WLSI Wellstar International Inc (CE)

UNITED STATES

 

SECURITIES AND EXCHANGE COMMISSION

 

  WASHINGTON, D.C. 20549

 

FORM 10-QSB

 

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

 

ACT OF 1934 For the quarterly period ended April 30, 2008

 

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

 

ACT OF 1934 For the Transition Period From _____ to _____

 

Commission File Number: 333-130295

 

Wellstar International, Inc.

 

(Exact name of registrant as specified in its charter)

 

 

Nevada	20-1834908
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

6911 Pilliod Road Holland, Ohio 43528

(Address of principal executive offices)

(419) 865-0069

(Issuer's telephone number)

 

Copies to:

Darrin M. Ocasio, Esq.

Sichenzia Ross Friedman Ference, LLP

1065 Avenue of the Americas

New York, New York 10018

(212) 930-9700

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes [_] No [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of June 6, 2008, the registrant had 445,940,017 shares of common stock issued and outstanding.

 

Transitional Small Business Disclosure Format (check one): Yes [_] No [X]

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INDEX

 

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements.	F-1
Item 2.	Management's Discussion and Analysis or Plan of Operation.	3
Item 3.	Controls and Procedures.	6
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	6
Item 2.	Unregistered Sale of Equity Securities and Use of Proceeds.	6
Item 3.	Defaults Upon Senior Securities.	7
Item 4.	Submission of Matters to a Vote of Security Holders.	7
Item 5.	Other Information.	7
Item 6.	Exhibits.	8
Item 7.	Signatures.	9

 

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES

 

Forward-Looking Statements

 

The information in this quarterly report contains forward-looking statements within the meaning of the Private Securities litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than these statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

 

The following discussion and analysis should be read in conjunction with the financial statements of Wellstar International, Inc., included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

Overview and Plan of Operation

 

Wellstar International, Inc. ("Wellstar" or the "Company") was formed in the State of Nevada on December 5, 1997. Wellstar was a development stage company with no operating activities. On July 12, 2005, Wellstar entered into a share exchange agreement with Trillennium Medical Imaging, Inc. ("Trillennium" or "TMI"), a development stage company formed in June, 2005. As a result of the share exchange agreement, Trillennium became a subsidiary of Wellstar.

 

Wellstar, through its Trillennium subsidiary, is dedicated to developing and licensing the use of advanced thermal imaging technology in the consumer health care and veterinary markets throughout the United States. Wellstar has obtained the rights to market a thermal imaging camera using infrared technology approved by the Food and Drug Administration as an adjunctive diagnostic device and software for thermal imaging pursuant to an exclusive supplier contract with the camera's manufacturer. Mikron Instrument, Inc. (Wellstar does not manufacture the thermal imaging cameras). Our camera and software technology is known as the TMI Thermal Imaging System.

 

We have been developing our market opportunity since the inception of Trillennium Medical Imaging, Inc. and initially positioned our equipment in pain clinics and acute care facilities. However we have refocused our direction exclusively to the Pressure Ulcer market.  The management decision to dedicate the resources of TMI to the Pressure Ulcer market is based on the capability of our system to detect patterns of tissue injury and continue to monitor said injury. In addition, the financial benefit to TMI will be recognized once hospitals will be denied reimbursement for hospital acquired pressure ulcers under the Medicare Hospital Patient Safety Initiative.  TMI’s system will allow hospitals to more accurately recognize patterns of injury upon POA to the hospital.

 

In furtherance of our refocused business strategy, we have entered into an agreement with Duke Medical Center pursuant to which Duke Medical Center has agreed to use our TMI Thermal Imaging System imaging systems in research studies conducted at Duke Medical Center's facilities.

TMI and the DUMC Wound Management Institute are in the final stages of  a 100 Patient Study using TMI Thermal Imaging Systems to document patterns of injury consistent with pressure ulcer development.  The 100 patients have been completed and the company is waiting for the initial results of the study.

The Department of Rheumatology utilized the TMI system in an study that was completed this fall.    An additional study is being contemplated in the area of Radiation Oncology to monitor the dosage of radiation for breast cancer patients.

 

While we continue to develop our plan to penetrate the equine market, we have not yet entered into any license agreements in this industry. In addition, we are continuing to seek qualified directors, employees and consultants, and to pursue agreements with pain clinic owners and operators.

 

 

Results of Operations

 

Three Months Ended April 30, 2008 compared to Three Months Ended April 30, 2007

 

 

6

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The Notes bear interest at the rate of 8% per annum. Interest is payable quarterly, unless the Company's common stock is greater than $0.0775 per share for each trading day of a month, in which event no interest is payable during such month. Any interest not paid when due shall bear interest of 15% per annum from the date due until the same is paid. The Notes mature three years from the date of issuance, and are convertible into common stock, at the Purchasers' option, at the lesser of (i) $0.12 or (ii) a 67.5% discount to the average of the three lowest trading prices of the common stock during the 20 trading day period prior to conversion. At the Company's option, in any month where the current stock price is below the Initial Market Price, the Company can pay the outstanding principal and interest due for that month and this will stay any conversions for that month. The term "Initial Market Price" means the volume weighted average price of the common stock for the five trading days immediately preceding the closing which was $0.09. The Notes contain a call option whereby, if the Company's stock price is below $0.15, the Company may prepay the outstanding principal amount of the Notes, subject to the conditions set forth in the call option. The Notes also contain a partial call option whereby, if the Company's stock price is below $0.09, the Company may prepay a portion of the outstanding principal amount of the Note, subject to the conditions set forth in the partial call option.

