AURI INC - Quarter Report: 2008 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 2008

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File Number 0-28161

WELLSTONE FILTERS, INC.
 (Exact name of small business issuer as specified in its charter)

 

Delaware                             33-0619264                                                         State or other jurisdiction         (IRS Employer of incorporation or Identification No.)   300 Market Street, Suite 130-13, Chapel Hill , North Carolina    27516     (Address of principal executive offices)                                 (Zip Code)                                 (919) 370-4408                            (Issuer's telephone number)

 

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]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

The number of shares outstanding of the issuer's classes of Common Stock, as of September 30, 2008 was 105,989.

 

 

 

 

 

Item 1. FINANCIAL STATEMENTS

Wellstone Filters, Inc.
(A Company in the Development Stage)
Consolidated Balance Sheets
	Unaudited	Audited
ASSETS	September 30, 2008	December 31, 2007
Current Assets
Cash and cash equivalents	$                             -	$                            -
Total Current Assets	-	-
Furniture and equipment, net	-	1,294
Total Property and Equipment	-	1,294
Total Assets	$                             -	$                    1,294
LIABILITIES AND CAPITAL
Current Liabilities
Current portion of long term debt	$              2,250,000	$             2,250,000
Accounts Payable	557,694	553,194
Related party accounts payable	116,728	116,728
Accrued expenses	1,324,759	1,230,363
Note Payable to Affiliate	59,200	59,200
Total Current Liabilities	4,308,381	4,209,485
Total Liabilities	4,308,381	4,209,485
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; 105,989 and 105,989 outstanding, respectively	106	106
Paid in Capital	28,264,340	28,264,340
Accumulated deficit	(32,572,827)	(32,472,637)
Total stockholders' deficit	(4,308,381)	(4,208,191)
Total liabilities & equity	$                             -	$                    1,294

 The accompanying notes are an integral part of the financial statements.

2

WELLSTONE FILTERS, INC.
(A Company in the Development Stage)
Condensed Consolidated Statement of Operations
(unaudited)
	Three Months Ended		Nine Months Ended			Twelve Months Ended		Cumulative
	September 30		September 30			December 31		Amounts
								Since
	2008	2007	2008	2007		2007		Inception
								(Feb. 1998)
Revenues	$                   -	$         -	$           -	$         -		$                               -		$      258,193
		-		-
Cost of Sales	-	-	-	-		-		273,075
		-		-
Gross Profit	-	-	-	-		-		(14,882)
Expenses:
General and administrative expense	500	2,811	5,794	69,870		71,193		31,224,537
Research and development expense	-	-	-	-		-		237,269
Loss from operations	(500)	(2,811)	(5,794)	(69,870)		(71,193)		(31,476,688)
Interest Expense	31,465	31,465	94,396	94,396		125,861		1,443,213
Loss before income taxes	(31,965)	(34,277)	(100,190)	(164,266)		(197,054)		(32,919,901)
Forgiveness of debt	-	-	-	120,000		120,000		347,074
Income tax benefit	-	-	-	-		-		-
Net loss	$         (31,965)	$(34,277)	$(100,190)	$(44,266)		$                     (77,054)		$(32,572,827)
Basic and diluted weighted average number of common shares outstanding	105,989	105,989	105,989	105,989		105,989
Basic and Diluted Net Loss Per Share	$             (0.30)	$   (0.32)	$     (0.95)	$   (0.42)		$                        (0.73)

 

 

The accompanying notes are an integral part of the financial statements.

3

 

WELLSTONE FILTERS, INC.
(A Company in the Development Stage)
Consolidated Condensed Statement of Cash Flows
(Unaudited)
				Cumulative
		Nine Months Ended		Amount
		September 30		Since
		2008	2007	Inception
				(Feb. 17, 1998)
Cash from operating activity:
	Net income/(loss)	$   (100,190)	$     (44,266)	$  (32,572,827)
	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	-	-	1,020,000
	Depreciation	-	4,855	25,594
	Rental expense forgiven by officer and board member	-	-	29,400
	Loss on disposal of furniture	-	-	1,795
	Gain on forgiveness of debt	-	(120,000)	-
	(Increase) in accounts receivable	-	-	-
	(Increase) / decrease in inventory	-	-	-
	Increase/(decrease) in bank overdraft	-	-	45
	(Increase) in prepaid expenses	-	-	-
	Increase/(decrease) in accounts payable	5,794	3,213	557,694
	Increase in related party accounts payable	-	61,145	111,436
	Increase in accrued expense	94,396	94,396	1,318,839
	Net cash used in operating activity	$                -	$          (657)	$    (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	-	-	199,000
	Proceeds from exercise of stock options	-	-	26,000
	Proceeds form long-term debt	-	-	2,250,000
	Member contribution of equity	-	-	100
	Proceeds form related party notes payable	-	-	59,200
	Net cash provided from financing activities	-	-	2,534,300
	Net increase/(decrease) in cash and cash equivalents	-	(657)	-
Cash and cash equivalents at beginning of period		-	657	-
Cash and cash equivalents at end of period		$                -	$                -	$                  -

 

Supplemental Disclosure of Cash Flow Information:

Cash paid during the period for interest                                                               $                     0      $                     0      $                        0

Cash paid during the period for income taxes                                                      $                     0      $                     0      $                        0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the financial statements.

