to the Selling
Stockholder (also called the "Investor"). The Investor will purchase the common stock from us
at a purchase price of 95% of the lowest closing best bid price of the common stock during
each pricing period. The pricing period is the period beginning on a put notice date and ending
on and including the date that is 5 trading days after the put notice date. The put notice date
is the date that we request a draw down of the ELOC.
Risk Factors The securities offered hereby involve a high degree of risk. See "Risk Factors."
7
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.
IF WE ISSUE SECURITIES PURSUANT TO THE EQUITY LINE OF CREDIT, THEN EXISTING
STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION.
The sale of shares pursuant to equity line of credit will have a dilutive
impact on our stockholders. As a result, our net income per share could decrease
in future periods, and the market price of our common stock could decline. The
lower our stock price at the time we exercise draw down on the equity line of
credit, then the more shares we will have to issue to Dutchess. If our stock
price decreases, then our existing stockholders would experience greater
dilution.
DUTCHESS WILL EFFECTIVELY PAY LESS THAN THE THEN PREVAILING MARKET PRICE OF OUR
COMMON STOCK, WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DECLINE.
As we draw down the equity line of credit and we issue common stock to
Dutchess, such common stock will be purchased by Dutchess at less than the then
market price. At such times, Dutchess will have a financial incentive to sell
our common stock immediately upon receiving the shares. When Dutchess sells
shares of our common stock, the price of our stock could decrease. If our stock
price decreases, Dutchess may have a further incentive to sell the shares of our
common stock that it holds. Such sales of common stock by Dutchess could cause
the market price of our common stock to decline.
OUR STOCK PRICE IS HIGHLY VOLATILE AND YOU MAY LOSE SOME OR ALL OF YOUR
INVESTMENT.
Trading prices of our common stock may fluctuate in response to a number of
events and factors, such as:
- general economic conditions changes in interest rates;
- fluctuations in the stock market in general ;
- 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;
- additions or departures of our key personnel;
- corporate restructurings, including layoffs or closures of facilities;
- 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, 2004, we had a net loss of $965,840. For the nine months ended
September 30, 2005 we had a net loss of $824,231. For the quarter ended
September 30, 2005 we had a net loss of $128,979. Our stockholders deficit as of
December 31, 2004 was $276,588. Our stockholders deficit at September 30, 2005
was $599,504. We expect to incur significant operating losses until product
sales increase. We will also need to raise sufficient funds to finance our
activities. We may not be able to achieve or sustain profitability. 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. 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 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
additional stock, there may be a significant dilution in the value of our
outstanding common stock.
8
LACK OF INDUSTRIAL AND CONSUMER ACCEPTANCE OF FUNCTIONAL WATER WOULD IMPAIR OUR
BUSINESS.
We sell equipment that makes functional water. The current market for
industrial and consumer functional water equipment is small in the USA. We must
increase market acceptance of functional water in order to be successful. We do
not know if the products we sell will receive market acceptance at a level that
would allow us to operate profitably.
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.
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 50,000,000 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.
EDWARD ALEXANDER OWNS 58% OF OUR COMMON STOCK AND HE CONTROL US.
Edward Alexander is our CEO. Mr. Alexander has the ability to control
substantially all matters submitted to our stockholders for approval, including
the election and removal of directors and any merger, consolidation, takeover or
other business combination involving us, and to control our management and
affairs. This may discourage a potential acquirer from making a
9
tender offer or otherwise attempting to obtain control in an acquisition or
takeover.
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
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
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 not receive proceeds from the sale of our shares by the Selling
Stockholders. However, we will receive proceeds from our sale of the common
stock to the Selling Stockholder (also called the "Investor"). The Investor will
purchase the common stock from us at a purchase price of 95% of the lowest
closing best bid price of the common stock during each pricing period. The
pricing period is the period beginning on a put notice date and ending on and
including the date that is 5 trading days after the put notice date. The put
notice date is the date that we request a draw down of the ELOC.
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. However, we will receive proceeds from our sale of the
common stock to the Selling Stockholder (also called the "Investor"). The
Investor will purchase the common stock from us at a purchase price of 95% of
the lowest closing best bid price of the common stock during each pricing
period.
We may receive up to the gross amount of $10,000,000 if we draw down on the
entire ELOC. However, we are not required to use the entire ELOC.
Example of Funds Raised Using the ELOC:
---------------------------------------
Number of Shares Sold: 5,000,000 12,500,000 25,000,000 50,000,000
Funds provided by the ELOC: $ 1,000,000 $ 2,500,000 $ 5,000,000 $10,000,000
Use of Funds: General corporate purposes and working capital
10
Dilution
Our net tangible book value, based on our unaudited financial statements
for the fiscal quarter ended September 30, 2005, was $(599,504) or, $(0.042) per
share of common stock (unaudited).
Net tangible book value per share is determined by dividing our tangible
book value (total tangible assets less total liabilities) by the number of
outstanding shares of our common stock which was 14,270,100 shares outstanding
as of December 12, 2005.
Since this offering is being made solely by the selling securities holders
and none of the proceeds will be paid to us, our net tangible book value will be
unaffected by this offering. Our net tangible book value, however, will be
impacted by the common stock that we will sell to Dutchess under the Investment
Agreement. The amount of dilution resulting from share issuances to Dutchess
will be determined by our stock price at or near the time of the put of shares
to Dutchess by us.
