AURI INC - Quarter Report: 2010 June (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

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 June 30, 2010

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

Commission File Number 0-28161

WELLSTONE FILTER SCIENCES, 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.)

organization)

710 Market Street 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):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
(Do not check if a smaller reporting company)

The number of shares outstanding of the issuer's classes of Common Stock, as of June 30, 2010 was 93,551,580.

Item 1. FINANCIAL STATEMENTS

Wellstone Filter Sciences, Inc.

(A Company in the Development Stage)

Consolidated Balance Sheets

(Unaudited)

(Audited)

ASSETS

June 30, 2010

December 31, 2009

Current assets

Cash and cash equivalents

2,424

Total current assets

Total assets

2,424

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities

Notes payable

1,500,000

Accounts payable

561,178

Related party accounts payable

2,500

Accrued expenses

678,620

Total current liabilities

2,500

2,739,849

Total liabilities

2,500

2,739,849

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, 3000,000 shares

authorized; 93,551,580 issued and outstanding

93,552

Paid in capital

35,613,824

32,843,175

Accumulated deficit

(35,707,452)

(35,674,152)

Total stockholders' equity (deficit)

(76)

(2,737,425)

Total liabilities and stockholders' equity (deficit)

2,424

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

WELLSTONE FILTERS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

CUMULATIVE

FOR THE THREE

FOR THE SIX

FROM INCEPTION

MONTHS ENDED

(FEBRUARY 17, 1998)

June 30,

2010

2009

2010

2009

June 30, 2010

Revenues

COST OF GOODS SOLD

GROSS PROFIT

EXPENSES

General and administrative exp.

2,500

20,881,655

Research and development exp.

5,057

(LOSS) FROM OPERATIONS

(2,500)

(20,886,712)

OTHER INCOME (EXPENSE):

Interest expense

(31,465)

(62,930)

(1,582,609)

NET (LOSS) BEFORE INCOME TAXES

(2,500)

(31,465)

(2,500)

(62,930)

(22,469,321)

FORGIVENESS OF DEBT

347,074

INCOME TAX BENEFIT

NET LOSS FROM CONTINUING

OPERATIONS

(2,500)

(31,465)

(2,500)

(62,930)

(22,122,247)

LOSS FROM DISCONTINUED

OPERATIONS

(250)

(30,800)

(500)

(13,585,205)

NET (LOSS)

(2,500)

(31,715)

(33,300)

(63,430)

$(35,707,452)

NET (LOSS) PER SHARE

(.00)

(.32)

(.00)

(.10)

BASIC AND DILUTED

WEIGHTED AVERAGE NUMBER

OF SHARES OUTSTANDING

93,551,580

105,989

93,551,580

618,844

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

WELLSTONE FILTERS, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS

(Unaudited)

CUMULATIVE

FROM INCEPTION

FOR THE SIX

(FEBRUARY 17, 1998)

MONTHS ENDED

June 30, 2010

June 30, 2009

June 30, 2010

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss) from continuing operations

(2,500)

(62,930)

(22,122,247)

Adjustments to reconcile net loss to

net cash used in operating activities

Issuances of common stock for services

13,835,869

Issuance of stock options for services

654,946

Issuance of stock options to employees

as compensation

15,475,000

Amortization of debt discount

1,020,000

Depreciation

25,594

Rental expense forgiven by officer and board member

29,400

Loss on disposal of furniture

1,795

Increase in accounts payable

574,540

Increase in related party accounts payable

2,500

500

116,420

Increase in accrued expense

62,930

1,458,234

Net cash flows from operating activities

500

11,069,551

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of fixed assets

(16,222)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from sale of common stock

199,000

Proceeds from exercise of stock options

26,000

Proceeds from long term debt

2,250,000

Member contribution of equity

100

Proceeds from related party notes payable

59,200

Net cash flows from financing activities

2,534,300

CASH USED BY DISCONTINUED

OPERATIONS

(500)

