SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from
__________________ to __________________
Commission File Number 0-28161
CIK Number 0001092802
WELLSTONE FILTERS, INC.
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(Exact Name of small business issuer as specified in its charter)
Delaware 33-0619264
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(State or other Jurisdiction of I.R.S. Employer Identi-
Incorporation or Organization fication No.)
250 Crown Boulevard, Timberlake, North Carolina 27583
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(Address of Principal Executive Offices) (Zip Code)
(336) 597-8300
(Issuer's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13, or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (of for such shorter period that the
Registrant was required to file such reports) and (ii) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Common Stock, $.001 par value 252,542,991
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Title of Class Number of Shares outstanding
at August 5, 2005
Transitional Small Business Format Yes No X
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No exhibits included.
1
WELLSTONE FILTERS, INC.
(A Company in the Development Stage)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2005 2004
ASSETS
-------------------------------------------
Current assets:
Cash $ 581,460 $ 1,431,088
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Prepaid expenses 30,000 -
-------------------------------------------
Inventory 54,566 -
-------------------------------------------
Total current assets 666,026 1,431,088
Furniture and equipment, net of accumulated depreciation 12,218 12,695
-------------------------------------------
Total Assets $ 678,244 $ 1,443,783
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 112,806 $ 23,890
Accrued expenses 413,889 20,727
Related party notes payable 59,200 59,200
Related party accounts payable 40,584 40,584
-------------------------------------------
Total current liabilities 626,479 144,401
-------------------------------------------
Note payable net of unamortized debt discount of $595,000
and $977,500, respectively 905,000 522,500
-------------------------------------------
Total liabilities 1,531,479 666,9001
Commitments and contingencies
Shareholders' Equity (Deficit):
Preferred Stock, $.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.001 par value; 300,000,000 shares
authorized; 252,542,991 shares issued and outstanding 252,543 252,543
Additional paid-in capital 21,471,903 21,471,903
Accumulated deficit (22,577,681) (20,947,564)
-------------------------------------------
Total shareholders' equity (deficit) (853,235) 776,882
-------------------------------------------
Total liabilities and shareholder's equity (deficit) $ 678,244 $ 1,443,783
-------------------------------------------
The accompanying notes are an integral part of the financial statements.
2
WELLSTONE FILTERS, INC.
(A Company in the Development Stage)
Consolidated Statement of Operations
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, Cumulative
Amounts Since
---------------- ---------------- ---------------- ----------------
2005 2004 2005 2004 Inception
---------------- ---------------- ---------------- ---------------- ------------------
Revenues $ - $ - $ - $ - $ -
General and administrative expenses $ 463,716 $ 42,724 $ 1,131,676 $ 82,847 $ 8,441,309
Research and development expenses - 8,990 67,389 13,990 86,969
Stock compensation expense - 6,300,000 - 6,940,000 13,555,000
Interest expense 143,684 1,184 431,052 3,552 494,403
---------------- ---------------- ---------------- ---------------- ------------------
Loss before income taxes (607,400) (6,352,898) (1,630,117) (7,040,389) (22,577,681)
Income tax benefit - - - - -
---------------- ---------------- ---------------- ---------------- ------------------
Net loss $ (607,400) $ (6,352,898) $ (1,630,117) $ (7,040,389) $ (22,577,681)
================ ================ ================ ================ ==================
Net loss per share -
basic and diluted $ - $ (0.03) $ (0.01) $ (0.03)
================ ================ ================ ================
Weighted average shares - basic and
diluted 252,543,000 237,407,000 252,543,000 237,252,000
================ ================ ================ ================
The accompanying notes are an integral part of the financial statements.
3
WELLSTONE FILTERS, INC.
