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 June 30, 2007
[ ] 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
WELLSTONE FILTERS, INC.
----------------------------------------------------
(Exact name of small business issuer in its charter)
Delaware 3-0619264
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Market Street, Suite 130-13, Chapel Hill, North Carolina 27516
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 370-4408
Check whether the issuer (1) filed all reports required to be filed by
Section 13, or 15(d) of the Exchange Act during the past 12 months (of for such
shorter period that the registrant was required to file such reports)and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
The number of shares outstanding of the issuer's classes of Common Stock, as of
June 30, 2007.
Title of Class Number of Shares outstanding at June 30, 2007
- -------------- ----------------------------------------------
Common Stock, $.001 par value 105,949
Transitional Small Business Format Yes [ ] No [X]
ITEM 1. FINANCIAL STATEMENTS
WELLSTONE FILTERS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
Unaudited Audited
June 30, December 31,
2007 2006
----------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ -- $ 657
----------- -----------
Total current assets -- 657
Furniture and equipment, net 4,235 7,472
----------- -----------
Total Assets $ 4,235 $ 8,129
=========== ===========
LIABILITIES
Current Liabilities
Current portion of long term debt $ 2,250,000 $ 2,250,000
Accounts payable 568,194 669,981
Related party accounts payable 100,535 55,584
Accrued expenses 1,167,433 1,104,502
Notes payable to affiliate 59,200 59,200
----------- -----------
Total current liabilities 4,145,362 4,139,267
Total liabilities 4,145,362 4,139,267
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value,
1,000,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $.001 par value,
100,000,000 shares authorized:
105,949 and 10,433,760 outstanding
respectively 106 10,434
Additional paid in capital 28,264,340 28,254,012
Accumulated deficit (32,405,573) (32,395,584)
----------- -----------
Total stockholders' deficit (4,141,127) (4,131,138)
Total liabilities & equity $ 4,235 $ 8,129
=========== ===========
The accompanying notes are an integral part of the financial statements.
WELLSTONE FILTERS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
Six Months Ended Cumulative
June 30, Amounts
--------------------------- Since
2007 2006 Inception
(Feb. 1998)
---------- ----------- ---------------
Revenues $ -- $ 215,741 $ 258,193
Cost of Sales -- 232,430 273,075
---------- ----------- ---------------
Gross Profit -- (16,689) (14,882)
Expenses:
General and administrative expense 67,058 905,294 31,214,610
Research and development expense -- -- 237,269
---------- ----------- ---------------
Loss from operations (67,058) (921,983) (31,466,761)
Interest Expense 62,930 309,812 1,285,886
---------- ----------- ---------------
Loss before income taxes (129,988) (1,231,796) (32,752,647)
Forgiveness of debt 120,000 -- 347,074
---------- ----------- ---------------
Income Tax Benefit -- -- --
Net loss $ (9,988) $(1,231,796) $ (32,405,573)
========== =========== ===============
Basic and diluted weighted average number
of common shares outstanding 1,756,611 10,425,760 94,617
========== =========== ===============
Basic and Diluted Net Loss Per Share $ (0.01) $ (0.12) $ (342.00)
========== =========== ===============
The accompanying notes are an integral part of the financial statements.
