Smokes still in trial state, tobacco startup continues borrowing
TIMBERLAKE - Independent cigarette maker Wellstone Filters continues to rely on short-term borrowing despite reporting its first-ever revenue.
In documents filed May 23 with the U.S. Securities and Exchange Commission, Wellstone states that it has tapped the Carlson Group Ltd. for a capital infusion of $250,000, repayable at 18 percent by December 2007.
It's the third time Wellstone has gone to the Carlson Group money well. The company borrowed $1.5 million in fall 2004 and $500,000 in January 2006, about the same time it announced it had begun shipping cigarettes to a distributor in Arizona.
Wellstone CEO Learned J. Hand says the latest infusion will be used for general corporate purposes. He declines to be any more specific. "I am limited in what I can say," he says. "I can't say anything I haven't told the public."
Publicly traded Wellstone moved from Tarytown, N.Y., to set up shop in Timberlake near Durham in 2005. There, it laid plans to begin outscourcing production of its own cigarette brands after it couldn't sell its proprietary filter technology to major U.S. manufacturers.
After efforts to iron out distribution agreements that would take its brand from a regional to national audience, the company in March reported its first-ever revenue, $49,000, and significantly lower net losses.
"Our market intelligence to date indicates our products appear to have gained traction in key markets such as Southern California and the Southeastern U.S.," states Wellstone in a press release.
In recent weeks, the company has announced deals with distributors in North Carolina, California and in the Ukraine.
In the North Carolina deal, a Wellstone press release says the firm has "partnered" with a "major supplier," Sanford-based J.T. Davenport & Sons, which supplies roughly 1,700 convenience stores from Maryland to South Carolina.
Davenport tobacco buyer Graham Parker says the partnership at this point consists of Davenport's agreement to buy 60 cases of Wellstone cigarettes on a trial basis with no guarantee of a re-order. "It's hard to tell how it will do. This is just a trial," Parker says.
Parker says Davenport's Wellstone trial will last six months. "It's like any new product," says Wellstone's Hand. "You get a trial, and if they like it, they (distributors) buy more."
Wellstone's Arizona deal is with a company called Elite Tobacco Sales of Phoenix, which was incorporated in June 2005. A spokesman for Elite declined to say how the Wellstone brands are selling.
A typical case of cigarettes contains 60 cartons of 10 packs each, or 12,000 cigarettes. Sixty cartons would contain 720,000 cigarettes. In 2004, the U.S. domestic market consumed 365 billion cigarettes, meaning sales of 3.7 billion cigarettes were needed for a company to gain a modest 1 percent market share.
Wellstone's cigarettes are being manufactured on a contract basis by the Flue Cured Tobacco Cooperative, an independent manufacturer based in Raleigh. Arnold Hamm, director of the FCTC, says Wellstone is approaching the market conservatively.
"It often takes 12 to 16 months before a brand gets some traction in the market," says Hamm, who characterized 60 cases of cigarettes as a small order. "We have some orders of 600 cases or more at a time," he adds, declining to estimate the size of an average order.
Wellstone, which trades as an Over The Counter Bulletin Board stock, filed documents May 22 stating its intention to implement a 1 for 3 reverse stock split that would decrease its authorized shares from 300 million to 100 million.
The same filing spelled out pre-split ownership figures showing that Hand and his wife, Carla, jointly own nearly 180 million shares, or 64.5 percent, of the company. Former Vector Tobacco Co. CFO Samuel Veasey, who joined Wellstone in early 2006 as chief financial officer, owns 8.5 million shares, or 3.2 percent.
Trading as high as $1.41 per share in November 2004, Wellstone stock is now trading in the 19-cent range. For more than two years, the stock has been on the radar screen of penny stock day traders. In 2004, faxes alerting investors to Wellstone began turning up in Arizona, prompting a consumer activist, Christine Baker, to file a lawsuit alleging the faxes were intended to pump up the share price.
The 2005 suit subsequently was dismissed in Arizona state court after Hand submitted a statement saying that neither he nor anyone in the company ordered the faxes sent.
Baker has continued to post information critical of the company on her Web site. "They hired the best lawyer in Phoenix to fight my junk fax suit," says Baker. "But they haven't challenged anything else I have said online."
Hand calls the Baker suit and the controversy surrounding it "silliness," adding, "If I sued her, it would be like manna from heaven as far as she is concerned."