(A Company in the Development Stage)
Consolidated Statement of Cash Flows
(unaudited)
Nine Months Ended Amounts Since
September 30, Inception
2005 2004
-------------------------------------- --------------------------
Cash flows from operating activities:
Net loss $ (1,630,117) $ (7,040,389) $ (22,577,681)
Adjustments to reconcile net loss to
net cash used in operating activities:
Issuance of common stock for services - - 6,270,000
Issuance of stock options for services - - 654,946
Issuance of stock options to employees
as compensation - 6,940,000 13,555,000
Amortization of debt discount 382,500 - 425,000
Depreciation 3,662 2,251 10,863
Loss on disposal of furniture and equipment 2,007 - 2,007
Rental expense forgiven by officer - - 29,400
Increase(decrease) in accounts payable 88,916 7,502 112,806
Increase in prepaid expenses (30,000) - (30,000)
Increase in inventories (54,566) - (54,566)
Increase in related party accounts payable - 46,360 29,417
Increase in accrued expenses 393,162 3,552 413,889
-------------------------------------- --------------------------
Net cash used in
operating activities (844,436) (40,724) (1,158,919)
------------------------------------ --------------------------
Cash flows from investing activities-
Purchase of fixed assets (5,192) - (13,921)
-------------------------------------- --------------------------
Cash flows from financing activities:
Proceeds from sale of common stock - 105,000 195,000
Proceeds from long-term debt - - 1,500,000
Members' contribution of equity - - 100
Proceeds from related party notes payable - - 59,200
-------------------------------------- --------------------------
Net cash provided by
financing activities - 105,000 1,754,300
-------------------------------------- --------------------------
Net (decrease) increase in cash and cash equivalents (849,628) 64,276 581,460
Cash at beginning of period 1,431,088 3,109 -
-------------------------------------- --------------------------
Cash at end of period $ 581,460 $ 67,385 $ 581,460
-------------------------------------- --------------------------
The accompanying notes are an integral part of the financial statements.
4
WELLSTONE FILTERS, INC.
(A Company in the Development Stage)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
The accompanying financial statements are unaudited, but in the opinion
of the management of the Company, contain all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the
financial position at September 30, 2005, the results of operations for
the nine and three months ended September 30, 2005 and 2004, and the
cash flows for the nine months ended September 30, 2005 and 2004.
Reference is made to the Company's Form 10-KSB for the year ended
December 31, 2004. The results of operations for the nine months ended
September 30, 2005 are not necessarily indicative of the results of
operations to be expected for the full fiscal year ending December 31,
2005.
Wellstone Filters, LLC (Wellstone) was organized as a Delaware limited
liability company on February 17, 1998 (date of inception). On May 25,
2001, Wellstone Filters, Inc. (formerly Farallon Corporation) (the
"Registrant") acquired Wellstone pursuant to an Agreement and Plan of
Reorganization (the Agreement), dated as of May 25, 2001. The
Registrant acquired all of the outstanding membership interest of
Wellstone, in exchange for 70,000,000 shares of the Registrant's Common
Stock. This transaction was accounted for as a reverse acquisition. In
addition, the Company issued 5,958,200 shares of common stock in
cancellation of debt and issued 499,791 shares for cash of $150,000.
All share amounts are after giving effect to a 5-for-1 forward stock
split effected in July 2003, a .40 for one stock dividend effected in
October 2003 and a 3-for-1 forward stock split effected in September
2004.
The Company is engaged in the development and marketing of a
proprietary cigarette filter technology and the Wellstone brand of
cigarettes utilizing its patented filter. On September 30, 2005
Wellstone announced that it had launched its brand in Central and South
America; however, no revenue has been recognized from inception through
September 30, 2005. Accordingly, the Company continues to be considered
a development stage company as defined in SFAS No. 7.
2. Related Party Transactions
The related party notes payable consist of loans from officers of the
Company. The amounts are unsecured, bearing interest at 8% and are due
on demand. Accrued interest on the notes was $15,727 and $19,279 at
December 31, 2004 and September 30, 2005, respectively and is included
in accrued expenses.
Related party accounts payable include amounts due to an officer of the
Company and the brother of an officer of the Company.
During the quarter ended September 30, 2004 the Company sold 131,349
shares of common stock for $45,000 to a company controlled by the
brother of the CEO. The share price was equal to the closing price on
the date the shares were sold.
5
3. Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations,
and has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) NO. 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost is
recognized in the financial statements, when options granted under
those plans have an exercise price equal to or greater than the market
value of the underlying common stock on the date of grant.