(13,585,205)

NET INCREASE (DECREASE) IN CASH

2,424

CASH BALANCE AT BEGINNING

OF PERIOD

2,424

CASH BALANCE AT END OF PERIOD

2,424

Supplemental Disclosure of Cash Flow Information:

Cash paid during the period for interest

Cash paid during the period for income taxes

Stock issued on conversion of debt

1,696,411

Dividend in kind

2,770,649

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

WELLSTONE FILTER SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Six Months Ended June 30, 2010

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 as of June 30, 2010 and the results of operations and cash flows for the three and six months ended June 30, 2010 and 2009. 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-K for the year ended December 31, 2009, 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. In September 2009 the registrant changed its name to “Wellstone Filter Sciences, Inc."

The Company is engaged in the development and marketing of a proprietary cigarette filter technology. In the quarter ended March 31, 2010, the Company declared a dividend to its stockholders of all of the outstanding shares in its subsidiary, Wellstone Tobacco Company, which markets the Wellstone brand of cigarettes utilizing its patented reduced risk filter. 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 subsidiary Wellstone Filters, LLC. All significant intercompany transactions and accounts have been eliminated in consolidation.

2 - GOING CONCERN

The Company incurred a net loss of $2,500 and $62,930 for the six months ended June 30, 2010 and 2009. The Company's liabilities exceed its assets by $76 as of June 30, 2010. 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.

WELLSTONE FILTER SICENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Six Months Ended June 30, 2010

(continued)

3- NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-01, “Equity (Topic 505-10): Accounting for Distributions to Shareholders with Components of Stock and Cash (A Consensus of the FASB Emerging Issues Task Force)”. This amendment to Topic 505 clarifies the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying Topics 505 and 260. This update is effective for interim and annual periods ending on or after December 15, 2009, and would be applied on a retrospective basis. The Company does not expect the provisions of ASU 2010-01 to have a material effect on the financial position, results of operations or cash flows of the Company.

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-02, “Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary”. This amendment to Topic 810 clarifies, but does not change, the scope of current US GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and removes the potential conflict between guidance in that Subtopic and asset derecognition and gain or loss recognition guidance that may exist in other US GAAP. An entity will be required to follow the amended guidance beginning in the period that it first adopts FAS 160 (now included in Subtopic 810-10). For those entities that have already adopted FAS 160, the amendments are effective at the beginning of the first interim or annual reporting period ending on or after December 15, 2009. The amendments should be applied retrospectively to the first period that an entity adopted FAS 160. The Company does not expect the provisions of ASU 2010-02 to have a material effect on the financial position, results of operations or cash flows of the Company.

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-6, “Improving Disclosures about Fair Value Measurements.” This update requires additional disclosure within the roll forward of activity for assets and liabilities measured at fair value on a recurring basis, including transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy and the separate presentation of purchases, sales, issuances and settlements of assets and liabilities within Level 3 of the fair value hierarchy. In addition, the update requires enhanced disclosures of the valuation techniques and inputs used in the fair value measurements within Levels 2 and 3.

The new disclosure requirements are effective for interim and annual periods beginning after December 15, 2009, except for the disclosure of purchases, sales, issuances and settlements of Level 3 measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010. As ASU 2010-6 only requires enhanced disclosures, the company does not expect that the adoption of this update will have a material effect on its financial statements.

In February 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for a Securities and Exchange Commission (SEC) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP.

WELLSTONE FILTER SICENCES, INC.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Six Months Ended June 30, 2010

(continued)

3 - NEW ACCOUNTING PRONOUNCEMENTS - continued

The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SECs literature. All of the amendments in the ASU were effective upon issuance except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements position or results of operations.

4 - RELATED PARTY TRANSACTIONS

In the six months ended June 30, 2010, an officer/shareholder advanced $2,500 for the company. The advances are due on demand and bear no interest.

5. LIQUIDITY

The Company is funding its cash needs from funds lent by its officer and director.

