WELLSTONE FILTER SCIENCES INC /DE/ - FORM 10-Q

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EX-32 - WELLSTONE FILTER SCIENCES INC /DE/	exhibit32.htm
EX-31 - WELLSTONE FILTER SCIENCES INC /DE/	certification.htm

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, 2009

[ ] 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)

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):


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 September 30, 2009 was 93,445,596.

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Item 1. FINANCIAL STATEMENTS

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

CONSOLIDATED BALANCE SHEETS

Unaudited

Audited

September 30,

December 31,

2009

2008

ASSETS

Current Assets

Cash and cash equivalents

Total Current Assets

Furniture and equipment, net

Total Property and Equipment

Total Assets

LIABILITIES AND CAPITAL

Current Liabilities

Current portion of long term debt

1,500,000

2,250,000

Accounts payable

558,444

557,944

Related party accounts payable

116,728

Accrued expenses

663,671

1,356,224

Note payable to Affiliate

59,200

Total Current Liabilities

2,722,365

4,340,096

Total Liabilities

2,722,365

4,340,096

STOCKHOLDERS’ EQUITY (DEFICIT)

Preferred stock, $0.001 par value, 1,000,000

shares authorized; no shares issued and outstanding

Common stock, $0.001 par value 300,000,000

shares authorized; 93,445,596 and 105,989

outstanding respectively

93,552

106

Paid in Capital

29,867,306

28,264,340

Accumulated deficit

(32,683,223)

(32,604,542)

Total stockholders’ deficit

(2,722,365)

(4,340,096)

Total liabilities & equity

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

____________________________________________________________________________________________________________________

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

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

CUMULATIVE

FROM INCEPTION

FOR THE THREE

FOR THE NINE

(FEBRUARY 1998)

MONTHS ENDED

September 30,

September 30,
2009

2008

2009

2008

2009

Revenues

258,193

COST OF GOODS SOLD

273,075

GROSS PROFIT

(14,882)

EXPENSES

General and Administrative Exp.

250

500

750

5,794

31,225,287

Research and Development Exp.

237,269

(LOSS) FROM OPERATIONS

(250)

(500)

(750)

(5,794)

(31,477,439)

OTHER INCOME (EXPENSE):

Interest Expense

(15,000)

(31,465)

(77,931)

(94,396)

(1,552,609)

NET (LOSS) BEFORE INCOME TAXES

(15,000)

(31,965)

(76,681)

(100,190)

(33,030,297)

FORGIVENESS OF DEBT

347,074

INCOME TAX BENEFIT

NET (LOSS)

(15,250)

(31,965)

(78,681)

(100,190)

(32,683,223)

NET (LOSS) PER SHARE

(.00)

(.30)

(.13)

(.95)

BASIC AND DILUTED

WEIGHTED AVERAGE NUMBER

OF SHARES OUTSTANDING

93,551,933

105,989

618,844

105,989

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

________________________________________________________________________________________________

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

(Unaudited)

CUMULATIVE

FROM INCEPTION

FOR THE NINE

(FEBRUARY 1998)

MONTHS ENDED

September 30, 2009

September 30, 2008

September 30, 2009

CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)

(78,681)

(100,190)

(32,683,223)

Adjustments to reconcile net loss to

net cash used in operating activities

Issuances 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

1,294

25,594

Rental expense forgiven by officer and board member

29,400

Loss on disposal of furniture

1,795

Increase in bank overdraft

Increase in accounts payable

750

5,794

558,694

Increase in related party accounts payable

111,436

Increase in accrued expense

77,930

94,396

1,428,234

Net cash flows from operating activities

(2,518,078)

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

NET INCREASE (DECREASE) IN CASH

CASH BALANCE AT BEGINNING

OF PERIOD

CASH BALANCE AT END OF PERIOD

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

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)

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, 2009 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-K for the year ended December 31, 2008, 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 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 intercompany transactions and accounts have been eliminated in consolidation.

2 - PRINCIPAL ACCOUNTING POLICIES

Revenue Recognition

The Company recognizes revenues in accordance with the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”. The Company recognizes revenue from product sales when the orders are completed and shipped, provided that collection of the resulting receivable is reasonably assured. Amounts billed to customers are recorded as sales while the shipping costs are included in cost of sales. Returns on defective custom parts may only be exchanged for replacement parts within 30 days of the invoice date. Returns on defective catalogue parts, which can be resold, may be exchanged for replacement parts or for a refund. Revenue from non-refundable customer tooling deposits is recognized when the materials are shipped or when the deposit is forfeited, whichever is earlier.

______________________________________________________________________________________________________________________

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(continued)

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Income tax

We are subject to income taxes in the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In accordance with FASB ASC Topic 740, “Income Taxes,” we provide for the recognition of deferred tax assets if realization of such assets is more likely than not.