The following table illustrates the effect on net (loss) earnings per
share if the Company had applied the fair value recognition provision
of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------------------------------
2005 2004 2005 2004
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Net Loss, as reported $ (607,400) $ (6,352,898) $ (1,630,117) $ (7,040,389)
Stock-based employee Compensation expense
Included in reported net loss,
net of related tax effects - 6,300,000 - 6,300,000
Deduct:
Total stock-based employee Compensation expense
determined under fair value
based for all awards,
net of related tax effects - 8,580,488 - 8,580,488
--------------- --------------- ---------------- ----------------
Pro forma net (loss) income (607,400) (8,633,386) (1,630,117) (9,320,877)
--------------- --------------- ---------------- ----------------
(Loss) earnings per share:
Basic and diluted - as reported $ - $ (0.03) $ (0.00) $ (0.03)
--------------- --------------- ---------------- ----------------
Basic and diluted - pro forma $ - $ (0.04) $ (0.00) $ (0.04)
--------------- --------------- ---------------- ----------------
6
4. Weighted Average Shares
The computation of basic earnings (loss) per common share is based on
the weighted average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the
weighted average number of common shares outstanding during the year,
plus the common stock equivalents that would arise from the exercise of
stock options and warrants outstanding, using the treasury stock method
and the average market price per share during the year. Options to
purchase 31,825,000 and 5,325,000 shares of common stock at prices
ranging from $.0007 to $.01 per share were outstanding at September 30,
2005 and 2004, respectively, but were excluded for the calculation of
diluted earnings per share because their effect was anti-dilutive.
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 September 30, 2005.
During the year ended December 31, 2003, the Company:
o acquired furniture and equipment in exchange for an increase
in related party accounts payable of $67,705.
During the year ended December 31, 2002 the Company:
o acquired furniture and equipment in exchange for an increase
in related party accounts payable of $11,167.
o issued 5,968,200 shares of common stock in settlement of
$2,842 of debt.
6. Inventories
Inventories consist of $54,566 of raw materials and $ 0.00 of finished
goods. Inventories are valued at the lower of cost or market on a first
in, first out basis.
7. Liquidity
The Company is a development stage company and has a deficit in working
capital and stockholders' equity, and has incurred sustained losses. On
September 30, 2005, Wellstone announced that it had launched its brand
in Central and South America; however, no revenue has been recorded
from inception through September 30, 2005.
In October 2004 the Company entered into an agreement with another fund
under which it received $1.5 million in debt financing plus warrants.
As of September 30, 2005, the Company had a cash balance of
approximately $581,460, which is believed by management to be
sufficient for our working capital needs through December 31, 2005.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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Wellstone's Strategic Direction
In the quarter ended March 31, 2005 Wellstone determined to augment its
strategic focus. Wellstone's original plan was to license its proprietary
cigarette filter technology to existing cigarette manufacturers. Because
Wellstone believes its filter compound removes certain carcinogens, Wellstone
believed that incorporation of its compound into currently marketed brands would
be the quickest way to bring its Wellstone Filters to the smoking public. After
a review of the tobacco marketplace, Management determined to join the group of
small manufacturers who have gained market share in recent years (estimated by
some to be 12% of total US 2004 market) in this multi- billion dollar market.
Wellstone intends to offer a product or products within the discount segment of
the market. Sales of the Wellstone brand are expected to begin in the fourth
quarter of calendar 2005.
Wellstone intends to market cigarettes with the first significant
advance in cigarette filters. Using a natural compound, the Wellstone Filter
targets harshness while letting the tobacco's full flavor come through.
Wellstone's strategic plan as well as its philosophy is based on two facts:
First, that quitting smoking can be difficult. Second, smokers do not apparently
focus much attention on tar levels. Wellstone believes that part of the reason
smokers prefer high tar cigarettes is because of taste. The goal of Wellstone is
to reduce tar and harshness while letting the tobacco's full flavor come
through. Wellstone's patented filter does not make a safer cigarette and
continues to emphasize that no cigarette is safe. We believe smokers will try
Wellstone for its lower price, and come back for its taste.
