WASHINGTON,
[x]
Annual Report Pursuant to Section
[ ]
Transition Report Pursuant to Section2010
WELLSTONE FILTER SCIENCES,number: 000-28161
(Exact
Delaware | 33-0619264 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1200 Coast Highway, Laguna Beach, California | 92651 |
(Address of principal executive offices) | (Zip Code) |
(949) 793-4045 | |
(Registrant's telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act: | |
Title of Each Class | Name of Each Exchange on Which Registered |
None | N/A |
Securities registered pursuant to Section 12(g) of the Act: | |
Common Stock, $0.001 |
Delaware 33-0619264
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
710 Market Street, Chapel Hill, North Carolina 27516
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 370-4408
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001
Yes o No x
Yes o No x
Yes x No o
Yes o No o
o
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Small reporting company [ X ]
Act. (check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company x |
Yes [ ]o No [ X ]
x
State issuer's revenues for its most recent fiscal year: None
The number$1,903,553. (1)
Common Stock, $.001 Par Value – 93,551,580 Shares
March 31, 2011: 87,551,580
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(1) Excludes 74,516,048 shares of common stock held by directors and officers, and any stockholder whose ownership exceeds five percent of the shares outstanding as of June 30, 2010. |
PART I | ||
Item 1 | Business | |
Item 1A | Risk Factors | |
Item 1B | Unresolved Staff Comments | |
Item 2 | Properties | |
Item 3 | Legal Proceedings | |
Item 4 | [Removed and Reserved] | |
PART II | ||
Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
Item 6 | Selected Financial Data | |
Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A | Quantitative and Qualitative Disclosures About Market Risk | |
Item 8 | Financial Statements and Supplementary Data | |
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | |
Item 9A | Controls and Procedures | |
Item 9B | Other Information | |
PART III | ||
Item 10 | Directors, Executive Officers and Corporate Governance | |
Item 11 | Executive Compensation | |
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13 | Certain Relationships and Related Transactions, and Director Independence | |
Item 14 | Principal Accountant Fees and Services | |
PART IV | ||
Item 15 | Exhibits and Financial Statement | |
Schedules | ||
Signatures |
Item 1.
DESCRIPTION OF BUSINESS
When used
Item1. | BUSINESS |
• | anticipating and responding to changing consumer demands in a timely manner; | ||||||
• | maintaining brand reputation and authenticity; | ||||||
• | developing high quality products that appeal to consumers; | ||||||
• | appropriately pricing products; | ||||||
• | providing strong and effective product marketing support; | ||||||
• | ensuring product availability; and | ||||||
• | maintaining and effectively accessing our distribution channels. |
ITEM 1A. | RISK FACTORS |
Revenues | Net Loss | |||||||
Fiscal Year Ended December 31, 2010 | $ | 577,965 | $ | 1,015,165 | ||||
Fiscal Year Ended December 31, 2009 | $ | 577,591 | $ | 890,492 |
Background
Wellstone Filters, LLC ("Wellstone LLC") was founded in February, 1998 by Dr. Carla Cerami Hand at Cerami Consulting Company. Cerami Consulting Corp was investigating the negative health impact of cigarette smoking. As an outgrowthoutcome of this work, Cerami Consulting decideduncertainty.
On May 25, 2001, Wellstone LLC was acquired by Farallon Corporation, a publicly registered reporting corporation formed with the intention of making subsequent acquisitions. Farallon Corporation acquired all of the outstanding membership interests of Wellstone LLC in exchange for 8,400,000 shares of common stock of Farallon Corporation. In addition, in connection with the transaction, Farallon Corporation issued 238,728 shares of common stock in cancellation of debt. As a result of the merger, the former members of Wellstone LLC acquired a majority of the outstanding shares of Farallon. Accordingly, the combination has been accounted for as a reverse acquisition, under which for accounting purposes, Wellstone LLC is the accounting acquiror, and Farallo n Corporation is accordingly the accounting acquiree. As is customary in a reverse acquisition, only the historical financial statements of Wellstone LLC, the accounting acquiror, are presented for periods prior to the acquisition. Farallon Corporation, incorporated in 1994, subsequently changed its name to Wellstone Filters, Inc and Wellstone LLC became a wholly-owned subsidiary of Wellstone Filters, Inc. References to Wellstone refer to the combined entity. On January 5, 2005, Wellstone created a wholly-owned subsidiary operating company, Wellstone Tobacco, Inc., a North Carolina corporation. All of the tobacco sales operationswe cannot guarantee will occur, we do not have been conducted through Wellstone Tobacco, Inc.
Wellstone tested the filter technology in small manufacturing batches. Wellstone held discussions with several major manufacturers for licensing or supply contracts, but no contracts have been entered into nor are any currently under negotiation. All testing performed on the filter technology prior to and through December 31, 2005 was for developmental purposes only and in the third quarter of 2005 Wellstone shipped product to Central and South America for promotional and consumer trial purposes only.
Wellstone's original plan was to license its proprietary cigarette filter technology to existing cigarette manufacturers. We believe that our filter compound removes certain carcinogens and the incorporation of our
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Wellstone has developed packaging materials and tobacco blends for a full line of cigarettes (regular, smooth blue, and menthol) that is consistent with its ultra premium brand positioning. In addition to selling our own brand of Wellstone cigarettes, we will continue to pursue incorporation of our filter into existing cigarette brands. We purchase various ingredients necessary for our filter from suppliers, but do not enter into written agreements with such suppliers; rather we submit purchase orders on an as-needed basis.
The Wellstone brand of cigarettes are lower in toxins, yet, we believe, do not compromise the pleasurable effects of smoking. Wellstone's strategic plan as well as its philosophy is based on two assumptions: first, quitting smoking can be difficult and second, smokers do not appear to focus on cigarette tar levels. In 2002, according to industry reports, 64% of all cigarettes sold in the United States were high in tar. Wellstone believes that part of the reason smokers prefer high tar cigarettes is because of taste. Wellstone's goal is to reduce tar and certain associated carcinogens without affecting the cigarettes' taste. We believe smokers will try Wellstone for its lower price, and come back for its taste.
In the quarter ended September 30, 2006, the Company continued to suffer from a negative gross margin on its cigarettes, which was part of the Company's strategy to obtain market share and entry into the competitive cigarette marketplace. Management reviewed the liquidity position of the Company during the quarter ended September 30, 2006 and sought unsuccessfully for additional debt or equity funding. Although the Company did enter into negotiations for a private placement, the funding group required that the Company carry out a 1-for- 25 reverse split of the common stock as a precondition to such placement. After Wellstone carried out the reverse split, the funding source did not complete funding. Faced with inadequate cash resources to fund the market introduction of its products, management determined to suspend further marketing activity. As a result, sales in the quarter ended September 30, 2006 fell to only $6,475, a nd Wellstone had no significant sales for the remainder of the year ended December 31, 2006. All employees and officers have been dismissed or have resigned, except for the Company Chief Executive Officer. The Company had negotiated with its suppliers for time to obtain financing and continue its business, was not successful in obtaining financing. Currently the Company has no sales and is seeking financing in order to re-enter the market.
Recent Developments
Wellstone has determined to separate its tobacco cigarette business (carried out by its North Carolina subsidiary, Wellstone Tobacco) and its filter science business by distributing the shares of Wellstone Tobacco to its shareholders. The Tobacco Control Act (See below under "Governmental Regulation) granted FDA important new authority to regulate the manufacture, marketing, and distribution of tobacco products to protect the public health generally and to reduce tobacco use by minors. Among its many provisions, the Tobacco Control Act added sections 904 and 905 to the Federal Food, Drug, and Cosmetic Act (the act) (21 U.S.C. 387d), establishing requirements for tobacco product ingredient submissions, requiring submission of documents related to certain effects of tobacco products, and adding requirements for tobacco product establishment registration and product listing. These requirements apply differently to different tobacco products.
Section 904(a)(1) of the act requires each tobacco product manufacturer or importer, or agent thereof, to submit a listing of all ingredients, including tobacco, substances, compounds, and additives that are added by the manufacturer to the tobacco, paper, filter, or other part of each tobacco product by brand and by quantity in each brand and subbrand. For tobacco products not on the market as of June 22, 2009, section 904(c)(1) requires that the list of ingredients be submitted at least 90 days prior to delivery for introduction into interstate commerce. Section 904(c) of the act also requires submission of information whenever any additive, or the quantity of any additive, is changed.
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Section 904(a)(4) of the act requires each tobacco product manufacturer or importer, or agent thereof, to submit all documents developed after June 22, 2009 “that relate to health, toxicological, behavioral, or physiologic effects of current or future tobacco products, their constituents (including smoke constituents), ingredients, components, and additives.”
Section 905(b) of the act requires that “every person who owns or operates any establishment in any State engaged in the manufacture, preparation, compounding, or processing of a tobacco product or tobacco products” register with FDA the name, places of business, and all establishments engaged in these activities owned or operated by that person. Section 905(i)(1) of the act requires that all registrants “shall, at the time of registration . . . file with [FDA] a list of all tobacco products which are being manufactured, prepared, compounded, or processed by that person for commercial distribution,” along with certain accompanying information, including all labeling. In addition, section 905(i)(3) of the act requires that certain changes in the product list be submitted biannually. Wellstone has completed this registration process for its Wellstone Filters brand.
At this time, the FDA intends to enforce the ingredient listing requirements, the tobacco health document submission requirements, and the tobacco product manufacturer or importer registration requirements with respect to:
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manufacturers and importers of cigarettes, smokeless tobacco, and roll-your-own tobacco for consumer use; and
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manufacturers and importers of tobacco (including tobacco leaf blends, reconstituted tobacco, and bulk smokeless tobacco), papers, filters (including filter rods), or pouches, whether such products are for further manufacturing of, or for consumer use as, regulated tobacco products. Products for consumer use include tobacco, papers, and filters sold separately, in kits (such as for roll-your-own tobacco), or as part of accessories.
The failure to provide any information required by section 904 is a prohibited act under section 301(q)(1)(B) of the act (21 U.S.C. § 331(q)(1)(B)). In addition, under section 903(a)(10) of the act, tobacco products are deemed misbranded for a “failure or refusal . . . to comply with any requirement prescribed under section 904 . . . .” 21 U.S.C. § 387c(a)(10). Violations relating to section 904(a)(4) are subject to regulatory and enforcement action by FDA, including seizure and injunction. Wellstone has also complied with the requirements of Section 904.
Because Wellstone has developed packaging materials and tobacco blends for a full line of cigarettes in addition to having developed separately its proprietary filter technology, the company falls under both categories of filing requirements under sections 904 and 905.
However, the filing requirements are substantially dissimilar for the tobacco cigarette and the Wellstone filter. In addition to their dissimilar composition, the Wellstone cigarette is produced on a contract basis by outside entities, while the Wellstone filter is a proprietary product.
Moreover, the Tobacco Control Act treats the regulation of Modified Risk Tobacco Products (MRTP) differently for the two categories of product. Section 911 of the act, as amended by the Tobacco Control Act, states, in pertinent part:
(a) No person may introduce or deliver for introduction into interstate commerce any modified risk tobacco product unless an order issued pursuant to subsection (g) is effective with respect to such product.
(d) Any person may file with the Secretary an application for a modified risk tobacco product. . . .
Section 911(g) provides the criteria under which the Agency determines whether to issue an order that a MRTP may be commercially marketed. The Tobacco Control Act provides that, within two years and nine months of its enactment, the Agency shall issue regulations or guidance regarding MRTP applications, and those regulations or guidance shall “establish a reasonable timetable for the Secretary to review an application under this section.” (See section 6 of the Tobacco Control Act and section 911(l) of the FDCA as added by the Tobacco Control Act.)
The MRTP application procedure in section 911(d) of the FDCA provides that the application must contain: a description of the product and any proposed advertising and labeling; the conditions for using the product; the formulation of the product; sample product labels and labeling; all documents related to research findings, both favorable and non-favorable, relating to the effect of the product on tobacco-related diseases and health–related conditions; and data and information on actual consumer use. Section 911(e) of the FDCA provides that the Agency make the MRTP applications available for public comment. Section 911(f) of the FDCA requires that an MRTP application be referred to the Tobacco Products Scientific Advisory Committee for review and that the committee report its recommendations to the Agency within 60 days of the referral. The FDC states in its official commentary:
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As a consequence of the conflicts in compliance under the Tobacco Control Act with respect to its separate product categories, management believes it is necessary to split Wellstone into two companies, one for the manufacture of tobacco cigarettes, and the other focused solely on filter science and production. This conclusion is consistent with management’s business appraisal of a marketing conflict in selling our filters to other cigarette manufacturers while simultaneously competing with these companies by manufacturing our own brand of cigarettes.