 

The full principal amount of the Notes are due upon a default under the terms of the Notes. In addition, the Company granted the Purchasers a security interest in substantially all of the Company's assets and intellectual property. The Company is required to file a registration statement with the Securities and Exchange Commission within 60 days of closing, which will include the common stock underlying the Notes and the Warrants.

 

The Warrants are exercisable until seven years from the date of issuance at a purchase price of $0.0001 per share. The Purchasers may exercise the Warrants on a cashless basis if the shares of common stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event the Purchasers exercise the Warrants on a cashless basis, then the Company will not receive any proceeds. Upon an issuance of shares of common stock below the market price, the exercise price of the Warrants will be reduced accordingly. The market price is determined by averaging the last reported sale prices for the Company's shares of common stock for the five trading days immediately preceding such issuance as set forth on the Company's principal trading market. The exercise price shall be determined by multiplying the exercise price in effect immediately prior to the dilutive issuance by a fraction. The numerator of the fraction is equal to the sum of the number of shares outstanding immediately prior to the offering plus the quotient of the amount of consideration received by us in connection with the issuance divided by the market price in effect immediately prior to the issuance. The denominator of such issuance shall be equal to the number of shares outstanding after the dilutive issuance.

 

The conversion price of the Notes and the exercise price of the Warrants may be adjusted in certain circumstances such as if the Company pays a stock dividend, subdivides or combines outstanding shares of common stock into a greater or lesser number of shares, or takes such other action as would otherwise result in dilution of the selling stockholder's position.

 

The Purchasers have agreed to restrict their ability to convert their Notes or exercise their Warrants and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock.

7

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Derivative Instruments

 

In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

 

The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For options, warrants and bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black-Scholes option pricing model. That model requires assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. Because of the limited trading history for our common stock, we have estimated the future volatility of our common stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.

 

Registration Rights Agreements

 

In connection with the sale of debt or equity instruments, we may enter into registration rights agreements. Generally, these registration rights agreements require us to file registration statements with the Securities and Exchange Commission to register common shares that may be issued on conversion of debt or preferred stock, to permit re-sale of common shares previously sold under an exemption from registration or to register common shares that may be issued on exercise of outstanding options or warrants.

 

The registration rights agreements usually require us to pay penalties for any time delay in filing the required registration statements, or in the registration statements becoming effective, beyond dates specified in the registration rights agreement. These penalties are usually expressed as a fixed percentage, per month, of the original amount we received on issuance of the debt or preferred stock, common shares, options or warrants. We account for these penalties as a contingent liability and not as a derivative instrument. Accordingly, we recognize the penalties when it becomes probable that they will be incurred. Any penalties are expensed over the period to which they relate.

 

Recent Accounting Pronouncements

 

Emerging Issues Task Force Pronouncement 00-27, relating to certain convertible instruments, requires the discounting of certain debt instruments when the conversion feature meets certain criteria. FASB 123R, Stock Options To Employees And Consultants. This pronouncement relates to employees and consultants who receive stock based pay.

 

The Company will account for the fair value of employee and non-employee options and warrants in accordance with SFAS No. 123R, "Share-Based Payment", which is effective for options and warrants during the annual reporting period beginning after December 15, 2005. The compensation cost will be measured after the grant date based on the value of the reward and is recognized over the service period. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes stock option pricing model. The Company has not yet adopted a stock option plan but is evaluating the affect of a stock option plan on its financial position and results of operations in future periods.

 

ITEM 3. CONTROLS AND PROCEDURES

 

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.

 

(b) Changes in internal controls. There was no change in our internal controls or in other factors that could affect these controls during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Wellstar is not a party to any pending legal proceeding, nor is its property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of Wellstar's business.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

 

 

In August, 2007 we issued the following shares of common stock:
o	2,232,142 shares to an individual for legal services
o	2,200,000 to a consultant for computer software development
In October, 2007 we issued the following shares of common stock:
o	1,000,000 shares to an individual for legal services
o	250,000 shares to an individual for medical consulting services
In November, 2007 we issued the following shares of common stock:
o	2,000,000 shares to an individual for legal services

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

On December 1, 2006, the Company received a notice of default in connection with the secured promissory note issued to Micro Health Systems, Inc. on January 31, 2006 as part of the purchase price for the assets of Micro Health Systems (the "MHS Note"). The MHS note is secured by 1,500,000 shares of the Company's common stock. The MHS Note currently has an outstanding principal balance and accrued interest as of the first maturity date of June 21, 2006 of $207,891.20. The default notice states that the pledged shares will be released from escrow if the outstanding principal balance and accrued interest is not paid within ten days from receipt of the default notice.

 

We are in default pursuant to the registration rights agreement entered into in connection with our November 2006 convertible note financing. The default arises from our failure to file a registration statement by the filing deadline set forth in the registration rights agreement. As a result, we are required to pay to the convertible note holders liquidated damages equal to two percent of the outstanding principal balance of the convertible notes per month.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

 

ITEM 6. EXHIBITS

ITEM 7. SIGNATURES