Non-Cash Equity Transactions

Shares of equity instruments issued for non-cash consideration are recorded at the fair value of the consideration received based on the market value of services to be rendered, or at the value of the stock given, considered in reference to contemporaneous cash sale of stock.

Estimates

The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of net sales and expenses during the reported periods. Actual results may differ from those estimates and such differences may be material to the financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of fixed assets, fair market values of inventory, and goodwill and intangible assets impairment tests. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.

Fair Value Measurements

Effective beginning second quarter 2009, the FASB ASC Topic 825, Financial Instruments, requires disclosures about fair value of financial instruments in quarterly reports as well as in annual reports. For the Company, this statement applies to certain investments and long-term debt. Also, the FASB ASC Topic 820, Fair Value Measurements and Disclosures , clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

__________________________________________________________________________________________________________________________

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(continued)

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Various inputs are considered when determining the value of the Company’s investments and long-term debt. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.

Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc…).

Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

The Company adoption of FASB ASC Topic 825 did not have a material impact on the company’s consolidated financial statements.

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. The Company’s had no financial assets and/or liabilities carried at fair value on a recurring basis at September 30, 2009.

The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment. As of September 30, 2009, the Company had no assets.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(continued)

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basic and diluted earnings per share

Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted Earnings per share is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:

Warrants,

Employee stock options, and

Other equity awards, which include long-term incentive awards.

The FASB ASC Topic 260, Earnings Per Share, requires the Company to include additional shares in the computation of earnings per share, assuming dilution.

Diluted earnings per share is based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Basic and diluted earnings per share are the same as there was no dilutive effect of the outstanding stock options for the three and nine months ended September 30, 2009 and 2008.

Concentrations, Risks, and Uncertainties

The Company did not have a concentration of business with suppliers or customers constituting greater than 10% of the Company’s gross sales during 2009 and 2008.

Subsequent Events

In May 2009, the FASB issued accounting guidance now codified as FASB ASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. FASB ASC Topic 855 is effective for interim or fiscal periods ending after June 15, 2009. Accordingly, the Company adopted the provisions of FASB ASC Topic 855 on July 9, 2009. The Company has evaluated subsequent events for the period from September 30, 2009, the date of these financial statements, through November 15, 2009, which

________________________________________________________________________________________________________________________

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(continued)

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

represents the date these financial statements are being filed with the Commission. Pursuant to the requirements of FASB ASC Topic 855, there were no subsequent events.

Stock Based Compensation

For purposes of determining the variables used in the calculation of stock compensation expense under the provisions of FASB ASC Topic 505, “Equity” and FASB ASC Topic 718, “Compensation — Stock Compensation,” we perform an analysis of current market data and historical company data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted, any fluctuations in these calculations could have a material effect on the results presented in our Condensed Consolidated Statement of Operations and Other Comprehensive Income. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our financial statements.

There were no share-based compensation costs that were included in operating expenses for the three months ended September 30, 2009 and 2008, respectively.

Recently Enacted Accounting Standards

In June 2009 the FASB established the Accounting Standards Codification ("Codification" or "ASC") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants. Existing GAAP was not intended to be changed as a result of the Codification, and accordingly the change did not impact our financial statements. The ASC does change the way the guidance is organized and presented.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(continued)

SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurements (Continued)

Statement of Financial Accounting Standards ("SFAS") SFAS No. 165 (ASC Topic 855),"Subsequent Events", SFAS No. 166 (ASC Topic 810), "Accounting for Transfers of FinancialAssets-an Amendment of FASB Statement No. 140", SFAS No. 167 (ASC Topic 810),"Amendments to FASB Interpretation No. 46(R)", and SFAS No. 168 (ASC Topic 105), "TheFASB Accounting Standards Codification and the Hierarchy of Generally Accepted AccountingPrinciples-a replacement of FASB Statement No. 162" were recently issued. SFAS No. 165, 166, 167, and 168 have no current applicability to the Company or their effect on the financialstatements would not have been significant.

Accounting Standards Update ("ASU") ASU No. 2009-05 (ASC Topic 820), which amends Fair

Value Measurements and Disclosures - Overall, ASU No. 2009-13 (ASC Topic 605), MultipleDeliverable Revenue Arrangements, ASU No. 2009-14 (ASC Topic 985), Certain Revenue Arrangements that include Software Elements, and various other ASU's No. 2009-2 through ASU No. 2009-15 which contain technical corrections to existing guidance or affect guidance to specialized industries or entities were recently issued. These updates have no current applicability to the Company or their effect on the financial statements would not have been significant.

3- GOING CONCERN

The Company incurred a net loss of $78,681 and $(100,190) for the nine months ended September 30, 2009 and 2008. The Company's liabilities exceed its assets by $2,722,365 as of September 30, 2009. The Company has not received revenues for more than two years. 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 resume sales, 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.