The Tobacco and Cigarette Industry
Annual U.S sales of cigarettes in 2007 were 348 billion. Approximately 43.1 million (18.3%) of Americans smoke (National Center for Health Statistics), according to ; worldwide, the figure is estimated to be 1.5 billion people. The market share of five major U.S. cigarette manufacturers in 2008 was estimated as follows:
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Filters
Almost all cigarettes sold are filtered. Worldwide, about 90-95% of sold worldwide are filtered. Four types of material are used in filters: cellulose acetate (68%), polypropylene (21% primarily in China) pure cellulose (less than 1%), and granular additive filters such as activated charcoal (1%). Activated charcoal filters are efficient, having been proven to reduce carcinogenicity. However, activated carbon filters also remove much of the taste and nicotine, and have probably not become more popular due to this reason. In management's opinion, the development of "safe" or "safer" cigarettes has been slow due to three factors. First, the manufacturers had no interest in developing "safer" cigarettes since to do so would be an admission that smoking was prejudicial to health, which would adversely impact sales and lead to liability. We think this is no longer a factor due to overwhelming consensus that smoking is unhealthy, and the 1998 settlement between the state governments and the tobacco companies.
Second, an effective filter (such as activated charcoal) also is likely to remove that substance in tobacco smoke which makes smoking a pleasurable or addictive habit - nicotine.
Third, until Wellstone was introduced, any perceived safer cigarette, or PREP (perceived reduced exposure product) did not lead to a pleasant smoking experience. We believe that the Wellstone filter provides a unique smoothness and rich flavor not found in any other PREP.
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Cigarette manufacturers produce their own filters, or purchase from outside manufacturers, principally Filtrona Richmond, Inc.
Another device used to enhance filter performance is to make perforations around the base of the filter for ventilation. The introduction of air dilutes the smoke, but this device can be circumvented by the smoker by covering the perforations with the fingers.
Harmful Components of Tobacco Smoke
Tobacco smoke is comprised of atmospheric and other gases, particulate matter, and hundreds of chemical compounds. Tar is condensed tobacco smoke. Nicotine is the addictive substance in tobacco smoke. In the doses found in cigarette smoke carbon monoxide reduces the blood's ability to carry oxygen. Known carcinogens include benzene, 2-napthylamine, 4-amino and byphenyl and radioactive polonium-210. Potential carcinogens include N-nitrosodiethylamine, N-nitrosopyrrolidine, benzoapyrene, N-nitrosodieth aholomine and cadmium.
Our Filter Removes Certain Carcinogens
Our filter material works by trapping nucleophiles in tobacco which is produced during combustion and is the subject of U.S. Patent 6,119,701, "Methods, agents and devices for removing nucleophilic toxins from tobacco and tobacco smoke", issued September 19, 2000, to Anthony Cerami, Dr. Carla Cerami Hand M.D./Ph.D. and Dr. Peter Ulrich Ph.D, all shareholders of Wellstone and licensed to Wellstone on September 14, 1999, and of U.S. Patent 6,615,842 "Methods for removing nucleophilic toxins from tobacco smoke" issued September 9, 2003 to Dr. Cerami, and Drs. Cerami Hand and Ulrich and licensed to Wellstone on September 14, 1999. Compounds in the filter material include periodate-oxidated (dialdeyhde) derivaties of the polysaccharides cellulose, starch and agarose.
We intend to sublicense our filter technology to our Wellstone Tobacco Company subsidiary, which will be spun off to shareholders and will attempt to re-enter the market, and to sell filters directly to manufacturers to be integrated into their own cigarette brands.
Results of in-house Filter Testing
The patent developers have tested our filter technology in a biopharmaceuticals laboratory, using standard cigarette filter material (cellulose acetate) containing the compound. We have also tested our filter in an FTC testing facility. These tests indicate that our technology removes a measurable level of harmful substances. Variables such as the mix of tobacco used and manufacturing additives may cause variations in the actual percentage of harmful materials removed.
The Ames test is a standard test used to measure mutagenicity by exposing the smoke (filtered and unfiltered) to a strain of Salmonella bacteria. The Ames test demonstrated that our filter removed a majority of mutagens compared to the control cigarette.
The Greiss test measures nitrosamines, which are contained in cigarette smoke and believed to be carcinogenic. With a 250 milligram level of concentration in the Wellstone filter, a majority of the nitrosamines were removed.
Marketing
The U.S. cigarette market is a mature market in which overall consumer demand is expected to continue to decline over time. On average, domestic consumption has fallen approximately 2 percent per year over the past decade. Numerous factors have contributed to this decline, including health considerations, diminishing social acceptance of smoking, legislative limitations on smoking in public places, and rapidly accelerating costs in the form of increased state tax on cigarettes and settlement cost.
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Even though our filter technology has proven to be effective, tobacco companies are now prohibited from making any claims around the safety of an ingredient, filter or process utilized in cigarette manufacturing. However, because our test marketing indicates that our package design and product taste is acceptable, management feels that the brand will be successful if we get consumer trial and are able to maintain adequate distribution channels. We believe that our sales in the first half of 2006 justified management’s assessment of the potential success of the brand. Wellstone did not conduct any formal taste tests, but feedback from smokers indicated that Wellstone cigarettes had high taste acceptance. Unfortunately, Wellstone had to suspend marketing in the third quarter of 2006 due to lack of finances. We do not know when, if ever, we will be able to contin ue marketing and resume sales.
INTERNATIONAL MARKETS; GLYCANEX LICENSE; ACQUISITIONS
Wellstone investigated the international potentialsuccessfully obtain, develop or enforce any future patent, trademark or our rights in other proprietary technology against third parties, or defend any future patent or other proprietary technology that we hold against invalidity, unenforceability or infringement claims from competitors or other third parties, or defend against a claim of its proprietary compound, especially in Europe, Africa, and Asia where smoking levels are much higher than in the United States and Canada. On January 17, 2007, Wellstone entered into a Patent License Agreement with Glycanex BV, the supplierinfringement of the patented filter compound used in Wellstone cigarettes. Underintellectual property rights of any third party. The products are relatively easy to copy and reproduce. Our future success will depend on our ability to prevent others from infringing our proprietary rights, as well as our ability to operate without infringing the Patent License Agreement, Wellstone grantedproprietary rights of others. We may be required at times to Glycanex an exclusive righttake legal action to protect our proprietary rights and, despite our reasonable efforts, we may be sued for infringing the patent rights of others. In such case we may need to design our products and methods around third party rights or obtain license(s) from the holders of such rights. Patent and other intellectual property litigation is costly and, even if we were to prevail, the cost of such litigation could materially and adversely affect our business, operating results and future prospects.
Two principalU.S. and world economy. The recent tightening of the credit markets, the depression of the real estate market and the recession generally are indicative of a contraction in the U.S. and worldwide economy. Conditions such as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment and acts or threats of war or terrorism, and other factors ledbeyond our control may adversely affect our business and our earnings. These crises are without precedent in recent history and the full effect of them remains unknown. Moreover, adverse economic conditions may disproportionately affect the footwear market since our products are not a necessity and we depend on rising disposable incomes of our customers to purchase our products. Therefore, such conditions could weaken demand for our products and negatively impact our ability to provide you with a return on your investment. Investors must be able and willing to bear an entire loss of their investment.
We are also considering one orbasis of price and production and more acquisitions if such can be synergistic with our current business, but no agreements have been reached for any acquisitions.
COMPETITION
Our technology facesquickly develop new products. In addition, new companies may enter the markets in which we compete, further increasing competition but we think that our technology competes favorably because it reduces carcinogens while retaining taste and a significant level of nicotine. in the footwear industry.
Philip Morris test-marketed a new cigarette brand during 2005, Marlboro Ultra Smooth, which contained a new carbon filter that was presumably designedour ability to help filter out certain toxins in cigarette smoke and to therefore reduce exposure to these toxins. However, Philip Morris did not make any reduced risk or reduced exposure health claims. The brand was removed from test market due to a lack of consumer acceptance.
RJ Reynolds introduced its Eclipse cigarette in 1998. Eclipse purports to be safer because it primarily heats rather than burns tobacco, greatly reducing second hand smoke, and leaves no ashes, stains or odor. RJR advertised that smoking Eclipse cigarette might reduce the risk of cancer, chronic bronchitis, and emphysema. The American Lung Association and American Heart Association disagree with those claims. Eclipse is being marketed through the internet and limited retail sales.
INTELLECTUAL PROPERTY
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The technology fundamental to Wellstone is protected under U.S. Patent number 6,119,701, entitled "Methods, agents and devices for removing nucleophilic toxins from tobacco and tobacco smoke," by Cerami et al., and issued to the Cerami Consulting Corporation. This patent was filed on February 13, 1998, and approved on September 19, 2000. Basedcompete successfully depends on a licensing agreement with Cerami Consulting Corporation, Wellstone has exclusive rightsnumber of factors, including the style and quality of our products and the strength of our brand name, as well as many factors beyond our control. We may not be able to compete successfully in the technology on which the patent is based. The patent is protected until February 13, 2018, accordingfuture, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to current U.S. Patent law. A second U.S. patent was issued to Cerami Consulting Corporation and licensed to Wellstone: U.S. Patent U.S. ; Patent number 6,615,842, entitled "Methods for removing nucleophilic toxins from tobacco smoke" by Cerami et al., and issued to Cerami Consulting Corporation. This patent was filed on June 26, 2000 and issued on September 9, 2003. Based on a licensing agreement with Cerami Consulting Corporation, Wellstone has exclusive rights to the technology on which the patent is based. Therefore, Wellstone has controlling rights to the technology on which it is based until June 26, 2020, according to current U.S. Patent law.
The international rights to our technology have been licensed to Glycanex, NL, as set forth under the caption “Marketing.”
EMPLOYEES
As of December 31, 2009, we had only one employee, our Chief Executive Officer, and a part-time controller. Pending resumption of marketing, we do not intend to add additional employees at this time.
Legislation and Regulation
On June 22, 2009, President Obama signed into law the “Family Smoking Prevention and Tobacco Control Act” (H.R. 1256) (the “Tobacco Act”). The law grants the Food and Drug Administration (“FDA”) broad authority over the manufacture, sale, marketing and packaging of tobacco products. Under various deadlines, the Tobacco Act:
Gives the FDA the authority to impose tobacco product standardsgenerate cash flows that are appropriate for the protection of the public health (by, for example, requiring reductionsufficient to maintain or elimination of the use of particular constituents or components, requiring product testing, or addressing other aspects of tobacco product construction, constituents, properties or labeling);
Requires manufacturers to obtain FDA reviewexpand our development and authorization for the marketing of certain new or modified tobacco products;
Requires pre-market approval byproducts, which would adversely impact the FDA for tobacco products represented (through labels, labeling, advertising, ortrading price of our Common Stock.
Requires manufacturersmaterial adverse effect on our ability to report ingredients and harmful constituents and requires the FDA to disclose certain constituent information to the public;
Mandates that manufacturers test and report on ingredients and constituents identified by the FDA as requiring such testing to protect the public health, and allows the FDA to require the disclosure of testing results to the public;
Imposes new health warning requirements on cigarette and smokeless tobacco products;
Imposes new restrictions on the sale and distribution of tobacco products;
Bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;
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Requires manufacturers to submit to the FDA certain information regarding the health, toxicological, behavioral or physiologic effects of tobacco products;
Prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under federal law;
Requires the FDA to establish “good manufacturing practices” to be followed at tobacco manufacturing facilities;
Requires tobacco product manufacturers and certain other entities to register with the FDA (Wellstone has complied with this requirement);
Authorizes the FDA to require the reduction of nicotine (although it may not require the reduction of nicotine yields of a tobacco product to zero) and the reduction or elimination of other constituents;
Imposes significant new restrictions on the advertising and promotion of tobacco products; and
Grants the FDA the regulatory authority to impose broad additional restrictions.
The Tobacco Act also requires establishment of a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products, including recommendations on modified risk applications.
The law imposes user fees on certain tobacco product manufacturers in order to fund tobacco related FDA activities. User fees will be allocated among tobacco product classes according to a formula set out in the legislation, and then among manufacturers and importers within each class based on market share.
Compliance costs are not possible to predict and depend substantially on the future requirements imposed by the FDA under the Tobacco Act. Costs, however, could be substantialretain key personnel and could have a material adverse effect on the company’s financial condition, results of operations, and cash flows. In addition, failure to comply with the Tobacco Act and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on theour business, financial condition and results of operationoperations. Our ability to manage our anticipated growth effectively will require us to continue to develop and improve our operational, financial and other internal systems, as well as our business development capabilities, and to train, motivate and manage our employees.
Cigarettesor outstanding Common Stock. We believe the CEO and his management team are relatively experienced in the field of marketing our products, but there can be no assurance that such experience will result in our success in the anticipated activities. The Chief Executive Officer may resign at any time. If the Chief Executive Officer was to resign, our business and operations would be adversely affected.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 2. | PROPERTIES |
ITEM 3. | LEGAL PROCEEDINGS |
A wide variety of federal, state and local laws limit the advertising, sale and use of cigarettes, and these laws have proliferated in recent years. This trend has had, and is likely to continue to have, an adverse effect on cigarette sales.our business, operating results or cash flows. It is not possibleour practice to predict what, if any, additional legislation, regulationaccrue for open claims based on our historical experience and available insurance coverage.