WELLSTONE FILTERS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended Cumulative
June 30, Amounts
--------------------------- Since
2007 2006 Inception
(Feb. 1998)
---------- ----------- ---------------
Cash from operating activity:
Net income/(loss) $ (9,988) $(1,231,796) $ (32,405,573)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Issuance of common stock for services -- -- 10,860,000
Issuance of stock options for services -- -- 654,946
Issuance of stock options to employees
as compensation -- -- 15,475,000
Amortization of debt discount -- 255,000 1,020,000
Depreciation 3,236 2,628 21,359
Rental expense forgiven by officer
and board member -- -- 29,400
Loss on disposal of furniture -- -- 1,795
(Increase) / decrease in accounts receivable -- (220,826) --
(Increase) / decrease in inventory -- (199,705) --
Increase/(decrease) in bank overdraft 45 -- 45
Increase / (decrease) in accounts payable (101,787) 137,221 568,194
Increase in related party accounts payable 44,907 2,368 95,243
Increase in accrued expense 62,930 285,466 1,161,513
---------- ----------- ---------------
Net cash used in operating activity $ (657) $ (969.644) $ (2,518,078)
Cash flow from investing activities --
Purchase of fixed assets -- -- (16,222)
Cash flows form financing activities:
Proceeds from sale of common stock -- 28,000 199,000
Proceeds from exercise of stock options -- -- 26,000
Proceeds form long-term debt -- 750,000 2,250,000
Member contribution of equity -- -- 100
Proceeds from related party notes payable -- -- 59,200
---------- ----------- ---------------
Net cash provided from financing activities -- 778,000 2,534,300
Net increase/(decrease) in cash
and cans equivalents (657) (191,644) --
---------- ----------- ---------------
Cash and cash equivalents at
beginning of period 657 233,426 --
Cash and cash equivalents at
end of period $ -- $ 41,782 $ --
========== =========== ===============
The accompanying notes are an integral part of the financial statements.
WELLSTONE FILTERS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The interim consolidated financial statements of the Company are unaudited and,
in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to state fairly the Company's consolidated financial
position, results of operations and cash flows. These financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2006, as filed with the Securities and Exchange Commission.
The consolidated results of operations for interim periods should not be
regarded as necessarily indicative of the results that may be expected for the
entire year.
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 2,800,000 shares of
the Registrant's Common Stock. This transaction was accounted for as a reverse
acquisition. 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 and a
1-for-25 reverse split effective June 2006 and a 1-for-100 reverse stock split
effective June of 2007.
The Company is engaged in the development and marketing of a proprietary
cigarette filter technology and the Wellstone brand of cigarettes utilizing its
patented reduced risk filter. On January 5, 2006 Wellstone announced that it
had launched its brand in the United Stares with shipments to Phoenix, Arizona.
The Company subsequently announced that it had shipped the Wellstone brand to
Chapel Hill, NC, and Richmond, Virginia and has partnered with a major supplier
of convenience stores in the Southeastern United States to carry the Wellstone
brand family.
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 5% and are due on demand.
Accrued interest on the notes was $28,317 and $25,387 at June 30, 2007 and
December 31, 2006, respectively.
Related party accounts payable include amounts due to an officer of the Company
and the brother of an officer of the Company.
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. Because no
stock options or warrants vested during the six months ended June 30, 2007 and
2006, pro forma net loss and net loss per share is the same as the net loss and
net loss per share as reported.
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 140,900 and 11,450
shares of common stock at prices ranging from $1.75 to $25.00 per share were
outstanding at September 30, 2006 and 2005, respectively, but were excluded for
the calculation of diluted earnings per share because the effect of the stock
options was anti- dilutive.
Options to purchase 12,290 and 14,090 shares of
common stock at prices ranging from $1.75 to $25.00 per share were outstanding
at June 30, 2007 and 2006, respectively.
5. COMMON STOCK
In May of 2007 there was a 1-for-100 reverse stock split which was accounted
for retroactively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
No amounts were paid for interest or income taxes during the period from
February 17, 1998 (date of inception) to June 30, 2007.
7. INVENTORY
The Company has no inventory as of period ending June 30, 2007 due to an
obsolescence charge in the 4th quarter of 2006.
8. 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
has partnered with several suppliers of convenience stores in the Southeastern
and the West Coast to carry the Wellstone brand family. Even though the
Company's net revenue increased 241% for the second quarter over the first
quarter it continued to have a deficit in working capital and stockholders'
deficit, and continued to incur losses. Although sales were increasing, 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.