Wellstone will be the only small (less than $50 million in sales) US
cigarette manufacturer which is publicly traded. The remainder of the small
manufacturers in the industry are privately held or foreign. Management believes
Wellstone's access to the US capital markets will assist Wellstone 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.
Management has not abandoned its plan to license the formulation, and
continues discussions with industry players. Management has determined that
manufacturing and distributing a Wellstone line of cigarettes will be in the
best interests of its stockholders, particularly if Wellstone is able to
successfully market its brand. The successful launch of a Wellstone brand should
add significant value to the Company. More importantly, the success of a
Wellstone brand will, it is anticipated, lead the way for other manufacturers to
utilize the filter in their own cigarettes under a Wellstone license.
Timetable to Market
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
8
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. In furtherance
of its marketing plans, the Company:
o Enlarged its management team by adding an experienced COO and CFO from
one of the major manufacturers.
o Hired a VP Sales with extensive experience in the sale and marketing of
cigarettes.
o Is updating its package design to reflect the benefits of the Wellstone
filter.
o Retained Signal Design, Inc. of Durham, North Carolina to assist in
developing a comprehensive brand strategy and marketing campaign.
o Has received results from an independent FTC testing facility that
confirm the Company's expectations for their patented filter
technology.
o Moved its Investor Relations department to its Timberlake, NC offices.
o Has entered into an agreement with U.S. Flue-Cured Tobacco Growers,
Inc. to manufacture Wellstone's product line.
o Is formulating distribution plans through discussions with
distributors.
o Forged a strategic alliance with an organization that has a strong and
vast international network.
Results of Operations
On September 30, 2005 Wellstone announced that it had launched its
brand in Central and South America; however, no revenue has been recognized from
inception through September 30, 2005. Wellstone anticipates sales of its product
in Central and South America to commence in the fourth quarter. Wellstone has
not yet commenced sales of its products in the United States. It intends to
launch its brand domestically upon approval by the settling States under the
Master Settlement Agreement. Our operations to date have primarily consisted of
developing and refining our proprietary filter formulation, obtaining a US and
international patent on that formulation, and on seeking to market the filter
technology and the Wellstone brand of cigarettes.
The loss of $1,630,117 for the nine months ended September 30, 2005 is
primarily the result of research and development cost, employee wages, and
interest expense and legal and professional fees. The loss of $7,040,389 for the
nine months ended September 30, 2004 is primarily due to stock-based
compensation. During September 30, 2004, 4,800,000 options were issued to a
scientific adviser at a price of $.0007 per share and 22,500,000 shares were
issued to two officer employee with an exercise price of $.003 resulting in
expense of $6,940,000.
9
Liquidity and Capital Resources
We have never earned revenues from operations. Through October 31, 2005
our operations were being funded by shareholder advances and a financing
agreement with a private investment fund controlled by a related party. These
shareholder advances and financings from the related party, including accrued
interest, totaled $115,511 as of December 31, 2004. On January 2, 2004, we
entered into a funding agreement with Arrakis Select, a private investment fund
controlled by a brother of our Chief Executive Officer under which agreement
Arrakis Select agreed to satisfy Wellstone's funding requirements for 90 days
(renewable for additional 90 day periods), in exchange for common stock valued
at the closing bid price of the common stock as of the 15th day of the month in
which the funding was made. Through October 31, 2004 Wellstone had received
$195,000 from Arrakis for the issuance of 574,791 restricted shares.
In October, 2004, the Company entered into an agreement with another
fund under which it received $1,500,000 in debt financing plus warrants, and the
agreement with Arrakis was not renewed. On September 30, 2005 the Company had
cash of approximately $581,460. Management believes that the cash will be
sufficient to sustain operations.
Wellstone has obtained 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.
We do not have any agreements or understandings with respect to
additional sources of capital. We have not identified any potential additional
sources. If needed for our business we may need to raise other funds in the near
future.
We are a development stage company as that term is defined in
paragraphs 8 and 9 of SFAS No. 7. Our activities to date have been limited to
seeking capital; seeking supply contracts and development of a business plan.