ITEM 4. | [REMOVED AND RESERVED] |
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS’ MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Common Stock | ||||||||
Sales Price | ||||||||
High | Low | |||||||
Fiscal Year 2010 | ||||||||
Quarter Ended December 31, 2010 | $ | 0.14 | $ | 0.10 | ||||
Quarter Ended September 30, 2010 | $ | 0.12 | $ | 0.10 | ||||
Quarter Ended June 30, 2010 | $ | 0.10 | $ | 0.06 | ||||
Quarter Ended March 31, 2010 | $ | 0.20 | $ | 0.12 | ||||
Fiscal Year 2009 | ||||||||
Quarter Ended December 31, 2009 | $ | 0.15 | $ | 0.12 | ||||
Quarter Ended September 30, 2009 | $ | 0.18 | $ | 0.15 | ||||
Quarter Ended June 30, 2009 | $ | 0.07 | $ | 0.07 | ||||
Quarter Ended March 31, 2009 | $ | 0.05 | $ | 0.15 |
Tobacco Product Regulation
The regulation of tobacco product characteristics has two primary goals. One iscommon stock have no preemptive rights and no right to reduce consumption. The second is to reduce the harm from the continued use of tobacco products. This harm reduction can be achieved by reducing the toxic emissions from cigarettesconvert their common stock into any other securities. There are no redemption or the toxic constituents of smokeless tobacco. Reducing toxic exposures would potentially lower the risk and severity of disease in people who continue to smoke. The Tobacco
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The Tobacco Act marks a reversal of government policy regarding the treatment of reduced risk tobacco products. Prior to the Tobacco Act, manufacturers were forbidden from advertising a “safer cigarette” due to government concerns that any such claims would encourage the consuming public to startcommon stock have been declared or continue smoking. The Tobacco Act explicitly provides for a category of reduced risk tobacco products to be evaluatedpaid by the FDA and approvedCompany. The Company intends to employ all available funds for marketing.
The Tobacco Act goes farther than simply allowing for the introduction of reduced risk products. The FDA is mandated to establish “Tobacco Product Standards.” The content of these standards is to include “the reduction or elimination of … constituents, including smoke constituents, or harmful components of the product,” including “provisions respecting the construction [and] components” of cigarettes.” “Components” expressly includes cigarette filters. The FDA’s authority to establish manufacturing standards for tobacco products means that the sale of less toxic cigarettes should become the standard rather than the exception.
Reducing Harm from Continued Use
The Tobacco Act is intended to reduce the harm of tobacco use in smokers who continue to use these products. The ways in which the harm of tobacco products might be reduced include (1) setting performance standards to reduce toxic emissions from cigarettes, (2) evaluating and approving potential reduced exposure products (PREPs), (3) educating users about the risks and benefits of tobacco products, and (4) encouraging the development of medicationsits business and, accordingly, does not intend to reduce cigarette consumption.
As general principles guiding its authority,pay any cash dividends in the FDA’s decisions must be based on sound science. The goals are bothforeseeable future.
Product Standards
The Tobacco Act gives the FDA broad authority to promulgate tobacco product standards whenever such a standardwhich Auri Design Group, LLC is found to be “appropriatemerged with an into our wholly owned subsidiary, Auri Footwear, Inc., a California corporation (the “Reverse Merger”). The merger was effective on February 24, 2011. In connection with the merger, we issued to the members of Auri Design Group, LLC, an aggregate of 59,325,360 shares of our common stock in exchange for protectionsuch members transfer of all of their membership interests in Auri Design Group, LLC to Auri Footwear, Inc., and Auri Design Group, LLC was merged with and into Auri Footwear, Inc. pursuant to California law.
Potential Reduced-Exposure Products
The Tobacco Act authorizesrecipient took the FDAsecurities for investment and not resale, and our company took appropriate measures to develop specific standards for evaluating products that companies intend to promote as reduced exposure or reduced-risk products. Such products would be those, as indicated byrestrict the manufacturer explicitly or implicitly, that present a lower risk of tobacco-related diseases or that are less harmful than other commercially-marketed tobacco products; tobacco products or their smoke that contain a reduced level of a substance or whose use results in a reduced exposure to a substance; or tobacco products that, when smoked, do not contain or are free of a particular substance. The FDA is granted the authority to regulate reduced-exposure and reduced-risk health claims and to ensure that there is a scientific basis for the claims that are permitted.
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Center for Tobacco Products
The FDA established the Center for Tobacco Products to oversee the implementationtransfer of the Act. The Center’s mission, according to the FDA, is to “use the best available science to guide the development and implementation of effective public health strategies to reduce the burden of illness and death caused by tobacco products.” In establishing the Tobacco Product Standards, the FDA expressly must consider “Technical Achievability.” Therefore, when the FDA promulgates the new Tobacco Product Standards, it will require the use of the best available scientifically proven technology to reduce smoking risk.
Management believes the Tobacco Act will favor companies that are first to market with alternatives offering significant reductions in toxins and carcinogens. None of the largest tobacco product manufacturers is known to have a viable product that will meet the new Tobacco Product Standards. This creates a distinct opportunity for companies that have developed better technologies but have not been able to compete effectively against the dominant tobacco product manufacturers. Management believes that Wellstone’s filter technology is ideally suited for the new FDA oversight of tobacco products, and that the FDA is effectively mandating the technology Wellstone has been developing for years. Wellstone plans on submitting its patented Reduced Exposure Filter as the “best available technology” to the FDA.
PRODUCT LIABILITY
securities.
In the United States, there have been numerous and well-publicized lawsuits against the largest manufacturers of cigarettes and other tobacco products initiated by state and municipal governmental units, health care providers and insurers, individuals (for themselves and on a class-action basis) and by others. The legal theories underlying such lawsuits are varied, but are generally based upon one or more of the following: (1) manufacturer defendants have deceived consumers about the health risks associated with tobacco product consumption; (2) such defendants knew or should have known about various harmful ingredients of their products and failed to adequately warn consumers about the po tential harmful effects of those ingredients; and (3) such defendants knew of the addictive attributes of nicotine and have purposefully manipulated their product ingredients so as to enhance the delivery of nicotine.
ITEM 6. | SELECTED FINANCIAL DATA |
We intend to sell cigarettes and to supply filters which we believe could make cigarettes less prejudicial to health, but Wellstone could still be liable for personal injury to consumers. Even if we believe such lawsuits are without merit, the cost of defense or settlement of lawsuits could be substantial.
AVAILABLE INFORMATION
We file annual, quarterly and current reports, information statements and other information with the Securities and Exchange Commission (the "SEC"). The public may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
Item 1A. RISK FACTORS.
Item 1B. UNRESOLVED STAFF COMMENTS
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ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS |
Item 2. PROPERTIES
. Wellstone hasAnnual Report on Form 10-K contains forward-looking statements that have been made pursuant to the use of a minimal amount of space in Chapel Hill, North Carolina provided by the officer and director at no cost.
Item 3. LEGAL PROCEEDINGS
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarterprovisions of the fiscal year endedPrivate Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-K. Words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable as of the date of this Annual Report on Form 10-K, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Annual Report on Form 10-K. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, set forth in detail in Item 1A of Part I, under the heading “Risk Factors.”
December 31 | December 31 | |||||||
2010 | 2009 | |||||||
(Audited) | (Audited) | |||||||
Sales | 577,965 | 577,591 | ||||||
Cost of goods sold | 448,493 | 439,608 | ||||||
Gross profit | 129,472 | 137,983 | ||||||
Selling, general & administrative expenses | 1,131,465 | 1,029,357 | ||||||
Loss from operations | (1,001,993 | ) | (891,374 | ) | ||||
Other income (expenses) | (13,172 | ) | 882 | |||||
Net loss | (1,015,165 | ) | (890,492 | ) | ||||
Accumulated (deficit), beginning of year | (2,781,754 | ) | (1,891,262 | ) | ||||
Accumulated (deficit), end of year | (3,796,919 | ) | (2,781,754 | ) |
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PART II
(a) Market information The women’s fall-2010 collection was held back by one season (until Spring-11) in order to refine and issuanceperfect the technical aspects of unregistered securities
The Company's Common Stock has traded on the OTC Bulletin Board under the symbol WLSF.OBentirely new product assortment. This postponement reduced 2010 revenues.
Quarter Ended | High | Low |
December 31, 2009 | $ .15 | $ .12 |
September 30, 2009 | .18 | .15 |
June 30, 2009 | .07 | .07 |
March 31, 2009 | .07 | .05 |
December 31, 2008 | .51 | .51 |
September 30, 2008 | 1.01 | 1.01 |
June 30, 2008 | 3.00 | 3.00 |
March 31, 2008 | 1.60 | 1.60 |
All share information is adjusted for stock splits and stock dividends. The above information was supplied by the OTC Bulletin Board or Pink Sheets, LLC and these prices reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
In May 2009, we converted accounts payable owed to an officer and a company related to him in the amount of $94,228 into 9,422,800, shares of common stock of the Company at the rate of $.01 per share. In addition, the officer converted $528,000 in accrued compensation (which was classified as accrued expenses) into 52,800,000 shares of common stock at $.01 per share, but these latter shares vest at the earlier of three years; the death or disability of the officer, or the Company attaining earnings of $.10 per share. The conversion rate of $.01 per share created an additional stock-based compensation expense from debt conversion of $2,975,869.
Effective June 30, 2009, seven noteholders of outstanding promissory notes aggregating $750,000 agreed to convert their notes and the $202,444 in accrued interest thereon into 19,048,891 shares of common stock, or $.05 per share.
These share issuances are believed to be exempt from registration under Section 4(2) of the Securities Act as a transaction not involving any public offering.
(b) Holders
As of December 31, 2009, there were approximately 150 record holders of Company common stock.
(c) Dividends
The Company has not paid any dividends on its common stock. The Company currently intends to retain any earnings for use in its business, and therefore does not anticipate paying cash dividends in the foreseeable future.
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(d)
Company repurchases of common stock during the years ended December 31, 2009 and 2008.
None
Item 6.
SELECTED FINANCIAL DATA
As a smaller reporting company we are not required to respond to this item.
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
SUSPENSION OF MARKETING PROGRAM
In the quarter ended September 30, 2006, the Company continued to suffer from a negative gross margin on its cigarettes; which was part of the Company's strategy to obtain market share and entry into the competitive cigarette marketplace. Management reviewed the liquidity position of the Company during the quarter ended September 30, 2006 and sought unsuccessfully for additional debt or equity funding. Although the Company did enter into negotiations for a private placement, the funding group required that the Company carry out a 1-for- 25 reverse split of the common stock as a precondition to such placement. After Wellstone carried out the reverse split, the funding source did not complete funding. Faced with inadequate cash resources to fund the marke t introduction of its products, management determined to suspend further marketing activity. As a result, sales in the quarter ended September 30, 2006 fell to only $6,475, and Wellstone had no significant sales for the fourth quarter, and does not expect to be able to have any further sales until such time as Wellstone obtains financing. All full time employees and officers have been dismissed or have resigned except for the Company Chief Executive Officer. The Company is in negotiations with its suppliers for time to obtain financing and continue its business, but there is not a high probability that financing can be obtained that is not unduly dilutive to the Company shareholders.
WELLSTONE'S STRATEGIC DIRECTION
Following a review of the tobacco market and cigarette industry, Wellstone, through its Wellstone Tobacco subsidiary, determined to manufacture and produce its own brand of cigarettes. In connection with such plan, Wellstone has developed packaging materials and tobacco blends for a full line of cigarettes, including regular, smooth blue and menthol. Wellstone Tobacco's strategy and objective is to offer an ultra-premium product at a value price.
Wellstone Tobacco has received approval from the Federal Trade Commission (FTC) and the National Association of Attorneys Generals (NAAG) and has been added to the list of approved brands in thirty one states. We have initiated the process for approval in the remaining states but are not actively prosecuting approval due to lack of funds and uncertainty about the Company’s future marketing. Wellstone Tobacco has signed a multi-year manufacturing contract with US Flue-Cured Tobacco for production. With the exception of filters, US Flue- Cured will procure all materials, manufacture, package, and ship to order. Wellstone Tobacco believes US Flue-Cured's annual manufacturing capacity is sufficient to meet its short and long-term needs. Wellstone Filter Sciences has supplied the filters for Wellstone Tobacco. Tobacco leaves are readily available through a va riety of sources.
Subject to regulatory approval, we intend to offer what we consider to be a "Potentially Reduced Exposure Product" or "PREP" or products within the price value segment of the market. Wellstone Tobacco launched its Wellstone brand of cigarettes in the United States during the first quarter of 2006 and has shipped all brand styles to Arizona, Louisiana, North Carolina, Virginia and California. Wellstone Filter Sciences is investigating the international potential of its proprietary compound, especially in Europe, Africa, and Asia where smoking levels are much higher than in the United States and Canada. The Company continues to
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We believe that the Wellstone Tobacco brand of cigarettes are lower in toxins and do not compromise the pleasurable effects of smoking. Wellstone's strategic plan as well as its philosophy is based on two assumptions: first, quitting smoking can be difficult and second, many smokers do not concentrate on cigarette tar levels. In 2002, according to industry reports, 64% of all cigarettes sold in the United States were high (more than 10 mg) in tar. Wellstone believes that part of the reason smokers prefer high tar cigarettes is because of taste. Wellstone's goal is to reduce toxins and certain associated carcinogens without affecting the cigarettes' taste. We believe smokers will try Wellstone for its lower price, and come back for its taste.
