Item 1
Business
Item 1A
ITEM 1A.
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by or on behalf of Wellstone, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our potential product and service revenues, acceptance of our products and services, expenses, net income(loss) and earnings(loss) per common share.
We have three years of business operations and sales.
The Company was incorporated in January 2008. The Company’s current operations are subject to all of the risks inherent in early stage and under capitalized business enterprises. The likelihood of the success of the Company must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the early stage of a new business and the competitive aspect of the products that the Company produces. No assurance can be given that the Company will be able to generate sufficient revenues to operate profitably in the future or to pay the Company’s debts as they become due.
We have incurred significant losses to date and may continue to incur losses.
We have had limited revenues and incurred net losses in each fiscal year since we commenced operations. The following table represents our revenues and net losses incurred for each of our last two fiscal years:
While we expect to continue to derive revenues from the sale of our products, in order to achieve and sustain profitable operations, we must successfully and significantly expand our market presence and increase revenues. We may continue to incur losses in the future and may never generate revenues sufficient to become profitable or to sustain profitability. Continuing losses may impair our ability to raise the additional capital required to continue and expand our operations.
Our auditors have expressed doubt about our ability to continue as a going concern.
The Report of Independent Registered Public Accounting Firm to our December 31, 2010 financial statements includes an explanatory paragraph stating that the recurring losses and negative cash flows from operations since inception and our limited working capital and cash and cash equivalent balance at December 31, 2010 raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
If we are unable to obtain additional funding, we may have to reduce or discontinue our business operations.
As of February 28, 2011, we had cash and cash equivalents of $22,281. We have historically experienced negative cash flows from operations and we expect to continue to experience negative cash flows from operations in the future. Therefore, our ability to continue and expand our operations is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to fund our future operations. We anticipate that we will be required to seek additional financing to continue our operations. There can be no assurance that any additional financing on commercially reasonable terms, or at all, will be available when needed. The inability to obtain additional capital may reduce our ability to continue to conduct business operations. Any additional equity financing may involve substantial dilution to our then existing stockholders. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
We are dependent on third-party manufacturers for our products.
We currently utilize southern China third party manufacturers to produce our products. In some cases, third party manufacturers may not be obligated under contracts that fix the term of their commitments and they may discontinue production upon little or no advance notice. Manufacturers also may experience problems with product quality or timeliness of product delivery. We will be dependent on these manufacturers to comply with our quality controls. The loss of a manufacturer may disrupt our ability to fill orders, or require us to suspend production until we find another manufacturer. We believe that we will be unable to closely control the manufacturing efforts of these third party manufacturers. Further, should any of these manufacturers fail to meet applicable standards and laws, we or such manufacturer could face various government penalties or an order to cease production. A delay in shipping products from China could adversely impact our ability to deliver our products to customers on a timely basis. This potential delay could cause our customers to cancel orders thereby reducing our projected sales. We contract with a third party representative of the manufacturers which representative requires prepayment of product costs prior to delivery. Generally these terms require a 30% prepayment some time in advance of shipment from China and the remaining 70% FOB China. There is no guarantee the manufacturer will deliver the product after the 30% prepayment.
We have limited intellectual property protection to date.
Our brand name “Auri” has been registered in the US, Canada and 27 EU countries, including Germany, Spain, UK, Italy, Belgium, Sweden, Portugal, Ireland, Greece, France and The Netherlands, with China currently in the process of registration, is exclusively licensed on a royalty free basis for use by us on a world wide basis in connection with the design, manufacture, marketing and sales of footwear. Three design patents have been issued with three utility pending.
Other than the three patents that have been issued, until any of the remaining patent applications issue as patents, which we cannot guarantee will occur, we do not have any way to protect our technology. Further, we cannot be certain that we will be able to successfully obtain, develop or enforce any future patent, trademark or our rights in other proprietary technology against third parties, or defend any future patent or other proprietary technology that we hold against invalidity, unenforceability or infringement claims from competitors or other third parties, or defend against a claim of infringement of the intellectual property rights of any third party. The products are relatively easy to copy and reproduce. Our future success will depend on our ability to prevent others from infringing our proprietary rights, as well as our ability to operate without infringing the proprietary rights of others. We may be required at times to take legal action to protect our proprietary rights and, despite our reasonable efforts, we may be sued for infringing the patent rights of others. In such case we may need to design our products and methods around third party rights or obtain license(s) from the holders of such rights. Patent and other intellectual property litigation is costly and, even if we were to prevail, the cost of such litigation could materially and adversely affect our business, operating results and future prospects.
There can be no assurance that we will not infringe the proprietary information of other companies or individuals.
Although we intend that our products will not infringe the proprietary rights of third parties, there can be no assurance that infringement or invalidity claims will not be asserted or prosecuted against us or that any such assertions or prosecutions will not materially adversely affect our business, operating results or financial condition. Accordingly, an adverse determination in such litigation could have a material adverse effect on our business, financial condition and results of operation.
We may be subject to product liability claims, which may harm our ability to operate our business.
Testing, manufacturing, marketing and sale of our products may subject us to product liability claims. Regardless of merit or eventual outcome, product liability claims may result in decreased demand for a product, injury to our reputation and loss of revenues. As a result, regardless of whether we are insured, a product liability claim or product recall may result in losses that could be material to us.
We anticipate an initial financial loss for the foreseeable future, and once net profits are obtained, we intend to retain any of such and other future earnings to finance our operations.
Initial losses are anticipated and could continue for the foreseeable future until sufficient product commercialization is achieved to cover our operating expenses. There can be no assurance that such sales volumes will ever be achieved or that we will ever operate profitably. In addition, for the foreseeable future, we intend to retain any remaining future earnings, if any, to finance our operations, and we do not anticipate paying any cash dividends with respect to our Common Stock until we have maintained sufficient cash reserves and our Company has significant cash flows. As a result, investors should not expect to receive dividends on any of the Common Stock for a long period of time.
The possibility of adverse developments in general business, economic and political conditions may make it impossible to deliver a return on investment to investors or even return the capital contributions made by investors.
Our business and operations are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include interest rates, energy costs, inflation, recession, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy. The recent tightening of the credit markets, the depression of the real estate market and the recession generally are indicative of a contraction in the U.S. and worldwide economy. Conditions such as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment and acts or threats of war or terrorism, and other factors beyond our control may adversely affect our business and our earnings. These crises are without precedent in recent history and the full effect of them remains unknown. Moreover, adverse economic conditions may disproportionately affect the footwear market since our products are not a necessity and we depend on rising disposable incomes of our customers to purchase our products. Therefore, such conditions could weaken demand for our products and negatively impact our ability to provide you with a return on your investment. Investors must be able and willing to bear an entire loss of their investment.