Our independent registered public accounting firm has included an explanatory
paragraph in their report on our financial statements, relating to the
substantial doubt about our ability to continue as a going concern, due to our
lack of operating history or current revenues, its nature as a start up
business, management's limited experience and limited funds. We do not believe
that conventional financing, such as bank financing, is available to us due to
these factors. Management believes that Wellstone's ability to raise significant
additional amounts of financing, will be dependent on favorable capital markets
and also on obtaining significant sales, and other risks inherent in the
business as discussed under the caption "Risks and Uncertainties" in our Form
10-KSB for the year ended December 31, 2004 may affect the outcome of
Management's plans.
10
When used in this Form 10-QSB, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties, including
those set forth under the "Risks and Uncertainties" set forth below that could
cause actual results to differ materially from those projected. These
forward-looking statements speak only as of the date hereof. Wellstone expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any statement is based. This
discussion should be read together with the financial statements and other
financial information included in this Form 10-QSB.
Risks and Uncertainties
We are still in the Research and Development Stage and have not received any
revenues.
To date, Wellstone's activities have been limited primarily to research
and development, product testing and initial marketing. Wellstone has not yet
commenced sales of its products in the United States. It intends to launch its
brand domestically upon approval by the settling States under the Master
Settlement Agreement. We have not received any revenues or income since
inception and, even though sales and marketing of the Wellstone brand are
expected to begin upon approval of the Settling States, Wellstone might not be
able to find a market for its products, achieve a significant level of sales or
attain profitability. As a result of the significant operating expenses related
to start up operations, operating results will be adversely affected if
significant sales do not materialize, whether due to competition or otherwise.
Wellstone might not be able to grow in the future or attain profitability.
Wellstone might not be able to implement its business plan in accordance with
its internal forecasts or to a level that meets the expectations of investors.
We Are Dependent on the Domestic Tobacco Business, which is contracting.
The majority all of our revenues are expected to be derived from sales
in the United States. The U.S. cigarette business has been contracting in recent
years. If the U.S. cigarette market continues to contract, it could adversely
affect our potential future sales, operating income and cash flows.
We don't have any production facilities and therefore; we have to contract out
production.
Problems in contracting out the production of filter material,
Wellstone filters, and our cigarettes can be expected. If we cannot continue to
outsource filter material, the Wellstone filter and cigarettes we cannot go to
market with our own brand nor can the Wellstone filter be used in existing
brands.
11
Competition could prevent us from meeting our objectives.
The cigarette industry is highly competitive. We encounter competition
from developers of low-carcinogen tobacco and developers of other filter
technology, which may have substantially greater financial, manufacturing,
marketing and other resources than we do. Another company could develop filter
technology similar to ours. Competition will affect our ability to market our
product and obtain financing. As we enter the cigarette market ourselves with
the Wellstone brands, we will be subject to the competition in that market,
which has been growing and which has encountered increasing pressure due to
price discounting.
Our cigarettes and the cigarettes using our filter may not Be Accepted by
Smokers.
Our filter and the Wellstone brand utilizing it may not be accepted
ultimately by adult smokers. Adult smokers may decide not to purchase our brand
or any tobacco product made with our filters due to taste or other preferences,
and sales of filters with our technology would be adversely affected.
The Cigarette Industry is Subject to Substantial and Increasing Regulation and
Taxation and this can only have a negative impact on us.
Various federal, state and local laws limit the advertising, sale and
use of cigarettes, and these laws have proliferated in recent years. If this
trend continues, it may have material and adverse effects on potential sales,
operating income and cash flows. In addition, cigarettes are subject to
substantial and increasing excise taxes. Increased excise taxes may result in
declines in overall sales volume. This result could adversely affect the market
for our product.
The U.S. Food and Drug Administration ("FDA") has promulgated
regulations governing the sale and advertising of tobacco products. These
regulations are designed primarily to discourage the sale to, and consumption
by, adolescents and children. The authority of the FDA to promulgate such
regulations was challenged in the federal courts. On March 21, 2000, the United
States Supreme Court in a five to four decision held that the Congress has not
given the FDA authority to regulate tobacco products as customarily marketed.