The following example shows the dilution to new investors assuming the
issuance of 100%, 50%, 25% and 10% of the 50,000,000 shares of common stock to
Dutchess at an assumed offering price of $0.20 per share which is based on the
closing price of our common stock on December 9, 2005 ($0.24) that has been
adjusted for the 5% discount at which we will issue shares under our agreement
with Dutchess and a 15% downward fluctuation in share price (total of a 20%
decrease in price from the actual closing price of $0.24 per share on December
12, 2005). The Dutchess discount is defined as 95% of the lowest closing bid
price of our common stock during the pricing period.
Our pro forma net tangible book value as of September 30, 2005 (unaudited)
would have been as follows:
Pro Forma Effects of Dilution from Dutchess Offering:
Assumed percentage of
Shares issued: 100% 50% 25% 10%
Number of shares issued: 50,000,000 25,000,000 12,500,000 5,000,000
Assumed public offering
price: $ 0.20 $ 0.20 $ 0.20 $ 0.20
Net tangible book value
Per share before this
Offering: $ (0.042) $ (0.042) $ (0.042) $ (0.042)
Net tangible book value
after this offering $ 9,449,023 $ 4,449,003 $ 2,444,903 $ 449,003
Net tangible book value
per share after this
Offering: $ 0.147 $ 0.112 $ 0.071 $ 0.021
Dilution of net tangible
Book value per share
To new investors: $ 0.053 $ 0.088 $ 0.129 $ 0.179
Increase in net tangible
Book value per share
To existing shareholders $ 0.188 $ 0.154 $ 0.113 $ 0.063
11
DESCRIPTION OF BUSINESS
INTRODUCTION
Our executive offices are located at: Proton Laboratories, Inc., 1135
Atlantic Avenue, Suite 101, Alameda, CA 94501, tel. (510) 865-6412, fax: (510)
865-9385. Our Web site is www.protonlabs.com.
Our growth is dependent on attaining profit from our operations and our
raising capital through the sale of stock or debt. There is no assurance that we
will be able to raise any equity financing or sell any of our products at a
profit.
Our stock is traded on the OTCBB. Our trading symbol is "PLBI."
OUR BUSINESS--THE BACKGROUND OF FUNCTIONAL WATER
Our business is the marketing of residential and commercial "functional
water systems." "Functional water" is water that has been processed through an
electrolytic ion separation process or electrolysis process and has a wide array
of functional properties due to its unique characteristics. Our functional water
systems restructure tap water into one type of water that is alkaline in
concentration and one type of water that is acidic in concentration. We believe
that the functional water systems that we market will have applications in a
large variety of industries, such as corporate agriculture, organic agriculture,
food processing, medicine and dentistry, dermatology, heavy industry, mining,
environmental clean-up, product formulations and beverages.
We are an exclusive importer and master distributor of functional water
systems that are manufactured by Matsushita Electric Corporation of America. We
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 a provider of systems that produce
functional water, also called "electrolyzed water" or "functional electrolyzed
water." Functional water is water that has been restructured through the process
of electrolysis. Electrolysis forces a separation to occur in the electrolytes
that are present in the water molecules. Through the process of creating
functional water, regular tap water can be restructured into two separate types
of water. For instance, tap water can be restructured into one type of water
that is alkaline in concentration and one type of water that is acidic in
concentration.
We believe that water with these unique functional properties is desirable
for a number of reasons. Water with smaller clusters of molecules has a lower
surface tension. With a lower surface tension, water may have improved
hydrating, permeating and solubility properties. These properties may enhance
the overall functional effectiveness of water. The separation of the alkaline
and acidic properties found in water provides the water with functional
abilities. For example, functional acidic water has disinfecting abilities to
meet a wide array of disinfecting requirements in food processing procedures.
Functional alkaline water makes an excellent drinking water due to improved
hydration.
OUR BUSINESS--SYSTEMS AND MARKETS
We market functional water systems to the residential and commercial
markets. For the residential market, we market functional water systems that are
used to produce a health-beneficial, alkaline-concentrated drinking water. For
the commercial market, we market commercial-grade functional water systems that
are used in applications ranging from food preparation to hospital disinfection.
Our goal is to take our functional water technology and market it throughout
North America.
Our business model envisions us as: a supplier of technology for functional
water applications; a supplier of hardware for functional water systems; a
provider of intellectual property for functional water systems under licensing
agreements; a supplier of consumer functional water products; consultants to
industries requiring functional water; facilitators between Japanese functional
water manufacturers and industrial users in the U.S.A.; and educators of
academia, government and industry on the benefits of functional water.
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
12
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
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.
Commercial Systems. 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
13
approximately one gallon per minute of electrolyzed alkaline and acidic waters.
For the food processing industry, the alkaline water may be used as an effective
medium for removing pesticides from agricultural products, while the acidic
water may be used as anti-microbial water. For the hospital industry, the
alkaline water may be used as an effective medium in removing protein buildup
from surfaces, while the acidic water may be used as anti-microbial water. For
the organic agricultural industry, the alkaline water may be used for plant
growth and as a solid nutrient, while the acidic water may be used as a
substitute for fungicides, pesticides, herbicides and sporicides.
OUR BUSINESS--MARKETING STRATEGY
Our objectives are:
- To create a revenue stream through our marketing of residential
systems. These sales may be made through independent distributors,
network marketing, infomercials, mail order, retail sales and direct
sales generated through word-of-mouth referrals.