We do not know how viable the international market will be for our products.
We plan to introduce our products in other countries. There may not be sufficient demand for our products in other countries. Such countries may be slow to adopt new designs and the technologies utilized by our products. The market in such countries may be more sensitive to the prices we anticipate charging for our products. Also, other countries may be hesitant to purchase disposable products such as ours. The failure to create and/or maintain an international market for our products could have an adverse effect on our business, financial condition and results of operations.
We may not be able to borrow funds from third parties on satisfactory terms or at all.
We may need to borrow funds from third parties, which borrowings may be secured by our assets. We cannot be certain that funds will be available on terms satisfactory to us when needed or at all, especially in light of the recent worldwide and nationwide credit crises. Due to changes in general and local economic and market conditions and the availability of other sources of capital, as well as other factors, our costs for borrowing funds may be higher than the income we receive from the potential sale of our products. In addition, we may not be able to repay borrowed funds due to a variety of factors, including poor financial performance. Therefore, available cash flow may also be reduced in cases where we are required to repay borrowed funds to third party lenders.
We may require additional equity or debt in the future and dilution to you could result.
Future capital requirements depend on many factors, including our ability to successfully develop market and sell products. We believe it will likely be necessary to raise additional funds through debt or equity financings. Any equity or debt financings, if available at all, may be on terms that are not favorable to us and in the case of equity financings, our shareholders will incur a dilution of their ownership. In the case of debt financings, the obligations related to such debt may restrict our operations and encumber our assets and jeopardize our ability to obtain other financings. If adequate capital cannot be obtained, our business, operating results and financial condition could be adversely affected.
We operate in a highly competitive market.
To date, no single competitor now dominates the industry. The Company believes that the three key ingredients that will ultimately dictate a company’s success are access to funding, high quality products and management. Should a Company emerge within the industry that has access to capital and superior products and/or management that company could be in a position to assume a dominant role within the industry. There can be no assurance that the Company will be able to compete successfully with new or existing competitors.
The Company’s success depends upon its ability to attract new customers. To the extent competitors and potential competitors offer comparable or more efficient designs and technologies and to the extent that larger companies, with greater resources, better operating efficiencies and more extensive capabilities to produce, market and distribute products, enter into the Company’s markets, the Company’s ability to compete effectively could be adversely affected.
Our business and the success of our products could be harmed if we are unable to maintain our brand image.
Our success to date has been due in large part to the strength of the Auri brand. If we are unable to timely and appropriately respond to changing consumer demand, our brand name and brand image may be impaired. Even if we react appropriately to changes in consumer preferences, consumers may consider our brand image to be outdated or associate our brand with styles of footwear that are no longer popular. In the past, several footwear companies have experienced periods of rapid growth in revenues and earnings followed by periods of declining sales and losses. Our business may be similarly affected in the future.
We face intense competition, including competition from companies with significantly greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.
We face intense competition in the footwear industry from other established companies. A number of our competitors have significantly greater financial, technological, engineering, manufacturing, marketing and distribution resources than we do. Their greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products. In addition, new companies may enter the markets in which we compete, further increasing competition in the footwear industry.
We believe that our ability to compete successfully depends on a number of factors, including the style and quality of our products and the strength of our brand name, as well as many factors beyond our control. We may not be able to compete successfully in the future, and increased competition may result in price reductions, reduced profit margins, loss of market share and an inability to generate cash flows that are sufficient to maintain or expand our development and marketing of new products, which would adversely impact the trading price of our Common Stock.
We may have difficulties managing anticipated growth.
Our anticipated growth will continue to place significant demands on our management, capital and other resources. If we are unable to manage our anticipated growth effectively, this inability could have a material adverse effect on our ability to retain key personnel and could have a material adverse effect on our business, financial condition and results of operations. Our ability to manage our anticipated growth effectively will require us to continue to develop and improve our operational, financial and other internal systems, as well as our business development capabilities, and to train, motivate and manage our employees.
We are dependent upon the chief executive officer and if the chief executive officer is not successful in meeting our business objectives or otherwise resigns, then your investment may not be profitable and may be completely lost.
Our success depends substantially on management and supervision and leadership provided by our Chief Executive Officer, who beneficially owns approximately 44% of or outstanding Common Stock. We believe the CEO and his management team are relatively experienced in the field of marketing our products, but there can be no assurance that such experience will result in our success in the anticipated activities. The Chief Executive Officer may resign at any time. If the Chief Executive Officer was to resign, our business and operations would be adversely affected.
The liability of the management and other persons is limited.
Our Company has agreed to indemnify our directors and officers under most claims, demands, liabilities, costs, expenses, damages, losses, suits, proceedings and actions, whether judicial, administrative, investigative or otherwise, of whatever nature, known or unknown, liquidated or unliquidated, and also similarly indemnify any other organizer, member or officer of our Company except in limited circumstances. We may or may not purchase directors’ and officers’ insurance.
There can be no assurance that we will be successful or achieve our objectives or that you will not lose your entire investment.
There can be no assurance that we will be successful or achieve our objectives, or, if we are successful, that any particular price will be guaranteed to you upon liquidation of the Company or upon your determination to sell your Common Stock. Investors must be able to bear the burden of an entire loss of their investment.
Our stock is deemed to be penny stock.
Our stock is currently traded on the OTC Bulletin Board and is subject to the “penny stock rules” adopted pursuant to Section 15(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The penny stock rules apply to companies not listed on a national exchange whose common stock trades at less than $5.00 per share or which have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). Such rules require, among other things, that brokers who trade “penny stock” to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Penny stocks sold in violation of the applicable rules may entitle the buyer of the stock to rescind the sale and receive a full refund from the broker.
Many brokers have decided not to trade “penny stock” because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. In the event that we remain subject to the “penny stock rules” for any significant period, there may develop an adverse impact on the market, if any, for our securities. Because our securities are subject to the “penny stock rules,” investors will find it more difficult to dispose of our securities. Further, for companies whose securities are traded in the OTC Bulletin Board, it is more difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for significant news events because major wire services, such as the Dow Jones News Service, generally do not publish press releases about such companies, and (iii) to obtain needed capital.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2.