Given the decision by the Supreme Court it is unclear whether the Congress in
the future will act to grant such authority to the FDA, although legislation
that would create such authority has already been introduced in Congress. See
"Government Regulation."
We might get sued and insurance possibly won't cover our losses.
There are currently several pending legal actions affecting the
tobacco industry, including proceedings and claims arising out of the sale,
distribution, manufacture, development, advertising, marketing and claimed
health effects of cigarettes. We may be named as a defendant in the future as
there has been a noteworthy increase in the number of these cases pending.
Punitive damages, often in amounts ranging into the hundreds of millions, or
even billions of dollars, are specifically pleaded in a number of these cases in
addition to compensatory and other damages. We don't yet have any product
liability insurance, and if such can be obtained it probably would be very
limited in scope of coverage to any claims that tobacco products manufactured by
or for us contain any foreign object. Such insurance probably does not cover
12
health-related claims such as those that have been made against the major
manufacturers of tobacco products. We do not believe that such insurance
currently can be obtained. Accordingly, our inclusion in any of these actions or
any future action could have a material and adverse effect on our financial
condition.
If we are successful, we might not be able to hire employees and manage a bigger
enterprise.
If we are successful in obtaining market acceptance for our products,
we will be required to manage substantial volume from our customers. To
accommodate any such growth and compete effectively, we will be required to
attract, integrate, motivate and retain additional highly skilled sales,
technical and other employees. We face competition for these people. Our ability
to successfully manage such volume also will be dependent on our ability to find
a suitable manufacturer for our brand and filters. We or any person contracted
with to produce our products in commercial quantities might not be able to
overcome the challenge of setting up any production operations, and our
personnel, systems, procedures and controls might prove inadequate to support
our future operations. Any failure to implement and improve our operational,
financial and management systems or to attract, integrate, motivate and retain
additional employees required by future growth, if any, could have a material
and adverse effect on our business and prospects, financial condition and
results of operations.
We may not be able to protect our patent against infringement.
Our success in commercially exploiting our proprietary technology
depends in large part on our ability to defend our issued patent, to obtain
further patent protection for the technology in the United States and other
jurisdictions, and to operate without infringing upon the patents and
proprietary rights of others. Additionally, we must be able to obtain
appropriate licenses to patents or proprietary rights held by third parties if
infringement would otherwise occur, both in the United States and in foreign
countries. Our primary patents have been issued in the United States and our
patents are pending in all relevant foreign jurisdictions. If international
patents are not issued, it would adversely affect our competitive advantage,
with respect to sales outside the United States.
Patent positions, including our patent positions (owned or licensed)
are uncertain and involve complex legal and factual questions for which
important legal principles are unresolved. Any conflicts resulting from third
party patent applications and patents could significantly reduce the coverage of
our patents and limit our ability to obtain meaningful patent protection. If
patents are issued to other companies that contain competitive or conflicting
claims, we may be required to obtain licenses to these patents or to develop or
obtain alternative technology. Such licensing agreements, if required, may be
unavailable on acceptable terms or at all. If such licenses are not obtained, we
could be delayed in or prevented from pursuing the development or
commercialization of our products. It is possible that there exists an issued or
pending patent which conflict with or potentially infringe on our patent.
Litigation which could result in substantial cost may also be
necessary to enforce any patents to which we have rights, or to determine the
scope, validity and unenforceability of other parties' proprietary rights which
may affect our rights. U.S. patents carry a presumption of validity and
generally can be invalidated only through clear and convincing evidence. We may
13
also have to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine the priority of an invention, which could
result in substantial cost. Our licensed patents might not be held valid by a
court or administrative body or that an alleged infringer would be found to be
infringing. The mere uncertainty resulting from the institution and continuation
of any technology-related litigation or interference proceeding could have a
material and adverse effect on our business and prospects.
We may also rely on unpatented trade secrets and know-how to maintain
our competitive position, which we seek to protect, in part, by confidentiality
agreements with employees, consultants, suppliers and others. These agreements
might be breached or terminated, or we might not have adequate remedies for any
breach, and our trade secrets might otherwise become known or be independently
discovered by competitors.