Wellstone Filters, Inc. received $250,000 from the Carlson Group, Ltd.,
pursuant to a promissory note, dated May 17, 2006. This Note is not associated
with the prior promissory notes which had been issued in 2006 and 2004. The
Company borrowed the principal amount of $250,000, at an interest rate of 8%
per annum, due in full on December 31, 2007. In addition to the stated interest
rate, the Company shall also pay to the Lender an amount equal to the lesser of
(a) $25,000 or (b) 3% of the net profits after taxes as of September 30, 2007,
to be payable simultaneously with the principal and interest due on December
31, 2007. If a portion of the principal or interest is paid prior to December
31, 2007, the calculation of the additional amount shall be adjusted pro-rata.
In the event of a default under the note when due, then the Lender, at its
election, may declare the entire unpaid principal and all accrued but unpaid
interest, immediately due and payable. The maximum additional amount that the
Company shall pay is $25,000, and such amount is due on the maturity of the
Note.
On January 25, 2006, Wellstone Filters, Inc. received $500,000 from the Carlson
Group, Ltd., pursuant to a promissory note, dated January 25, 2006. This Note
is not associated with the prior promissory note which had been issued in 2004.
The Company borrowed the principal amount of $500,000, at an interest rate of
8% per annum, due in full on December 31, 2007. In addition to the stated
interest rate, the Company shall also pay to the Lender an amount equal to the
lesser of (a) $25,000 or (b) 3% of the net profits after taxes as of September
30, 2007, to be payable simultaneously with the principal and interest due on
December 31, 2007. If a portion of the principal or interest is paid prior to
December 31, 2007, the calculation of the additional amount shall be adjusted
pro-rata. In the event of a default under the note when due, then the Lender,
at its election, may declare the entire unpaid principal and all accrued but
unpaid interest, immediately due and payable. The maximum additional amount
that the Company shall pay is $25,000, and such amount is due on the maturity
of the Note. In October 2004 the Company entered into an agreement with another
fund under which it received $1.5 million in debt financing plus warrants. The
Company has dismissed or accepted the resignation of all employees and officers
except for its Chief Executive Officer, has vacated its corporate offices and
otherwise drastically reduced its general and administrative costs pending a
resolution of its liquidity problems. The Company is funding its cash needs
from funds lent by its officer and director.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
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. Readers should carefully review the risk factors
described in other documents that the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-
QSB and Annual Reports on Form 10-KSB that the Company will file subsequent to
this Quarterly Report on Form 10-QSB and any Current Reports on Form 8-K filed
by the Company.
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 he 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 after June 30, 2006 were minimal and,
and Wellstone does not forecast any significant sales for the future until it
is able to obtain financing. All 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
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. Our strategy and objective is to offer an ultra-premium product at
a value price.
Wellstone 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 the majority of participating States.. We are in the
process of being added to the list of approved brands in all fifty states and
hope to be approved in 2006. Wellstone 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. The company believes US Flue-Cured's annual manufacturing
capacity is sufficient to meet its short and long-term needs. Filters will be
sourced from the largest domestic filter manufacturer, as well as several
European alternatives. Tobacco leaves and filter compound material is readily
available through a variety 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. 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. Wellstone 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 considering one or more acquisitions if such can be synergistic
with our current business, but no agreements have been reached for any
acquisitions.
We believe that our 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'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.
We intend to sell and market our own cigarette brand and to sell filters
directly to manufacturers to be integrated into their own cigarette brands.
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. We also intend develop to our own "make your own" as well
as enter into the small cigar market.
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. 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.
- - Enter 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 formulating 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
$215,741 for the six months ended June 30, 2006. On April 5, 2006, the Company
announced that a major supplier to convenience stores in the Southeastern
United States has agreed to carry all styles of the Wellstone brand and secure
orders using its sales organization. Wellstone has been able to secure
additional suppliers to carry all styles of the Wellstone brand family and that
it will ship to additional states during the third quarter of 2006 with sales
to most states by the end of the year. Wellstone shipped product to Central and
South America during the third quarter of 2005 for promotional and consumer
trial purposes only. Prior to January 2006 Wellstone had received no revenue.