PROPERTIES
We do not own real property. We currently lease approximately 1,584 square feet of corporate facilities, located at 1200 N. Coast Highway, Laguna Beach, CA, 92631. We currently make base lease payments of approximately $2,100 per month, due at the beginning of each month. The lease expires on October 31, 2011, and with mutual consent continues on a month to month basis at the same monthly rate as the immediately preceding month.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary course of business, we may at times be subject to various legal proceedings and disputes, including product liability claims. We currently are not aware of any such legal proceedings or claim that we believe will have, individually or in the aggregate, a material adverse effect on our business, operating results or cash flows. It is our practice to accrue for open claims based on our historical experience and available insurance coverage.
ITEM 4.
ITEM 4.
[REMOVED AND RESERVED]
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS’ MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information. Our common stock is currently traded on OTCBB under the symbol “AURI.” The following table shows the high and low sales price of our common stock for the two fiscal years ended December 31, 2010 and 2009.
The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
(b) Holders. As of March 21, 2011, we had 154 shareholders of record of our common stock. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock
(c) Dividends. No dividends on common stock have been declared or paid by the Company. The Company intends to employ all available funds for the development of its business and, accordingly, does not intend to pay any cash dividends in the foreseeable future.
(d) Securities Authorized for Issuance Under Equity Compensation. We currently do not have any stock incentive plans.
(e) Recent Sale of Unregistered Securities. On February 14, 2011, we entered into a Merger Agreement and Plan of Reorganization (the “Merger Agreement”) with Auri Design Group, LLC, and the members of Auri Design Group, LLC, pursuant to which Auri Design Group, LLC is to be merged with an into our wholly owned subsidiary, Auri Footwear, Inc., a California corporation (the “Reverse Merger”). The merger was effective on February 24, 2011. In connection with the merger, we issued to the members of Auri Design Group, LLC, an aggregate of 59,325,360 shares of our common stock in exchange for such members transfer of all of their membership interests in Auri Design Group, LLC to Auri Footwear, Inc., and Auri Design Group, LLC was merged with and into Auri Footwear, Inc. pursuant to California law.
We claim an exemption from the registration requirements of the Act for the private placement of these securities pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the recipient is an accredited investor and had access to information about our company and their investment, the recipient took the securities for investment and not resale, and our company took appropriate measures to restrict the transfer of the securities.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
This item is inapplicable because we are a "smaller reporting company" as defined in Rule 405.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 and concern matters that involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-K. Words such as “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable as of the date of this Annual Report on Form 10-K, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this Annual Report on Form 10-K. We expressly disclaim any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations. Readers are urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the risks, uncertainties, and other factors that affect our business, set forth in detail in Item 1A of Part I, under the heading “Risk Factors.”
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes to those statements contained elsewhere in this Annual Report on Form 10-K.
Overview:
Auri Design Group, LLC designs, develops, manufactures and sells men’s and women’s footwear. It utilizes unique technical materials and designs and incorporates those attributes with fashionable, contemporary styles, presenting the highest level of tactile, aesthetic and functional qualities available of any footwear brand offering. The Company’s footwear products are manufactured in China and sold primarily to retail outlets throughout the United States.
The following table sets forth certain information regarding our results of operations ($).
RESULTS OF OPERATIONS
For The Year Ended December 31, 2010 Compared to December 31, 2009
Sales: For 2010, revenue was $577,965 compared to $577,591 for 2009. The women’s fall-2010 collection was held back by one season (until Spring-11) in order to refine and perfect the technical aspects of the entirely new product assortment. This postponement reduced 2010 revenues.
Cost of goods sold: For 2010, cost of goods sold was $448,493 compared to $439,608 for 2009.
Gross profit: Gross profit decreased by $8,511 or 6.1% to $129,472 for 2010. Gross margin decreased from 23.9% for 2009 to 22.4% for the year ended December 31, 2010.
Operating expense: Operating expenses consist of sales, marketing and general and administrative expenses. Operating expenses increased by $102,108, or 9.9%, from $1,029,357 for 2009 to $1,131,465 for 2010. This increase was mainly due to the increase in advertising and marketing expenses.
Loss from operations: As a result of the foregoing, loss from operations was $(1,001,993) for 2010, compared to a loss from operations of $(891,374) for 2009, an increase of $(110,619).
Net Loss: For the year ended December 31, 2010, net loss was $(1,015,165), compared to a net loss of $(890,492) for the year ended December 31, 2009. This $124,673 increase was mainly due to the increase of advertising and marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents at the beginning of the year ended December 31, 2010 was $22,931 and increased to $406,439 by the end of the year, an increase of $383,508. We had net working capital of $240,325 at December 31, 2010, a decrease of $56,640 from $296,965 at December 31, 2009.
Our cash flow information summary is as follows:
Net Cash Provided By (Used In) Operating Activities
Net cash used in operating activities was $(683,382) for 2010 while $(515,842) was used in operating activities for 2009. This increase in net cash used in operating activities was primarily due to the increase of net loss for 2010.
Net Cash Used In Investing Activities
Net cash used in investing activities decreased $6,482, from $(76,149) for 2009 to $(69,667) for 2010.
Net Cash Provided By (Used In) Financing Activities
Net cash provided by financing activities was $1,136,557 for 2010 and $549,963 for 2009. This $586,594 increase was primarily due to the financing from a $480,000 note and two notes totaling $200,000.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities for which we cannot reasonably predict future payments. The following chart represents our contractual obligations as of December 31, 2010, aggregated by type:
(1) The Company has a long-term note payable to a major owner at December 31, 2010 of $50,000. The note is dated November 12, 2010 and is for a three year term with an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by all of the Company’s assets excluding accounts receivable and certain intangible assets. The short term portion of long-term notes payable at December 31, 2010 is $4,167.
(2) The Company borrowed $150,000 on November 12, 2010, under a three year note with an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by all of the Company’s assets excluding accounts receivable and certain intangible assets. The short term portion of long-term note payable at December 31, 2010 is $12,500.
(3) On December 20, 2010, the company borrowed $500,000 under a short-term convertible note due 180 days later. Interest accrues at 15% per annum, payable monthly commencing January 15, 2011. The principal is callable at anytime by the Company with a 2% fee. The note is convertible into voting units of the Company or, if the Company has merged into a Corporation, into restricted common shares of the Corporation, both conversions at the conversion price equal to any equity share offering price.