- To create a revenue stream through the sale of disinfectant systems to
the food processing industry.
- To create a revenue stream through licensing agreements based upon a
wide array of applications for functional water that will be targeted
to specific industries. For example, electrolyzed water may be used in
the beverage industry to extract flavors from their natural sources,
such as extracting tea from tea leaves for use in bottled iced tea.
Electrolyzed water may also be used in the formulation of
nutraceutical-type dietary supplement products in the health-food and
dietary supplement industries.
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 engineers from Japan to design, engineer and assemble
prototypes of functional water systems that are built for specific industrial
needs. We believe that by performing these functions ourselves, we will have all
of the necessary tools to become a leading provider of functional water
technology.
OUR BUSINESS--GOVERNMENT REGULATIONS
Our functional water systems are, or may be, subject to regulation by a
variety of federal, state and local agencies, including the Consumer Product
Safety Commission (CPSC") and the Food and Drug Administration ("FDA").
Our hand disinfectant functional water system may be subject to pre-market
approval by the FDA under Title 21 of the Code of Federal Regulations. We would
expect such an approval process to take approximately 90 days after filing with
the FDA, although there is no assurance that we will be able to obtain
pre-market approval from the FDA. We have not made any applications to the FDA
yet. We have engaged the consulting services of Environ Health Associates Inc.
to assist us with our FDA application for the hand disinfectant. We anticipate
filing the FDA application in the near future. Environ Health Associates Inc. is
familiar with a modern food safety procedure known as Hazard Analysis and
Critical Control Point ("HACCP"). HACCP is a food safety procedure that focuses
on identifying and preventing hazards that could cause food-borne illnesses. We
believe that complying with the HACCP procedure may assist us in getting FDA
approval, since the FDA generally encourages retailers to apply HACCP-based food
safety principles, along with other recommended practices.
At such time as we may obtain FDA approval for the hand disinfectant, we
then would request that the system be tested by Underwriter's Laboratories and
the National Sanitation Foundation.
OUR BUSINESS--MARKETING AND DISTRIBUTION
We intend to develop systems for the following markets:
- Hand disinfection for the food processing, fast food, medical, dental,
personal care and general health care industries.
- Residential, countertop drinking water electrolysis systems.
- Commercial functional water systems, such as metal mining and
refining, wine grape mildew treatment, wine aging control, potato
maintenance
14
treatment, and the formulation of dietary supplement products.
Hand Disinfection. After we obtain FDA approvals for the hand disinfection
system, we plan to introduce the device and what we believe to be its
operational simplicity, user-friendliness, high efficacy and affordability,
through industrial circulars where hand disinfection is of a primary concern. We
also intend to arrange with a leasing company to lease the hand disinfectant
system to the fast food industry. A large part of our marketing efforts will be
directed to educating our target markets about functional water. We plan to
write and publish articles through industrial media, disinfection forums, trade
shows and documentary-type films that may be aired through CNN, PBS and Voice of
America introducing a new and novel method for hand disinfection. We intend to
handle all inquiries through a toll-free number.
We plan to hire a public relations company that provides the news media
with documentary videos for the purpose of educating the public on the
technology, processes and applications that we market. The videos will cover the
following subjects:
- The use of functional electrolyzed water for food safety.
- The use of functional electrolyzed water for effective disinfection in
hospitals and clinical settings.
- The use of functional electrolyzed water for agriculture and organic
agriculture.
- The use of functional electrolyzed water as a wellness medium.
Residential Countertop Units. The first step towards the marketing and
distribution of residential countertop units is to develop a national product
distribution program through network marketing, mail order catalogs sales,
infomercials, independent distributor channels and word of mouth sales. Since we
understand that the demographics in these sales channels is predominately
composed of females in the age groups of 35-60, we intend to concentrate on this
market segment. The second step in the marketing and distribution of residential
countertop units is to introduce a simplified, lower price-point system that
will be introduced through retail outlets under a series of private labels.
Commercial Functional Water Systems. In addition to marketing the
residential countertop systems, we plan to develop marketing plans for
commercial systems. We may enter into agreements with companies to act as
distributors of our functional water systems. We may also grant exclusive rights
to companies to use our systems in specific industries for specific applications
in exchange for royalties.
We presently have 12 product distributors. We are presently seeking 108
additional product distributors. In 2004 we had a radio advertising campaign to
advertise our residential consumer products.
OUR BUSINESS--COMPETITION
Our 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 U.S.A.
during the past nine-year period through various companies and organizations.
These consultants are the leaders in the U.S.A. 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 U.S.A., 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 ten-year period. These members
are highly respected within the Japanese electrolysis community and attend
annual conferences as invited speakers.
We have excellent working relationships with the Japanese manufacturers and
we are often relied upon to provide international perspectives to be used in the
refinement of their scientific, design and engineering thought processes to
create products that will be accepted on a global basis.
With our knowledge, experience and foresight into the electrolyzed water
15
industry, we are well-positioned to branch out on our own without reliance on
Japanese manufacturing, if necessary.
We have strategically positioned ourselves as the "go to" organization for
technology, hardware and informational support for the public.
Although the majority of competitors are small 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, but we do not believe that any real strong competitors
are imminent for the foreseeable 3 to 4 year period, other than Hoshizaki U.S.A.
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.
EMPLOYEES
We currently have 3 full-time employees all of whom are in management
positions. None of our employees is subject to a collective bargaining
agreement. We believe that our employee relations are good.