We believe that Wellstone is the only small (less than $50 million in sales) US cigarette manufacturer that is publicly traded. We believe that the remainder of the small manufacturers in the industry are privately held or foreign. Management believes Wellstone Tobacco's access to the US capital markets will assist it in its goal to become the largest company in the growing discount cigarette market. However, there can be no assurance that Wellstone's access to US capital markets will provide the necessary financing to build and grow the business.
Wellstone intends to spin off its Wellstone Tobacco Company subsidiary which will market the cigarette product, and to continue to market its filter as its principal business.
OVERVIEW
Wellstone has relocated from New York to North Carolina to avail itself of the talent pool and infrastructure already in place in North Carolina. Wellstone has leased space in a state-of-the-art cigarette manufacturing facility. In addition to office and plant space, Wellstone also leases, on a non-exclusive basis as needed, certain production assets to produce cigarette samples. The office space and plant are located at 250 Crown Boulevard in Timberlake, North Carolina, approximately 20 miles from Durham. This space was vacated in September, 2006, and now uses a minimal amount of space in Chapel Hill, North Carolina. In furtherance of its marketing plans, the Company:
- Designed packaging to reflect the benefits of the Wellstone filter.
- Retained Signal Design, Inc. of Durham, North Carolina to assist in developing a comprehensive brand strategy and marketing campaign.
- Has received results from an independent FTC testing facility that confirm the Company's expectations for their patented filter technology.
- Hired independent sales consultants and are negotiating with several more.
- Entered into an agreement with U.S. Flue-Cured Tobacco Growers, Inc. to manufacture Wellstone's product line.
- Received FTC advertising approval and rotation warning approval
- Wellstone brand approved by Settling States under the Master Settlement Agreement
- Has formulated distribution plans and begun shipping cigarettes.
RESULTS OF OPERATIONS
On January 5, 2006, the Company announced that it launched its Wellstone brand in the United States with shipments to several states resulting in revenue of $258,19422.4% for the year ended December 31, 2006,2010.
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December 31 | December 31 | |||||||
2010 | 2009 | |||||||
(Audited) | (Audited) | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | (683,382 | ) | $ | (515,842 | ) | ||
Investing activities | (69,667 | ) | (76,149 | ) | ||||
Financing activities | 1,136,557 | 549,963 | ||||||
Net increase (decrease) in cash & cash equivalents | 383,508 | (42,028 | ) | |||||
Beginning cash & cash equivalents | 22,931 | 64,959 | ||||||
Ending cash & cash equivalents | $ | 406,439 | $ | 22,931 |
Payments | ||||||||||||
Due By Period | ||||||||||||
Total | <1 year | 1-3 years | ||||||||||
Note payable obligation (1) | $ | 50,000 | $ | 4,167 | $ | 45,833 | ||||||
Note payable obligation (2) | 150,000 | 12,500 | 137,500 | |||||||||
Note payable obligation (3) | 500,000 | 500,000 | ||||||||||
Operating leases, net (4) | 21,000 | 21,000 | ||||||||||
Total contractual obligations | $ | 721,000 | $ | 537,667 | $ | 183,333 |
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
Wellstone had a loss from operationsthe Company was approved by the Board of $ $2,976,678 and $6,044 inDirectors.
LIQUIDITY AND CAPITAL RESOURCES
During 2004, the Company received $1,500,000 in exchange for a $1,500,000 convertible promissory note, due December 31, 2006. The note bears interest at a rate of 4% per annum (effective interest rate of 38%), which accrues and is payable on maturity. This note was not paid as of December 31, 2009, and the Company lacks funds to pay the note. Wellstone is in discussions with the noteholder regarding repayment options. Other debt owed to management and to other noteholders totaling $1,696,412 was converted in May and June 2009 into common stock.
Wellstone“going concern” qualification, during that period, no accountant’s report has sourced suppliers to manufacture its patented formulation in commercial quantities. These sources of supply will enable Wellstone to meet all foreseeable market demand for the Wellstone line as well as to supply other manufacturers who may choose to license the product. Because the formulation is unique to Wellstone's product, Wellstone has been required to specially source manufacturing to ensure that strict specifications can be met. Wellstone intends to use multiple suppliers to ensure a reliable supply.
Our activities to date have been limited to seeking capital; seeking sources of supply and development of a business plan. We do not believe that conventional financing, such as bank loans, is available to us due to these factors. The Company will be required to engage in debt or equity transactions to satisfy cash needs over the next twelve months, and Management believes that it will be able to raise the required funds for operations from one or more future offerings and to affect our business plan. However, there can be no assurances to that effect because our ability to raise significant amounts of financing will be dependent on favorable capital markets and obtaining a market for our products, and other risks inherent in the business as discussed under the caption "Risk Factors" may af fect the outcome of Management's plans.
This item is not applicable since the Company is a smaller reporting company.
17
Wellstone's financial statements are appended to the end of this report and include the following:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Operations for the years ended December 31, 2009 and 2008 and the period inception (February 17, 1998)) to December 31, 2009
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008 and the period inception (February 17, 1998) to December 31, 2009
Consolidated Statement of Changes in Stockholders’ Deficit for the period inception (February 17, 1998) to December 31, 2009
Notes to Consolidated Financial Statements.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On November 16, 2009 the Registrant's dismissed its former independent accountant The Blackwing Group LLC ("Blackwing"). The report by Blackwing on the consolidated financial statements of the Registrant dated March 17, 2009, including a balance sheet as of December 31, 2008 and 2007 and the statements of operations, cash flows and statement of stockholders' equity for the years ended December 31, 2008 and 2007 did not contain ancontained any adverse opinion or a disclaimer of an opinion noror was otherwise qualified or modified as to uncertainty, audit scope, or accounting principles.
procedure, which, if not resolved to the satisfaction of the Prior Auditor would have caused it to make reference to the subject matter of the disagreement in connection with its report. Further, the Company has not been advised by the Prior Auditor that:
On November 16, 2009, the Registrant engaged Larry O'Donnell, CPA, P.C. as its independent auditor. This engagement was approved by the Board of Directors. During the two fiscal years ended December 31, 2008, and the interim period until the engagement of Larry O'Donnell, CPA, P.C., the Registrant didhas not consultconsulted with Larry O'Donnell, CPA, P.C. onMaloneBailey regarding the application of accounting principles to anya specific transaction, noreither completed or proposed, or the type of audit opinion that might be rendered on the Registrant'sCompany’s financial statements. Further, Larry O'Donnell, CPA, P.C.statements, nor did notMaloneBailey provide anyadvice to the Company, either written or oral, advice that was an important factor considered usby the Company in reaching a decision as to any suchthe accounting, auditing or financial reporting issue. Further, during the Company’s two most recent fiscal years or subsequent interim period through March 24, 2011, the Company has not consulted with MaloneBailey on any matter beingthat was the subject of a disagreement or "reportable event" or any other mattera reportable event.
On February 16, 2010 the Registrant dismissed its former independent accountant Larry O'Donnell, CPA, P.C. Larry O'Donnell, CPA, P.C. did not audit any financial statements of the Registrant. During the period covered by the financial statements through the date of dismissal of the former accountant, there were no disagreementswhich was filed with the former accountantSecurities and Exchange Commission on any matterMarch 25, 2011.
ITEM 9A. | CONTROLS AND PROCEDURES |
DuringDisclosure Controls and Procedures.
On February 16, 2010, the Registrant engaged Child, Van Wagoner & Bradshaw, PLLC as its independent auditor. This engagement was approved by the Board of Directors. During the two fiscal years ended December 31, 2008, and the interim period until the engagement of Child, Van Wagoner & Bradshaw, PLLC, the Registrant did not consult with Child, Van Wagoner & Bradshaw, PLLC on the application of accounting principles to any specific transaction nor the type of audit opinion that might be rendered on the Registrant's financial statements. Further, Child, Van Wagoner & Bradshaw, PLLC did not provide any written or oral advice that was an important factor considered us in reaching a decision as to any such accounting, auditing or financial reporting or any matter being the subject of disagreement or "reportable event" or any other matter as defined in Regulation S-K, Item 304 (a)(1)(iv) or (a)(1)(v).
The Registrant requested that Larry O' Donnell, CPA, P.C. provide a letter to indicate whether or not it agrees with the statements made herein, but has not yet received any letter.
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Item 9T. CONTROLS AND PROCEDURES
We maintain disclosure controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in ourthe reports filedthat it files under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported accurately, in accordance with U.S. Generally Accepted Accounting Principles and within the required time periods, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, who is also our acting Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure.
As of the end of the period covered by this report, we carried out an evaluation, underperiods. Under the supervision and with the participation of our management, including our Chief Executive Officer, who is also our acting Chief Financial Officer,chief executive officer and chief financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). . Management conducted an evaluationas of the effectiveness of our internal control over financial reporting basedDecember 31, 2010. Based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations ("COSO"). Based upon thatthis evaluation, our Chief Executive Officer, who is alsopresident and chief executive officer and our acting Chief Financial Officerchief financial officer concluded that as of the end of the period covered by this Annual Report on Form 10-K our disclosure controls and procedures were not effective as of December 31, 2010 to enable us to accurately record, process, summarize and report cert ainensure the timely disclosure of required information required to be included in the Company’s periodic SEC filings within the required time periods, and to accumulate and communicate to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In carrying out that evaluation, management identified a material weakness (as defined in Public Company Accounting Oversight Board Standard No. 2) in our Securities and Exchange Commission filings.
The material weakness identified by Management consistedreporting may not prevent or detect misstatements. In addition, the design of inadequate staffingany system of control is based upon certain assumptions about the likelihood of future events, and supervision within the bookkeeping and accounting operations of the Company. Because there is only one employee with bookkeeping and accounting functions, we are unable to segregate duties within the Company’scan be no assurance that any design will succeed in achieving its stated goals under all future events, no matter how remote. Accordingly, even effective internal control system. The inadequate segregationover financial reporting can only provide reasonable assurance of dutiesachieving their control objectives.
Reporting.
ThereThis annual report does not include an attestation report
ITEM 9B. | OTHER INFORMATION |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Name | Age | Position | Date Elected | |||||||
Ori Rosenbaum | 47 | Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer, Secretary and Director | 2011 |
build consumer loyalty.
Item 9B.
OTHER INFORMATION
Not applicable
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
The members of the Board of Directors of Wellstone serve
· | Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time. | |
· | Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses. | |
· | Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities. | |
· | Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated. |
· | Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Learned Jeremiah Han
Learned Jeremiah Hand, Chief Executive Officer
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Mr. Hand, age 50, joined Wellstone in March, 2000. He has been Chief Executive Officer anddirectors currently acts as our compensation committee.
our nominating committee.
Wellstone has not adopted a code of ethics which applies to
Audit Committeeethics.
Wellstone doesOfficer and Secretary. We do not have either an Audit Committeeany independent directors. We believe Mr. Rosenbaum is best situated to serve as chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for our company. We believe that this leadership structure has served our company well.
· | appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting; | |
· | approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
· | reviewing annually the independence and quality control procedures of the independent auditors; | |
· | reviewing and approving all proposed related party transactions; |
· | discussing the annual audited financial statements with the management; | |
· | meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a)future needs.
ITEM 11. | EXECUTIVE COMPENSATION |
Annual Compensation | Long Term Compensation | ||||||||||||||||||||
Name and Principal Position | Fiscal Year End | Salary ($) | Bonus ($) | All other and annual Compensa- tion and LTIP Payouts ($) | Securities under Options/ SARS Granted (#) | Restricted Shares or Restricted Share Units (#) | |||||||||||||||
Ori Rosenbaum | 2010 | 110,000(1) | 0 | 0 | 0 | 0 | |||||||||||||||
President, Chief Executive Officer, | 2009 | 252,500(1) | 0 | 0 | 0 | 0 | |||||||||||||||
Chief Financial Officer and Secretary | 2008 | 252,500(1) | 0 | 0 | 0 | 0 |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
21
Item 11. EXECUTIVE COMPENSATION
No compensation or benefits have been paid to the soleclass of voting securities, (ii) each director, (iii) our chief executive officer and (iv) all executive officers and directors as a group as of February 28, 2011.
Name and Address | Number of Shares of Common Stock Beneficially Owned | Percentage Ownership of Shares of Common Stock | ||||||
Owner of More than 5% of Class | ||||||||
Andrew Furia 1200 N. Coast Highway Laguna Beach, California 92651 | 12,049,477 | 13.8 | % | |||||
Herrington Management 3535 East Coast Highway #47 Corona Del Mar, California 92625 | 4,500,000 | 5.1 | % | |||||
Directors and Executive Officers | ||||||||
Ori Rosenbaum 1200 N. Coast Highway Laguna Beach, California 92651 | 38,746,350 | 44.2 | % | |||||
All directors and executive officers (1 persons) | 38,746,350 | 44.2 | % |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
· | On November 12, 2010, the parents of Mr. Rosenbaum loaned Auri Design Group, LLC, the sum of $150,000. The note is for a three year term at an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by a secondary security interest in all of the Company’s assets excluding accounts receivable and certain intangible assets. |
· | On November 12, 2010, Andrew Furia, a holder of in excess of 5% of our outstanding common stock, loaned to Auri Design Group, LLC the sum of $50,000 The note is for a three year term at an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by a secondary security interest in all of the Company’s assets excluding accounts receivable and certain intangible assets |
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
In September 2004 Mr. Hand was granted options to purchase 7,200 shares at $250.00 per share. The above options were granted under Wellstone's 1994 Stock Option Plan, as such plan was amended and restatedpaid by the Company in 2004. There were no options granted or exercised2011.