If we lose our management it would damage our business.
We depend upon the continued services of our senior management for our
continued success. The loss of the Company's Chief Executive Officer, Learned
Jeremiah Hand, or the Company's Chief Financial Officer, Samuel Veasey could
have a serious negative impact upon our business and operating results. We do
not have an employment agreement with Mr. Hand or with Mr. Veasey, and we have
not obtained "key-man" life insurance with respect to either of their lives.
No cash dividends have or will be paid.
Wellstone has not paid any cash dividends on its capital stock.
Wellstone anticipates that its future earnings, if any, will be retained for use
in the business, or for other corporate purposes, and it is not anticipated that
any cash dividends on its common stock will be paid in the foreseeable future.
Investors cannot expect to receive any dividends or other periodic income on
their investment.
Penny Stock rules could make it hard to resell your shares.
The Penny Stock rules apply to the trading of our stock. Wellstone's
common stock does not meet the listing requirements for any trading market other
than the OTC Bulletin Board. Consequently, the liquidity of Wellstone's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' and the news media's coverage of Wellstone, and
lower prices for Wellstone's securities than might otherwise be attained.
In addition, the "penny stock" rules limit trading of securities not
traded on NASDAQ or a recognized stock exchange, or securities which do not
trade at a price of $5.00 or higher, in that brokers making trades in those
securities must make a special suitability determination for purchasers of the
security, and obtain the purchaser's consent prior to sale. The application of
these rules may make it difficult for shareholders to resell their shares.
14
Management owns so many shares, it will be difficult to carry out hostile
takeovers. This could affect the value of our stock price.
Management owns 179,433,000 shares, or 71.1% of the outstanding
shares. Management is able to elect all the board of directors and otherwise
control Wellstone and its operations, and other shareholders will have little,
if any control over Wellstone's management. The concentration of control in
management will discourage takeover attempts such as tender offers, and the
purchase of shares by persons who wish to acquire control of Wellstone.
Stockholders will likely not be able to benefit from a rise in share prices
which usually accompanies hostile takeovers. .
We could change the strategy we outline in this report.
Although we have no current plan to do so, we may change our strategy
for the development and marketing of the 3C904 technology in the future. Our
business plan might not be implemented as set forth herein.
Item 3. CONTROLS AND PROCEDURES.
------------------------
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of September 30, 2005. Based on
this evaluation, our principal executive officer and our principal financial
officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective and adequately designed to
ensure that the information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in applicable rules
and forms.
(b) Changes in internal controls over financial reporting.
During the quarter ended September 30, 2005, there has been no
change in our internal control over financial reporting that has material
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
15
PART II. OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS - None
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - None.
Item 3. DEFAULTS UPON SENIOR SECURITIES - None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - On September
2, 2004, stockholders holding 39,000,000 (post-split) shares of common
stock authorized an amendment to the certificate of incorporation to
effect a three-for-one forward stock split and an increase in
authorized common shares to 300,000,000. An information statement was
mailed to all non consenting stockholders, and the amendment and
forward stock split was effective for shareholders of record as of
September 27, 2004 with a payable date of October 5, 2004.
Item 5. OTHER INFORMATION - None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
31. Certifications
31.1 Certification of Learned J. Hand
31.2 Certification of Samuel Veasey, Chief Financial
Officer.
32. Certifications
32.1 Certification pursuant to 18 U.S.C. Section 1350 of
Learned J. Hand
32.2 Certification pursuant to 18 U.S.C. Section 1350 of
Samuel Veasey
Reports on Form 8-K--None.
SIGNATURES
Pursuant to the requirements 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.
WELLSTONE FILTERS, INC.
Date: November 21, 2005
By /s/ Learned J. Hand
--------------------------------------------
Learned J. Hand
Chief Executive Officer
(Principal Executive Officer)
By /s/ Samuel Veasey
---------------------------------------------
Samuel Veasey
Chief Financial Officer
(Principal Financial Officer)