OTHER DEVELOPMENTS
We have done preliminary field 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 may remove mildew
We have done preliminary field testing in the potato growing industry with
respect to potato maintenance during storage. Our preliminary review of this use
of functional water indicates better potato maintenance during storage. We plan
to continue this preliminary test using an automated functional water sprayer.
We have done preliminary testing in the mining and refining industry with
respect to the effect of the use of functional water on heap leaching and
refining of precious metals.
We obtained, through a sublicense from Edward Alexander at no cost to us,
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. We plan to
sell this product to the fitness, sports and wellness markets.
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 to the various active properties of the wine.
We plan to file an FDA application for our hand disinfectant system and our
surface disinfectant system.
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.
Our functional currency is the U.S. dollar.
Our independent auditors made a going concern qualification in their report
dated March 7, 2005 which raises substantial doubt about our ability to
16
continue as a going concern.
DESCRIPTION OF PROPERTY
We lease approximately 4,000 square feet of office and storage space
located at 1135 Atlantic Avenue, Suite 101, Alameda, CA 94501, for a lease
payment of approximately $6,000 per month. Under this lease, we are required to
pay a percentage of the property taxes, insurance and maintenance. The lease
expires in July 2006 and we anticipate renewing the lease at that time. We
believe this space is adequate for our current needs, and that additional space
is available to us at a reasonable cost, if needed.
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 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 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.
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. We incurred net losses applicable to common
shareholders of $829,031 for the nine months ended September 30, 2005. We have
incurred net losses of $965,840 for the year ended December 31, 2004, and
$217,333 for the year ended December 31, 2003. We had a working capital deficit
of $713,997 at September 30, 2005 and $273,400 at December 31, 2004. Loans were
required to fund operations. This condition raises 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 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 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.
17
We: formulate intellectual properties under licensing agreements; supply
consumer products; consult on projects utilizing functional water; facilitate
usage, uses and users of functional water between manufacturer and industry; and
act as educators on the benefits of functional water. Our business has been
focused on marketing functional water equipment and systems.
Alkaline-concentrated functional water may have health-beneficial properties and
may be used for drinking and cooking purposes. Acidic-concentrated functional
water may be used as a topical, astringent medium.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. These estimates and assumptions provide a basis for us
to make judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Our actual results may differ from
these estimates under different assumptions or conditions, and these differences
may be material.
We recognize revenue when all four of the following criteria are met: (i)
persuasive evidence that an arrangement exists; (ii) delivery of the products
and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable. Our revenues are
derived from sales of our industrial, environmental and residential systems
which alter the properties of water to produce functional water. We believe that
this critical accounting policy affects our more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Our fiscal year end is December 31.
We began a joint research and development program with Weber Farms located
in 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 a
fresh 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 fires 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.
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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
We had revenue of $274,501 for the nine months ended September 30, 2005
Compared to revenue of $278,907 for the nine months ended September 30, 2004.
We had Selling, General and Administrative Expenses of $793,599 for the
nine months ended September 30, 2005 compared to Selling, General and
Administrative Expenses of $341,119 for the nine months ended September 30,
2004. This increase in Selling, General and Administrative Expenses was due
18
primarily to stock compensation we paid to a consultant that we valued at
$459,040 during the second quarter
We had a net loss of $824,231 for the nine months ended September 30, 2005
compared to a net loss of $246,114 for the nine months ended September 30, 2004.
This increase in net loss was due primarily to the increase in expenses for
Selling, General and Administrative Expenses.
Net cash used by operating activities was $231,096 for the nine months
Ended September 30, 2005 compared to cash used by operating activities of
$230,446 for the none months ended September 30, 2004.
LIQUIDITY
As of September 30, 2005, we had cash on hand of $12,396. Our growth is
dependent on attaining profit from our operations and our raising of additional
capital either through the sale of stock or borrowing. There is no assurance
that we will be able to raise any equity financing or sell any of our products
to generate a profit.
During 2005 to date, two of our shareholders advanced us an aggregate of
$48,642. These advances bear interest at 7% with principal and accrued interest
due between November 2005 and January 2007. At September 30, 2005 we owed the
two shareholders an aggregate of $310,642 and at December 31, 2004, we owed the
two shareholders an aggregate of $262,000. These amounts include loans made to
us by them prior to 2005. At September 30, 2005 and December 31, 2004, the
accrued interest was $31,604 and $15,946, respectively.
During the nine months ended September 30, 2005, we accrued $45,000 as
salaries payable to our majority shareholders resulting in $139,890 of salaries
payable at September 30, 2005. This accrual includes salary accruals that we
made prior to 2005.
In March 2005, we issued a note payable in the amount of $164,000. The note
was originally due in May 2005 and has been extended to December 2005 secured by
inventory. The original terms of the loan provided for an interest payment of
$28,500 or 106% per annum; when the note was extended in May 2005, the interest
rate was amended to 30% on the original principal balance. At September 30, 2005
$47,776 of interest had been accrued. 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. The lender is Gary Taylor who is
our President. These shares have not been issued yet.
During July 2005, we sold 100,000 shares of our common stock to one
investor at $0.20 per share.
In June 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.
Thought September 30, 2005, Mitachi had paid to us 6,000,000 Yen (US $52,506) in
connection with this agreement. Since the project is not yet completed and no
units have been sold, this amount is classified as deferred revenue.