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | |||
(a) | (1) | Financial Statements | ||
Index to consolidated financial statements: | Page | |||
Financial Statements of Auri Design Group, LLC | ||||
Report of Independent Registered Public | F-1 | |||
Accounting Firm | ||||
Balance Sheets as of | F-2 | |||
December 31, 2010 and 2009 | ||||
Statements of Operations and Accumulated Deficit | F-3 | |||
For the Years Ended | ||||
December 31, 2010 and 2009 | ||||
Statements of Changes in Members' Equity | F-4 | |||
For the Years Ended | ||||
December 31, 2010 and 2009 | ||||
Statements of Cash Flows | F-5 | |||
For The Years | ||||
Ended December 31, 2010 and 2009 | ||||
Notes to Financial Statements | F-8 | |||
Financial Statements of Auri, Inc. (formerly known as Wellstone Filter Sciences, Inc.) | ||||
Report of Independent Registered Public | F-15 | |||
Accounting Firm | ||||
Consolidated Balance Sheets as of | F-17 | |||
December 31, 2010 and 2009 | ||||
Consolidated Statements of Operations | F-18 | |||
For the Years Ended December 31, 2010 and 2009 | ||||
and the Period From February 17, 1998 (date of inception) | ||||
to December 31, 2010 | ||||
Consolidated Statement of Changes in Stockholders’ Equity Deficit | F-19 | |||
From Date of Inception (February 17, 1998) | ||||
Through December 31, 2010 | ||||
Condensed Consolidated Statements of Cash Flows | F-21 | |||
From Date of Inception (February 17, 1998) | ||||
Through December 31, 2010 | ||||
Notes to Financial Statements | F-22 | |||
Pro Forma Unaudited Consolidated Balance Sheet | ||||
Pro Forma Unaudited Consolidated Balance Sheet (Auri Design Group, LLC and Auri, Inc. (formerly | F-__ | |||
known as Wellstone Filter Sciences, Inc.) |
Wellstone has no long term incentive plans other thanMembers of
The following table sets forth information relating to the beneficial ownershipaccompanying balance sheets of Company common stock as of the date of this report by (i) each person known by Wellstone to be the beneficial owner of more than 5% of the outstanding shares of common stock (ii) each of Wellstone's directors and executive officers, and (iii) all officers and directors as a group. Unless otherwise noted below, Wellstone believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities. Each beneficial owner's percentage ownership is determined by assuming that any warrants, options or convertible securities that are held by such person (but not tho se held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised.
Name and Address
Common Stock
Percentage
Learned Jeremiah Hand(1)(2)
74,468,473
79.6%
Chief Executive Officer
Carla Cerami Hand, MD, PhD(1)(2)
74,468,473
79.6%
All officers and directors
as a group (1 person)
74,468,473
79.6%
* less than 1%
(1)The business address of each of these persons is 710 Market Street, Chapel Hill, North Carolina 27516
(2)Ms. Cerami Hand and Mr. Learned Jeremiah Hand are wife and husband. The 74,468,473 shares listed as beneficially owned by Mr. Learned Jeremiah Hand include 9,679,233 shares which are controlled by Carla Cerami Hand, as stated below; 7,200 shares issuable upon exercise of stock options, and 9,240 shares held through a family limited partnership controlled by him. Mr. Hand disclaims beneficial ownership of such 59,670,233 shares. Ms. Cerami is the sole limited partner of a partnership which holds 46,093 shares, is the owner of Cerami Consulting Corp. which owns 9,623,900 shares., and also controls 9,240 shares held via a trust, and may be deemed to beneficially own the 64,789,240 shares controlled by Learned Jeremiah Hand. She disclaims beneficial ownership of the 64,789,240 shares controlled by Learned Jeremiah Hand.
Equity Compensation Plans
Equity Compensation Plan InformationAuri Design Group, LLC (the “Company”) as of December 31, 2010 and 2009
Number and the related statements of Securities
remaining available
(a)
(b)
operations, changes in members’ equity and cash flows for future issuance
Numberthe years then ended. These financial statements are the responsibility of Securities
Weighted Average
under equity
To be issued upon
exercise pricethe Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
compensation plans
exercise the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of existing outstanding options, (excluding Securities
Options, warrants
warrants and
reflectedmaterial misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
Plan Category
and rights
rights
column (a)
Equity compensation
7,200
$250 9,600
approved by
Security holders
Equity compensation
-
-
-
Plans the circumstances, but not approved
By Security holders
Total
7,200
9,600
22
Mr. Learned Hand,for the purpose of expressing an officer and director, advanced $28,940 to Wellstone for expensesopinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a non-interest bearingtest basis, which had not been reimbursedevidence 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.
AURI DESIGN GROUP, LLC | ||
BALANCE SHEETS | ||
DECEMBER 31, 2010 AND 2009 | ||
2010 | 2009 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 406,439 | $ | 22,931 | ||||
Accounts receivable - net | 104,355 | 159,848 | ||||||
Due from factor | 15,796 | - | ||||||
Inventory - net | 226,773 | 196,507 | ||||||
Prepaid expenses and other assets | 116,320 | 21,268 | ||||||
Deferred finance fee - net | 18,778 | - | ||||||
Total Current Assets | 888,461 | 400,554 | ||||||
Property and equipment - net | 85,035 | 69,082 | ||||||
Total Assets | $ | 973,496 | $ | 469,636 | ||||
LIABILITIES AND MEMBERS' CAPITAL ACCOUNTS | ||||||||
Accounts payable | $ | 85,337 | $ | 53,280 | ||||
Accrued liabilities | 46,132 | 50,309 | ||||||
Short-term portion of long-term note payable | 12,500 | - | ||||||
Short-term portion of long-term related party note payable | 4,167 | - | ||||||
Short-term convertible note payable | 500,000 | - | ||||||
Total Current Liabilities | 648,136 | 103,589 | ||||||
Long-term note payable - net of short term portion | 137,500 | - | ||||||
Long-term related party note payable - net of short term portion | 45,833 | - | ||||||
Total Liabilities | 831,469 | 103,589 | ||||||
MEMBERS' CAPITAL ACCOUNTS | 142,027 | 366,047 | ||||||
Total Liabilities and Members' Capital Accounts | $ | 973,496 | $ | 469,636 |
AURI DESIGN GROUP, LLC | ||||||||
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT | ||||||||
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 | ||||||||
2010 | 2009 | |||||||
SALES | ||||||||
Men's sales - net | $ | 431,832 | $ | 569,981 | ||||
Women's sales - net | 133,664 | - | ||||||
565,496 | 569,981 | |||||||
Reboxing, shipping and delivery, and other sales | 12,469 | 7,610 | ||||||
Total Sales | 577,965 | 577,591 | ||||||
COST OF GOODS SOLD | 448,493 | 439,608 | ||||||
GROSS PROFIT | 129,472 | 137,983 | ||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 1,131,465 | 1,029,357 | ||||||
LOSS FROM OPERATIONS | (1,001,993 | ) | (891,374 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Interest and other income | 936 | 882 | ||||||
Interest expense | (14,108 | ) | - | |||||
Total other income (expense) | (13,172 | ) | 882 | |||||
NET LOSS | (1,015,165 | ) | (890,492 | ) | ||||
ACCUMULATED DEFICIT, BEGINNING OF YEAR | (2,781,754 | ) | (1,891,262 | ) | ||||
ACCUMULATED DEFICIT, END OF YEAR | $ | (3,796,919 | ) | $ | (2,781,754 | ) |
AURI DESIGN GROUP, LLC | ||||||||||||||||
STATEMENTS OF CHANGES IN MEMBERS' EQUITY | ||||||||||||||||
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009 | ||||||||||||||||
Membership | Member | Accumulated | ||||||||||||||
Units | Contributions | Deficit | Total | |||||||||||||
Balance, December 31, 2008 | 2,705,403 | $ | 2,705,403 | $ | (2,463,647 | ) | $ | 241,756 | ||||||||
Contributions | 549,963 | 549,963 | - | 549,963 | ||||||||||||
Membership units exchanged for services | 464,820 | 464,820 | - | 464,820 | ||||||||||||
Net loss | - | - | (890,492 | ) | (890,492 | ) | ||||||||||
Balance, December 31, 2009 | 3,720,186 | 3,720,186 | (3,354,139 | ) | 366,047 | |||||||||||
Contributions | 486,950 | 486,950 | - | 486,950 | ||||||||||||
Membership units exchanged for services | 304,195 | 304,195 | - | 304,195 | ||||||||||||
Net loss | - | - | (1,015,165 | ) | (1,015,165 | ) | ||||||||||
Balance, December 31, 2010 | 4,511,331 | $ | 4,511,331 | $ | (4,369,304 | ) | $ | 142,027 |
AURI DESIGN GROUP, LLC | ||||||||
STATEMENTS OF CASH FLOWS | ||||||||
FOR THE YEAR ENDED DECEMBER 31, 2010 AND 2009 | ||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,015,165 | ) | $ | (890,492 | ) | ||
Adjustments to reconcile net loss to cash | ||||||||
used in operating activities | ||||||||
Depreciation and amortization | 54,936 | 21,316 | ||||||
Profit interest units exchanged for services | 334,588 | 464,820 | ||||||
Changes in: | ||||||||
Accounts receivable | 55,493 | (120,175 | ) | |||||
Due from factor | (15,796 | ) | - | |||||
Inventory | (30,266 | ) | (29,706 | ) | ||||
Prepaid expenses and other current assets | (95,052 | ) | (21,268 | ) | ||||
Accounts payable | 32,057 | 43,583 | ||||||
Accrued expenses | (4,177 | ) | 16,080 | |||||
Net cash used in operating activities | (683,382 | ) | (515,842 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Cash paid for purchase of property and equipment | (69,667 | ) | (76,149 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of short-term convertible note payable | 480,000 | - | ||||||
Proceeds from issuance of long-term related party note payable | 50,000 | - | ||||||
Proceeds from issuance of long-term note payable | 150,000 | - | ||||||
Proceeds from capital contributions | 456,557 | 549,963 | ||||||
Net cash provided by financing activities | 1,136,557 | 549,963 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 383,508 | (42,028 | ) | |||||
Cash and Cash Equivalents - Beginning | 22,931 | 64,959 | ||||||
CASH AND CASH EQUIVALENTS - ENDING | $ | 406,439 | $ | 22,931 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 10,830 | $ | - | ||||
NON-CASH FINANCING ACTIVITIES: | ||||||||
Financing of loan acquisition costs | $ | 20,000 | $ | - |
2010 | 2009 | |||||||
On hand | $ | 232,080 | $ | 195,949 | ||||
Consignment | 16,015 | 15,538 | ||||||
Showroom | 1,876 | - | ||||||
Total | 249,971 | 211,487 | ||||||
Less: allowance for obsolescence | (23,198 | ) | (14,980 | ) | ||||
Net inventory | $ | 226,773 | $ | 196,507 |
2010 | 2009 | |||||||
Tooling, molds & dies | $ | 155,349 | $ | 85,908 | ||||
Furniture & equipment | 9,102 | 9,046 | ||||||
Total | 164,451 | 94,954 | ||||||
Less: accumulated depreciation | (79,416 | ) | (25,872 | ) | ||||
Net property & equipment | $ | 85,035 | $ | 69,082 |
2011 | $ | 12,500 | ||
2012 | 75000 | |||
2013 | 62500 | |||
Total | $ | 150,000 |
2011 | $ | 4,167 | ||
2012 | 25,000 | |||
2013 | 20,833 | |||
Total | $ | 50,000 |
Effective January 31, 2008, the Company entered into a two-year employment agreement with Andrew Tastad to serve as the Company’s Vice President of Sales, renewable annually in one-year increments. The agreement was automatically extended for one additional year on January 31, 2010 and again on January 31, 2011. |
Mr. Learned J. Hand has advanced the Company additional funds during 2007 in the amount of $61,144. Mr. Hand is under no commitment to continue to advance funds to the Company.
Carla Cerami Hand or Cerami Consulting Corporation and an entity controlled by Learned Hand loaned various amounts to Wellstone for its capital requirements prior to the year ended December 31, 2006. The loans are due on demand, bear interest at 8% per annum and are represented by promissory notes. As of December 31, 2009 and 2008, $36,644 and $34,671 had accrued as interest on these notes, none of which had been paid. These related party notes payable totaled $59,200 as of December 31, 2009 and 2008. All of these amounts with accrued interest were converted into common stock in May 2009.
The Company has a licensing agreement with Cerami Consulting Corporation, an entity owned and controlled by the spouse of the Company's Chief Executive Officer. The licensing agreement grants the Company the exclusive worldwide exploitation rights to practice and utilize the inventions, technology, know- how, and patent, including the rights to manufacture and market the filters which are the subject of the licensing agreement, that are held by Cerami Consulting Corporation. In exchange for the license rights, the Company agreed to pay all future costs for development, manufacture, and commercialization of the technology, including all other future fees and costs in connection with the patents.