Our operations 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.
During the six months ended June 30, 2007 the Company had a loss of $ 9,988.
This loss is the result of other income due to a forgiveness of debt in the
amount of $120,000 in addition to general and administrative expenses of
$67,058 and interest expense of $62,930.
PATENT LICENSE AGREEMENT
On January 17, 2007, Wellstone entered into a Patent License Agreement with
Glycanex, BV, the supplier of the patented filter compound used in
Wellstone cigarettes. Under the Patent License Agreement, Wellstone granted to
Glycanex an exclusive right to the patent rights for all countries excepting
the United States of America and its territories and possessions. Glycanex
agreed to pay Wellstone a 3% royalty on net sales which exceed the minimum
threshold of Euro 500,000. The consideration for the granting of the license
to Glycanex was the cancellation of $120,000 owed to Glycanex for purchases of
the filter compound.
LIQUIDITY AND CAPITAL RESOURCES
We began shipping cigarettes in the US during January 2006 with shipments to
several states resulting in revenue of $215,741 for the six months ended June
30, 2006. Sales after June 30, 2006, have been minimal.
Wellstone Filters, Inc. received $250,000 from the Carlson Group, Ltd.,
pursuant to a promissory note, dated May 17, 2006. This Note is not associated
with the prior promissory notes which had been issued in 2006 and 2004. The
Company borrowed the principal amount of $250,000, at an interest rate of 8%
per annum, due in full on December 31, 2007. In addition to the stated interest
rate, the Company shall also pay to the Lender an amount equal to the lesser of
(a) $25,000 or (b) 3% of the net profits after taxes as of September 30, 2007,
to be payable simultaneously with the principal and interest due on December
31, 2007. If a portion of the principal or interest is paid prior to December
31, 2007, the calculation of the additional amount shall be adjusted pro-rata.
In the event of a default under the note when due, then the Lender, at its
election, may declare the entire unpaid principal, and all accrued but unpaid
interest, immediately due and payable. The maximum additional amount that the
Company shall pay is $25,000, and such amount is due on the maturity of the
Note.
On January 25, 2006, Wellstone Filters, Inc. received $500,000 from the Carlson
Group, Ltd., pursuant to a promissory note, dated January 25, 2006. This Note
is not associated with the prior promissory note which had been issued in 2004.
The Company borrowed the principal amount of $500,000, at an interest rate of
8% per annum, due in full on December 31, 2007. In addition to the stated
interest rate, the Company shall also pay to the Lender an amount equal to the
lesser of (a) $25,000 or (b) 3% of the net profits after taxes as of September
30, 2007, to be payable simultaneously with the principal and interest due on
December 31, 2007. If a portion of the principal or interest is paid prior to
December 31, 2007, the calculation of the additional amount shall be adjusted
pro-rata. In the event of a default under the note when due, then the Lender,
at its election, may declare the entire unpaid principal, and all accrued but
unpaid interest, immediately due and payable. The maximum additional amount
that the Company shall pay is $25,000, and such amount is due on the maturity
of the Note.
Wellstone 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 affect the outcome of Management's plans.
Wellstone is currently not marketing its products due to lack of financial
resources and will not be able to resume marketing until it can obtain
financing. Pending receipt of financing, the officer and director has been
advancing cash to the Company.
RISKS AND UNCERTAINTIES
We may be sued and may not be covered by insurance.
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 do not yet have any product
liability insurance, and if such insurance can be obtained it probably would be
very limited in scope of coverage to any claims that tobacco products
manufactured by or for us. Such insurance probably would not cover 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 actions would have a material and adverse effect on our financial
condition.
We are still in the Research and Development Stage and have not received any
significant revenues.