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.
19
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." Our stock
was added to the OTCBB in late December 2003. The first reported trade in our
stock on the OTCBB occurred in January 2004. We are not aware of any trading
market for our stock prior to January 2004. 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. There were no
trades in our common stock until January 2004. Our fiscal year ends December 31.
COMMON STOCK PRICE RANGE
YEAR AND QUARTER HIGH LOW
--------------------------------------------
2003:
First Quarter (*) (*)
Second Quarter (*) (*)
Third Quarter (*) (*)
Fourth Quarter (*) (*)
2004: (**)
First Quarter $ 2.45 $ 0.60
Second Quarter $ 2.30 $ 0.90
Third Quarter $ 1.15 $ 0.30
Fourth Quarter $ 2.90 $ 0.35
2005 (**)
First Quarter $ 1.55 $ 0.38
Second Quarter $ 0.48 $ 0.32
Third Quarter $ 0.40 $ 0.20
Fourth Quarter (through $ 0.29 $ 0.14
December 9, 2005)
---------------------------------
(*) There was no trading market for our stock until January 2004.
(**) As set forth on www.yahoo.com
On December 9, 2005, the closing price of our stock was $0.24.
On December 12, 2005, we had outstanding 14,270,100 shares of common stock
(includes 47,500 shares that have not been certificated yet).
On December 12, 2005, we had approximately 86 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, warrants, convertible debt. Our Series A Preferred Stock
pays dividends.
20
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of
securities to Number of securities
be issued remaining available
upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding outstanding compensation
options, options, plans (excluding
warrants and warrants and securities reflected
rights rights in column (a))
(a) (b) (c)
PLAN CATEGORY:
Equity compensation
plans approved by
security holders -0- n/a -0- (1)
Equity compensation
plans not approved by
security holders (2) -0- n/a 352,400
Total -0- n/a 352,400
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
Michael Fintan Ledwith 63 Director, Member of the Audit Committee
Gary Taylor 56 Director and President
Edward Alexander has been our Chairman, a Director, Chief Executive
Officer, Chief Financial Officer, and Secretary since 2002. He had been the
owner and president of Proton Laboratories, LLC from January, 2001 until its
merger with us. Proton Laboratories, LLC introduced an electrolytic water
separation technology that has many uses in industry, product formulations and
consumer products. From January 1997 to July 1998, Mr. Alexander served as owner
and president of Advanced H2O, LLC. In July 1998, Mr. Alexander formed Advanced
H2O, Inc. to specialize in bottled water production. 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.
Michael Ledwith has been our Director since 2002. He has been a member of
the Audit Committee since June 2004. He has been semi-retired from daily
business activities since 1998. He was Professor of Systematic Theology at the
Pontifical University of Maynooth in Ireland from 1976 to 1994. He was later
Dean of the Faculty, Head of Department and Editor of "The Irish Theological
Quarterly." He was later appointed as a Consulting Editor of the renowned
international review "Communio" and still serves in that capacity. He was
appointed Vice-President of the University in 1980, re-appointed in 1983, and
was appointed President in 1985. He served as Chairman of the Committee of Heads
of the Irish Universities and was a Member of the Governing Bureau of the
European University Presidents' Federation (CRE). He retired from his
Professorship on September 30, 1996 and has since continued to pursue his
interest in research, writing, and lecturing in the field of actualizing human
potential. Since November 2001 he has been a partner in World of Star Stuff,
which markets whole food
21
products.
On June 3, 2005, Gary Taylor was appointed as a Director and President. We
granted 131,600 shares of common stock to Mr. Taylor in connection with this
appointment. Since 1998, Mr. Taylor has been the CEO of The Moore Company which
provides consulting for product distribution and third party logistical
services.
COMMITTEES OF THE BOARD OF DIRECTORS
We do not have any nominating, or compensation committees of the Board, or
committees performing similar functions.
In December 2003, our Board adopted our Audit Committee Charter (the
"Charter") which established our Audit Committee. The Board of Directors has
selected Michael Ledwith, our only independent Director, to be on the Audit
Committee. Mr. Ledwith is not a financial expert. We have determined Mr.
Ledwith's independence using the definition of independence set forth in NASD
Rule 4200-(14). We have not yet been able to recruit an independent director who
is also a financial expert.
The primary purpose of the Audit Committee is to oversee our financial
reporting process on behalf of the Board of Directors. The Audit Committee will
meet privately with our Chief Accounting Officer and with our independent public
accountants and evaluate the responses by the Chief Accounting Officer both to
the facts presented and to the judgments made by our independent accountants.
The Charter establishes the independence of our Audit Committee and sets forth
the scope of the Audit Committee's duties. The Purpose of the Audit Committee is
to conduct continuing oversight of our financial affairs. The Audit Committee
conducts an ongoing review of our financial reports and other financial
information prior to filing them with the Securities and Exchange Commission, or
otherwise providing them to the public. The Audit Committee also reviews our
systems, methods and procedures of internal controls in the areas of: financial
reporting, audits, treasury operations, corporate finance, managerial, financial
and SEC accounting, compliance with law, and ethical conduct. A majority of the
members of the Audit Committee will be independent directors. The Audit
Committee is objective, and reviews and assesses the work of our independent
accountants and our internal audit department. The Audit Committee will review
and discuss the matters required by SAS 61 and our audited financial statements
for the year ended December 31, 2004 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 did not hold meetings during the year ended December
31, 2004, but did act by consent on four 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., 1135
Atlantic Avenue, Suite 101, Alameda, CA 94501.