Item 14 Principal Accountant Fees and Services.
Audit Fees
Item 14 Principal Accountant Fees and Services.
During the period covering the fiscal year ended December 31, 2009, our principal accounting firm Blackwing Group was paid review fees of $750 for reviewing our Form 10Q reports in 2009. During the period
23
Audit Committees pre-approval policies and procedures
We do not have an audit committee. Our engagement of Blackwing Group LLC, as our independent registered public accounting firm, was approved by the Board of Directors. No services described in Item 9(e)(2) through 9(e)(4) of Schedule 14A were performed by our auditors.
24
PART IV
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements. All Financial Statements are listed in Item 7. No schedules are required.
(b) Exhibits. The following exhibits of the Company are included herein.
2. Plan of acquisition, reorganization, arrangement, liquidation or succession.
3.6
10. Material Contracts
10.10 Lease Extension Agreement with U.S. Flue-Cured Tobacco Growers Inc., dated May 2, 2005 (5)
32.1 Certification of Chief Executive and Financial Officer pursuant to 18 U.S.C. Section 1350(11).
(1) Incorporated by reference to the Company's Registration Statement on Form 10-SB, file no. 0-28161.
(2) Incorporated by reference to the Company's Current Report on Form 8-K, dated May 25, 2001.
(3) Incorporated by reference to the Company's Current Report on Form 8-K dated August 6, 2001.
(4) Incorporated by reference to the Company's Current Report on Form 8-K, dated December 3, 2004.
(5) Incorporated by reference to the Company's amended Annual Report on Form 10-KSB/A, dated December 31, 2004.
25
(6) Incorporated by reference to the Company's Current Report on Form 8-K, dated December 25, 2005.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB, dated December 31, 2004.
(8) Incorporated by reference to the Company's Current Report on Form 8-K, dated January 22, 2007.
(9) Incorporated by reference to the Company's Annual Report on Form 10-KSB, dated December 31, 2006.
(10) Incorporated by reference to the Company's Annual Report on Form 10-KSB, dated December 31, 2008.
(11) Filed herewith.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on April 10, 2010.
WELLSTONE FILTER SCIENCES, INC.
By:/s/ Learned Jeremiah Hand
Learned Jeremiah Hand
CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on April 10, 2010.
By:/s/Learned Jeremiah Hand
CEO and Director
Learned Jeremiah Hand
(principal executive officer and acting
accounting and financial officer)
27
Child, Van Wagoner & Bradshaw PLLC
Certified Public Accountants
WFSI.
WELLSTONE FILTERS, INC. | ||
(a development stage company) | ||
CONSOLIDATED BALANCE SHEETS | ||
DECEMBER 31, 2010 AND 2009 |
2010 | 2009 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 100 | $ | 2,424 | ||||
Total assets | $ | 100 | $ | 2,424 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT: | ||||||||
Current liabilities: | ||||||||
Notes payable | $ | - | $ | 1,500,000 | ||||
Accounts payable | - | 561,178 | ||||||
Due to related party | 5,714 | - | ||||||
Accrued expenses | 4,500 | 678,671 | ||||||
Total current liabilities | 10,214 | 2,739,849 | ||||||
Total Liabilities | 10,214 | 2,739,849 | ||||||
Stockholders' deficit: | ||||||||
Preferred stock, $0.001 par value; 1,000,000 shares authorized, no shares issued and outstanding | - | - | ||||||
Common stock, $0.001 par value, 300,000,000 shares authorized, 93,551,580 shares issued and outstanding | 93,552 | 93,552 | ||||||
Additional paid in capital | 35,628,824 | 32,843,175 | ||||||
Deficit accumulated during development stage | (35,732,490 | ) | (35,674,152 | ) | ||||
Total stockholders' deficit | (10,114 | ) | (2,737,425 | ) | ||||
Total liabilities and stockholders' deficit | $ | 100 | $ | 2,424 | ||||
The accompanying notes are an integral part of the financial statements |
WELLSTONE FILTERS, INC. | |||
(a development stage company) | |||
CONSOLIDATED STATEMENTS OF OPERATIONS |
1998 (inception) | Year ended December 31, | From February 17, 1998 through | ||||||||||
2010 | 2009 | December 31, 2010 (Unaudited) | ||||||||||
Revenues | $ | - | $ | - | $ | 258,193 | ||||||
Cost of goods sold | - | - | 273,075 | |||||||||
Gross profit | - | - | (14,883 | ) | ||||||||
Operating expenses: | ||||||||||||
Selling, general and administrative expenses | 12,538 | 2,976,678 | 34,214,003 | |||||||||
Research and development | - | - | 237,269 | |||||||||
Total operating expenses | 12,538 | 2,976,678 | 34,451,272 | |||||||||
Net loss from operations | (12,538 | ) | (2,976,678 | ) | (34,466,155 | ) | ||||||
Other income (expense): | ||||||||||||
Interest expense | - | (92,931 | ) | (1,567,609 | ) | |||||||
Forgiveness of debt | - | - | 347,074 | |||||||||
Net loss before provision for income taxes | (12,538 | ) | (3,069,609 | ) | (35,686,690 | ) | ||||||
Provision for income taxes | - | - | - | |||||||||
Net loss from continuing operations | (12,538 | ) | (3,069,609 | ) | (35,686,690 | ) | ||||||
(Loss) from discontinued operations | (45,800 | ) | - | (45,800 | ) | |||||||
NET LOSS | $ | (58,338 | ) | $ | (3,069,609 | ) | $ | (35,732,490 | ) | |||
Net income (loss) per common stock (basic and fully diluted): | ||||||||||||
Continuing operations | $ | (0.00 | ) | $ | (0.05 | ) | ||||||
Discontinued operations | $ | (0.00 | ) | $ | - | |||||||
Total | $ | (0.00 | ) | $ | (0.05 | ) | ||||||
Weighted average shares outstanding (basic and fully diluted) | 93,551,580 | 58,627,096 | ||||||||||
The accompanying notes are an integral part of the financial statements |
WELLSTONE FILTER SCIENCES, INC. | |||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT | |||||||||
FROM DATE OF INCEPTION (FEBRUARY 17, 1998) THROUGH DECEMBER 31, 2010 | |||||||||
(unaudited from February 17, 1998 through December 31, 2007) |
Additional | ||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid In | Subscription | Accumulated | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Total | |||||||||||||||||||||||||
Balance, February 17, 1998 | - | $ | - | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||
Restatement for capitalization | - | - | 84,000 | 84 | (84 | ) | - | - | - | |||||||||||||||||||||||
Capital contributions | - | - | - | - | - | - | 100 | 100 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (6,675 | ) | (6,675 | ) | ||||||||||||||||||||||
Balance, December 31, 1998 | - | - | 84,000 | 84 | (84 | ) | - | (6,575 | ) | (6,575 | ) | |||||||||||||||||||||
Net loss | - | - | - | - | - | - | (969 | ) | (969 | ) | ||||||||||||||||||||||
Balance, December 31, 1999 | - | - | 84,000 | 84 | (84 | ) | - | (7,544 | ) | (7,544 | ) | |||||||||||||||||||||
Net loss | - | - | - | - | - | - | (21,395 | ) | (21,395 | ) | ||||||||||||||||||||||
Balance, December 31, 2000 | - | - | 84,000 | 84 | (84 | ) | - | (28,939 | ) | (28,939 | ) | |||||||||||||||||||||
Acquisition of Farallon Corporation | - | - | 8,400 | 8 | (2,850 | ) | - | - | (2,842 | ) | ||||||||||||||||||||||
Stock issued in cancellation of debt | - | - | 2,387 | 3 | 2,840 | - | - | 2,843 | ||||||||||||||||||||||||
Reclassification of members' contribution to additional paid in capital | - | - | - | - | 100 | - | (100 | ) | - | |||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (8,218 | ) | (8,218 | ) | ||||||||||||||||||||||
Balance, December 31, 2001 | - | - | 94,787 | 95 | 6 | - | (37,257 | ) | (37,156 | ) | ||||||||||||||||||||||
Additional paid in capital | - | - | - | - | 16,800 | - | - | 16,800 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (35,033 | ) | (35,033 | ) | ||||||||||||||||||||||
Balance, December 31, 2002 | - | - | 94,787 | 95 | 16,806 | - | (72,290 | ) | (55,389 | ) | ||||||||||||||||||||||
Additional paid in capital | - | - | - | - | 12,600 | - | - | 12,600 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (72,694 | ) | (72,694 | ) | ||||||||||||||||||||||
Balance, December 31, 2003 | - | - | 94,787 | 95 | 29,406 | - | (144,984 | ) | (115,483 | ) | ||||||||||||||||||||||
Common stock issued for cash | - | - | 230 | - | 195,000 | - | - | 195,000 | ||||||||||||||||||||||||
Common stock issued for services | - | - | 6,000 | 6 | 6,269,994 | - | - | 6,270,000 | ||||||||||||||||||||||||
Stock options issued to consultants | - | - | - | - | 654,946 | - | - | 654,946 | ||||||||||||||||||||||||
Stock options issued to officers and employees | - | - | - | - | 13,555,000 | - | - | 13,555,000 | ||||||||||||||||||||||||
Warrants issued for debt | - | - | - | - | 1,020,000 | - | - | 1,020,000 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (20,802,580 | ) | (20,802,580 | ) | ||||||||||||||||||||||
Balance, December 31, 2004 | - | $ | - | 101,017 | $ | 101 | $ | 21,724,346 | $ | - | $ | (20,947,564 | ) | $ | 776,883 |
28
WELLSTONE FILTER SCIENCES, INC. | ||||||||
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT | ||||||||
FROM DATE OF INCEPTION (FEBRUARY 17, 1998) THROUGH DECEMBER 31, 2010 | ||||||||
(unaudited from February 17, 1998 through December 31, 2007) |
Additional | ||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid In | Subscription | Accumulated | ||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Total | |||||||||||||||||||||||||
Balance forward | - | $ | - | 101,017 | $ | 101 | $ | 21,724,346 | $ | - | $ | (20,947,564 | ) | $ | 776,883 | |||||||||||||||||
Common stock issued for exercise of options | - | - | 240 | - | 2,000 | - | - | 2,000 | ||||||||||||||||||||||||
Common stock issued for services | - | - | 1,800 | 2 | 4,589,998 | - | - | 4,590,000 | ||||||||||||||||||||||||
Stock options issued to employees | - | - | - | - | 1,920,000 | - | - | 1,920,000 | ||||||||||||||||||||||||
Employee subscription receivable | - | - | 1,040 | 1 | 25,999 | (26,000 | ) | - | - | |||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (8,675,439 | ) | (8,675,439 | ) | ||||||||||||||||||||||
Balance, December 31, 2005 | - | - | 104,097 | 104 | 28,262,343 | (26,000 | ) | (29,623,003 | ) | (1,386,556 | ) | |||||||||||||||||||||
Common stock issued for exercise of options | - | - | 240 | - | 2,000 | - | - | 2,000 | ||||||||||||||||||||||||
Payment of subscription receivable | - | - | - | - | - | 26,000 | - | 26,000 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (2,772,581 | ) | (2,772,581 | ) | ||||||||||||||||||||||
Balance, December 31, 2006 | - | - | 104,337 | 104 | 28,264,343 | - | (32,395,584 | ) | (4,131,137 | ) | ||||||||||||||||||||||
Shares issued for rounding in reverse split | - | - | 1,652 | 2 | - | - | - | - | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (77,054 | ) | (77,054 | ) | ||||||||||||||||||||||
Balance, December 31, 2007 | - | - | 105,989 | 106 | 28,264,343 | - | (32,472,638 | ) | (4,208,191 | ) | ||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (131,905 | ) | (131,905 | ) | ||||||||||||||||||||||
Balance, December 31, 2008 | - | - | 105,989 | 106 | 28,264,343 | - | (32,604,543 | ) | (4,340,096 | ) | ||||||||||||||||||||||
Stock issued on conversion of debt | - | - | 33,928,231 | 33,928 | 1,662,483 | - | - | 1,696,411 | ||||||||||||||||||||||||
Stock based compensation from conversion of debt | - | - | 59,517,360 | 59,518 | 2,916,351 | - | - | 2,975,869 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (3,069,609 | ) | (3,069,609 | ) | ||||||||||||||||||||||
Balance, December 31, 2009 | - | - | 93,551,580 | 93,552 | 32,843,177 | - | (35,674,152 | ) | (2,737,425 | ) | ||||||||||||||||||||||
Cancellation of debt in connection with the spinoff of wholly owned subsidiary | - | - | - | - | 2,785,649 | - | - | 2,785,649 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (58,338 | ) | (58,338 | ) | ||||||||||||||||||||||
Balance, December 31, 2010 | - | $ | - | 93,551,580 | $ | 93,552 | $ | 35,628,826 | $ | - | $ | (35,732,490 | ) | $ | (10,114 | ) |
The accompanying notes are an integral part of the financial statements |
WELLSTONE FILTERS, INC. | |||
(a development stage company) | |||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
Year ended December 31, | From February 17, 1998 through | |||||||||||
2010 | 2009 | December 31, 2010 (Unaudited) | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net (loss) from continuing operations | $ | (12,538 | ) | $ | (3,069,609 | ) | $ | (35,686,690 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Losses on discontinued operations | (45,800 | ) | (45,800 | ) | ||||||||
Depreciation | - | - | 25,595 | |||||||||
Common stock issued in exchange for services rendered | - | 2,975,869 | 13,835,869 | |||||||||
Fair value of options issued for services rendered | - | - | 654,946 | |||||||||
Fair value of options issued as compensation | - | - | 15,475,000 | |||||||||
Amortization of debt discount | - | - | 1,020,000 | |||||||||
Fair value of rental expense forgiven by related party | - | - | 29,400 | |||||||||
Loss on disposal of equipment | - | - | 1,795 | |||||||||
Increase (decrease) in: | ||||||||||||
Bank Overdraft | 45 | |||||||||||
Accounts payable | 15,800 | 750 | 574,494 | |||||||||
Due from related party | 5,714 | 2,484 | 119,634 | |||||||||
Accrued expenses | 34,500 | 92,930 | 1,477,734 | |||||||||
Net cash (used in) provided by operating activities: | (2,324 | ) | 2,424 | (2,517,978 | ) | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Purchase of fixed assets | - | - | (16,222 | ) | ||||||||
Net cash used in investing activities | - | - | (16,222 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Proceeds from sale of common stock | - | - | 199,000 | |||||||||
Proceeds from exercise of options | - | - | 26,000 | |||||||||
Proceeds from borrowing on a long term basis | - | - | 2,250,000 | |||||||||
Member contribution to equity | - | - | 100 | |||||||||
Proceeds from related party note payable | - | - | 59,200 | |||||||||
Net cash provided by financing activities: | - | - | 2,534,300 | |||||||||
Net increase in cash and cash equivalents | (2,324 | ) | 2,424 | 100 | ||||||||
Cash and cash equivalents, beginning of the period | 2,424 | - | - | |||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the period for interest | $ | - | $ | - | $ | - | ||||||
Cash paid during the period for income taxes | $ | - | $ | - | $ | - | ||||||
Stock issued on conversion of debt | $ | - | $ | 1,696,411 | $ | 1,696,411 | ||||||
Dividend in kind | $ | 2,785,649 | $ | - | $ | 2,785,649 | ||||||
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
DECEMBER 31,
2009
2008
Current Assets
Cash and cash equivalents
$
2,424
$
--
Total Current Assets
2,424
--
Furniture and equipment, net
--
--
Total Property and Equipment
--
--
Total Assets
$
2,424
$
--
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Note payable – due on demand – Note 12
$
1,500,000
$
2,250,000
Accounts payable
561,178
557,944
Related party accounts payable
--
116,728
Accrued expenses
678,671
1,356,224
Note payable to affiliate
--
59,200
Total Current Liabilities
2,739,849
4,340,096
Total Liabilities
2,739,849
4,340,096
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.001 par value, 1,000,000
shares authorized; no shares issued and outstanding
--
--
Common stock, $0.001 par value, 300,000,000 shares
authorized; 93,551,580 and 105,989 outstanding,
respectively
93,552
106
Additional Paid In Capital
32,843,175
28,264,340
Accumulated Deficit
(35,674,152)
(32,604,542)
Total stockholders' deficit
(2,737,425)
(4,340,096)
Total Liabilities and Stockholders’ Deficit
$
2,424
$
--
See accompanying Notes to Financial Statements.