6 - NOTE PAYABLE - RESTRUCTURING AND DISTRIBUTION AGREEMENT

The Company obtained financing for its operations from the issuance of promissory notes, as follows: $250,000 in notes on May 17, 2006; $500,000 in notes on January 25, 2006; and $1,500,000 in notes in October 2004. All the notes were due December 31, 2007 and bore interest at 8%; however, the $250,000 and $500,000 notes were entitled to additional interest 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 was to be adjusted pro-rata. The maximum additional amount that the Company shall pay is $25,000, and such mount is due on the maturity of such notes. The Company was unable to repay the above notes. As of June 30, 2009, there was $275,000 in accrued interest on the $1.5 million note and $202,444 in accrued interest on the other two notes. Effective June 30, 2009, the noteholders of the $250,000 and $500,000 notes agreed to convert their notes and the $202,444 into 19,048,891 shares of commons stock.

The holders of the $1.5 million in notes have transferred such debt to Wellstone Tobacco Company and has released the Company from liability on this note, pursuant to a Distribution Agreement dated as of March 31, 2010. As a result of the Distribution Agreement, all the debt associated with Wellstone Tobacco continues to be the sole liability of Wellstone Tobacco, and all of the outstanding shares of Wellstone Tobacco are held in trust for the pro rata distribution to the Company stockholders, and the Company has minimal debt as of June 30, 2010. With the debt restructured, management believes it can attract more equity financing during 2010.

8 - SUBSEQUENT EVENT

Effective July 27, 2010, all the shares of Wellstone Tobacco which had been held by the transfer agent were distributed to the shareholders. All certificates representing the shares bear a restrictive legend until such time as a registration statement can be filed and declared effective or an exemption from registration is available.

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-Qs. 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- Q and Annual Reports on Form 10-K 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.

RESULTS OF OPERATIONS

During the six months ended June 30, 2010 and 2009 the Company had losses of $2,500 and $62,930. This loss includes general and administrative expenses of $2,500 in 2010 and interest expenses of $62,930 in 2009.

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 June 30, 2010, no royalties have been paid to Wellstone, and to the knowledge of Wellstone at this time no royalties are due.

LIQUIDITY AND CAPITAL RESOURCES

The holders of the $1.5 million in notes have agreed to transfer such debt to Wellstone Tobacco Company and has released the Company from liability on this note, pursuant to a Distribution Agreement dated as of March 31, 2010. As a result of the Distribution Agreement, all the debt associated with Wellstone Tobacco continues to be the sole liability of Wellstone Tobacco, and all of the outstanding shares of Wellstone Tobacco were distributed pro rata distribution to the Company stockholders, and the Company has minimal debt as of June 30, 2010. With the debt restructured, management believes it can attract more equity financing during 2010.

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.

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, 2010. 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 not effective to enable us to accurately record, process, summarize and report certain information required to be included in the Company’s periodic SEC filings within the required time periods, and to accumulate and communicate to our management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. In carrying out that evaluation, management identified a material weakness (as defined in Public Company Accounting Oversight Board Standard No. 2) in our internal control over financial reporting.

The material weakness identified by Management consisted of inadequate staffing and supervision within the bookkeeping and accounting operations of the Company. Because there is only one employee with bookkeeping and accounting functions, we are unable to segregate duties within the Company’s internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. Accordingly, based on their evaluation of the Company’s disclosure controls and procedures as of June 30, 2010, the Company’s Chief Executive Officer, who is also the acting Chief Financial Officer has concluded that, as of that date, the Company’s controls and procedures were not effective for the purposes described above. The Company intends to take steps to remediate such procedures as soon as reasonably possible.

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.

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 FILTER SCIENCES, INC.

Date: August 20, 2010

By /s/ Learned J. Hand

Learned J. Hand

Chief Executive Officer and

Acting Chief Financial Officer

(Principal Executive and

Financial Officer) and Duly Authorized Officer