Executive Compensation
The following table sets forth certain information as to our highest paid
officers and directors for our fiscal year ended December 31, 2004. No other
compensation was paid to any such officers or directors other than the
22
compensation set forth below.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Pay-Outs
Securities
Other Under-
Name and Restricted lying All
Principal Annual Stock Options/ LTIP Other
Position Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
$ $ $ $ # $
2004 (1) 62,400 -0- -0- -0- -0- -0- -0-
Edward 2003 (2) 62,400 -0- -0- -0- -0- -0- -0-
Alexander 2002 (3) 60,000 -0- -0- -0- -0- -0- -0-
CEO, CFO
--------------------------------
(1) Mr. Alexander received $2,400 as cash compensation. We determined that the
value of his services was $62,400, of which $60,000 was recorded as accrued
wages.
(2) Mr. Alexander received $2,400 as cash compensation. We determined that the
value of his services was $62,400, of which $45,000 was recorded as
additional paid-in capital and $15,000 was recorded as accrued wages.
(3) Mr. Alexander did not receive any cash compensation. This amount was
determined to be the value of his services and was recorded as additional
paid in capital.
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
We believe that our future success will depend in part on our continued
ability to attract and retain highly qualified personnel. We pay wages and
salaries that we believe are competitive. We also believe that equity ownership
is an important factor in our ability to attract and retain skilled personnel.
Our Board of Directors has adopted the 2005 Stock and Stock Option Plan (the
"Plan"). It has not yet been approved by shareholders. The purpose of the Plan
is to further our interests, our subsidiaries and our stockholders by providing
incentives in the form of stock and stock options to our officers, directors,
employees, vendors, consultants, attorneys and subcontractors. There are a total
of 352,400 shares remaining available for issuance in the Plan.
NO EMPLOYMENT AGREEMENT
We do not have any employment agreements with any employees.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Number of
securities to Number of securities
be issued remaining available
upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding outstanding compensation
options, options, plans (excluding
warrants and warrants and securities reflected
rights rights in column (a))
(a) (b) (c)
PLAN CATEGORY:
Equity compensation
plans approved by
security holders -0- n/a -0- (1)
Equity compensation
plans not approved by
security holders (2) -0- n/a 352,400
Total -0- n/a 352,400
23
The following table sets forth certain information concerning the number of
shares of common stock owned beneficially as of December 12, 2005 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 December 12, 2005 we had 14,270,100 shares of
common stock outstanding (includes 47,500 shares that have not been certificated
yet).
Name Amount of Shares Class of Percentage
and Address Beneficially Owned Securities of Class
--------------------------------------------------------------------------------
Edward Alexander
1135 Atlantic Avenue, Suite 101
Alameda, CA 94501 8,224,000 Common Stock 58%
Gary Taylor
333 S.E. 2ND AVE.
PORTLAND OR 97214 156,400 Common Stock 1%
Michael Fintan Ledwith
6610 Churchill Rd. SE
Tenino, WA 98589 -0- Common Stock -0-%
Executive Officers
As A Group(3 Persons) 8,380,400 Common Stock 59%
We are not aware of any arrangements that could result in a change of
control.
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.
In March 2005, Gary Taylor loaned us $164,000 and we issued to him a note
payable in the amount of $164,000. The note was originally due in May 2005 and
has since been extended to mature on December 31, 2005. The note is secured by
inventory. The original terms of the loan provided for an interest payment of
$28,500 or 106% per annum. When the note's maturity was extended in May 2005,
the interest rate was amended to 30% on the original principal balance. At
September 30, 2005 $47,776 of interest had been accrued. 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. These
shares have not been issued yet.
During the year ended December 31, 2004, 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
24
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 2004, we obtained, through a sublicense from Edward Alexander, at no
cost to us, 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. We plan to sell this product to the fitness, sports and wellness markets.
In January 2005, a shareholder advanced $40,000 to us. This advance bears
interest at 7% with principal and accrued interest due January 2007.
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 December 12, 2005, there are 14,270,100 shares of
common stock outstanding (includes 47,500 shares that have not been certificated
yet), 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 14,270,100 shares of common stock outstanding, 5,571,600 shares are
free trading shares and 8,698,500 shares are restricted 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
25
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 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 Owned After
Selling Before For After Offering If All
Stockholder Offering Sale Offering Shares Are
Sold If All Shares
Are Sold
(1) (2) (2)
-----------------------------------------------------------------------------------------------
Dutchess Private Equities Fund, LP(4) -0- 50,000,000 (3) -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). 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. The Selling Stockholders, Dutchess Private Equities Fund, II,
LP, and any broker-dealers or agents that are involved in selling the
shares are underwriters within the meaning of the Securities Act for such
sales. An underwriter is a person who has purchased shares from an issuer
with a view towards distributing the shares to the public. In such event,
any commissions received by such broker-dealers or agents and any profit on
the resale of the shares purchased by them may be considered to be
underwriting commissions or discounts under the Securities Act.
(2) Assumes no sales or purchases are transacted by the Selling Stockholder
during the offering period other than in this offering.
(3) Includes 50,000,000 shares not yet beneficially owned that are the subject
of our equity line of credit agreement with Dutchess
(4) Douglas Leighton and Michael Novielli are managing members of Dutchess
Capital Management, LLC which is the general partner of Dutchess Private
Equities Fund, LP.