29
WELLSTONE FILTER SCIENCES, INC.
CONSOLIDATED
YEAR ENDED
DECEMBER 31,
FEBRUARY 17, 1998 (inception)
______________________
THROUGH
2009
2008
DEC. 31, 2009
(Unaudited)
REVENUES
$
--
$
--
$
258,193
Cost of Sales
$
--
$
--
$
273,075
Gross profit
$
--
$
--
$
(14,883)
EXPENSES
General and administrative
2,976,678
6,044
34,201,465
Research and development
--
--
237,269
Loss from operations
(2,976,678)
(6,044)
(34,438,734)
OTHER INCOME (EXPENSE)
Interest expenses
92,931
125,861
1,567,609
Total other income (expense)
(92,931)
(125,861)
(1,567,609)
Loss before income taxes
$
(3,069,609)
$
(131,905)
$
(36,021,226)
Forgiveness of debt
$
--
$
--
$
347,074
Income tax benefit
--
--
--
Net loss
$
(3,069,609)
$
(131,905)
$
(35,674,152)
LOSS PER COMMON SHARE - BASIC
(0.05)
(1.24)
Basic weighted average shares outstanding
58,627,096
105,989
See accompanying Notes to Financial Statements.
30
WELLSTONE FILTER SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
THROUGHENDING DECEMBER 31, 2009
2010
Additional
Common Stock
Paid In
Subscription
Accumulated
Total
Shares
Amount
Capital
Receivable
Deficit
Capital
Balance, February 17, 1998
--
$
--
$
--
$
--
$
--
$
--
Restatement for recapitalization
84,000
84
(84)
--
--
--
Capital contributions
--
--
--
--
100
100
Net loss
--
--
--
--
(6,675)
(6,675)
Balance, December 31, 1998
84,000
84
(84)
--
(6,575)
(6,575)
Net loss
--
--
--
--
(969)
(969)
Balance, December 31, 1999
84,000
84
(84)
--
(7,544)
(7,544)
Net loss
--
--
--
--
(21,395)
(21,395)
Balance, December 31, 2000
84,000
84
(84)
--
(28,939)
(28,939)
Acquisition of Farallon Corporation
8,400
8.4
(2,850)
--
--
(2,842)
Stock issued in cancellation of debt
2,387
2.4
2,840
--
--
2,842
Reclassification of members' contribution to
additional paid-in capital
--
--
100
--
(100)
--
Net loss
--
--
--
--
(8,218)
(8,218)
Balance, December 31, 2001
94,787
95
6
--
(37,257)
(37,156)
Additional paid-in capital
--
--
16,800
--
--
16,800
Net loss
--
--
--
--
(35,033)
(35,033)
31
WELLSTONE FILTER SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
THROUGH DECEMBER 31, 2009
(unaudited from February 17, 1998 (inception) to December 31, 2007)
Additional
Common Stock
Paid In
Subscription
Accumulated
Total
Shares
Amount
Capital
Receivable
Deficit
Capital
Balance, December 31, 2002
94,787
$
95
$
16,806
$
--
$
(72,290)
$
(55,389)
Additional paid-in capital
--
--
12,600
--
--
12,600
Net loss
--
--
--
--
(72,694)
(72,694)
Balance, December 31, 2003
94,787
95
29,406
--
(144,984)
(115,483)
Common stock issued for:
Cash
230
0.23
195,000
--
--
195,000
Services (related party)
6,000
6
6,269,994
--
--
6,270,000
Stock options issued to:
Consultants
--
--
654,946
--
--
654,496
Officers / employees
--
--
13,555,000
--
--
13,555,000
Warrants issued with Debt
--
--
1,020,000
--
--
1,020,000
Net loss
--
--
--
--
(20,802,580)
(20,802,580)
Balance, December 31, 2004
101,017
101
21,724,346
--
(20,947,564)
776,882
See accompanying Notes to Financial Statements.
32
WELLSTONE FILTER SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
THROUGH DECEMBER 31, 2009
(unaudited from February 17, 1998 (inception) to December 31, 2007)
Additional
Common Stock
Paid In
Subscription
Accumulated
Total
Shares
Amount
Capital
Receivable
Deficit
Capital
Common stock issued for:
Exercise of stock options
240
0.24
2,000
--
--
2,000
Services
1,800
2
4,589,998
--
--
4,590,000
Stock options issued to employees
--
--
1,920,000
--
--
1,920,000
Employee subscription receivable
1,040
1
25,999
(26,000)
--
--
Net loss
--
--
--
--
(8,675,439)
(8,675,439)
Balance, December 31, 2005
104,097
104
28,262,343
(26,00)
(29,623,003)
(1,386,556)
Stock issued on exercise of options
--
0.24
2,000
--
--
2,000
Payment of subscription receivable
240
--
--
26,000
--
26,000
Net loss
--
--
--
--
(2,772,581)
(2,772,581)
Balance, December 31, 2006
104,337
104
28,264,343
--
(32,395,584)
(4,131,137)
See accompanying Notes to Financial Statements.
33
WELLSTONE FILTER SCIENCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
THROUGH DECEMBER 31, 2009
(unaudited from February 17, 1998 (inception) to December 31, 2007)
Additional
Common Stock
Paid In
Subscription
Accumulated
Total
Shares
Amount
Capital
Receivable
Deficit
Capital
Shares issued for rounding in reverse stock split
2
-2
--
--
--
--
Net loss for the year ended December 31, 2007)
--
--
--
--
(77,053)
(77,053)
Balance, December 31, 2007
105,989
106
28,264,341
--
(32,472,637)
(4,208,191)
Net loss
(year months ended December 2008)
--
--
--
--
(131,905)
(131,905)
Balance, December 31, 2008
105,989
106
$
28,264,341
--
(32,604,542)
(4,340,096)
Stock issued on conversion of debt
33,928,231
33,928
1,662,483
--
--
1,696,411
Stock-based compensation from conversion of debt
59,517,360
59,518
2,916,351
-
-
2,975,869
Net loss
for the year ended December 31, 2009
--
--
--
--
(3,069,609)
(3,069,609)
Balance, December 31, 2009
93,551,580
$
93,552
$
32,843,175
--
$
(35,674,152)
$(2,737,425)
See accompanying Notes to Financial Statements.
34
WELLSTONE FILTER SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE
FROM INCEPTION
YEARS ENDED
(February 17, 1998)
DECEMBER 31,
THROUGH
______________________
DECEMBER 31,
2009
2008
2009
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
$
(3,069,609)
$
(131,905)
$
(35,674,152)
Adjustments to reconcile net loss to net cash
used in operating activities:
Issuance of common stock for services
2,975,869
--
13,835,869
Issuance of stock options for services
--
--
654,946
Issuance of stock options to employees as compensation
--
--
15,475,000
Amortization of debt discount
--
--
1,020,000
Depreciation
--
1,294
25,594
Rental expense forgiven by officer and board member
--
--
29,400
Loss on disposal of furniture
--
--
1,795
(Increase)/decrease in inventory
--
--
--
Increase/(decrease) in bank overdraft
--
--
45
(Increase)/decrease in prepaid expenses
--
--
--
Increase/(decrease) in accounts payable
750
4,750
558,694
Increase/(decrease) in related party accounts payable
2,484
--
113,920
Increase/(decrease) in accrued expense
92,930
125,861
1,443,234
Net cash provided (used) by operating activities
2,424
--
(2,515,655)
Cash flows from investing activities:
Purchase of equipment
--
--
(16,222)
Net cash used by investing activities
--
--
(16,222)
Cash Flows from Financing Activities:
Proceeds from sale of common stock
--
--
199,000
Proceeds from exercise of stock options
--
--
26,000
Proceeds from long-term debt
--
--
2,250,000
Member contribution of equity
--
--
100
Proceeds from related party notes payable
--
--
59,200
Net cash provided by financing activities
--
--
2,534,300
Net increase (decrease) in cash
2,424
--
2,424
Cash, at beginning of period
--
--
--
Cash, at end of period
$
2,424
$
--
$
2,424
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest
$
--
$
--
$
--
Income taxes
$
--
$
--
$
--
Stock issued on conversion of debt
$
1,696,411
$
--
$
1,696,411
See accompanying Notes to Financial Statements
35
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These Consolidated financial statements include the accounts of the Company and its subsidiaries Wellstone Tobacco Company and Wellstone Filters, LLC. All significant intercompany transactions and accounts have been eliminated in consolidation.
Revenue Recognition
The Company recognizes revenues in accordance with the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”. The Company recognizes revenue from product sales when the orders are completed and shipped, provided that collection of the resulting receivable is reasonably assured. Amounts billed to customers are recorded as sales while the shipping costs are included in cost of sales. Returns on defective custom parts may only be exchanged for replacement parts within 30 days of the invoice date. Returns on defective catalogue parts, which can be resold, may be exchanged for replacement parts or for a refund. Revenue from non-refundable customer tooling deposits is recognized when the materials are shipped or when the deposit is forfeited, whichever is earlier.
For purposes of the statement of cash flows, the
36
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 1 –SIGNIFICANT ACCOUNTING POLICIES (continued)
Income tax
We are subject to income taxes in the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In accordance with FASB ASC Topic 740,“Income Taxes,”we provide for the recognition
Non-Cash Equity Transactions
Shares of equity instruments issued for non-cash consideration are recorded at the fair value of the consideration received based on the market value of services to be rendered, or at the value of the stock given, considered in reference to contemporaneous cash sale of stock.
Estimates
Fair Value Measurements
Effective beginning second quarter 2009, the FASB ASC Topic 825,Financial Instruments, requiresdisclosures aboutdisclosed; otherwise only available information pertinent to fair value has been disclosed.
37
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) tovalues. At December 31, 2007)
2010, there were no outstanding employee stock options
NOTE 1 –SIGNIFICANT ACCOUNTING POLICIES (continued)
Various inputs are considered when determining the value of the Company’s investments and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
·
Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
·
Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc…).