(4) Represents the company’s office operating lease in Laguna Beach, California under a one year non-cancelable lease agreement which expires in October 2011.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of its financial condition and results of operations are based upon our audited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe that the following reflect the more critical accounting policies that currently affect our financial condition and results of operations.
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Actual results could differ from those estimates.
Revenue recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. This typically occurs when the product is shipped. Sales reductions for anticipated returns are recognized during the period when sales are recorded.
Impairment of long-lived assets -. The carrying values of long-lived assets, which include property and equipment, are evaluated periodically for impairment. Impairment losses are recognized when indicators of impairment are present and discounted cash flow estimated to be generated by the Company’s long-lived assets is less than the carrying amount of such assets. The amount of impairment loss, if any, is determined by comparing the amount of the Company’s long-lived assets to its estimated fair value. No impairment losses have been recognized during 2010 or 2009.
RECENTLY ISSUED ACCOUNTING GUIDANCE
In July 2010, the FASB issued Accounting Standard Update (ASU) 2010-20, “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”. This ASU amends Topic 310 to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses. For public entities, the disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Except for the expanded disclosure requirements, the adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.
ASU No. 2010-06-Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This Update amends ASC 820 subtopic 10 that requires new disclosures about transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. This Update also amends ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010.
In February 2010, the FASB issued Accounting Standards Update (ASU) 2010-09 to amend ASC 855, Subsequent Events, whose effective date is for interim or annual reporting periods ending after June 15, 2010. As a result, ASU No. 2010-09 excludes SEC reporting entities from the requirement to disclose the date on which subsequent events have been evaluated; In addition, it modifies the requirement to disclose the date on which subsequent events have been evaluated in reissued financial statements to apply only to such statements that have been restated to correct an error or to apply U.S. GAAP retrospectively.
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in United States interest rates would affect the interest earned on our cash and cash equivalents. Based on our overall cash and cash equivalents interest rate exposure at December 31, 2010, a near-term change in interest rates, based on historical movements, would not have a material adverse effect on our financial position or results of operations.
Because our three outstanding debt obligations all bear interest at a fixed rate, a near-term change in interest rates, based on historical movements, would not have any impact on our financial position or results of operations.
We have operated primarily in the United States. Accordingly, we have not had any significant exposure to foreign currency rate fluctuations.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements included in this Report at pages through.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
On or about March 24, 2011, the Board of Directors of Wellstone Filter Sciences Inc. (the “Company”) advised Child, Van Wagoner & Bradshaw, PLLC, its independent auditor (the “Prior Auditor”), that it had been dismissed and would not be appointed as the Company’s auditor for the fiscal year ending December 31, 2010, and the interim periods for 2011. The decision to change the independent auditor of the Company was approved by the Board of Directors.
The report of the Prior Auditor on the Company’s financial statements for the fiscal years ending December 31, 2009 and 2008 contained a “going concern” qualification. Other than the “going concern” qualification, during that period, no accountant’s report has contained any adverse opinion or a disclaimer of an opinion or was otherwise qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ending December 31, 2009 and 2008, and through the interim period from January 1, 2010 to March 24, 2011, the date of the Prior Auditor's dismissal, there were no disagreements between the Company and the Prior Auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of the Prior Auditor would have caused it to make reference to the subject matter of the disagreement in connection with its report. Further, the Company has not been advised by the Prior Auditor that:
(1) The internal controls necessary to develop reliable financial statements did not exist; or
(2) Information has come to the attention of the Prior Auditor which made it unwilling to rely upon management’s representations, or made it unwilling to be associated with the financial statements prepared by management; or
(3) The scope of the audit should be expanded significantly, or information has come to the attention of the Prior Auditor that it has concluded will, or if further investigated might, materially impact the fairness or reliability of a previously issued audit report or the underlying financial statements, or the financial statements issued or to be issued covering the past two most recent fiscal years.
(b) On or about March 17, 2011, the Company engaged MaloneBailey, LLP (“MaloneBailey”), as its principal accountant to audit the Company’s financial statements for the fiscal year ending December 31, 2010 as successor to the Prior Auditor. During the Company’s two most recent fiscal years or subsequent interim period through March 24, 2011, the Company has not consulted with MaloneBailey regarding the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, nor did MaloneBailey provide advice to the Company, either written or oral, that was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue. Further, during the Company’s two most recent fiscal years or subsequent interim period through March 24, 2011, the Company has not consulted with MaloneBailey on any matter that was the subject of a disagreement or a reportable event.
The Board of Directors approved the change in the Company’s auditor on March 17, 2011, following the consummation of the reverse merger of Auri Design Group, LLC (the “Acquiree”) with and into the Company’s wholly owned subsidiary, Auri Footwear, Inc., as previously reported in Item 1.01 of our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 22, 2011. MaloneBailey has acted as the Acquiree’s principal accountant and audited its financial statements for the fiscal years ending December 31, 2010 and 2009, and is familiar with the Acquiree and its business, which is the business of the Company following the reverse merger.
On March 24, 2011, the Company provided a draft copy of its Form 8-K to the Prior Auditor, requesting its comments on the information contained herein. A copy of the responsive letter from the Prior Auditor was filed as an exhibit to the Form 8-K, which was filed with the Securities and Exchange Commission on March 25, 2011.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The term “disclosure controls and procedures” (defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2010. Based on this evaluation, our president and chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2010 to ensure the timely disclosure of required information in our Securities and Exchange Commission filings.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, the design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all future events, no matter how remote. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
(b) Management’s Report on Internal Control Over Financial Reporting. Management’s Report on Internal Control Over Financial Reporting which appears on the following page, is incorporated herein by this reference.
(c) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets for the name and age of each director and executive officer, the year first elected as a director and/or executive officer and the position(s) held with us:
Name
Age
Position
Date Elected
Ori Rosenbaum
Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer, Secretary and Director
Background of Directors and Officers:
Ori Rosenbaum, age 47, is our sole director and the President, Chief Financial Officer and Secretary of our company. He was the founder and majority owner of Auri Design Group, LLC, which was acquired by us in connection with the Reverse Merger. Auri Design Group, LLC was formed in California in January 2008 to design, develop, manufacture and sell men’s and women’s footwear. Auri utilizes unique technical materials and designs and incorporates those attributes with fashionable, contemporary styles, presenting the highest level of tactile, aesthetic and functional qualities available. The Company’s footwear products are manufactured in China and sold primarily to retail outlets throughout the United States and abroad. Prior to forming Auri Design Group, LLC, Mr. Rosenbaum focused his engineering, process and production talents on his consulting practice, Omicron Technologies, Inc. where he successfully spearheaded the successful launch of the Southern California region for Stephen Gould Corporation, and also managed major projects for key clients, including Apple Computers, Toyota, Hewlett Packard and Oakley. Mr. Rosenbaum has over 27 years experience as an entrepreneur, sales and marketing executive and consultant. He has a successful track record working with engineering, design and development, manufacturing distribution and brand creation, working directly with end-users to enhance market penetration and build consumer loyalty.