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.
26
- 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.
- 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.
The Selling Stockholders, Dutchess Private Equities Fund, II, LP, and any
broker-dealers or agents that are involved in selling the shares are
underwriters within the meaning of the Securities Act for such sales. An
underwriter is a person who has purchased shares from an issuer with a view
towards distributing the shares to the public. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be considered to be underwriting commissions or
discounts under the Securities Act.
We have engaged the services of US EURO Securities, Inc. to be our
placement agent in connection with the equity line of credit. US EURO
Securities, Inc. is a member of the NASD. We will pay $10,000 to US EURO
Securities, Inc. for this service. The placement agent provides consulting
services to us with respect to the Dutchess Investment Agreement. The placement
agent is available to us for consultation in connection with financings to be
requested by us pursuant to the Dutchess Investment Agreement.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
27
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
Joel Seidner, Esq., Attorney At Law, 1240 Blalock Road, Suite 250, Houston,
Texas 77055, tel. (713) 461-2627 ext. 210, 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 Mr. Seidner. As of the date of this
prospectus, Mr. Seidner owns 86,000 shares of our common stock.
Our consolidated balance sheets as of December 31, 2004 and 2003, and the
consolidated statements of operations, stockholders' deficit, and cashflows, 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.
28
PROTON LABORATORIES, INC.
FINANCIAL STATEMENTS
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
Condensed Consolidated Balance Sheets - September 30, 2005 and
December 31, 2004 (Unaudited) FF-1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2005 and 2004 (Unaudited) FF-2
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2005 and 2004 (Unaudited) FF-3
Notes to Condensed Consolidated Financial Statements (Unaudited) FF-4
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 Edward Alexander 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 [former]
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
PROTON LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 12,396 $ 14,412
Accounts receivable, less allowance for doubtful accounts of $16,522 17,786 10,633
Inventory 63,798 34,097
------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 93,980 59,142
------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Furniture and fixtures 19,709 18,438
Equipment and machinery 161,502 95,039
Leasehold improvements 11,323 10,995
Deposit on equipment - 69,500
LESS: ACCUMULATED DEPRECIATION (35,530) (19,160)
------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 157,004 174,812
DEPOSITS 6,131 -
------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 257,115 $ 233,954
------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 102,201 $ 134,780
Accrued expenses 219,270 110,562
Deferred revenue 52,506 -
Preferred dividends payable 8,000 3,200
Note payable 164,000 -
Stockholder loans, current portion 262,000 84,000
------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 807,977 332,542
------------------------------------------------------------------------------------------------------
STOCKHOLDER LOANS, NET OF CURRENT PORTION 48,642 178,000
------------------------------------------------------------------------------------------------------
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 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; 14,270,100 and 12,975,000 shares issued and
outstanding, respectively 1,429 1,299
Additional paid in capital 1,856,602 1,350,616
Accumulated deficit (2,537,535) (1,708,503)
------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (599,504) (276,588)
------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 257,115 $ 233,954
------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
FF-1
PROTON LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------------------------------------------------
SALES $ 116,791 $ 120,902 $ 274,501 $ 278,907
COST OF GOODS SOLD 113,786 99,401 214,649 172,371
-----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 3,005 21,501 59,852 106,536
-----------------------------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 114,219 178,361 793,599 341,119
-----------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (111,214) (156,860) (733,747) (234,583)
-----------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (EXPENSE)
Loss on disposal of property and equipment - (943) - (943)
Interest income 61 - 161 -
Interest expense (17,826) (5,117) (90,645) (10,588)
-----------------------------------------------------------------------------------------------------------------
NET OTHER EXPENSE (17,765) (6,060) (90,484) (11,531)
-----------------------------------------------------------------------------------------------------------------
NET LOSS (128,979) (162,920) (824,231) (246,114)
PREFERRED STOCK DIVIDEND (1,600) (1,600) (4,800) (1,600)
-----------------------------------------------------------------------------------------------------------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (130,580) $ (164,520) $ (829,031) $ (247,714)
-----------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.01) $ (0.01) $ (0.06) $ (0.02)
-----------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED WEIGHTED AVERAGE
SHARES OUTSTANDING 14,234,230 11,268,481 13,534,217 11,256,230
-----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
FF-2
PROTON LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 2005 2004
-----------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(824,231) $(246,114)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation 16,370 8,495
Provision for allowance for doubtful accounts - 6,430
Loss on disposal of property and equipment - 943
Common stock issued for services 459,040 40,000
Amortization of loan costs 27,075 -
Changes in operating assets and liabilities
Accounts receivable (7,153) (591)
Inventory (29,701) (67,034)
Deposits (1,131) -
Deferred revenue 52,506 -
Accounts payable (32,579) (28,437)
Accrued expenses 108,708 55,862
-----------------------------------------------------------------------
NET CASH FROM OPERATING ACTIVITIES (231,096) (230,446)
-----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,562) (24,760)
-----------------------------------------------------------------------
NET CASH FROM INVESTING ACTIVITIES (3,562) (24,760)
-----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 20,000 -
Proceeds from sale of preferred stock - 80,000
Proceeds from notes payable 164,000 -
Proceeds from shareholder loans 48,642 178,000
-----------------------------------------------------------------------
NET CASH FROM FINANCING ACTIVITIES 232,642 258,000
-----------------------------------------------------------------------
NET INCREASE IN CASH (2,016) 2,794
CASH AT BEGINNING OF PERIOD 14,412 4,423
-----------------------------------------------------------------------
CASH AT END OF PERIOD $ 12,396 $ 7,217
-----------------------------------------------------------------------
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of inventory to equipment $ 64,500 $ 27,377
Issuance of common stock for loan costs $ 27,075 $ -
Accrual of preferred stock dividends $ 4,800 $ -
-----------------------------------------------------------------------
The accompanying notes are an integral part of these
condensed consolidated financial statements.