4

WELLSTONE FILTERS, INC.
 (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED 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 as of September 30, 2008 and for all periods presented.. 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, 2007, 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 for 84,000 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,  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 States 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. The Company is not currently generating any revenues from planned principal operations and is considered a development stage company as defined in Statement of Financial Accounting Standards No. 7. 

These Consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant inter-company transactions and accounts have been eliminated in consolidation.

 

2  -  GOING CONCERN

 

The Company incurred a net loss of $100,190 and $44,266 for the nine months ended September 30, 2008 and 2007.  The Company's liabilities exceed its assets by $4,308,381 as of September 30, 2008.  The Company's sole operations have been discontinued with no other source of operating revenues. These factors create substantial doubt about the Company's ability to continue as a going concern.  The  Company's  management  plans to continue as a going concern  revolves  around  its  ability  to  raise funds to begin operating again,  as  well  as  raise  necessary  capital  to pay ongoing general and administrative expenses  of  the  Company.

 

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. The  financial statements do not include any adjustments that might be necessary if  the  Company  is  unable  to  continue  as  a  going  concern.

5

WELLSTONE FILTERS, INC.
 (A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

(continued)

3-  NEW ACCOUNTING PRONOUNCEMENTS

 

Recently Enacted Accounting Standards - In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.”  FIN 48 prescribes a minimum recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition for tax related positions.  FIN 48 becomes effective for the Company on January 1, 2007.  The Company does not believe that the adoption of FIN 48 will have any effect on the consolidated financial statements.

4 -. RELATED PARTY TRANSACTIONS

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 $37,841 and $31,248 as of June 30, 2008 and December 31, 2007, respectively.

Accounts payable – related party include amounts due to an officer of the Company and the brother of an officer of the Company.

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, 2007. The Company recorded other income in the nine months ended September 30, 2007 of $120,000 from forgiveness of debt in connection with the granting of a license to its technology outside the United States.

During the three months ended March 31, 2006, the Company received $2,000 from the exercise of stock options.

 

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 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. 

6

7 - NOTE PAYABLE

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 mount 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-Q 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

The Company does not forecast any 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.

7

RESULTS OF OPERATIONS

During the nine months ended September 30, 2008 the Company had a loss of $100,190.  This loss includes general and administrative expenses of $5,794 and interest expense of $94,396.  Audit fees of $3,000 are included within the general and administrative expenses.

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.  As of March 31, 2008, no royalties have been paid to Wellstone, and to the knowledge of Wellstone at this time no royalties are due.

LIQUIDITY AND CAPITAL RESOURCES

We began shipping cigarettes in the US during January 2006 with shipments to several states. Almost all of the Company’s sales in 2006 took place prior to June 30, 2006 ($215,741 for the six months ended June 30, 2006) with only minimal sales in the quarter ended September 30, 2006.  There have been no sales or revenues in the three months ended March 31, 2008

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 principle, 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 principle 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.

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. Management does not believe that it is presently able to raise the required funds for operations, and so it has suspended operations.

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.

8

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 began 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 as of December 31, 2007 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, 2007 consolidated financial statements included in our Annual Report on Form 10-KSB, filed with the Securities and Exchange Commission on May 15, 2007, 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. 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.

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.

9

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.

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 Pink Sheets LLC or 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.

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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. Quantitative and Qualitative Disclosures About Market Risk.

 

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

 

Item 4T. Controls and Procedures.

 

Disclosure Controls and Procedures

 

Evaluation of disclosure controls and procedures. The Company’s principal executive officer and its principal financial officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d -14 (c) as of June 30, 2008., Based on this evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including our consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to management, including our principal executive officer/principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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 Changes in internal controls. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

Item 6.EXHIBITS

Exhibits
31. Certifications
31.1 Certification of Learned J. Hand as Chief Executive and Financial Officer
32. Certifications
32.1 Certification pursuant to 18 U.S.C. Section 1350 of Learned J. Hand as Chief Executive and Financial Officer

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: November 12, 2008                                         By /s/ Learned J. Hand                                         -----------------------------                                         Learned J. Hand                                         Chief Executive Officer and                                         Acting Chief Financial Officer                                         (Principal Executive and                                          Financial Officer)

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