Our director holds his position until the next annual meeting of shareholders and until successors are elected and qualified by our shareholders, or until earlier death, retirement, resignation or removal.
Save as otherwise reported above, none of our directors hold directorships in other reporting companies.
There are no family relationships among our director or officers.
To our knowledge, during the last ten years, our sole director and executive officer has not:
·
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
·
Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
·
Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
·
Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
·
Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Audit Committee Financial Expert
Our board of directors currently acts as our audit committee. Because we only recently executed the Reverse Merger, our board of directors is still in the process of finding an “audit committee financial expert” as defined in Regulation S-K and directors that are “independent” as that term is used in Section 10A of the Securities Exchange Act.
Audit Committee
We have not yet appointed an audit committee. At the present time, we believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We do, however, recognize the importance of good corporate governance and intend to appoint an audit committee comprised entirely of independent directors, including at least one financial expert, in the near future.
Compensation Committee
We do not presently have a compensation committee. Our board of directors currently acts as our compensation committee.
Nominating Committee
We do not presently have a nominating committee. Our board of directors currently acts as our nominating committee.
Code of Ethics
Because we only recently completed the Reverse Merger, we have yet to adopt a code of ethics.
Board Leadership Structure and Role in Risk Oversight
Ori Rosenbaum is currently our sole director, President, Chief Executive Officer, Chief Financial Officer and Secretary. We do not have any independent directors. We believe Mr. Rosenbaum is best situated to serve as chairman of the Board because he is the director most familiar with our business and industry and the director most capable of identifying strategic priorities and executing our business strategy. In addition, having a single leader eliminates the potential for confusion and provides clear leadership for our company. We believe that this leadership structure has served our company well.
Our board of directors has overall responsibility for risk oversight. Because we do not have a compensation, nominating or audit committee, the board will, for the time being, function in these capacities.
The board’s role in the risk oversight of our company includes, among other things:
·
appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting;
·
approving all auditing and non-auditing services permitted to be performed by the independent auditors;
·
reviewing annually the independence and quality control procedures of the independent auditors;
·
reviewing and approving all proposed related party transactions;
·
discussing the annual audited financial statements with the management;
·
meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management.
Director Qualifications
Directors are responsible for overseeing our business consistent with their fiduciary duty to stockholders. This significant responsibility requires highly-skilled individuals with various qualities, attributes and professional experience. The board believes that there are general requirements for service on our board of directors that are applicable to all directors and that there are other skills and experience that should be represented on the board as a whole but not necessarily by each director. The board considers the qualifications of director and director candidates individually and in the broader context of the board’s overall composition and our current and future needs.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following is a summary of the compensation we paid to our President, Chief Executive Officer, Chief Financial Officer, Secretary and sole director, Ori Rosenbaum, for the three years ended December 31, 2008, 2009 and 2010. We had no other executive officers for any of those years.
(1) Mr. Rosenbaum’s compensation was paid as follows: 2010 consists of $110,000 cash, 2009 consists of $252,500 non-cash compensation for services rendered and he was issued 252,500 Profits Interest Units in the LLC and 2008 consists of $252,500 non-cash compensation for services rendered and he was issued 252,500 Profits Interest Units in the LLC.
Compensation of Directors
Independent directors are permitted to receive fixed fees and other compensation for their services as directors. The board of directors has the authority to fix the compensation of independent directors. We currently do not have any independent directors. We plan to implement a compensation program for our independent directors, as and when they are appointed, which we anticipate will include such elements as an annual retainer, meeting attendance fees and stock options. The details of that compensation program will be negotiated with each independent director.
Option Grants Table
We do not have any stock incentive plans.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
We do not have any stock incentive plans
Long-Term Incentive Plan (“LTIP”) Awards Table
We do not have any stock incentive plans.
Employment Agreements
We do not have any employment agreements with our executive officers. Ori Rosenbaum, our current President, has received the compensation set forth above during the prior three fiscal years. His annualized base salary for calendar year 2011 is $132,000, to be paid in cash.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the beneficial ownership of our voting securities following the completion of the Reverse Merger by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and (iv) all executive officers and directors as a group as of February 28, 2011.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except for the ownership of our securities, and except as set forth below, none of the directors, executive officers, holders of more than five percent of our outstanding common stock, or any member of the immediate family of any such person have, to our knowledge, had a material interest, direct or indirect, in any transaction or proposed transaction which may materially affect our company.
·
On November 12, 2010, the parents of Mr. Rosenbaum loaned Auri Design Group, LLC, the sum of $150,000. The note is for a three year term at an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by a secondary security interest in all of the Company’s assets excluding accounts receivable and certain intangible assets.
·
On November 12, 2010, Andrew Furia, a holder of in excess of 5% of our outstanding common stock, loaned to Auri Design Group, LLC the sum of $50,000 The note is for a three year term at an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by a secondary security interest in all of the Company’s assets excluding accounts receivable and certain intangible assets
Except as disclosed above, no executive officer, director or any member of these individuals’ immediate families, any corporation or organization with whom any of these individuals is an affiliate or any trust or estate in which any of these individuals serve as a trustee or in a similar capacity or has a substantial beneficial interest in is or has been indebted to us at any time since the beginning of our last fiscal year.
Procedures for Approval of Related Party Transactions
Our board of directors is charged with reviewing and approving all potential related party transactions. All such related party transactions must then be reported under applicable SEC rules. We have not adopted other procedures for review, or standards for approval, of such transactions, but instead review them on a case-by-case basis.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
In connection with the audit of Auri Design Group, LLC’s financial statements for the years ended December 31, 2010 and 2009, we paid our principal accounting firm, Malone Bailey, LLP, audit fees of $36,000. This amount was recorded and paid by the Company in 2011.