FF-3
PROTON LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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, 2004 Annual Report. 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, 2005
are not necessarily indicative of the results that may be expected for the full
year ending December 31, 2005.
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.
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.
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 $829,031 for
the nine months ended September 30, 2005. The Company had a working capital
deficit of $713,997 and $273,400 at September 30, 2005 and December 31, 2004,
respectively. Loans were required to fund operations.
FF-4
NOTE 2 - BUSINESS CONDITION (continued)
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.
NOTE 3 - RELATED PARTY TRANSACTIONS
During 2005, two shareholders advanced the Company $48,642. These advances bears
interest at 7% with principal and accrued interest due between November 2005 and
January 2007. At September 30, 2005 and December 31, 2004, the company owed the
two shareholders $310,642 and $262,000, respectively. At September 30, 2005 and
December 31, 2004, the accrued interest was $31,604 and $15,946, respectively.
During the nine months ended September 30, 2005, the Company accrued $45,000 as
salaries payable to the majority shareholder resulting in $139,890 of salaries
payable at September 30, 2005.
NOTE 4 - NOTES PAYABLE
In March 2005 the Company issued a note payable in the amount of $164,000. The
note was originally due in May 2005 and has been extended to December 2005
secured by inventory. The original terms of the loan provided for an interest
payment of $28,500 or 106% per annum; when the note was extended in May 2005,
the interest rate was amended to 30% on the original principal balance. At
September 30, 2005 $47,776 of interest had been accrued. 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.
NOTE 5 - COMMON STOCK
During the nine months ended September 30, 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 value of the Company's stock
on the date of issuance.
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.
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.
FF-5
NOTE 6 - COMMITMENTS
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, 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.
FF-6
FORM SB-2
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
47
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
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
48
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
49
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.
50
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The amounts set forth are all estimates:
Amount Paid or
be Paid
SEC registration fee $ 1,300.00
Placement Agent Fee 10,000.00
Printing and engraving expenses 1,000.00
Attorneys' fees and expenses 25,000.00
Accountants' fees and expenses 3,000.00
Transfer agent's and registrar's fees and expenses 1,000.00
Edgar service provider fee 2,000.00
Miscellaneous 1,000.00
---------------
Total $ 44,300.00
===============
51
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the three year period ended December 12, 2005, we issued
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.
In December 2004, we sold 280,000 shares of common stock to one investor at
a price of $0.70 per share. We issued these securities in reliance on Section
4(2) of the Securities Act. This transaction did not involve a public offering.
The investor was knowledgeable about our operations and financial condition. The
investor had knowledge and experience in financial and business matters that
allowed him to evaluate the merits and risk of receipt of these securities.
In March 2005 we issued a note payable in the amount of $164,000. As
additional consideration for receiving this loan, we issued the lender 47,500
shares of common stock which was recorded as a $27,075 loan costs and is
amortized over the term of the note. At June 30, 2005, the loan costs were fully
amortized. We issued these securities in reliance on Section 4(2) of the
Securities Act. This transaction did not involve a public offering. The investor
was knowledgeable about our operations and financial condition. The investor had
knowledge and experience in financial and business matters that allowed him to
evaluate the merits and risk of receipt of these securities. These shares have
not been issued yet
In August 2005, we sold 100,000 shares of common stock to one investor at a
price of $0.20 per share. We issued these securities in reliance on Section 4(2)
of the Securities Act. This transaction did not involve a public offering. The
investor was knowledgeable about our operations and financial condition. The
investor had knowledge and experience in financial and business matters that
allowed him to evaluate the merits and risk of receipt of these securities.
52
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)----Previously provided.
3.1.3 Amendment to Articles of Incorporation (Series A Preferred Stock)----Previously provided.
3.2 By-laws----Incorporated by reference to our Form SB-2 filed
on March 31, 2000, as amended.
4.1 Specimen Stock Certificate----Previously provided.
5.1 Opinion re: legality----Provided herewith.
10.1 Investment Agreement----Incorporated by reference to our Form 8-K
filed on December 1, 2005.
10.2 Registration Rights Agreement----Incorporated by reference to our Form 8-K
filed on December 1, 2005.
10.3 Placement Agent Agreement----Incorporated by reference to our Form 8-K
filed on December 01, 2005.
10.4 Amendment to Investment Agreement----Previously provided.
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.
53
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.
54
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
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.
55
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 Amendment Number 2 and authorized
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Alameda, California on December 29,
2005.
PROTON LABORATORIES, INC.
December 29, 2005 /s/ Edward Alexander
Edward Alexander
Director, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Edward Alexander Director, Chief Executive Officer December 29, 2005
Edward Alexander and Chief Financial Officer
/s/ Director
Michael Fintan Ledwith
/s/ Gary Taylor December 29, 2005
Gary Taylor Director and President
56