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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 $37,109 as of December 31, 2008. The notes totaling $81,700 and interest accrued of $40,049 as of June 30, 2009 were converted into shares of common stock at a price of $.01 per share as of June 30, 2009.

Accounts payable – related party include amounts due to an officer of the Company and the brother of an officer of the Company. These amounts ($94,228 as of June 30, 2009) were converted into common stock of the Company at the rate of $.01 per share. In addition, the officer converted $528,000 in accrued compensation (included as accrued expenses) into shares of common stock at $.01 per share, but these latter shares vest in three years; the death or disability of the officer, or the Company attaining earnings of $.10 per share.

5. SUPPLEMENTAL CASH FLOW INFORMATION

No amounts were paid for interest or income taxes during the period from February 17, 1998 (date of inception) to September 30, 2009. Effective June 30, 2009, the Company converted $953,444 in debt owed to third parties into 19,048,891 shares of common stock, and converted $743,967 in debt owed to affiliates into 74,396,700 shares. See note 7.

6. LIQUIDITY

The Company launched its Wellstone brand of cigarettes in the United States during the first quarter of 2006 and has shipped all brand styles to Arizona, Louisiana, North Carolina, Virginia and California. Additionally, the Company had partnered with several suppliers of convenience stores in the Southeastern and the West Coast to carry the Wellstone brand family. Faced with inadequate cash resources to fund the market introduction of its products; management determined to suspend further marketing activity in 2006 and to concentrate on selling filters to other manufacturers. The Company is funding its cash needs from funds lent by its officer and director.

7 - NOTES PAYABLE - RESTRUCTURING

______________________________________________________________________________________________________________________-

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 Company is in negotiation with the holders of the $1.5 million in notes and intends to review its other debt, and believes that substantially all of such debt will be converted into common stock or negotiated down in the next few months. With the debt restructured, management believes it can attract more equity financing during the remainder of 2009.

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.

MARKETING

The Company has determined to focus on the marketing of its filter technology because of the regulatory opportunity provided by the Family Smoking Prevention and Tobacco Control Act. 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.

RESULTS OF OPERATIONS

The Company has had minimal expenses other than accrued interest on its debts. There remains $5,000 per month in interest expense which was not eliminated in the June 2009 restructuring. We expect that as we attempt to re-enter the market in 2009 we will have expenses of about $10,000 per month.

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, 2009, no royalties have been paid to Wellstone, and to the knowledge of Wellstone at this time no royalties are due.

___________________________________________________________________________________________________________________________

LIQUIDITY AND CAPITAL RESOURCES

Management has converted $743,967 in debt including $528,000 in accrued salary into common stock. The Company is in negotiation with the holders of the $1.5 million in notes and intends to review its other debt, and believes that substantially all of such debt will be converted into common stock or negotiated down in the next few months. As of June 30, 2009, as a result of the restructuring, our liabilities were $2,707,115, which represents a 38% reduction from the debt of $4,340,096 as of December 31, 2008. With the debt restructured, management believes it can attract more equity financing during the remainder of 2009.

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 believes that following the restructuring, the Company will be 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.

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-K as of December 31, 2008 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, 2008 consolidated financial statements included in our Annual Report on Form 10-K 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.

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.

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The Family Smoking Prevention and Tobacco Control Act was enacted in June 2009. This legislation places tobacco products under the jurisdiction of the U.S. Food and Drug Administration ("FDA"), which is empowered to promulgate regulations governing the sale and advertising of tobacco products. This Act is designed primarily to discourage the sale to, and consumption by, adolescents and children. The Act also provides for FDA regulation of modified risk tobacco products. Wellstone believes that its patented technology is uniquely suited as a modified risk tobacco product; however, the FDA has not yet promulgated regulations implementing this Act.

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.

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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.

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.

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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, 2009. 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.

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 1.

LEGAL PROCEEDINGS - Wellstone Filters, Inc. and its subsidiary Wellstone Tobacco were served on a collection lawsuit by a former counsel in North Carolina. The amount of the liability (approximately $28,000) was already included in our financial statements. The plaintiff dismissed all parties except for Wellstone Tobacco and Wellstone Tobacco confessed to judgment on $24,456.06 puls interest at 8% from and after June 23, 2006, and $3,340.27 plus interest t 8% from October 5, 2006 until paid. These amounts are already accrued on our financial statements.

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: November 16, 2009

By /s/ Learned J. Hand

Learned J. Hand, Chief Executive and Financial Officer (prinicpal executive and

financial officer and duly authorized officer)

WELLSTONE FILTER SCIENCES INC /DE/ - FORM 10-Q - November 19, 2009

Attached files

WELLSTONE FILTER SCIENCES INC /DE/ Reports