·
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The Company’s adoption of FASB ASC Topic 825 did not
The carrying valueposition, results of financial assets and liabilities recorded at fair value is measured on a recurringoperations or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company’s had no financial assets and/or liabilities carried at fair value on a recurring basis at December 31, 2009.
cash flows.
The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment. As of December 31, 2009, the Company had no assets.
Basic and diluted earnings per share
Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted Earnings per share is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:
38
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 1 –SIGNIFICANT ACCOUNTING POLICIES (continued)
·
Warrants,
·
Employee stock options, and
·
Other equity awards, which include long-term incentive awards.
The FASB ASC Topic 260,Earnings Per Share, requires the Company to include additional shares in the computation of earnings per share, assuming dilution.
Diluted earnings per share is based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Basic and diluted earnings per share are the same as there was no dilutive effect of the outstanding stock options for the three and nine months ended September 30, 2009 and 2008.
Concentrations, Risks, and Uncertainties
The Company did not have a concentration of business with suppliers or customers constituting greater than 10% of the Company’s gross sales during 2009 and 2008.
Subsequent Events
In May 2009, the FASB issued accounting guidance now codified as FASB ASC Topic 855, “Subsequent Events,”which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC Topic 855 is effective for interim or fiscal periods ending after June 15, 2009. Accordingly, the Company adopted the provisions of FASB ASC Topic 855 on July 9, 2009. The Company has evaluated subsequent events for the period from September 30, 2009, the date of these financial statements, through April 13, 2010, which represents the date these financial statements are being filed with the Commission. Pursuant to the requirements of FASB ASC Topic 855, subsequent events are disclosed in Note 16.
Stock Based Compensation
For purposes of determining the variables used in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, “Equity” and FASB ASC Topic 718, “Compensation — Stock Compensation,”we perform an analysis of current market
39
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 1 –SIGNIFICANT ACCOUNTING POLICIES (continued)
data and historical company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material effect on the results presented in our Condensed Consolidated Statement of Operations and Other Comprehensive Income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our financial statements.
GOING CONCERN MATTERS
Accounting Standards Codification
In June 2009,
NOTE 3- GOING CONCERN
The Company incurred a net loss of $3,069,609 and $131,905 for the years ended December 31, 20092010, the Company has incurred losses of $58,338 and 2008,$35,719,974, respectively. The Company's liabilities exceed its assets by $2,737,425In addition, as of December 31, 2009. The2010, the Company has not received revenues for more than two years.had a working capital deficit of $10, 114 and no revenue generating operations. These factors, create substantial doubt aboutamong others, indicate that the Company's abilityCompany may be unable to continue as a going concern.
develop profitable operations which will resolve its liquidity problems. The ability of the Company to continue as a going concern is dependent on securing additional sources of capital and the success of the Company's plan. Theaccompanying consolidated financial statements do not include any adjustments that might be necessary ifmay result should the Company isbe unable to continue as a going concern.
40
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception)
obtain financing for its operations. However, no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems.
4 -.
The notes payable - related party consist of loans from officers of the Company. The amounts are unsecured, bearing interest rates between 5% to 8% and are due on demand. Accrued interest on the notes was $37,109 as of December 31, 2008. The notes totaling $81,700 and interest accrued of $40,049 as of June 30, 2009 were converted into shares of common stock at a price of $.01 per share as of June 30, 2009.
The Company has a licensing agreement with Cerami Consulting Corporation,
5. SUPPLEMENTAL CASH FLOW INFORMATION
No amounts were paid for interest or income taxes during the period from February 17, 1998 (date of inception) to December 31, 2009. Effective June 30, 2009, the Company converted $953,444 in debt owed to third parties into 19,048,891 shares of common stock, and converted $743,967 in debt owed to affiliates into 74,396,700 shares. See note 7.
6. LIQUIDITY
The Company launched its Wellstone brand of cigarettes in the United States during the first quarter of 2006 and has shipped all brand styles to Arizona, Louisiana, North Carolina, Virginia and California. Additionally, the Company had partnered with several suppliers of convenience stores in the Southeastern and the West Coast to carry the Wellstone brand family. Faced with inadequate cash resources to fund the market introduction of its products; management determined to suspend further marketing activity in 2006 and to concentrate on selling filters to other manufacturers. The Company is funding its cash needs from funds lent by its officer and director.
7bear no interest.
AND DISTRIBUTION AGREEMENT
41
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 7 – NOTES PAYABLE - RESTRUCTURING-(continued)
million note and $202,444 in accrued interest on the other two notes. Effective June 30,During 2009, the noteholdersnote holders of the $250,000 and $500,000$750,000 notes agreed to convert their notes and the $202,444 into 19,048,891 shares of commons stock.
shares.
NOTE 8 – STOCK SPLITS AND STOCK DIVIDENDS
The Company has declared and affected the following stock splits and dividends:
- A five for one stock split in July 2003
- A four-tenths for one stock dividend in September 2003
- A three for one stock split in September 2004
- A one for 25 reverse stock split in June 2006
- A one for 100 reverse stock split in January 2007
All share amounts in the consolidated financial statements have been retroactively restated to reflect these stock splits and dividend.
The Company accounts for income taxes using the liability method; under which deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.
NOTE 9 – INCOME TAXES – Continued
As of December 31, 2009, the Company had net operating loss carryforwards of approximately $35,674,152, which expire in varying amounts between 2017 and 2027. Realization of this potential future tax benefit is dependent on generating sufficient taxable income prior to expiration of the loss carryforward. The deferred tax asset related to this (and other) potential future tax benefits has been offset by a valuation allowance in the same amount. The amount of the deferred tax asset ultimately realizable could be increased in the near term if estimates of future taxable income during the carryforward period are revised.
Deferred income tax assets of $14,947,468 and $13,661,302at December 31, 2009 and 2008, respectively were offset in full by a valuation allowance.
42
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 9 – INCOME TAXES – Continued
The components of the Company's net deferred tax assets, including a valuation allowance, are as follows:
Deferred Tax Assets | As of December 31, 2009 | As of December 31, 2008 |
Net operating loss carryforwards | $1,807,845 | $1,547,336 |
Stock based compensation | 12,555,675 | 11,308,786 |
Amortization of debt discount | 427,380 | 427,380 |
Deferred Compensation | 156,568 | 377,800 |
Net deferred tax assets before valuation allowance | $14,947,468 | $13,661,302 |
Less: Valuation Allowance | (14,947,468) | (13,661,302) |
Net deferred tax assets | -- | -- |
A reconciliation between the amounts of income tax benefit determined by applying the applicable U.S. and State statutory income tax rate to pre-tax loss is as follows:
| As of December 31, 2009 | As of December 31, 2008 |
Statutory federal income tax | (35%) | (35%) |
Statutory state income tax | (6.9%) | (6.9%) |
Change in valuation allowance on deferred tax assets | (41.9%) | (41.9%) |
2011.
presented.
Net loss per share is calculated in accordance with ASC 260-10 using the weighted average number of common shares outstanding during the year.
The computation of diluted loss per common share is based on the weighted average number of shares outstanding during the year, plus common stock equivalents calculated under the treasury stock method. The Company has issued stock options issued to employees, consultants and creditors that can be exercised for approximately 7,200 shares of common stock at December 31, 2006 with conversion process of $250 per share as of December 31, 2009. Common stock equivalents have not been included in the diluted loss per share calculation for the year December 31, 2009 or 2008 because the effect would be antidilutive.
43
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 11 – ACCRUED EXPENSES
The Company has accrued expenses for years ended 2009 and 2008 of $678,671 and $1,356,224 , respectively. The amounts were primarily the result of deferred salaries of Company executives and interest on notes payable.
NOTE 12 – NOTES PAYABLE – DUE ON DEMAND
Current Portion of Long-Term Debt consists of one note payable due on December 31, 2006 with 4% interest due on December 31, 2006 which is outstanding at December 31, 2009 and 2008, and seven other 8% notes payable aggregating $750,000 and due December 31, 2007 which were outstanding on December 31, 2008 (see Note 7).
NOTE 136 – CAPITAL STOCK
outstanding.
INCOME TAXES
2010 | 2009 | |||||||
Deferred tax asset | $ | 14,971,913 | $ | 14,947,470 | ||||
Less valuation allowance | (14,971,913 | ) | (14,947,470 | ) | ||||
Net deferred tax asset | $ | 0 | $ | 0 |
Auri, Inc.
44
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDING DECEMBER 31, 2009 AND 2008
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 15 – STOCK OPTION PLAN
On April 1, 1994,
WELLSTONE FILTER SCIENCES, INC. | ||||
(a development stage company) | ||||
PROFORMA CONSOLIDATED BALANCE SHEET | ||||
DECEMBER 31, 2010 | ||||
ASSETS | ||||
Cash and cash equivalents | $ | 406,539 | ||
Accounts receivable - net | 104,355 | |||
Due from factor | 15,796 | |||
Inventory - net | 226,773 | |||
Prepaid expenses and other assets | 116,320 | |||
Due from Auri Footwear, Inc. | ||||
Investment in subsidary | ||||
Deferred finance fee - net | 18,778 | |||
Total Current Assets | 888,561 | |||
- | ||||
Property and equipment - net | 85,035 | |||
- | ||||
Total Assets | $ | 973,596 | ||
LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||
Accounts payable | $ | 85,337 | ||
Accrued liabilities | 50,632 | |||
Due to Auri, Inc. | - | |||
Due to related party | 5,714 | |||
Short-term portion of long-term note payable | 12,500 | |||
Short-term portion of long-term related party note payable | 4,167 | |||
Short-term convertible note payable | 500,000 | |||
Total Current Liabilities | 658,350 | |||
Long-term liabilities: | ||||
Long-term note payable - net of short term portion | 137,500 | |||
Long-term related party note payable - net of short term portion | 45,833 | |||
Total Long-term Liabilities | 183,333 | |||
Total Liabilities | 841,683 | |||
- | ||||
Stockholders' Deficit: | ||||
Preferred stock, $0.001 par value; 1,000,000 shares authorized, | - | |||
no shares issued and outstanding | ||||
Common stock, $0.001 par value; 300,000,000 shares authorized, | ||||
93,551,580 shares issued and outstanding | 87,552 | |||
Additional paid in capital | 4,413,665 | |||
Member's contributions | ||||
Current income (loss) | - | |||
Accumulated deficit | (4,369,304 | ) | ||
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) | 131,913 | |||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 973,596 |
Exhibit Number | Description | ||
Exhibit Number | Description | ||
3.1 | Certificate of Incorporation | ||
3.2 | Certificate of Amendment | ||
3.3 | Bylaws | ||
3.4 | Certificate of Amendment increasing authorized common stock to 300,000,000 shares | ||
3.5 | Certificate of Amendment for reverse stock split | ||
3.6 | Certificate of Amendment changing name to Wellstone Filter Sciences, Inc. | ||
3.7 | Certificate of Amendment to Certificate of Incorporation changing name to Auri, Inc. (Incorporated by reference to Appendix A of Definitive Schedule 14C filed with the Commission on March 25, 2011) | ||
10.4 | Merger Agreement and Plan of Reorganization (Incorporated by reference to Preliminary Schedule 14C filed with the Commission on March 10, 2011 | ||
16.2 | Letter from Child, Van Wagoner and Bradshaw, PLLC (Incorporated by reference to Current Report on Form 8-K filed with the Commission on March 25, 2011) | ||
21 | Subsidiaries of Registrant * | ||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | ||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* | ||
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | ||
_______________________________ | |||
* | Filed herewith. |
AURI, INC. | |||
Dated: April __, 2011 | By: | /s/ ORI ROSENBAUM | |
Ori Rosenbaum, | |||
President, Chief Executive Officer, Chief Financial Officer and Sole Director | |||
dates indicated:
NOTE 16 - SUBSEQUENT EVENT
On March 4, 2010, the Board of Directors determined to spin off its Wellstone Tobacco Company to all shareholders at the rate of one Wellstone Tobacco Company share for each one common share owned by the Company. The pro-forma balance sheet of each of Wellstone Filter Sciences at December 31, 2009 giving effect to the spin-off as if it occurred on December 31, 2009 is as follows:
Wellstone Filter
Wellstone Filter
Wellstone Tobacco
Sciences, Inc.
Sciences, Inc.
Company
Consolidated
after spinoff
after spinoff
Current Assets - Cash
$
2,424
$
--
$
2,424
Total Assets
$
2,424
$
--
$
2,424
Current Portion of
long term debt
$1,500,000
$
--
$ 1,500,000
Accounts payable
561,178
--
561,178
Accrued expenses
678,671
--
678,671
total current liabilities
2,739,849
--
2,739,849
Common stock
93,552
93,552
93,552
Additional paid in capital
29,867,306 29,529,451
337,855
Accumulated deficit
(32,698,283) (29,623,003) (3,168,832)
Total stockholders' deficit (2,737,425) - (2,737,425)
Total liabilities and
stockholders' deficit
$
2,424
$
--
$
2,424
45
Signature | Capacity | Date |
/s/ ORI ROSENBAUM | Principal Executive Officer, Principal Accounting Officer and Sole Director | April __, 2011 |
Ori Rosenbaum |