PART IV
To the Members of
Auri Design Group, LLC
Laguna Beach, California
We have audited the accompanying balance sheets of Auri Design Group, LLC (the “Company”) as of December 31, 2010 and 2009 and the related statements of operations, changes in members’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Auri Design Group, LLC as of December 31, 2010 and 2009 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note C to the consolidated financial statements, the Company has suffered recurring losses from operations, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are described in Note C. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MaloneBailey, LLP
Houston, Texas
March 14, 2011
AURI DESIGN GROUP, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
NOTE A - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Nature of business - Auri Design Group, LLC was incorporated in California on January 1, 2008. Auri Design Group, LLC designs, develops, manufactures and sells men’s and women’s footwear. It utilizes unique technical materials and designs and incorporates those attributes with fashionable, contemporary styles, presenting the highest level of tactile, aesthetic and functional qualities available of any footwear brand offering. The Company’s footwear products are manufactured in China and sold primarily to retail outlets throughout the United States.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Use of estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States necessarily requires management to make estimates and assumptions that affect the amounts reported in the financial statements. We regularly evaluate estimates and judgments based on historical experience and other relevant facts and circumstances. Actual results could differ from those estimates.
Revenue recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. This typically occurs when the product is shipped. Sales reductions for anticipated returns are recognized during the period when sales are recorded.
Impairment of long-lived assets -. The carrying values of long-lived assets, which include property and equipment, are evaluated periodically for impairment. Impairment losses are recognized when indicators of impairment are present and discounted cash flow estimated to be generated by the Company’s long-lived assets is less than the carrying amount of such assets. The amount of impairment loss, if any, is determined by comparing the amount of the Company’s long-lived assets to its estimated fair value. No impairment losses have been recognized during 2010 or 2009.
NOTE C - GOING CONCERN
As shown in the accompanying financial statements, we have incurred net losses of $1,015,165 and $890,492 during 2010 and 2009, respectively. In addition, we have accumulated losses of $4,369,304 as of December 31, 2010. These conditions raise substantial doubt as to our ability to continue as a going concern. In response to these conditions, we may raise additional capital through the sale of equity securities, through an offering of debt securities or through borrowings from financial institutions or individuals. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
NOTE D - ACCOUNTS RECEIVABLE
Our customers are granted varying credit terms. During 2010, a majority of our accounts receivables were sold on a nonrecourse basis to a factoring company. The remaining balances are collected directly by the Company.
NOTE E - ALLOWANCE FOR BAD DEBTS
We establish an allowance for bad debts through a review of several factors including historical collection experience, current aging status of the customer accounts, and financial condition of our customers. Bad debt expense has traditionally been insignificant. There was an allowance for doubtful accounts of $6,686 as of December 31, 2010 and 2009.
NOTE F - INVENTORY
Inventories consists of finished goods which are stated at the lower of cost or market using the average cost method of accounting. Inventories consisted of the following as of December 31:
NOTE G - PREPAID ASSETS AND OTHER ASSETS
At December 31, 2010, prepaid and other assets consists of inventory deposits of $91,760 and prepaid tradeshows and other of $24,560. At December 31, 2009, prepaid assets consists of inventory deposits of $9,708 and prepaid tradeshows and other of $11,560.
NOTE H - PROPERTY AND EQUIPMENT
Property and equipment, consisting primarily of tooling, molds and dies, are carried at cost, less accumulated depreciation. Depreciation is provided using the straight-line and double declining balance methods over the estimated useful lives of the assets, which are generally three to five years.
NOTE H - PROPERTY AND EQUIPMENT (Continued)
Property and equipment consisted of the following at December 31:
Depreciation expense totaled $53,714 and $21,316 for 2010 and 2009, respectively.
NOTE I - DUE FROM FACTOR
On January 21, 2010, the Company signed a Discount Factoring Agreement with Merchant Factors Corp. and CIT Group/Commercial Services, Inc. (Factor). The Company submits customers and related invoices to Merchants who either approves or disapproves the customer for accounts receivable factoring. The Factor purchases account receivable invoices for approved customers only. The sales of these invoices is considered a transfer and are classified as sales of receivables. These invoices are nonrecourse to the Company if not collected when due solely because of the customer’s financial inability to pay and not because of a dispute with the customer. All individually approved invoices under $200 are full recourse to the Company. The majority of approved invoices are over $200. The Company holds the entire risk for the receivables it retains. Approximately 70% of the Companies accounts receivable balances are factored. The net factor receivable balance at December 31, 2010 was $15,796.
The agreement provides for an advance rate up to 75% of each credit-approved receivable. There is an up-front fee of 1.25% of each receivable with a minimum of $15,000 per year in fees. Fees for 2010 totaled $5,034. Because it was the first year of the factor arrangement, the minimum fee requirement was waived for 2010.
An interest rate equal to prime + 3.5% with a 6% floor is charged any amounts owed to the Factor. Factor advances are secured by a primary secruity interest in all accounts receivable (including those amounts not factored) and all sums standing to the credit with the factor, whether on the books of the Company or an Affiliate of the Company. As of December 31, 2010, no amounts were owed to the factor.
NOTE J - SHORT-TERM CONVERTIBLE NOTE PAYABLE
On December 20, 2010, the company borrowed $500,000 under a short-term convertible note due 180 days later. Interest accrues at 15% per annum, payable monthly commencing January 15, 2011. The principal is callable at anytime by the Company with a 2% fee. The note is convertible into voting units of the Company or, if the Company has merged into a Corporation, into restricted common shares of the Corporation, both conversions at the conversion price equal to any equity share offering price.
An origination fee of $20,000 was deducted from the proceeds, which is being amortized over the 6-month term. Amortization was $1,222 during 2010.
NOTE K - LONG-TERM NOTE PAYABLE
The Company borrowed $150,000 on November 12, 2010, under a three year note with an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by all of the Company’s assets excluding accounts receivable and certain intangible assets. The short term portion of long-term note payable at December 31, 2010 is $12,500.
Future maturities of the long-term note payable as of December 31, 2010 are as follows:
NOTE L - RELATED PARTY NOTE PAYABLE
The Company has a long-term note payable to a majority owner at December 31, 2010 of $50,000. The note is dated November 12, 2010 and is for a three year term with an interest rate of 10% per annum. Repayment terms are interest only for twelve months and monthly amortization of principal and interest for 24 equal months thereafter. The note is secured by all of the Company’s assets excluding accounts receivable and certain intangible assets. The short term portion of long-term notes payable at December 31, 2010 is $4,167.