To date, Wellstone's activities have been limited to research and development,
product testing and initial marketing. We have not received any significant
revenues or income since inception and, even though sales and marketing of the
Wellstone brand have begun in January 2006, 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.
The report of our independent registered public accounting firm included in the
audited financials in our most recent Annual Report on Form 10-KSB contains an
explanatory paragraph expressing substantial doubt about our ability to
continue as a going concern.
As a result of our losses to date and our current lack of revenue, our
independent registered public accounting firm has concluded that there is
substantial doubt as to our ability to continue as a going concern, and
accordingly, our independent registered public accounting firm has included in
their report on our December 31, 2005 consolidated financial statements
included in our Annual Report on Form 10-KSB, filed with the Securities and
Exchange Commission on April 11, 2006, an explanatory paragraph describing the
events that have given rise to this uncertainty. The Company will seek
additional sources of capital through the issuance of debt or equity financing,
but there can be no assurance the Company will be successful in accomplishing
its objectives. The ability of the Company to continue as a going concern is
dependent on additional sources of capital.
We are dependent on the domestic tobacco business, which is contracting.
Substantially all of our revenues are expected to be derived from sales in the
United States. The U.S. cigarette market is a mature market and on average,
domestic consumption has decreased approximately 2% 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
from of increased state tax on cigarettes and settlement cost. If the U.S.
cigarette market continues to contract, it could adversely affect our potential
future sales, operating income and cash flows.
Weaknesses in the Company's internal controls and procedures could have a
material adverse effect on the Company.
Management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements in
accordance with GAAP. Management determined that there were no material
weaknesses in our internal control over financial reporting as of June 30,
2006. A material weakness is a control deficiency, or combination of control
deficiencies that results in a more than remote likelihood a material
misstatement of the annual or interim financial statements will not be
prevented or detected.
If we are unable to maintain our internal controls, our ability to report our
financial results on a timely and accurate basis could be adversely affected,
which could have a material adverse effect on our ability to operate our
business. Please see Item 3 - Controls and Procedures for more information
regarding the measures implemented in the quarter ended March 31, 2006, as well
as those that we intend to implement throughout 2006. Each remedy is designed
to remediate the deficiencies in our internal controls. In addition, even after
the remedial measures discussed in Item 3 - Controls and Procedures are fully
implemented, our internal controls may not prevent all potential errors or
fraud, because any control system, no matter how well designed, can only
provide reasonable and not absolute assurance that the objectives of the
control system will be achieved.
We do not have any production facilities unless we acquire them or contract out
production.
Problems in purchasing equipment, establishing manufacturing facilities and
meeting demand can be expected. Problems in contracting out production can also
be expected. If we cannot produce filter material or outsource production we
may not be able to meet market demands of our own brand nor can the filter be
used in existing brands unless we license the filer to such existing brands.
Competition could prevent us from meeting our objectives.
The cigarette industry is highly competitive. Our competitors include
developers of low-carcinogen tobacco and developers of other filter technology.
Such competition may have substantially greater financial, manufacturing,
marketing and other resources. Another company could develop filter technology
similar to ours. Competition will affect our ability to market our product and
obtain financing. Wellstone brands will be subject to increased competition and
this has resulted in additional 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 by smokers.
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, as expected,
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."
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 increasing, possibly substantial, volume from the
resulting 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 patents against infringement.
Our success in commercially exploiting our proprietary technology depends in
large part on our ability to defend the patents that were licensed to us, 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, either in the United States or in foreign
countries. The primary patents licensed to us were only issued in the United
States and not in 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 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 been paid and we do not anticipate that we will pay any
dividends in the future.
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 should not 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.
As the holders of a significant amount of common stock of Wellstone, management
and its affiliates have, and will have, substantial influence over Wellstone,
and such affiliates may have interests which differ from other holders.