NOTE L - RELATED PARTY NOTE PAYABLE (Continued)
Future maturities of the long-term related party note payable as of December 31, 2010 are as follows:
NOTE M - MEMBERSHIP UNITS ISSUED
The Company issued membership units for cash during 2010 and 2009. Total units issued for cash were 486,950 and 549,963 for 2010 and 2009, respectively. Of the units issued in 2010, 30,700 were issued in exchange for 0.01 per unit. Consulting expense of $30,393 was recorded by the Company to reflect the $1 per share value of the units issued.
The Company also awarded membership units to several employees and non-employees in exchange for services provided during 2010 and 2009. These units were determined to have a value of $1 and are subject to certain vesting provisions. The number of units vested in 2010 and 2009 was 304,195 and 464,820, respectively. The compensation cost related to vested units included in selling, general and administrative expenses for 2010 and 2009 was $169,195 and $344,820, respectively, and consulting expense related to vested units included in selling, general and administrative expenses for 2010 and 2009 was $135,000 and $120,000, respectively. All units were fully vested as of December 31, 2010.
In February 2011, these membership units were exchanged for common shares of Wellstone Filter Sciences, Inc., which is more fully described in Note T.
NOTE N - PRODUCT DEVELOPMENT COSTS
Costs incurred in connection with the development and design of new products and manufacturing methods are charged to product development expense as incurred. During 2010 and 2009, $58,314 and $48,035, respectively, were expensed as product development costs, included in selling, general and administrative expenses.
NOTE O - INCOME TAXES
The Company is a pass-through entity for tax purposes therefore pays no federal or state income tax. Effective January 1, 2011, the Company elected to be taxed as a corporation.
NOTE P - OPERATING LEASE
The Company leases space under a one year noncancelable lease agreement. Monthly payments under this agreement for the period through October 31, 2011 are $2,100. The Company had rent expense of $24,200 and $32,750 for 2010 and 2009, respectively.
NOTE Q - EMPLOYMENT AGREEMENT
Effective January 31, 2008, the Company entered into a two-year employment agreement with Andrew Tastad to serve as the Company’s Vice President of Sales, renewable annually in one-year increments. The agreement was automatically extended for one additional year on January 31, 2010 and again on January 31, 2011.
As part of the employment agreement, the Company also granted Mr.Tastad 201,560 membership units. As part of the First Amendment to the Employment Agreement, the Company agreed to issue an additional 112,684 membership units at a rate of 4,334 per month. These units were subject to certain vesting provisions and became fully vested during 2010. Upon termination of Mr. Tastad the Company is required to repurchase all of his membership units in the Company.
Effective December 2, 2010 Mr. Tastad’s agreement was further amended to 1) reduce his medical and base salary due upon termination from twelve (12) months to six (6) months and 2) end the issuance of any additional membership units subsequent to December 31, 2010.
NOTE R - COMMITMENTS AND CONTINGENCIES
All of the Company’s footwear is manufactured in China. Manufacturing production and shipping schedules are frequently unpredictable and may change without notice. Payment terms are generally 30% approximately 30 days before shipment from China and 70% due upon shipment from China. Although the Company is not obligated to fund the 70% payment until, if and when, the product ships, there almost certainly will be a significant payment after the date of the financial statements. At December 31, 2010, this amount was approximately $300,000 and was paid in February 2011.
NOTE R - COMMITMENTS AND CONTINGENCIES (Continued)
In the normal course of business, we may become subject to lawsuits and other claims and proceedings. Such matters are subject to uncertainty and outcomes are not predictable with assurance. Management is not aware of any pending or threatened lawsuits or proceedings which would have a material effect on the Company’s financial position, liquidity, or results of operations.
NOTE S - CONCENTRATIONS
In fiscal 2010, no one customer generated more than 10% of total sales. In fiscal 2009, 18% of sales was from one customer.
At December 31, 2010, four customers had receivable balances exceeding 10% of the total balance; receivables from these customers were approximately 62% of total outstanding receivables. At December 31, 2009, two customers had receivable balances exceeding 10% of the total balance; receivables from these customers were approximately 32% of total outstanding receivables.
During 2010 and 2009, the Company purchased all of its merchandise from one supplier in China.
NOTE T - SUBSEQUENT EVENTS
On February 24, 2011, the Company completed a merger agreement with Wellstone Filter Sciences, Inc., the principal Wellstone stockholder, the owners of Auri Design Group, LLC and Auri Design Group, LLC. Wellstone is a publicly-traded company with no current operations and is considered a development stage company. The owners of Auri exchanged their membership units for common stock of WFSI. After closing, the Auri Group of owners held approximately 68% of the outstanding common shares of WFSI.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Officers and Directors
Wellstone Filter Sciences, Inc
We have audited the accompanying consolidated balance sheets of Wellstone Filter Sciences, Inc. (the “Company”) as of December 31, 2010, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America).Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wellstone Filter Sciences, Inc. as of December 31, 2010, and the results of its operations, and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has recurring losses and has not generated revenues from its planned principal operations. These factors raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ MALONE BAILEY, LLP
www.malonebailey.com
Houston, Texas
April 7, 2011
Child, Van Wagoner & Bradshaw PLLC
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Officers and Directors
Wellstone Filter Sciences, Inc
We have audited the accompanying consolidated balance sheets of Wellstone Filter Sciences, Inc. as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wellstone Filter Sciences, Inc.as of December 31, 2009 and 2008, as of December 31, 2009 and
2008, and the results of its operations, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has recurring losses and has not generated revenues from its planned principal operations. These factors raise substantial doubt that the Company will be able to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Child, Van Wagoner & Bradshaw, PLLC
Child, Van Wagoner & Bradshaw, PLLC
Certified Public Accountants
Salt Lake City, Utah
April 13, 2010
The accompanying notes are an integral part of the financial statements
WELLSTONE FILTERS, INC.
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements
The accompanying notes are an integral part of the financial statements
The accompanying notes are an integral part of the financial statements
WELLSTONE FILTERS, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
WELLSTONE FILTER SCIENCES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDING DECEMBER 31, 2010
(unaudited from February 17, 1998 (inception) to December 31, 2007)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Basis of Presentation
Wellstone Filters, LLC (Wellstone) was organized as a Delaware limited liability company on February 17, 1998. On May 25, 2001, Wellstone Filters, Inc. (formerly Farallon Corporation) acquired Wellstone. In September 2009, Wellstone changed its name to “Wellstone Filter Sciences, Inc."
The Company was 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. Until February 24, 2011, the Company had no planned principal operations and has been considered a development stage company as defined in Statement of Financial Accounting Standards No. 7.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity date of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Reclassifications
Certain reclassifications may have been made in prior year’s financial statements to conform to classifications used in the current year.