Members of management, and their affiliates, own 75,383 shares of common stock,
on a fully diluted basis, or 65.7% of the common stock. As such, such
individuals have substantial influence and control over matters voted upon by
stockholders (such as the election of the directors to the Board of Directors
of Wellstone, mergers and sale of assets involving Wellstone and other matters
upon which stockholders of Wellstone vote). This power, in turn, gives them
substantial control over the business and operations of Wellstone.
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 our technology in the future. Our business plan
might not be implemented as set forth herein.
ITEM 3. CONTROLS AND PROCEDURES.
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed 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 and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, with the participation of our Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of June 30, 2007. In connection with the completion of its audit
of, and the issuance of its report on, our financial statements for the year
ended December 31, 2006, De Joya Griffith & Co, our independent registered
public accounting firm, identified deficiencies that existed in the design or
operation of our internal control over financial reporting that it considers to
be "material weaknesses." The Public Company Accounting Oversight Board has
defined a material weakness as a "significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected."
The deficiencies in our internal controls related to accounting for equity
transactions, including the issuance of stock and stock options for services.
The disclosure controls deficiencies related to the statement of stockholders
equity and footnote disclosure of information required by U.S. generally
accepted accounting principles. The adjustments to record the issuances of
stock and stock options for services or compensation and the footnote
disclosure deficiencies were detected in the audit process and have been
appropriately recorded and disclosed in our Form 10-KSB, filed with the
Securities and Exchange Commission on April 11, 2006. Based on our evaluation
and the deficiencies identified above, we concluded that, as of June 30, 2006,
our disclosure controls and procedures were effective in timely alerting us to
the material information relating to us (or our consolidated subsidiaries)
required to be included in the reports we file or submit under the Exchange
Act. We have implementing the following controls and procedures to ensure that
future issuances of securities are properly disclosed on Current Reports and
included in and reflected on Quarter and Annual Reports:
- - The Chief Financial Officer of the Company shall receive written notification
simultaneous with or immediately after all issuances of securities authorized
by the Board of Directors or granted by the Chief Executive Officer of the
Company, in the event that the Board of Directors grants the Chief Executive
Officer the ability to issue securities;
- - Prior to providing any Quarterly or Annual Reports to the Company's
independent registered public accounting firm, the Chief Financial Officer
shall contact the Company's transfer agent and request a statement specifying
the number of outstanding shares at the end of the period, a list of all
issuances during such period and a list of parties to whom such securities were
issued;
- - The Chief Financial Officer shall prepare a report detailing the number of
securities issued during the period based upon the written notification it
received from the Chief Executive Officer and the information provided by the
transfer agent;
- - The Chief Financial Officer shall deliver to the Company's independent
registered public accounting firm its report of the number of securities issued
during the period simultaneous with its delivery of a draft of the Quarterly or
Annual Reports.
- - The Chief Financial Officer shall deliver to the Board of Directors its
report of the number of securities issued during the period simultaneous with
its delivery of the Quarterly or Annual Reports and the Board of Directors
shall review such report and the Quarterly or Annual Reports prior to such
Quarterly or Annual Reports being filed with the Securities and Exchange
Commission.
These controls and procedures are a work in progress and the Company intends to
refine and improve upon them over time. Our management and Board of Directors
will continue to work with our auditors and other outside advisors to ensure
that our controls and procedures are adequate and effective.
PART II. OTHER INFORMATION
ITEM 6.EXHIBITS
Exhibits
31. Certifications
31.1 Certification of Learned J. Hand
32. Certifications
32.1 Certification pursuant to 18 U.S.C. Section 1350 of Learned J. Hand
SIGNATURES
Pursuant to the requirements the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLSTONE FILTERS, INC.
Date: August 14, 2007
By /s/ Learned J. Hand
-----------------------------
Learned J. Hand
Chief Executive Officer and
Acting Chief Financial Officer
(Principal Executive and
Financial Officer)