Income Taxes
The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse and are considered immaterial.
Net Income (loss) Per Common Share
The Company computes earnings per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share. Net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and dilutive common stock equivalents outstanding during the year. Dilutive common stock equivalents consist of shares issuable and the exercise of the Company’s stock options and warrants (calculated using the treasury stock method). During 2010 and 2009, common stock equivalents derived from shares issuable in the exercise of options are not considered in the calculation of the weighted average number of common shares outstanding because they would be anti-dilutive, thereby decreasing the net loss per share.
Fair Value of Financial Instruments
Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.
Stock Based Compensation
The Company follows Accounting Standards Codification subtopic 718-10, Compensation. This requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options and employee stock purchases related to a Employee Stock Purchase Plan based on the estimated fair values. At December 31, 2010, there were no outstanding employee stock options
Recent Accounting Pronouncements
There were no recent rule changes expected to a have a material impact on the Company's consolidated financial position, results of operations or cash flows.
NOTE 2 - GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements for the year and inception to date periods ended December 31, 2010, the Company has incurred losses of $58,338 and $35,719,974, respectively. In addition, as of December 31, 2010, the Company had a working capital deficit of $10, 114 and no revenue generating operations. These factors, among others, indicate that the Company may be unable to continue as a going concern.
The Company's existence is dependent upon management's ability to generate business opportunities and develop profitable operations which will resolve its liquidity problems. The accompanying consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.
The Company is attempting to obtain financing for its operations. However, no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems.
NOTE 3 - RELATED PARTY TRANSACTIONS
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 at $.01 per share. In addition, the officer converted $528,000 in accrued compensation (included as accrued expenses) into 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. The debt conversion resulted in an additional stock-based compensation expense of $2,975,869 due to the difference between the conversion price of $.01 per share and the fair market value of $.05 per share.
During 2010, an officer/shareholder advanced $5, 714 for the Company. The advances are due on demand and bear no interest.
NOTE 5 - NOTE PAYABLE - RESTRUCTURING AND DISTRIBUTION AGREEMENT
The Company obtained financing for its operations from the issuance of various promissory notes totaling $1.5 million and $750,000 due to various individuals. The Company was unable to repay these 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. During 2009, the note holders of the $750,000 notes agreed to convert their notes and the $202,444 into 19,048,891 shares.
The holders of the $1.5 million in notes have transferred such debt to Wellstone Tobacco Company and have 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 December 31, 2010. With the debt restructured, management believes it can attract more equity financing during 2011.
Due to the above transaction, the activity from Company's previously wholly owned subsidiary, Wellstone Tobacco Company is shown as discontinued operations for all periods presented.
NOTE 6 - CAPITAL STOCK
The Company has authorized 1,000,000 shares of preferred stock, $.001 par value, with such rights, preferences and designation and to be issued in such series as determined by the Board of Directors. No shares of preferred stock are issued or outstanding.
The Company has authorized 300,000,000 shares of par value $.001 common stock. A three for one stock split was approved on September 27, 2004 and subsequently effected on October 6, 2004. The stock split resulted in the issuance of an additional 157,978,800 shares of common stock. On September 15, 2003 a four tenths for one stock dividend was declared and subsequently issued on September 30, 2003. The stock dividend resulted in the issuance of an additional 45,136,800 shares of common stock.
On December 1, 2006 a one for one-hundred reverse stock split was approved and effected on January 31, 2007. The reverse stock split resulted in a reclassification of common stock from 10,433,720 to 105,989 including 1,652 shares issued to shareholders in rounding off the reverse stock split. .
On May 17, 2006 a one for twenty-five reverse stock split was approved and effected on June 19, 2006. The reverse stock split resulted in a reclassification of common stock from 280,842,991 to 10,433,720.
The Company issued shares in 2009 in a restructuring, resulting in 93, 551, 580 shares outstanding at December 31, 2010 and 2009.
NOTE 8 - INCOME TAXES
At December 31, 2010, the Company has available for federal income tax purposes a net operating loss carry forward of approximately $35,732,490, expiring in the year 2030, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Due to significant changes in the Company's ownership in February 2011 and possible prohibition due to changes in business, in the opinion of management, the Company will not be able to use its existing net operating losses in the future.
Deferred net tax assets consist of the following at December 31, 2010 and 2009:
NOTE 9 - DISCONTINUED OPERATIONS
On March 4, 2010, The Company spun-off Wellstone Tobacco Company its wholly owned subsidiary by distributing 93,551,580 shares of Wellstone Tobacco Company to its current shareholders, such shares to be distributed pro rata to its shareholders upon regulatory approval. Pursuant to the Distribution Agreement between the parties, Wellstone Tobacco assumed the outstanding $1,500,000 note and the interest thereon, and the creditor released Wellstone Filter Sciences, Inc. from such note and interest. All of the remaining liabilities as of March 31, 2010 totaling $2,785,649 have been assumed by Wellstone Tobacco Company and accounted for as Paid in Capital on the balance sheet of Wellstone Filter Science, Inc. The results of operations of Wellstone Tobacco are accounted for as discontinued operations. There was no gain or loss on disposition of the subsidiary.
NOTE 10 - SUBSEQUENT EVENTS
On February 19, 2011, the Company entered into a Merger Agreement and Plan of Reorganization dated February 14, 2011 pursuant to which the Company acquired Auri Design Group, LLC (“Auri Shoes”). Auri Shoes develops and sells innovative, high quality footwear. The parties to the Merger Agreement included the Company, its principal stockholder Learned J. Hand, Auri Shoes, the members of Auri Shoes, and ADG Acquisition, Inc., a newly-formed California corporation into which Auri Shoes will merge at Closing.
On the Closing Date, the Company acquired Auri Shoes by issuing 59,325,360 common shares, constituting 68.4% of the outstanding shares after giving effect to their issuance and the cancellation of a 74,540,834 shares held by the Company’s prior control persons. After the Closing, there were 87,580,551 shares outstanding. The Company intends to change the name of the Company in the near future to Auri, Inc.
In addition, two stockholders of the Company have agreed to place an aggregate of 5,385,804 shares of common stock in escrow pending the satisfactory completion of a private placement.
(3) Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Capacity
Date
/s/ ORI ROSENBAUM
Principal Executive Officer, Principal Accounting Officer and Sole Director
April __, 2011
Ori Rosenbaum